-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q/w0SRWTOkwOsd1S93RgsZ3XovrudgH4Y0tNPj/rQUCmwHkm9h4CaHNBx2I8q2Dz QOi05hyikP5t0HMCg5ZE3A== 0000891020-99-001433.txt : 19990818 0000891020-99-001433.hdr.sgml : 19990818 ACCESSION NUMBER: 0000891020-99-001433 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 21 FILED AS OF DATE: 19990817 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BSQUARE CORP /WA CENTRAL INDEX KEY: 0001054721 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 911650880 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-85351 FILM NUMBER: 99694071 BUSINESS ADDRESS: STREET 1: 3633 136TH PLACE S E SUITE 100 CITY: BELLEVUE STATE: WA ZIP: 98006 BUSINESS PHONE: 4255195900 MAIL ADDRESS: STREET 1: 3633 136TH PLACE S E SUITE 100 CITY: BELLEVUE STATE: WA ZIP: 98006 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 16, 1999 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ BSQUARE CORPORATION (NAME OF ISSUER IN ITS CHARTER) WASHINGTON 7371 91-1650880 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
3633 136TH PLACE S.E., SUITE 100 BELLEVUE, WASHINGTON 98006 (425) 519-5900 (ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL PLACE OF BUSINESS) WILLIAM T. BAXTER CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER 3633 136TH PLACE S.E., SUITE 100 BELLEVUE, WASHINGTON 98006 (425) 519-5900 (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE) COPIES OF ALL COMMUNICATIONS TO BE SENT TO: MICHAEL J. ERICKSON, ESQ. KAREN A. ANDERSEN, ESQ. LAURA A. BERTIN, ESQ. MARK F. WORTHINGTON, ESQ. SUMMIT LAW GROUP, PLLC 1505 WESTLAKE AVENUE NORTH, SUITE 300 SEATTLE, WASHINGTON 98109 (206) 281-9881 WILLIAM D. SHERMAN, ESQ. CORI M. ALLEN, ESQ. COREY A. LEVENS, ESQ. MORRISON & FOERSTER LLP 755 PAGE MILL ROAD PALO ALTO, CALIFORNIA 94304 (650) 813-5600 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - ------------------ If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - ------------------ If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - ------------------ If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] CALCULATION OF REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------- Common Stock, no par value........................... $60,000,000.00 $16,680.00 - --------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED AUGUST , 1999 SHARES [BSQUARE CORPORATION LOGO] COMMON STOCK ------------------ Prior to this offering, there has been no public market for our common stock. The initial public offering price is expected to be between $ and $ per share. We will apply to list our common stock on The Nasdaq Stock Market's National Market under the symbol "BSQR." The underwriters have an option to purchase a maximum of additional shares to cover over-allotments of shares. INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 5.
UNDERWRITING DISCOUNTS AND PROCEEDS TO PRICE TO PUBLIC COMMISSIONS BSQUARE --------------- ------------- ----------- Per Share............................................ $ $ $ Total................................................ $ $ $
Delivery of the shares of common stock will be made on or about , 1999. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. CREDIT SUISSE FIRST BOSTON LEHMAN BROTHERS A.G. EDWARDS & SONS, INC. WIT CAPITAL CORPORATION The date of this prospectus is , 1999. 3 [Description of Artwork] Front Inside Cover [BSQUARE LOGO] [Text] ICD Road Map Chart of BSQUARE & WINDOWS CE BSQUARE provides Windows(R) CE-based software solutions to enable a wide range of intelligent computing devices SET-TOP BOXES INDUSTRIAL DEVICES THIN CLIENTS GAMING SYSTEMS HANDHELD DEVICES CONSUMER APPLIANCES Enabling the age of INTELLIGENT COMPUTING DEVICES 4 INSIDE GATEFOLD [Text] BSQUARE CORPORATION BSQUARE - A LEADING WINDOWS CE SOLUTIONS PROVIDER The growth of the market for intelligent computing devices, compounded by the growth of the Windows CE operating system, has created an emerging market opportunity for Windows CE-based software solutions and engineering services. BSQUARE provides software engineering services to Microsoft to help develop the Windows CE operating system and the accompanying tool set. BSQUARE provides OEMs with software infrastructure products and services to help achieve time-to-market objectives. End-users license BSQUARE's mobile productivity software, such as bFAX(R), to extend the use of intelligent computing devices. Off-the-shelf software products help OEMs achieve a faster time-to-market, and end-users to increase the functionality of intelligent computing devices. BSQUARE's experienced software engineering team has been developing Windows CE-based software solutions since January 1995 - prior to the commercial release of Windows CE. INTELLIGENT COMPUTING DEVICES [Pictures reflecting BSQUARE products and models posing as BSQUARE engineering team] 5 Inside Gatefold [Text] From the operating system to run-time software to value-added applications, BSQUARE provides end-to-end software solutions for the development and use of Windows CE-based intelligent computing devices. Intelligent Computing Device Development Process [Chart reflecting] Microsoft Microprocessor Vendors Intelligent Computing Device Manufacturers )OEMs) End-users Software engineering services for development of Windows CE operating system and accompanying tools Software engineering services for development of Windows CE tools and system level software support Software products and engineering services for the integration of Windows CE into devices. End-user applications for bundling on devices After-market software products to extend the use of intelligent computing devices BSQUARE supplies software products and services throughout the process [BSQUARE LOGO] Windows CE 6 Back Cover [BSQUARE LOGO] [Text] BSQUARE provides software solutions to enable the development and proliferation of Windows CE-based intelligent computing devices. From the operating system to run-time software to value-added applications. BSQUARE PRODUCTS AND SERVICES COMPRISE END-TO-END SOLUTIONS. "We came to BSQUARE because we knew they had the products and expertise to assist us in the development of Capio[TM], our latest Window[R]-based Terminal, within our tight timeframe. With BSQUARE's CE Xpress[TM] Kit and a custom Ethernet driver they developed for us, we were able to shorten our development time and deliver our product to market quickly." MIKE OLIVA, DIRECTOR OF MARKETING, BOUNDLESS TECHNOLOGIES INC. "BSQUARE seems to always be keying in on the most meaningful segments of the Windows CE product market: They always know what we want as consuming people." JARED MINIMAN, WINCELAIR INTELLIGENT COMPUTING DEVICES 7 ------------------ TABLE OF CONTENTS
PAGE ---- PROSPECTUS SUMMARY.................... 3 RISK FACTORS.......................... 5 FORWARD-LOOKING STATEMENTS............ 14 USE OF PROCEEDS....................... 14 DIVIDEND POLICY....................... 14 CAPITALIZATION........................ 15 DILUTION.............................. 16 SELECTED CONSOLIDATED FINANCIAL DATA................................ 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 18 BUSINESS.............................. 27
PAGE ---- MANAGEMENT............................ 41 CERTAIN TRANSACTIONS.................. 48 PRINCIPAL SHAREHOLDERS................ 49 DESCRIPTION OF CAPITAL STOCK.......... 51 SHARES ELIGIBLE FOR FUTURE SALE....... 53 UNDERWRITING.......................... 55 NOTICE TO CANADIAN RESIDENTS.......... 57 LEGAL MATTERS......................... 58 EXPERTS............................... 58 WHERE TO FIND ADDITIONAL DOCUMENTS.... 58 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.......................... F-1
------------------ YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT. DEALER PROSPECTUS DELIVERY OBLIGATION UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 2 8 PROSPECTUS SUMMARY The following summary highlights information that we present more fully elsewhere in this prospectus. You should read this entire prospectus carefully. BSQUARE CORPORATION We are a leading provider of software solutions that enable the development and proliferation of a wide variety of intelligent computing devices based on the Microsoft Windows CE operating system. Intelligent computing devices, or ICDs, are a new class of powerful and cost-effective devices that have form factors and feature sets closely tailored to their specific applications and are able to support sophisticated communications capabilities. ICDs include, among other devices, digital set-top boxes, gaming systems, handheld data collectors used for industrial purposes and Windows-based terminals. As businesses and consumers continue to leverage the Internet to enhance connectivity among suppliers, partners and consumers alike, users are increasingly looking to ICDs as a cost-effective and more flexible means of achieving electronic connectivity. To enable the deployment of ICDs and to support the development of industry-specific applications, semiconductor vendors and original equipment manufacturers, or OEMs, demand a highly scalable and customizable operating system with minimal system requirements. Microsoft's Windows CE operating system is rapidly gaining market acceptance as an operating system of choice for these hardware manufacturers. We help enable the rapid and low-cost deployment of ICDs by providing a variety of software solutions for the development and integration of the Windows CE operating system with industry-specific applications. We have also developed software applications that we license to end users to provide ICDs with additional functionality. Because we have been building Windows CE-based software solutions since before the commercial release of Windows CE, we believe that we offer a greater breadth and depth of Windows CE software solutions expertise than any of our current competitors. We provide solutions to Microsoft for the development of the Windows CE operating system and tools. We also provide Windows CE solutions to OEMs and semiconductor vendors and license our end-user software applications to OEMs for bundling on ICDs and to end users. To date, we have provided our products and services to Microsoft, Hewlett-Packard, Hitachi, Motorola, NEC, Philips Electronics and Sharp Electronics, among others. Our strategy is to become the leading provider of software solutions for the development and proliferation of ICDs. The key elements of our strategy include continuing to enhance our position as a leading provider of Windows CE solutions, expanding our strategic relationships with hardware and software vendors, continuing to leverage our relationship with Microsoft, leveraging our extensive Windows CE expertise to develop additional software applications and expanding our international presence. We were incorporated in the State of Washington in July 1994. Our principal executive offices are located at 3633 136th Place S.E., Suite 100, Bellevue, Washington 98006, and our telephone number is (425) 519-5900. Our World Wide Web address is www.bsquare.com. Information on our website does not constitute a part of this prospectus. ------------------------ BSQUARE, bFAX and BSQUARE View are our registered trademarks. Additionally, bTRACK, bREADY, bFIND, bPRINT, bMOBILE, bUSEFUL, bTASK, bPRODUCTIVE, bSTART and CEValidator are our trademarks. This prospectus also contains trademarks and tradenames of other companies. 3 9 THE OFFERING Common stock offered by us...................... shares Common stock to be outstanding after this offering...................................... shares Use of proceeds................................. For general corporate purposes, including planned relocation expenses. See "Use of Proceeds" on page 14. Proposed Nasdaq National Market Symbol.......... BSQR
Unless otherwise indicated, the information in this prospectus reflects the number of shares outstanding on July 31, 1999 and assumes the conversion of all outstanding shares of preferred stock into common stock upon the closing of this offering and no exercise of the underwriters' over-allotment option. Please see "Capitalization" on page 15 for a more complete discussion regarding the outstanding shares of common stock, options to purchase common stock and other related matters. SUMMARY CONSOLIDATED FINANCIAL DATA The pro forma consolidated balance sheet data summarized below gives effect to the conversion of all outstanding preferred stock into common stock upon completion of this offering. The pro forma as adjusted consolidated balance sheet data summarized below reflects the application of the net proceeds from the sale of the shares of common stock offered by us at the assumed initial public offering price of $ per share and after deducting the underwriting discounts and commissions and estimated offering expenses.
PERIOD FROM INCEPTION SIX MONTHS ENDED (JULY 15) TO YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, ---------------------------------------- ----------------- 1994 1995 1996 1997 1998 1998 1999 ------------ ----------- ------ ------- ------- ------- ------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue.................... $ 151 $1,573 $4,186 $14,405 $24,612 $10,802 $18,543 Gross profit............... 68 778 2,782 8,761 13,311 5,774 9,644 Income from operations..... 64 692 1,971 4,564 3,170 1,704 1,448 Net income................. $ 64 $ 693 $1,971 $ 3,806 $ 2,300 $ 1,217 $ 866 ======= ====== ====== ======= ======= ======= ======= Basic earnings per share... $ 0.00 $ 0.03 $ 0.09 $ 0.18 $ 0.12 $ 0.06 $ 0.04 ======= ====== ====== ======= ======= ======= ======= Shares used in computation of basic earnings per share................... 21,000 21,000 22,106 21,400 18,372 18,615 18,206 ======= ====== ====== ======= ======= ======= ======= Pro forma basic earnings per share............... $ 0.09 $ 0.03 ======= ======= Shares used in computation of pro forma basic earnings per share...... 26,021 26,539 ======= =======
JUNE 30, 1999 (UNAUDITED) ----------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................ $ 9,284 $ 9,284 $ Working capital.......................................... 10,675 10,675 Total assets............................................. 18,749 18,749 Long term obligations, net of current portion............ 210 210 Mandatorily redeemable convertible preferred stock....... 14,475 -- Shareholders' equity (deficit)........................... (255) 14,220
4 10 RISK FACTORS You should carefully consider the following risk factors and all other information contained in this prospectus before purchasing our common stock. Investing in our common stock involves a high degree of risk. Any of the following risks could materially adversely affect our business, operating results and financial condition and could result in a complete loss of your investment. UNANTICIPATED FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS DUE TO FACTORS SUCH AS CHANGES IN OUR RELATIONSHIP WITH MICROSOFT OR A DECLINE IN THE MARKET FOR WINDOWS CE-BASED ICDS COULD CAUSE OUR STOCK PRICE TO DECLINE SIGNIFICANTLY. Our operating results have fluctuated in the past, and we expect that they will continue to do so. We believe that period-to-period comparisons of our operating results are not meaningful, and you should not rely on such comparisons to predict our future performance. If our operating results fall below the expectations of stock analysts and investors, the price of our common stock may fall. Factors that may cause our quarterly operating results to fluctuate include: - the failure or perceived failure of Windows CE to achieve widespread market acceptance; - the failure of the ICD market to develop; - adverse changes in our relationship with Microsoft; - our inability to develop and market new and enhanced products and services on a timely basis; - unanticipated delays, or announcement of delays, by Microsoft of Windows CE product releases; - changes in demand for our products and services; - increased competition and changes in our pricing as a result of increased competitive pressure; - our ability to control our expenses, a large portion of which are relatively fixed and which are budgeted based on anticipated revenue trends, in the event that customer projects, particularly Microsoft projects, are delayed, curtailed or discontinued; - changes in the mix of our services and product revenue, which have different gross margins; - underestimates by us of the costs to be incurred in significant fixed-fee service projects; and - varying customer buying patterns which are often influenced by year-end budgetary pressures. In addition, our stock price may fluctuate due to conditions unrelated to our operating performance, including general economic conditions in the software industry and the market for technology stocks. IF THE MARKET FOR THE WINDOWS CE OPERATING SYSTEM FAILS TO DEVELOP FULLY OR DEVELOPS MORE SLOWLY THAN WE EXPECT, OUR BUSINESS AND OPERATING RESULTS WILL BE MATERIALLY HARMED. Windows CE is one of many operating systems developed for the ICD market and the extent of its future acceptance is uncertain. If the market for the Windows CE operating system fails to develop fully or develops more slowly than we expect, our business and operating results will be significantly harmed. Market acceptance of the Windows CE operating system will depend on many factors, including: - Microsoft's development and support of the Windows CE market. Microsoft could decide to discontinue or lessen its support of the Windows CE market. In addition, Microsoft has developed a version of its Windows NT operating system for ICDs and could decide to shift its support to this operating system to the detriment of Windows CE; - the ability of the Windows CE operating system to compete against existing and emerging operating systems for the ICD market including: VxWorks from WindRiver Systems Inc., pSOS from Integrated Systems, Inc., VRTX from Mentor Graphics Corporation, JavaOS from Sun Microsystems, Inc. and LINUX. In particular, in the market for palm-size devices, Windows CE faces intense 5 11 competition from PalmOS used on 3Com Corporation's Palm devices and to date has had limited success in this market. In the market for cellular phones, Windows CE faces intense competition from the EPOC operating system from Symbian. Windows CE may be unsuccessful in capturing a significant share of the larger segments of the ICD market; - the acceptance by OEMs and consumers of the mix of functionalities and features offered by Windows CE; and - the willingness of software developers to write applications that run on Windows CE. IF THE MARKET FOR ICDS FAILS TO DEVELOP FULLY OR DEVELOPS MORE SLOWLY THAN WE EXPECT, OUR REVENUE WILL NOT GROW AS FAST AS ANTICIPATED, IF AT ALL. The market for ICDs is emerging and the potential size of this market and the timing of its development are not known. As a result, our profit potential is uncertain and our revenue may not grow as fast as we anticipate, if at all. We are dependent upon the commercialization and broad acceptance by businesses and consumers of a wide variety of Windows CE-based ICDs. This commercialization and broad acceptance will depend on many factors, including: - the development of content and applications for ICDs; - the willingness of large numbers of businesses and consumers to use devices other than personal computers to achieve electronic connectivity; and - the evolution of industry standards that facilitate the distribution of content over the Internet to these devices. A SUBSTANTIAL PORTION OF OUR REVENUE IS GENERATED UNDER A MASTER DEVELOPMENT AND LICENSE AGREEMENT WITH MICROSOFT, WHICH CAN BE MODIFIED OR TERMINATED BY MICROSOFT AT ANY TIME. In 1997 and 1998, and for the six months ended June 30, 1999, 39%, 79% and 87% of our revenue, respectively, was generated under our master development and license agreement with Microsoft. The master agreement, which concludes in October 2000, includes a number of project-specific work plans. We bill Microsoft on a time-and-materials basis, although each project has a maximum dollar cap. We expect the revenue generated from work plans with Microsoft will continue to comprise the majority of our revenue for the next several years. We presently have dedicated approximately 200 of our 270 engineers to these projects. However, the master agreement and each of the individual work plans may be terminated or modified by Microsoft at any time. In addition, there is no guarantee that Microsoft will continue to enter into additional work plans with us. In the past, Microsoft has modified the timing and scale of certain projects and requested that our engineers be moved from one project to another. We do not believe that we could replace the Microsoft revenue in the short- or medium-term if existing work plans were canceled or curtailed, and such cancellations or curtailments would substantially reduce our revenue. IF MICROSOFT ADDS FEATURES TO ITS WINDOWS CE OPERATING SYSTEM THAT DIRECTLY COMPETE WITH SOLUTIONS WE PROVIDE, OUR REVENUE COULD BE REDUCED AND OUR PROFIT MARGINS COULD SUFFER. As the developer of Windows CE, Microsoft could add features to its operating system that directly compete with the software solutions we provide to our customers. Such features could include, for example, faxing, board support packages and quality assurance tools. The ability of our customers or potential customers to obtain solutions directly from Microsoft that compete with our solutions could harm our business. Even if the standard features of future Microsoft operating system software were more limited than our offerings, a significant number of our customers and potential customers might elect to accept more limited functionality in lieu of purchasing additional software. Moreover, the resulting competitive pressures could lead to price reductions for our products and reduce our profit margins. 6 12 IF WE DO NOT MAINTAIN OUR FAVORABLE RELATIONSHIP WITH MICROSOFT WE WILL HAVE DIFFICULTY MARKETING OUR SOLUTIONS AND OUR REVENUE WILL SUFFER. In the event that our relationship with Microsoft or with individuals within Microsoft were to deteriorate or Microsoft's distribution model for Windows CE were to change, then our efforts to market and sell our software solutions to OEMs could be adversely affected and our business would be harmed. Microsoft has great influence over the development plans and buying decisions of OEMs utilizing Windows CE for ICDs. Many of our OEM customers are referred to us by Microsoft. Moreover, Microsoft controls the marketing activities related to its operating systems, including trade shows, direct mail campaigns and print advertising. We must maintain mutually successful relationships with Microsoft and individuals within Microsoft so that we may continue to participate in joint marketing activities with and receive referrals from Microsoft. In addition, Microsoft may at any time make changes to its distribution model for Windows CE. For example, in late 1997 Microsoft decided to contract with us to provide Windows CE support services to microprocessor vendors with whom we had previously contracted directly. As a result, from late 1997 through late 1998 our revenue shifted from being generated by a variety of microprocessor vendors to being generated primarily by Microsoft. UNANTICIPATED DELAYS, OR ANNOUNCEMENT OF DELAYS, BY MICROSOFT OF WINDOWS CE PRODUCT RELEASES COULD ADVERSELY AFFECT OUR SALES. Unanticipated delays, or announcement of delays, in Microsoft's delivery schedule for new versions of its Windows CE operating system could cause us to delay our product introductions and impede our ability to complete customer projects on a timely basis. These delays or announcements by Microsoft could also cause our customers to delay or cancel their project development activities or product introductions. Any resulting delays in, or cancellations of, our planned product introductions or in our ability to commence or complete customer projects may adversely affect our revenue and could cause our quarterly operating results to fluctuate. For example, in 1998 Microsoft delayed the release of a version of its Windows CE Platform Builder, which delayed our introduction of a complementary product for an OEM customer. WE HAVE SIGNED A NON-COMPETITION AGREEMENT WITH MICROSOFT WHICH COULD LIMIT OUR ABILITY TO SUSTAIN OR GROW OUR BUSINESS. We must receive written permission from Microsoft in order to design or develop, or participate in, the design or development of products, or provide services in connection with products, which compete with Windows CE, the Windows CE Tools products, the Microsoft Windows card operating system, and/or the Microsoft Windows card tools in existence as of October 1, 1998, or which we know or have reason to know Microsoft intends to develop, is developing, or has developed, or intends to acquire. Therefore, if there is a significant shift away from Microsoft operating systems in the ICD market segments we are targeting, we will be unable to target and support other operating system platforms. Moreover, if our relationship with Microsoft is curtailed or terminated, we would be required to invest significant time and resources to transition our operations to target and support other operating systems. In addition, our ability to make acquisitions and/or to assimilate all of the operations of any acquired company into our operations may consequently be limited. These restrictions could limit our ability to develop and market software solutions which could, in turn, constrain our sales. THE FIXED-FEE ARRANGEMENTS WE HAVE WITH MANY OF OUR CUSTOMERS EXPOSE US TO THE RISK THAT WE MAY UNDERESTIMATE OUR COSTS FOR PROJECTS, WHICH COULD LOWER OUR PROFIT MARGINS. We provide our services to many of our customers under fixed-fee arrangements. In the event that we underestimate the scope or work effort required for a customer's project, we may be required to complete the project at a loss or at a significantly reduced gross margin. If we underestimate the fees for a series of projects and/or a very large project, our gross margins for a fiscal period may decline. In addition, revenue from these contracts is recognized on the percentage-of-completion method, measured by the cost incurred to date relative to the estimated total cost for the contract. If we underestimate the time necessary to complete these 7 13 projects, we may be required to recognize revenue at a later time than we had anticipated, which would have a negative impact on our financial condition and cause our quarterly results to fluctuate. IF WE FAIL TO SECURE CONTRACTS ON SUFFICIENTLY FAVORABLE TERMS, OR AT ALL, WITH THE LIMITED NUMBER OF MARKET-LEADING OEMS OUR REVENUE AND PROFIT MARGINS COULD SUFFER. There are a limited number of OEM customers that are capable of building and shipping large quantities of ICDs. In some market segments, one or two OEMs account for a majority of all unit sales. Competition for the business of these OEMs is intense. If we fail to secure and maintain service and licensing contracts with the limited number of OEMs in these markets we may not be able to participate in those market segments. In addition, as a result of their strong market position, these companies are typically able to secure favorable terms, including favorable pricing, in their technology licensing and service agreements. Further, many of these potential OEM customers have the capability to replace our services and products by utilizing internal resources. For these reasons, there is no guarantee that we will be able to secure contracts on sufficiently favorable terms, or at all, with the market-leading OEMs, which could harm our business. OUR MARKET IS BECOMING INCREASINGLY COMPETITIVE, WHICH MAY RESULT IN PRICE REDUCTIONS, LOWER GROSS MARGINS AND LOSS OF MARKET SHARE. The market for Windows CE-based solutions is becoming increasingly competitive. Increased competition may result in price reductions, lower gross margins and loss of market share, which would harm our business. We face competition from: - our current and potential customers' internal research and development departments that may seek to develop their own proprietary solutions; - large professional engineering services firms that may enter the market; - established ICD software and tools manufacturers such as Applied Microsystems Corporation, Spyglass, Inc., Phoenix Technologies, Inc., Mentor Graphics and Integrated Systems; - small- and medium-size engineering services companies such as VenturCom, Inc., Eclipse International, Inc., BlueWater Systems, Inc. and Vadem; and - software and component distributors such as Avnet/Hamilton Hallmark, Pioneer and Annasoft Systems. As we develop new products, particularly solutions focused on specific industries, we may begin competing with companies with whom we have not previously competed. It is also possible that new competitors will enter the market or that our competitors will form alliances, including alliances with Microsoft, that may enable them to rapidly increase their market share. The barrier to entering the market as a Windows CE-based ICD solutions provider is low and Microsoft is constantly encouraging new suppliers. New competitors may have lower overhead than us and therefore be able to offer advantageous pricing. We expect that competition will increase as other established and emerging companies enter the Windows CE-based ICD market and as new products and technologies are introduced. WE ARE DEPENDENT ON OUR CURRENT KEY PERSONNEL, AND OUR SUCCESS DEPENDS UPON OUR CONTINUED ABILITY TO ATTRACT, TRAIN AND RETAIN ADDITIONAL QUALIFIED PERSONNEL AT ACCEPTABLE COMPENSATION LEVELS. Our performance depends substantially on the continued services of our executive officers and key employees, in particular William T. Baxter, our Chairman of the Board, President and Chief Executive Officer. The loss of the services of Mr. Baxter or any of our other executive officers or key employees could harm our business. None of our executive officers has a contract that guarantees employment. Other than a $2.0 million life insurance policy on the lives of each of Messrs. Baxter, Dosser and Gregory, we do not maintain "key person" life insurance policies. In addition, we depend on our ability to attract, train and retain qualified personnel, specifically those with management, technical and product development skills. Competition for such personnel is intense, particularly in geographic areas recognized as high technology centers 8 14 such as the greater-Seattle area, where substantially all of our employees are located. There can be no assurance that we will be able to attract, train or retain additional highly qualified technical and managerial personnel in the future, which could harm our business. Moreover, to remain competitive we have had to increase employee compensation and our gross margins have been adversely impacted. To the extent such competitive wage pressure continues or increases our gross margins could suffer. IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, COMPETITORS MAY BE ABLE TO USE OUR TECHNOLOGY OR TRADEMARKS, WHICH COULD WEAKEN OUR COMPETITIVE POSITION, REDUCE OUR REVENUE AND INCREASE OUR COSTS. Our intellectual property is critical to our success. If we fail to adequately protect our intellectual property our competitive position could be weakened and our revenue adversely affected. We rely primarily on a combination of patent, copyright, trade secret and trademark laws, confidentiality procedures and contractual provisions to protect our intellectual property. These laws and procedures provide only limited protection. We have applied for three patents relating to our engineering work. These patents, if issued, may not provide sufficiently broad protection or they may not prove to be enforceable against alleged infringers. There can be no assurance that any of our pending patents will be granted. Even if granted, patents may be circumvented or challenged and, if challenged, may be invalidated. Any patents obtained may provide limited or no competitive advantage to us. It is also possible that another party could obtain patents that block our use of some, or all, of our products and services. If that occurred, we would need to obtain a license from the patent holder or design around their patent. The patent holder may or may not choose to make a license available to us at all or on acceptable terms. Similarly, it may not be possible to design around such a blocking patent. In general, there can be no assurance that our efforts to protect our intellectual property rights through patent, copyright, trade secret and trademark laws will be effective to prevent misappropriation of our technology, or to prevent the development and design by others of products or technologies similar to or competitive with those developed by us. We frequently license the source code of our products and the source code results of our services to customers. There can be no assurance that customers with access to our source code will comply with the license terms or that we will discover any violations of the license terms or, in the event of discovery of violations, that we will be able to successfully enforce the license terms and/or recover the economic value lost from such violations. To license many of our software products, we rely in part on "shrinkwrap" and "clickwrap" licenses that are not signed by the end user and, therefore, may be unenforceable under the laws of certain jurisdictions. As with other software products, our products are susceptible to unauthorized copying and uses that may go undetected, and policing such unauthorized use is difficult. A significant portion of our marks include the word "BSQUARE" or the preface "b." Other companies use forms of "BSQUARE" or the preface "b" in their marks alone or in combination with other words, and we cannot prevent all such third-party uses. We license certain trademark rights to third parties. Such licensees may not abide by compliance and quality control guidelines with respect to such trademark rights and may take actions that would harm our business. The computer software market is characterized by frequent and substantial intellectual property litigation, which is often complex and expensive, and involves a significant diversion of resources and uncertainty of outcome. Litigation may be necessary in the future to enforce our intellectual property or to defend against a claim of infringement or invalidity. Litigation could result in substantial costs and the diversion of resources and could harm our business and operating results. THIRD PARTIES COULD ASSERT THAT OUR SOLUTIONS INFRINGE THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH COULD EXPOSE US TO ADDITIONAL COSTS AND LITIGATION. Third parties may claim that our current or future solutions infringe their proprietary rights, and these claims, regardless of their merit, could increase our costs and harm our business. We have not conducted patent searches to determine whether the technology used in our products infringes patents held by third parties. In addition, it is difficult to determine whether our solutions infringe third-party intellectual property 9 15 rights, particularly in a rapidly evolving technological environment in which there may be numerous patent applications pending, many of which are confidential when filed, with regard to similar technologies. If we were to discover that one of our solutions violated a third party's proprietary rights, we may not be able to obtain a license on commercially reasonable terms or at all to continue offering that solution. Moreover, although we generally seek to be indemnified against claims that the technology we license from third parties infringes the proprietary rights of others, this indemnification is not always available or may be limited in scope or amount. Even if we receive broad third-party indemnification, these indemnitors may not have the financial capability to indemnify us in the event of infringement. In addition, in some circumstances we could be required to indemnify our customers for claims made against them that are based on our solutions. There can be no assurance that infringement or invalidity claims related to the solutions we develop and/or arising from the incorporation of third-party technology, and claims for indemnification from our customers resulting from such claims, will not be asserted or prosecuted against us. We expect that software product developers will be increasingly subject to infringement claims as the number of products and competitors in the software industry grows and the functionality of products in different industry segments overlaps. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources in addition to potential product redevelopment costs and delays. IF WE DO NOT RESPOND ON A TIMELY BASIS TO TECHNOLOGICAL ADVANCES AND EVOLVING INDUSTRY STANDARDS OUR FUTURE PRODUCT SALES COULD BE NEGATIVELY IMPACTED. The market for Windows CE-based solutions is new and evolving. As a result, the life cycles of our products are difficult to estimate. To be successful, we must continue to enhance our current product line and develop new products. We have experienced delays in enhancements and new product release dates in the past and may be unable to introduce enhancements or new products successfully or in a timely manner in the future. Our business may be harmed if we must delay releases of our products and product enhancements or if these products and product enhancements fail to achieve market acceptance when released. In addition, our customers may defer or forego purchases of our products if we, Microsoft, our competitors or major hardware, systems or software vendors introduce or announce new products or product enhancements. Such deferrals or failures to purchase would decrease our revenue. OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR FUTURE PROSPECTS AND WE CANNOT ASSURE YOU THAT WE WILL BE ABLE TO SUSTAIN OR INCREASE OUR PROFITABILITY. We were founded in July 1994, generated our first revenue in October 1994 and shipped our first product in November 1996. Accordingly, we have a limited operating history and you should not rely on our past results to predict our future performance. Although we have experienced significant revenue growth recently, this growth may not continue and we may not be able to sustain or increase profitability in the future. We anticipate that our expenses will increase substantially in the foreseeable future as we continue to develop our technology and expand our product and service offerings. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. If we fail to increase our revenue to keep pace with our expenses, we may experience losses. IF WE ARE UNABLE TO MANAGE OUR GROWTH OUR BUSINESS WILL SUFFER. Our rapid growth has placed, and is expected to continue to place, a significant strain on our managerial, technical, operational and financial resources. From August 1996 to July 1999, we grew from 21 employees to 348 employees, and we expect this rapid growth to continue for the foreseeable future. To manage our growth, we must implement additional management information systems, further develop our operational, administrative and financial systems and expand, train and manage our work force. We will also need to manage an increasing number of complex relationships with customers, marketing partners and other third parties. We cannot guarantee that our systems, procedures or controls will be adequate to support our current or future operations or that our management will be able to effectively manage our expansion. Our failure to do so could seriously harm our ability to deliver products and services in a timely fashion, fulfill existing customer commitments and attract and retain new customers. 10 16 OUR INTERNATIONAL OPERATIONS EXPOSE US TO GREATER INTELLECTUAL PROPERTY, MANAGEMENT, COLLECTIONS, REGULATORY AND OTHER RISKS. Our international operations expose us to a number of risks, including the following: - greater difficulty in protecting intellectual property; - greater difficulty in staffing and managing foreign operations; - increased risk of uncollectible accounts; - longer collection cycles; - unfavorable changes in regulatory practices and tariffs; - adverse changes in tax laws; - more extreme sales seasonality, particularly in the summer months; - the impact of fluctuating exchange rates between the U.S. dollar and foreign currencies; and - general economic and political conditions in these foreign markets. These risks could have a material adverse effect on the financial and managerial resources required to operate our foreign offices, as well as on our future international revenue, which could harm our business. IF WE CONDUCT FUTURE ACQUISITIONS, THEY COULD PROVE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE SHAREHOLDER VALUE AND ADVERSELY AFFECT OUR OPERATING RESULTS. Although we currently have no specific understandings, commitments or agreements for any acquisition, we may make investments in complementary companies, services and technologies in the future. We have not made any material acquisitions or investments to date, and therefore our ability as an organization to conduct acquisitions or investments is unproven. If we fail to properly evaluate and execute acquisitions and investments, they may seriously harm our business and prospects. To successfully complete an acquisition, we must properly evaluate the technology, accurately forecast the financial impact of the transaction, including accounting charges and transaction expenses, integrate and retain personnel, combine potentially different corporate cultures and effectively integrate products and research and development, sales, marketing and support operations. If we fail to do any of these, we may suffer losses or our management may be distracted from our day-to-day operations. In addition, if we conduct acquisitions using debt or equity securities, existing shareholders may be diluted, which could affect the market price of our stock. IF WE ARE UNABLE TO LICENSE KEY TECHNOLOGY FROM THIRD PARTIES OUR BUSINESS COULD BE HARMED. We rely on technology that we license from third parties, including software that is integrated with internally developed software and used in our products, to perform key functions. There can be no assurance that such third-party technology licenses will continue to be available to us on commercially reasonable terms, if at all. In the event that we are unable to continue to operate under current licenses or obtain additional licenses, we would be required to develop this technology internally, which could delay or limit our ability to introduce enhancements or new products or to continue to sell existing products. OUR SOFTWARE PRODUCTS OR THE THIRD-PARTY HARDWARE OR SOFTWARE INTEGRATED WITH OUR SOLUTIONS MAY SUFFER FROM DEFECTS OR ERRORS THAT COULD IMPAIR OUR ABILITY TO SELL OUR SOLUTIONS. Software and hardware solutions as complex as those needed for ICDs frequently contain errors or defects, especially when first introduced or when new versions are released. We have had to delay commercial release of certain versions of our solutions until software problems were corrected, and in some cases have provided product enhancements to correct errors in released products. Some of our contracts require us to repair or replace products that fail to work. To the extent that we repair or replace products our expenses may increase resulting in a decline in our gross margins. In addition, it is possible that by the time defects are fixed the market opportunity may have been missed which may result in lost revenue. Moreover, errors that 11 17 are discovered after commercial release could result in loss of revenue or delay in market acceptance, diversion of development resources, damage to our reputation or increased service and warranty costs, all of which could harm our business. WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN SIGNIFICANT COSTS. Our license agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims. It is possible, however, that these provisions may be ineffective under the laws of certain jurisdictions. Although we have not experienced any product liability claims to date, the sale and support of our solutions entail the risk of such claims and we may be subject to such claims in the future. A product liability claim brought against us, whether successful or not, could harm our business and operating results. THE LENGTHY SALES CYCLE OF OUR PRODUCTS MAKES OUR REVENUE SUSCEPTIBLE TO FLUCTUATIONS. Our sales cycle is generally long because the expense and complexity of our products and services typically require a lengthy approval process for investment in our products and services, and may be subject to a number of significant risks over which we have little or no control, including: - customers' budgetary constraints and internal acceptance review procedures; - the timing of budget cycles; and - the timing of customers' competitive evaluation processes. In addition, to successfully sell our products and services, we frequently must educate our potential customers about the full benefits of our products and services, which can require significant time. If our sales cycle lengthens unexpectedly, it could adversely affect the timing of our revenue which could cause our quarterly results to fluctuate. A SMALL NUMBER OF OUR EXISTING SHAREHOLDERS CAN EXERT CONTROL OVER US. After this offering, our officers, directors and principal shareholders holding more than 5% of our common stock will together control approximately % of our outstanding common stock. As a result, these shareholders, if they act together, will be able to control our management and affairs of the company and all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control of us and might affect the market price of our common stock. IT MIGHT BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US EVEN IF DOING SO WOULD BE BENEFICIAL TO OUR SHAREHOLDERS. Certain provisions of our amended and restated articles of incorporation, bylaws and Washington law may discourage, delay or prevent a change in the control of us or a change in our management even if doing so would be beneficial to our shareholders. Additionally, the existence of these provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. WE WILL HAVE BROAD DISCRETION IN THE USE OF THE PROCEEDS OF THIS OFFERING. OUR FAILURE TO APPLY SUCH FUNDS EFFECTIVELY COULD HARM OUR BUSINESS. We have not designated any specific use for a substantial portion of the net proceeds from this offering. We intend to use the net proceeds primarily for general corporate purposes, including working capital and relocation expenses. Management will have significant flexibility in applying the net proceeds of the offering. Our failure to apply such funds effectively could harm our business. 12 18 THE SUBSTANTIAL NUMBER OF SHARES THAT WILL BE ELIGIBLE FOR SALE IN THE FUTURE MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK. Sales of a substantial number of shares of our common stock in the public market following this offering could adversely affect the market price of the common stock. As additional shares of our common stock become available for resale in the public market, the supply of our common stock will increase which could decrease the price. The number of shares of common stock available for sale in the public market is limited by restrictions under the federal securities laws and under agreements some of our shareholders, directors and employees have entered into with the underwriters. The following table shows the timing of when shares outstanding on July 31, 1999 may be eligible for resale in the public market after this offering:
DAYS AFTER DATE OF THIS PROSPECTUS SHARES FIRST ELIGIBLE FOR RESALE COMMENT - ---------------------------------- -------------------------------- ------------------------------- - - Upon effectiveness............ - Freely tradeable shares sold in this offering, and shares eligible for sale pursuant to vested and exercisable options pursuant to our Form S-8 registration statement - - 90 days....................... - Shares eligible for sale under Rules 144 and 701 - - 180 days...................... - Expiration of lock up agreements
NEW INVESTORS WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION. Investors in our common stock in this offering will experience immediate and substantial dilution in the net tangible book value of their shares. Assuming an initial public offering price of $ per share, dilution to new investors would be $ per share. Additional dilution will occur upon exercise of outstanding stock options. YEAR 2000 ISSUES MAY NEGATIVELY IMPACT OUR BUSINESS. We believe the current versions of our solutions are "Year 2000 compliant" -- that is, they are capable of adequately distinguishing 21st century dates from 20th century dates. However, we may learn that our software solutions do not contain all the necessary routines and codes necessary for the accurate calculation, display, storage and manipulation of data involving dates. In addition, in the majority of our software licenses, we have warranted that dates on or after January 1, 2000 will not adversely affect the performance of our products. Moreover, our solutions are generally integrated into customer products involving sophisticated hardware and complex software products. If this third-party equipment or software does not operate properly with respect to the Year 2000, we may face claims or incur unexpected expenses to remedy any resulting problems. The costs of defending and resolving Year 2000-related disputes, regardless of the merits of such disputes, and any liability we may have for Year 2000-related damages, including consequential damages, could adversely affect our operating results. Further, many of our computer systems are connected to Microsoft's computer systems, and we depend on this connectivity to communicate with Microsoft on various levels. Any failure of this connectivity or of Microsoft's computers to be Year 2000 compliant may disrupt our communications with Microsoft and interfere with our ability to transact business. In addition, we believe that the purchasing patterns of our customers and potential customers may be affected by Year 2000 issues as companies expend significant resources to correct or upgrade their current software systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase software solutions such as those we offer. To the extent Year 2000 issues cause a significant delay in, or cancellation of, decisions to purchase our products or services, our business would be harmed. For a more detailed description of our Year 2000 preparedness, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000 Compliance" on page 25. 13 19 FORWARD-LOOKING STATEMENTS Some of the statements under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this prospectus constitute forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, those listed under "Risk Factors" and elsewhere in this prospectus. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "expects," "plans," "intends," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor anyone else assumes responsibility for the accuracy and completeness of such statements. We are under no duty to update any of the forward-looking statements after the date of this prospectus. USE OF PROCEEDS We expect to receive approximately $ million in net proceeds from the sale of the shares of common stock in this offering, assuming the initial public offering price is $ per share (approximately $ million if the underwriters' over-allotment option is exercised in full). The principal purposes of this offering are to create a public market for our stock and to raise working capital. We plan to use approximately $4.0 million of the net proceeds for capital equipment purchases associated with our planned relocation of our principal administrative, sales, marketing, support and research and development facilities in October 1999. We have no specific uses planned for the remainder of the net proceeds other than for general corporate purposes. Pending such uses, we intend to invest the net proceeds of this offering in investment grade, interest-bearing securities. We may use a portion of the net proceeds to acquire additional businesses, products and technologies or to establish joint ventures that we believe will complement our current or future business. However, we have no specific plans, agreements or commitments to do so, and are not currently engaged in any negotiations for any such acquisition or joint venture. DIVIDEND POLICY We have never paid cash dividends on our common stock. We currently intend to retain any future earnings to fund the development and growth of our business. Therefore, we do not currently anticipate paying any cash dividends in the foreseeable future. In addition, the terms of our current credit facility prohibit us from paying dividends without our lender's consent. 14 20 CAPITALIZATION The following table sets forth our capitalization as of June 30, 1999 on the following three bases: - on an actual basis; - on a pro forma basis after giving effect to the conversion of 8,333,333 outstanding shares of mandatorily redeemable convertible preferred stock into shares of common stock; and - on a pro forma as adjusted basis after giving effect to our receipt of the net proceeds from the sale of shares of common stock at $ per share in this offering. The outstanding share information excludes 2,996,562 shares of common stock that are reserved for issuance upon exercise of stock options under our stock option plan outstanding as of June 30, 1999 at a weighted average exercise price of $0.73 per share. The capitalization information set forth in the table below is qualified by and should be read in conjunction with the more detailed consolidated financial statements and related notes appearing elsewhere in this prospectus.
JUNE 30, 1999 (UNAUDITED) ----------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) Long-term obligations, net of current portion.............. $ 210 $ 210 $ Mandatorily redeemable convertible preferred stock, no par value: 10,000,000 shares authorized; 8,333,333 shares issued and outstanding, actual; no shares issued and outstanding, pro forma and pro forma as adjusted......... 14,475 -- -- Shareholders' equity: Common stock, no par value: 50,000,000 authorized, 18,225,205 shares issued and outstanding, actual; 50,000,000 authorized, 26,558,538 outstanding, pro forma; 50,000,000 authorized, shares issued and outstanding, pro forma as adjusted......... 3,209 17,684 Deferred stock option compensation....................... (1,157) (1,157) Stock subscription....................................... (29) (29) Cumulative foreign currency translation adjustment....... (61) (61) Retained earnings (accumulated deficit).................. (2,217) (2,217) ------- ------- -- Total shareholders' equity (deficit)............. (255) 14,220 ------- ------- -- Total capitalization........................ $14,430 $14,430 $ ======= ======= ==
15 21 DILUTION If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering. We calculate net tangible book value by dividing the net tangible book value (total assets less intangible assets and total liabilities) by the number of outstanding shares of common stock. At June 30, 1999, our pro forma net tangible book value, after giving effect to the automatic conversion of all outstanding shares of mandatorily redeemable convertible preferred stock into 8,333,333 shares of common stock upon the closing of this offering, was $14.2 million, or $0.54 per share of common stock. After giving effect to the sale of the shares of common stock in this offering at an assumed initial public offering price of $ per share (less estimated underwriting discounts and commissions and estimated expenses we expect to pay in connection with this offering), our pro forma as adjusted net tangible book value at June 30, 1999 would be $ , or $ per share. This represents an immediate increase in the pro forma as adjusted net tangible book value of $ per share to existing shareholders and an immediate dilution of $ per share to new investors or approximately % of the assumed offering price of $ per share. The following table illustrates this dilution on a per share basis: Assumed initial public offering price per share.......... $ ------- Pro forma net tangible book value per share at June 30, 1999................................................... $ 0.54 ------- Increase per share attributable to new investors......... ------- Pro forma as adjusted net tangible book value per share after this offering.................................... ------- Dilution per share to new investors...................... $ =======
The following table shows on a pro forma as adjusted basis at June 30, 1999, after giving effect to the automatic conversion of all outstanding shares of mandatorily redeemable convertible preferred stock into shares of common stock upon the closing of this offering, the number of shares of common stock purchased from us, the total consideration paid to us and the average price paid per share by existing shareholders and by new investors purchasing common stock in this offering (before deducting underwriting discounts and commissions and estimated offering expenses) at an assumed public offering price of $ per share:
SHARES PURCHASED TOTAL CONSIDERATION --------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ------------- Existing shareholders.............. 26,558,538 % $15,012,000 % $0.57 New investors...................... $ ---------- --- ----------- --- Total.................... 100% $ 100% ========== === =========== ===
The above computations assume no exercise of options after June 30, 1999. The number of shares outstanding at June 30, 1999 excludes 2,996,562 shares of common stock issuable upon exercise of options outstanding as of June 30, 1999 having a weighted average exercise price of $0.73 per share. To the extent that any shares are issued upon exercise of options, there will be further dilution to new investors. To the extent the option holders exercise these outstanding options, or any options we grant in the future, there will be further dilution to new investors. For a more detailed discussion of our stock plans and outstanding options to purchase common stock see Notes 7 and 8 of the Notes to Consolidated Financial Statements included elsewhere in this prospectus. 16 22 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data as of and for the years ended December 31, 1996, 1997 and 1998 are derived from our consolidated financial statements, which have been audited by Arthur Andersen LLP, independent public accountants. The consolidated financial data as of and for the periods ending December 31, 1994 and 1995 are derived from unaudited financial statements. The consolidated financial data as of and for the six months ended June 30, 1998 and 1999 are derived from unaudited financial statements included elsewhere in this prospectus. We have prepared this unaudited information on the same basis as the audited consolidated financial statements and have included all adjustments, consisting of only normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results. When you read this selected consolidated financial data, it is important that you also read the historical consolidated financial statements and related notes included in this prospectus, as well as the section of this prospectus related to "Management's Discussion and Analysis of Financial Condition and Results of Operations." Our historical results are not necessarily indicative of our future results.
PERIOD FROM INCEPTION SIX MONTHS ENDED (JULY 15) TO YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, ----------------------------------------- ----------------- 1994 1995 1996 1997 1998 1998 1999 ------------ ----------- ------- ------- ------- ------- ------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue............................................ $ 151 $ 1,573 $ 4,186 $14,405 $24,612 $10,802 $18,543 Cost of revenue.................................... 83 795 1,404 5,644 11,301 5,028 8,899 ------- ------- ------- ------- ------- ------- ------- Gross profit....................................... 68 778 2,782 8,761 13,311 5,774 9,644 Operating expenses Research and development......................... -- -- 205 1,391 3,671 1,452 2,960 Selling, general and administrative.............. 4 86 606 2,806 6,470 2,618 5,236 ------- ------- ------- ------- ------- ------- ------- Total operating expenses................... 4 86 811 4,197 10,141 4,070 8,196 ------- ------- ------- ------- ------- ------- ------- Income from operations............................. 64 692 1,971 4,564 3,170 1,704 1,448 Interest income (expense), net..................... -- 1 -- (12) 319 179 130 ------- ------- ------- ------- ------- ------- ------- Income before income taxes......................... 64 693 1,971 4,552 3,489 1,883 1,578 Provision for income taxes......................... -- -- -- 746 1,189 666 712 ------- ------- ------- ------- ------- ------- ------- Net income......................................... $ 64 $ 693 $ 1,971 $ 3,806 $ 2,300 $ 1,217 $ 866 ======= ======= ======= ======= ======= ======= ======= Basic earnings per share(1)........................ $ 0.00 $ 0.03 $ 0.09 $ 0.18 $ 0.12 $ 0.06 $ 0.04 ======= ======= ======= ======= ======= ======= ======= Shares used to compute basic earnings per share(1)......................................... 21,000 21,000 22,106 21,400 18,372 18,615 18,206 ------- ------- ------- ------- ------- ------- ------- Pro forma basic earnings per share(2).............. $ 0.09 $ 0.03 ======= ======= Shares used to compute pro forma basic earnings per share(2)......................................... 26,021 26,539 ======= =======
DECEMBER 31, JUNE 30, 1999 ------------------------------------------------------------- ------------------- 1994 1995 1996 1997 1998 ACTUAL PRO FORMA ----------- ----------- ------- ------- ------------- ------- --------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments............................... $ 61 $ 103 $ 187 $ 2,286 $ 6,906 $ 9,284 $ 9,284 Working capital............................. 65 236 658 2,918 10,280 10,675 10,675 Total assets................................ 96 514 1,057 6,453 16,158 18,749 18,749 Long-term obligations, net of current portion................................... -- -- -- 1,743 289 210 210 Mandatorily redeemable convertible preferred stock..................................... -- -- -- -- 14,417 14,475 -- Shareholders' equity (deficit).............. 66 261 924 2,330 (1,298) (255) 14,220
- --------------- (1) See Note 12 to the Consolidated Financial Statements for the determination of shares used in computing basic earnings per share. (2) Shares used to compute pro forma basic earnings per share is defined as the weighted average number of shares of common stock outstanding for the period plus the weighted average number of shares of common stock resulting from the assumed conversion of all outstanding shares of the mandatorily redeemable convertible preferred stock as if converted on date of issuance. 17 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section of this prospectus includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. We use words such as "anticipate," "believes," "expects," "future," "intends" and similar expressions to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this prospectus. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or our predictions. For a description of these risks, see "Risk Factors." OVERVIEW We are a leading provider of software solutions that enable the development and proliferation of a wide variety of ICDs based on the Microsoft Windows CE operating system. Our revenue totaled $14.4 million in 1997, $24.6 million in 1998 and $18.5 million for the six months ended June 30, 1999. We generated net income of $3.8 million in 1997, $2.3 million in 1998 and $866,000 for the six months ended June 30, 1999. We began operations in July 1994, generated our first revenue in October 1994 and shipped our first product in November 1996. Through late 1997, we provided software engineering services directly to microprocessor vendors. In late 1997, Microsoft decided to contract with us to provide our services to the microprocessor customers with whom we had previously contracted directly. As a result, we began to experience a shift from providing engineering services directly to microprocessor vendors to working for Microsoft for the benefit of these companies. This shift to Microsoft work was completed in the second quarter of 1998. In 1997 we began research and development activities which enabled us to enhance our ability to provide a broad range of software solutions. These research and development activities produced software applications for ICD tool kits and handheld devices. In connection with these activities, we hired personnel to build our human resource, finance, legal and administrative infrastructure. In early 1998, we accelerated our investments in research and development, marketing and domestic and international sales channels. Since March 1998, we have: - hired more than 165 employees; - provided solutions for the development of more than 30 different ICDs; - established direct sales offices in Germany and Japan; and - released more than 20 localized versions of our products in German, Spanish, French, Italian, Japanese, Portugese and International English. Beginning in early 1999, we expanded our marketing and sales force to penetrate the growing market for our products and services. These investments have significantly increased our operating expenses, contributing to reduced profitability compared to 1997. We anticipate that our operating expenses will increase substantially for the foreseeable future as we expand our product development, sales and marketing and professional services staff. If we fail to increase our revenue to keep pace with these increased expenses, we may experience quarterly losses. We derive the majority of our revenue from engineering services. We also generate revenue from product licenses, and to a lesser extent, from customer maintenance and training services. We perform services under both time-and-materials contracts and fixed-fee contracts. In conjunction with our fixed-fee contracts, we may also derive ongoing license royalties. We sell our products through our direct sales force as well as through indirect channels, such as original equipment manufacturers and distributors. To date, the majority of our sales have resulted from the efforts of our inside sales personnel. 18 24 We recognize revenue on the following bases: - Time-and-materials consulting contracts. We recognize revenue as services are rendered. - Fixed-fee consulting contracts. Revenue from fixed-fee contracts is recognized on the percentage-of-completion method, measured by the cost incurred to date to the estimated total cost for the contract. This method is used because we consider expended costs to be the best available measure of contract performance. Contract costs include all direct labor, material and any other costs related to contract performance. Selling, general and administrative costs are expensed as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions and estimated profitability may result in revisions in the estimate of total costs. Any required adjustments due to these changes are recognized in the period in which such revisions are determined. - Product Revenue. Product revenue, including advanced production royalty payments, is generally recognized when a customer license agreement has been executed, the software has been shipped, remaining obligations are insignificant and collection of the resulting account receivable is probable. We recognize license royalty income as it is reported by the reseller when it ships its product to distributors. HISTORICAL RESULTS OF OPERATIONS The following table presents certain financial data as a percentage of total revenue for the years ended December 31, 1996, 1997 and 1998 and for the six months ended June 30, 1998 and 1999. Our historical operating results are not necessarily indicative of the results for any future period.
AS A PERCENTAGE OF TOTAL REVENUE ----------------------------------------- SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ----------------------- -------------- 1996 1997 1998 1998 1999 ----- ----- ----- ----- ----- (UNAUDITED) CONSOLIDATED STATEMENT OF OPERATIONS DATA Revenue: Service....................................... 100% 97% 95% 94% 96% Product....................................... -- 3 5 6 4 ----- ----- ----- ----- ----- Total revenue............................ 100 100 100 100 100 ----- ----- ----- ----- ----- Cost of revenue: Service....................................... 33 39 46 46 47 Product....................................... -- -- -- 1 1 ----- ----- ----- ----- ----- Total cost of revenue.................... 33 39 46 47 48 ----- ----- ----- ----- ----- Gross margin..................................... 67 61 54 53 52 Operating expenses: Research and development...................... 5 10 15 13 16 Selling, general and administrative........... 15 20 26 24 28 ----- ----- ----- ----- ----- Total operating expenses................. 20 30 41 37 44 ----- ----- ----- ----- ----- Income from operations........................... 47 31 13 16 8 Interest income, net............................. -- -- 1 1 1 ----- ----- ----- ----- ----- Income before income taxes....................... 47 31 14 17 9 Provision for income taxes....................... -- 5 5 6 4 ----- ----- ----- ----- ----- Net income....................................... 47% 26% 9% 11% 5% ===== ===== ===== ===== =====
19 25 COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 AND 1999 Revenue Revenue consists of service and product revenue, which includes software license fees and royalties. Total revenue increased 72% from $10.8 million for the six months ended June 30, 1998 to $18.5 million for the six months ended June 30, 1999. Microsoft accounted for 73% and 87% of total revenue for the six months ended June 30, 1998 and 1999, respectively. Revenue outside of North America totaled $545,000 for the six months ended June 30, 1998 and $271,000 for the six months ended June 30, 1999. The decrease in international revenue resulted primarily from the shift from working directly with international microprocessor vendors to working directly with Microsoft on behalf of those customers. Service revenue. Service revenue increased by 75% from $10.2 million for the six months ended June 30, 1998 to $17.8 million for the six months ended June 30, 1999. This increase was due to an increase in the number and size of consulting service projects. As a percentage of total revenue, service revenue did not increase materially. Product revenue. Product revenue increased 12% from $621,000 for the six months ended June 30, 1998 to $695,000 for the six months ended June 30, 1999. This increase resulted primarily from an increase in sales of pre-packaged application products including the newly introduced CEValidator quality assurance test suite. As a percentage of total revenue, product revenue did not change materially. Cost of Revenue Cost of service revenue. Cost of service revenue consists primarily of salaries and benefits for software developers and quality assurance personnel, plus an allocation of facilities and depreciation costs. Cost of service revenue increased 79% from $4.9 million for the six months ended June 30, 1998 to $8.8 million for the six months ended June 30, 1999. The increase in absolute dollars resulted primarily from the hiring and training of consulting personnel to support our growing customer base. Cost of service revenue as a percentage of related service revenue was 48% for the six months ended June 30, 1998 and 49% for the six months ended June 30, 1999. The increase in cost of service revenue as a percentage of the related service revenue in the first half of 1999 was primarily the result of an increase in software engineering salaries due to competitive employee recruiting and retention pressures in the greater-Seattle area. Cost of product revenue. Cost of product revenue consists of license fees and royalties for third-party software, product media, product duplication and manuals. Cost of product revenue decreased from $121,000 for the six months ended June 30, 1998 to $108,000 for the six months ended June 30, 1999. Operating Expenses Research and development. Research and development expenses consist primarily of salaries and benefits for software developers, quality assurance personnel, program managers and an allocation of our facilities and depreciation costs. Research and development expenses increased 104%, from $1.5 million for the six months ended June 30, 1998 to $3.0 million for the six months ended June 30, 1999. This increase resulted from an increase in the number of software developers and quality assurance personnel to expand our product offerings and to support development and testing activities. Research and development costs represented 13% of our total revenue for the six months ended June 30, 1998 and 16% for the six months ended June 30, 1999. The increase in research and development expenses as a percentage of total revenue primarily reflects the more rapid increase of our investment in product development activities as compared to the growth in revenue during this period. We anticipate that research and development expenses will continue to increase in absolute dollars in future periods. Selling, general and administrative. Selling expenses are comprised of salaries and benefits earned by sales and marketing personnel, travel, corporate advertising and promotional expenses, plus an allocation of facilities and depreciation costs. General and administrative expenses consist primarily of salaries, benefits and related costs for our executive, finance, legal, administrative and information services personnel and professional service fees. 20 26 Selling expenses increased 68% from $967,000 for the six months ended June 30, 1998 to $1.6 million for the six months ended June 30, 1999. This increase resulted primarily from our continued investment in sales and marketing infrastructure, both domestically and internationally, which included significant personnel-related expenses, travel expenses and related facility and equipment costs, as well as increased marketing activities, including trade shows, public relations and other promotional expenses. Selling expenses represented 9% of our total revenue for the six months ended June 30, 1998 and June 30, 1999. We anticipate that sales and marketing expenses will increase in absolute dollars in future periods as we expand our sales and marketing staff both domestically and internationally. General and administrative expenses increased 119% from $1.7 million for the six months ended June 30, 1998 to $3.6 million for the six months ended June 30, 1999. General and administrative expenses represented 15% of our total revenue for the six months ended June 30, 1998 and 19% for the six months ended June 30, 1999. This increase in absolute dollars and as a percentage of total revenue resulted primarily from the addition of executive, finance and administrative personnel to support the growth of our business as well as personnel and facility costs associated with our international offices. Our general and administrative expenses have increased and we anticipate they will continue to increase in absolute dollars as we expand our administrative staff and incur expenses associated with becoming a public company. Interest income, net. Interest income, net consists of earnings on our cash, cash equivalents and short-term investment balances offset by interest expense associated with debt obligations. Interest income, net was $179,000 for the six months ended June 30, 1998 and $130,000 for the six months ended June 30, 1999. The decrease resulted from an increase in interest expense on our long-term obligations. Income taxes. Our provision for federal, state and international income taxes was $666,000 for the six months ended June 30, 1998 as compared to $712,000 for the six months ended June 30, 1999, yielding effective rates of 35.4% in 1998 and 45.1% in 1999. The increase in the effective rate is due to the effect of the non-deductibility of losses from our international operations. COMPARISON OF YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 Revenue Total revenue increased 244% from $4.2 million in 1996 to $14.4 million in 1997, and an additional 71% to $24.6 million in 1998. Microsoft accounted for 5%, 39% and 79% of total revenue in 1996, 1997 and 1998, respectively. Revenue outside of North America totaled $1.8 million in 1996, $4.3 million in 1997 and $955,000 in 1998. The decrease in international revenue from 1996 to 1998 and the increase in Microsoft revenue resulted from the shift from working directly with microprocessor vendors to working with Microsoft for the benefit of those customers during this period. Service revenue. Service revenue increased 236% from $4.2 million in 1996 to $14.0 million in 1997, and an additional 67% to $23.4 million in 1998. The increase in service revenue for all periods was due to the increasing number and size of service projects and related hiring of engineering personnel to fulfill project requirements. Product revenue. Product revenue increased 3,391% from $11,000 in 1996 to $384,000 in 1997, and an additional 217% to $1.2 million in 1998. The increase in product revenue from 1996 to 1997 resulted primarily from an increase in the volume of our software applications bundled on handheld personal computers. The increase in product revenue from 1997 to 1998 resulted from the expansion of product offerings from software applications for handheld personal computers to ICD tool products. Cost of Revenue Cost of service revenue. Cost of service revenue increased 298% from $1.4 million in 1996 to $5.6 million in 1997, and an additional 100% to $11.1 million in 1998. These increases resulted from the hiring and training of consulting engineers to support our growing customer base. Cost of service revenue as a percentage of related service revenue was 34% in 1996, 40% in 1997 and 48% in 1998. The increases in cost of service 21 27 revenue as a percentage of related service revenue reflect higher personnel costs related to the greater-Seattle personnel market pressures, as well as higher facilities and depreciation costs associated with expansion. Cost of product revenue. Cost of product revenue increased 1,850% from $4,000 in 1996 to $78,000 in 1997, and an additional 113% to $166,000 in 1998. Cost of product revenue as a percentage of related product revenue was 36% in 1996, 20% in 1997 and 14% in 1998. Operating Expenses Research and development. Research and development expenses increased 579% from $205,000 in 1996 to $1.4 million in 1997, and an additional 164% to $3.7 million in 1998. These increases primarily related to the increase in the number of software developers and quality assurance personnel hired to expand our product offerings and to support our product development and testing activities. Research and development expenses represented 5% of our total revenue in 1996, 10% in 1997 and 15% in 1998. The increases in research and development expenses as a percentage of total revenue primarily reflect the more rapid investment in our research and development activities compared to the growth of our revenue during these periods. Selling, general and administrative. Selling expenses increased 451% from $152,000 in 1996 to $837,000 in 1997, and an additional 172% to $2.3 million in 1998. These increases resulted primarily from our investment in sales and marketing infrastructure, both domestically and internationally, which included significant personnel-related expenses, travel expenses and related facility and equipment costs, as well as increased marketing activities, including trade shows, public relations and other promotional expenses. Selling expenses represented 4% of our total revenue in 1996, 6% in 1997 and 9% in 1998. The increases in selling expenses as a percentage of total revenue primarily reflects the more rapid investment in our sales and marketing infrastructure compared to the growth of our revenue during these periods. General and administrative expenses increased 334% from $454,000 in 1996 to $2.0 million in 1997, and an additional 113% to $4.2 million in 1998. The increases from 1996 to 1998 primarily resulted from the addition of finance, executive and administrative personnel to support the growth of our business during these periods. General and administrative costs represented 11%, 14% and 17% of our total revenue in 1996, 1997 and 1998, respectively. Interest income (expense), net. Interest income (expense), net was zero in 1996, $12,000 of expense in 1997 and $319,000 of income in 1998. The increase in interest income in 1998 over prior periods resulted from an increase in interest income resulting from higher average cash and cash equivalent and short-term investment balances over the period. Income taxes. Our provision for federal, state and international income taxes was zero for 1996, $746,000 for 1997 and $1.2 million for 1998, yielding effective rates of 0.0%, 16.4% and 34.1% in 1996, 1997 and 1998, respectively. We were taxed as a subchapter S corporation until October 15, 1997, when our shareholders elected to convert to a C corporation. Accordingly, taxes on our income were the responsibility of the shareholders until the conversion. 22 28 QUARTERLY RESULTS OF OPERATIONS The following table presents our unaudited quarterly results of operations for 1998 and the six months ended June 30, 1999. You should read the following table in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. We have prepared this unaudited information on the same basis as our audited consolidated financial statements. This table includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the quarters presented. You should not draw any conclusions about our future results from the results of operations for any quarter.
THREE MONTHS ENDED ------------------------------------------------------------------ MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, 1998 1998 1998 1998 1999 1999 --------- -------- --------- -------- --------- -------- (IN THOUSANDS, EXCEPT AS A PERCENTAGE OF REVENUE) CONSOLIDATED STATEMENT OF OPERATIONS DATA Revenue: Service............................... $5,159 $5,022 $6,334 $6,878 $8,461 $9,387 Product............................... 333 288 245 353 348 347 ------ ------ ------ ------ ------ ------ Total revenue.................... 5,492 5,310 6,579 7,231 8,809 9,734 ------ ------ ------ ------ ------ ------ Cost of revenue: Service............................... 2,360 2,547 2,978 3,250 4,150 4,641 Product............................... 68 53 9 36 58 50 ------ ------ ------ ------ ------ ------ Total cost of revenue............ 2,428 2,600 2,987 3,286 4,208 4,691 ------ ------ ------ ------ ------ ------ Gross profit............................. 3,064 2,710 3,592 3,945 4,601 5,043 Operating expenses: Research and development.............. 575 877 1,023 1,196 1,474 1,486 Selling, general and administrative... 1,201 1,417 1,373 2,479 2,405 2,831 ------ ------ ------ ------ ------ ------ Total operating expenses......... 1,776 2,294 2,396 3,675 3,879 4,317 ------ ------ ------ ------ ------ ------ Income from operations................... 1,288 416 1,196 270 722 726 Interest income, net..................... 33 146 58 82 53 77 ------ ------ ------ ------ ------ ------ Income before income taxes............... 1,321 562 1,254 352 775 803 Provision for income taxes............... 465 201 452 71 343 369 ------ ------ ------ ------ ------ ------ Net income............................... $ 856 $ 361 $ 802 $ 281 $ 432 $ 434 ====== ====== ====== ====== ====== ====== AS PERCENTAGE OF TOTAL REVENUE Revenue: Service............................... 94% 95% 96% 95% 96% 96% Product............................... 6 5 4 5 4 4 ------ ------ ------ ------ ------ ------ Total revenue.................... 100 100 100 100 100 100 ------ ------ ------ ------ ------ ------ Cost of revenue: Service............................... 43 48 45 45 47 48 Product............................... 1 1 -- -- 1 -- ------ ------ ------ ------ ------ ------ Total cost of revenue............ 44 49 45 45 48 48 ------ ------ ------ ------ ------ ------ Gross margin............................. 56 51 55 55 52 52 Operating expenses: Research and development.............. 10 16 16 17 17 15 Selling, general and administrative... 22 27 21 34 27 29 ------ ------ ------ ------ ------ ------ Total operating expenses......... 32 43 37 51 44 44 ------ ------ ------ ------ ------ ------ Income from operations................... 24 8 18 4 8 8 Interest income, net..................... -- 3 1 1 1 1 ------ ------ ------ ------ ------ ------ Income before income taxes............... 24 11 19 5 9 9 Provision for income taxes............... 8 4 7 1 4 4 ------ ------ ------ ------ ------ ------ Net income............................... 16% 7% 12% 4% 5% 5% ====== ====== ====== ====== ====== ======
23 29 The trends discussed in the annual comparisons of operating results from 1996 through 1998 and for the six months ended June 30, 1998 and 1999 generally apply to the comparison of results of operations for these six quarters. Revenue decreased during the three months ended June 30, 1998 due to the shift from working directly with microprocessor vendors on a fixed-fee basis to working with Microsoft on a time-and-materials basis. Research and development expenses increased significantly as a percentage of revenue during the three months ended June 30, 1998 due to substantial investments related to the development of integration tool kits and end-user applications. Selling, general and administrative expenses increased during the three months ended December 31, 1998 due to the increased personnel and facility costs associated with opening sales offices in Germany and Japan as well as expenses related to seasonal trade show activities. Our quarterly operating results have varied widely in the past, and we expect that they will continue to fluctuate in the future as a result of a number of factors, many of which are outside our control. LIQUIDITY AND CAPITAL RESOURCES Since our inception, we have financed our operations primarily through cash flow from operations. As of June 30, 1999, we had $9.3 million of cash and cash equivalents. This represents an increase of $2.4 million over December 31, 1998. In January 1998, we issued mandatorily redeemable convertible preferred stock from which we received net proceeds of approximately $14.3 million. Concurrent with this transaction, we repurchased 3,333,333 shares of our common stock for an aggregate of $6.0 million. To a lesser extent, we have financed software system purchases through traditional financing arrangements. Our working capital at June 30, 1999 was $10.7 million compared to $10.3 million at December 31, 1998. We have a working capital revolving line of credit with a financial institution that is secured by our accounts receivable. This facility allows us to borrow up to the lesser of 80% of our eligible accounts receivable or $5.0 million. The facility expires in July 2000. The agreement under which the line of credit was established contains certain covenants, including a provision requiring us to maintain specified financial ratios. We were in compliance with these covenants at June 30, 1999, and at that time there were no borrowings outstanding under this credit facility. We maintain a $1.0 million term loan for equipment purchases and a $4.0 million term loan for leasehold improvement purchases. These facilities operate as a revolver through June 2000, after which time any outstanding balances must be paid over 36-month and 60-month terms, respectively. These loans also require us to comply with certain financial covenants, including a requirement that we maintain certain financial ratios. We were in compliance with these covenants at June 30, 1999 and, at that time, there was approximately $367,000 outstanding under these credit facilities. Our operating activities resulted in net cash inflows of $1.6 million in 1996, $4.3 million in 1997, $188,000 in 1998 and $3.6 million for the six months ended June 30, 1999. The sources of cash in 1996, 1997, 1998 and for the six months ended June 30, 1999 were primarily income from operations, increases in accounts payable and accrued liabilities, partially offset by increases in accounts receivable. Investing activities used cash of $248,000 in 1996, $1.4 million in 1997 and $3.7 million in 1998, primarily for the purchase of capital equipment and short-term investments. Investing activities provided cash of $512,000 during the six months ended June 30, 1999, primarily due to proceeds from the maturity of investments offset by cash used for purchases of capital equipment. Financing activities used cash of $1.3 million in 1996, $775,000 in 1997 and $98,000 for the six months ended June 30, 1999, primarily through shareholder draws and repayment of long-term obligations. Financing activities generated $6.5 million in 1998, primarily through the issuance of mandatorily convertible preferred stock, partially offset by repayment of shareholder loans and the $6.0 million repurchase of shares of common stock. We currently anticipate that we will continue to experience significant increases in our operating expenses for the foreseeable future as we enter new markets for our products and services, increase research and development expenses, increase sales and marketing activities, develop new distribution channels and broaden our professional service capabilities. Our operating expenses will consume a material amount of our cash resources, including a portion of the net proceeds of this offering. We believe that the net proceeds of this offering, together with our existing cash and cash equivalents and available bank borrowings, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the foreseeable future. We currently intend to use the net proceeds of this offering for general corporate purposes. We may use a portion 24 30 of the net proceeds to acquire additional businesses, products and technologies or to establish joint ventures that we believe will complement our current or future business. However, we have no specific plans, agreements or commitments to do so, and are not currently engaged in any negotiations for any such acquisition or joint venture. Pending such uses, we will invest the net proceeds in government securities and other short-term, investment grade, interest-bearing instruments. YEAR 2000 COMPLIANCE Many currently installed computer systems are not capable of distinguishing 21st century dates from 20th century dates. As a result, beginning on January 1, 2000, computer systems and software used by many companies and organizations in a wide variety of industries, including technology, transportation, utilities, finance and telecommunications, will produce erroneous results or fail unless they have been modified or upgraded to process date information correctly. Significant uncertainty exists in the software industry and other industries concerning the scope and magnitude of problems associated with the century change. We recognize the need to ensure our operations will not be adversely affected by Year 2000 software failures. We are assessing the potential overall impact of the impending century change on our business, financial condition and operating results. Based on our assessment to date, we believe the current versions of our software products are "Year 2000 compliant" -- that is, they are capable of adequately distinguishing 21st century dates from 20th century dates. However, we may learn that our software solutions do not contain all the necessary routines and codes necessary for the accurate calculation, display, storage and manipulation of data involving dates. In addition, in the majority of our software licenses, we have warranted that dates on or after January 1, 2000 will not adversely affect the performance of our products. Moreover, our products are generally integrated into customer products involving sophisticated hardware and complex software products that may not be Year 2000 compliant. We may face claims based on Year 2000 problems in other companies' products or issues arising from the integration of multiple products within an overall system. Although we have not been a party to any litigation or arbitration proceeding to date involving our products or services related to Year 2000 compliance issues, we may in the future be required to defend our products or services in such proceedings, or to negotiate resolutions of claims based on Year 2000 issues. The costs of defending and resolving Year 2000-related disputes, regardless of the merits of such disputes, and any liability we have for Year 2000-related damages, including consequential damages, could materially adversely affect our business, financial condition and operating results. Further, many of our computer systems are connected to Microsoft's computer systems, and we depend on this connectivity to communicate with Microsoft on various levels. Any failure of this connectivity or of Microsoft's computers to be Year 2000 compliant may disrupt our communications with Microsoft and interfere with our ability to transact business. In addition, we believe that the purchasing patterns of customers and potential customers may be affected by Year 2000 issues as companies expend significant resources to correct or upgrade their current software systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase software products such as those we offer. To the extent Year 2000 issues cause a significant delay in, or cancellation of, decisions to purchase our products or services, our business would be harmed. We are reviewing our internal management information and other systems to identify any products, services or systems that are not Year 2000 compliant and to take corrective action. To date, we have not encountered any material Year 2000 problems with our computer systems or any other equipment that might be subject to such problems. We plan to verify compliance by external vendors that supply us with software and information systems and to communicate with significant suppliers to determine the readiness of third parties' remediation of their own Year 2000 issues. As part of our assessment, we are evaluating the level of validation we will require of third parties to ensure their Year 2000 readiness. If third parties cannot provide us with products, services or systems that meet the Year 2000 requirements on a timely basis, our business could be harmed. We will be relocating our principal offices in October 1999 to a new office location currently under construction. Before the relocation, we will complete our evaluation of whether the infrastructure and building 25 31 systems associated with our new facility, such as security and sprinkler systems, and all information technology systems, such as telephony and computer network systems, are Year 2000 compliant. We do not expect the total cost of these Year 2000 compliance activities to be material to our business, financial condition and operating results. To date, we have spent less than $100,000 for Year 2000 compliance and do not expect to expend more than $100,000 in the future. These costs and the timing with which we plan to complete our Year 2000 modifications and testing processes are based on our management's estimates. However, we may not identify and remediate all significant Year 2000 problems on a timely basis. Remediation efforts may involve significant time and expense and unremediated problems could harm our business. We have not developed a contingency plan for handling Year 2000 problems that are not detected and corrected prior to their occurrence. Upon completion of testing and implementation activities, we will be able to assess areas requiring contingency planning, and we expect to institute appropriate contingency planning at that time. Any failure to address any unforeseen Year 2000 issue could harm our business. RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which establishes guidelines for the accounting for the costs of all computer software developed or obtained for internal use. We are required to adopt SOP 98-1 for the fiscal year beginning January 1, 1999. Our adoption of SOP 98-1 did not have a material impact on our financial statements. In April 1998, the American Institute of Public Accountants issued Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-up Activities." SOP 98-5, which is effective for fiscal years beginning after December 15, 1998, provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start-up activities and organization costs to be expensed as incurred. The implementation of SOP 98-5 did not have a material impact on our financial position or results of operations. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as a part of a hedge transaction and, if it is, the type of hedge transaction. This statement is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. We do not use derivative instruments, therefore the adoption of this statement will not have any effect on our results of operations or financial position. 26 32 BUSINESS OVERVIEW We are a leading provider of software solutions that enable the development and proliferation of a wide variety of intelligent computing devices based on the Microsoft Windows CE operating system. Intelligent computing devices, or ICDs, are a new class of powerful and cost-effective devices that are able to support sophisticated communications capabilities. ICDs include, among other devices, digital set-top boxes, gaming systems, handheld data collectors used for industrial purposes and Windows-based terminals. As businesses and consumers continue to leverage the Internet to enhance connectivity among suppliers, partners and consumers alike, users are increasingly looking to ICDs as a cost-effective and more flexible means of achieving electronic connectivity. To enable the deployment of ICDs and to support the development of industry-specific applications, semiconductor vendors and original equipment manufacturers, or OEMs, demand a highly scalable and customizable operating system with minimal system requirements. Microsoft's Windows CE operating system is rapidly gaining market acceptance as an operating system of choice for these hardware manufacturers. We help enable the rapid and low-cost deployment of ICDs by providing a variety of software solutions for the development and integration of the Windows CE operating system with industry-specific applications. We have also developed software applications that we license to end users to provide ICDs with additional functionality. Because we have been building Windows CE-based software solutions since prior to the commercial release of Windows CE, we believe that we offer a greater breadth and depth of Windows CE software solutions expertise than any of our current competitors. INDUSTRY BACKGROUND Ubiquitous electronic communications and emerging Internet protocols increasingly are enabling networks of businesses and consumers to communicate, collaborate, access information and conduct business and personal interactions via the Internet. With each additional Internet user, the number of network connections increases, creating a more comprehensive communications environment and driving the development of new means and standards of communications among users. As the number of Internet users grows, so does the diversity of content, services and applications available via the Internet. According to International Data Corporation, the number of worldwide Internet users is expected to grow from 159 million in 1998 to 510 million in 2003. While the Internet is already having a significant and highly visible impact on business-to-consumer and consumer-to-consumer relationships, the market for business-to-business Internet transactions is expected to expand at a greater rate. According to Forrester Research, U.S.-based Internet commerce between businesses is expected to grow from $109 billion in 1999 to $1.3 trillion in 2003. As a result, electronic connectivity is growing increasingly important to the efficient conduct of business. For example: - many businesses use thin client computing devices to permit their employees to access server-based network applications and the Internet from remote sites; - numerous retail businesses use handheld point-of-sale terminals to provide real-time inventory tracking and to automate their procurement processes, supported by standard Internet communications protocols that enable companies to publish information instantly to both internal and external users; - some healthcare professionals use mobile computing devices to record and access patient information that can then be shared confidentially via the Internet among a broader group of professionals responsible for providing medical care; and - many consumers have begun utilizing Internet appliances, such as digital set-top boxes, screen phones, smart cellular phones, game devices and other purpose-specific computing devices, to access Internet content, communicate and conduct transactions. The increasing need for connectivity among both business and consumer users is driving demand for easy-to-use, cost-effective and customizable methods of communication. Although the personal computer has 27 33 been the traditional means of connecting suppliers, partners and customers, a new class of computing devices, including digital set-top boxes, gaming systems, handheld data collectors used for industrial purposes, and Windows-based terminals, among others, is emerging. These devices are particularly attractive to business and consumer users because they are often less expensive than personal computers; have adaptable form factors, including size, weight and shape; and are able to support a variety of customized, industry-specific applications and user interfaces that can be designed for particular tasks. These devices can also leverage existing business infrastructures, such as those in existing enterprise systems and computing architectures, helping make connectivity truly ubiquitous. According to International Data Corporation, the market for consumer information appliances, a subset of the overall ICD market, is expected to grow from $2.2 billion in 1998 to $18.7 billion in 2003. Because ICDs can be used for a variety of purposes, from consumer information to industrial automation, and can be designed specifically for a variety of industry-specific solutions, the ICD industry is characterized by heterogeneity of hardware configurations, microprocessor architectures and end-user applications, each often designed specifically for a unique vertical market. To address this heterogeneity without creating economic barriers to the proliferation of ICDs, semiconductor vendors and OEMs require an operating system that can support a myriad of devices and an expanding range of industry-specific content and applications. The Microsoft Windows CE operating system helps satisfy these requirements because it leverages the existing infrastructure of Microsoft Windows developers and standard technologies; can be customized to operate across a variety of hardware devices and to integrate with existing enterprise information technologies; offers Internet connectivity; and reduces systems requirements. Because of these characteristics, Windows CE is emerging as an operating system of choice for many hardware and software applications vendors. Venture Development Corporation estimates that the number of ICDs utilizing Windows CE will increase from just under one million units in 1999 to more than 14.0 million units by 2003. To leverage the multiple benefits of the Windows CE operating system, many OEMs and semiconductor and software applications vendors require a software solution provider with the breadth of experience and depth of capabilities to fully support the Windows CE operating system and related applications across multiple, heterogeneous microprocessor architectures and devices. These solutions should encompass the full cycle of the ICD development process, including hardware support, software development products and services, system validation and end-user software applications. In addition, these solutions should leverage existing Microsoft and other industry technologies and standards to promote rapid and low-cost development, reduced time-to-market and tight integration with existing enterprise software applications. These solutions should also be designed to accommodate the varying industry-specific needs of semiconductor, equipment and software developers without compromising feature functionality and performance. THE BSQUARE SOLUTION We are a leading provider of Microsoft Windows CE-based software solutions that enable the development and proliferation of Windows CE-based ICDs. OEMs, semiconductor vendors and Windows CE software developers rely on our solutions to bring high quality, low-cost, customized ICDs to market in a timely fashion. Key elements of our solution include: A BROAD SET OF END-TO-END WINDOWS CE DEVELOPMENT SOLUTIONS TO SUPPORT AN EXTENDED RANGE OF ICD HARDWARE, SYSTEMS AND APPLICATIONS DEVELOPMENT REQUIREMENTS: - Software development. We provide services to Microsoft and semiconductor vendors to assist in the development of the Windows CE operating system, the development of software development tools sold in conjunction with Windows CE and the porting of Windows CE to numerous microprocessor architectures. - Hardware support. We provide software products and services that support the heterogeneity of microprocessor architectures, computer board products and peripherals upon which many ICDs are based. For example, our CE Xpress Kits provide pre-configured software packages that support the microprocessor architecture and peripherals for reference boards from semiconductor and board manufacturers. 28 34 - System validation. We provide solutions to assist OEMs in the validation and verification of their hardware and software executing Windows CE, including services designed to help OEMs develop custom testing suites to validate the performance and reliability of their ICDs. - Applications software. We provide development tools to facilitate the third-party development of Windows CE-based ICD user interfaces. We also license personal productivity, utility and communications software applications to OEMs that enhance the functionality of their ICDs. PRODUCTS AND SERVICES THAT LEVERAGE EXISTING MICROSOFT TECHNOLOGIES AND STANDARDS. Our Windows CE-based products and services leverage existing Microsoft technologies and standards to enable semiconductor vendors and OEMs to deliver highly customizable and cost-efficient ICDs to their end-users. These technologies enable OEMs to efficiently utilize the existing pool of traditional Windows programmers to develop differentiating applications for ICDs based upon Windows CE. Our use of open standards also allows ICDs designed with our development products and services to integrate tightly with existing enterprise information technologies as well as with other Microsoft technologies and applications. By enabling OEMs to standardize on a software platform, our solutions help OEMs more rapidly deploy new hardware technologies without having to re-implement their software investments across multiple platforms. LEVERAGING OUR DEPTH OF EXPERIENCE IN DEVELOPING WINDOWS CE-BASED SOLUTIONS AND OUR VARIETY OF STRATEGIC RELATIONSHIPS TO DELIVER TANGIBLE BENEFITS TO WINDOWS CE-BASED ICD DEVELOPERS. We have been building Windows CE-based software solutions for the development, integration and deployment of the Windows CE operating system and industry-specific applications since prior to the commercial release of Windows CE. In addition, we have developed strategic relationships with Microsoft and have worked with nearly all of the leading microprocessor vendors to develop Windows CE-based software solutions. This experience enables us to bring tangible benefits to Microsoft and to a variety of OEMs, semiconductor vendors and software developers. Such benefits include: - Reduced time-to-market. By using our software services and pre-configured software components, our customers can leverage our experience with the Windows CE platform to help bring quality ICDs to market faster than if they had chosen to develop their hardware, operating systems and software applications internally. - Lower development costs and reduced risks. Because we offer an extensive library of software solutions required to develop Windows CE-based ICDs, our customers can reduce the implementation and training time required for engineers and thereby lower their ICD development costs. Our software components are thoroughly tested for performance and reliability, thereby reducing the risk of project failure. - Rapidly customizable graphical user interfaces. Our software development solutions help enable our customers to more rapidly design user- and industry-specific graphical user interfaces to meet the specific needs of ICD users across a variety of vertical markets. - Enhanced ICD feature functionality. Our pre-developed software components help enable OEM customers to quickly add new, differentiating application features to create unique value to their existing hardware components and extend product life cycles. Because software typically can be easily upgraded at significantly lower costs than replacing or upgrading hardware, we help enable our OEM customers to enhance their competitive product differentiation. STRATEGY We intend to establish BSQUARE as the leading provider of software solutions enabling the development and proliferation of ICDs. Key elements of our strategy include: Continue to enhance our position as a leading provider of Windows CE solutions. We intend to enhance our leadership position in the development of software solutions designed to enable the proliferation of Windows CE-based products across a wide variety of ICDs. Because we have been building Windows CE-based software solutions since prior to the commercial release of Windows CE, and our engineers have approximately 330 person-years of experience with Windows CE, we believe that we offer a greater breadth and depth of Windows CE software solutions expertise than our current competitors. We intend to continue 29 35 to leverage this expertise, as well as our strong brand reputation in the Windows CE market, by maintaining strong, quality-focused engineering groups, developing market-focused products and services, and undertaking sales and marketing activities that highlight key design wins, product awards and other third-party endorsements. Expand our strategic relationships with hardware and software vendors. We intend to continue to strengthen and extend our relationships with leading third-party hardware and software vendors that are designing products based on Windows CE. To date, we have developed alliances with leading manufacturers of microprocessors, computer boards and other components. We provide software solutions that enable these companies to develop hardware designs that interface with Windows CE. We have also developed key alliances with other software developers to provide connectivity technologies for products that interface with Windows CE. We believe that the adoption of our solutions by a broad group of industry leaders is important in increasing market awareness and generating new business opportunities. Continue to leverage our relationship with Microsoft. We have developed a close working relationship with Microsoft and are a "preferred Microsoft vendor" for the development of the Windows CE operating system and accompanying tools. Currently, we work closely with Microsoft on a number of different projects focused on Windows CE and we intend to continue this relationship in the future. We believe that the success of our company is related to the overall adoption of Windows CE as an operating platform and therefore we intend to continue to work with Microsoft toward further proliferation of Windows CE, as well as other Microsoft operating systems. Leverage our extensive Windows CE expertise to develop additional software applications. We believe that as Windows CE is widely adopted in the marketplace, there will be an increasing demand for complete, end-user software applications that enhance the capabilities of Windows CE-based ICDs. We intend to leverage our brand reputation as a Windows CE expert, our alliances with key strategic manufacturers and our relationship with Microsoft to develop a leading position in the market for Windows CE-based software applications. We currently offer a variety of personal productivity, utility and communications software for Windows CE-based ICDs. We intend to continue to leverage our Windows CE expertise to develop additional applications to address the evolving requirements of this market. Expand our international presence. We intend to continue to expand internationally in order to enhance our profile and market reach. We believe that Windows CE is gaining acceptance in the Asian and European markets. These markets are attractive to us because of their high concentration of OEM customers focusing on the development of ICDs. We have recently established sales offices in Tokyo, Japan and Munich, Germany. SOFTWARE SOLUTIONS We develop, market and support a wide variety Windows CE software solutions for the development and integration of the Windows CE operating system to help enable the rapid and low-cost deployment of ICDs. Operating system development and accompanying tools We provide software and engineering services to Microsoft and numerous microprocessor manufacturers to enable the following: - assistance in the continued development of the Windows CE operating system; - expansion of the utility of the Microsoft Visual Tools series, a set of software development tools for use with the Windows CE operating system; and - porting of Windows CE to multiple microprocessor architectures. The services we provide these customers include software development, software testing and program management. We provide these services both as a comprehensive solution and on a point basis to address specific needs depending upon customer requirements. 30 36 Integration of Windows CE with ICDs We offer products and services that are used by OEMs to integrate the Windows CE operating system with target ICDs. In order to customize the functionality of Windows CE and integrate it with a particular ICD, OEMs must develop or purchase software that is used in conjunction with the Visual Tools series and Windows CE Platform Builder products provided by Microsoft. We offer a comprehensive set of solutions that enable OEMs to cost-effectively integrate Windows CE with ICDs, with reduced time-to-market and decreased risk of project failure. The following table summarizes the key features and benefits of the products we offer for the integration of Windows CE with ICDs:
- -------------------------------------------------------------------------------------------------------------- BSQUARE PRODUCT DESCRIPTION BENEFIT - -------------------------------------------------------------------------------------------------------------- CE Xpress Adaptation - A set of pre-developed and tested - Designed to save OEMs time Kits device drivers and other code for developing low-level software low-level support of hardware in a support, reducing time-to-market Windows CE-based device - Pre-tested components increase - Available for a broad range of chip reliability of target device sets including those manufactured by AMD, Cyrix, Hitachi, Intel and Motorola - Sold in source code format to allow customer modifications - -------------------------------------------------------------------------------------------------------------- CE Xpress Binary Kits - Includes same functionality as CE - Enables OEMs to rapidly evaluate Xpress Adaptation Kit without access to Windows CE on a specific reference source code board with minimal investment - Enables OEMs to bring reference board-compatible products to market with no porting or low-level customization - -------------------------------------------------------------------------------------------------------------- CE Xpress Single Board - A development kit that works in - Provides a foundation for OEMs to Computer Kits conjunction with single board computers begin immediate development of to quickly install and run Windows CE Windows CE-based ICDs for the development of ICDs - Provides all of the infrastructure normally needed for development of applications and customizations based on the PCI/ISA expansion bus architecture - -------------------------------------------------------------------------------------------------------------- CE Xpress86 Kit - A development kit that allows OEMs to - Eliminates need to wait for run Windows CE on a standard PC-based hardware development before platform beginning software development, enabling faster time-to-market - Runs Windows CE without DOS - Reduces the cost of PC-based Windows CE systems by eliminating the DOS license requirement - -------------------------------------------------------------------------------------------------------------- CE Xpress OnDemand - An online subscription service for - Enables CE Xpress Kit customers to portable device drivers for CE Xpress Kit access the latest drivers and customers driver updates online - -------------------------------------------------------------------------------------------------------------- CEValidator - A quality assurance and testing - Designed to save OEMs testing costs technology for the validation of Windows CE integration with ICDs - Enables OEMs to test software throughout the design process - A client/server-based test suite of more than 1,000 individual test cases for testing compliance and reliability - Extensible architecture for incorporating additional and custom test programs - -------------------------------------------------------------------------------------------------------------- CE EmbeddedDesktop - A fully customizable desktop building - Gives OEMs the ability to create a utility device-specific graphical user interface - Includes a set of pre-developed components for creating a custom desktop - Helps enable OEMs to rapidly and easily create design prototypes and - Contains customizable security and complete the implementation of interface features for commercial graphical user interfaces applications - --------------------------------------------------------------------------------------------------------------
31 37 We also provide integration and support services to OEMs developing Windows CE-based ICDs. For example, we provide implementation services for companies developing Windows-based terminal designs, industrial automation solutions and set-top boxes. Our CE Xpress consulting services leverage our existing products, such as CE Xpress Adaptation Kits and CE EmbeddedDesktop, to implement the hardware and software specifications of our customer's OEM products. We often retain a license or other proprietary rights in the resulting work product. At times, we perform new applications or system software development on behalf of OEMs. We believe that OEM customers in need of complex adaptations can save time and resources by outsourcing this work to us. In addition, to support our OEM customers, we often "bundle" support services with our software solutions. These support services help enable our OEM customers to finalize ICD development and reduce time-to-market. To augment our Windows CE solutions, we occasionally partner with third-party software vendors to provide additional features and functionality. Our ability to license these third-party software products to OEMs, in conjunction with our own solutions, provides our OEM customers with a single source for Windows CE software solutions. We are currently a licensed distributor of Windows CE-based software from Communications Intelligence Corporation, Datalight, Intrinsyc and Microsoft. 32 38 End-User Software Applications We provide a wide range of commercially available personal productivity, utility and communications software to enhance the functionality and utility of Windows CE-based ICDs. We market our end-user software applications through standard retail and electronic commerce channels, and also license these products to OEMs in formats suitable for bundling. Our current software application product offerings include:
- --------------------------------------------------------------------------------------------------------- PRODUCT DESCRIPTION BENEFIT - --------------------------------------------------------------------------------------------------------- bFAX - A product family that provides - Provides a practical and faxing capabilities for ICDs comprehensive faxing solution for - bFAX Pro provides send and Windows CE-based devices receive capability for handheld PCs - bFAX Express provides send-only capability for handheld and palm-size PCs - --------------------------------------------------------------------------------------------------------- bMOBILE News - Provides access to Internet - Mobile users can download news newsgroups for handheld and palm- articles for on- or off-line use size PCs - --------------------------------------------------------------------------------------------------------- bPRINT - Print management software for - Users can spool jobs for batch palm-size and handheld PCs printing - Increases the variety of printers compatible with Windows CE-based devices - --------------------------------------------------------------------------------------------------------- bREADY - An electronic book creation and - Users can store and transport reading system which includes a large volumes of information and desktop component for publishing literature books and a client viewer for handheld or palm-size PCs - Sample applications include sales catalogs, forms and event materials, among others - --------------------------------------------------------------------------------------------------------- BSQUARE SpreadSheet - A spreadsheet application for - Provides independent palm-size PCs functionality while maintaining Pocket Excel compatibility - --------------------------------------------------------------------------------------------------------- bTASK - A navigation, status and control - Alleviates the problem of program for applications on managing multiple open applications palm-size PCs - --------------------------------------------------------------------------------------------------------- bUSEFUL Backup Plus - A full-featured backup and - Avoids critical information loss restore application for palm-size by backing up data and handheld PCs - --------------------------------------------------------------------------------------------------------- bUSEFUL Utilities Pak - Utility suite for palm-size and - Provides utility applications handheld PCs that contains 12 which enhance the performance and different utility applications functionality of Windows CE-based including bTASK, bUSEFUL Backup devices Plus and other utility applications - --------------------------------------------------------------------------------------------------------- bPRODUCTIVE Essentials Pak - Six software titles, including - A single installation program bFAX, bPRINT, bTRACK, bREADY, saves time bMOBILE News and bTASK - ---------------------------------------------------------------------------------------------------------
33 39 TECHNOLOGY We have developed a set of technologies relating to the integration of Windows CE with the target computer boards used by our customers as the core of their ICD products. LOGO The technology contained in our CE Xpress Kits, including the OEM Adaptation Layer, the CE Platform Layer and the Device Driver Library, provides the interface between Windows CE and the target computer board. OEM Adaptation Layer Library The OEM Adaptation Layer, or OAL, provides a standard interface between the Windows CE operating system and the core components of a target computer board. A new OAL must be implemented for each target computer board which is to be used with Windows CE. We maintain a library of OAL implementations for several of the target computer boards used in Windows CE-based ICD products. These implementations are distributed to our customers in the form of our CE Xpress Kits and are also used by our engineers when we are contracted to create custom solutions. In addition, our OAL library serves as a starting point for the rapid creation of new OAL implementations. Device Driver Library Device drivers provide the interface by which the Windows CE operating system controls peripheral devices connected to a target computer board. A device driver must be implemented for each peripheral device connected to a computer board that is under the control of Windows CE. Examples of such peripheral devices include keyboards, display screens and computer network interface cards. We have created a library of device drivers for inclusion in our CE Xpress Kits and for use in the custom solutions we create for our customers. The existing set of drivers also provides examples and starting points for the rapid creation of new device drivers. 34 40 CE Platform Layer A peripheral device normally requires a different device driver for each model of target computer board to which it is to be connected. A device driver for one model of computer board will not generally work with a different model of computer board. Our CE Platform Layer, or CEPL, technology allows our engineers and third-party hardware manufacturers to develop a single driver for a peripheral device that may be used on many different models of target computer boards. This increases the value and flexibility of each computer board by increasing the number of readily available peripheral devices that can be used. Our CEPL technology is included in our CE Xpress Kits and is used for the implementation of the majority of our device drivers. CEValidator Our CEValidator is a quality assurance and testing product which we originally developed for our in-house use. We believe that it is important to test devices early in the design process and to continue testing at a high frequency throughout the development cycle. We have designed our CEValidator to support such a testing pattern. CEValidator is based on two primary components: - a broad suite of over 1,000 tests which evaluates the various subsystems of Windows CE. These tests have been developed by our engineers in the course of our own software development efforts. In addition, our CEValidator allows OEMs to add their own test suites to evaluate specific features of their ICDs. - a test control system. This system manages the execution of the tests suite and the recording of test results. CEValidator provides communication features which control testing over network connections, a graphical user interface for displaying user controls and test results, and simultaneous testing capabilities for multiple systems. CUSTOMERS Microsoft is our largest customer, representing approximately 79% and 87% of our total revenue in 1998 and for the sixth months ended June 30, 1999, respectively. Our other target customers include OEMs and semiconductor device manufacturers seeking to leverage the numerous benefits of Windows CE in order to develop high quality, full-feature products that meet the complex and evolving requirements of numerous end-markets. Microprocessor Vendors We have received revenue in excess of $1.0 million directly from the following microprocessor vendors: ARM Hitachi Semiconductor (America) Motorola Computer Group NEC In addition to these vendors, we have provided software solutions to a variety of other microprocessor vendors under our master agreement with Microsoft. 35 41 OEM Customers The following is a representative list of our OEM customers in the first six months of 1999: AT&T Boundless Technologies Casio Cedar Systems Data General Development Concepts Ericsson Hewlett-Packard IGEL AG Lexicon LG Electronics NEC Electronics Philips Electronics Philips Mobile Computing Group Sainco Sharp Electronics Symbol Technologies Takaoka Electric Televideo Telxon Total Control Products Touchstar Technologies Two Technologies WebTV For the first six months of 1999, per customer revenue varied from less than $5,000 to approximately $575,000. Due to customer confidentiality requirements, some customers are not disclosed. 36 42 SELECTED CUSTOMER APPLICATIONS - --------------------------------------------------------------------------------
CUSTOMER APPLICATION - ---------------------------------- Hitachi Semiconductor Hitachi Semiconductor (America) Inc., a wholly owned [image] subsidiary of Hitachi America Ltd, markets a broad range of standard and low power semiconductor solutions in North America. When Microsoft Windows CE was first introduced, the Hitachi SuperH microprocessor architecture was targeted by Microsoft for Windows CE system-development support. However, at the time, Hitachi did not possess tools that would be compatible with Windows CE. Hitachi turned to us to help enable it to port the Windows CE operating system to the SuperH architecture. We worked closely with Hitachi to develop toolkits that helped enable Hitachi to develop a Windows CE-supported microprocessor architecture. - ---------------------------------- Hewlett-Packard Hewlett-Packard is a leading provider of handheld and [image] palm-size PC devices. To enhance the functionality of its handheld devices, HP was seeking to bundle third-party software applications that provide additional value for users and help distinguish its devices in a crowded marketplace. When HP began developing new Windows CE-based handheld devices, they turned to us to provide an integrated bundle of utility and personal productivity applications that would enhance the features of their product. We licensed to HP our bFAX Pro and bFIND applications. Rather than include these applications on the third-party CDs in the product box, HP now bundles these products into the memory of the HP Jornada 820 and HP Jornada 680, providing users instant access to our software programs without additional installations. - ----------------------------------
MICROSOFT RELATIONSHIP We maintain strategic relationships with Microsoft for furthering the proliferation of its Windows, and specifically Windows CE, operating systems within a broad range of industries and applications. Our relationship with Microsoft extends to the following: Development partner. We are a "preferred Microsoft vendor" for Windows CE. Approximately 200 of our software engineers work in a variety of teams on a number of different Windows CE-based projects for Microsoft. Typically, our engineers work on products related to tools for Windows CE, including compilers, assemblers, debuggers and integrated development environments. Systems integrator. We are a Microsoft-sanctioned systems integrator for Windows CE. In this capacity, we provide training, consulting and engineering services and products to OEMs that are building Windows CE-based ICDs. We actively participate in the Microsoft systems integrator program, including participating with Microsoft in "partner pavilions" at trade shows and listing our services and posting our product announcements on the "embedded Windows CE" portion of Microsoft's website. In addition, Microsoft has periodically utilized our services when an OEM has required additional engineering resources. Windows CE distributor. We are a licensed distributor of the Windows CE operating system. We sub-license Windows CE by reselling the right to bundle this operating system in ICDs. Microsoft actively assists and manages its distributors to secure additional licensing opportunities for Windows CE. We are promoted on the "embedded Windows CE" portion of Microsoft's website as a distributor, and Microsoft shares with us leads generated from Web inquiries and tradeshows. 37 43 Windows CE independent software vendor. Microsoft actively encourages third-party application development through its Developer Relations Group and Windows CE logo program, which allows third-party applications to receive Windows CE compatibility logos. We develop several software applications for a wide variety of Windows CE-based ICDs and participate in marketing opportunities offered by Microsoft for third-party developers. In addition, Microsoft has from time to time demonstrated our applications in connection with demonstrations to third parties of its Windows CE operating system. SALES AND MARKETING We market and sell our solutions through partners, representatives, distributors, retail channels and direct OEM sales. This broad range of channels is based upon the diversity of our products, including applications, tools and software technology. We have direct sales offices in the United States, Germany and Japan. As of July 31, 1999 we had 28 employees in our sales and marketing department. Key elements of our sales and marketing strategy include direct advertising, event marketing, an active public relations program, channel marketing programs, customer and strategic alliance partner co-marketing programs and a comprehensive website. We are currently developing new sales channels, including value-added resellers and systems integrators. We believe that these additional channels will further increase the brand awareness of our products and services and will further promote the development of software infrastructures for Windows CE-based ICDs. CUSTOMER SUPPORT We recognize the importance of offering quality service and support to our resellers and end-user customers. Therefore, we provide a wide range of services and support to both of these groups, including technical support for our products, educational services and professional services for implementing and customizing our products. Both our resellers and end-user customers utilize web-based, e-mail and/or telephone support 24 hours a day, seven days a week, to access answers to questions, obtain assistance in determining the source of defects or errors and acquire solutions to common problems. RESEARCH AND DEVELOPMENT As of July 31, 1999 we had 270 engineers engaged in research and development. Our research and development teams are responsible for the design, development and release of our products. Members of our research and development staff work closely with our sales and marketing department, as well as with our customers and potential customers, to better understand market needs and requirements. A substantial majority of our research and development engineers is involved in the development of the Windows CE operating system and accompanying tools for Microsoft. These responsibilities require significant expertise due to the radically different nature of the microprocessors and other hardware components used in Windows CE-based ICDs. This team has accumulated detailed knowledge of the Windows CE environment over the past five years, allowing us to continue to develop solutions that enable the expanding capability and compatibility of Windows CE-based ICDs. To ensure that compatibility goals are met and that a high level of product quality is achieved, quality assurance groups within this team subject our solutions to tens of thousands of individual tests in multiple test configurations before the solutions are released to our customers. Due to the broad variety of hardware that hosts Windows CE, the quality assurance groups have had to develop a special expertise in managing and extending the test tools used to validate the tool kits for these diverse operating environments. The remainder of our research and development engineers develop Windows CE software for both end-user markets and product/application developers. The software engineers in this team are responsible for the development of commercial applications that provide added breadth and functionality for Windows CE-based ICDs as well as standard products used in the development and testing of new products utilizing the Windows CE operating system. Our engineers have significant experience in creating products for Windows CE, which enables us to bring robust and flexible products to market in a timely manner. 38 44 COMPETITION The market for Windows CE-based solutions is becoming increasingly competitive. We face competition from: - our current and potential customers' internal research and development departments that may seek to develop their own proprietary solutions; - large professional engineering services firms that may enter the market; - established ICD software and tools manufacturers such as Applied Microsystems, Spyglass, Phoenix Technologies, Mentor Graphics and Integrated Systems; - small- and medium-size engineering services companies such as VenturCom, Eclipse International, BlueWater Systems and Vadem; and - software and component distributors such as Avnet/Hamilton Hallmark, Pioneer and Annasoft Systems. As we develop new products, particularly solutions focused on specific industries, we may begin competing with companies with whom we have not previously competed. It is also possible that new competitors will enter the market or that our competitors will form alliances, including alliances with Microsoft, that may enable them to rapidly increase their market share. The barrier to entering the market as a Windows CE-based ICD solutions provider is low and Microsoft is constantly encouraging new suppliers. New competitors may have lower overhead than us and therefore be able to offer advantageous pricing. We expect that competition will increase as other established and emerging companies enter the Windows CE-based ICD market and as new products and technologies are introduced. Increased competition may result in price reductions, lower gross margins and loss of our market share, which would harm our business. We compete principally on the basis of the breadth of solutions offered, the experience of the providers, the quality of the solutions, the time-to-market and price. We believe we compete favorably in each of these areas. INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS Intellectual property is critical to our success. In general, there can be no assurance that our efforts to protect our intellectual property rights through patent, copyright, trademark and trade secret laws will be effective to prevent misappropriation of our technology, or to prevent the development and design by others of products or technologies similar to or competitive with those developed by us. We frequently license the source code of our products and the source code results of our services to customers. There can be no assurance that customers with access to our source code will comply with the license terms or that we will discover violations of the license terms or, in the event of discovery of violations, that we will be able to successfully enforce the license terms and/or recover the economic value lost from such violations. To license many of our software products, we rely in part on "shrinkwrap" and "clickwrap" licenses that are not signed by the end user and, therefore, may be unenforceable under the laws of certain jurisdictions. As with other software products, our products are susceptible to unauthorized copying and uses that may go undetected, and policing such unauthorized use is difficult. The computer software market is characterized by frequent and substantial intellectual property litigation, which is often complex and expensive, and involves a significant diversion of resources and uncertainty of outcome. Litigation may be necessary in the future to enforce and protect our intellectual property or to defend against a claim of infringement or invalidity. Litigation could result in substantial costs and the diversion of resources and could harm our business and operating results. We currently have three pending U.S. patent applications. We do not have any issued patents. There can be no assurance that any of our pending patents will be granted. Even if granted, patents may be circumvented or challenged and, if challenged, may be invalidated. Any patents obtained may provide limited or no competitive advantage to us. It is also possible that another party could obtain patents that block 39 45 our use of some, or all, of our products and services. If that occurred, we would need to obtain a license from the patent holder or design around their patent. The patent holder may or may not choose to make a license available to us at all or on acceptable terms. Similarly, it may not be possible to design around such a blocking patent. We pursue registration of certain of our trademarks and service marks in the United States and in certain other countries, but we have not secured registration of all of our marks. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States, and effective copyright, trademark and trade secret protection may not be available in other jurisdictions. Our registration of "BSQUARE" has been opposed in Germany. EMPLOYEES As of July 31, 1999, we had 348 employees, excluding independent contractors and other temporary employees, including 273 employees in research and development, 28 employees in sales and marketing and 47 employees in general and administrative services. Of these employees, 337 are located in the United States, three are located in Germany and eight are located in Japan. In addition, from time to time, we employ temporary employees and consultants. None of our employees is represented by a labor union, and we consider our relations with our employees to be good. FACILITIES We lease approximately 70,000 square feet of space in three buildings in Bellevue, Washington under multiple leases with various terms, with the longest term expiring in April 2003. In October 1999, we plan to relocate all of our U.S. employees to a single new location in Bellevue, Washington with approximately 126,000 square feet, pursuant to a lease that expires in 2009, with the option to renew for up to an additional 20 years. We also lease office space in Munich, Germany and Tokyo, Japan. We believe that our new facilities will be adequate to meet our needs for at least the next twelve months. 40 46 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information regarding our executive officers and directors as of July 31, 1999:
NAME AGE POSITION ---- --- -------- William T. Baxter............... 36 Chairman of the Board, President and Chief Executive Officer Brian V. Turner................. 39 Senior Vice President, Chief Financial Officer and Secretary Albert T. Dosser................ 42 Senior Vice President, Director Peter R. Gregory................ 37 Senior Vice President, Director David Bialer.................... 39 General Manager Donald Whitt.................... 53 General Manager Jeffrey T. Chambers(1)(2)....... 44 Director Scot E. Land(1)(2).............. 45 Director William Larson.................. 43 Director
- --------------- (1) Member of audit committee (2) Member of compensation committee William T. Baxter co-founded BSQUARE in July 1994 and has served as our President, Chief Executive Officer and Chairman of the Board since our inception. From June 1993 to October 1994, Mr. Baxter served as Principal Engineer at Digital Equipment Corporation, a manufacturer of business and networking computer systems. Between February 1990 and May 1993, Mr. Baxter served as Manager of Compiler Development at Intergraph Corporation, a developer and manufacturer of interactive computer graphics systems. Mr. Baxter holds a B.S. and M.S. in computer science from the University of Wyoming. Brian V. Turner has been our Senior Vice President, Chief Financial Officer and Secretary since April 1999. From September 1995 to April 1999, Mr. Turner was the Chief Financial Officer at RadiSys Corporation, a manufacturer and designer of computers. Between July 1982 and September 1995, Mr. Turner was with PricewaterhouseCoopers LLP, an accounting firm, most recently as a director in Corporate Finance. Mr. Turner holds a B.A. in international political science and a B.B.A. in accounting from the University of Washington. Albert T. Dosser co-founded BSQUARE in July 1994 and has served as a Senior Vice President and a director since our inception. From June 1992 to October 1994, Mr. Dosser served as a software engineer at Digital Equipment Corporation. Between August 1984 and June 1992, Mr. Dosser served as a software engineer at Telesoft, a software firm developing Ada compilers and related products, and from July 1982 to August 1984, he served as a sales support analyst and as assistant to the national product manager for the OEM Systems Division at NCR, a manufacturer of business and networking computer systems. Mr. Dosser holds a B.S. in information science, with a minor in mathematics, from East Tennessee State University. Peter R. Gregory co-founded BSQUARE in July 1994 and has served as a Senior Vice President and a director since our inception. From August 1991 to October 1994, Mr. Gregory served as Senior Software Engineer at Digital Equipment Corporation. Between February 1990 and August 1991, Mr. Gregory served as Senior Software Engineer at a subsidiary of Motorola, a computer component and telecommunications equipment manufacturer. Mr. Gregory holds a B.A. in computer science from Southern Illinois University at Carbondale. David Bialer has been a General Manager at BSQUARE since September 1998. From January 1998 to August 1998, Mr. Bialer was the Director of Business Development at MobileSoft, a division of Philips Electronics North America Corporation and a Windows CE e-commerce website founded by Mr. Bialer. From April 1996 to January 1998, Mr. Bialer served as a Senior Product Manager at Philips Mobile Computing Group, a manufacturer of Windows CE-based devices, and from December 1995 to February 41 47 1996, he served as a Senior Manager, Business Development at VDOnet, a developer of video conferencing, messaging and streaming software. From December 1994 to December 1995, Mr. Bialer served as a Senior Manager at Oracle Corporation, a database company, and from January 1993 to December 1994, he served as a Senior Product Marketing Engineer at Intel Corporation, a manufacturer of semiconductor, computer and networking products. Mr. Bialer holds a B.S. in computer science from Cornell University and an M.B.A. from the University of Pennsylvania, Wharton School of Business. Donald Whitt has been a General Manager at BSQUARE since April 1998, and from May 1997 to April 1998, Mr. Whitt held various other positions with us. From October 1993 to May 1997, Mr. Whitt was a program manager at Secure Computing Corporation, an Internet security company, and from May 1970 to May 1993, he served in management positions at Control Data Corporation, a computer manufacturer. Mr. Whitt holds a B.S. in mathematics from California State University at Fresno. Jeffrey T. Chambers has been a director of BSQUARE since February 1998. Mr. Chambers was elected to our board of directors in connection with the purchase of shares of our preferred stock by affiliates of TA Associates, Inc., a venture capital firm. Mr. Chambers has been employed by TA Associates or its predecessor since 1980, where he currently serves as a managing director. In addition to BSQUARE, Mr. Chambers currently serves as a director of several privately held companies. Scot E. Land has been a director of BSQUARE since February 1998. Mr. Land was elected to our board of directors in connection with the purchase of shares of our preferred stock by affiliates of Encompass Group, a venture capital firm. Mr. Land is currently a managing director of Encompass Ventures, an affiliate of Encompass Group, a position he has held since September 1997. Prior to joining Encompass, Mr. Land was a Senior Technology Analyst and Strategic Planning Consultant with Microsoft from June 1993 to September 1997, and a technology research analyst and investment banker for First Marathon Securities, a Canadian investment bank, from September 1993 to April 1995. From October 1988 to February 1993, Mr. Land was the President and Chief Executive Officer of InVision Technologies, a publicly traded company founded by Mr. Land in October, 1988 that designs and manufacturers high-speed computer-aided topography systems for automatic explosives detection for aviation security. Prior to founding InVision Technologies, Mr. Land served as a principal in the international consulting practice of Ernst and Young LLP, a public accounting firm, from April 1984 to October 1988. William Larson has been a director of BSQUARE since September 1998. Since September 1993 Mr. Larson has been the Chief Executive Officer of Network Associates, Inc., a software company, where he has also served as President and a director since October 1993 and as Chairman of the Board since April 1995. From August 1988 to September 1993, Mr. Larson served as a Vice President of SunSoft, Inc., a systems software subsidiary of Sun Microsystems, where he was responsible for worldwide sales and marketing. BOARD OF DIRECTORS We currently have authorized seven directors; however, one board seat currently remains vacant. Currently all directors hold office until the next annual meeting of shareholders or until their successors are duly elected. Our amended and restated articles of incorporation provide that as of the first annual meeting of shareholders after the closing of this offering our board of directors will be divided into three classes, each with staggered three-year terms. As a result, only one class of directors will be elected at each annual meeting of our shareholders, with the other classes continuing for the remainder of their respective three-year terms. Committees Our board of directors currently has an audit committee and a compensation committee. The audit committee consists of Mr. Chambers and Mr. Land. The audit committee makes recommendations to our board of directors regarding the selection of independent auditors, reviews the scope of audit and other services by our independent auditors, reviews the accounting principles and auditing practices and procedures to be used for our financial statements and reviews the results of our audits. The compensation committee consists of Mr. Chambers and Mr. Land. The compensation committee reviews and approves the compensa- 42 48 tion and benefits for our executive officers, grants stock options under our stock option plan and makes recommendations to our board of directors on compensation matters. Compensation Committee Interlocks and Insider Participation No interlocking relationship exists between any member of our board of directors or compensation committee and any member of the board of directors or compensation committee of any other company, nor has any such interlocking relationship existed in the past. In January 1998, we sold 8,333,333 shares of Series A Preferred Stock at a per share price of $1.80. Purchasers of Series A Preferred Stock included TA Associates and its affiliates, who collectively purchased 6,666,667 shares and hold more than 5% of our outstanding common stock on an as-converted basis, and of which one of our directors, Jeffrey T. Chambers, is a managing director; and Encompass Ventures and its affiliates, who collectively purchased 1,666,666 shares and hold more than 5% of our outstanding common stock on an as-converted basis, and of which one of our directors, Scot E. Land, is a member. Upon closing of this offering, each outstanding share of Series A Preferred Stock will convert into one share of common stock. In connection with the sale of the Series A Preferred Stock, the investors were granted registration rights, and we may therefore become obligated to effect a registration under the Securities Act of 1933 of shares of common stock held by these investors upon the conversion of their preferred stock. In September 1998, we granted an option to purchase 125,000 shares of common stock at an exercise price of $1.00 per share to NextGen, an affiliate of Encompass Ventures, in exchange for consulting services. We have also granted options to purchase common stock to Messrs. Chambers and Land. Because of contractual obligations involving Mr. Chambers and his affiliated investment entities, the option grant to Mr. Chambers was issued in the name of TA Associates, Inc. Compensation Our directors are reimbursed for expenses incurred in connection with attending board and committee meetings but are not otherwise compensated for their services as board members. In August 1998, we granted to each of TA Associates, with whom Jeffrey T. Chambers, one of our directors, is affiliated, and Scot E. Land, one of our directors, an option to purchase 45,000 shares of our common stock at an exercise price of $1.80 per share, vesting in three annual installments of 15,000 shares each. In July 1998, we granted to William Larson, one of our directors, an option to purchase 120,000 shares of our common stock at an exercise price of $1.80 per share, vesting in three annual installments of 40,000 shares each. We currently intend to make comparable option grants to future non-employee directors. EXECUTIVE OFFICERS Our executive officers are elected by, and serve at the discretion of, our board of directors. There are no family relationships among our directors and officers. 43 49 EXECUTIVE COMPENSATION The following table sets forth certain information concerning compensation for services rendered to us in all capacities during the fiscal year ended December 31, 1998 by our chief executive officer and our four other most highly compensated executive officers whose salary and bonus for fiscal 1998 exceeded $100,000.
ANNUAL LONG TERM ALL OTHER COMPENSATION COMPENSATION COMPENSATION ------------------ ------------ ------------------------------------- SECURITIES HEALTH LIFE AND UNDERLYING INSURANCE DISABILITY MOVING NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS (#S) PREMIUMS PREMIUMS EXPENSES - --------------------------- -------- ------ ------------ ---------- ----------- -------- William T. Baxter.......... $252,625 $ -- -- $2,133 $1,060 $ -- President and Chief Executive Officer Albert T. Dosser........... 150,000 -- -- 1,776 1,305 -- Senior Vice President Peter R. Gregory........... 150,000 -- -- -- 1,070 -- Senior Vice President David Bialer(1)............ 37,000 1,000 100,000 699 -- 8,676 General Manager Donald Whitt............... 103,265 2,452 30,000 2,192 -- -- General Manager
- --------------- (1) Mr. Bialer was hired by us on September 8, 1998. If he had been employed during the entire fiscal year ended December 31, 1998, his annual salary would have been $130,000. Option Grants in Fiscal Year 1998 The following table sets forth certain information with respect to stock options granted to each of our named executive officers during the fiscal year ended December 31, 1998. In accordance with the rules of the Securities and Exchange Commission, also shown below is the potential realizable value over the term of the option (the period from the grant date to the expiration date) giving effect to an assumed initial public offering price of $ per share and based on assumed rates of stock appreciation of 5% and 10%, compounded annually. These rates are mandated by the SEC and do not represent our estimate of future stock price. Actual gains, if any, on stock option exercises will depend on the future performance of our common stock. In the fiscal year ended December 31, 1998, we granted options to acquire up to an aggregate of 1,108,150 shares of common stock to employees and directors, all under our stock option plan and all at an exercise price equal to the fair market value of our common stock on the date of grant as determined in good faith by our board of directors.
POTENTIAL REALIZABLE VALUE INDIVIDUAL GRANTS AT ASSUMED ------------------------------------------------------------- ANNUAL RATES OF PERCENT OF STOCK PRICE TOTAL OPTIONS APPRECIATION FOR NUMBER OF SECURITIES GRANTED TO EXERCISE OPTION TERM UNDERLYING OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ----------------- NAME GRANTED FISCAL 1998 SHARE DATE 5% 10% ---- -------------------- ------------- --------- ---------- ------- ------- William T. Baxter.............. -- -- $ -- -- $ -- $ -- Albert T. Dosser............... -- -- -- -- -- -- Peter R. Gregory............... -- -- -- -- -- -- David Bialer................... 100,000 9.0% 1.00 9/25/08 -- -- Donald Whitt................... 10,000 1.0% 1.00 7/17/08 -- --
44 50 Aggregate Option Exercises in Fiscal Year 1998 and Fiscal Year-End Option Values With respect to our named executive officers, the following table sets forth information concerning option exercises in the fiscal year ended December 31, 1998 and exercisable and unexercisable options held as of December 31, 1998. The "Value Realized" and the "Value of Unexercised In-the-Money Options at December 31, 1998" are based upon an assumed initial public offering price of $ per share minus the per share exercise price multiplied by the number of shares underlying the option.
NUMBER OF SECURITIES NUMBER OF SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED ACQUIRED ON EXERCISE OPTIONS AT IN-THE-MONEY OPTIONS AT ----------------------- DECEMBER 31, 1998 DECEMBER 31, 1998 VALUE --------------------------- --------------------------- NAME EXERCISED REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- --------- ----------- ----------- ------------- ----------- ------------- William T. Baxter............. -- $ -- -- -- $ -- $ -- Albert T. Dosser.............. -- -- -- -- -- -- Peter R. Gregory.............. -- -- -- -- -- -- David Bialer.................. -- -- -- 100,000 -- -- Donald Whitt.................. 5,000 -- 7,500 17,500 -- --
EMPLOYEE BENEFIT PLANS Amended and Restated Stock Option Plan Our board of directors adopted and our shareholders approved our amended and restated stock option plan in May 1997. As of July 31, 1999, we had reserved a total of 5,625,000 shares of common stock for issuance under the stock option plan. The stock option plan provides for the granting to our employees, including officers and directors, of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986 and for the granting to employees, consultants and non-employee directors of nonstatutory stock options. If an optionee would have the right in any calendar year to exercise for the first time incentive stock options for shares having an aggregate fair market value (determined for each share as of the date the option to purchase the shares was granted) in excess of $100,000, any such excess options shall be treated as nonstatutory stock options. Unless terminated earlier by our board of directors, the plan will terminate in May 2007. As of July 31, 1999, options to purchase 2,995,749 shares of common stock were outstanding under this plan and 224,726 shares had been issued upon exercise of options. The stock option plan may be administered by our board of directors or a committee of our board. Our board of directors determines the terms of each option granted under the stock option plan, including the number of shares subject to an option, exercise price, vesting schedule and duration. The exercise price of all incentive stock options granted under the stock option plan cannot be less than the fair market value of the common stock on the date of grant and, in the case of incentive stock options granted to holders of more than 10% of our voting power, not less than 110% of the fair market value. Generally, options granted under the stock option plan have a term of ten years, vest annually over a four-year period and are nontransferable. Payment of the exercise price of options may be made in cash or other consideration as determined by our board of directors. Our board of directors has the authority to amend or terminate the stock option plan as long as such action does not adversely affect any outstanding option and provided that shareholder approval for any amendments to the stock option plan shall be obtained to the extent required by applicable law. Employee Stock Purchase Plan Our board of directors and shareholders adopted an employee stock purchase plan in August 1999. We will implement the employee stock purchase plan effective as of the date of this prospectus. The employee stock purchase plan provides a convenient and practical means by which employees may participate in stock ownership. Our board of directors believes that the opportunity to acquire a proprietary interest in our success through the acquisition of shares of common stock pursuant to the employee stock purchase plan is an important aspect of our ability to attract and retain highly qualified and motivated employees. The employee 45 51 stock purchase plan is intended to qualify as an "employee stock purchase plan" within the meaning of Section 423 of the Internal Revenue Code. The employee stock purchase plan may be administered by our board of directors or by a committee appointed by our board of directors. The plan administrator has the power to make and interpret all rules and regulations it deems necessary to administer the employee stock purchase plan. Our board of directors has broad authority to amend the employee stock purchase plan, subject in some instances to shareholder approval. All of our employees who customarily work more than 20 hours per week, including our officers, are eligible to participate in the employee stock purchase plan. Eligible employees may elect to contribute from 1% to 10% of the compensation paid to them during each pay period towards stock purchases under the plan. Other than the first offering, which will have a duration of approximately 19 months, each participant may enroll in an 18-month offering in which shares of common stock are purchased on the last day of each six-month period during the offering. The first offering will commence on the date of this prospectus and will terminate on May 14, 2001. Thereafter, a separate offering will commence on November 15 and May 15 of each year. The purchase price for shares purchased under the employee stock purchase plan will be equal to 85% of the lower of: - the fair market value of our common stock on the enrollment date of the offering; or - the fair market value on the date of purchase. Neither payroll deductions credited to an employee's account nor any rights with regard to the purchase of shares under the employee stock purchase plan may be assigned, transferred, pledged or otherwise disposed of in any way by a participant, except that a participant may designate a beneficiary in the event of his or her death. Upon termination of employment due to death, retirement or disability, the payroll deductions credited to an employee's account will be used to purchase shares on the next purchase date. Any remaining balance will be returned to the participant or his or her beneficiary. Upon termination of employment for any other reason, any payroll deductions credited to an employee's account will be returned to the participant. We have authorized the issuance of up to 1,500,000 shares of common stock under the employee stock purchase plan. In the event of a merger, consolidation or acquisition by another corporation of all or substantially all of our assets, each outstanding right to purchase shares under the employee stock purchase plan shall be assumed or an equivalent stock purchase right substituted by the successor corporation. If the successor corporation refuses to assume or substitute for the stock purchase right, the offering period during which a participant may purchase stock will be shortened to a specified date before the proposed merger or sale. Similarly, in the event of our liquidation or dissolution, the offering period during which a participant may purchase stock will be shortened to a specified date before the date of the liquidation or dissolution. 401(k) Plan In March 1997, our board of directors adopted a tax-qualified employee savings and retirement plan for eligible U.S. employees. Eligible employees may elect to defer a percentage of their eligible compensation in the 401(k) plan, subject to the statutorily prescribed annual limit. We make matching contributions on behalf of all participants in the 401(k) plan in the amount equal to one-half of the first 6% of an employee's contributions. Matching contributions are subject to a vesting schedule; all other contributions are at all times fully vested. We intend the 401(k) plan to qualify under Sections 401(k) and 501 of the Internal Revenue Code so that contributions by employees or us to the 401(k) plan, and income earned, if any, on plan contributions, are not taxable to employees until withdrawn from the 401(k) plan, and so that we will be able to deduct our contributions when made. The trustee of the 401(k) plan, at the direction of each participant, invests the assets of the 401(k) plan in any of a number of investment options. EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS We currently do not have any employment agreements with any of our named executive officers. Our stock option plan provides that in the event a third party acquires us through the purchase of all or substantially all of our assets, a merger or other business combination, if so provided in applicable stock option agreements, the unexercised portion of outstanding options will vest and become immediately exercisable. 46 52 Only two of our officers have stock option agreements that contain change of control provisions. David Bialer has a stock option agreement which provides for the acceleration of vesting of 50% of any unvested portion of his options in the event a third party acquires us. In addition, Brian V. Turner has a stock option agreement pursuant to which his options are all immediately vested but subject to repurchase by us over a period of four years from the date of grant. Mr. Turner's option agreement also provides for the release of 50% of any unreleased portion of his options in the event a third party acquires us. We do not have change of control arrangements with any of our other named executive officers. DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY Our amended and restated articles of incorporation limit the liability of directors and officers to the fullest extent currently permitted by the Washington Business Corporation Act or as it may be amended in the future. Consequently, subject to the WBCA, no director will be personally liable to us or our shareholders for monetary damages resulting from his conduct as our director, except liability for: - acts or omissions involving intentional misconduct or knowing violations of law; - unlawful distributions; or - transactions from which the director personally receives a benefit in money, property or services to which the director is not legally entitled. Our amended and restated articles of incorporation also provide that we shall indemnify any individual made a party to a proceeding because that individual is or was one of our directors or officers and shall advance or reimburse reasonable expenses incurred by such individual in advance of the final disposition of the proceeding to the fullest extent permitted by applicable law. Any repeal of or modification to our amended and restated articles of incorporation may not adversely affect any right of any of our directors who is or was a director at the time of such repeal or modification. To the extent the provisions of our amended and restated articles of incorporation provide for indemnification of directors for liabilities arising under the Securities Act, those provisions are, in the opinion of the SEC, against public policy as expressed in the Securities Act and are therefore unenforceable. Our bylaws provide that we shall indemnify our directors and officers and may indemnify our employees and agents to the fullest extent permitted by law. In addition, we have entered into separate indemnification agreements with our directors and certain executive officers that could require us, among other things, to indemnify them against liabilities that arise because of their status or service as directors or executive officers and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. Finally, we have purchased and intend to maintain a liability insurance policy, pursuant to which our directors and officers may be indemnified against liability they may incur for serving in their capacities as our directors and officers. We believe that the limitation of liability provisions in our amended and restated articles of incorporation, the indemnification provisions in our bylaws, the indemnification agreements and the liability insurance policy will facilitate our ability to continue to attract and retain qualified individuals to serve as our directors and officers. 47 53 CERTAIN TRANSACTIONS In connection with our conversion from a subchapter S corporation to a C corporation in October 1997, we issued notes payable to William T. Baxter, Albert T. Dosser and Peter R. Gregory, each in the principal amount of $654,970.76, which were repaid in full in January 1998. In January 1998, we sold 8,333,333 shares of Series A Preferred Stock at a per share price of $1.80. Purchasers of Series A Preferred Stock included TA Associates and its affiliates, who collectively purchased 6,666,667 shares and hold more than 5% of our outstanding common stock on an as-converted basis, and of which one of our directors, Jeffrey T. Chambers, is a partner; and Encompass Ventures and its affiliates, who collectively purchased 1,666,666 shares and hold more than 5% of our outstanding common stock on an as-converted basis, and of which one of our directors, Scot E. Land, is a member. Upon closing of this offering, each outstanding share of Series A Preferred Stock will convert into one share of common stock. In connection with the sale of the Series A Preferred Stock, the investors were granted registration rights, and we may therefore become obligated to effect a registration under the Securities Act of shares of common stock held by these investors upon the conversion of their preferred stock. In addition, in connection with the Series A Preferred Stock offering, we redeemed 1,111,111 shares of common stock from each of Messrs. Baxter, Dosser and Gregory for aggregate consideration of $6,000,000, and Messrs. Chambers and Land were elected to our board of directors. In September 1998, we granted an option to purchase 125,000 shares of common stock at an exercise price of $1.00 per share to NextGen, an affiliate of Encompass Ventures, in exchange for consulting services. We granted options to purchase shares of common stock to the following officers and directors on the date, for the number of shares and with an exercise price indicated opposite each person's name:
NUMBER OF SHARES UNDERLYING EXERCISE NAME GRANT DATE OPTIONS PRICE ---- ---------- ---------------- -------- David Bialer............................... 9/25/98 100,000 $ 1.00 Jeffrey T. Chambers........................ 8/3/98 45,000 1.80 Scot E. Land............................... 8/3/98 45,000 1.80 William Larson............................. 7/20/98 120,000 1.80 Brian V. Turner............................ 4/7/99 300,000 1.44 Donald Whitt............................... 6/11/97 20,000 .04956 7/17/98 10,000 1.00 7/5/99 40,000 2.50
Because of contractual obligations involving Mr. Chambers and his affiliated investment entities, the option grant to Mr. Chambers was issued in the name of TA Associates, Inc. 48 54 PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of our common stock as of July 31, 1999, and as adjusted to reflect the sale of the common stock offered hereby, by: - each shareholder known by us to own beneficially more than 5% of our outstanding common stock; - each of our directors; - each of our named executive officers; and - all current executive officers and directors as a group. Beneficial ownership is determined in accordance with the rules of the SEC. For purposes of calculating the number of shares beneficially owned by a shareholder and the percentage ownership of that shareholder, shares of common stock subject to options that are currently exercisable or exercisable within 60 days of July 31, 1999 by that shareholder are deemed outstanding. These options are not treated as outstanding for the purpose of computing the percentage ownership of any other shareholder. Percentage ownership is based on 26,599,726 shares of common stock outstanding on July 31, 1999 and shares outstanding upon completion of this offering. Unless otherwise noted below, the address for each shareholder below is: c/o BSQUARE Corporation, 3633 136th Place S.E., Suite 100, Bellevue, WA 98006. Unless otherwise noted, we believe that each of the shareholders has sole investment and voting power with respect to the common stock indicated, except to the extent shared by spouses under applicable law.
PERCENTAGE OF SHARES OUTSTANDING NUMBER OF --------------------- SHARES NUMBER OF UNDERLYING BEFORE AFTER NAME AND ADDRESS OF BENEFICIAL OWNER SHARES OPTIONS OFFERING OFFERING ------------------------------------ ---------- ----------- --------- --------- Entities affiliated with TA Associates, Inc.(1)..... 7,192,130 15,000 27.1% High Street Tower Suite 2500 Boston, MA 02110 Jeffrey T. Chambers(2).............................. 7,192,130 15,000 27.1 Albert T. Dosser.................................... 5,888,889 -- 22.1 Peter R. Gregory.................................... 5,875,089 -- 22.1 William T. Baxter................................... 5,142,362 -- 19.3 Scot E. Land(3)..................................... 1,805,555 15,000 6.8 Entities affiliated with Encompass Ventures(4)...... 1,805,555 15,000 6.8 4040 Lake Washington Blvd. N.E Suite 205 Kirkland, WA 98033 Brian V. Turner..................................... -- 300,000 1.1 William Larson...................................... -- 40,000 * David Bialer........................................ -- 100,000 * Donald Whitt........................................ 5,000 7,500 * All executive officers and directors as a group(9)(5)....................................... 25,909,025 477,500 97.5%
- --------------- * Less than 1% (1) Includes 5,865,962 shares held by TA/Advent VIII L.P., 1,100,968 shares held by Advent Atlantic and Pacific III, L.P., 117,318 shares held by TA Investors L.L.C. and 107,882 shares held by TA Executives Fund L.L.C., all of which are funds managed by TA Associates. (2) Includes 5,865,962 shares held by TA/Advent VIII L.P., 1,100,968 shares held by Advent Atlantic and Pacific III, L.P., 117,318 shares held by TA Investors L.L.C. and 107,882 shares held by TA Executives Fund L.L.C., all of which are funds managed by TA Associates. Mr. Chambers is a managing 49 55 director of TA Associates. Mr. Chambers directly or indirectly shares voting and investment power with respect to such shares but disclaims beneficial ownership. (3) Includes 1,372,222 shares held by Encompass Group US Information Technology Partners 1 LP, 277,778 shares held by TCI Club and 155,555 shares held by Northwest Financing, L.L.C., all of which are funds managed by Encompass Ventures. Mr. Land is affiliated with Encompass Ventures. Mr. Land directly or indirectly shares voting and investment power with respect to such shares but disclaims beneficial ownership. (4) Includes 1,372,222 shares held by Encompass Group US Information Technology Partners 1 LP, 277,778 shares held by TCI Club and 155,555 shares held by Northwest Financing, L.L.C., all of which are funds managed by Encompass Ventures. (5) See footnotes (1) through (4) above. 50 56 DESCRIPTION OF CAPITAL STOCK GENERAL Upon completion of this offering, we will be authorized to issue up to 50,000,000 shares of common stock, no par value, and 10,000,000 shares of preferred stock, no par value. The following summary of certain provisions of our common stock and preferred stock is not complete and may not contain all the information you should consider before investing in the common stock. This description is subject to and qualified in its entirety by provisions of our amended and restated articles of incorporation and bylaws, which are included as exhibits to the registration statement of which this prospectus is a part, and by provisions of applicable Washington law. COMMON STOCK As of July 31, 1999, assuming conversion of all outstanding shares of preferred stock, there were 26,599,726 shares of common stock outstanding that were held of record by 78 shareholders. After giving effect to the sale of common stock offered in this offering, there will be shares of common stock outstanding (assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options). As of July 31, 1999, there were outstanding options to purchase a total of 2,995,749 shares of common stock. The holders of common stock are entitled to one vote per share on all matters to be voted on by the shareholders. Subject to preferences that may be granted to any outstanding shares of preferred stock, the holders of common stock are entitled to receive ratably only those dividends our board of directors declares out of funds legally available for the payment of dividends as well as any other distributions to the shareholders. If we are liquidated, dissolved or wound-up, the holders of common stock are entitled to share pro rata all of our assets remaining after payment of our liabilities and liquidation preferences of any then-outstanding shares of preferred stock. Holders of common stock have no preemptive rights or rights to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are fully paid and non-assessable, and the shares of common stock to be issued in this offering will be fully paid and non-assessable. PREFERRED STOCK Upon the closing of this offering, all outstanding shares of preferred stock will be converted into 8,333,333 shares of common stock. Thereafter, pursuant to our amended and restated articles of incorporation, our board of directors will have the authority, without further action by the shareholders, to issue up to 10,000,000 shares of preferred stock in one or more series and to fix the relative designations, powers, preferences and privileges of the preferred stock, any or all of which may be greater than the rights of the common stock. Our board of directors, without shareholder approval, can issue preferred stock with voting, conversion or other rights that could adversely affect the voting power and other rights of the holders of common stock. Preferred stock could thus be issued quickly with terms that could delay or prevent a change in control of us or make removal of our management more difficult. Additionally, the issuance of preferred stock may decrease the market price of the common stock and may adversely affect the voting and other rights of the holders of common stock. We have no present plans to issue any preferred stock. REGISTRATION RIGHTS After this offering, the holders of 8,333,333 shares of common stock will be entitled to rights with respect to the registration of such shares under the Securities Act pursuant to a stock purchase and shareholders agreement among such holders and us dated January 30, 1998. Under the terms of this agreement, if we propose to register any of our securities under the Securities Act, either for our own account or for the account of other security holders exercising registration rights, such holders are entitled to notice of the 51 57 registration and to include their shares of common stock in the registration at our expense. Additionally, such holders are entitled to demand registration rights pursuant to which they may require us to file a registration statement under the Securities Act at our expense with respect to their shares of common stock. Further, such holders may require us to file additional registration statements on Form S-3 at our expense. All of these registration rights are subject to the right of the underwriters of an offering to limit the number of shares included in such registration. These registration rights terminate when the holder can transfer his or her registrable shares pursuant to Rule 144. The holders of these registration rights have entered into lock-up agreements and waived their registration rights until 180 days following the closing of this offering. ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF OUR AMENDED AND RESTATED ARTICLES OF INCORPORATION, BYLAWS AND WASHINGTON LAW Our board of directors, without shareholder approval, has the authority under our amended and restated articles of incorporation to issue preferred stock with rights superior to the rights of the holders of common stock. As a result, preferred stock could be issued quickly and easily, could adversely affect the rights of holders of common stock and could be issued with terms calculated to delay or prevent a change in control of us or make removal of our management more difficult. In addition, our board of directors is divided into three classes. The directors in each class will serve for three-year terms, one class being elected each year by our shareholders. This system of electing and removing directors may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of us because it generally makes it more difficult for shareholders to replace a majority of the directors. Chapter 19 of the Washington Business Corporation Act generally prohibits a "target corporation" from engaging in certain significant business transactions with an "acquiring person," which is defined as a person or group of persons that beneficially owns 10% or more of the voting securities of the target corporation, for a period of five years after the acquisition, unless the transaction or acquisition of shares is approved by a majority of the members of the target corporation's board of directors prior to the time of acquisition. Prohibited significant business transactions include, among other things: - a merger or consolidation with, disposition of assets to, or issuance or redemption of stock to or from, the acquiring person; - termination of 5% or more of the employees of the target corporation as a result of the acquiring person's acquisition of 10% or more of the shares; or - allowing the acquiring person to receive any disproportionate benefits as a shareholder. After the five-year period, a "significant business transaction" may occur as long as it complies with certain "fair price" provisions of the statute. A corporation may not "opt out" of this statute. This provision may have the effect of delaying, deterring or preventing a change in control of us. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is ChaseMellon Shareholder Services, L.L.C. The transfer agent's address is 520 Pike Street, Suite 1220, Seattle, Washington 98101, and its telephone number is (206) 292-3795. NATIONAL MARKET LISTING We will apply to list our common stock on The Nasdaq Stock Market's National Market under the symbol "BSQR." 52 58 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, we will have shares of common stock outstanding, assuming no exercise of options after July 31, 1999. Of these shares, the shares that we expect to sell in this offering will be freely tradable in the public market without restriction under the Securities Act, unless such shares are held by our "affiliates," as that term is defined in Rule 144 under the Securities Act. The remaining 26,599,726 shares of common stock that will be outstanding after this offering will be restricted shares because they were sold in private transactions in reliance on exemptions from registration under the Securities Act. of these shares will be subject to the lock-up agreements described below for 180 days after the date of this prospectus. In addition, holders of stock options may exercise and sell their options. The following table shows the timing of when shares may be eligible for resale in the public market after effectiveness of this offering:
DAYS AFTER DATE OF THIS PROSPECTUS SHARES FIRST ELIGIBLE FOR RESALE COMMENT - ---------------------------------- -------------------------------- ------------------------------- - - Upon effectiveness............ - Freely tradeable shares sold in this offering, and shares eligible for sale pursuant to vested and exercisable options pursuant to our Form S-8 registration statement - - 90 days....................... - Shares eligible for sale under Rules 144 and 701 - - 180 days...................... - Expiration of lock up agreements
From time to time between the effectiveness of our Form S-8 registration statement and 90 days after the date of this prospectus additional shares will become eligible for sale, and 90 days thereafter additional shares will become eligible for sale, all pursuant to the exercise of vested options. S-8 Registration Statement As of July 31, 1999, there were a total of 2,995,749 shares of common stock subject to outstanding options under our stock option plan, 1,043,851 of which were vested. Immediately after the completion of the offering, we intend to file registration statements on Form S-8 under the Securities Act to register all of the shares of common stock issued or reserved for future issuance under our stock option plan and our employee stock purchase plan. After the effective dates of the registration statements on Form S-8, shares purchased upon exercise of options granted pursuant to our stock option plan and employee stock purchase plan generally would be available for resale in the public market, without restriction. Rule 144 In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned restricted shares for at least one year would be entitled to sell in any three-month period up to the greater of: - 1% of the then-outstanding shares of common stock (approximately shares immediately after this offering); and - the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale and notice requirements and to the availability of current public information about us. Rule 701 Any of our employees, directors, officers, consultants or advisors who purchased shares from us in connection with a written stock or option plan before the effective date of this offering is entitled to rely on the 53 59 resale provisions of Rule 701, subject to the lock-up agreements described above. In general, Rule 701 permits non-affiliates to sell their Rule 701 shares 90 days after the effectiveness of a registration statement relating to a company's initial public offering without having to comply with the public information, holding period, volume limitation or notice provisions of Rule 144 and permits affiliates to sell their Rule 701 shares without having to comply with the holding period of Rule 144. Rule 144(k) Under Rule 144(k), a person who has not been one of our affiliates during the preceding 90 days and who has beneficially owned the restricted shares for at least two years is entitled to sell them without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Lock-Up Agreements Pursuant to certain "lock-up" agreements, we and our executive officers, directors and certain of our other shareholders have agreed not to offer, sell, contract to sell, announce an intention to sell, pledge or otherwise dispose of, directly or indirectly, or file with the SEC a registration statement under the Securities Act relating to, any shares of common stock or securities convertible into or exchangeable or exercisable for any common stock without the prior written consent of Credit Suisse First Boston Corporation for a period of 180 days after the date of this prospectus. 54 60 UNDERWRITING Under the terms and subject to the conditions contained in an underwriting agreement dated , 1999, we have agreed to sell to the underwriters named below, for whom Credit Suisse First Boston Corporation, Lehman Brothers Inc., A.G. Edwards & Sons, Inc. and Wit Capital Corporation are acting as representatives, the following respective numbers of shares of common stock:
Number of Shares Underwriter ---------------- Credit Suisse First Boston Corporation...................... Lehman Brothers Inc. ....................................... A.G. Edwards & Sons, Inc. .................................. Wit Capital Corporation..................................... ---------------- Total.................................................. ================
The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or the offering of common stock may be terminated. We have granted to the underwriters a 30-day option to purchase on a pro rata basis up to additional shares at the initial public offering price less the underwriting discounts and commissions. This option may be exercised only to cover any over-allotments of common stock. The underwriters propose to offer the shares of common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a concession of $ per share. The underwriters and selling group members may allow a discount of $ per share on sales to other broker/dealers. After the initial public offering, the public offering price and concession and discount to dealers may be changed by the representatives. The following table summarizes the compensation and estimated expenses we will pay.
PER SHARE TOTAL -------------------------------- -------------------------------- WITHOUT WITH WITHOUT WITH OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT -------------- -------------- -------------- -------------- Underwriting discounts and commissions paid by us............. $ $ $ $ Expenses payable by us............... $ $ $ $
The underwriters have informed us that they do not expect discretionary sales to exceed 5% of the shares of common stock being offered. We and our executive officers, directors and certain of our other shareholders have agreed not to offer, sell, contract to sell, announce an intention to sell, pledge or otherwise dispose of, directly or indirectly, or file with the SEC a registration statement under the Securities Act relating to, any shares of common stock or securities convertible into or exchangeable or exercisable for any common stock without the prior written consent of Credit Suisse First Boston Corporation for a period of 180 days after the date of this prospectus. The underwriters have reserved for sale, at the initial public offering price, up to shares of common stock for employees, directors and certain other persons associated with us who have expressed an interest in purchasing common stock in this offering. The number of shares available for sale to the general public in this offering will be reduced to the extent these persons purchase the reserved shares. Any reserved 55 61 shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares. We have agreed to indemnify the underwriters against liabilities under the Securities Act, or contribute to payments which the underwriters may be required to make in that respect. We will apply to list our common stock on The Nasdaq Stock Market's National Market under the symbol "BSQR." Prior to this offering, there has been no public market for our common stock. The initial public offering price will be determined by negotiation between us and the underwriters. The principal factors that will be considered in determining the public offering price include: - the information in this prospectus and otherwise available to the underwriters; - the history and the prospects for the industry in which we will compete; - the ability of our management; - the prospects for our future earnings; - the present state of our development and our current financial condition; - the general condition of the securities markets at the time of this offering; and - the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies. The representatives may engage in over-allotment, stabilizing transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Securities Exchange Act of 1934. - Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. - Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. - Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. - Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a syndicate covering transaction to cover syndicate short positions. These stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the common stock to be higher than it would otherwise be in the absence of these transactions. These transactions may be effected on The Nasdaq Stock Market's National Market or otherwise and, if commenced, may be discontinued at any time. A prospectus in electronic format is being made available on an Internet website maintained by Wit Capital. In addition, pursuant to an e-dealer agreement, all dealers purchasing shares from Wit Capital in the offering similarly have agreed to make a prospectus in electronic format available on websites maintained by each of the e-dealers. Wit Capital, a member of the National Association of Securities Dealers, will participate in the offering as one of the underwriters. The NASD approved the membership of Wit Capital on September 4, 1997. Since that time, Wit Capital has acted as an underwriter, co-manager or selected dealer in over 75 public offerings. Except for its participation as a manager in this offering, Wit Capital has no relationship with us or any of our founders or our significant shareholders. 56 62 NOTICE TO CANADIAN RESIDENTS RESALE RESTRICTIONS The distribution of the common stock in Canada is being made only on a private placement basis exempt from the requirement that we prepare and file a prospectus with the securities regulatory authorities in each province where trades of common stock are effected. Accordingly, any resale of the common stock in Canada must be made in accordance with applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made in accordance with available statutory exemptions or under a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the common stock. REPRESENTATIONS OF PURCHASERS Each purchaser of common stock in Canada who receives a purchase confirmation will be deemed to represent to us and the dealer from whom the purchase confirmation is received that (1) the purchaser is entitled under applicable provincial securities laws to purchase common stock without the benefit of a prospectus qualified under the securities laws, (2) where required by law, that the purchaser is purchasing as principal and not as agent, and (3) the purchaser has reviewed the text under "Resale Restrictions." RIGHTS OF ACTION (ONTARIO PURCHASERS) The securities being offered are those of a foreign issuer and Ontario purchasers will not receive the contractual right of action prescribed by Ontario securities law. As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or rescission or rights of action under the civil liability provisions of the U.S. federal securities laws. ENFORCEMENT OF LEGAL RIGHTS All of the issuer's directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon the issuer and these persons. All or a substantial portion of the assets of the issuer and these persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against the issuer or these persons in Canada or to enforce a judgment obtained in Canadian courts against the issuer or these persons outside of Canada. NOTICE TO BRITISH COLUMBIA RESIDENTS A purchaser of common stock to whom the Securities Act (British Columbia) applies is advised that the purchaser is required to file with the British Columbia Securities Commission a report within ten days of the sale of any common stock acquired by such purchaser in this offering. This report must be in the form attached to British Columbia Securities Commission Blanket Order BOR #95/17, a copy of which may be obtained from us. Only one report must be filed in respect of common stock acquired on the same date and under the same prospectus exemption. TAXATION AND ELIGIBILITY FOR INVESTMENT Canadian purchasers of common stock should consult with their own legal and tax advisors with respect to the tax consequences of an investment in our common stock in their particular circumstances and with respect to the eligibility of our common stock for investment by the purchaser under relevant Canadian legislation. 57 63 LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for BSQUARE by Summit Law Group, PLLC, Seattle, Washington. Certain legal matters will be passed upon for the underwriters by Morrison & Foerster, LLP, Palo Alto, California. As of the date of this prospectus, Summit Law Group beneficially owns 34,722 shares of our common stock. EXPERTS Our audited consolidated financial statements and schedule of BSQUARE Corporation and subsidiaries included in this prospectus and elsewhere in the registration statement to the extent and for the periods indicated in their reports have been audited by Arthur Andersen LLP, independent public accountants, and are included herein as indicated in their reports with respect thereto, in reliance upon the authority of said firm as experts giving said reports. WHERE TO FIND ADDITIONAL DOCUMENTS We have filed with the SEC a registration statement on Form S-1. This prospectus, which forms a part of the registration statement, does not contain all the information included in the registration statement. Certain information is omitted and you should refer to the registration statement and its exhibits. With respect to references made in this prospectus to any of our contracts or other documents, such references are not necessarily complete and you should refer to the exhibits attached to the registration statement for copies of the actual contract or document. You may read and copy the registration statement, including exhibits and schedules filed with it, at the SEC's public reference facilities in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the SEC's public reference facilities by calling the SEC at 1-800-SEC-0330. The SEC maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as us, that file electronically with the SEC. 58 64 BSQUARE CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants.................... F-2 Consolidated Balance Sheets................................. F-3 Consolidated Statements of Income and Comprehensive Income.................................................... F-4 Consolidated Statements of Shareholders' Equity (Deficit)... F-5 Consolidated Statements of Cash Flows....................... F-6 Notes to Consolidated Financial Statements.................. F-7
F-1 65 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To BSQUARE Corporation: We have audited the accompanying consolidated balance sheets of BSQUARE Corporation and subsidiaries as of December 31, 1997 and 1998, and the related consolidated statements of income and comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our 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 consolidated financial statements referred to above, present fairly, in all material respects, the financial position of BSQUARE Corporation and subsidiaries as of December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Seattle, Washington, /s/ ARTHUR ANDERSEN LLP August 13, 1999 F-2 66 BSQUARE CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PRO FORMA SHAREHOLDERS' DECEMBER 31, EQUITY ---------------- JUNE 30, (NOTE 1) AT 1997 1998 1999 JUNE 30, 1999 ------ ------- ------------ ------------- (UNAUDITED) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................ $2,286 $ 5,324 $ 9,284 Short-term investments................................... -- 1,582 -- Accounts receivable, net of allowance for doubtful accounts of $10 in 1997, $67 in 1998 and $112 in 1999................................................... 2,700 5,487 4,531 Income taxes receivable.................................. -- 134 -- Prepaid expenses and other current assets................ 89 155 236 Deferred income tax asset................................ -- 237 832 ------ ------- ------- Total current assets.............................. 5,075 12,919 14,883 Furniture, equipment and leasehold improvements, net....... 1,320 3,061 3,380 Deposits and other assets.................................. 58 178 486 ------ ------- ------- Total assets...................................... $6,453 $16,158 $18,749 ====== ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Current portion of long-term obligations................. $ -- $ 157 $ 157 Accounts payable......................................... 367 676 507 Accrued compensation..................................... 732 1,331 1,333 Accrued expenses......................................... 147 308 1,509 Income taxes payable..................................... 484 -- 53 Deferred income taxes payable............................ 38 -- -- Deferred revenue......................................... 389 167 649 ------ ------- ------- Total current liabilities......................... 2,157 2,639 4,208 Notes payable to shareholders.............................. 1,743 -- -- Long-term obligations, net of current portion.............. -- 289 210 Deferred income tax payable, net of current portion........ 223 111 111 ------ ------- ------- Total liabilities................................. 4,123 3,039 4,529 ------ ------- ------- Commitments and contingencies (Note 6) Mandatorily redeemable convertible Series A preferred stock, no par value: Authorized 10,000,000 shares, issued and outstanding, no shares in 1997 and 8,333,333 shares in 1998 and 1999, preference in liquidation of $15,000,000.............................................. -- 14,417 14,475 -- Shareholders' equity (deficit): Common stock, no par value: Authorized 50,000,000 shares, issued and outstanding, 21,375,000 shares in 1997, 18,161,605 shares in 1998, and 18,225,205 in 1999...... 2,766 2,123 3,209 17,684 Deferred stock option compensation....................... (572) (401) (1,157) (1,157) Stock subscription....................................... -- -- (29) (29) Cumulative foreign currency translation adjustment....... -- 5 (61) (61) Retained earnings (accumulated deficit).................. 136 (3,025) (2,217) (2,217) ------ ------- ------- ------- Total shareholders' equity (deficit).............. 2,330 (1,298) (255) $14,220 ------ ------- ------- ======= Total liabilities and shareholders' equity........ $6,453 $16,158 $18,749 ====== ======= =======
See notes to Consolidated Financial Statements. F-3 67 BSQUARE CORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, --------------------------- ----------------- 1996 1997 1998 1998 1999 ------- ------- ------- ------- ------- (UNAUDITED) Revenue: Service........................................ $ 4,175 $14,021 $23,393 $10,181 $17,848 Product........................................ 11 384 1,219 621 695 ------- ------- ------- ------- ------- Total revenue.......................... 4,186 14,405 24,612 10,802 18,543 ------- ------- ------- ------- ------- Cost of revenue: Service........................................ 1,400 5,566 11,135 4,907 8,791 Product........................................ 4 78 166 121 108 ------- ------- ------- ------- ------- Total cost of revenue.................. 1,404 5,644 11,301 5,028 8,899 ------- ------- ------- ------- ------- Gross profit........................... 2,782 8,761 13,311 5,774 9,644 ------- ------- ------- ------- ------- Operating expenses: Research and development....................... 205 1,391 3,671 1,452 2,960 Selling, general and administrative............ 606 2,806 6,470 2,618 5,236 ------- ------- ------- ------- ------- Total operating expenses............... 811 4,197 10,141 4,070 8,196 ------- ------- ------- ------- ------- Income from operations................. 1,971 4,564 3,170 1,704 1,448 ------- ------- ------- ------- ------- Other income (expense): Interest income................................ -- 20 359 196 149 Interest expense............................... -- (32) (40) (17) (19) ------- ------- ------- ------- ------- Total other income (expense)........... -- (12) 319 179 130 ------- ------- ------- ------- ------- Income before income taxes....................... 1,971 4,552 3,489 1,883 1,578 Provision for income taxes....................... -- 746 1,189 666 712 ------- ------- ------- ------- ------- Net income............................. $ 1,971 $ 3,806 $ 2,300 $ 1,217 $ 866 ======= ======= ======= ======= ======= Foreign currency translation adjustment.......... -- -- (5) -- 66 ------- ------- ------- ------- ------- Comprehensive net income......................... $ 1,971 $ 3,806 $ 2,295 $ 1,217 $ 932 ======= ======= ======= ======= ======= Basic earnings per share......................... $ 0.09 $ 0.18 $ 0.12 $ 0.06 $ 0.04 ======= ======= ======= ======= ======= Weighted average shares outstanding used to compute basic earnings per share............... 22,106 21,400 18,372 18,615 18,206 ======= ======= ======= ======= ======= Diluted earnings per share....................... $ 0.09 $ 0.17 $ 0.08 $ 0.04 $ 0.03 ======= ======= ======= ======= ======= Weighted average shares outstanding to compute diluted earnings per share..................... 22,106 21,781 27,475 27,050 28,615 ======= ======= ======= ======= =======
See notes to Consolidated Financial Statements. F-4 68 BSQUARE CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CUMULATIVE FOREIGN RETAINED TOTAL COMMON STOCK DEFERRED CURRENCY EARNINGS SHAREHOLDERS' -------------------- STOCK OPTION STOCK TRANSLATION (ACCUMULATED EQUITY SHARES AMOUNT COMPENSATION SUBSCRIPTION ADJUSTMENT DEFICIT) (DEFICIT) ---------- ------- ------------ ------------ ----------- ------------ ------------- Balance, December 31, 1995...... 21,000,000 $ 2 $ -- $ -- $ -- $ 259 $ 261 Issuance of common stock...... 1,106,000 14 -- -- -- -- 14 Shareholder draws............. -- -- -- -- -- (1,322) (1,322) Net income.................... -- -- -- -- -- 1,971 1,971 ---------- ------- ------- ---- ---- ------- ------- Balance, December 31, 1996...... 22,106,000 16 -- -- -- 908 924 Issuance of common stock for services rendered........... 500,000 25 -- -- -- -- 25 Repurchase of common stock.... (1,231,000) (46) -- -- -- -- (46) Shareholder note payable on S to C Corporation conversion.................. -- -- -- -- -- (2,000) (2,000) Shareholder draws............. -- -- -- -- -- (460) (460) Net income from January 1, 1997 to October 15, 1997.... 3,670 3,670 Conversion from S corporation to C corporation............ 2,118 (2,118) -- Issuance of compensatory stock options..................... -- 653 (653) -- -- -- -- Compensation attributable to stock option vesting........ -- -- 81 -- -- -- 81 Net income from October 16, 1997 to December 31, 1997........................ -- -- -- -- -- 136 136 ---------- ------- ------- ---- ---- ------- ------- Balance, December 31, 1997...... 21,375,000 2,766 (572) -- -- 136 2,330 Repurchase of common stock.... (3,333,333) (649) -- -- -- (5,351) (6,000) Exercise of stock options..... 119,938 6 -- -- -- -- 6 Compensation attributable to stock option vesting........ -- -- 171 -- -- -- 171 Foreign currency translation adjustment.................. -- -- -- -- 5 -- 5 Accretion on mandatorily redeemable convertible preferred stock............. -- -- -- -- -- (110) (110) Net income.................... -- -- -- -- -- 2,300 2,300 ---------- ------- ------- ---- ---- ------- ------- Balance, December 31, 1998...... 18,161,605 2,123 (401) -- 5 (3,025) (1,298) Exercise of stock options..... 63,600 6 -- -- -- -- 6 Note receivable from shareholder................. -- 30 -- (30) -- -- -- Issuance of compensatory stock options..................... -- 1,050 (1,050) -- -- -- -- Issuance of common stock upon payment of subscription receivable from shareholder................. -- -- -- 1 -- -- 1 Compensation attributable to stock option vesting........ -- -- 294 -- -- -- 294 Foreign currency translation adjustment.................. -- -- -- -- (66) -- (66) Accretion on mandatorily redeemable convertible preferred stock............. -- -- -- -- -- (58) (58) Net income.................... -- -- -- -- -- 866 866 ---------- ------- ------- ---- ---- ------- ------- Balance, June 30, 1999 (unaudited)................... 18,225,205 $ 3,209 $(1,157) $(29) $(61) $(2,217) $ (255) ========== ======= ======= ==== ==== ======= =======
See notes to Consolidated Financial Statements. F-5 69 BSQUARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------- ----------------- 1996 1997 1998 1998 1999 ------- ------- ------- ------- ------- (UNAUDITED) Cash flows from operating activities: Net income..................................... $ 1,971 $ 3,806 $ 2,300 $ 1,217 $ 866 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization............... 35 329 948 387 1,070 Deferred income taxes....................... -- 261 (387) 7 (595) Stock and stock option compensation......... -- 106 171 83 294 Amortization of deferred financing costs.... -- -- 14 7 -- Changes in operating assets and liabilities: Accounts receivable....................... (205) (2,109) (2,786) (1,020) 956 Prepaid expenses and other current assets................................. (13) (66) (76) (60) (56) Deposits and other assets................. (27) (24) (117) (4) (315) Accounts payable and accrued expenses..... 101 1,111 960 125 703 Income taxes.............................. -- 484 (221) (562) 187 Deferred revenue.......................... (222) 389 (618) (354) 482 ------- ------- ------- ------- ------- Net cash provided by (used in) operating activities................. 1,640 4,287 188 (174) 3,592 ------- ------- ------- ------- ------- Cash flows from investing activities: Purchases of furniture equipment and leasehold improvements................................ (248) (1,413) (2,116) (1,628) (1,070) Maturity (purchase) of short-term investments, net......................................... -- -- (1,582) (1,552) 1,582 ------- ------- ------- ------- ------- Net cash provided by (used in) investing activities................. (248) (1,413) (3,698) (3,180) 512 ------- ------- ------- ------- ------- Cash flows from financing activities: Repayment of shareholder notes payable......... -- (256) (1,743) (1,743) -- Payments on long-term obligations.............. -- -- (26) -- (79) Repurchase of common stock..................... -- (46) (6,000) (6,000) -- Deferred financing costs....................... -- (13) (2) (2) (25) Proceeds from exercise of stock options........ -- -- 5 1 6 Shareholders' draws............................ (1,322) (460) -- -- -- Net proceeds from issuance of Series A Preferred Stock............................. -- -- 14,307 14,307 -- Proceeds from sale of common stock............. 14 -- -- -- -- ------- ------- ------- ------- ------- Net cash provided by (used in) financing activities................. (1,308) (775) 6,541 6,563 (98) ------- ------- ------- ------- ------- Effect of exchange rate changes on cash.......... -- -- 7 -- (46) ------- ------- ------- ------- ------- Net increase in cash and cash equivalents.......................... 84 2,099 3,038 3,209 3,960 Cash and cash equivalents, beginning of period... 103 187 2,286 2,286 5,324 ------- ------- ------- ------- ------- Cash and cash equivalents, end of period......... $ 187 $ 2,286 $ 5,324 $ 5,495 $ 9,284 ======= ======= ======= ======= =======
See notes to Consolidated Financial Statements. F-6 70 BSQUARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 (INFORMATION AS OF JUNE 30, 1998 AND 1999 IS UNAUDITED) (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS BSQUARE Corporation, a Washington corporation, and its subsidiaries (collectively the Company) provides complete software solutions that enable the proliferation of a wide variety of intelligent computing devices based on the Microsoft Windows CE operating system. The Company works with semiconductor vendors and original equipment manufacturers to provide software products and engineering services for the development of intelligent computing devices, or ICDs. The Company helps enable the rapid and low-cost deployment of ICDs by providing a variety of software solutions for the development, integration and deployment of the Windows CE operating system with industry-specific applications. The Company also develops software applications that are licensed to end users to provide ICDs with additional functionality. The Company markets and supports its products and provides services on a worldwide basis through a direct sales force augmented by distributors. CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES The Company operates in the software industry, and accordingly, can be affected by a variety of factors. For example, management of the Company believes that any of the following factors could have a significant negative effect on the Company's future financial position, results of operations and cash flows: unanticipated fluctuations in quarterly operating results; failure of the market for Windows CE operating system to develop fully; failure of the market for ICDs to develop fully; adverse changes in the Company's relationship with Microsoft; failure to secure contracts with market-leading OEMs; intense competition; failure to attract and retain key personnel; failure to protect intellectual property; risks associated with international operations; inability to manage growth; litigation or other claims against the Company. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated. Accounts denominated in foreign currencies have been re-measured into the functional currency, using the U.S. dollar as the functional currency. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. UNAUDITED INTERIM FINANCIAL DATA The unaudited interim financial statements as of June 30, 1999 and for the six months ended June 30, 1998 and 1999 have been prepared on the same basis as the audited financial statements and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial information set forth therein, in accordance with generally accepted accounting principles. The Company believes that the results of operations for the six months ended June 30, 1999 are not necessarily indicative of the results to be expected for any future period. F-7 71 BSQUARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) EARNINGS PER SHARE In accordance with Statement of Financial Accounting Standards (SFAS) No. 128, "Computation of Earnings Per Share," basic earnings per share is computed by dividing net income available to common stock (net income less accretion of mandatorily redeemable convertible preferred stock) by the weighted average number of shares of common stock outstanding during the period. Dilutive earnings per share is computed by dividing net income by the weighted average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares consist of the shares of common stock issuable upon the conversion of the mandatorily redeemable convertible preferred stock (using the if-converted method) and shares issuable upon the exercise of stock options and warrants (using the treasury stock method); common equivalent shares are excluded from the calculation if their effect is antidilutive. The Company has not had any issuances or grants for nominal consideration as defined under Staff Accounting Bulletin 98. CASH AND CASH EQUIVALENTS Cash and cash equivalents, include demand deposits, money market accounts and all highly liquid debt instruments with an original maturity date of three months or less. SHORT-TERM INVESTMENTS The Company's short-term investments consist primarily of investment-grade marketable securities, which are classified as held to maturity and recorded at amortized cost. Due to the short-term nature of these investments, changes in market interest rates would not have a significant impact on the fair value of these securities that are carried at amortized cost, which approximates fair value. At December 31, 1998, all short-term investments had a contractual maturity of one year or less. FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, short-term investments and trade accounts receivable, accounts payable and long-term debt. Fair values of cash and cash equivalents and short-term investments approximate cost due to the short period of time to maturity. The fair values of financial instruments that are short-term and/or that have little or no market risk are considered to have a fair value equal to book value. Assets and liabilities that are included in this category are receivables, accounts payable and accrued liabilities. The Company performs initial and ongoing evaluations of its customers' financial position, and generally extends credit on open account, requiring collateral as deemed necessary. The Company maintains allowances for potential credit losses. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Furniture, equipment and leasehold improvements are stated at cost less accumulated depreciation. Depreciation is provided on the straight-line method over the estimated useful lives, as follows: office furniture and equipment -- four years; computer equipment -- three years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life. Maintenance and repairs are expensed as incurred. When properties are retired or otherwise disposed, gains or losses are reflected in the income statement. When facts and circumstances indicate that the cost of long-lived assets may be impaired, an evaluation of recoverability is performed by comparing the carrying value of the asset to projected future cash flows. Upon indication that the carrying value of such assets may not be recoverable, the Company would recognize an impairment loss by a charge against current operations. SOFTWARE DEVELOPMENT COSTS Under the criteria set forth in Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed," capitalization of software F-8 72 BSQUARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) development costs begins upon the establishment of technological feasibility of the product, which the Company has defined as the completion of beta testing of a working product. The establishment of technological feasibility and the ongoing assessment of the recoverability of these costs require considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future gross product revenue estimated economic life and changes in software and hardware technology. Amounts that could have been capitalized under this statement after consideration of the above factors were immaterial and, therefore, no software development costs have been capitalized by the Company to date. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred and consist primarily of salaries and materials. INCOME TAXES The Company was taxed as an S Corporation until October 15, 1997, when the shareholders elected to convert to a C Corporation. Accordingly, taxes on income to the Company were generally the responsibility of the shareholders until the conversion. The Company computes income taxes using the asset and liability method, under which deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. Deferred tax assets and liabilities are measured using currently enacted tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized. FOREIGN CURRENCY TRANSLATION The Company commenced operations in Germany and Japan during 1998. The functional currency of foreign subsidiaries is the local currency. Accordingly, assets and liabilities are translated at exchange rates in effect at the balance sheet date and income and expense accounts at the average exchange rates during the year. Resulting translation adjustments are recorded as a separate component of shareholders' equity. The net gains and losses resulting from foreign currency transactions are recorded in the consolidated statements of income in the period incurred and were not significant for any of the periods presented. REVENUE RECOGNITION The Company's revenue recognition policy is in compliance with the provisions of the American Institute of Certified Public Accountants' Statement of Position 97-2, "Software Revenue Recognition." Service revenue is derived from software porting and development contracts. Product revenue consists of licensing fees from software application products and operating system and software development tool products. The Company's customers consist of software companies, original equipment manufacturers, distributors and end users. The Company's revenue is recognized as follows: Time and Material Consulting Contracts. The Company recognizes revenue as services are rendered. Fixed-Price Consulting Contracts. Revenue from fixed-price contracts is recognized on the percentage-of-completion method, measured by the cost incurred to date to the estimated total cost for the contract. This method is used as management considers expended costs to be the best available measure of contract performance. Contract costs include all direct labor, material and any other costs related to contract performance. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions and estimated profitability may result in revisions in the estimate of total costs. Any required adjustments due to these changes are recognized in the period in which such revisions are determined. F-9 73 BSQUARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Product Revenue. Product revenue consists principally of fees from the licensing and sale of software products. Product licensing fees, including advanced production royalty payments, are generally recognized when a customer license agreement has been executed, the software has been shipped, remaining obligations are insignificant and collection of the resulting account receivable is probable. The Company recognizes license royalty income as it is reported by the reseller when it ships its product to distributors. ADVERTISING COSTS The cost of advertising is expensed as incurred. During the years ending December 31, 1996, 1997 and 1998 and for the six months ended June 30, 1998 and 1999, the Company incurred advertising expense of $159, $279 and $276, $186, and $128, respectively. UNAUDITED PRO FORMA SHAREHOLDERS' EQUITY If the offering contemplated by this prospectus is consummated, all of the mandatorily redeemable convertible preferred stock outstanding and subscribed to as of the closing date will automatically be converted into an aggregate of 8,333,333 shares of common stock. Unaudited pro forma shareholders' equity at June 30, 1999, as adjusted for the conversion of mandatorily redeemable convertible preferred stock, is presented in the accompanying consolidated balance sheet. RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1 (SOP 98-1), "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use." SOP 98-1 is effective for financial statements for years beginning after December 15, 1998. SOP 98-1 provides guidance over accounting for computer software developed or obtained for internal use including the requirement to capitalize specified costs and amortization of such costs. The implementation of SOP 98-1 did not have a material impact on the Company's financial position or results of operations. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up Activities." SOP 98-5, which is effective for fiscal years beginning after December 15, 1998, provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start up activities and organization costs to be expensed as incurred. The implementation of SOP 98-5 did not have a material impact on the Company's financial position or results of operations. In June 1998, the Financial Accounting Standards Board issued Statement No. 133 of Financial Accounting Standards, "Accounting for Derivative Instruments and Hedging Activities." This statement requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as a part of a hedge transaction and, if it is the type of hedge transaction. This statement is effective for all fiscal quarters of all fiscal years beginning after December 15, 1999. The Company does not use derivative instruments, therefore the adoption of this statement will not have any effect on the Company's results of operations or financial position. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the current year presentation. F-10 74 BSQUARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Major classifications of furniture, equipment and leasehold improvements consist of the following:
DECEMBER 31, ----------------- JUNE 30, 1997 1998 1999 ------ ------- -------- Computer equipment and system software................. $1,003 $ 2,450 $ 3,158 Office furniture and equipment......................... 404 667 727 Leasehold improvements................................. 293 1,040 1,300 Construction in progress............................... -- 118 114 ------ ------- ------- 1,700 4,275 5,299 Less: accumulated depreciation and amortization........ (380) (1,214) (1,919) ------ ------- ------- $1,320 $ 3,061 $ 3,380 ====== ======= =======
3. INCOME TAXES As discussed in Note 1 to the financial statements, the Company was a Subchapter S Corporation for income tax purposes from inception to October 15, 1997. Effective October 16, 1997, the Company converted to a C Corporation and was thereafter responsible for U.S. federal income taxes. A net deferred tax liability of $445, primarily related to the required conversion for income tax purposes from the cash basis method to the accrual basis method of accounting, was recorded at the conversion date to reflect the Company's net taxable temporary differences. In addition, in accordance with Staff Accounting Bulletin Topic 4.B., the Company has reclassified accumulated earnings generated prior to the date of conversion to C corporation status from retained earnings to common stock and additional paid in capital. The provision for income taxes consisted of the following:
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, -------------- ---------------- 1997 1998 1998 1999 ---- ------ ----- ------- Current U.S. Current..................................... $484 $1,549 $655 $1,194 International.................................... -- 27 -- 84 U.S. Deferred...................................... 262 (387) 11 (566) ---- ------ ---- ------ Total tax provision...................... $746 $1,189 $666 $ 712 ==== ====== ==== ======
The components of net deferred tax (assets) liabilities consisted of the following at December 31:
DECEMBER 31, ------------- JUNE 30, 1997 1998 1999 ---- ----- -------- Deferred income tax (asset) liabilities: Depreciation............................................. $ -- $ (41) $(163) Accrued compensation and benefits........................ (64) (206) (265) Deferred revenue......................................... -- (57) (452) Allowance for doubtful accounts.......................... (3) (23) (38) Cash to accrual basis conversion......................... 111 111 111 Other, net............................................... (6) (21) (25) ---- ----- ----- $ 38 $(237) $(832) ==== ===== ===== Deferred income taxes payable: Cash to accrual basis conversion......................... $223 $ 111 $ 111 ---- ----- ----- $223 $ 111 $ 111 ==== ===== =====
F-11 75 BSQUARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pre-tax income, as a result of the following:
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, ------------- ------------ 1997 1998 1998 1999 ----- ---- ---- ---- Taxes at the U.S. statutory rate....................... 34.0% 34.0% 34.0% 34.0% Increase (decreases) in income taxes resulting from: Conversion from an S Corporation to C Corporation.... 9.8 -- -- -- Shareholder responsibility for taxes associated with S Corporation status.............................. (27.4) -- -- -- Research and development tax credit.................. (0.8) (6.2) (0.5) (8.4) International operations............................. -- 4.5 -- 14.7 Other, net........................................... 0.8 1.8 1.9 4.8 ----- ---- ---- ---- 16.4% 34.1% 35.4% 45.1% ===== ==== ==== ====
4. SHAREHOLDER NOTES PAYABLE The Company was a Subchapter S Corporation for income tax purposes from inception to October 15, 1997. Effective October 16, 1997, the Company converted to a C Corporation. In connection with the conversion, the Company issued notes payable totaling $2.0 million to the shareholders. Interest accrued at the applicable federal long-term rate under Section 1274 of the Internal Revenue Code of 1986, as amended. Although the notes were not due until December 2002, or earlier if certain conditions were met, the Company paid in full the shareholder notes payable and related accrued interest on January 30, 1998. 5. BANK LINE OF CREDIT AND NOTES PAYABLE At December 31, 1998, the Company had available a $2.0 million secured domestic revolving bank line of credit to support working capital, and a $500 domestic term loan to finance the purchase of software and equipment. During 1998, the Company used $473 of the domestic term loan to finance the purchase of certain equipment. Interest accrues at the bank's prime for the line of credit and the bank's prime plus 0.25% for the term loan. The facility fee is 0.50% per annum or $10 for the line of credit and bank's prime plus 0.25% per annum, or $3 for the term loan. Restrictive terms of the line of credit require, among other restrictions that the Company maintains a minimum quick ratio, tangible net worth and debt service ratio. Principal maturities of long-term obligations at December 31, 1998 are as follows: 1999........................................................ $157 2000........................................................ 157 2001........................................................ 132 ---- $446 ====
In July 1999, the Company renewed its bank line of credit, which provided for a $5.0 million secured domestic revolving line of credit, $1.0 million term loan for the purchase of equipment and a $4.0 term loan for leasehold improvements. Interest accrues at the bank's prime rate for the revolving line of credit, the bank's prime rate plus 0.25% for the equipment term loan and the bank's prime rate plus 0.5% for the leasehold term loan. The facility fee is $25. Restrictive terms of the lines require, among other requirements that the Company maintains a minimum quick ratio, tangible net work and debt service ratio. The line of credit is secured by substantially all of the assets of the Company. As of July 31, the Company had $464 in standby letters of credit issued and outstanding under the domestic revolving line of credit. F-12 76 BSQUARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. COMMITMENTS AND CONTINGENCIES The Company leases its office space under non-cancelable operating leases that expire at various dates through 2009. During the years ending December 31, 1996, 1997, 1998 and for the six months ended June 30, 1998 and 1999, rental expense was $370, $482, $980, $400, and $927, respectively. Minimum rental commitments under non-cancelable operating leases at June 30, 1999 are as follows: 1999 (six months)........................................... $ 1,962 2000........................................................ 4,172 2001........................................................ 4,165 2002........................................................ 3,719 2003........................................................ 3,490 Thereafter.................................................. 20,305 ------- $37,813 =======
As of June 30, 1999, commitments for construction of leasehold improvements in 1999 total $4.0 million. In January 1999, the Company signed a ten-year lease for a new corporate headquarters in Bellevue, Washington, which is expected to commence in October 1999. The minimum lease payments associated with this lease are included in the commitments above. The Company has the option to extend the lease for four additional periods of five years each. The Company must provide a $500 letter of credit as security for the lease. If certain working capital requirements are not met on the commencement date, the Company must provide an additional $250 letter of credit. The letter of credit may be reduced annually by specified amounts by specified amounts in the lease agreement upon the Company's achieving certain economic goals. 7. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK The Company has authorized 10.0 million shares of convertible preferred stock. The Board of Directors has the authority to establish and define, in one or more series, the price, rights, preferences and dividends of authorized but unissued shares of preferred stock. On January 30, 1998, the Company issued 8,333,333 shares of Series A Convertible Preferred Stock (Preferred Stock) at $1.80 per share. Total proceeds, net of offering costs, approximated $14.3 million. Concurrent with this transaction, the Company repurchased 3,333,333 shares of the Company's common stock from its founders for $6.0 million. The rights and preferences of the preferred stock are as follows: - In the event of any liquidation, dissolution or winding up of the Company, the holders of Series A preferred stock would be entitled to receive the greater of: (i) an amount in cash equal to $1.80 per share (adjusted for stock splits, stock dividends and the like) or (ii), cash in an amount equal to the portion of the assets of the Company remaining for distribution to shareholders which such shareholder would have received if each share of Series A Preferred Stock held had been converted into the number of shares of common stock issuable upon the conversion of a share of Series A Preferred Stock immediately prior to any liquidation, dissolution or winding up of the Company. - The Preferred Stock is voluntarily convertible at any time at the option of the holder into shares of the Company's common stock at a one-for-one conversion. The Preferred Stock is automatically convertible upon closing of a Qualified Public Offering, as defined in the agreement. - Any time following the fifth anniversary of the closing, holders of the Preferred Stock have the right to cause the Company to redeem up to 50% of the Preferred Stock at the original purchase price. Any time following the sixth anniversary of the closing, the holders shall have the right to cause the Company to redeem up to 100% of the Preferred Stock at the original purchase price. F-13 77 BSQUARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - The Preferred Stock converts at a one-for-one conversion rate, and is adjusted in certain circumstances to prevent dilution of the preferred shareholder's ownership interest. - The Preferred shareholders have the same voting rights and voting powers as common shareholders. COMMON STOCK RESERVED FOR FUTURE ISSUANCES At June 30, 1999, the Company has reserved the following shares of common stock for future issuance: Convertible mandatorily redeemable preferred stock.......... 8,333,333 Employee stock purchase plan................................ 1,500,000 Stock Option Plan........................................... 3,441,462 ---------- 13,274,795 ==========
8. EMPLOYEE BENEFIT PLANS STOCK OPTIONS In May 1997, the Company adopted the 1997 Stock Option Plan (the Plan). Under the Plan, the Board of Directors may grant nonqualified stock options at a price determined by the Board, not to be less than 85% of the fair market value of the common stock. Options have a term of up to 10 years and vest over a schedule determined by the Board of Directors, generally four years. Incentive stock options granted under this program may only be granted to employees of the Company, have a term of up to 10 years, and shall be granted at a price equal to the fair market value of the Company's stock. A summary of stock option activity follows:
PRICE PER SHARE -------------------------------- NUMBER OF OPTIONS AVAILABLE FOR WEIGHTED AVERAGE OUTSTANDING ISSUANCE EXERCISE PRICE RANGE ----------------- -------------- ---------------- ------------- Balance, December 31, 1996........... -- -- -- Authorized......................... -- 2,500,000 -- -- Granted............................ 1,750,100 (1,750,100) $0.08 $0.05 - $0.50 Exercised.......................... -- -- -- -- Canceled........................... (69,300) 69,300 $0.05 $0.05 - $0.50 --------- ---------- ----- ------------- Balance, December 31, 1997........... 1,680,800 819,200 $0.08 $0.05 - $0.50 Authorized......................... -- 1,125,000 -- -- Granted............................ 1,108,150 (1,108,150) $1.15 $1.00 - $1.80 Exercised.......................... (119,938) -- $0.05 $0.05 - $0.05 Canceled........................... (128,850) 128,850 $0.34 $0.05 - $0.50 --------- ---------- ----- ------------- Balance, December 31, 1998........... 2,540,162 964,900 $0.54 $0.05 - $0.50 Granted............................ 626,400 (626,400) $1.44 $1.44 - $1.44 Exercised.......................... (63,600) -- $0.53 $0.05 - $1.00 Canceled........................... (106,400) 106,400 $0.42 $0.05 - $1.80 --------- ---------- ----- ------------- Balance, June 30, 1999............... 2,996,562 444,900 $0.73 $0.05 - $1.80 ========= ========== ===== =============
In July 1999, the Company authorized an additional 2.0 million shares for grants under the plan. F-14 78 BSQUARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes information concerning currently outstanding and exercisable options at June 30, 1999:
OUTSTANDING ------------------------------------------ EXERCISABLE WEIGHTED AVERAGE ------------------------------------- REMAINING CONTRACTUAL WEIGHTED AVERAGE NUMBER OF OPTIONS LIFE (YEARS) NUMBER OF OPTIONS EXERCISE PRICE ----------------- --------------------- ----------------- ---------------- Rate of Exercise Price: $0.05.............. 1,303,012 8.0 578,378 $0.05 $0.50.............. 31,650 8.3 8,100 $0.50 $1.00.............. 827,500 8.3 177,571 $1.00 $1.44.............. 624,400 9.7 300,000 $1.44 $1.80.............. 210,000 9.1 -- $1.80 --------- --- --------- ----- 2,996,562 8.5 1,064,049 $0.60 ========= === ========= =====
Had compensation expense been recognized on stock options issued based on the fair value of the options at the date of the grant and recognized over the vesting period, the Company's net income would have been reduced to the pro forma amounts presented below.
YEAR ENDED DECEMBER 31, ---------------- 1997 1998 ------ ------ Net income, as reported..................................... $3,806 $2,300 (12) (82) ------ ------ Pro forma net income........................................ $3,794 $2,218 ====== ====== Pro forma basic earnings per share.......................... $ 0.18 $ 0.11 ====== ======
The fair value of options granted in 1997 and 1998 presented below has been estimated at the date of grant using the Black-Scholes method with the following weighted-average assumptions:
YEAR ENDED DECEMBER 31 ------------------ 1997 1998 ------- ------- Dividend yield.............................................. 0% 0% Expected life............................................... 5 years 5 years Expected volatility......................................... 0% 0% Risk-free interest rate..................................... 6.0% 5.5%
The effects on pro forma disclosures of applying SFAS No. 123 are not likely to be representative of the effects on pro forma disclosures of future years. DEFERRED STOCK OPTION COMPENSATION In connection with the grant of certain stock options to employees and consultants during 1997 and the six months ended June 30, 1999, the Company recorded deferred stock option compensation of $653 and $1.1 million, respectively, representing the difference between the estimated fair value of the common stock for accounting purposes and the option exercise price of such options at the date of grant. Such amount is presented as a reduction of shareholders' equity and amortized, in accordance with FASB Interpretation No. 28, on an accelerated basis over the vesting period of the applicable options (generally four years). During the years ended December 31, 1997, 1998 and for the six months ended June 30, 1998 and 1999, the Company expensed approximately $106, $171, $83 and $294, respectively. The balance will be expensed over the period the options vest. Compensation expense is decreased in the period of forfeiture for any accrued but unvested compensation arising from the early termination of an option holder's services. F-15 79 BSQUARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1999 EMPLOYEE STOCK PURCHASE PLAN On July 21, 1999, the board of directors approved the adoption of the Company's 1999 Employee Stock Purchase (the "1999 Purchase Plan"), subject to shareholder approval. A total of 1.5 million shares of common stock has been reserved for issuance under the 1999 Purchase Plan. The 1999 Purchase Plan permits eligible employees to acquire shares of the Company's common stock through periodic payroll deductions of up to 10% of base cash compensation. No more than 3,334 shares may be purchased by each employee on any purchase date. Each offering period will have a maximum duration of 6 months. The price at which the common stock may be purchased is 85% of the lesser of the fair market value of the Company's common stock on the first day of the applicable offering period or on the last day of the respective purchase period. The initial offering period will commence on the effectiveness of the initial public offering and will end on May 14, 2001. PROFIT SHARING AND DEFERRED COMPENSATION PLAN The Company has a Profit Sharing and Deferred Compensation Plan (Profit Sharing Plan) under Section 401(k) of the Internal Revenue Code of 1986, as amended. Substantially all full-time employees are eligible to participate. The Company, at its discretion, may elect to match the participants' contributions to the Profit Sharing Plan. Participants will receive their share of the value of their investments upon retirement or termination, subject to a vesting schedule. The Company made no matching contributions to the Profit Sharing Plan during 1998 or 1997. For the six months ended June 30, 1999, the Company made matching contributions to the profit sharing plan of $228. 9. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------- ---------------- 1996 1997 1998 1998 1999 ----- ----- ------- ------ ------ Issuance of notes payable for equipment............ $-- $-- $ 473 $ -- $ -- Cash paid for interest............................. -- 13 53 38 42 Cash paid for income taxes......................... -- -- 2,170 1,220 1,100
All significant non-cash financing activities are listed elsewhere in the financial statements or the notes thereto. 10. SIGNIFICANT CUSTOMERS Sales to customers, which comprised at least 10% of revenue for the years ended December 31 were as follows:
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------ ---------------- 1996 1997 1998 1998 1999 ---- ---- ---- ---- ---- Microsoft....................................... 5% 39% 79% 73% 87% Hitachi......................................... 43% 18% 2% 5% -- NEC............................................. 48% 17% 3% 5% -- ARM............................................. -- 11% 1% -- --
As of December 31, 1997, and 1998, and as of June 30, 1999, Microsoft represented 73%, 84% and 72% of total accounts receivable, respectively. In February 1999, the Company signed a two-year agreement with Microsoft Corporation to continue to provide services to Microsoft which extend the capabilities of the Windows CE operating system. F-16 80 BSQUARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. GEOGRAPHIC AND SEGMENT INFORMATION The Company follows the requirements of Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information. As defined in SFAS No. 131, the Company operates in two reportable segments, Service and Products for the Microsoft Windows CE environment. The following table summarizes total revenue and long-lived assets attributed to significant countries:
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED -------------------------- JUNE 30, 1996 1997 1998 1999 ------ ------- ------- ---------- Total revenue: United States............................... $2,364 $10,065 $23,657 $18,272 Japan....................................... 1,802 2,632 955 271 Other Foreign............................... 20 1,708 -- -- ------ ------- ------- ------- Total revenue*...................... $4,186 $14,405 $24,612 $18,543 ====== ======= ======= ======= Long-lived assets: United States............................... $ 1,378 $ 2,795 $ 3,461 Japan....................................... -- 239 219 Germany..................................... -- 205 186 ------- ------- ------- Total long-lived assets............. $ 1,378 $ 3,239 $ 3,866 ======= ======= =======
- --------------- * Revenue is attributed to countries based on location of customer invoiced. BSQUARE has two operating segments, Services and Products. The Services segment includes design, development and porting tools for the microprocessor vendors and the original equipment manufacturer market. The Product segment derives revenue from licensing of software products to original equipment manufactures and distributing product through resellers. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company does not track assets or operating expenses by operating segments. Consequently, it is not practicable to show assets or operating expenses by operating segments. F-17 81 BSQUARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. EARNINGS PER SHARE The following is a reconciliation of the numerators and denominators used in computing basic and diluted earnings per share:
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, ------------------ --------------------------- JUNE 30, 1996 1997 1998 1998 1999 ------- ------- ------- -------- ------- Net income (numerator diluted),.............. $ 1,971 $ 3,806 $ 2,300 $ 1,217 $ 866 Less: Accretion of mandatorily redeemable convertible preferred stock............. -- -- (110) (50) (58) ------- ------- ------- ------- ------- Net income available to common shareholders (numerator basic).......................... $ 1,971 $ 3,806 $ 2,190 $ 1,167 $ 808 ======= ======= ======= ======= ======= Shares (denominator basic): Weighted average common shares outstanding............................. 22,106 21,400 18,372 18,615 18,206 ======= ======= ======= ======= ======= Basic earnings per share..................... $ 0.09 $ 0.18 $ 0.12 $ 0.06 $ 0.04 ======= ======= ======= ======= ======= Shares (denominator diluted): Weighted average common shares outstanding............................. 22,106 21,400 18,372 18,615 18,206 Mandatorily redeemable convertible preferred stock................................... -- -- 7,648 6,951 8,333 Common stock equivalents................... -- 381 1,455 1,484 2,076 ------- ------- ------- ------- ------- Shares used in computation, (denominator diluted)................................ 22,106 21,781 27,475 27,050 28,615 ======= ======= ======= ======= ======= Diluted earnings per share................... $ 0.09 $ 0.17 $ 0.08 $ 0.04 $ 0.03 ======= ======= ======= ======= =======
F-18 82 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses, other than the underwriting discounts and commissions, payable by the registrant in connection with the sale of the securities being registered. All amounts are estimates except the Securities and Exchange Commission registration fee, the NASD filing fee and The Nasdaq National Market listing fee. Securities and Exchange Commission Registration Fee......... $ 16,680 NASD Filing Fee............................................. 6,500 Nasdaq National Market Filing Fee........................... 17,500 Printing Costs.............................................. 200,000 Legal Fees and Expenses..................................... 300,000 Accounting Fees and Expenses................................ 100,000 Directors' and Officers' Insurance Policy Premium........... 100,000 Blue Sky Fees and Expenses.................................. 5,000 Transfer Agent and Registrar Fees........................... 5,000 Miscellaneous............................................... 49,320 -------- Total............................................. $800,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Sections 23B.08.500 through 23B.08.600 of the Washington Business Corporation Act (the "WBCA") authorize a corporation to indemnify its directors, officers, employees and agents against certain liabilities they may incur in such capacities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"), provided they acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation. The registrant's Amended and Restated Articles of Incorporation (Exhibit 3.1 hereto) and Bylaws (Exhibit 3.2 hereto) require the registrant to indemnify its officers and directors to the fullest extent permitted by Washington law. Section 23B.08.320 of the WBCA authorizes a corporation to limit or eliminate a director's liability to the corporation or its shareholders for monetary damages for breaches of fiduciary duties, other than for (1) acts or omissions that involve intentional misconduct or a knowing violation of law, (2) unlawful distributions to shareholders, or (3) transactions from which a director derives an improper personal benefit. The registrant's Amended and Restated Articles of Incorporation (Exhibit 3.1 hereto) contain provisions implementing, to the fullest extent permitted by Washington law, such limitations on a director's liability to the registrant and its shareholders. In addition, the registrant has entered into separate indemnification agreements with its directors and certain executive officers that could require the registrant, among other things, to indemnify them against liabilities that arise because of their status or service as directors or executive officers and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification between the underwriters and the registrant from and against certain liabilities arising in connection with the offering which is the subject of this registration statement. II-1 83 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The following is a description of all securities that the registrant has sold within the past three years without registering the securities under the Securities Act: On March 17, 1997, the registrant issued an aggregate of 500,000 shares of its common stock to two of its employees in exchange for services to be rendered to the registrant. These issuances were exempt from registration pursuant to Section 4(2) of the Securities Act. On January 30, 1998, the registrant sold 8,333,333 shares of the its Series A redeemable convertible preferred stock at a price of $1.80 per share to 11 accredited investors in a private transaction for an aggregate offering price of approximately $15.0 million. This issuance was exempt from registration pursuant to Rule 506 of Regulation D under Section 4(2) of the Securities Act. From June 1998 to August 1999, 224,726 shares of the registrant's common stock were issued to 58 individuals upon the exercise of stock options granted pursuant to the registrant's amended and restated stock option plan at a weighted average exercise price of $0.29 per share. These issuances were exempt from registration pursuant to Rule 701 under the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits.
NUMBER DESCRIPTION ------ ----------- 1.1+ Form of Underwriting Agreement. 3.1 Articles of Incorporation and all amendments thereto. 3.1(a) Form of Amended and Restated Articles of Incorporation. 3.2 Bylaws and all amendments thereto. 4.1 See Exhibits 3.1 and 3.2 for provisions defining the rights of the holders of common stock. 5.1+ Opinion of Summit Law Group, PLLC regarding legality of shares. 10.1 Amended and Restated Stock Option Plan. 10.2 Employee Stock Purchase Plan. 10.3 401(k) Plan. 10.4 Form of Indemnification Agreement. 10.5 Loan and Security Agreement and between Imperial Bank and BSQUARE Corporation dated February 11, 1998. 10.6 One Bellevue Center Office Lease between EOP Northwest Properties, LLC and BSQUARE Corporation dated December 14, 1998. 10.7 Mercer Island Partners Associates Building Lease Agreement between Mercer Island Partners Associates, LLC and BSQUARE Corporation dated January 30, 1998. 10.8 Office Lease Agreement between Seattle Office Associates, LLC and BSQUARE Corporation dated November 15, 1996 (for Suite 205). 10.9 Office Lease Agreement between Seattle Office Associates, LLC and BSQUARE Corporation dated March 24, 1997 (for Suite 310). 10.10 Office Lease Agreement between Seattle Office Associates, LLC and BSQUARE Corporation dated March 24, 1997 (for Suite 100). 10.11 Sunset North Corporate Campus Lease Agreement between WRC Sunset North and BSQUARE Corporation.
II-2 84
NUMBER DESCRIPTION ------ ----------- 10.12* Microsoft Software For Dedicated Systems Distributor Agreement between Microsoft Corporation and BSQUARE Corporation dated November 1, 1997, as amended by Amendment No. 1, Amendment No. 2, Amendment No. 3, Amendment No. 4 and Amendment No. 5. 10.13* Master Development & License Agreement between Microsoft Corporation and BSQUARE Corporation dated effective as of October 1, 1998. 10.14+ Stock Purchase and Shareholders Agreement dated as of January 30, 1998. 21.1 Subsidiaries of the registrant. 23.1 Consent of Arthur Andersen LLP, Independent Public Accountants. 23.2 Consent of Summit Law Group, PLLC (contained in the opinion filed as Exhibit 5.1 hereto). 24.1 Power of Attorney (See Page II-4). 27.1 Financial Data Schedule.
- --------------- * Confidential Treatment Requested + To be filed by amendment (b) Financial Statement Schedules. All schedules are omitted because they are inapplicable or the requested information is shown in the consolidated financial statements of the registrant or related notes thereto. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding), is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the questions whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be a part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 85 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Bellevue, State of Washington, on the 16th day of August, 1999. BSQUARE CORPORATION By: /s/ WILLIAM T. BAXTER ------------------------------------ William T. Baxter President and Chief Executive Officer POWER OF ATTORNEY Each person whose individual signature appears below hereby authorizes and appoints William T. Baxter and Brian V. Turner, and each of them, with full power of substitution and resubstitution 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 registration statement, including any and all post-effective amendments thereto and any registration statement relating to the same offering as this registration statement that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities indicated below on the 16th day of August, 1999.
SIGNATURE TITLE --------- ----- /s/ WILLIAM T. BAXTER Chairman of the Board, Chief Executive - ----------------------------------------------------- Officer and President (Principal Executive William T. Baxter Officer) /s/ BRIAN V. TURNER Chief Financial Officer (Principal Financial - ----------------------------------------------------- and Accounting Officer) Brian V. Turner /s/ ALBERT T. DOSSER Director - ----------------------------------------------------- Albert T. Dosser /s/ PETER R. GREGORY Director - ----------------------------------------------------- Peter R. Gregory /s/ JEFFREY T. CHAMBERS Director - ----------------------------------------------------- Jeffrey T. Chambers /s/ SCOT E. LAND Director - ----------------------------------------------------- Scot E. Land /s/ WILLIAM LARSON Director - ----------------------------------------------------- William Larson
II-4 86 BSQUARE CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COLUMN C -- ADDITIONS COLUMN B ------------------------- COLUMN E BALANCE AT CHARGED TO COLUMN D BALANCE AT BEGINNING COSTS AND DEDUCTIONS- END OF DESCRIPTION OF PERIOD EXPENSES DESCRIBE PERIOD ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS) For the year ended December 31, 1996: Allowance for doubtful accounts..................... $-- $-- $-- $ -- For the year ended December 31, 1997: Allowance for doubtful accounts..................... $-- $10 $-- $ 10 For the year ended December 31, 1998: Allowance for doubtful accounts..................... $10 $60 $ 3 $ 67 For the six months ended June 30, 1999: Allowance for doubtful accounts..................... $67 $45 $-- $112
87 EXHIBIT INDEX
NUMBER DESCRIPTION - ------ ----------- 1.1+ Form of Underwriting Agreement. 3.1 Articles of Incorporation and all amendments thereto. 3.1(a) Form of Amended and Restated Articles of Incorporation 3.2 Bylaws and all amendments thereto. 4.1 See Exhibits 3.1 and 3.2 for provisions defining the rights of the holders of common stock. 5.1+ Opinion of Summit Law Group, PLLC regarding legality of shares. 10.1 Amended and Restated Stock Option Plan. 10.2 Employee Stock Purchase Plan. 10.3 401(k) Plan. 10.4 Form of Indemnification Agreement. 10.5 Loan and Security Agreement and between Imperial Bank and BSQUARE Corporation dated February 11, 1998. 10.6 One Bellevue Center Office Lease between EOP Northwest Properties, LLC. and BSQUARE Corporation dated December 14, 1998. 10.7 Mercer Island Partners Associates Building Lease Agreement between Mercer Island Partners Associates, LLC and BSQUARE Corporation dated January 30, 1998. 10.8 Office Lease Agreement between Seattle Office Associates, LLC and BSQUARE Corporation dated November 15, 1996 (for Suite 205). 10.9 Office Lease Agreement between Seattle Office Associates, LLC and BSQUARE Corporation dated March 24, 1997 (for Suite 310). 10.10 Office Lease Agreement between Seattle Office Associates, LLC and BSQUARE Corporation dated March 24, 1997 (for Suite 100). 10.11 Sunset North Corporate Campus Lease Agreement between WRC Sunset North and BSQUARE Corporation 10.12* Microsoft Software For Dedicated Systems Distributor Agreement between Microsoft Corporation and BSQUARE Corporation dated November 1, 1997, as amended by Amendment No.1, Amendment No.2, Amendment No. 3, Amendment No. 4 and Amendment No. 5. 10.13* Master Development & License Agreement between Microsoft Corporation and BSQUARE Corporation dated effective as of October 1, 1998. 10.14 Stock Purchase and Shareholders Agreement dated as of January 30, 1998. 21.1 Subsidiaries of the registrant. 23.1 Consent of Arthur Andersen LLP, Independent Public Accountants. 23.2 Consent of Summit Law Group, PLLC (contained in the opinion filed as Exhibit 5.1 hereto). 24.1 Power of Attorney (See Page II-4). 27.1 Financial Data Schedule.
- --------------- * Confidential Treatment Requested + To be filed by amendment EX-3.1 2 ARTICLES OF INCORPORATION & ALL AMENDMENTS THERETO 1 EXHIBIT 3.1 ARTICLES OF AMENDMENT OF BSQUARE CORPORATION Pursuant to RCW 23B.10.060, the undersigned corporation adopts the following Articles of Amendment to its Articles of Incorporation: FIRST: The name of the corporation is BSQUARE Corporation (the "Corporation"). SECOND: The Articles of Incorporation are hereby amended by deleting Article III in its entirety and replacing it with a new Article III as follows: ARTICLE III DIRECTORS The Board of Directors shall be set at seven. At the first election of directors after the Corporation is a Public Company, as defined below, the Board of Directors shall be divided into three (3) classes, as determined by the Board of Directors, with said classes to be as equal in number as may be possible, which classes shall be elected for the terms set forth below:
Class Term ----- ---- Class 1 1 Year Class 2 2 Years Class 3 3 Years
Thereafter, each Director's term shall be three (3) years, and each Director shall serve for the term he or she was elected and thereafter until his or her successor is elected and qualified (or the number of directors is reduced), or until his or her death, resignation or removal from office. Directors need not be shareholders of the Corporation or residents of the State of Washington. Written ballots are not required in the election of Directors. For purposes of these Articles of Incorporation, the Corporation shall be a "Public Company" at such time and for so long as it has a class of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, or any successor statute (the "Exchange Act"), or is otherwise subject to the reporting requirements of Section 15(d) of the Exchange Act. Newly created directorships resulting from any increase in the number of Directors or any vacancies on the Board of Directors resulting from death, resignation, removal or other cause shall be filled by the affirmative vote of a majority of the remaining Directors then in office, even though less than a quorum of the Board of Directors. Any Director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of Directors in which the new directorship was created or in which the vacancy occurred and thereafter until such Director's successor shall have been elected and qualified (or the number of directors is reduced). No decrease in the number of Directors constituting the Board of Directors shall shorten the term of any incumbent Director. 2 THIRD: The Articles of Incorporation are hereby amended by adding new Articles XII and XIII to read as follows: ARTICLE XII REMOVAL OF DIRECTORS Any Director or the entire Board of Directors may be removed with or without cause by the holders of not less than a majority of the shares then entitled to vote at an election of Directors; provided, however, beginning at such time and for so long as the Corporation is a Public Company (as defined in Article III), no Director may be removed without "Cause," as defined below. Such action may be taken at any regular or special meeting of the shareholders of the Corporation, or by unanimous written consent in lieu of a meeting, provided that notice of the proposed removal, which shall include a statement of the charges alleged against the Director(s) in the event of removal for Cause, shall have been duly given to the shareholders together with or as a part of the notice of the meeting. Where a question of the removal of a Director for Cause is to be presented for shareholder consideration while the Corporation is a Public Company, an opportunity must be provided to such Director to present his or her defense to the shareholders by a statement which must accompany or precede the notice of the meeting at which removal of such Director for Cause shall be considered. Under such circumstances the Director involved shall be served with notice of the meeting at which such action is proposed to be taken together with a statement of the specific charges and shall be given an opportunity to be present and to be heard at the meeting at which his or her removal is considered. For purposes of this Article XII, "Cause" for removal shall be limited to (a) action by a Director involving willful malfeasance having a material adverse effect on the Corporation or (b) a Director being convicted of a felony; provided that any action by a Director shall not constitute "Cause" if, in good faith, such Director believed such action to be in or not opposed to the best interests of the Corporation, or if a Director shall be entitled, under applicable law or the Articles of Incorporation or Bylaws of the Corporation, to be indemnified with respect to such action. ARTICLE XIII SPECIAL MEETINGS OF THE SHAREHOLDERS The Chairman of the Board of Directors, the President of the Corporation or the Board of Directors may call special meetings of the shareholders for any purpose. Further, a special meeting of the shareholders shall be held if the holders of not less than twenty-five percent (25%) of all the votes entitled to be cast on any issue proposed to be considered at such special meeting have dated, signed and delivered to the Secretary of the Corporation one or more written demands for such meeting, describing the purposes for which is to be held. FOURTH: The amendments do not provide for an exchange, reclassification or cancellation of issued shares. FIFTH: The foregoing amendments were adopted by the Board of Directors of the Corporation on August 13, 1999 and were duly approved by the shareholders of the Corporation on August ____, 1999 in accordance with RCW 23B.10.030 and RCW 23B.10.040, respectively. 3 Dated: August ____, 1999. BSQUARE Corporation By: ----------------------------------- William T. Baxter, Chairman of the Board, President and Chief Executive Officer 4 STATE OF WASHINGTON SECRETARY OF STATE I, RALPH MUNRO, Secretary of State of the State of Washington and Custodian of its seal, hereby issue this CERTIFICATE OF AMENDMENT to BSQUARE CORPORATION a Washington Profit corporation. Articles of Amendment were filed for record in this office on the date indicated below. ARTICLES OF CORRECTION - Correcting Designation of Rights and Preferences filed January 29, 1998 UBI Number: 601 559 419 Date: February 10, 1998 GIVEN UNDER MY HAND AND THE SEAL OF THE STATE OF WASHINGTON AT OLYMPIA, THE STATE CAPITAL [SEAL] /s/ RALPH MUNRO ------------------------------- RALPH MUNRO, Secretary of State 5 ARTICLES OF CORRECTION OF BSQUARE CORPORATION Pursuant to RCW 23B.01.240, BSQUARE CORPORATION (the "Company"), hereby makes the following corrections to its Certificate of Amendment to its Articles of Incorporation as filed with the Office of the Secretary of State of the State of Washington on January 29, 1998: FIRST: The Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock of BSQUARE CORPORATION (the "Certificate of Designation"), as filed with the Office of the Secretary of the State of Washington on January 29, 1998, contained incorrect information and the Company is hereby submitting for correction the corrected section as set forth below. SECOND: The Certificate of Designation incorrectly referenced a Redemption Agreement, dated as of January 30, 1998: Section 6. Restrictions and Limitations. (iv) directly or indirectly redeem, purchase, or otherwise acquire for consideration any shares of its Common Stock or any other class of its capital stock except (A) for the redemption of Convertible Preferred Shares pursuant to and as provided in Sections 2, 4 and 5 hereof, (B) as contemplated by Sections 1.2, 4.6, and 5.2 of that certain Stock Purchase and Shareholders Agreement, dated as of January 30, 1998 or (C) as contemplated by the Corporation's standard form of agreement, as approved by the Board of Directors, to be executed by employees, officers, and consultants of the Corporation upon the grant to such employees, officers, and consultants of options under the Plan, IN WITNESS WHEREOF, the Company has caused these Articles of Correction to be signed by Albert T. Dosser, its Senior Vice President, as of this 3RD day of February, 1998. BSQUARE CORPORATION, a Washington corporation /s/ ALBERT T. DOSSER ------------------------ Albert T. Dosser Vice President 6 STATE of WASHINGTON SECRETARY OF STATE I RALPH MUNRO, SECRETARY OF STATE OF THE STATE OF WASHINGTON AND CUSTODIAN OF ITS SEAL, HEREBY ISSUE THIS CERTIFICATE OF AMENDMENT to BSQUARE CORPORATION a Washington Profit corporation. Articles of Amendment were filed for record in this office on the date indicated below. Amending and Restating Articles UBI Number: 601 559 419 Date: January 29, 1998 [SEAL] GIVEN UNDER MY HAND AND THE SEAL OF THE STATE OF WASHINGTON AT OLYMPIA, THE STATE CAPITAL /S/ RALPH MUNRO ------------------------------- RALPH MUNRO, Secretary of State 7 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF BSQUARE CORPORATION ARTICLE I NAME The name of the corporation (the "Corporation") is BSQUARE CORPORATION. ARTICLE II AUTHORIZED SHARES 2.1 AUTHORIZED CAPITAL. The total authorized number of shares of the Corporation is Sixty Million (60,000,000) shares; Fifty Million (50,000,000) shares of common stock without par or ascribed value; Ten Million (10,000,000) shares of preferred stock without par or ascribed value. 2.2 ISSUANCE OF PREFERRED STOCK IN SERIES. The Preferred Stock may be issued from time to time in one or more series in any manner permitted by law and the provisions of these Articles of Incorporation, as determined from time to time by the Board of Directors and stated in the resolution or resolutions providing for the issuance thereof, prior to the issuance of any shares thereof. The Board of Directors shall have the authority to fix and determine and to amend, subject to the provisions hereof, the designations, powers, preferences and relative, participating, optional or other rights, if any, and qualifications, limitations or other restrictions of the shares of any series that is wholly unissued or to be established and the number of shares constituting any such series. Unless otherwise specifically provided in the resolution establishing any series, the Board of Directors shall further have the authority, after the issuance of shares of a series whose number it has designated, to amend the resolution establishing such series to decrease the number of shares of that series, but not below the number of shares of such series then outstanding. (a) Dividends. The holders of shares of the Preferred Stock shall be entitled to receive dividends, out of the funds of the corporation legally available therefor, at the rate and at the time or times as may be provided by the Board of Directors in designating a particular series of Preferred Stock. The holders of the Preferred Stock shall not be entitled to receive any dividends thereon, unless otherwise provided by the Board of Directors in designating a particular series of Preferred Stock. (b) Liquidation. In the event of any liquidation, dissolution or winding up of the affairs of the corporation, whether voluntary or involuntary, then, before any distribution shall be made to the holders of the Common Stock, the holders of the Preferred Stock at the time outstanding shall be entitled to be paid the preferential amount or amounts per share as may be provided by the Board of Directors in designating a particular series of Preferred Stock, plus dividends accrued thereon to the date of such payment. In designating a particular series of Preferred Stock, the Board of Directors may also provide that such series is senior, on a par with or subordinate in order of priority to any other existing or later issued series of Preferred Stock in respect of distribution of amounts upon the liquidation, dissolution or winding up of the affairs of the corporation. 'The holders of the Preferred Stock shall not be entitled to receive any distributive amounts upon the liquidation, dissolution or winding up of the -1- 8 affairs of the corporation, unless otherwise provided by the Board of Directors in designating a particular series of Preferred Stock. (c) Conversion. Shares of Preferred Stock may be convertible to shares of Common Stock at such rate and subject to such adjustments as may be provided by the Board of Directors in designating a particular series of Preferred Stock. (d) Redemption. The Preferred Stock may be redeemable in such amounts, and at such time or times as may be provided by the Board of Directors in designating a particular series of Preferred Stock. In any event, such Preferred Stock may be repurchased by the corporation only to the extent legally permissible. (e) Voting Rights. Holders of Preferred Stock shall have such voting rights as may be provided by the Board of Directors in designating a particular series of Preferred Stock. ARTICLE III DIRECTORS The number of directors of the Corporation and the manner in which such directors are to be elected shall be as set forth in the bylaws. ARTICLE IV PREEMPTIVE RIGHTS Shareholders of the Corporation shall have no preemptive rights to acquire additional shares of the Corporation. ARTICLE V CUMULATIVE VOTING The right to cumulate votes in the election of Directors shall not exist with respect to shares of stock of this Corporation. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS (a) The capitalized terms in this Article 6 shall have the meanings set forth in RCW 23B.08.500. (b) The corporation shall indemnify and hold harmless each individual who is or was serving as a Director or officer of the corporation or who, while serving as a Director or officer of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee -2- 9 benefit plan, or other enterprise, against any and all Liability incurred with respect to any Proceeding to which the individual is or is threatened to be made a Party because of such service, and shall make advances of reasonable Expenses with respect to such Proceeding, to the fullest extent permitted by law, without regard to the limitations in RCW 23B.08.510 through 23B.08.550; provided, however, that the payment of Expenses in advance of the final disposition of a Proceeding shall be made upon delivery to the corporation of an undertaking, by or on behalf of such Director or officer, to repay all amounts so advanced if it shall ultimately be determined that such Director or officer is not entitled to be indemnified under this Article or otherwise; provided further, that no such indemnity shall indemnify any Director or officer from or on account of (1) acts or omissions of the Director or officer finally adjudged to be intentional misconduct or a knowing violation of law; (2) conduct of the Director or officer finally adjudged to be in violation of RCW 23B.08.310; or (3) any transaction with respect to which it was finally adjudged that such Director or officer personally received a benefit in money, property, or services to which the Director or officer was not legally entitled. Except as provided in Subsection (f) of this Article, the corporation shall not indemnify a Director or officer in connection with a Proceeding (or part thereof) initiated by the Director or officer unless such Proceeding (or part thereof) was authorized by the Board of Directors of the corporation. (c) The corporation may purchase and maintain insurance on behalf of an individual who is or was a director, officer, employee, or agent of the corporation or, who, while a director, officer, employee, or agent of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise against Liability asserted against or incurred by the individual in that capacity or arising from the individual's status as a director, officer, employee, or agent, whether or not the corporation would have power to indemnify the individual against such Liability under RCW 23B.08.510 or 23B.08.520. (d) If, after the effective date of this Article 6, the Act is amended to authorize further indemnification of Directors or officers, then Directors and officers of the corporation shall be indemnified to the fullest extent permitted by the Act as so amended. (e) To the extent permitted by law, the rights to indemnification and advance of reasonable Expenses conferred in this Article 6 shall not be exclusive of any other right which any individual may have or hereafter acquire under any statute, provision of the Bylaws, agreement, vote of shareholders or disinterested directors, or otherwise. The right to indemnification conferred in this Article 6 shall be a contract right upon which each Director or officer shall be presumed to have relied in determining to serve or to continue to serve as such. Any amendment to or repeal of this Article 6 shall not adversely affect any right or protection of a Director or officer of the corporation for or with respect to any acts or omissions of such Director or officer occurring prior to such amendment or repeal. (f) If a claim under this Article is not paid in full by the corporation within sixty (60) days after a written claim has been received by the corporation, except in the case of a claim for expenses incurred in defending a proceeding in advance of its final disposition, in which case the applicable period shall be twenty (20) days, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, to the extent successful in whole or in part, the Director or officer shall be entitled to be paid also the expense of prosecuting such claim. Neither the failure of the corporation (including its Board of Directors, its shareholders or independent legal counsel) to have made a determination prior to the commencement of such action that indemnification of or reimbursement or advancement of expenses to the claimant is proper in the circumstances, nor an actual -3- 10 determination by the corporation (including its Board of Directors, its shareholders or independent legal counsel) that the Director or officer is not entitled to indemnification or to the reimbursement or advancement of expenses, shall be a defense to the action or create a presumption that the Director or officer is not so entitled. (g) If the corporation indemnifies or advances expenses to a Director or officer pursuant to this Article 6 in connection with a Proceeding by or in the right of the corporation, the corporation shall report the indemnification or advance in writing to the shareholders with or before the notice of the next shareholders' meeting. (h) If any provision of this Article 6 or any application thereof shall be invalid, unenforceable, or contrary to applicable law, the remainder of this Article 6, and the application of such provisions to individuals or circumstances other than those as to which it is held invalid, unenforceable, or contrary to applicable law, shall not be affected thereby. ARTICLE VII INTERESTED TRANSACTIONS (1) No contracts or other transactions between the corporation and any other corporation, and no act of the corporation shall in any way be affected or invalidated by the fact that any of the directors or shareholders of the corporation are pecuniarily or otherwise interested in, or are directors or officers of, such other corporation; and (2) Any director or shareholder individually, or any firm of which any director or shareholder may be a member, may be a party to, or may be pecuniarily or otherwise interested in, any contracts or transactions of the corporation, provided that the fact that he or such firm is so interested shall be disclosed or shall have been known to the Board of Directors or a majority thereof. ARTICLE VIII SHAREHOLDER ACTIONS BY CONSENT In accordance with RCW 23B.07.040, any action that may be taken at a meeting of this corporation's shareholders may be taken by written consent by the shareholders holding of record or otherwise entitled to vote in the aggregate not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote on the action were present and voted. If action is taken by less than unanimous consent, the corporation shall give nonconsenting shareholders prior notice of such action; provided that if the action is of a type that would constitute a significant business transaction under RCW 23B.19.020(15), notice must be given no fewer than 20 days prior to the effective date of the action (such prior or 20 day period, a "Notice Period"). Such notice shall include the resolution approved by the shareholders by written consent and shall be hand delivered or sent first-class mail to each nonconsenting shareholder at the address on the books and records of the corporation. Unless the written consent specifies a different effective date, the action is effective when consents sufficient to authorize the action have been delivered to the corporation and the Notice Period has been satisfied. If the action is of a type that would entitle shareholders to exercise dissenters' rights under RCW 23B.13.020(l), then (i) the notice must comply with RCW 23B.13.220(2), (ii) RCW 23B.13.210 shall not apply, and (iii) all nonconsenting shareholders are entitled to receive the -4- 11 notice, demand payment under RCW 23B.13.230 and assert other dissenters' rights to which they are by law entitled. ARTICLE IX REGISTERED OFFICE The address of the registered office of the Corporation is 1505 Westlake Avenue N., Suite 300, Seattle, Washington, and the name of the registered agent at such address is Michael J. Erickson. ARTICLE X AMENDMENT OF ARTICLES The Corporation reserves the right to amend, alter, change or repeal any provision contained in these Articles of Incorporation, in the manner now or hereafter prescribed by law, and all rights and powers conferred herein on shareholders and directors are subject to this reserved power. ARTICLE XI LIMITATION OF DIRECTOR LIABILITY No director of the corporation shall be personally liable to the corporation or its shareholders for monetary damages for his or her conduct as a director on or after the date this Article becomes effective, except for: (i) acts or omissions that involve intentional misconduct or a knowing violation of law by the director, (ii) approval of certain distributions or loans in violation of RCW 23B.08.310, or (iii) any transaction from which the director will personally receive a benefit in money, property or services to which the director is not legally entitled. If, after approval by shareholders of this Article, the Washington Business Corporation Act is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Washington Business Corporation Act, as so amended. Any amendment to or repeal of this Article shall not adversely affect any right or protection of a director of the corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. DATED: JAN 29TH, 1998 /S/ ALBERT T. DOSSER --------------------------------------- Albert T. Dosser, Senior Vice President -5- 12 CERTIFICATE OF OFFICER OF BSQUARE CORPORATION I, Albert T. Dosser hereby certify: 1. That I am the duly elected Senior Vice President of BSQUARE CORPORATION (the "Corporation"). 2. That the Amended and Restated Articles of Incorporation (the "Amendment") attached hereto as EXHIBIT A supersede the Articles of Incorporation of the Corporation filed with the Office of the Secretary of State of Washington on July 15, 1994 (the "Articles"). 3. That Articles I through IX to the Articles are hereby deleted in their entirety and replaced with new Articles I through XI as set forth below: ARTICLE I NAME The name of the corporation (the "Corporation") is BSQUARE CORPORATION. ARTICLE II AUTHORIZED SHARES 2.1 AUTHORIZED CAPITAL. The total authorized number of shares of the Corporation is Sixty Million (60,000,000) shares; Fifty Million (50,000,000) shares of common stock without par or ascribed value; Ten Million (10,000,000) shares of preferred stock without par or ascribed value. 2.2 ISSUANCE OF PREFERRED STOCK IN SERIES. The Preferred Stock may be issued from time to time in one or more series in any manner permitted by law and the provisions of these Articles of Incorporation, as determined from time to time by the Board of Directors and stated in the resolution or resolutions providing for the issuance thereof, prior to the issuance of any shares thereof. The Board of Directors shall have the authority to fix and determine and to amend, subject to the provisions hereof, the designations, powers, preferences and relative, participating, optional or other rights, if any, and qualifications, limitations or other restrictions of the shares of any series that is wholly unissued or to be established and the number of shares constituting any such series. Unless otherwise specifically provided in the resolution establishing any series, the Board of Directors shall further have the authority, after the issuance of shares of a series whose number it has designated, to amend the resolution establishing such series to decrease the number of shares of that series, but not below the number of shares of such series then outstanding. (a) Dividends. The holders of shares of the Preferred Stock shall be entitled to receive dividends, out of the funds of the corporation legally available therefor, at the rate and at the time or times as may be provided by the Board of Directors in designating a particular series of Preferred 1 13 Stock. The holders of the Preferred Stock shall not be entitled to receive any dividends thereon, unless otherwise provided by the Board of Directors in designating a particular series of Preferred Stock. (b) Liquidation. In the event of any liquidation, dissolution or winding up of the affairs of the corporation, whether voluntary or involuntary, then, before any distribution shall be made to the holders of the Common Stock, the holders of the Preferred Stock at the time outstanding shall be entitled to be paid the preferential amount or amounts per share as may be provided by the Board of Directors in designating a particular series of Preferred Stock, plus dividends accrued thereon to the date of such payment. In designating a particular series of Preferred Stock, the Board of Directors may also provide that such series is senior, on a par with or subordinate in order of priority to any other existing or later issued series of Preferred Stock in respect of distribution of amounts upon the liquidation, dissolution or winding up of the affairs of the corporation. The holders of the Preferred Stock shall not be entitled to receive any distributive amounts upon the liquidation, dissolution or winding up of the affairs of the corporation, unless otherwise provided by the Board of Directors in designating a particular series of Preferred Stock. (c) Conversion. Shares of Preferred Stock may be convertible to shares of Common Stock at such rate and subject to such adjustments as may be provided by the Board of Directors in designating a particular series of Preferred Stock. (d) Redemption. The Preferred Stock may be redeemable in such amounts, and at such time or times as may be provided by the Board of Directors in designating a particular series of Preferred Stock. In any event, such Preferred Stock may be repurchased by the corporation only to the extent legally permissible. (e) Voting Rights. Holders of Preferred Stock shall have such voting rights as may be provided by the Board of Directors in designating a particular series of Preferred Stock. ARTICLE III DIRECTORS The number of directors of the Corporation and the manner in which such directors are to be elected shall be as set forth in the bylaws. ARTICLE IV PREEMPTIVE RIGHTS Shareholders of the Corporation shall have no preemptive rights to acquire additional shares of the Corporation. ARTICLE V CUMULATIVE VOTING The right to cumulate votes in the election of Directors shall not exist with respect to shares of stock of this Corporation. 2 14 ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS (a) The capitalized terms in this Article 6 shall have the meanings set forth in RCW 23B.08.500. (b) The corporation shall indemnify and hold harmless each individual who is or was serving as a Director or officer of the corporation or who, while serving as a Director or officer of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, against any and all Liability incurred with respect to any Proceeding to which the individual is or is threatened to be made a Party because of such service, and shall make advances of reasonable Expenses with respect to such Proceeding, to the fullest extent permitted by law, without regard to the limitations in RCW 23B.08.510 through 23B.08.550; provided, however, that the payment of Expenses in advance of the final disposition of a Proceeding shall be made upon delivery to the corporation of an undertaking, by or on behalf of such Director or officer, to repay all amounts so advanced if it shall ultimately be determined that such Director or officer is not entitled to be indemnified under this Article or otherwise; provided further, that no such indemnity shall indemnify any Director or officer from or on account of (1) acts or omissions of the Director or officer finally adjudged to be intentional misconduct or a knowing violation of law; (2) conduct of the Director or officer finally adjudged to be in violation of RCW 23B.08.310; or (3) any transaction with respect to which it was finally adjudged that such Director or officer personally received a benefit in money, property, or services to which the Director or officer was not legally entitled. Except as provided in Subsection (f) of this Article, the corporation shall not indemnify a Director or officer in connection with a Proceeding (or part thereof) initiated by the Director or officer unless such Proceeding (or part thereof) was authorized by the Board of Directors of the corporation. (c) The corporation may purchase and maintain insurance on behalf of an individual who is or was a director, officer, employee, or agent of the corporation or, who, while a director, officer, employee, or agent of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise against Liability asserted against or incurred by the individual in that capacity or arising from the individual's status as a director, officer, employee, or agent, whether or not the corporation would have power to indemnify the individual against such Liability under RCW 23B.08.510 or 23B.08.520. (d) If, after the effective date of this Article 6, the Act is amended to authorize further indemnification of Directors or officers, then Directors and officers of the corporation shall be indemnified to the fullest extent permitted by the Act as so amended. (e) To the extent permitted by law, the rights to indemnification and advance of reasonable Expenses conferred in this Article 6 shall not be exclusive of any other right which any individual may have or hereafter acquire under any statute, provision of the Bylaws, agreement, vote of shareholders or disinterested directors, or otherwise. The right to indemnification conferred in this Article 6 shall be a contract right upon which each Director or officer shall be presumed to have relied in determining to serve or to continue to serve as such. Any amendment to or repeal of this Article 6 shall not adversely affect any right or protection of a Director or officer of the corporation for or with respect to any acts or omissions of such Director or officer occurring prior to such amendment or repeal. 3 15 (f) If a claim under this Article is not paid in full by the corporation within sixty (60) days after a written claim has been received by the corporation, except in the case of a claim for expenses incurred in defending a proceeding in advance of its final disposition, in which case the applicable period shall be twenty (20) days, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, to the extent successful in whole or in part, the Director or officer shall be entitled to be paid also the expense of prosecuting such claim. Neither the failure of the corporation (including its Board of Directors, its shareholders or independent legal counsel) to have made a determination prior to the commencement of such action that indemnification of or reimbursement or advancement of expenses to the claimant is proper in the circumstances, nor an actual determination by the corporation (including its Board of Directors, its shareholders or independent legal counsel) that the Director or officer is not entitled to indemnification or to the reimbursement or advancement of expenses, shall be a defense to the action or create a presumption that the Director or officer is not so entitled. (g) If the corporation indemnifies or advances expenses to a Director or officer pursuant to this Article 6 in connection with a Proceeding by or in the right of the corporation, the corporation shall report the indemnification or advance in writing to the shareholders with or before the notice of the next shareholders' meeting. (h) If any provision of this Article 6 or any application thereof shall be invalid, unenforceable, or contrary to applicable law, the remainder of this Article 6, and the application of such provisions to individuals or circumstances other than those as to which it is held invalid, unenforceable, or contrary to applicable law, shall not be affected thereby. ARTICLE VII INTERESTED TRANSACTIONS (1) No contracts or other transactions between the corporation and any other corporation, and no act of the corporation shall in any way be affected or invalidated by the fact that any of the directors or shareholders of the corporation are pecuniarily or otherwise interested in, or are directors or officers of, such other corporation; and (2) Any director or shareholder individually, or any firm of which any director or shareholder may be a member, may be a party to, or may be pecuniarily or otherwise interested in, any contracts or transactions of the corporation, provided that the fact that he or such firm is so interested shall be disclosed or shall have been known to the Board of Directors or a majority thereof. ARTICLE VIII SHAREHOLDER ACTIONS BY CONSENT In accordance with RCW 23B.07.040, any action that may be taken at a meeting of this corporation's shareholders may be taken by written consent by the shareholders holding of record or otherwise entitled to vote in the aggregate not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote on the action were present and voted. If action is taken by less than unanimous consent, the corporation shall give nonconsenting shareholders prior notice of such action; provided that if the action is of a type that would constitute a significant business transaction under RCW 23B.19.020(15), notice must be given no fewer than 20 days prior to the effective date of the action (such prior or 20 day period, a "Notice Period"). Such notice shall include the resolution approved by the shareholders by written consent and shall be hand 4 16 delivered or sent first-class mail to each nonconsenting shareholder at the address on the books and records of the corporation. Unless the written consent specifies a different effective date, the action is effective when consents sufficient to authorize the action have been delivered to the corporation and the Notice Period has been satisfied. If the action is of a type that would entitle shareholders to exercise dissenters' rights under RCW 23B.13.020(l), then (i) the notice must comply with RCW 23B.13.220(2), (ii) RCW 23B.13.210 shall not apply, and (iii) all nonconsenting shareholders are entitled to receive the notice, demand payment under RCW 23B.13.230 and assert other dissenters' rights to which they are by law entitled. ARTICLE IX REGISTERED OFFICE The address of the registered office of the Corporation is 1505 Westlake Avenue N., Suite 300, Seattle, Washington, and the name of the registered agent at such address is Michael J. Erickson. ARTICLE X AMENDMENT OF ARTICLES The Corporation reserves the right to amend, alter, change or repeal any provision contained in these Articles of Incorporation, in the manner now or hereafter prescribed by law, and all rights and powers conferred herein on shareholders and directors are subject to this reserved power. ARTICLE XI LIMITATION OF DIRECTOR LIABILITY No director of the corporation shall be personally liable to the corporation or its shareholders for monetary damages for his or her conduct as a director on or after the date this Article becomes effective, except for: (i) acts or omissions that involve intentional misconduct or a knowing violation of law by the director, (ii) approval of certain distributions or loans in violation of RCW 23B.08.310, or (iii) any transaction from which the director will personally receive a benefit in money, property or services to which the director is not legally entitled. If, after approval by shareholders of this Article, the Washington Business Corporation Act is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Washington Business Corporation Act, as so amended. Any amendment to or repeal of this Article shall not adversely affect any right or protection of a director of the corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. * * * * * * * * * 4. The Amendment does not provide for an exchange, reclassification or cancellation of issued shares. 5 17 The foregoing Amendments were adopted by the Board of Directors of the Corporation on January 29th 1998 and by the Shareholders of the Corporation on January 29th, 1998 in accordance with the provisions of RCW 23B.10.030 and RCW 23B.10.040. Dated: January 29th, 1998 BSQUARE CORPORATION, a Washington corporation By: /s/ ALBERT T. DOSSER --------------------------------------- Albert T. Dosser, Senior Vice President 6 18 EXHIBIT A AMENDED AND RESTATED ARTICLES OF INCORPORATION OF BSQUARE CORPORATION ARTICLE I NAME The name of the corporation (the "Corporation") is BSQUARE CORPORATION. ARTICLE II AUTHORIZED SHARES 2.1 AUTHORIZED CAPITAL. The total authorized number of shares of the Corporation is Sixty Million (60,000,000) shares; Fifty Million (50,000,000) shares of common stock without par or ascribed value; Ten Million (10,000,000) shares of preferred stock without par or ascribed value. 2.2 ISSUANCE OF PREFERRED STOCK IN SERIES. The Preferred Stock may be issued from time to time in one or more series in any manner permitted by law and the provisions of these Articles of Incorporation, as determined from time to time by the Board of Directors and stated in the resolution or resolutions providing for the issuance thereof, prior to the issuance of any shares thereof. The Board of Directors shall have the authority to fix and determine and to amend, subject to the provisions hereof, the designations, powers, preferences and relative, participating, optional or other rights, if any, and qualifications, limitations or other restrictions of the shares of any series that is wholly unissued or to be established and the number of shares constituting any such series. Unless otherwise specifically provided in the resolution establishing any series, the Board of Directors shall further have the authority, after the issuance of shares of a series whose number it has designated, to amend the resolution establishing such series to decrease the number of shares of that series, but not below the number of shares of such series then outstanding. (a) Dividends. The holders of shares of the Preferred Stock shall be entitled to receive dividends, out of the funds of the corporation legally available therefor, at the rate and at the time or times as may be provided by the Board of Directors in designating a particular series of Preferred Stock. The holders of the Preferred Stock shall not be entitled to receive any dividends thereon, unless otherwise provided by the Board of Directors in designating a particular series of Preferred Stock. (b) Liquidation. In the event of any liquidation, dissolution or winding up of the affairs of the corporation, whether voluntary or involuntary, then, before any distribution shall be made to the holders of the Common Stock, the holders of the Preferred Stock at the time outstanding shall be entitled to be paid the preferential amount or amounts per share as may be provided by the Board of Directors in designating a particular series of Preferred Stock, plus dividends accrued thereon to the date of such payment. In designating a particular series of Preferred Stock, the Board of Directors may also provide that such series is senior, on a par with or subordinate in order of priority to any other existing or later issued series of Preferred Stock in respect of distribution of amounts upon the liquidation, dissolution or winding up of the affairs of the corporation. The holders of the Preferred Stock shall not be entitled to receive any distributive amounts upon the liquidation, dissolution or winding up of the -1- 19 affairs of the corporation, unless otherwise provided by the Board of Directors in designating a particular series of Preferred Stock. (c) Conversion. Shares of Preferred Stock may be convertible to shares of Common Stock at such rate and subject to such adjustments as may be provided by the Board of Directors in designating a particular series of Preferred Stock. (d) Redemption. The Preferred Stock may be redeemable in such amounts, and at such time or times as may be provided by the Board of Directors in designating a particular series of Preferred Stock. In any event, such Preferred Stock may be repurchased by the corporation only to the extent legally permissible. (e) Voting Rights. Holders of Preferred Stock shall have such voting rights as may be provided by the Board of Directors in designating a particular series of Preferred Stock. ARTICLE III DIRECTORS The number of directors of the Corporation and the manner in which such directors are to be elected shall be as set forth in the bylaws. ARTICLE IV PREEMPTIVE RIGHTS Shareholders of the Corporation shall have no preemptive rights to acquire additional shares of the Corporation. ARTICLE V CUMULATIVE VOTING The right to cumulate votes in the election of Directors shall not exist with respect to shares of stock of this Corporation. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS (a) The capitalized terms in this Article 6 shall have the meanings set forth in RCW 23B.08.500. (b) The corporation shall indemnify and hold harmless each individual who is or was serving as a Director or officer of the corporation or who, while serving as a Director or officer of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee -2- 20 benefit plan, or other enterprise, against any and all Liability incurred with respect to any Proceeding to which the individual is or is threatened to be made a Party because of such service, and shall make advances of reasonable Expenses with respect to such Proceeding, to the fullest extent permitted by law, without regard to the limitations in RCW 23B.08.510 through 23B.08.550; provided, however, that the payment of Expenses in advance of the final disposition of a Proceeding shall be made upon delivery to the corporation of an undertaking, by or on behalf of such Director or officer, to repay all amounts so advanced if it shall ultimately be determined that such Director or officer is not entitled to be indemnified under this Article or otherwise; provided further, that no such indemnity shall indemnify any Director or officer from or on account of (1) acts or omissions of the Director or officer finally adjudged to be intentional misconduct or a knowing violation of law; (2) conduct of the Director or officer finally adjudged to be in violation of RCW 23B.08.310; or (3) any transaction with respect to which it was finally adjudged that such Director or officer personally received a benefit in money, property, or services to which the Director or officer was not legally entitled. Except as provided in Subsection (f) of this Article, the corporation shall not indemnify a Director or officer in connection with a Proceeding (or part thereof) initiated by the Director or officer unless such Proceeding (or part thereof) was authorized by the Board of Directors of the corporation. (c) The corporation may purchase and maintain insurance on behalf of an individual who is or was a director, officer, employee, or agent of the corporation or, who, while a director, officer, employee, or agent of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise against Liability asserted against or incurred by the individual in that capacity or arising from the individual's status as a director, officer, employee, or agent, whether or not the corporation would have power to indemnify the individual against such Liability under RCW 23B.08.510 or 23B.08.520. (d) If, after the effective date of this Article 6, the Act is amended to authorize further indemnification of Directors or officers, then Directors and officers of the corporation shall be indemnified to the fullest extent permitted by the Act as so amended. (e) To the extent permitted by law, the rights to indemnification and advance of reasonable Expenses conferred in this Article 6 shall not be exclusive of any other right which any individual may have or hereafter acquire under any statute, provision of the Bylaws, agreement, vote of shareholders or disinterested directors, or otherwise. The right to indemnification conferred in this Article 6 shall be a contract right upon which each Director or officer shall be presumed to have relied in determining to serve or to continue to serve as such. Any amendment to or repeal of this Article 6 shall not adversely affect any right or protection of a Director or officer of the corporation for or with respect to any acts or omissions of such Director or officer occurring prior to such amendment or repeal. (f) If a claim under this Article is not paid in full by the corporation within sixty (60) days after a written claim has been received by the corporation, except in the case of a claim for expenses incurred in defending a proceeding in advance of its final disposition, in which case the applicable period shall be twenty (20) days, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, to the extent successful in whole or in part, the Director or officer shall be entitled to be paid also the expense of prosecuting such claim. Neither the failure of the corporation (including its Board of Directors, its shareholders or independent legal counsel) to have made a determination prior to the commencement of such action that indemnification of or reimbursement or advancement of expenses to the claimant is proper in the circumstances, nor an actual -3- 21 determination by the corporation (including its Board of Directors, its shareholders or independent legal counsel) that the Director or officer is not entitled to indemnification or to the reimbursement or advancement of expenses, shall be a defense to the action or create a presumption that the Director or officer is not so entitled. (g) If the corporation indemnifies or advances expenses to a Director or officer pursuant to this Article 6 in connection with a Proceeding by or in the right of the corporation, the corporation shall report the indemnification or advance in writing to the shareholders with or before the notice of the next shareholders' meeting. (h) If any provision of this Article 6 or any application thereof shall be invalid, unenforceable, or contrary to applicable law, the remainder of this Article 6, and the application of such provisions to individuals or circumstances other than those as to which it is held invalid, unenforceable, or contrary to applicable law, shall not be affected thereby. ARTICLE VII INTERESTED TRANSACTIONS (1) No contracts or other transactions between the corporation and any other corporation, and no act of the corporation shall in any way be affected or invalidated by the fact that any of the directors or shareholders of the corporation are pecuniarily or otherwise interested in, or are directors or officers of, such other corporation; and (2) Any director or shareholder individually, or any firm of which any director or shareholder may be a member, may be a party to, or may be pecuniarily or otherwise interested in, any contracts or transactions of the corporation, provided that the fact that he or such firm is so interested shall be disclosed or shall have been known to the Board of Directors or a majority thereof. ARTICLE VIII SHAREHOLDER ACTIONS BY CONSENT In accordance with RCW 23B.07.040, any action that may be taken at a meeting of this corporation's shareholders may be taken by written consent by the shareholders holding of record or otherwise entitled to vote in the aggregate not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote on the action were present and voted. If action is taken by less than unanimous consent, the corporation shall give nonconsenting shareholders prior notice of such action; provided that if the action is of a type that would constitute a significant business transaction under RCW 23B.19.020(15), notice must be given no fewer than 20 days prior to the effective date of the action (such prior or 20 day period, a "Notice Period"). Such notice shall include the resolution approved by the shareholders by written consent and shall be hand delivered or sent first-class mail to each nonconsenting shareholder at the address on the books and records of the corporation. Unless the written consent specifies a different effective date, the action is effective when consents sufficient to authorize the action have been delivered to the corporation and the Notice Period has been satisfied. If the action is of a type that would entitle shareholders to exercise dissenters' rights under RCW 23B.13.020(l), then (i) the notice must comply with RCW 23B.13.220(2), (ii) RCW 23B.13.210 shall not apply, and (iii) all nonconsenting shareholders are entitled to receive the -4- 22 notice, demand payment under RCW 23B.13.230 and assert other dissenters' rights to which they are by law entitled. ARTICLE IX REGISTERED OFFICE The address of the registered office of the Corporation is 1505 Westlake Avenue N., Suite 300, Seattle, Washington, and the name of the registered agent at such address is Michael J. Erickson. ARTICLE X AMENDMENT OF ARTICLES The Corporation reserves the right to amend, alter, change or repeal any provision contained in these Articles of Incorporation, in the manner now or hereafter prescribed by law, and all rights and powers conferred herein on shareholders and directors are subject to this reserved power. ARTICLE XI LIMITATION OF DIRECTOR LIABILITY No director of the corporation shall be personally liable to the corporation or its shareholders for monetary damages for his or her conduct as a director on or after the date this Article becomes effective, except for: (i) acts or omissions that involve intentional misconduct or a knowing violation of law by the director, (ii) approval of certain distributions or loans in violation of RCW 23B.08.310, or (iii) any transaction from which the director will personally receive a benefit in money, property or services to which the director is not legally entitled. If, after approval by shareholders of this Article, the Washington Business Corporation Act is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Washington Business Corporation Act, as so amended. Any amendment to or repeal of this Article shall not adversely affect any right or protection of a director of the corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. DATED:_____________________, 1998 EXHIBIT ONLY DO NOT SIGN --------------------------------------- Albert T. Dosser, Senior Vice President -5- 23 STATE OF WASHINGTON [SEAL] SECRETARY of STATE I, RALPH MUNRO, Secretary of State of the State of Washington and custodian of its seal, hereby issue this DESIGNATION OF RIGHT & PREFERENCES OF THE SERIES A CONVERTIBLE PREFERRED STOCK to BSQUARE CORPORATION a Washington Profit Corporation. Articles of Amendment were filed for record in this office on the date indicated below. UBI Number: 601 559 419 Date: January 29, 1998 Given under my hand and the Seal of the State [SEAL] of Washington at Olympia, the State Capital /s/ RALPH MUNRO ------------------------------- RALPH MUNRO, SECRETARY OF STATE 24 CERTIFICATE OF DESIGNATION of the RELATIVE RIGHTS AND PREFERENCES of the SERIES A CONVERTIBLE PREFERRED STOCK of BSQUARE CORPORATION The undersigned Senior Vice President of BSQUARE CORPORATION, a Washington corporation (the "Corporation"), in accordance with the provisions of RCW 23B.06.020, does hereby certify that, pursuant to the authority conferred upon the Board of Directors by the Articles of Incorporation of the Corporation, the following resolution creating a series of Series A Convertible Preferred Stock was duly adopted by the Board of Directors of the Corporation as of January 29, 1998: RESOLVED, that, pursuant to the authority conferred on the Board of Directors of the Corporation by the Articles of Incorporation of the Corporation, the Board of Directors does hereby provide for the designation of a series of preferred stock to be named "Series A Convertible Preferred Stock," initially consisting of 8,333,333 shares, and that to the extent that the designation, powers, preferences and relative and other special rights and the qualifications, limitations and restrictions of the Series A Convertible Preferred Stock are not stated and expressed in the Articles of Incorporation, the Board of Directors does hereby fix and herein state and express such designation, powers, preferences and relative and other special rights and the qualifications, limitations and restrictions of the Series A Convertible Preferred Stock as follows: SERIES A CONVERTIBLE PREFERRED STOCK The designations and the powers, preferences and rights of the Series A Convertible Preferred Stock are as follows: Section 1. Designation and Dividends. The Corporation hereby designates 8,333,333 shares of the Preferred Stock as Series A Convertible Preferred Stock (the "Series A Preferred Stock"), which shall have the rights, preferences and terms set forth herein. The holders of the Series A Preferred Stock shall be entitled to receive dividends at the same rate as dividends (other than dividends paid in additional shares of Common Stock) are paid with respect to the Common Stock (treating each share of Series A Preferred Stock as being equal to the number of shares of Common Stock into which each such share of Series A Preferred Stock could be converted pursuant to the provisions of Section 4 hereof with such number determined as of the record date for the determination of holders of Common Stock entitled to receive such dividend) (the "Participating Dividends"). 1 25 Section 2. Liquidation, Dissolution or Winding Up. (a) In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, each holder of outstanding shares of Series A Preferred Stock shall be entitled to be paid, out of the assets of the Corporation available for distribution to stockholders, whether such assets are capital, surplus, or earnings and before any amount shall be paid or distributed to the holders of any class of Common Stock or of any other stock ranking on liquidation junior to the Series A Preferred Stock, the greater of: (i) an amount in cash equal to $1.80 per share (adjusted appropriately for stock splits, stock dividends and the like) together with declared but unpaid dividends to which the holders of outstanding shares of Series A Preferred Stock are entitled pursuant to Section 1 hereof (the "Minimum Liquidation Amount"); provided, however, that if, upon any liquidation, dissolution or winding up of the Corporation, the amounts payable with respect to the Series A Preferred Stock and any other stock ranking as to any such distribution on a parity with the Series A Preferred Stock are not paid in full, the holders of the Series A Preferred Stock and such other stock shall share ratably in any distribution of assets in proportion to the full respective preferential amounts to which they are entitled; or (ii) cash in an amount equal to the portion of the assets of the Corporation remaining for distribution to shareholders which such holder would have received if each share of Series A Preferred Stock held by such holder had been converted into the number of shares of Common Stock issuable upon the conversion of a share of Series A Preferred Stock immediately prior to any such liquidation, dissolution or winding up of the Corporation after taking into account the rights of holders of any other class or series of capital stock of the Corporation (including the Common Stock) entitled to share in such distribution in either case, plus any declared but unpaid dividends to which the holders of outstanding shares of Series A Preferred Stock are entitled pursuant to Section 1 hereof (the "Aggregate Liquidation Amount"). (b) A consolidation, merger or capital reorganization of the Corporation (except (i) into or with a wholly-owned subsidiary of the Corporation with requisite shareholder approval or (ii) a merger in which the beneficial owners of the Corporation's outstanding capital stock immediately prior to such transaction hold no less than fifty-one percent (51%) of the voting power in the resulting entity) or a sale of all or substantially all of the assets of the Corporation shall be regarded as a liquidation, dissolution or winding up of the affairs of the Corporation within the meaning of this Section 2; provided, however, that each holder of the Series A Preferred Stock shall have the right to elect the benefits of the provisions of Section 4(i) hereof in lieu of receiving payment in liquidation, dissolution or winding up of the Corporation pursuant to this Section 2. 2 26 executive office of the Corporation or the offices of the transfer agent for the Series A Preferred Stock or such office of offices in the continental United States of an agent for conversion as may Section 3. Voting Power. Except as otherwise expressly provided herein or as required by law, the holder of each share of Series A Preferred Stock shall be entitled to vote on all matters. Each share of Series A Preferred Stock shall entitle the holder thereof to such number of votes per share as shall equal the number of shares of Common Stock into which each share of Series A Preferred Stock is then convertible. Except as otherwise expressly provided herein (including without limitation the provisions of Section 6 hereof) or as required by law, the holders of shares of the Series A Preferred Stock and the Common Stock shall vote together as a single class on all matters. Section 4. Conversion. The holders of the Series A Preferred Stock shall have the following conversion rights: (a) Voluntary Conversion. Holders of a majority of the outstanding shares of Series A Preferred Stock shall be entitled, at any time and from time to time after the date hereof, to cause any or all of such shares to be converted into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing $1.80 by the conversion price applicable to such shares, determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. Initially the conversion price shall be $1.80 per share of Common Stock, which price shall be adjusted as hereinafter provided (and, as so adjusted, is hereinafter sometimes referred to as the "Conversion Price"). If a holder of Series A Preferred Stock elects to convert his or her Series A Preferred Stock at a time when there are any accrued and unpaid dividends or other amounts due on such shares (including any Participating Dividends), such dividends and other amounts shall, to the extent permitted by applicable law, be paid in full by the Corporation in connection with such conversion. (b) Automatic Conversion. Each share of Series A Preferred Stock outstanding shall automatically, and without the requirement of any consent of any holder, be converted into the number of shares of Common Stock into which such shares are convertible at the then effective Conversion Price upon the closing of a Qualified Public Offering. For purposes hereof, the term "Qualified Public Offering" shall mean an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), covering the offer and sale of Common Stock of the Corporation to the public at a minimum price of $4.50 per share and pursuant to which (i) the gross proceeds received by the Corporation equal or exceed $30,000,000 and (ii) the shares of Common Stock sold under such registration statement are approved for listing on the New York Stock Exchange or approved for quotation on The Nasdaq Stock Market, Inc.'s National Market. (c) Conversion Procedures. Any holder of Series A Preferred Stock converting such shares into shares of Common Stock pursuant to Section 4(a), or whose shares are automatically converted pursuant to Section 4(b), shall surrender the certificate or certificates representing the Series A Preferred Stock being converted, duly assigned or endorsed for transfer to the Corporation (or accompanied by duly executed stock powers relating thereto), at the principal 3 27 executive office of the Corporation or the offices of the transfer agent for the Series A Preferred Stock or such office or offices in the continental United States of an agent for conversion as may from time to time be designated by notice to the holders of the Series A Preferred Stock by the Corporation, accompanied by written notice of conversion. Such notice of conversion shall (i) specify the number of shares of Series A Preferred Stock to be converted, (ii) specify the name or names in which such holder wishes the certificate or certificates for Common Stock and for any Series A Preferred Stock not to be so converted to be issued, (iii) include payment of any applicable transfer tax and (iv) specify the address to which such holder wishes delivery to be made of such new certificates to be issued upon such conversion. Upon surrender of a certificate representing Series A Preferred Stock for conversion, the Corporation shall issue and send by hand delivery, by courier or by first class mail (postage prepaid) to the holder thereof or to such holder's designee, at the address designated by such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled upon conversion. In the event that there shall have been surrendered a certificate or certificates representing Series A Preferred Stock, only part of which are to be converted, the Corporation shall issue and send to such holder or such holder's designee, in the manner set forth in the preceding sentence, a new certificate or certificates representing the number of shares of Series A Preferred Stock which shall not have been converted. (d) Effective Date of Conversion. The issuance by the Corporation of shares of Common Stock upon a conversion of Series A Preferred Stock into shares of Common Stock made at the option of the holder thereof pursuant to Section 4(a) hereof shall be effective as of the surrender of the certificate or certificates for the Series A Preferred Stock to be converted, duly assigned or endorsed for transfer to the Corporation (or accompanied by duly executed stock powers relating thereto). The issuance by the Corporation of shares of Common Stock upon a conversion of Series A Preferred Stock into Common Stock pursuant to Section 4(b) hereof shall be deemed to be effective immediately prior to the closing of the Qualified Public Offering. On and after the effective date of conversion, the person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock. (e) Fractional Shares. The Corporation shall not be obligated to deliver to holders of Series A Preferred Stock any fractional share of Common Stock issuable upon any conversion of such Series A Preferred Stock, but in lieu thereof may make a cash payment in respect thereof in any manner permitted by law. (f) Reservation of Common Stock. The Corporation shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for issuance upon the conversion of Series A Preferred Stock as herein provided, free from any preemptive rights or other obligations, such number of shares of the Common Stock as shall from time to time be issuable upon the conversion of all the Series A Preferred Stock then outstanding provided that the shares of Common Stock so reserved shall not be reduced or affected in any manner whatsoever so long as any Series A Preferred Stock is outstanding, except in the case of a reverse stock split or stock combination. The Corporation shall prepare and shall use its reasonable business efforts to obtain 4 28 and keep in force such governmental or regulatory permits or other authorizations as may be required by law, and shall comply with all requirements as to registration, qualification or listing of the Common Stock, in order to enable the Corporation lawfully to issue and deliver to each holder of record of Series A Preferred Stock such number of shares of its Common Stock as shall from time to time be sufficient to effect the conversion of all shares of Series A Preferred Stock then outstanding and convertible into shares of Common Stock. (g) Adjustments to Conversion Price. The Conversion Price in effect from time to time shall be subject to adjustment as follows: (i) Stock Dividends, Subdivisions and Combinations. Upon the issuance of additional shares of Common Stock as a dividend or other distribution on outstanding Common Stock, the subdivision of outstanding shares of Common Stock into a greater number of shares of Common Stock, or the combination of outstanding shares of Common Stock into a smaller number of shares of Common Stock, the Conversion Price shall, simultaneously with the happening of such dividend, subdivision or combination be adjusted by multiplying the then effective Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event. An adjustment made pursuant to this Section 4(g)(i) shall be given effect, upon payment of such a dividend or distribution, as of the record date for the determination of shareholders entitled to receive such dividend or distribution (on a retroactive basis) and, in the case of a subdivision or combination, immediately as of the effective date thereof. (ii)Sale of Common Stock. In the event the Corporation shall at any time or from time to time while the Series A Preferred Stock is outstanding, issue, sell or exchange any shares of Common Stock (including shares held in the Corporation's treasury, but excluding: (i) any Common Stock which may be issued upon conversion of the Series A Preferred Stock; and (ii) up to 3,625,000 shares of Common Stock issued to officers, directors, employees, consultants or agents of the Corporation pursuant to the Corporation's Stock Option Plan (the "Plan") or upon the exercise of options issued pursuant to such Plan, or such greater number of shares as may be issuable pursuant to the adjustment provisions of such Plan as in effect on the date hereof (collectively, the "Excluded Shares")), for a consideration per share less than the Conversion Price in effect immediately prior to the issuance, sale or exchange of such shares (any such issuance, sale or exchange hereinafter referred to as a "Dilutive Transaction"), then, and thereafter successively upon the consummation of any Dilutive Transaction, the Conversion Price in effect immediately prior to the Dilutive Transaction shall forthwith be reduced to an amount (calculated to the nearest cent) determined by multiplying such Conversion Price by a fraction: (A) the numerator of which shall be (1) the number of shares of Common Stock of all classes outstanding immediately prior to the Dilutive Transaction 5 29 (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Series A Preferred Stock, options, warrants, rights or convertible securities), plus (2) the number of shares of Common Stock which the net aggregate consideration received by the Corporation for the total number of such additional shares of Common Stock so issued in the Dilutive Transaction would purchase at the Conversion Price (prior to adjustment), and (B) the denominator of which shall be (1) the number of shares of Common Stock of all classes outstanding immediately prior to the Dilutive Transaction (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Series A Preferred Stock, options, warrants, rights or convertible securities), plus (2) the number of such additional shares of Common Stock so issued in the Dilutive Transaction. (iii) Sale of Options, Rights or Convertible Securities. In the event the Corporation shall at any time or from time to time while the Series A Preferred Stock is outstanding, issue options, warrants or rights to subscribe for shares of Common Stock (other than any options for Excluded Shares), or issue any securities convertible into or exercisable or exchangeable for shares of Common Stock, for a consideration per share (determined by dividing the Net Aggregate Consideration (as determined below) by the aggregate number of shares of Common Stock that would be issued if all such options, warrants, rights or convertible securities were exercised or converted to the fullest extent permitted by their terms) less than the Conversion Price in effect immediately prior to the issuance of such options or rights or convertible or exchangeable securities, the Conversion Price in effect immediately prior to the issuance of such options, warrants or rights or securities shall be reduced to an amount determined by multiplying such Conversion Price by a fraction: (A) the numerator of which shall be (1) the number of shares of Common Stock of all classes outstanding immediately prior to the issuance of such options, rights or convertible securities (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Series A Preferred Stock, options, warrants, rights or convertible securities), plus (2) the number of shares of Common Stock which the total amount of consideration received by the Corporation for the issuance of such options, warrants, rights or convertible securities plus the minimum amount set forth in the terms of such security as payable to the Corporation upon the exercise or conversion thereof (the "Net Aggregate Consideration") would purchase at the Conversion Price prior to adjustment, and (B) the denominator of which shall be (1) the number of shares of Common Stock of all classes outstanding immediately prior to the issuance of such options, warrants, rights or convertible securities (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Series A Preferred Stock, options, warrants, rights or convertible 6 30 securities), plus (2) the aggregate number of shares of Common Stock that would be issued if all such options, warrants, rights or convertible securities were exercised or converted. (iv) Expiration or Change in Price. If the consideration per share provided for in any options or rights to subscribe for shares of Common Stock or any securities exercisable or exchangeable for or convertible into shares of Common Stock, changes at any time, the Conversion Price in effect at the time of such change shall be readjusted to the Conversion Price which would have been in effect at such time had such options or convertible securities provided for such changed consideration per share (determined as provided in Section 4(g)(iii) hereof) at the time initially granted, issued or sold; provided, that such adjustment of the Conversion Price will be made only as and to the extent that the Conversion Price effective upon such adjustment remains less than or equal to the Conversion Price that would be in effect if such options, rights or securities had not been issued. No adjustment of the Conversion Price shall be made under this Section 4 upon the issuance of any additional shares of Common Stock which are issued pursuant to the exercise of any warrants, options or other subscription or purchase rights or pursuant to the exercise of any conversion or exchange rights in any convertible securities if an adjustment shall previously have been made upon the issuance of such warrants, options or other rights. Any adjustment of the Conversion Price shall be disregarded if, as, and when the rights to acquire shares of Common Stock upon exercise or conversion of the warrants, options, rights or convertible securities which gave rise to such adjustment expire or are canceled without having been exercised, so that the Conversion Price effective immediately upon such cancellation or expiration shall be equal to the Conversion Price in effect at the time of the issuance of the expired or canceled warrants, options, rights or convertible securities, with such additional adjustments as would have been made to that Conversion Price had the expired or canceled warrants, options, rights or convertible securities not been issued. (h) Other Adjustments. In the event the Corporation shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, then and in each such event lawful and adequate provision shall be made so that the holders of Series A Preferred Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the number of securities of the Corporation which they would have received had their Series A Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the conversion date (calculated in accordance with Section 4(d) hereof), retained such securities receivable by them as aforesaid during such period, giving application to all adjustments called for during such period under this Section 4 as applied to such distributed securities. If the Common Stock issuable upon the conversion of the Series A Preferred Stock shall be changed into the same or different number of shares of any class or classes of stock, whether by reclassification or otherwise (other than a subdivision or combination of shares or stock dividend 7 31 provided for above, or a reorganization, merger, consolidation or sale of assets provided for elsewhere in this Section 4), then and in each such event the holder of each share of Series A Preferred Stock shall have the right thereafter to convert each such share into the kind and amount of shares of stock and other securities and property receivable upon such reorganization, reclassification or other change, by holders of the number of shares of Common Stock into which such shares of Series A Preferred Stock might have been converted immediately prior to such reorganization, reclassification or change, all subject to further adjustment as provided herein. (i) Mergers and Other Reorganizations. If at any time or from time to time there shall be a capital reorganization of the Common Stock (other than a subdivision, combination, reclassification or exchange of shares provided for elsewhere in this Section 4) or a merger or consolidation of the Corporation with or into another Corporation or the sale of all or substantially all of the Corporation's properties and assets to any other person, then, as a part of and as a condition to the effectiveness of such reorganization, merger, consolidation or sale, lawful and adequate provision shall be made so that the holders of the Series A Preferred Stock shall thereafter be entitled to receive upon conversion of the Series A Preferred Stock the number of shares of stock or other securities or property of the Corporation or of the successor corporation resulting from such merger or consolidation or sale, to which a holder of Common Stock deliverable upon conversion would have been entitled on such capital reorganization, merger, consolidation, or sale. In any such case, appropriate provisions shall be made with respect to the rights of the holders of the Series A Preferred Stock after the reorganization, merger, consolidation or sale to the end that the provisions of this Section 4 (including, without limitation, provisions for adjustment of the Conversion Price and the number of shares purchasable upon conversion of the Series A Preferred Stock) shall thereafter be applicable, as nearly as may be, with respect to any shares of stock, securities or assets to be deliverable thereafter upon the conversion of the Series A Preferred Stock. Each holder of Series A Preferred Stock upon the occurrence of a capital reorganization, merger or consolidation of the Corporation or the sale of all or substantially all its assets and properties as such events are more fully set forth in the first paragraph of this Section 4(i), shall have the option of electing treatment of his or her shares of Series A Preferred Stock under either this Section 4(i) or Section 2(b) hereof, notice of which election shall be submitted in writing to the Corporation at its principal offices no later than ten (10) days before the effective date of such event, provided that any such notice shall be effective if given not later than fifteen (15) days after the date of the Corporation's notice, pursuant to Section 8, with respect to such event. (j) Notices. In each case of an adjustment or readjustment of the Conversion Price, the Corporation will furnish each holder of Series A Preferred Stock with a certificate, prepared by the chief financial officer of the Corporation, showing such adjustment or readjustment, and stating in detail the facts upon which such adjustment or readjustment is based. 8 32 Section 5. Redemption. (a) Any holder of shares of Series A Preferred Stock may request that up to 50% of the Series A Preferred Stock then held by such holder be redeemed by the Corporation at any time on or after January 30, 2003 (the "First Redemption Date"), or that up to 100% of the Series A Preferred Stock then held by such holder be redeemed by the Corporation at any time on or after January 30, 2004 (the "Second Redemption Date," and, collectively with the First Redemption Date, the "Redemption Date"), by giving 90 days written notice to the Corporation, stating in such notice the number of shares to be redeemed and delivering the certificates for the shares of Series A Preferred Stock to be so redeemed to the Corporation by the Redemption Date. The Corporation shall redeem all shares as to which it has received requests for redemption from the holders thereof in accordance with the foregoing. Any redemption hereunder shall be at a per share redemption price equal to $1.80 per share (adjusted appropriately for stock splits, stock dividends and the like), plus any accrued but unpaid dividends (including any Participating Dividends) to which the holders of outstanding shares of Series A Preferred Stock are entitled pursuant to Section 1 hereof (the "Redemption Price"). (b) If the Corporation does not have sufficient funds legally available to redeem all shares for which redemption is requested hereunder, then it shall redeem such shares on a pro-rata basis among the holders of the Series A Preferred Stock in proportion to the shares of Series A Preferred Stock then held by them to the extent possible and shall redeem the remaining shares to be redeemed as soon as sufficient funds are legally available. In the event that the Corporation fails to timely redeem shares for which redemption is requested pursuant to Section 5(a) for any reason whatsoever, then during the period from the Redemption Date through the date on which such shares are redeemed, the Redemption Price of such shares shall bear interest at a per annum rate equal to the Prime Rate (as reported in The Wall Street Journal from time to time) plus two percent, which interest rate shall increase by an additional 1% at the end of each three (3) month period thereafter until the Redemption Price (and any interest thereon) is paid in full, subject to a maximum interest rate of the greater of 15% or such Prime Rate plus ten percent, but in no event greater than 18%. Section 6. Restrictions and Limitations. (a) So long as any shares of the Series A Preferred Stock remain outstanding, the Corporation shall not without the affirmative vote or written consent of the holders of two-thirds in interest of the Series A Preferred Stock: (i) sell, lease or otherwise dispose of (whether in one transaction or a series of related transactions) all or substantially all of its assets or business, (ii) merge with or into or consolidate with another entity or enter into or engage in any other transaction or series of related transactions, in any such case in connection with or as a result of which the Company is not the surviving entity or the owners of the Company's outstanding equity securities immediately prior to the transaction or series 9 33 of related transactions do not own at least a majority of the outstanding equity securities of the surviving, resulting or consolidated entity, (iii) dissolve, liquidate or wind up its operations, (iv) directly or indirectly redeem, purchase, or otherwise acquire for consideration any shares of its Common Stock or any other class of its capital stock except (A) for the redemption of Convertible Preferred Shares pursuant to and as provided in Sections 2, 4 and 5 hereof, (B) as contemplated by Sections 1.2, 4.6, and 5.2 of that certain Stock Purchase and Shareholders Agreement, dated as of January 30, 1998, (C) as contemplated by that certain Redemption Agreement, dated as of January 30, 1998, or (D) as contemplated by the Corporation's standard form of agreement, as approved by the Board of Directors, to be executed by employees, officers, and consultants of the Corporation upon the grant to such employees, officers, and consultants of options under the Plan, or upon exercise of such options, (v) adopt any amendment to this Certificate of Designation, or any amendment to its Articles of Incorporation or By-Laws, that eliminates, amends, restricts or otherwise adversely affects the rights and preferences of the Convertible Preferred Stock, or that increases the authorized shares of Convertible Preferred Stock, (vi) declare or make dividend payments on any shares of its Common Stock or any other class of its capital stock, (vii) create, or obligate itself to create, any class or series of shares that has a preference over, or is on a parity with, the Convertible Preferred Stock, (viii) increase the size of the Board of Directors to more than seven (7) members, (ix) enter into any agreement or arrangement or take any other action that eliminates, amends, restricts or otherwise adversely affects the rights of the holders of Convertible Preferred Stock or its ability to perform its obligations hereunder; or (x) enter into or be a party to any transaction or agreement, including, without limitation, any lease or other rental or purchase agreement providing for loans or extensions of credit by or to the Company, with or for the benefit of any person or entity which is a shareholder, officer or director of the Company, or which is a relative by blood or marriage of, a trust or estate for the benefit of, or a person or entity which directly or indirectly controls, is controlled by, or is under common control with, any such person or entity, except for normal compensation paid to employees of the Company in the ordinary course of business. 10 34 Section 7. No Reissuance of Series A Preferred Stock. No share or shares of the Series A Preferred Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be reissued, and all such shares shall be canceled, retired, and eliminated from the shares which the Corporation shall be authorized to issue. The Corporation may from time to time take such appropriate corporate action as may be necessary to reduce the authorized number of shares of the Series A Preferred Stock accordingly. Section 8. Other Rights. Except as otherwise provided in this Certificate of Designation, each share of Series A Preferred Stock and each share of Common Stock shall be identical in all respects, shall have the same powers, preferences and rights, without preference of any such class or share over any other such class or share. IN WITNESS WHEREOF, the undersigned has executed and subscribed this Certificate and does affirm the foregoing as true as of the 29th day of January, 1998. BSQUARE CORPORATION /s/ ALBERT T. DOSSER --------------------------------------- Albert T. Dosser, Senior Vice President 11 35 STATE OF WASHINGTON [STATE SEAL] SECRETARY OF STATE I, RALPH MUNRO, Secretary of State of the State of Washington and custodian of its seal, hereby issue this CERTIFICATE OF AMENDMENT to BSQUARE CONSULTING, INC. a Washington Profit corporation. Articles of Amendment were filed for record in this office on the date indicated below. Changing name to BSQUARE CORPORATION UBI Number: 601 559 419 Date: June 30, 1997 Given under my hand and the Seal of the State of Washington at Olympia, the State Capital /s/ RALPH MUNRO ------------------------------- Ralph Munro, Secretary of State [STATE SEAL] 2-494682-4 36 STATE OF WASHINGTON FILED STATE OF WASHINGTON ARTICLES OF AMENDMENT JUN 30 1997 OF RALPH MUNRO bsquare consulting, inc. SECRETARY OF STATE Pursuant to RCW 23B.10.060, the undersigned corporation adopts the following Articles of Amendment to its Articles of Incorporation: FIRST: The name of the corporation is bsquare consulting, inc. (the "Corporation"). SECOND: The Articles of Incorporation are hereby amended as follows: ARTICLE I NAME The name of the corporation is bsquare corporation. THIRD: The amendment does not provide for an exchange, reclassification, or cancellation of issued shares. FOURTH:The foregoing amendment was adopted by the Board of Directors of the Corporation on June 25, 1997 without shareholder action. Pursuant to RCW 23B.10.020, shareholder action with regard to the amendment of the Articles of Incorporation of the Corporation is not required. Dated: June 27, 1997. bsquare consulting, inc. /s/ WILLIAM T. BAXTER ---------------------------- William T. Baxter, President 37 STATE of WASHINGTON [STATE SEAL] SECRETARY of STATE I, RALPH MUNRO, Secretary of State of the State of Washington and custodian of its seal, hereby issue this CERTIFICATE OF AMENDMENT to BSQUARE CONSULTING, INC. a Washington Profit corporation. Articles of Amendment were filed for record in this office on the date indicated below. UBI Number: 601 559 419 Date: April 30, 1997 Given under my hand and the Seal of the State of Washington at Olympia, the State Capital /s/ RALPH MUNRO ------------------------------- Ralph Munro, Secretary of State [STATE SEAL] 2-494682-4 38 ARTICLES OF AMENDMENT OF BSQUARE CONSULTING, INC. Pursuant to RCW 23B.10.060, the undersigned corporation adopts the following Articles of Amendment to its Articles of Incorporation: FIRST: The name of the corporation is bsquare consulting, inc. (the "Corporation"). SECOND: The Articles of Incorporation are hereby amended by deleting Article II in its entirety and replacing it with a new Article II to read as follows: II. Authorized Shares 2.1 Authorized Capital. The aggregate number of shares which the Corporation shall have the authority to issue is 60,000,000 shares of stock, consisting of up to fifty million (50,000,000) shares of Common Stock and up to ten million (10,000,000) shares of Preferred Stock. 2.2 Issuance of Preferred Stock in Series. The Preferred Stock may be issued from time to time in one or more series in any manner permitted by law and the provisions of these Restated Articles of Incorporation, as determined from time to time by the Board of Directors and stated in the resolution or resolutions providing for the issuance thereof, prior to the issuance of any shares thereof. The Board of Directors shall have the authority to fix and determine and to amend, subject to the provisions hereof, the designations, powers, preferences and relative, participating, optional or other rights, if any, and qualifications, limitations or other restrictions of the shares of any series that is wholly unissued or to be established and the number of shares constituting any such series. Unless otherwise specifically provided in the resolution establishing any series, the Board of Directors shall further have the authority, after the issuance of shares of a series whose number it has designated, to amend the resolution establishing such series to decrease the number of shares of that series, but not below the number of shares of such series then outstanding. (a) Dividends. The holders of shares of the Preferred Stock shall be entitled to receive dividends, out of the funds of the corporation legally available therefor, at the rate and at the time or times as may be provided by the Board of Directors in designating a particular series of Preferred Stock. The holders of the Preferred Stock shall not be entitled to receive any dividends thereon, unless otherwise provided by the Board of Directors in designating a particular series of Preferred Stock. (b) Liquidation. In the event of any liquidation, dissolution or winding up of the affairs of the corporation, whether voluntary or involuntary, then, before any distribution shall be made to the holders of the Common Stock, the holders of the Preferred Stock at the time outstanding shall be entitled to be paid the preferential amount or amounts per share as may be provided by the Board of Directors in designating a particular series of Preferred Stock, plus 39 dividends accrued thereon to the date of such payment. In designating a particular series of Preferred Stock, the Board of Directors may also provide that such series is senior, on a par with or subordinate in order of priority to any other existing or later issued series of Preferred Stock in respect of distribution of amounts upon the liquidation, dissolution or winding up of the affairs of the corporation. The holders of the Preferred Stock shall not be entitled to receive any distributive amounts upon the liquidation, dissolution or winding up of the affairs of the corporation, unless otherwise provided by the Board of Directors in designating a particular series of Preferred Stock. (c) Conversion. Shares of Preferred Stock may be convertible to shares of Common Stock at such rate and subject to such adjustments as may be provided by the Board of Directors in designating a particular series of Preferred Stock. (d) Redemption. The Preferred Stock may be redeemable in such amounts, and at such time or times as may be provided by the Board of Directors in designating a particular series of Preferred Stock. In any event, such Preferred Stock may be repurchased by the corporation only to the extent legally permissible. (e) Voting Rights. Holders of Preferred Stock shall have such voting rights as may be provided by the Board of Directors in designating a particular series of Preferred Stock. THIRD: The amendment does not provide for an exchange, reclassification, or cancellation of issued shares. FOURTH: The foregoing amendment was adopted by the Board of Directors of the Corporation on April 17, 1997, and was duly approved by the shareholders of the Corporation on April 17, 1997 in accordance with RCW 23B.10.030 and RCW 23B.10.040, respectively. Dated: April 17, 1997. bsquare consulting, inc. By: /s/ WILLIAM T. BAXTER ------------------------- Its: President & CEO ---------------------- -2- 40 [SEAL] STATE of WASHINGTON SECRETARY of STATE I, RALPH MUNRO, Secretary of State of the State of Washington and custodian of its seal, hereby issue this CERTIFICATE OF INCORPORATION to BSQUARE CONSULTING, INC. a Washington Profit corporation. Articles of Incorporation were filed for record in this office on the date indicated below: U.B.I. Number: 601 559 419 Date: July 15, 1994 Given under my hand and the seal of the State of Washington at Olympia, the State Capital /s/ Ralph Munro ------------------------------- Ralph Munro, Secretary of State [SEAL] 41 ARTICLES OF INCORPORATION OF BSQUARE CONSULTING, INC. The undersigned individuals, Albert T. Dosser, Peter R. Gregory and William T. Baxter, for the purpose of forming a corporation under the laws of the State of Washington, and in pursuance thereof, hereby execute the following Articles of Incorporation in duplicate form and state as follows: I. NAME The name of this corporation shall be: BSQUARE CONSULTING, INC. II. AUTHORIZED SHARES The number of shares this corporation shall be authorized to issue will be 100,000 shares of a single class. III. REGISTERED AGENT The street address of this corporation's initial registered office is 777 108th Avenue N.E., Suite 1900, Bellevue, Washington 98004, and the name of its initial registered agent located at the above address is Patricia A. Murray, Esq. IV. INCORPORATORS The names and addresses of the incorporators are set forth below: Albert T. Dosser 16340 N.E. 83rd Street, Apt. E-125 Redmond, Washington 98052 Peter R. Gregory 13423 N.E. 115th Court Redmond, Washington 98052 -1- 42 William T. Baxter 3233 168th Place S.E. Bellevue, Washington 98008 V. PURPOSE This corporation has the purpose of engaging in any lawful business activity under the Washington Business Corporation Act but is being formed more specifically for the purpose of providing computer software consulting services. VI. POWERS This corporation shall have the same powers as an individual to do all things necessary or convenient to carry out its business and affairs, including, without limitation power: (1) to sue and be sued, complain and defend in its corporate name; (2) to have a corporate seal, which may be altered at will, and to use it, or a facsimile of it, by impressing or affixing it or in any other manner reproducing it; (3) to make and amend bylaws, not inconsistent with these Articles of Incorporation or with the laws of this state, for managing the business and regulating the affairs of the corporation; (4) to purchase, receive, lease, or otherwise acquire, and own, hold, improve, use, and otherwise deal with, real or personal property, or any legal or equitable interest in property, wherever located; (5) to sell, convey, mortgage, pledge, lease, exchange, and otherwise dispose of all or any part of its property; (6) to purchase, receive, subscribe for, or otherwise acquire, own, hold, vote, use, sell, mortgage, lend, pledge, or otherwise dispose of, and deal in and with shares or other interests in, or obligations of, any person; -2- 43 (7) to make contracts, incur liabilities, borrow money, issue notes, bonds, and other obligations (which may be convertible into or include the option to purchase other securities of the corporation), and secure any of its obligations by mortgage or pledge of any of its property, franchises, or income; (8) to make guarantees respecting the contracts, securities, or obligations of any person (including, but not limited to, any shareholder, affiliated or unaffiliated individual, domestic or foreign corporation, partnership, association, joint venture or trust) to the extent permitted by the Washington Business Corporation Act as amended from time to time; (9) to lend money, invest and reinvest its funds, and receive and hold real and personal property as security for repayment; (10) to be a promoter, partner, member, associate, or manager of any partnership, joint venture, trust, or other entity; (11) to conduct its business, locate offices, and exercise the powers granted by this title within or without this state; (12) to elect, appoint, or hire officers, employees, and other agents of the corporation, define their duties, fix their compensation, and lend them money and credit; (13) to fix the compensation of directors, and lend them money and credit; (14) to pay pensions and establish pension plans, pension trusts, profit sharing plans, share bonus plans, share option plans, and benefit or incentive plans for any or all of its current or former directors, officers, employees, and agents; (15) to make donations for the public welfare or for charitable, scientific, or educational purposes; (16) to transact any lawful business that will aid governmental policy; and -3- 44 (17) to make payments or donations, or do any other act, not inconsistent with law, that furthers the business and affairs of the corporation. VII. DURATION This corporation shall have perpetual existence. VIII. DIRECTORS The number of directors of this corporation shall be determined in the manner provided in the Bylaws of the corporation, and may be increased or decreased from time to time as specified in the Bylaws. There shall always be at least one (1) director. The initial Board of Directors shall consist of three (3) directors and the names and addresses of the persons who shall serve as directors until the first annual meeting of shareholders or until their successors are elected and qualified, unless they sooner resign or are removed, are: Albert T. Dosser 16340 N.E. 83rd Street, Apt. E-125 Redmond, Washington 98052 Peter R. Gregory 13423 N.E. 115th Court Redmond, Washington 98052 William T. Baxter 3233 168th Place S.E. Bellevue, Washington 98008 IX. BYLAWS The Board of Directors shall adopt initial Bylaws of this corporation that are not inconsistent with the Washington Business Corporation Act or these Articles of Incorporation. The Board of Directors shall also have the power to alter, amend or repeal the Bylaws or to adopt new Bylaws subject to repeal or change by action of the shareholders. -4- 45 IN WITNESS WHEREOF, the incorporator hereunto executed this document as of this 13th day of July, 1994. /s/ Albert T. Dosser ------------------------------- Albert T. Dosser, Incorporator /s/ Peter R. Gregory ------------------------------- Peter R. Gregory, Incorporator /s/ William T. Baxter ------------------------------- William T. Baxter, Incorporator -5- EX-3.1(A) 3 FORM OF AMENDED AND RESTATED ARTICLES OF INCORP. 1 EXHIBIT 3.1(a) FORM OF AMENDED AND RESTATED ARTICLES OF INCORPORATION OF BSQUARE CORPORATION ARTICLE I NAME The name of the corporation (the "Corporation") is BSQUARE Corporation. ARTICLE II AUTHORIZED SHARES 2.1 AUTHORIZED CAPITAL. The total authorized number of shares of the Corporation is Sixty Million (60,000,000) shares; Fifty Million (50,000,000) shares of common stock without par or ascribed value; Ten Million (10,000,000) shares of preferred stock without par or ascribed value. 2.2 ISSUANCE OF PREFERRED STOCK IN SERIES. The Preferred Stock may be issued from time to time in one or more series in any manner permitted by law and the provisions of these Articles of Incorporation, as determined from time to time by the Board of Directors and stated in the resolution or resolutions providing for the issuance thereof, prior to the issuance of any shares thereof. The Board of Directors shall have the authority to fix and determine and to amend, subject to the provisions hereof, the designations, powers, preferences and relative, participating, optional or other rights, if any, and qualifications, limitations or other restrictions of the shares of any series that is wholly unissued or to be established and the number of shares constituting any such series. Unless otherwise specifically provided in the resolution establishing any series, the Board of Directors shall further have the authority, after the issuance of shares of a series whose number it has designated, to amend the resolution establishing such series to decrease the number of shares of that series, but not below the number of shares of such series then outstanding. (a) Dividends. The holders of shares of the Preferred Stock shall be entitled to receive dividends, out of the funds of the Corporation legally available therefor, at the rate and at the time or times as may be provided by the Board of Directors in designating a particular series of Preferred Stock. The holders of the Preferred Stock shall not be entitled to receive any dividends thereon, unless otherwise provided by the Board of Directors in designating a particular series of Preferred Stock. (b) Liquidation. In the event of any liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, then, before any distribution shall be made to the holders of the Common Stock, the holders of the Preferred Stock at the time outstanding shall be entitled to be paid the preferential amount or amounts per share as may be provided by the Board of Directors in designating a particular series of Preferred Stock, plus dividends accrued thereon to the date of such payment. In designating a particular series of Preferred Stock, the Board of Directors may also provide that such series is senior, on a par with or subordinate in order of priority to any other existing or later issued series of Preferred Stock in respect of distribution of amounts upon the liquidation, dissolution or winding up of the affairs of the Corporation. The holders of the Preferred Stock shall not be entitled to receive any distributive amounts upon the liquidation, dissolution or winding up of the affairs of the -1- 2 Corporation, unless otherwise provided by the Board of Directors in designating a particular series of Preferred Stock. (c) Conversion. Shares of Preferred Stock may be convertible to shares of Common Stock at such rate and subject to such adjustments as may be provided by the Board of Directors in designating a particular series of Preferred Stock. (d) Redemption. The Preferred Stock may be redeemable in such amounts, and at such time or times as may be provided by the Board of Directors in designating a particular series of Preferred Stock. In any event, such Preferred Stock may be repurchased by the Corporation only to the extent legally permissible. (e) Voting Rights. Holders of Preferred Stock shall have such voting rights as may be provided by the Board of Directors in designating a particular series of Preferred Stock. ARTICLE III DIRECTORS The Board of Directors shall be set at seven. At the first election of directors after the Corporation is a Public Company, as defined below, the Board of Directors shall be divided into three (3) classes, as determined by the Board of Directors, with said classes to be as equal in number as may be possible, which classes shall be elected for the terms set forth below:
Class Term ------- ------- Class 1 1 Year Class 2 2 Years Class 3 3 Years
Thereafter, each Director's term shall be three (3) years, and each Director shall serve for the term he or she was elected and thereafter until his or her successor is elected and qualified (or the number of directors is reduced), or until his or her death, resignation or removal from office. Directors need not be shareholders of the Corporation or residents of the State of Washington. Written ballots are not required in the election of Directors. For purposes of these Articles of Incorporation, the Corporation shall be a "Public Company" at such time and for so long as it has a class of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, or any successor statute (the "Exchange Act"), or is otherwise subject to the reporting requirements of Section 15(d) of the Exchange Act. Newly created directorships resulting from any increase in the number of Directors or any vacancies on the Board of Directors resulting from death, resignation, removal or other cause shall be filled by the affirmative vote of a majority of the remaining Directors then in office, even though less than a quorum of the Board of Directors. Any Director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of Directors in which the new directorship was created or in which the vacancy occurred and thereafter until such Director's successor shall have been elected and qualified (or the number of directors is reduced). No decrease in the number of Directors constituting the Board of Directors shall shorten the term of any incumbent Director. -2- 3 ARTICLE IV PREEMPTIVE RIGHTS Shareholders of the Corporation shall have no preemptive rights to acquire additional shares of the Corporation. ARTICLE V CUMULATIVE VOTING The right to cumulate votes in the election of Directors shall not exist with respect to shares of stock of the Corporation. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS (a) The capitalized terms in this Article 6 shall have the meanings set forth in RCW 23B.08.500. (b) The Corporation shall indemnify and hold harmless each individual who is or was serving as a Director or officer of the Corporation or who, while serving as a Director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, against any and all Liability incurred with respect to any Proceeding to which the individual is or is threatened to be made a Party because of such service, and shall make advances of reasonable Expenses with respect to such Proceeding, to the fullest extent permitted by law, without regard to the limitations in RCW 23B.08.510 through 23B.08.550; provided, however, that the payment of Expenses in advance of the final disposition of a Proceeding shall be made upon delivery to the Corporation of an undertaking, by or on behalf of such Director or officer, to repay all amounts so advanced if it shall ultimately be determined that such Director or officer is not entitled to be indemnified under this Article or otherwise; provided further, that no such indemnity shall indemnify any Director or officer from or on account of (1) acts or omissions of the Director or officer finally adjudged to be intentional misconduct or a knowing violation of law; (2) conduct of the Director or officer finally adjudged to be in violation of RCW 23B.08.310; or (3) any transaction with respect to which it was finally adjudged that such Director or officer personally received a benefit in money, property, or services to which the Director or officer was not legally entitled. Except as provided in Subsection (f) of this Article, the Corporation shall not indemnify a Director or officer in connection with a Proceeding (or part thereof) initiated by the Director or officer unless such Proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. (c) The Corporation may purchase and maintain insurance on behalf of an individual who is or was a director, officer, employee, or agent of the Corporation or, who, while a director, officer, employee, or agent of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise against Liability asserted against or incurred by -3- 4 the individual in that capacity or arising from the individual's status as a director, officer, employee, or agent, whether or not the Corporation would have power to indemnify the individual against such Liability under RCW 23B.08.510 or 23B.08.520. (d) If, after the effective date of this Article 6, the Act is amended to authorize further indemnification of Directors or officers, then Directors and officers of the Corporation shall be indemnified to the fullest extent permitted by the Act as so amended. (e) To the extent permitted by law, the rights to indemnification and advance of reasonable Expenses conferred in this Article 6 shall not be exclusive of any other right which any individual may have or hereafter acquire under any statute, provision of the Bylaws, agreement, vote of shareholders or disinterested directors, or otherwise. The right to indemnification conferred in this Article 6 shall be a contract right upon which each Director or officer shall be presumed to have relied in determining to serve or to continue to serve as such. Any amendment to or repeal of this Article 6 shall not adversely affect any right or protection of a Director or officer of the Corporation for or with respect to any acts or omissions of such Director or officer occurring prior to such amendment or repeal. (f) If a claim under this Article is not paid in full by the Corporation within sixty (60) days after a written claim has been received by the Corporation, except in the case of a claim for expenses incurred in defending a proceeding in advance of its final disposition, in which case the applicable period shall be twenty (20) days, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, to the extent successful in whole or in part, the Director or officer shall be entitled to be paid also the expense of prosecuting such claim. Neither the failure of the Corporation (including its Board of Directors, its shareholders or independent legal counsel) to have made a determination prior to the commencement of such action that indemnification of or reimbursement or advancement of expenses to the claimant is proper in the circumstances, nor an actual determination by the Corporation (including its Board of Directors, its shareholders or independent legal counsel) that the Director or officer is not entitled to indemnification or to the reimbursement or advancement of expenses, shall be a defense to the action or create a presumption that the Director or officer is not so entitled. (g) If the Corporation indemnifies or advances expenses to a Director or officer pursuant to this Article 6 in connection with a Proceeding by or in the right of the Corporation, the Corporation shall report the indemnification or advance in writing to the shareholders with or before the notice of the next shareholders' meeting. (h) If any provision of this Article 6 or any application thereof shall be invalid, unenforceable, or contrary to applicable law, the remainder of this Article 6, and the application of such provisions to individuals or circumstances other than those as to which it is held invalid, unenforceable, or contrary to applicable law, shall not be affected thereby. ARTICLE VII INTERESTED TRANSACTIONS (1) No contracts or other transactions between the Corporation and any other corporation, and no act of the Corporation shall in any way be affected or invalidated by the fact that any of the directors or shareholders of the Corporation are pecuniarily or otherwise interested in, or are directors or officers of, such other corporation; and -4- 5 (2) Any director or shareholder individually, or any firm of which any director or shareholder may be a member, may be a party to, or may be pecuniarily or otherwise interested in, any contracts or transactions of the Corporation, provided that the fact that he or such firm is so interested shall be disclosed or shall have been known to the Board of Directors or a majority thereof. ARTICLE VIII SHAREHOLDER ACTIONS BY CONSENT In accordance with RCW 23B.07.040, any action that may be taken at a meeting of the Corporation's shareholders may be taken by written consent by the shareholders holding of record or otherwise entitled to vote in the aggregate not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote on the action were present and voted. If action is taken by less than unanimous consent, the Corporation shall give nonconsenting shareholders prior notice of such action; provided that if the action is of a type that would constitute a significant business transaction under RCW 23B.19.020(15), notice must be given no fewer than 20 days prior to the effective date of the action (such prior or 20 day period, a "Notice Period"). Such notice shall include the resolution approved by the shareholders by written consent and shall be hand delivered or sent first-class mail to each nonconsenting shareholder at the address on the books and records of the Corporation. Unless the written consent specifies a different effective date, the action is effective when consents sufficient to authorize the action have been delivered to the Corporation and the Notice Period has been satisfied. If the action is of a type that would entitle shareholders to exercise dissenters' rights under RCW 23B.13.020(1), then (i) the notice must comply with RCW 23B.13.220(2), (ii) RCW 23B.13.210 shall not apply, and (iii) all nonconsenting shareholders are entitled to receive the notice, demand payment under RCW 23B.13.230 and assert other dissenters' rights to which they are by law entitled. ARTICLE IX REGISTERED OFFICE The address of the registered office of the Corporation is 1505 Westlake Avenue N., Suite 300, Seattle, Washington, and the name of the registered agent at such address is Michael J. Erickson. ARTICLE X AMENDMENT OF ARTICLES The Corporation reserves the right to amend, alter, change or repeal any provision contained in these Articles of Incorporation, in the manner now or hereafter prescribed by law, and all rights and powers conferred herein on shareholders and directors are subject to this reserved power. -5- 6 ARTICLE XI LIMITATION OF DIRECTOR LIABILITY No director of the Corporation shall be personally liable to the Corporation or its shareholders for monetary damages for his or her conduct as a director on or after the date this Article becomes effective, except for: (i) acts or omissions that involve intentional misconduct or a knowing violation of law by the director, (ii) approval of certain distributions or loans in violation of RCW 23B.08.310, or (iii) any transaction from which the director will personally receive a benefit in money, property or services to which the director is not legally entitled. If, after approval by shareholders of this Article, the Washington Business Corporation Act is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Washington Business Corporation Act, as so amended. Any amendment to or repeal of this Article shall not adversely affect any right or protection of a director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. ARTICLE XII REMOVAL OF DIRECTORS Any Director or the entire Board of Directors may be removed with or without cause by the holders of not less than a majority of the shares then entitled to vote at an election of Directors; provided, however, beginning at such time and for so long as the Corporation is a Public Company (as defined in Article III), no Director may be removed without "Cause," as defined below. Such action may be taken at any regular or special meeting of the shareholders of the Corporation, or by unanimous written consent in lieu of a meeting, provided that notice of the proposed removal, which shall include a statement of the charges alleged against the Director(s) in the event of removal for Cause, shall have been duly given to the shareholders together with or as a part of the notice of the meeting. Where a question of the removal of a Director for Cause is to be presented for shareholder consideration while the Corporation is a Public Company, an opportunity must be provided to such Director to present his or her defense to the shareholders by a statement which must accompany or precede the notice of the meeting at which removal of such Director for Cause shall be considered. Under such circumstances the Director involved shall be served with notice of the meeting at which such action is proposed to be taken together with a statement of the specific charges and shall be given an opportunity to be present and to be heard at the meeting at which his or her removal is considered. For purposes of this Article XII, "Cause" for removal shall be limited to (a) action by a Director involving willful malfeasance having a material adverse effect on the Corporation or (b) a Director being convicted of a felony; provided that any action by a Director shall not constitute "Cause" if, in good faith, such Director believed such action to be in or not opposed to the best interests of the Corporation, or if a Director shall be entitled, under applicable law or the Articles of Incorporation or Bylaws of the Corporation, to be indemnified with respect to such action. -6- 7 ARTICLE XIII SPECIAL MEETINGS OF THE SHAREHOLDERS The Chairman of the Board of Directors, the President of the Corporation or the Board of Directors may call special meetings of the shareholders for any purpose. Further, a special meeting of the shareholders shall be held if the holders of not less than twenty-five percent (25%) of all the votes entitled to be cast on any issue proposed to be considered at such special meeting have dated, signed and delivered to the Secretary of the Corporation one or more written demands for such meeting, describing the purposes for which is to be held. DATED: , 1999 ----------- -------------------------------------- William T. Baxter, President and Chief Executive Officer -7- EX-3.2 4 BYLAWS AND ALL AMENDMENTS THERETO 1 EXHIBIT 3.2 AMENDMENTS TO BYLAWS August 15, 1998: Section 2 of Article V of the Company's Bylaws was amended as follows: Section 2. Annual Meeting. Subject to the foregoing provisions, the date, the time and location of the annual meeting of the shareholders shall be determined each year by the Board of Directors. At said annual meeting, directors of the Corporation shall be elected, reports of the affairs of the Corporation shall be considered and any other business may be transacted which is within the powers of the shareholders to transact. 2 AMENDMENTS TO THE BYLAWS January 29, 1998: - - Section 2 of Article II of the Company's Bylaws was amended to increase the number of directors on the Company's Board of Directors from three to seven - - Added Article X, which reads as follows: ARTICLE X INDEMNIFICATION Section 1. Right to Indemnification Each person who was, is or is threatened to be made a named party to or is otherwise involved (including, without limitation, as a witness) in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal (hereinafter a "proceeding"), by reason of the fact that he or she is or was a Director or officer of the corporation or, that being or having been such a Director or officer or an employee of the corporation, he or she is or was serving at the request of the corporation as a Director, officer, partner, trustee, employee or agent of another corporation or of a partnership, joint venture, trust, employee benefit plan or other enterprise (hereinafter an "indemnitee"), whether the basis of a proceeding is alleged action in an official capacity as such a Director, officer, partner, trustee, employee or agent or in any other capacity while serving as such a Director, officer, partner, trustee, employee or agent, shall be indemnified and held harmless by the corporation against all expense, liability and loss (including counsel fees, judgments, fines, ERISA excise taxes or penalties and amounts to be paid in settlement) actually and reasonably incurred or suffered by such indemnitee in connection therewith, and such indemnification shall continue as to an indemnitee who has ceased to be a Director, officer, partner, trustee, employee or agent and shall inure to the benefit of the indemnitee's heirs executors and administrators. Except as provided in Section 2 of this Article 10 with respect to proceedings seeking to enforce rights to indemnification, the corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if a proceeding (or part thereof) was authorized or ratified by the Board. The right to indemnification conferred in this Article shall be a contract right. 3 Section 2. Restrictions on Indemnification No indemnification shall be provided to any such indemnitee for acts or omissions of the indemnitee finally adjudged to be intentional misconduct or a knowing violation of law, for conduct of the indemnitee finally adjudged to be in violation of Section 23B.08.310 of the Washington Business Corporation Act, for any transaction with respect to which it was finally adjudged that such indemnitee personally received a benefit in money, property or services to which the indemnitee was not legally entitled or if the corporation is otherwise prohibited by applicable law from paying such indemnification, except that if Section 23B.08.560 or any successor provision of the Washington Business Corporation Act is hereafter amended, the restrictions on indemnification set forth in this Section 2 shall be as set forth in such amended statutory provision. Section 3. Advancement of Expenses The right to indemnification conferred in this Article shall include the right to be paid by the corporation the expenses incurred in defending any proceeding in advance of its final disposition (hereinafter an "advancement of expenses"). An advancement of expenses shall be made upon delivery to the corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such indemnitee is not entitled to be indemnified for such expenses under this Section 3. Section 4. Right of Indemnitee to Bring Suit If a claim under Section 1 or 3 of this Article 10 is not paid in full by the corporation within sixty days after a written claim has been received by the corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty days, the indemnitee may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim. If successful in whole or in part, in any such suit or in a suit brought by the corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. The indemnitee shall be presumed to be entitled to indemnification under this Article upon submission of a written claim (and, in an action brought to enforce a claim for an advancement of expenses, where the required undertaking has been tendered to the corporation) and thereafter the corporation shall have the burden of proof to overcome the presumption that the indemnitee is so entitled. Section 5. Procedures Exclusive Pursuant to Section 23B.08.560(2) or any successor provision of the Washington Business Corporation Act, the procedures for indemnification and advancement of expenses set forth in this Article are in lieu of the procedures 4 required by Section 23B.08.550 or any successor provision of the Washington Business Corporation Act. Section 6. Nonexclusivity of Rights The right to indemnification and the advancement of expenses conferred in this Section shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Articles of Incorporation or Bylaws of the corporation, general or specific action of the Board, contract or otherwise. Section 7. Insurance, Contracts and Funding The corporation may maintain insurance, at its expense, to protect itself and any Director, officer, partner, trustee, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the Washington Business Corporation Act. The corporation may enter into contracts with any Director, officer, partner, trustee, employee or agent of the corporation in furtherance of the provisions of this Article and may create a trust fund, grant a security interest or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided in this Article. Section 8. Indemnification of Employees and Agents of the Corporation The corporation may, by action of the Board, grant rights to indemnification and advancement of expenses to employees and agents or any class or group of employees and agents of the corporation (i) with the same scope and effect as the provisions of this Article with respect to the indemnification and advancement of expenses of Directors and officers of the corporation; (ii) pursuant to rights granted pursuant to, or provided by, the Washington Business Corporation Act; or (iii) otherwise consistent with law. Section 9. Personal Serving Other Entities Any person who, while a Director, officer or employee of the corporation, is or was serving (a) as a Director or officer of another foreign or domestic corporation of which a majority of the shares entitled to vote in the election of its Directors is held by the corporation or (b) as a partner, trustee or otherwise in an executive or management capacity in a partnership, joint venture, trust or other enterprise of which the corporation or a wholly owned subsidiary of the corporation is a general partner or has a majority ownership shall be deemed to be so serving at the request of the corporation and entitled to indemnification and advancement of expenses under Sections 1 and 3 of this Article 10. 5 BYLAWS OF BSQUARE CONSULTING, INC. ARTICLE I. Place of Business Section 1. PRINCIPAL LOCATION. The principal office of the corporation for the transaction of business shall be at such location as the Board of Directors shall determine from time to time. Section 2. ADDITIONAL OFFICES. Additional business offices may be established at such other places as the Board of Directors may from time to time designate. ARTICLE II. Directors Section 1. INITIAL BOARD OF DIRECTORS. Each member of the Initial Board of Directors, appointed through the Articles of Incorporation, shall serve until his death, resignation, until removed, or until a Board of Directors is elected by the shareholders at the first shareholders meeting. Section 2. NUMBER. The number of directors shall be not less than one (1), with the exact number to be fixed from time to time by the Board of Directors, provided that until otherwise changed by resolution of the Board of Directors, the number of directors shall be three (3). Section 3. TERM. The directors shall be elected at the annual meeting of shareholders and each director shall be elected to serve for a term of one (1) year; provided that in the event of failure to hold such meeting or to hold such election at such meeting, the directors may be elected at any special meeting of the stockholders called for that purpose. Section 4. QUORUM. A majority of the directors shall constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. Section 5. NOTICES. Regular meetings of the Board of Directors may be held without notice of the time, date, location or purpose of the meeting. Special meetings shall be preceded by at least, two days notice of the time, date and location of said meeting. Any notice of a meeting required to be given or which may be given to a director shall be personally served or mailed by United States Mail, postage prepaid, properly addressed to the last known address of -1- 6 such director and, if mailed, shall be deemed to be given and received three (3) days following the date of mailing. Any director may waive notice of any meeting, so long as said waiver is in writing, signed by the director entitled to notice and delivered to the corporation for inclusion in the minutes of the corporation. Notwithstanding the foregoing, attendance of a director at a meeting shall constitute a waiver of notice of such meeting except where the director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened and where said director does not thereafter vote for or assent to any action taken at the said meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. Section 6. POWERS AND DUTIES. The Board of Directors shall be responsible for the management of the business of the corporation, and, subject to the restrictions imposed by law, by the Articles of Incorporation, or by these Bylaws, may exercise all the powers of the corporation. Section 7. COMMITTEES. By resolution adopted by a majority of the full Board of Directors, the Board of Directors may appoint from among its members an Executive Committee of not less than two nor more than five members, one of whom shall be the President (who shall be the Chairman of the Executive Committee). The Board of Directors may also designate one or more of its members as alternates to serve as a member or members of the Executive Committee in the absence of a regular member or members. The Executive Committee shall have and may exercise all the authority of the Board of Directors during the intervals between meetings of the Board of Directors, except that the Executive Committee (and other committees) shall not have the authority to (1) declare dividends or distributions, except according to a general formula or method prescribed by the Board of Directors, (2) approve or recommend to shareholders actions or proposals required by this title to be approved by shareholders, (3) fill vacancies on the Board of Directors or any committee thereof, (4) amend the Articles of Incorporation, (5) adopt, amend or repeal the Bylaws, (6) authorize or approve the issuance or reacquisition of shares unless pursuant to general formula or method specified by the Board of Directors, (7) fix compensation of any director for serving on the Board of Directors or any committee, (8) approve a plan of merger, consolidation or exchange of shares not requiring shareholder approval, or (9) appoint other committees of the Board of Directors. The Board of Directors may also appoint from among its own members such other committees as the Board of Directors may determine, which shall in each case consist of not less than two (2) directors, and which shall have such powers and duties as shall from time to time be prescribed by the Board. A majority of the members of any committee may fix its rules of procedure. All actions by any committee shall be reported to the Board of Directors at a meeting succeeding such action and shall be subject to revision, alteration, and approval by the Board of Directors; provided that no rights or acts of third parties shall be affected by any such revision or alteration. Members of any committee may participate in a meeting of such committee by means of a conference telephone or similar communications equipment by means of which all persons -2- 7 participating in the meeting can hear each other at the same time, and participation by such means shall constitute presence in person at a meeting. Section 8. SALARY. Directors may receive a salary for their services as directors but any such salary must be approved by unanimous vote of all of the directors. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent or otherwise and receiving compensation therefor so long as the compensation is approved by the Board of Directors. Section 9. VACANCY. Any vacancy that occurs in the Board of Directors may be filled by a majority of the remaining directors or by the shareholders, and each director so elected shall hold office until his successor is selected at the next meeting of shareholders held for that purpose. Section 10. CONSENT AND WAIVER OF NOTICE. Any transactions of the Board of Directors at any meeting thereof, regardless of how or whether call was made or notice given, shall be as valid as though transacted at a meeting duly held after regular call and notice, if a quorum be present, and if, either before or after the meeting, each of the directors entitled to vote and not present in person sign a written waiver of notice, or a consent to the holding of such meeting, or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the Secretary of this corporation and made a part of the records of the meeting. Whenever any notice whatsoever is required to be given under the provisions of these Bylaws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the actual giving of such notice. Any action, which under any provision of these Bylaws might be taken at a meeting of the directors, may be taken without a meeting if a record or memorandum thereof be made in writing and signed by all of the directors who would be entitled to vote at a meeting for such purpose and such record or memorandum be filed with the Secretary and made a part of the corporate records. A director who is present at a meeting at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as Secretary before the adjournment of the meeting or shall forward such dissent by registered mail to the Secretary immediately after the adjournment. Section 11. CONFERENCE TELEPHONE CALLS. Members of the Board of Directors may participate in a meeting of such Board by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time, and participation by such means shall constitute presence in person at a meeting. -3- 8 ARTICLE III. Officers Section 1. APPOINTMENT AND QUALIFICATIONS. The officers of this corporation shall consist of a President, and such other officers as may be chosen by the Board of Directors. No officer shall execute, acknowledge or verify any instrument in more than one capacity if such instrument be required by law or these Bylaws to be executed, acknowledged or verified, as the case may be, by any two or more officers, except that when all of the issued and outstanding shares of the corporation is owned by one shareholder, one person may hold all or any combination of offices and any such one person may execute, acknowledge or verify any such instrument in more than one capacity. Section 2. TERMS AND COMPENSATION. The terms of office and the salary of each of said officers and the manner and time of the payment of such salaries shall be fixed and determined by the Board of Directors and may be altered by said Board from time to time, and at any time at its pleasure. Any officer may be removed at any time by the Board. ARTICLE IV. Powers and Duties of Officers Section 1. PRESIDENT. The powers and duties of the President shall be: (1) To preside at all meetings of the Board of Directors or of the shareholders, regular and special. (2) Except when otherwise directed by the Board of Directors, to affix the signature of the corporation to all deeds, conveyances, mortgages, bonds, contracts and other instruments in writing and other papers that may require the same, to sign certificates of shares of the corporation; and in general to supervise and control all of the business affairs of the corporation. Subject to the direction of the Board of Directors, the President shall supervise and control all officers, agents and employees of the corporation. Unless otherwise directed by the Board of Directors or by law, all deeds, conveyances, mortgages, bonds, contracts and other instruments of the corporation need only be signed by the President and need not be signed by the Secretary or any other officer of the corporation. (3) To enforce these Bylaws and perform all of the duties incident to the office and which are required by law. Section 2. VICE-PRESIDENT. In case of the absence, disability or death of the President, the Vice-President of this corporation, if the corporation shall have a Vice President, shall have such powers and perform such duties as may be granted or prescribed by the Board of Directors from time to time. -4- 9 At all times, the Vice-President shall have the power to countersign such instruments, if any, as may by law require execution, acknowledgment, or verification by two officers. Section 3. SECRETARY. The powers and duties of the Secretary, if the corporation shall have a Secretary shall be: (1) To keep full and complete records of the meetings of the Board of Directors and of the shareholders. (2) To keep the seal of the corporation and to affix the same to all instruments which may require it. (3) To make service and publication of all notices that may be necessary or proper, without command or direction from anyone. To transfer upon the books of the corporation any and all shares; provided, however, that no certificate of shares shall be issued or delivered, or if issued or delivered, shall have any validity whatsoever, until and unless it has been signed by the President of the corporation. (4) Generally to have such powers and perform such duties as pertain to his office and as may be required by the Board of Directors. Section 4. TREASURER. If the corporation shall have a Treasurer, the Treasurer shall receive all moneys belonging to or paid into the corporation and give receipts therefor; and shall deposit such moneys, as the treasurer shall be directed by the Board of Directors, with one or more solvent and reputable banks to be designated by the Board of Directors; and shall keep full and complete records of the funds received and the disbursement thereof. The treasurer shall render to the shareholders at the regular annual meeting thereof, and also to the Board of Directors at any meeting thereof, or from time to time whenever the Board of Directors or the President may require, an account of all transactions as Treasurer and of the financial condition of the corporation, and shall perform such other duties as may from time to time be prescribed by the Board of Directors. The treasurer shall exhibit or cause to be exhibited the books of the corporation to the Board of Directors, or to any committee appointed by the Board, or to any director on application during business hours, or to any other person entitled to inspect such books pursuant to pertinent provisions of the Business Corporation Act of the State of Washington. At all times, the Treasurer shall have the power to countersign such instrument, if any, as may by law require execution, acknowledgment, or verification by two officers. The Treasurer shall have such powers and perform such duties as pertain to the office of the treasurer and as may be required by the Board of Directors. Section 5. OTHER OFFICERS. The Board of Directors may appoint such other officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the Bylaws or as the Board of Directors may from time to time determine. -5- 10 ARTICLE V. Shareholders Section 1. PLACE OF MEETING. Notwithstanding anything to the contrary in these Bylaws, any meeting (whether annual, special or adjourned) of the stockholders of this corporation may be held at any place within or without the State of Washington which has been designated therefor by the Board of Directors. Section 2. ANNUAL MEETING. Subject to the foregoing provisions, the annual meeting of the stockholders shall be held at the principal office of the corporation in the City of Bellevue, State of Washington, at the hour of 9:00 a.m. on 15th day of February in each year, if not a legal holiday, and if a legal holiday, then on the next succeeding business day not a legal holiday. At said annual meeting, directors of the corporation shall be elected, reports of the affairs of the corporation shall be considered and any other business may be transacted which is within the powers of the stockholders to transact. The corporation shall notify shareholders of the date, time and place of each annual meeting and each special meeting of the shareholders. Said notice shall be given no fewer than 10 nor more than 60 days before the meeting date, except that notice of a shareholders' meeting to act on an amendment to the Articles of Incorporation, a plan of merger or share exchange, a proposed sale of assets pursuant to RCW 23B.12.020, or the dissolution of the corporation shall be given no fewer than 20 nor more than 60 days before the meeting date. In the case of a notice of a special meeting of shareholders, the notice shall also include a description of the purpose or purposes for which the meeting is called. Notice of special meetings of stockholders shall be given by written notice personally served on each shareholder, or deposited in the United States mail, postage prepaid, and addressed to him at his last known post office address appearing upon the books of the corporation. Such notice, if mailed, shall be deemed to be given and received three (3) days following the date of mailing. In the event the annual meeting be not held, or the directors be not elected thereat, the directors may be elected at a special meeting held for that purpose, and it shall be the duty of the President, the Vice-President, or the Secretary, upon the demand of any shareholder entitled to vote at such meeting, to call such special meeting. Section 3. SPECIAL MEETINGS. Subject to Section (2) of this Article, special meetings of the shareholders may be called at any time by the President or by the Board of Directors or by one or more shareholders holding not less than one-tenth (1/10) of the voting power of the corporation. Section 4. CONSENT AND WAIVER OF NOTICE. Any transactions of the shareholders at any meeting thereof, regardless of how or whether call was made or notice given, shall be as valid as though transacted at a meeting duly held after regular call and notice, if a quorum be present, either in person or by proxy, and if, either before or after the meeting, each of the shareholders entitled to vote and not present in person or by proxy sign a written -6- 11 waiver of notice, or a consent to the holding of such meeting, or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the Secretary and made a part of the records of the meeting. Whenever any notice whatsoever is required to be given under the provisions of these Bylaws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the actual giving of such notice. A shareholder's attendance at a meeting waives objection to lack of notice or defective notice of the meeting, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting. A shareholder waives objection to consideration of a particular matter at a meeting that is not within the purpose or purposes described in the meeting notice unless the shareholder objects to consideration of the matter when it is presented. Any action, which under any provisions of these Bylaws might be taken at a meeting of the shareholders, may be taken without a meeting if a record or memorandum thereof be made in writing and signed by all of the holders of shares who would be entitled to vote at a meeting for such purpose and such record or memorandum be filed with the Secretary and made a part of the corporate records. The consent shall have the same force and effect as a unanimous vote of shareholders, and may be stated as such in any articles or document filed with the Secretary of State. Section 5. QUORUM, VOTING AND PROXIES. At all meetings of the shareholders (whether annual, special or adjourned) the presence in person or by proxy in writing of the holders of a majority of the shares entitled to vote at that meeting shall constitute a quorum for the transaction of business. Each share shall entitle the duly qualified and registered holder thereof to one vote. All proxies shall be in writing subscribed by the party entitled to vote the number of shares represented thereby, or by his duly authorized attorney, and no such proxy shall be valid or confer any right or authority to vote or act thereunder unless such proxy has been offered for filing to, and left with, the Secretary of the corporation prior to the meeting at which the same is to be used; provided, however, that in case any meeting of shareholders whatsoever (whether annual, special or adjourned) shall have been for any cause adjourned, proxies shall be valid and may be used at such adjourned meeting, which have been offered for filing to, and left with the Secretary of the corporation prior to the date upon which said adjourned meeting shall in fact be held. Once a share is represented at a meeting for any purpose other than solely to object to holding the meeting or transacting business at the meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment thereof, unless a new record date is or must be set for that adjourned meeting. An amendment to the Articles of Incorporation, adding, changing or reducing a quorum for a voting group greater or lesser than the simple majority specified above, or adding, changing or reducing a voting requirement from a simple majority shall be governed by RCW 23B.07.270. -7- 12 Section 6. ADJOURNMENTS. Any business which might be transacted at an annual meeting of the shareholders may be done at a special or at an adjourned meeting. If no quorum be present at any meeting of the stockholders (whether annual, special or adjourned) such meeting may be adjourned by those present from day to day, or from time to time, until such quorum be obtained, such adjournment and the reasons therefor being recorded in the journal or minutes of proceedings of the stockholders, and no notice whatsoever need be given of any such adjourned meeting if the time and place of such meeting be fixed at the meeting adjourned. Section 7. CONFERENCE TELEPHONE CALLS. Shareholders may participate in a meeting of shareholders by means of a conference telephone call or similar communication equipment by means of which all persons participating in the meeting can hear each other at the same time, and participation by such means shall constitute presence in person at a meeting. ARTICLE VI. Shares Section 1. CLASS. The shares of this corporation shall consist of such classes as may be authorized by the Articles of Incorporation as they may be amended from time to time. Section 2. CERTIFICATES. The shares of the corporation shall be represented by certificates prepared by the Board of Directors and signed by two officers of the corporation, unless the corporation has only one officer, in which case certificates for shares shall be signed by said officer. Each certificate shall be sealed with the seal of the corporation or a facsimile thereof, if any. The certificates shall be numbered consecutively and in the order in which they are issued; and a share register shall be maintained in which shall be entered the name of the person to whom the shares represented by each certificate are issued, the number and class or series of such shares, and the date of issue. Each certificate shall state upon the face thereof (i) that the corporation is organized under the laws of the state of incorporation, (ii) the name of the person to whom issued, (iii) the number and class of the shares, and the designation of the series, if any. Section 3. SUBSCRIPTIONS. Subscriptions to the shares shall be paid at such times and in such installments as the Board of Directors may determine. If default be made in the payment of any installment as required by such resolution, the Board may declare the shares and all previous payments thereon forfeited for the use of the corporation, if such payment remains in default twenty (20) days after written notice of the default has been sent to the subscriber, or in such other manner prescribed by law. Section 4. SHARE OPTIONS. The corporation may issue rights, options or warrants for the purchase of shares of the corporation. The Board of Directors shall determine the terms upon which the rights, options, or warrants are issued, their form and content, and the consideration for which the shares are to be issued. -8- 13 Section 5. RESTRICTION ON TRANSFER OF SHARES OR OTHER SECURITIES. (a) The Articles of Incorporation, an agreement among shareholders, or an agreement between shareholders and the corporation may impose restrictions on the transfer or registration of transfer of shares. The restriction does not affect shares issued before the restriction was adopted unless the holders of the shares are parties to the restriction agreement or voted in favor of the restriction. (b) A restriction on the transfer or registration of transfer of shares is valid and enforceable against the holder or a transferee of the holder if the restriction is authorized and its existence is noted conspicuously on the front or back of the certificate or is contained in the information statement. Unless so noted, a restriction is not enforceable against a person without knowledge of the restriction. (c) A restriction on the transfer or registration of transfer of shares is authorized: (1) to maintain the corporation's status when it is dependent on the number or identity of its shareholders; (2) to preserve exemptions under federal or state securities law; or (3) for any other reasonable purpose. (d) A restriction on the transfer or registration of transfer of shares may: (1) obligate the shareholder first to offer the corporation or other persons (separately, consecutively, or simultaneously) an opportunity to acquire the restricted shares; (2) obligate the corporation or other persons (separately, consecutively, or simultaneously) to acquire the restricted shares; (3) require the corporation, the holders of any class of its shares, or another person to approve the transfer of the restricted shares, if the requirement is not manifestly unreasonable; or (4) prohibit the transfer of the restricted shares to designated persons or classes of persons, if the prohibition is not manifestly unreasonable. Section 6. RETURNED CERTIFICATES. All certificates for shares changed or returned to the corporation for transfer shall be marked by the Secretary "Cancelled" with the date of cancellation; and the transaction shall be immediately recorded in the transfer book opposite the memorandum of their issue. The returned certificates shall be retained by the corporation and filed with the stock register. Section 7. LOST CERTIFICATES. Any person claiming a certificate for shares to be lost or destroyed shall make an affidavit or an affirmation of the fact and shall advertise the same in such manner as the Board of Directors may determine; and, if the directors require, -9- 14 shall give the corporation a bond of indemnity in form and with sureties satisfactory to the Board, in an amount to be fixed by the Board whereupon a new certificate may be issued of the same tenor and for the same number of shares as the certificate alleged to be lost or destroyed. ARTICLE VII. Books and Records Section 1. This corporation shall keep as permanent records minutes of all meetings of its shareholders and board of directors, a record of all actions taken by the shareholders or board of directors without a meeting, and a record of all actions taken by a committee of the board of directors exercising the authority of the board of directors on behalf of the corporation. Section 2. This corporation shall maintain appropriate accounting records. Section 3. This corporation or its agent shall maintain a record of its shareholders, in a form that permits preparation of a list of the names and addresses of all shareholders, in alphabetical order by class of shares showing the number and class of shares held by each. Section 4. This corporation shall maintain its records in written form or in another form capable of conversion into written form within a reasonable time. Section 5. The corporation shall keep a copy of the following records at its principal office: (a) its articles or restated articles of incorporation and all amendments to them currently in effect; (b) its bylaws or restated bylaws and all amendments to them currently in effect; (c) the minutes of all shareholders' meetings, and records of all action taken by shareholders' without a meeting, for the past three years; (d) the financial statements prepared pursuant to RCW 23B.16.200, for the past three years; (e) all written communications to shareholders generally within the past three years; (f) a list of the names and business addresses of its current directors and officers; and (g) its most recent annual report delivered to the secretary of state. -10- 15 ARTICLE VIII. Amendments These Bylaws may be amended or repealed and new and additional Bylaws may be made from time to time at any time by the Board of Directors. ARTICLE IX. Miscellaneous Provisions Section 1. INSTRUMENTS IN WRITING. Notwithstanding any other provision hereof, all checks, drafts and demands for money of the corporation shall be signed by such officer or officers, agent or agents, as the Board of Directors may from time to time by resolution designate. No officer, agent or employee of the corporation shall have the power to bind the corporation by contract or otherwise unless authorized to do so by the Board of Directors. Section 2. FISCAL YEAR. The fiscal year of this corporation shall be set by resolution of the Board of Directors. KNOW ALL MEN BY THESE PRESENTS: That we, the undersigned, being the Board of Directors of BSQUARE CONSULTING, INC., a Washington corporation, organized and existing under the laws of the State of Washington, do hereby certify that the foregoing code of Bylaws was duly adopted by resolution of the Board of Directors of the corporation on the ___ day of July, 1994. /s/ ALBERT T. DOSSER --------------------------------------------- Albert T. Dosser, Director /s/ PETER R. GREGORY --------------------------------------------- Peter R. Gregory, Director /s/ WILLIAM T. BAXTER --------------------------------------------- William T. Baxter, Director -11- EX-10.1 5 AMENDED AND RESTATED STOCK OPTION PLAN 1 EXHIBIT 10.1 BSQUARE CORPORATION AMENDED AND RESTATED STOCK OPTION PLAN 2 1. DEFINITIONS ....................................................................................1 2 PURPOSES .......................................................................................4 3 ADMINISTRATION .................................................................................4 (A) COMMITTEE ..............................................................................4 (B) APPOINTMENT OF COMMITTEE ...............................................................4 (C) POWERS; REGULATIONS ....................................................................4 (D) DELEGATION TO EXECUTIVE OFFICER ........................................................5 4 ELIGIBILITY ....................................................................................5 5 STOCK ..........................................................................................5 6 TERMS AND CONDITIONS OF OPTIONS ................................................................5 (A) NUMBER OF SHARES AND TYPE OF OPTION ....................................................5 (B) DATE OF GRANT ..........................................................................6 (C) OPTION PRICE ...........................................................................6 (D) DURATION OF OPTIONS ....................................................................6 (E) VESTING SCHEDULE AND EXERCISABILITY OF OPTIONS .........................................7 (F) ACCELERATION OF VESTING AND EXERCISABILITY .............................................7 (G) TERM OF OPTION .........................................................................8 (H) EXERCISE OF OPTIONS ....................................................................8 (I) PAYMENT UPON EXERCISE OF OPTION ........................................................9 (J) RIGHTS AS A SHAREHOLDER ...............................................................10 (K) TRANSFER OF OPTION ....................................................................10 (L) SECURITIES REGULATION AND TAX WITHHOLDING .............................................11 (M) STOCK DIVIDEND, REORGANIZATION OR LIQUIDATION .........................................12 (N) APPROVED TRANSACTIONS; CONTROL PURCHASE ...............................................13 7. EFFECTIVE DATE; TERM ..........................................................................14 8. NO OBLIGATIONS TO EXERCISE OPTION .............................................................14 9. NO RIGHT TO OPTIONS OR TO EMPLOYMENT ..........................................................14 10. APPLICATION OF FUNDS ..........................................................................14 11. INDEMNIFICATION OF COMMITTEE ..................................................................14 12. SHAREHOLDERS AGREEMENT ........................................................................15 13. SEPARABILITY ..................................................................................15 14. NON-EXCLUSIVITY OF THE PLAN ...................................................................15 15. EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION .........................................15 16. AMENDMENT OF PLAN .............................................................................15
3 BSQUARE CORPORATION AMENDED AND RESTATED STOCK OPTION PLAN 1. DEFINITIONS. Capitalized terms not defined elsewhere in the Plan shall have the following meanings (whether used in the singular or plural). (a) "AGREEMENT" means a written agreement approved by the Committee evidencing Options granted under the Plan. (b) "APPROVED TRANSACTION" means (i) a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act covering the offer and sale of Common Stock for the account of the Company to the public with aggregate proceeds paid to the Company of not less than $10,000,000 (after the deduction of underwriting commissions and offering expenses); (ii) the acquisition of the Company by another entity by means of merger, consolidation or other transaction or series of related transactions resulting in the exchange of the outstanding shares of the Company for securities of, or consideration issued, or caused to be issued by, the acquiring entity or any of its affiliates, provided, that after such event the shareholders of the Company immediately prior to the event own less than a majority of the outstanding voting equity securities of the surviving entity immediately following the event; (iii) any liquidation or dissolution of the Company; and (iv) any sale, lease, exchange or other transfer not in the ordinary course of business (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company. (c) "BOARD" means the Board of Directors of the Company. (d) "CODE" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute or statutes thereto. Reference to any specific section of the Code shall include any successor section. (e) "COMMITTEE" shall mean the Board, or the committee appointed by the Board pursuant to Section 3(b) of the Plan, if it is administering the Plan. (f) "COMMON STOCK" means the Common Stock, no par value, of the Company. (g) "COMPANY" means BSQUARE CORPORATION, a Washington corporation. (h) "CONTROL PURCHASE" means any transaction (or series of related transactions) in which any person, corporation or other entity (including any "person" as defined in Sections 1 4 13(d)(3) and 14(d)(2) of the Exchange Act, but excluding the Company and any employee benefit plan sponsored by the Company): (i) purchases any Common Stock (or securities convertible into Common Stock) for cash, securities or any other consideration pursuant to a tender offer or exchange offer unless by the terms of such offer the offeror, upon consummation thereof, would be the "beneficial owner" (as that term is defined in Rule 13d-3 under the Exchange Act) of less than 30% of the shares of Common Stock then outstanding; or (ii) becomes the "beneficial owner", directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in Rule 13d-3(d) under the Exchange Act in the case of rights to acquire the Company's securities); provided, however, that the foregoing shall not constitute a Control Purchase if the transactions or related transactions received the prior approval of a majority of all of the directors of the Company, excluding for such purpose the votes of directors who are directors or officers of, or have a material financial interest in any Person (other than the Company) who is a party to the event specified in either clauses (i) or (ii). (i) "COVERED EMPLOYEE" has the meaning given to it by Section 162(m)(3) of the Code. (j) "DATE OF GRANT" means that date the Committee has deemed to be the effective date of the Option for purposes of the Plan. (k) "DISABILITY" means any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months that renders the Optionee unable to engage in any substantial gainful activity. (l) "EFFECTIVE DATE" means at the time specified in the resolutions of the Board adopting the Plan. (m) "EMPLOYEES" means individuals employed by the Company or a Related Corporation. (n) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute or statutes thereto. Reference to any specific section of the Exchange Act shall include any successor section. (0) "EXECUTIVE OFFICER" shall be defined in Section 3(d). (p) "FAIR MARKET VALUE" means, if the Common Stock is publicly traded, the last sales price (or, if no last sales price is reported, the average of the high bid and low asked prices) for a share of Common Stock on that day (or, if that day is not a trading day, on the next preceding trading day), as reported by the principal exchange on which the Common Stock is listed, or, if the Common Stock is publicly traded but not listed on an exchange, as reported by The Nasdaq Stock Market, or if such prices or quotations are not reported by 2 5 The Nasdaq Stock Market, as reported by any other available source of prices or quotations selected by the Committee. If the Common Stock is not publicly traded or if the Fair Market Value is not determinable by any of the foregoing means, the Fair Market Value on any day shall be determined in good faith by the Committee on the basis of such considerations as the Committee deems important. (q) "IMMEDIATE FAMILY MEMBER" means a spouse, children or grandchildren of the Optionee. (r) "INCENTIVE STOCK OPTION" means an Option that is an incentive stock option within the meaning of Section 422 of the Code. (s) "NON-EMPLOYEE DIRECTOR" has the meaning given to it by Rule 16b-3 promulgated under the Exchange Act of 1934. (t) "NON-INSIDERS" has the meaning given to by Section 162(m)(3) of the Code. (u) "NON-QUALIFIED STOCK OPTION" means an Option that is not an Incentive Stock Option. (v) "OPTION" means an option with respect to shares of Common Stock awarded pursuant to Section 6. (w) "OPTIONEE" means any person to whom an Option is granted under the Plan (as well as any permitted transferee of an Option). (x) "OUTSIDE DIRECTOR" has the meaning given to it by the regulations promulgated under Section 162(m) of the Code. (y) "PLAN" means the BSQUARE CORPORATION stock option plan. (z) "QUALIFIED PERFORMANCE-BASED COMPENSATION" has the meaning given to it by the regulations promulgated under Section 162(m) of the Code. (aa) "RELATED CORPORATION" means any corporation (other than the Company) that is a "parent corporation" of the Company or "subsidiary corporation" of the Company, as defined in Sections 424(e) and 424(f), respectively, of the Code. (bb) "SECTION 16 INSIDERS" means individuals who are subject to Section 16(b) of the Exchange Act with respect to the Common Stock. (cc) "SECURITIES ACT" means the Securities Act of 1933, as amended from time to time, or any successor statute or statutes thereto. References to any specific section of the Securities Act shall include any successor section. (dd) "TEN PERCENT SHAREHOLDER" means a person who owns more than ten percent of the total combined voting power of the Company or any related corporation as determined with reference to Section 424(d) of the Code. 3 6 2. PURPOSES. The purposes of the Plan are to retain the services of directors, valued key employees and consultants of the Company and such other persons as the Committee shall select in accordance with Section 4, to encourage such persons to acquire a greater proprietary interest in the Company, thereby strengthening their incentive to achieve the objectives of the shareholders of the Company, and to serve as an aid and inducement in hiring new employees and to provide an equity incentive to directors, consultants and other persons selected by the Committee. 3. ADMINISTRATION. (a) COMMITTEE. The Plan shall be administered by the Board unless the Board appoints a separate committee of the board to administer the Plan pursuant to Section 3(b) below. A majority of the members of the Committee shall constitute a quorum, and all actions of the Committee shall be taken by a majority of the members present. Any action may be taken by a written instrument signed by all of the members of the Committee and any action so taken shall be fully effective as if it had been taken at a meeting. (b) APPOINTMENT OF COMMITTEE. The Board may appoint a committee consisting of two or more of its members to administer the Plan. The Board shall consider whether a director is (i) an Outside Director and (ii) a Non-Employee Director when appointing any such Committee and shall appoint solely two or more individuals who qualify as Outside Directors if the Board intends for compensation attributable to Options to be Qualified Performance-Based Compensation. The Committee shall have the powers and authority vested in the Board hereunder (including the power and authority to interpret any provision of the Plan or of any Option). The members of any such Committee shall serve at the pleasure of the Board. (c) POWERS; REGULATIONS. Subject to the provisions of the Plan, and with a view to effecting its purpose, the Committee shall have sole authority, in its absolute discretion, to: (i) construe and interpret the Plan; (ii) define the terms used in the Plan; (iii) prescribe, amend and rescind rules and regulations relating to the Plan; (iv) correct any defect, supply any omission or reconcile any inconsistency in the Plan; (v) grant Options under the Plan; (vi) determine the individuals to whom Options shall be granted under the Plan and whether the Option is an Incentive Stock Option or a Non-Qualified Stock Option; (vii) determine the time or times at which Options shall be granted under the Plan; (viii) determine the number of shares of Common Stock subject to each Option, the exercise price of each Option, the duration of each Option and the times at which each Option shall become exercisable; (ix) determine all other terms and conditions of Options; and (x) make all other determinations necessary or advisable for the administration of the Plan. 4 7 All decisions, determinations and interpretations made by the Committee shall be binding and conclusive on all participants in the Plan and on their legal representatives, heirs and beneficiaries. (d) DELEGATION TO EXECUTIVE OFFICER. The Committee may by resolution delegate to one or more executive officers (the "Executive Officer") of the Company the authority to grant Options under the Plan to employees of the Company who, at the time of grant, are not Section 16 Insiders nor Covered Employees; provided, however, that the authority delegated to the Executive Officer under this Section 3 shall not exceed that of the Committee under the provisions of the Plan and shall be subject to such limitations, in addition to those specified in this Section 3, as may be specified by the Committee at the time of delegation. 4. ELIGIBILITY. Incentive Stock Options may be granted to any individual who, at the time such Options are granted, is an Employee, including Employees who are also directors of the Company. Non-Qualified Stock Options may be granted to Employees and to such other persons as the Committee shall select. Options may be granted in substitution for outstanding options of another corporation in connection with the merger, consolidation, acquisition of property or stock or other reorganization between such other corporation and the Company or any subsidiary of the Company. At such point as the Company first becomes subject to the periodic reporting requirements of Section 12 of the Exchange Act, no person shall be eligible to receive in any fiscal year Options to purchase more than 500,000 shares of Common Stock (subject to adjustment as set forth in Section 6(m) hereof). 5. STOCK. The Company is authorized to grant Options to acquire up to a total of 3,625,000 shares of the Company's authorized but unissued, or reacquired, Common Stock. The number of shares with respect to which Options may be granted hereunder is subject to adjustment as set forth in Section 6(m). In the event that any outstanding Option expires or is terminated for any reason, the shares of Common Stock allocable to the unexercised portion of such Option may again be subject to an Option granted to the same Optionee or to a different person eligible under Section 4; provided, however, that any expired or terminated Options will be counted against the maximum number of shares with respect to which Options may be granted to any particular person as set forth in Section 4. 6. TERMS AND CONDITIONS OF OPTIONS. Each Option granted under the Plan shall be evidenced by an Agreement. Agreements may contain such provisions, not inconsistent with the Plan, as the Committee or Executive Officer, in its discretion, may deem advisable. All Options also shall comply with the following requirements: (a) NUMBER OF SHARES AND TYPE OF OPTION. Each Agreement shall state the number of shares of Common Stock to which it pertains and whether the Option is intended to be an Incentive Stock Option or a Non-Qualified Stock Option. In the absence of action to the contrary by the Committee or Executive Officer in connection with the grant of an Option, all Options shall be Non-Qualified Stock Options. The aggregate Fair Market Value (determined at the Date of Grant) of the Common Stock with respect to which the Incentive Stock Options granted to the Optionee and any incentive stock options granted to the Optionee under any other stock option plan of the Company, any Related Corporation or any predecessor corporation are exercisable for the first time by the 5 8 Optionee during any calendar year shall not exceed $100,000, or such other limit as may be prescribed by the Code. If (i) an Optionee holds one or more Incentive Stock Options under the Plan (and/or any incentive stock options under any other stock option plan of the Company, any Related Corporation or any predecessor corporation), and (ii) the aggregate Fair Market Value of the shares of Common Stock with respect to which, during any calendar year, such Options become exercisable for the first time exceeds $100,000 (said value to be determined as provided above), then such Option or Options are intended to qualify under Section 422 of the Code with respect to the maximum number of such shares as can, in light of the foregoing limitation, be so qualified, with the shares so qualified to be the shares subject to the Option or Options earliest granted to the Optionee. If an Option that would otherwise qualify as an Incentive Stock Option becomes exercisable for the first time in any calendar year for shares of Common Stock that would cause such aggregate Fair Market Value to exceed $100,000, then the portion of the Option in respect of such shares shall be deemed to be a Non-Qualified Stock Option. (b) DATE OF GRANT. Each Agreement shall state the Date of Grant. (c) OPTION PRICE. Each Agreement shall state the price per share of Common Stock at which it is exercisable. The exercise price shall be fixed by the Committee or Executive Officer at whatever price the Committee or Executive Officer may determine in the exercise of its sole discretion; provided, however, that the per share exercise price for an Incentive Stock Option shall not be less than the Fair Market Value at the Date of Grant; provided further, that with respect to Incentive Stock Options granted to Ten Percent Shareholders of the Company, the per share exercise price shall not be less than 110 percent (110%) of the Fair Market Value at the Date of Grant; and, provided further, that Options granted in substitution for outstanding options of another corporation in connection with the merger, consolidation, acquisition of property or stock or other reorganization involving such other corporation and the Company or any subsidiary of the Company may be granted with an exercise price equal to the exercise price for the substituted option of the other corporation, subject to any adjustment consistent with the terms of the transaction pursuant to which the substitution is to occur. (d) DURATION OF OPTIONS. On the Date of Grant, the Committee or Executive Officer shall designate, subject to Section 6(g), the expiration (late of the Option, which date shall not be later than ten (10) years from the Date of Grant in the case of Incentive Stock Options; provided, however, that the expiration date of any Incentive Stock Option granted to a Ten Percent Shareholder shall not be later than five (5) years from the Date of Grant. In the absence of action to the contrary by the Committee in connection with the grant of an Option, and except in the case of Incentive Stock Options granted to Ten Percent Shareholders, all Options granted under this Section 6 shall expire ten (10) years from the Date of Grant. 6 9 (e) VESTING SCHEDULE AND EXERCISABILITY OF OPTIONS No Option shall be exercisable until it has vested. The vesting schedule for each Option shall be specified by the Committee or Executive Officer at the time of grant of the Option; provided, however, that if no vesting schedule is specified at the time of grant, the Option shall be vested according to the following schedule:
Number of Years of Continuous Employment Portion of Total With the Company Following Option Which Will Become Grant Date Vested --------------------------- ------------------------ 1 25% 2 50% 3 75% 4 100%
The Committee or Executive Officer may specify a vesting schedule for all or any portion of an Option based on the achievement of performance objectives established in advance of the commencement by the Optionee of services related to the achievement of the performance objectives. Performance objectives shall be expressed in terms of one or more of the following: return on equity, return on assets, share price, market share, sales, earnings per share, costs, net earnings, net worth, inventories, cash and cash equivalents, gross margin or the Company's performance relative to its internal business plan. Performance objectives may be in respect of the performance of the Company as a whole (whether on a consolidated or unconsolidated basis), a Related Corporation, or a subdivision, operating unit, product or product line of the foregoing. Performance objectives may be absolute or relative and may be expressed in terms of a progression or a range. An Option which is exercisable (in whole or in part) upon the achievement of one or more performance objectives may be exercised only upon completion of the following process: (a) the Optionee must deliver written notice to the Company that the performance objective has been achieved and demonstrating, if necessary, how the objective has been satisfied, (b) within 45 days after receipt of such notice, the Committee will make a good faith determination whether such performance objective has been achieved and deliver written notice to the Optionee detailing the results of such determination; if the Company fails to respond with such 45-day period, then the performance objective shall be presumed to have been achieved and (c) upon receipt of written notice from the Company that the performance objective has been achieved (or upon expiration of such 45-day period without a determination by the Company), the Optionee may exercise the Option; upon receipt of written notice from the Company that the performance objective has not been achieved, the Optionee shall have 15 days to appeal the Company's determination and the Company shall have 15 days after the receipt of such appeal to consider the issues presented by the Optionee and make a determination on the appeal, which determination shall be conclusive and binding on the Optionee. (f) ACCELERATION OF VESTING. Except to the extent that such acceleration would render unavailable "pooling of interests" accounting treatment for any reorganization, merger or consolidation of the Company, the vesting of one or more outstanding Options may be accelerated by the Board at such times and in such amounts as it shall determine in its sole discretion. 7 10 (g) TERM OF OPTION. Any vested Option granted to an Optionee shall terminate, to the extent not previously exercised, upon the occurrence of the first of the following events: (i) as designated by (x) the Board in accordance with Section 6(n) hereof or (y) the Committee or the Executive Officer in accordance with Section 6(d) hereof; (ii) the date of the Optionee's termination of employment or contractual relationship with the Company or any Related Corporation for cause (as determined in the sole discretion of the Committee); (iii) the expiration of ninety (90) days from the date of the Optionee's termination of employment or contractual relationship with the Company or any Related Corporation for any reason whatsoever other than cause, death or Disability unless the exercise period is extended by the Committee a date not later than the expiration date of the Option; (iv) the expiration of one year from (A) the date of death of the Optionee or (B) cessation of the Optionee's employment or contractual relationship by reason of Disability unless the exercise period is extended by the Committee until a date not later than the expiration date of the Option; or (v) any other event specified by the Committee at the time of grant of the Option. If an Optionee's employment or contractual relationship is terminated by death, any Option granted to the Optionee shall be exercisable only by the person or persons to whom such Optionee's rights under such Option shall pass by the Optionee's will or by the laws of descent and distribution of the state or county of the Optionee's domicile at the time of death. The Committee shall determine whether an Optionee has incurred a Disability on the basis of medical evidence reasonably acceptable to the Committee. Upon making a determination of Disability, the Committee shall, for purposes of the Plan, determine the date of an Optionee's termination of employment or contractual relationship. Unless accelerated in accordance with Section 6(f), any unvested Option granted to an Optionee shall terminate immediately upon termination of employment of the Optionee by the Company for any reason whatsoever, including death or Disability. For purposes of the Plan, transfer of employment between or among the Company and/or any Related Corporation shall not be deemed to constitute a termination of employment with the Company or any Related Corporation. For purposes of this subsection with respect to Incentive Stock Options, employment shall be deemed to continue while the Optionee is on military leave, sick leave or other bona fide leave of absence (as determined by the Committee). The foregoing notwithstanding, employment shall not be deemed to continue beyond the first ninety (90) days of such leave, unless the Optionee's re-employment rights are guaranteed by statute or by contract. (h) EXERCISE OF OPTIONS. If less than all of the shares included in an Option are purchased, the remainder may be purchased at any subsequent time prior to the expiration date with respect to, or the termination of, the Option. No portion of any Option may be exercised for less than one hundred (100) shares (as adjusted pursuant to Section 6(m)); provided, however, that if the Option is less than one hundred (100) shares, it may be 8 11 exercised with respect to all shares for which it is vested. Only whole shares may be issued upon exercise of an Option, and to the extent that an Option covers less than one (1) share, it is unexercisable. An Option or any portion thereof may be exercised by giving written notice to the Company upon such terms and conditions as the Agreement evidencing the Option may provide and in accordance with such other procedures for the exercise of an Option as the Committee may establish from time to time. Such notice shall be accompanied by payment in the amount of the aggregate exercise price for such shares, which payment shall be in the form specified in Section 6(i). The Company shall not be obligated to issue, transfer or deliver a certificate of Common Stock to the holder of any Option until provision has been made by the holder, to the satisfaction of the Company, for the payment of the aggregate exercise price for all shares for which the Option shall have been exercised and for satisfaction of any tax withholding obligations associated with such exercise. Options granted to an Optionee are, during the Optionee's lifetime, exercisable only by the Optionee or a transferee who takes title to the Option in the manner permitted by Section 6(k). (i) PAYMENT UPON EXERCISE OF OPTION. Upon the exercise of an Option, the Optionee shall pay to the Company the aggregate exercise price therefor in cash, by certified or cashier's check. In addition, such Optionee may pay for all or any portion of the aggregate exercise price by complying with one or more of the following alternatives: (1) by delivering to the Company whole shares of Common Stock then owned by such Optionee, or, subject to the prior approval of the Committee, by the Company withholding whole shares of Common Stock otherwise issuable to the Optionee upon exercise of the Option, which shares of Common Stock received or withheld shall be valued for such purpose at their Fair Market Value on the date of exercise. (2) by delivering a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale or loan proceeds required to pay the exercise price; (3) by any combination of the foregoing methods of payment; or (4) by complying with any other payment mechanism, including through the execution of a promissory note, as may be permitted for the issuance of equity securities under applicable securities and other laws and approved by the Committee at the time of exercise. 9 12 (j) RIGHTS AS A SHAREHOLDER. An Optionee shall have no rights as a shareholder with respect to any shares of Common Stock issuable upon exercise of the Option until such holder becomes a record holder of such shares. Subject to the provisions of Sections 6(m), no rights shall accrue to an Optionee and no adjustments shall be made on account of dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights declared on, or created in, the Common Stock for which the record date is prior to the date such Optionee becomes a record holder of the shares of Common Stock issuable upon exercise of such Option. (k) TRANSFER OF OPTION. Options granted under the Plan and the rights and privileges conferred by the Plan may not be transferred, assigned, pledged or hypothecated in any manner (whether by operation of law or otherwise) other than by will, by applicable laws of descent and distribution or pursuant to a domestic relations order (as defined in the Code or Title I of the Employment Retirement Income Security Act of 1974 or the rules or regulations thereunder), and shall not be subject to execution, attachment or similar process; provided, however, that solely with respect to Non-Qualified Stock Options, the Committee may, in its discretion, authorize all or a portion of the Options to be granted to an Optionee to be on terms which permit transfer by such Optionee to: (i) Immediate Family Members, (ii) a trust or trusts for the exclusive benefit of such Immediate Family Members, or (iii) a partnership in which such Immediate Family Members are the only partners, provided that: (x) there may be no consideration for any such transfer, (y) the Agreement evidencing such Options must be approved by Committee, and must expressly provide for transferability in a manner consistent with this Section, and (z) subsequent transfers of transferred Options shall be prohibited other than by will, by applicable laws of descent and distribution or pursuant to a domestic relations order (as defined in the Code or Title I of the Employment Retirement Income Security Act of 1974 or the rules or regulations thereunder). Following transfer, any such Options shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, provided that for purposes of Section 6(l)(2), the term "Optionee" shall be deemed to refer to the initial transferor. The events of termination of employment of Section 6(g) shall continue to be applied with respect to the original Optionee, following which the options shall be exercisable by the transferee only to the extent, and for the periods, specified in Section 6(g). Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of any Option or of any right or privilege conferred by the Plan contrary to the provisions hereof, or upon the sale, levy or any attachment or similar 'process upon the rights and privileges conferred by the Plan, such Option shall thereupon terminate and become null and void. 10 13 (i) SECURITIES REGULATION AND TAX WITHHOLDING. (1) No shares of Common Stock shall be issued upon exercise of an Option unless the exercise of such Option and the issuance and delivery of such shares shall comply with all relevant provisions of law, including, without limitation, any applicable state securities laws, the Securities Act, the Exchange Act, the rules and regulations thereunder and the requirements of any stock exchange upon which such shares may then be listed, and such issuance shall be further subject to the approval of counsel for the Company with respect to such compliance, including the availability of an exemption from registration for the issuance and sale of such shares. The inability of the Company to obtain from any regulatory body the authority deemed by the Company to be necessary for the lawful issuance and sale of any shares under the Plan, or the unavailability of an exemption from registration for the issuance and sale of any shares under the Plan, shall relieve the Company of any liability with respect to the non-issuance or sale of such shares. As long as the Common Stock is not registered under the Exchange Act, the Company intends that all offers and sales of Options and shares of Common Stock issuable upon exercise of Options shall be exempt from registration under the provisions of Section 5 of the Securities Act, and the Plan shall be administered in a manner so as to preserve such exemption. The Company also intends that the Plan shall constitute a written compensatory benefit plan, within the meaning of Rule 701(b) promulgated under the Securities Act, and that each Option granted pursuant to the Plan at a time when the Common Stock is not registered under the Exchange Act shall, unless otherwise specified by the Committee at the time the Option is granted or at any time thereafter, be granted in reliance on the exemption from the registration requirements of Section 5 of the Securities Act provided by Rule 701. As a condition to the exercise of an Option, the Committee may require the Optionee to represent and warrant in writing, at the time of such exercise that the shares of Common Stock issuable upon exercise of the Option are being purchased only for investment and without any then-present intention to sell or distribute such shares. At the option of the Committee, a stop-transfer order against such shares may be placed on the stock books and records of the Company, and a legend indicating that such shares may not be pledged, sold or otherwise transferred unless an opinion of counsel is provided stating that such transfer is not in violation of any applicable law or regulation, may be stamped on the certificates representing such shares in order to assure an exemption from registration. The Committee also may require such other documentation as it shall, in its discretion, deem necessary from time to time to comply with federal and state securities laws. THE COMPANY HAS NO OBLIGATION TO UNDERTAKE REGISTRATION OF ANY OPTION OR ANY SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF ANY OPTION. (2) The Optionee shall pay to the Company by certified or cashier's check, promptly upon exercise of the Option or, if later, the date that the amount of such obligations becomes determinable, all applicable federal, state, local and foreign withholding taxes that the Committee, in accordance with the applicable rules and regulations, determines to result from the exercise of the Option or from a transfer or other disposition of shares of Common Stock acquired upon exercise of the Option or otherwise related to the Option or shares of Common Stock acquired upon exercise of the Option, which determination by the Committee of the amount due shall be binding upon the Optionee. Upon approval of the Committee, such Optionee may satisfy such obligation by complying with one or more of the following alternatives selected by the Committee: (A) by delivering to the Company whole shares of Common Stock then owned by such Optionee, or by the Company withholding whole shares of Common Stock otherwise issuable to the Optionee upon exercise of the Option, which shares of Common Stock received or withheld shall have a Fair Market Value on the date of exercise (as 11 14 determined by the Committee in good faith) equal to the tax obligation to be paid by such Optionee upon such exercise; (B) by executing appropriate loan documents approved by the Committee by which such Optionee borrows funds from the Company to pay the withholding taxes due under this Section 6(l)(2), with such repayment terms as the Committee shall select; (C) by any combination of the foregoing methods of payment; or (D) by complying with any other payment mechanism as may be permitted for the issuance of equity securities under applicable securities and other laws and approved by the Committee from time to time. (3) The issuance, transfer or delivery of certificates of Common Stock pursuant to the exercise of an Option may be delayed, at the discretion of the Committee, until the Committee is satisfied that the applicable requirements of the federal and state securities laws and the withholding provisions of the Code have been met. (m) STOCK SPLIT, REORGANIZATION OR LIQUIDATION. (1) Upon the occurrence of any of the following events, the Committee shall, with respect to each outstanding Option, proportionately adjust the number of shares of Common Stock issuable upon exercise of such Option, the per share exercise price or both so as to preserve the rights of the Optionee substantially proportionate to the rights of such Optionee prior to such event, and to the extent that such action shall include an increase or decrease in the number of shares of Common Stock issuable upon exercise of outstanding Options, the number of shares available under Section 5 shall automatically be increased or decreased, as the case may be, proportionately, without further action on the part of the Committee, the Company, the Company's shareholders, or any Optionee: (i) the Company shall at any time be involved in a transaction described in Section 424(a) of the Code (or any successor provision) or any "corporate transaction" described in the regulations promulgated thereunder; (ii) the Company subdivides its outstanding shares of Common Stock into a greater number of shares of Common Stock (by stock dividend, stock split, reclassification or otherwise) or combines its outstanding shares of Common Stock into a smaller number of shares of Common Stock (by reverse stock split, reclassification or otherwise); or (iii) any other event with substantially the same effect shall occur. (2) If the Company shall at any time declare an extraordinary dividend with respect to the Common Stock, whether payable in cash or other property, or is involved in any recapitalization, spinoff, combination, exchange of shares, warrants or rights offering to purchase Common Stock, or other similar event (including a merger or consolidation other than one that constitutes an Approved Transaction), the Committee may, in the exercise of its sole discretion and with respect to each outstanding Option, proportionately adjust the number of shares of Common Stock issuable upon exercise of such Option, the per share exercise price or both so as to preserve the rights of the Optionee substantially proportionate to the rights of such Optionee prior to such event, and to the extent that such action shall include an increase or decrease in the number of shares of Common Stock issuable upon exercise of outstanding Options, the 12 15 number of shares available under Section 5 of the Plan shall automatically be increased or decreased, as the case may be, proportionately, without further action on the part of the Committee, the Company, the Company's shareholders, or any Optionee. (3) The foregoing adjustments shall be made by the Committee or by the applicable terms of any assumption or substitution document. (4) With respect to the foregoing adjustments, the number of shares subject to an Option shall always be a whole number. The Committee may, if deemed appropriate, provide for a cash payment to any Optionee in connection with any adjustment made pursuant to this Section 6(m). (5) The grant of an Option shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge, consolidate or dissolve, to liquidate or to sell or transfer all or any part of its business or assets. (n) APPROVED TRANSACTIONS; CONTROL PURCHASE. In the event of any Approved Transaction or Control Purchase, if so provided for in the Agreement representing such Option, an Option may become exercisable in full in respect of the aggregate number of shares thereunder effective upon the Control Purchase or immediately prior to consummation of the Approved Transaction. In the case of an Approved Transaction, the Company shall provide notice of the pendency of the Approved Transaction at least fifteen (15) days prior to the expected date of consummation thereof to each Optionee entitled to acceleration. Each such Optionee shall thereupon be entitled to exercise the vested portion of the Option at any time prior to consummation of the Approved Transaction or immediately following the Control Purchase. Any such exercise shall be contingent on such consummation. Following consummation of the Approved Transaction or Control Purchase, and until such Option is terminated pursuant to Section 6(g) hereof, any vested portion of Options that are not exercised shall remain exercisable, and any unvested portions of any Options shall remain in effect and continue to vest in accordance with the vesting schedule specified at the time of grant, and upon such vesting shall become exercisable. Notwithstanding the foregoing, in its reasonable discretion, the Board may determine that any or all outstanding Options that are unvested at the time of, or are not exercised upon consummation of, the Approved Transaction or Control Purchase shall thereafter terminate, provided that, in making such determination, the Board shall consider the best interests of the Optionees, the Company and its shareholders, and will make such determination only if the action to be taken, in the opinion of the Board, is appropriate in light of the circumstances under which such determination is made. Moreover, except to the extent that such determination would render unavailable "pooling of interests" accounting treatment for any reorganization, merger or consolidation of the Company, the Board may take, or make effective provision for the taking of, such action as in the opinion of the Board is equitable and appropriate in order to substitute new stock options for any or all outstanding Options that do not become exercisable on an accelerated basis, or to assume such Options (which assumption may be effected by any means determined by the Board, in its discretion, including, but not limited to, by a cash payment to each Optionee, in cancellation of the Options held by him or her, of such amount as the Board determines, in its sole discretion, represents the then value of the Options) and in order to make such new stock options or assumed Options, as nearly as practicable, equivalent to the old Options, taking into account, to the extent applicable, the kind and amount of securities, cash or other assets into or for which the Common Stock may be changed, converted or exchanged in connection with the Approved Transaction. 13 16 7. EFFECTIVE DATE; TERM. The Plan shall be effective at the time specified in the resolutions of the Board adopting the Plan (the "Effective Date"). Options may be granted by the Committee or Executive Officer from time to time thereafter until the tenth anniversary of the Effective Date. Termination of the Plan shall not terminate any Option granted prior to such termination. Issuance of Non-Qualified Stock Options under the Plan shall be subject to the requirement of RCW 21.20.310(10) that the Administrator of Securities of the Department of Financial Institutions of the State of Washington be provided with notification of the adoption of the Plan. No Non-Qualified Stock Option shall be granted hereunder until this notification requirement has been satisfied. Issuance of Incentive Stock Options under the Plan within twelve (12) months after the Effective Date shall be subject to the approval of the Plan by the shareholders of the Company at a duly held meeting of shareholders at which a majority of all outstanding voting stock of the Company is represented in person or by proxy. The approval required shall be a majority of the votes cast on the proposal to approve the Plan. Such approval may also be provided pursuant to a written consent in lieu of such meeting. No Incentive Stock Option granted hereunder shall be exercisable until this approval requirement has been satisfied. If this requirement is not satisfied within twelve (12) months after the Effective Date, then, notwithstanding, any contrary provision in the Plan (a) no Incentive Stock Options may thereafter be granted under the Plan, and (b) each Incentive Stock Option granted under the Plan prior thereto shall automatically be deemed to be a Non-Qualified Stock Option (except to the extent the Agreement evidencing the Option expressly provides otherwise). 8. NO OBLIGATIONS TO EXERCISE OPTION. The grant of an Option shall impose no obligation upon the Optionee to exercise such Option. 9. NO RIGHT TO OPTIONS OR TO EMPLOYMENT. Whether or not any Options are to be granted under the Plan shall be exclusively within the discretion of the Committee, and nothing contained in the Plan shall be construed as giving any person any right to participate under the Plan. The grant of an Option to any Optionee shall in no way constitute any form of agreement or understanding binding on the Company or any Related Corporation, express or implied, that the Company or such Related Corporation will employ or contract with such Optionee for any length of time, nor shall it interfere in any way with the Company's or, where applicable, a Related Corporation's right to terminate such Optionee's employment at any time, which right is hereby reserved. 10. APPLICATION OF FUNDS. The proceeds received by the Company from the sale of Common Stock issued upon the exercise of Options shall be used for general corporate purposes, unless otherwise directed by the Board. 11. INDEMNIFICATION OF COMMITTEE. In addition to all other rights of indemnification they may have by virtue of being a member of the Board or an executive officer of the Company, members of the Committee and the Executive Officer shall be indemnified by the Company for all reasonable expenses and liabilities of any type or nature, including attorneys' fees, incurred in connection with any action, suit or proceeding to which they or any of them are a party by reason of, or in connection with, the Plan or any Option granted under the Plan, and against all amounts paid by them in settlement thereof (provided that such settlement is approved by independent legal counsel selected by the Company), except to the extent that such expenses relate to matters for which it is adjudged that such Committee member or Executive Officer is liable for willful misconduct; provided, 14 17 however, that within fifteen (15) days after the institution of any such action, suit or proceeding, the Committee member or Executive Officer involved therein shall, in writing, notify the Company of such action, suit or proceeding, so that the Company may have the opportunity to make appropriate arrangements to prosecute or defend the same. 12. SHAREHOLDERS AGREEMENT. Unless the Agreement evidencing an Option expressly provides otherwise, each Optionee may be required, as a condition to the issuance of any shares of Common Stock that such Optionee acquires upon the exercise of the Option, to execute and deliver to the Company a shareholders agreement in such form as may be required by the Company at the time of such exercise, or a counterpart thereof, together with, unless the Optionee is unmarried, a spousal consent in the form required thereby, unless the Optionee has previously executed and delivered such documents and they are in effect at the time of exercise and apply by their terms to the shares to be issued. 13. SEPARABILITY. With respect to Incentive Stock Options, if the Plan does not contain any provision required to be included herein under Section 422 of the Code, such provision shall be deemed to be incorporated herein with the same force and effect as if such provision had been set out in full herein; provided, however, that to the extent any Option that is intended to qualify as an Incentive Stock Option cannot so qualify, the Option, to that extent, shall be deemed to be a Non-Qualified Stock Option for all purposes of the Plan. 14. NON-EXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the Board nor the submission of the Plan to the shareholders of the Company for approval shall be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options and the awarding of stock and cash otherwise than pursuant to the Plan, and such arrangements may be either generally applicable or applicable only in specific cases. 15. EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION. By acceptance of an Option, unless otherwise provided in the Agreement evidencing the Option, the Optionee with respect to such Option shall be deemed to have agreed that the Option is special incentive compensation that will not be taken into account, in any manner, as salary, compensation or bonus in determining the amount of any payment or other benefit under any pension, retirement or other employee benefit plan, program or policy of the Company or any of its affiliates. 16. AMENDMENT OF PLAN. The Board may, at any time, modify, amend or terminate the Plan or modify or amend any Option granted pursuant to the Plan, including, without limitation, such modifications or amendments as are necessary to maintain compliance with applicable statutes, rules or regulations; provided, however, that no amendment with respect to an outstanding Option which has the effect of reducing the benefits afforded to the Optionee shall be made over the objection of such Optionee; further provided, that the events triggering acceleration of vesting of an outstanding Option may be modified, expanded or eliminated without the consent of the Optionee. The Board may condition the effectiveness of any such amendment on the receipt of shareholder approval at such time and in such manner as the Committee may consider necessary for the Company to comply with or to avail the Company, the Optionees or both of the benefits of any securities, 15 18 tax, market listing or other administrative or regulatory requirement which the Board determines to be desirable. Without limiting the generality of the foregoing, the Board may modify grants to persons who are eligible to receive Options under the Plan who are foreign nationals or employed outside the United States to recognize differences in local law, tax policy or custom. Date Amended and Restated Plan was Approved by Board of Directors of Company: January 29, 1998 Date Amended and Restated Plan was Approved by Shareholders of Company: January 29, 1998 16 EX-10.2 6 EMPLOYEE STOCK PURCHASE PLAN 1 EXHIBIT 10.2 BSQUARE CORPORATION 1999 EMPLOYEE STOCK PURCHASE PLAN I. PURPOSE OF PLAN As a means by which Employees may share in the Company's growth and success, BSQUARE Corporation (the "Company") believes that ownership of shares of its Common Stock by its Employees is desirable. To this end, and as an incentive to better performance and improved profits, the Company has established the BSQUARE Corporation 1999 Employee Stock Purchase Plan (the "Plan"). The Company intends that the Plan will constitute an "employee stock purchase plan" within the meaning of Section 423 of the Code. II. DEFINITIONS Terms that are capitalized within this document shall have the meanings as set forth in Exhibit A, unless otherwise specified within the text. III. EMPLOYEE PARTICIPATION PARTICIPATION Subject to the provisions of this Section III, an Employee may elect to participate in the Plan effective as of any Enrollment Date by completing and filing a Payroll Deduction Authorization Form in the form attached hereto as Exhibit B, as provided in Section IV. As of each Enrollment Date, the Company hereby grants a right to purchase Shares under the terms of the Plan to each eligible Employee who has elected to participate in the Offering commencing on that Enrollment Date. REQUIREMENTS FOR PARTICIPATION A person shall become eligible to participate in the Plan on the first Enrollment Date on which that person meets the following requirements: a) The person is an Employee, and b) The person's customary period of Employment is more than twenty (20) hours per week. Any eligible Employee may enroll in the Plan as of the Enrollment Date of any Offering by filing timely written notice of such participation, subject to the following provisions: (i) In order to enroll in the Plan initially, an eligible Employee must complete, sign and submit to the Company the following forms: (A) Payroll Deduction Authorization Form Must be received by the Company at least fifteen (15) days prior to the Enrollment Date of an Offering to be effective for that Offering. (B) ESPP New Account Form This form must accompany the Payroll Deduction Authorization Form submitted for enrollment in the Plan. An ESPP New Account Form must be received by the Company at least fifteen (15) days prior to the Enrollment Date of an Offering to be effective for that Offering. (ii) A Participant in an ongoing Offering may elect as of any Enrollment Date to enroll in the new Offering commencing on that Enrollment Date by filing a Payroll Deduction Authorization Form making such election prior to 4:00 p.m. Pacific Time on the Enrollment Date. An election by a current Participant to enroll in a new Offering shall constitute a withdrawal, effective as of such Enrollment Date, from the ongoing Offering and simultaneous reenrollment in the new Offering. A reenrollment shall not affect the purchase of Shares under the ongoing Offering occurring on the Purchase Date immediately preceding the Enrollment Date. A Participant may make an ongoing election to reenroll on any Enrollment Date as of which the fair market value of the Shares for purposes of Section VI is less than it was as of the Enrollment Date for the Offering in which the Participant is currently participating. Unless otherwise specified by the Participant, any such ongoing reenrollment election shall be subject to revocation; 2 provided, however, that to be effective to prevent reenrollment on any Enrollment Date, such revocation must be received by the Company prior to 4:00 p.m. Pacific Time on the Enrollment Date. (iii) Absent withdrawal from the Plan pursuant to Section VII, a Participant will automatically be re-enrolled in the Offering commencing on the Enrollment Date immediately following the expiration of the Offering of which that person is then a Participant. A Participant shall become ineligible to participate in the Plan and shall cease to be a Participant when the Participant ceases to meet the eligibility requirements as defined above. LIMITATIONS ON PARTICIPATION No Employee may obtain a right to purchase Shares under the Plan if, immediately after the right is granted, the Employee owns or is deemed to own Shares possessing five percent (5%) or more of the combined voting power or value of all classes of stock of the Company or any parent or subsidiary of the Company. For purposes of determining share ownership, the rules of Section 425(d) of the Code shall apply and Shares that the Employee may purchase under any options or rights to purchase, whether or not Vested, shall be treated as Shares owned by the Employee. No Employee may obtain a right to purchase Shares under the Plan that permits the Employee's rights to purchase Shares under the Plan and any other employee stock purchase plan within the meaning of Section 423 of the Code of the Company or any parent or subsidiary of the Company to accrue at a rate which exceeds $25,000 in fair market value of Shares (determined as of the Enrollment Date) for each calendar year of the Offering. This section shall be interpreted to permit an Employee to purchase the maximum number of Shares permitted under Section 423(b)(8) of the Code and regulations and interpretations adopted thereunder. The maximum number of Shares that an Employee may purchase in an Offering shall not exceed 10,000 shares, no more than one-third of which may be purchased on any Purchase Date with respect to that Offering. VOLUNTARY PARTICIPATION Participation in the Plan shall be strictly voluntary. IV. PAYROLL DEDUCTIONS PAYROLL DEDUCTION AUTHORIZATION An Employee may contribute to the Plan only by means of payroll deductions. A Payroll Deduction Authorization Form must be filed with the Company's stock administrator at least fifteen (15) days prior to the Enrollment Date as of which the payroll deductions are to take effect. AMOUNT OF DEDUCTIONS A Participant may specify that the person desires to make contributions to the Plan at a rate not less than 1% and not more than 10% of the Compensation paid to the Participant during each pay period in the Offering, or other such minimum or maximum percentages as the Plan Administrator shall establish from time to time. Such specification shall apply during any period of continuous participation in the Plan, unless otherwise modified or terminated as provided in this Section IV or as otherwise provided in the Plan. If a payroll deduction cannot he made in whole or in part because the Participant's pay for the period in question is insufficient to fund the deduction after having first withheld all other amounts deductible from that person's pay, the amount that was not withheld cannot be made up by the Participant nor will it be withheld from subsequent pay checks. COMMENCEMENT OF DEDUCTIONS Payroll deductions for a Participant shall commence on the Enrollment Date of the Offering for which that person's Payroll Deduction Authorization Form is effective and shall continue indefinitely, unless modified or terminated as provided in this Section IV or as otherwise provided in the Plan. ACCOUNTS All payroll deductions made for a Participant shall be credited to his or her Account under the Plan. Following 3 each Purchase Date, the Plan Administrator shall promptly deliver a report to each Participant setting forth the aggregate payroll deductions credited to such Participant's Account during the preceding six months and the number of Shares purchased and delivered to the Custodian for deposit into the Participant's Custodial Account. MODIFICATION OF AUTHORIZED DEDUCTIONS A Participant may, prior to the commencement of each Offering in which that person will be a Participant, and not more than three times during each Offering, increase or decrease the amount of that person's payroll deduction effective for all applicable payroll periods, by completing an amended Payroll Deduction Authorization Form and filing it with the Company's stock administrator in accordance with this Section IV. A Participant may at any time discontinue the Participant's payroll deductions, without withdrawing from the Plan, by completing an amended Payroll Deduction Authorization Form and filing it with the Company's stock administrator. Previous payroll deductions will then be retained in the Participant's Account for application to purchase Shares on the next Purchase Date, after which the Participant's participation in the Offering and in the Plan will terminate unless the participant has timely filed another Payroll Deduction Authorization Form to resume payroll deductions. For purposes of the above, an amended Payroll Deduction Authorization form shall be effective for a specific pay period when filed 15 days prior to the last day of such payroll period. V. CUSTODY OF SHARES DELIVERY AND CUSTODY OF SHARES Shares purchased pursuant to the Plan shall be delivered to and held by the Custodian. CUSTODIAL ACCOUNT As soon as practicable after each Purchase Date, the Company shall deliver to the Custodian the full Shares purchased for each Participant's Account. The Shares will be held in a Custodial Account specifically established for this purpose. An Employee must open a Custodial Account with the Custodian in order to be eligible to purchase Shares under the Plan. In order to open a Custodial Account, the Participant must complete an ESPP New Account Form and file it with the stock administrator no later than fifteen (15) days prior to the Enrollment Date of the Offering as of which the enrollment is to take effect; provided, however, that an ESPP New Account Form that effects a change in the status of the Custodial Account may be filed at any time during participation in the Plan. TRANSFER OF SHARES Upon receipt of appropriate instructions from a Participant on forms provided for that purpose, the Custodian will transfer into the Participant's own name all or part of the Shares held in the Participant's Custodial Account and deliver such Shares to the Participant. STATEMENTS The Custodian will deliver to each Participant a semi-annual statement showing the activity of the Participant's Custodial Account and the balance as to both Shares and cash. Participants will be furnished such other reports and statements, and at such intervals, as the Custodian and Plan Administrator shall determine from time to time. VI. PURCHASE OF SHARES PURCHASE OF SHARES Subject to the limitations of Section VII, on each Purchase Date in an Offering, the Company shall apply the amount credited to each Participant's Account to the purchase of as many full Shares that may be purchased with such amount at the price set forth in this Section VI, and shall promptly deliver such Shares to the Custodian for deposit into the Participant's Custodial Account. Payment for Shares purchased under the Plan will be made only through payroll withholding deductions in accordance with Section IV. PRICE The price of Shares to be purchased on any Purchase Date shall be the lower of: 4 (a) Eighty-five percent (85%) of the fair market value of the Shares on the Enrollment Date of the Offering; or (b) Eighty-five percent (85%) of the fair market value of the Shares on the Purchase Date. FAIR MARKET VALUE The fair market value of the Shares on any date shall be equal to the closing trade price of such shares on the Valuation Date, as reported on the NASDAQ National Market System or such other quotation system that supersedes it. UNUSED CONTRIBUTIONS Any amount credited to a Participant's Account and remaining therein immediately after a Purchase Date because it was less than the amount required to purchase a full Share shall be carried forward in such Participant's Account for application on the next succeeding Purchase Date. VII. TERMINATION AND WITHDRAWAL TERMINATION OF EMPLOYMENT Upon termination of a Participant's Employment for any reason other than death, Retirement or Disability, the payroll deductions credited to such Participant's Account shall be returned to the Participant. A Participant shall have no right to accrue Shares upon termination of the person's Employment. TERMINATION UPON DEATH, RETIREMENT OR DISABILITY Upon termination of the Participant's Employment because of that person's death, Retirement or Disability, the payroll deductions credited to that person's Account shall be used to purchase Shares as provided in Section VI on the next Purchase Date. Any remaining balance in the Participant's Account shall be returned to that person or, in the case of death, any Shares purchased and any remaining balance shall be transferred to the deceased Participant's Beneficiary, or if none, to that person's estate. DESIGNATION OF BENEFICIARY Each Participant may designate, revoke, and redesignate Beneficiaries. All changes to designation of Beneficiary shall be in writing and will be effective upon delivery to the Plan Administrator. WITHDRAWAL A Participant may withdraw the entire amount credited to that individual's Account under the Plan and thereby terminate participation in the current Offering at any time by giving written notice to the Company, but in no case may a Participant withdraw accounts within the 15 days immediately preceding a Purchase Date for the Offering. Any amount withdrawn shall be paid to the Participant promptly after receipt of proper notice of withdrawal and no further payroll deductions shall be made from the person's Compensation unless a Payroll Deduction Authorization Form directing further deductions is or has been submitted. STATUS OF CUSTODIAL ACCOUNT Upon termination of a Participant's Employment for any reason other than death, the Participant may, (a) Elect to retain with the Custodian the Shares held in the Participant's Custodial Account. The Participant will bear the cost of any annual fees resulting from maintaining such an account. (b) Request issuance of the Shares held in the Participant's Custodial Account by submitting to the Custodian the appropriate forms provided for that purpose. Upon termination of a Participant's Employment as a result of death, any Shares held by the Custodian for the Participant's Account shall be transferred to the person(s) entitled thereto under the laws of the state of domicile of the Participant upon a proper showing of authority. 5 VIII. SHARES PURCHASED UNDER THE PLAN SOURCE AND LIMITATION OF SHARES The Company has reserved for sale under the Plan 1,500,000 shares of common stock, subject to adjustment upon changes in capitalization of the Company as provided in Section X. Shares sold under the Plan may be newly issued Shares or Shares reacquired in private transactions or open market purchases, but all Shares sold under the Plan regardless of source shall be counted against the 1,500,000 Share limitation. If there is an insufficient number of Shares to permit the full exercise of all existing rights to purchase Shares, or if the legal obligations of the Company prohibit the issuance of all Shares purchasable upon the full exercise of such rights, the Plan Administrator shall make a pro rata allocation of the Shares remaining available in as nearly a uniform and equitable manner as possible, based pro rata on the aggregate amounts then credited to each Participant's Account. In such event, payroll deductions to be made shall be reduced accordingly and the Plan Administrator shall give written notice of such reduction to each Participant affected thereby. Any amount remaining in a Participant's Account immediately after all available Shares have been purchased will be promptly remitted to such Participant. Determination by the Plan Administrator in this regard shall be final, binding and conclusive on all persons. No deductions shall be permitted under the Plan at any time when no Shares are available. DELIVERY OF SHARES As promptly as practicable after each Purchase Date, the Company shall deliver to the Custodian the full Shares purchased for each Participant's Account. INTEREST IN SHARES The rights to purchase Shares granted pursuant to this Plan will in all respects be subject to the terms and conditions of the Plan, as interpreted by the Plan Administrator from time to time. The Participant shall have no interest in Shares purchasable under the Plan until payment for the Shares has been completed at the close of business on the relevant Purchase Date. The Plan provides only an unfunded, unsecured promise by the Company to pay money or property in the future. Except with respect to the Shares purchased on a Purchase Date, an Employee choosing to participate in the Plan shall have no greater rights than an unsecured creditor of the Company. After the purchase of Shares, the Participant shall be entitled to all rights of a shareholder of the Company. IX. ADMINISTRATION PLAN ADMINISTRATOR At the discretion of the Board of Directors, the Plan shall be administered by the Board of Directors or by a Committee appointed by the Board of Directors. Each member of the Committee shall be a director, an officer or an Employee of the Company. Each member shall serve for a term commencing on a date specified by the Board of Directors and continuing until that person dies, resigns or is removed by the Board of Directors. POWERS The Plan Administrator shall be vested with full authority to make, administer and interpret the rules and regulations as it deems necessary to administer the Plan. Any determination, decision or act of the Plan Administrator with respect to any action in connection with the construction, interpretation, administration or application of the Plan shall be final, binding and conclusive upon all Participants and any and all other persons claiming under or through any Participant. The provisions of the Plan shall be construed in a manner consistent with the requirements of Section 423 of the Code. X CHANGES IN CAPITALIZATION, MERGER, ETC. RIGHTS OF THE COMPANY The grant of a right to purchase Shares pursuant to this Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or other changes in its capital or business structure or to merge, consolidate or dissolve, liquidate or transfer all or any part of its divisions, subsidiaries, 6 business or assets. RECAPITALIZATION Subject to any required action by shareholders, the number of Shares covered by the Plan as provided in Section VIII and the price per Share shall be proportionately adjusted for any increase or decrease in the number of issued Shares of the Company resulting from a subdivision or consolidation of Shares or the payment of a stock dividend or any other increase or decrease in the number of such Shares effected without receipt or payment of consideration by the Company. CONSOLIDATION OR MERGER In the event of the consolidation or merger of the Company with or into any other business entity, or sale by the Company of substantially all of its assets, the successor may at its discretion continue the Plan by adopting the same by resolution of its Board of Directors or agreement of its partners or proprietors or substitute an equivalent Plan therefor. If the successor refuses to continue or substitute for the Plan, the Plan Administrator will shorten the Offering to a specified date before the proposed consolidation, merger or sale. Similarly, in the event of a liquidation or dissolution of the Company, the Plan Administrator will shorten the Offering to a specified date before the proposed liquidation or dissolution. XI. TERMINATION OF EMPLOYMENT VACATION, LEAVE OR LAYOFF A person's Employment shall not terminate on account of an authorized leave of absence, sick leave or vacation, or on account of a military leave described in this Section XI, or a direct transfer between Employers. Failure to return to work upon expiration of any leave of absence, sick leave or vacation shall be considered a resignation effective as of the expiration of such leave of absence, sick leave or vacation. MILITARY LEAVE Any Employee who leaves the Employer directly to perform services in the Armed Forces of the United States or in the United States Public Health Service under conditions entitling the Employee to reemployment rights provided by the laws of the United States, shall be on military leave. An Employee's military leave shall expire if the Employee voluntarily resigns from the Employer during the leave or if that person fails to make an application for reemployment within a period specified by such law for preservation of employment rights. In such event, the individual's Employment shall terminate by resignation on the day the military leave expires. XII. SHAREHOLDER APPROVAL AND RULINGS The Plan is expressly made subject to (a) the approval of the Plan within twelve (12) months after the Plan is adopted by the shareholders of the Company and (b) at the Company's election, to the receipt by the Company from the Internal Revenue Service of a ruling in scope and content satisfactory to counsel to the Company, affirming qualification of the Plan within the meaning of Section 423 of the Code. If the Plan is not so approved by the shareholders within 12 months after the date the Plan is adopted and if, at the election of the Company a ruling from the Internal Revenue Service is sought but not received on or before one year after this Plan's adoption by the Board of Directors, this Plan shall not come into effect. In that case, the Account of each Participant shall forthwith be paid to the Participant. XIII. MISCELLANEOUS PROVISIONS AMENDMENT AND TERMINATION OF THE PLAN The Board of Directors of the Company may at any time amend the Plan. Except as otherwise provided herein, no amendment may adversely affect or change any right to purchase Shares without prior approval of the shareholders of the Company if the amendment would: (i) Permit the sale of more Shares than are authorized under Section VIII; (ii) Permit the sale of Shares to employees of entities which are not Employers; (iii) Materially increase the benefits accruing to Participants under the Plan; or 7 (iv) Materially modify the requirements as to eligibility for participation in the Plan. The Plan is intended to be a permanent program, but the Company reserves the right to declare the Plan terminated at any time. Upon such termination, amounts credited to the Accounts of the Participants with respect to whom the Plan has been terminated shall be returned to such Participants. NON-TRANSFERABILITY Neither payroll deductions credited to a Participant's Account nor any rights with regard to the purchase of Shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way by the Participant except as provided in Section VII, and any attempted assignment, transfer, pledge, or other disposition shall be null and void. The Company may treat any such act as an election to withdraw funds in accordance with Section VII. USE OF FUNDS All payroll deductions received or held by the Company under the Plan may be used by the Company for any corporate purposes and the Company shall not be obligated to segregate the payroll deductions. EXPENSES All expenses of administering the Plan shall be borne by the Company. The Company will not pay expenses, commissions or taxes incurred in connection with sales of Shares by the Custodian at the request of a Participant. Expenses to be paid by a Participant will be deducted from the proceeds of sale prior to remittance. TAX WITHHOLDING Each Participant who has purchased Shares under the Plan shall immediately upon notification of the amount due, if any, pay to the Employer in cash amounts necessary to satisfy any applicable federal, state and local tax withholding determined by the Employer to be required. If the Employer determines that additional withholding is required beyond any amounts deposited at the time of purchase, the Participant shall pay such amount to the Employer on demand. If the Participant fails to pay the amount demanded, the Employer may withhold that amount from other amounts payable by the Employer to the Participant, including salary, subject to applicable law. NO INTEREST No Participant shall be entitled, at any time, to any payment or credit for interest with respect to or on the payroll deductions contemplated herein, or on any other assets held hereunder for the Participant's Account. REGISTRATION AND QUALIFICATION OF SHARES The offering of Shares hereunder shall be subject to the effecting by the Company of any registration or qualification of the Shares under any federal or state law or the obtaining of the consent or approval of any governmental regulatory body which the Company shall determine, in its sole discretion, is necessary or desirable as a condition to, or in connection with, the offering or the issue or purchase of the Shares covered thereby. The Company shall make every reasonable effort to effect such registration or qualification or to obtain such consent or approval. RESPONSIBILITY AND INDEMNITY Neither the Company, its Board of Directors, the Custodian, nor any member, officer, agent or employee of any of them, shall be liable to any Participant under the Plan for any mistake of judgment or for any omission or wrongful act unless resulting from gross negligence, willful misconduct or intentional misfeasance. The Company will indemnify and save harmless its Board of Directors, the Custodian and any such member, officer, agent or employee against any claim, loss, liability or expense arising out of the Plan, except such as may result from the gross negligence, willful misconduct or intentional misfeasance of such entity or person. PLAN NOT A CONTRACT OF EMPLOYMENT The Plan is strictly a voluntary undertaking on the part of the Employer and shall not constitute a contract between the Employer and any Employee, or consideration for or an inducement or a condition of employment of an Employee. Except as otherwise required by law, or any applicable collective bargaining agreement, nothing contained in the Plan shall give any Employee the right to be retained in the service of the Employer or to interfere 8 with or restrict the right of the Employer, which is hereby expressly reserved, to discharge or retire any Employee at any time, with or without cause and with or without notice. Except as otherwise required by law, inclusion under the Plan will not give any Employee any right or claim to any benefit hereunder except to the extent such right has specifically become fixed under the terms of the Plan. The doctrine of substantial performance shall have no application to any Employee, Participant, or Beneficiary. Each condition and provision, including numerical items, has been carefully considered and constitutes the minimum limit on performance which will give rise to the applicable right. SERVICE OF PROCESS The Secretary of the Company is hereby designated agent for service or legal process on the Plan. NOTICE All notices or other communications by a Participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received by the Plan Administrator. Any notice required by the Plan to be received by the Company prior to an Enrollment Date, payroll period or other specified date, and received by the Plan Administrator subsequent to such date shall be effective on the next occurring Enrollment Date, payroll period or other specified date to which such notice applies. GOVERNING LAW The Plan shall be interpreted, administered and enforced in accordance with the Code, and the rights of Participants, former Participants, Beneficiaries and all other persons shall be determined in accordance with it. To the extent state law is applicable, the laws of the State of Washington shall apply. REFERENCES Unless the context clearly indicates to the contrary, reference to a Plan provision, statute, regulation or document shall be construed as referring to any subsequently enacted, adopted or executed counterpart. 9 EXHIBIT A DEFINITIONS ACCOUNT Shall mean each separate account maintained for a Participant under the Plan collectively or singly as the context requires. Each Account shall be credited with a Participant's contributions, and shall be charged for the purchase of Shares. A Participant shall be fully vested in the cash contributions to that person's Account at all times. The Plan Administrator may create special types of Accounts for administrative reasons, even though the Accounts are not expressly authorized by the Plan. BENEFICIARY Shall mean a person or entity entitled under Section VII of the Plan to receive Shares purchased by, and any remaining balance in, a Participant's Account on the Participant's death. BOARD OF DIRECTORS Shall mean the Board of Directors of the Company. CODE Shall mean the Internal Revenue Code of 1986, as amended, or the corresponding provisions of any future tax code. COMMITTEE Shall mean the Committee appointed by the Board of Directors in accordance with Section IX of the Plan. COMPENSATION Shall mean the total cash compensation (except as otherwise set forth below), before tax withholding, paid to an Employee in the period in question for services rendered to the Employer by the Employee. Compensation shall include the earnings waived by an Employee pursuant to a salary reduction arrangement under any cash or deferred or cafeteria plan that is maintained by the Employer and that is intended to be qualified under Section 40 1(k) or 125 of the Code. An Employee's Compensation shall not include severance pay, hiring or relocation bonuses, or pay in lieu of vacations or sick leave COMMON STOCK Shall mean the common stock of the Company. COMPANY Shall mean BSQUARE Corporation, a Washington Corporation. CUSTODIAN Shall mean the investment or financial firm appointed by the Plan Administrator to hold all Shares pursuant to the Plan. CUSTODIAL ACCOUNT Shall mean the account maintained by the Custodian for a Participant under the Plan. DISABILITY Shall refer to a mental or physical impairment which is expected to result in death or which has lasted or is expected to last for a continuous period of twelve (12) months or more and which causes the Employee to be unable, in the opinion of the Company and two independent physicians, to perform his or her duties as an Employee of the Company. Disability shall be deemed to have occurred on the first day after the Company and two independent physicians have furnished their opinion of Disability to the Plan Administrator. 10 EMPLOYEE Shall mean an individual who renders services to the Employer pursuant to a regular-status employment relationship with such Employer. A person rendering services to an Employer purportedly as an independent consultant or contractor shall not be an Employee for purposes of the Plan. EMPLOYER Shall mean, collectively, the Company and its Subsidiaries or any successor entity that continues the Plan. All Employees of entities which constitute the Employer shall be treated as employed by a single company for all purposes of the Plan. EMPLOYMENT Shall mean the period during which an individual is an Employee. Employment shall commence on the day the individual first performs services for the Employer as an Employee and shall terminate on the day such services cease, except as determined under Section XI. ENROLLMENT DATE Shall mean the first day of each Offering. ESPP NEW ACCOUNT FORM Shall mean the form provided by the Company on which a Participant shall elect to open an Account with the Custodian and authorize delivery to the Custodian of all Shares issued for the Participant's Account. OFFERING Shall mean any one of the separate overlapping eighteen (18) month periods commencing on May 15 and November 15 of each calendar year under the Plan; provided, however, the first Offering shall commence on the effective date of the Company's registration statement filed in connection with the Company's initial public offering and end on May 14, 2001. PARTICIPANT Shall mean any Employee who is participating in any Offering under the Plan pursuant to Section III. PAYROLL DEDUCTION Shall mean the form provided by the Company on which a Participant shall elect to participate in the Plan and the Offering under the Plan and designate the percentage of that individual's compensation to be contributed to that individual's Account through payroll deductions. PLAN AUTHORIZATION FORM Shall mean this document. PLAN ADMINISTRATOR Shall mean the Board of Directors or the Committee, whichever shall be administering the Plan from time to time in the discretion of the Board of Directors, as described in Section IX. PURCHASE DATE Other than the first Offering, Purchase Date shall mean the last day of each of the sixth-, twelfth- and eighteenth-month periods of each Offering; accordingly, Purchase Dates for every Offering other than the first Offering shall occur on May 14 and November 14 of each year, beginning with May 14, 2000. For purposes of the first Offering (which shall commence on the effective date of the Company's registration statement filed in connection with the Company's initial public offering and end on May 14, 2001), the Purchase Dates shall be May 14, 2000, November 14, 2000 and May 14, 2001. RETIREMENT Shall mean a Participant's termination of Employment on or after attaining the age of 65 or after the Plan Administrator has determined that the individual has suffered a Disability. 11 SHARE Shall mean one share of Common Stock. SUBSIDIARIES Shall mean any corporation in which at least eighty percent (8 0%) or more of the total combined voting power of all classes of stock are owned directly or indirectly by BSQUARE Corporation VALUATION DATE Shall mean the date upon which the fair market value of Shares is to be determined for purposes of setting the price of Shares under Section VI (that is, the Enrollment Date or the applicable Purchase Date). If the Enrollment Date or the Purchase Date is not a date on which the fair market value may be determined in accordance with Section VI, the Valuation Date shall be the first day prior to the Enrollment Date or the Purchase Date, as applicable, for which such fair market value may be determined. VESTED Shall mean non-forfeitable. 12 EXHIBIT B BSQUARE 1999 Employee Stock Purchase Plan Payroll Deduction Authorization Form NAME ____________________________________ SOCIAL SECURITY: ________________________ DATE OF HIRE: ________________ Please complete the sections below which apply. Initial enrollments, withdrawals and changes in payroll deductions are effective for a specific pay period if submitted to the Stock Administrator 15 days prior to the last day of the payroll period. Re-enrollments must be received by the Stock Administrator by 4:00 PM on the Enrollment Date. Beneficiary designations are effective immediately and remain in effect until revoked. Enrollment Dates are on November 15 and May 15. Each Offering is in effect for 18 months. 1. INITIAL ENROLLMENT Complete 5 below. Attach Stock Broker New Account forms (Account Agreement, Information Sheet, and W-9), if you do not already have a custodial account with Stock Broker. I elect to participate in the BSQUARE 1999 Employee Stock Purchase Plan, effective as of the next Enrollment Date. I authorize a deduction of __% per pay period (not less than 1% or more than 10%) of my Compensation. On any Enrollment Date on which the market price of the shares is less than the initial market price of BSQUARE shares in the Offering in which I am currently participating, I hereby elect to withdraw from the Offering in which I am currently participating and reenroll in the new Offering beginning on such Enrollment Date. 2. CHANGE IN PAYROLL DEDUCTION I elect to change the amount of my payroll deduction to per pay period (not less than 1% or more than 10%) of my Compensation. I understand that the Plan permits modifications not more than three times during each 18 month Offering Period. I elect to discontinue my payroll deduction, without withdrawing from the Plan. I request that the aggregate balance in my Account be used to purchase Shares on the next Purchase Date, after which my participation in the Plan will terminate unless I timely file another Payroll Deduction Authorization form to resume payroll deductions. 3. WITHDRAWAL/TERMINATION I elect to withdraw from the Plan and terminate participation in the Offering in which I am currently participating. I request that my contributions be discontinued and the aggregate balance in my Account be returned to me. I understand that my Account balance will not be returned unless my election to withdraw is submitted at least 15 days prior to the next Purchase Date. 4. RE-ENROLLMENT Effective as of the first Enrollment Date that is either on or after the date of this Form, I elect to withdraw from the Offering in which I am currently participating and re-enroll in the new Offering beginning on such Enrollment Date. 5. BENEFICIARY DESIGNATION OR CHANGE I designate the following individual(s) as my beneficiary: (Name) (Relationship) ---------------------------------- -------------------------------- ---------------------------------- -------------------------------- ---------------------------------- -------------------------------- I have read the BSQUARE Corporation 1999 Employee Stock Purchase Plan and understand the terms and conditions stated in the Plan. I authorize the transactions indicated above. I understand that my current elections remain in effect until I submit a new election, in writing and on a timely basis, to the Stock Administrator. EX-10.3 7 401(K)PLAN 1 EXHIBIT 10.3 BSQUARE CONSULTING, INC. 401(K) PLAN AND TRUST 2 TABLE OF CONTENTS ARTICLE I DEFINITIONS ARTICLE II ADMINISTRATION 2.1 POWERS AND RESPONSIBILITIES OF THE EMPLOYER .......................... 16 2.2 DESIGNATION OF ADMINISTRATIVE AUTHORITY .............................. 16 2.3 POWERS AND DUTIES OF THE ADMINISTRATOR ............................... 17 2.4 RECORDS AND REPORTS .................................................. 18 2.5 APPOINTMENT OF ADVISERS .............................................. 18 2.6 PAYMENT OF EXPENSES .................................................. 19 2.7 CLAIMS PROCEDURE ..................................................... 19 2.8 CLAIMS REVIEW PROCEDURE .............................................. 19 ARTICLE III ELIGIBILITY 3.1 CONDITIONS OF ELIGIBILITY ............................................ 20 3.2 EFFECTIVE DATE OF PARTICIPATION ...................................... 20 3.3 DETERMINATION OF ELIGIBILITY ......................................... 20 3.4 TERMINATION OF ELIGIBILITY ........................................... 20 3.5 OMISSION OF ELIGIBLE EMPLOYEE ........................................ 21 3.6 INCLUSION OF INELIGIBLE EMPLOYEE ..................................... 21 3.7 ELECTION NOT TO PARTICIPATE .......................................... 21 ARTICLE IV CONTRIBUTION AND ALLOCATION 4.1 FORMULA FOR DETERMINING EMPLOYER CONTRIBUTION ........................ 21
3 4.2 PARTICIPANT'S SALARY REDUCTION ELECTION .............................. 22 4.3 TIME OF PAYMENT OF EMPLOYER CONTRIBUTION ............................. 26 4.4 ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS ................. 26 4.5 ACTUAL DEFERRAL PERCENTAGE TESTS ..................................... 30 4.6 ADJUSTMENT TO ACTUAL DEFERRAL PERCENTAGE TESTS ....................... 33 4.7 ACTUAL CONTRIBUTION PERCENTAGE TESTS ................................. 35 4.8 ADJUSTMENT TO ACTUAL CONTRIBUTION PERCENTAGE TESTS ................... 37 4.9 MAXIMUM ANNUAL ADDITIONS ............................................. 40 4.10 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS ............................ 43 4.11 TRANSFERS FROM QUALIFIED PLANS ....................................... 44 4.12 DIRECTED INVESTMENT ACCOUNT .......................................... 46 ARTICLE V VALUATIONS 5.1 VALUATION OF THE TRUST FUND .......................................... 48 5.2 METHOD OF VALUATION .................................................. 49 ARTICLE VI DETERMINATION AND DISTRIBUTION OF BENEFITS 6.1 DETERMINATION OF BENEFITS UPON RETIREMENT ............................ 49 6.2 DETERMINATION OF BENEFITS UPON DEATH ................................. 49 6.3 DETERMINATION OF BENEFITS IN EVENT OF DISABILITY ..................... 51 6.4 DETERMINATION OF BENEFITS UPON TERMINATION ........................... 51 6.5 DISTRIBUTION OF BENEFITS ............................................. 54 6.6 DISTRIBUTION OF BENEFITS UPON DEATH .................................. 57 6.7 TIME OF SEGREGATION OR DISTRIBUTION .................................. 59
4 6.8 DISTRIBUTION FOR MINOR BENEFICIARY ................................... 59 6.9 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN ....................... 59 6.10 QUALIFIED DOMESTIC RELATIONS ORDER DISTRIBUTION ...................... 60 ARTICLE VII TRUSTEE 7.1 BASIC RESPONSIBILITIES OF THE TRUSTEE ................................ 60 7.2 INVESTMENT POWERS AND DUTIES OF THE TRUSTEE .......................... 61 7.3 OTHER POWERS OF THE TRUSTEE .......................................... 63 7.4 LOANS TO PARTICIPANTS ................................................ 65 7.5 DUTIES OF THE TRUSTEE REGARDING PAYMENTS ............................. 67 7.6 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES ........................ 67 7.7 ANNUAL REPORT OF THE TRUSTEE ......................................... 67 7.8 AUDIT ................................................................ 68 7.9 RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE ....................... 69 7.10 TRANSFER OF INTEREST ................................................. 70 7.11 DIRECT ROLLOVER ...................................................... 70 ARTICLE VIII AMENDMENT, TERMINATION AND MERGERS 8.1 AMENDMENT ........................................................... 71 8.2 TERMINATION ......................................................... 72 8.3 MERGER OR CONSOLIDATION ............................................. 72 ARTICLE IX TOP HEAVY 9.1 TOP HEAVY PLAN REQUIREMENTS .......................................... 73 9.2 DETERMINATION OF TOP HEAVY STATUS .................................... 73
5 ARTICLE X MISCELLANEOUS 10.1 PARTICIPANT'S RIGHTS ................................................. 77 10.2 ALIENATION ........................................................... 77 10.3 CONSTRUCTION OF PLAN ................................................. 78 10.4 GENDER AND NUMBER .................................................... 78 10.5 LEGAL ACTION ......................................................... 78 10.6 PROHIBITION AGAINST DIVERSION OF FUNDS ............................... 78 10.7 BONDING .............................................................. 79 10.8 EMPLOYER'S AND TRUSTEE'S PROTECTIVE CLAUSE ........................... 79 10.9 INSURER'S PROTECTIVE CLAUSE .......................................... 79 10.10 RECEIPT AND RELEASE FOR PAYMENTS ..................................... 80 10.11 ACTION BY THE EMPLOYER ............................................... 80 10.12 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY ................... 80 10.13 HEADINGS ............................................................. 81 10.14 APPROVAL BY INTERNAL REVENUE SERVICE ................................. 81 10.15 UNIFORMITY ........................................................... 81 ARTICLE XI PARTICIPATING EMPLOYERS 11.1 ADOPTION BY OTHER EMPLOYERS .......................................... 82 11.2 REQUIREMENTS OF PARTICIPATING EMPLOYERS .............................. 82 11.3 DESIGNATION OF AGENT ................................................. 83 11.4 EMPLOYEE TRANSFERS ................................................... 83 11.5 PARTICIPATING EMPLOYER CONTRIBUTION .................................. 83 11.6 AMENDMENT ............................................................ 84 11.7 DISCONTINUANCE OF PARTICIPATION ...................................... 84
6 11.8 ADMINISTRATOR'S AUTHORITY ............................................ 84
7 BSQUARE CONSULTING, INC. 401 (K) PLAN AND TRUST THIS AGREEMENT, hereby made and entered into this ______ day of ________________, 19___, by and between bsquare consulting, inc. (herein referred to as the "Employer") and William Baxter, Albert Dosser and Peter Gregory (herein referred to as the "Trustee"). W I T N E S S E T H: WHEREAS, the Employer desires to recognize the contribution made to its successful operation by its employees and to reward such contribution by means of a 401(k) Profit Sharing Plan for those employees who shall qualify as Participants hereunder; NOW, THEREFORE, effective January 1, 1997, (hereinafter called the "Effective Date"), the Employer hereby establishes a 401(k) Profit Sharing Plan and creates this trust (which plan and trust are hereinafter called the "Plan") for the exclusive benefit of the Participants and their Beneficiaries, and the Trustee hereby accepts the Plan on the following terms: ARTICLE I DEFINITIONS 1.1 "Act" means the Employee Retirement Income Security Act of 1974, as it may be amended from time to time. 1.2 "Administrator" means the Employer unless another person or entity has been designated by the Employer pursuant to Section 2.2 to administer the Plan on behalf of the Employer. 1.3 "Affiliated Employer" means any corporation which is a member of a controlled group of corporations (as defined in Code Section 414(b)) which includes the Employer; any trade or business (whether or not incorporated) which is under common control (as defined in Code Section 414(c)) with the Employer; any organization (whether or not incorporated) which is a member of an affiliated service group (as defined in Code Section 414(m)) which includes the Employer; and any other entity required to be aggregated with the Employer pursuant to Regulations under Code Section 414(o). 1.4 "Aggregate Account" means, with respect to each Participant, the value of all accounts maintained on behalf of a Participant, whether attributable to Employer or Employee contributions, subject to the provisions of Section 9.2. 1.5 "Anniversary Date" means December 31st. 1.6 "Beneficiary" means the person to whom the share of a deceased Participant's total account is payable, subject to the restrictions of Sections 6.2 and 6.6. 1 8 1.7 "Code" means the Internal Revenue Code of 1986, as amended or replaced from time to time. 1.8 "Compensation" with respect to any Participant means such Participant's wages, salaries, fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer maintaining the Plan to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a nonaccountable plan (as described in Regulation 1.62-2(c)) for a Plan Year. Compensation shall exclude (a)(1) contributions made by the Employer to a plan of deferred compensation to the extent that, the contributions are not includible in the gross income of the Participant for the taxable year in which contributed, (2) Employer contributions made on behalf of an Employee to a simplified employee pension plan described in Code Section 408(k) to the extent such contributions are excludable from the Employee's gross income, (3) any distributions from a plan of deferred compensation; (b) amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by an Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture, (c) amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (d) other amounts which receive special tax benefits, or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of any annuity contract described in Code Section 403(b) (whether or not the contributions are actually excludable from the gross income of the Employee). For purposes of this Section, the determination of Compensation shall be made by: (a) including amounts which are contributed by the Employer pursuant to a salary reduction agreement and which are not includible in the gross income of the Participant under Code Sections 125, 402(e)(3), 402(h)(1)(B), 403(b) or 457(b), and Employee contributions described in Code Section 414(h)(2) that are treated as Employer contributions. For a Participant's initial year of participation, Compensation shall be recognized as of such Employee's effective date of participation pursuant to Section 3.2. Compensation in excess of $150,000 shall be disregarded. Such amount shall be adjusted for increases in the cost of living in accordance with Code Section 401(a)(17), except that the dollar increase in effect on January 1 of any calendar year shall be 2 9 effective for the Plan Year beginning with or within such calendar year. For any short Plan Year the Compensation limit shall be an amount equal to the Compensation limit for the calendar year in which the Plan Year begins multiplied by the ratio obtained by dividing the number of full months in the short Plan Year by twelve (12). In applying this limitation, the family group of a Highly Compensated Participant who is subject to the Family Member aggregation rules of Code Section 414(q)(6) because such Participant is either a "five percent owner" of the Employer or one of the ten (10) Highly Compensated Employees paid the greatest "415 Compensation" during the year, shall be treated as a single Participant, except that for this purpose Family Members shall include only the affected Participant's spouse and any lineal descendants who have not attained age nineteen (19) before the close of the year. if, as a result of the application of such rules the adjusted limitation is exceeded, then the limitation shall be prorated among the affected Family Members in proportion to each such Family Member's Compensation prior to the application of this limitation, or the limitation shall be adjusted in accordance with any other method permitted by Regulation. If, as a result of such rules, the maximum "annual addition" limit of Section 4.9(a) would be exceeded for one or more of the affected Family Members, the prorated Compensation of all affected Family Members shall be adjusted to avoid or reduce any excess. The prorated Compensation of any affected Family Member whose allocation would exceed the limit shall be adjusted downward to the level needed to provide an allocation equal to such limit. The prorated Compensation of affected Family Members not affected by such limit shall then be adjusted upward on a pro rata basis not to exceed each such affected Family Member's Compensation as determined prior to application of the Family Member rule. The resulting allocation shall not exceed such individual's maximum "annual addition" limit. If, after these adjustments, an "excess amount" still results, such "excess amount" shall be disposed of in the manner described in Section 4.10(a) pro rata among all affected Family Members. For purposes of this Section, if the Plan is a plan described in Code Section 413(c) or 414(f) (a plan maintained by more than one Employer) , the limitation applies separately with respect to the Compensation of any Participant from each Employer maintaining the Plan. 1.9 "Contract" or "Policy" means any life insurance policy, retirement income or annuity policy, or annuity contract (group or individual) issued pursuant to the terms of the Plan. 1.10 "Deferred Compensation" with respect to any Participant means the amount of the Participant's total Compensation which has been contributed to the Plan in accordance with the Participant's deferral election pursuant to Section 4.2 excluding any such amounts distributed as excess "annual additions" pursuant to Section 4.10(a). 3 10 1.11 "Designated Investment Alternative" means a specific investment identified by name by a Fiduciary as an available investment under the Plan which may be acquired or disposed of by the Trustee pursuant to the investment direction by a Participant. 1.12 "Directed Investment Option" means one or more of the following: (a) a Designated investment Alternative. (b) any other investment permitted by the Plan and the Participant Direction Procedures and acquired or disposed of by the Trustee pursuant to the investment direction of a Participant. 1.13 "Early Retirement Date." This Plan does not provide for a retirement date prior to Normal Retirement Date. 1.14 "Elective Contribution" means the Employer contributions to the Plan of Deferred Compensation excluding any such amounts distributed as excess "annual additions" pursuant to Section 4.10(a). In addition, any Employer Qualified Non-Elective Contribution made pursuant to Section 4.1(c) and Section 4.6(b) which is used to satisfy the "Actual Deferral Percentage" tests shall be considered an Elective Contribution for purposes of the Plan. Any contributions deemed to be Elective Contributions (whether or not used to satisfy the "Actual Deferral Percentage" tests) shall be subject to the requirements of Sections 4.2(b) and 4.2(c) and shall further be required to satisfy the nondiscrimination requirements of Regulation 1. 401 (k) -1 (b) (5) , the provisions of which are specifically incorporated herein by reference. 1.15 "Eligible Employee" means any Employee. Employees whose employment is governed by the terms of a collective bargaining agreement between Employee representatives (within the meaning of Code Section 7701(a)(46)) and the Employer under which retirement benefits were the subject of good faith bargaining between the parties will not be eligible to participate in this Plan unless such agreement expressly provides for coverage in this Plan. Employees of Affiliated Employers shall not be eligible to participate in this Plan unless such Affiliated Employers have specifically adopted this Plan in writing. 1.16 "Employee" means any person who is employed by the Employer or Affiliated Employer, but excludes any person who is an independent contractor. Employee shall include Leased Employees within the meaning of Code Sections 414(n)(2) and 414(o)(2) unless such Leased Employees are covered by a plan described in Code Section 414(n)(5) and such Leased Employees do not constitute more than 20% of the recipient's non-highly compensated work force. 4 11 1.17 "Employer" means bsquare consulting, inc. and any successor which shall maintain this Plan; and any predecessor which has maintained this Plan. The Employer is a corporation, with principal offices in the State of Washington. In addition, where appropriate, the term Employer shall include any Participating Employer (as defined in Section 11.1) which shall adopt this Plan. 1.18 "Excess Aggregate Contributions" means, with respect to any Plan Year, the excess of the aggregate amount of the Employer matching contributions made pursuant to Section 4.1(b) and any qualified non-elective contributions or elective deferrals taken into account pursuant to Section 4.7(c) on behalf of Highly Compensated Participants for such Plan Year, over the maximum amount of such contributions permitted under the limitations of Section 4.7(a). 1.19 "Excess Contributions" means, with respect to a Plan Year, the excess of Elective Contributions used to satisfy the "Actual Deferral Percentage" tests made on behalf of Highly Compensated Participants for the Plan Year over the maximum amount of such contributions permitted under Section 4.5(a). Excess Contributions shall be treated as an "annual addition" pursuant to Section 4.9(b). 1.20 "Excess Deferred Compensation" means, with respect to any taxable year of a Participant, the excess of the aggregate amount of such Participant's Deferred Compensation and the elective deferrals pursuant to Section 4.2(f) actually made on behalf of such Participant for such taxable year, over the dollar limitation provided for in Code Section 402(g), which is incorporated herein by reference. Excess Deferred Compensation shall be treated as an "annual addition" pursuant to Section 4.9(b) when contributed to the Plan unless distributed to the affected Participant not later than the first April 15th following the close of the Participant's taxable year. Additionally, for purposes of Sections 9.2 and 4.4(g), Excess Deferred Compensation shall continue to be treated as Employer contributions even if distributed pursuant to Section 4.2(f). However, Excess Deferred Compensation of Non-Highly Compensated Participants is not taken into account for purposes of Section 4.5(a) to the extent such Excess Deferred Compensation occurs pursuant to Section 4.2(d). 1.21 "Family Member" means, with respect to an affected Participant, such Participant's spouse and such Participant's lineal descendants and ascendants and their spouses, all as described in Code Section 414(q)(6)(B). 1.22 "Fiduciary" means any person who (a) exercises any discretionary authority or discretionary control respecting management of the Plan or exercises any authority or control respecting management or disposition of its assets, (b) renders investment advice for a fee or other compensation, direct or indirect, with respect to any monies or other property of the Plan or has any authority or responsibility to do so, or (c) has any 5 12 discretionary authority or discretionary responsibility in the administration of the Plan, including, but not limited to, the Trustee, the Employer and its representative body, and the Administrator. 1.23 "Fiscal Year" means the Employer's accounting year of 12 months commencing on January 1st of each year and ending the following December 31st. 1.24 "Forfeiture" means that portion of a Participant's Account that is not Vested, and occurs on the earlier of: (a) the distribution of the entire Vested portion of a Terminated Participant's Account, or (b) the last day of the Plan Year in which the Participant incurs five (5) consecutive 1-Year Breaks in Service. Furthermore, for purposes of paragraph (a) above, in the case of a Terminated Participant whose Vested benefit is zero, such Terminated Participant shall be deemed to have received a distribution of his Vested benefit upon his termination of employment. Restoration of such amounts shall occur pursuant to Section 6.4 (e) (2) . In addition, the term Forfeiture shall also include amounts deemed to be Forfeitures pursuant to any other provision of this Plan. 1.25 "Former Participant" means a person who has been a Participant, but who has ceased to be a Participant for any reason. 1.26 "415 Compensation" with respect to any Participant means such Participant's wages, salaries, fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer maintaining the Plan to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a nonaccountable plan (as described in Regulation 1.62-2(c)) for a Plan Year. "415 Compensation" shall exclude (a) (1) contributions made by the Employer to a plan of deferred compensation to the extent that, the contributions are not includible in the gross income of the Participant for the taxable year in which contributed, (2) Employer contributions made on behalf of an Employee to a simplified employee pension plan described in Code Section 408 (k) to the extent such contributions are excludable from the Employee's gross income, (3) any distributions from a plan of deferred compensation; (b) amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) 6 13 held by an Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (c) amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (d) other amounts which receive special tax benefits, or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of any annuity contract described in Code Section 403(b) (whether or not the contributions are actually excludable from the gross income of the Employee). 1.27 "414(s) Compensation" with respect to any Participant means such Participant's "415 Compensation" paid during a Plan Year. The amount of "414(s) Compensation" with respect to any Participant shall include "414(s) Compensation" for the entire twelve (12) month period ending on the last day of such Plan Year, except that "414 (s) Compensation" shall only be recognized for that portion of the Plan Year during which an Employee was a Participant in the Plan. For purposes of this Section, the determination of "414(s) Compensation" shall be made by including amounts which are contributed by the Employer pursuant to a salary reduction agreement and which are not includible in the gross income of the Participant under Code Sections 125, 402(e)(3), 402 (h) (1) (B) , 403(b) or 457(b), and Employee contributions described in Code Section 414(h)(2) that are treated as Employer contributions. "414 (s) Compensation" in excess of $150,000 shall be disregarded. Such amount shall be adjusted for increases in the cost of living in accordance with Code Section 401(a)(17), except that the dollar increase in effect on January 1 of any calendar year shall be effective for the Plan Year beginning with or within such calendar year. For any short Plan Year the "414(s) Compensation" limit shall be an amount equal to the "414(s) Compensation" limit for the calendar year in which the Plan Year begins multiplied by the ratio obtained by dividing the number of full months in the short Plan Year by twelve (12). In applying this limitation, the family group of a Highly Compensated Participant who is subject to the Family Member aggregation rules of code Section 414(q) (6) because such Participant is either a "five percent owner" of the Employer or one of the ten (10) Highly Compensated Employees paid the greatest "415 Compensation" during the year, shall be treated as a single Participant, except that for this purpose Family Members shall include only the affected Participant's spouse and any lineal descendants who have not attained age nineteen (19) before the close of the year. 1.28 "Highly Compensated Employee" means an Employee described in Code Section 414(q) and the Regulations thereunder, and generally means an Employee who performed services for the Employer during the "determination year" and is in one or more of the following groups: 7 14 (a) Employees who at any time during the "determination year" were "five percent owners" as defined in Section 1.34(c). (b) Employees who received "415 Compensation" during the "determination year" from the Employer in excess of $75,000. (c) Employees who received "415 Compensation" during the "determination year" from the Employer in excess of $50,000 and were in the Top Paid Group of Employees for the Plan Year. (d) Employees who during the "determination year" were officers of the Employer (as that term is defined within the meaning of the Regulations under Code Section 416) and received "415 Compensation" during the "determination year" from the Employer greater than 50 percent of the limit in effect under Code Section 415(b)(1)(A) for any such Plan Year. The number of officers shall be limited to the lesser of (i) 50 employees; or (ii) the greater of 3 employees or 10 percent of all employees. For the purpose of determining the number of officers, Employees described in Section 1.62(a), (b), (c) and (d) shall be excluded, but such Employees shall still be considered for the purpose of identifying the particular Employees who are officers. If the Employer does not have at least one officer whose annual "415 Compensation" is in excess of 50 percent of the Code Section 415 (b) (1) (A) limit, then the highest paid officer of the Employer will be treated as a Highly Compensated Employee. The "determination year" shall be the Plan Year for which testing is being performed. If an Employee is, during a "determination year", a Family Member of either a "five percent owner" (whether active or former) or a Highly Compensated Employee who is one of the 10 most Highly Compensated Employees ranked on the basis of "415 Compensation" paid by the Employer during such year, then the Family Member and the "five percent owner" or top-ten Highly Compensated Employee shall be aggregated. In such case, the Family Member and "five percent owner" or top-ten Highly Compensated Employee shall be treated as a single Employee receiving "415 Compensation" and Plan contributions or benefits equal to the sum of such "415 Compensation" and contributions or benefits of the Family Member and "five percent owner" or top-ten Highly Compensated Employee. For purposes of this Section, the determination of "415 Compensation" shall be made by including amounts which are contributed by the Employer pursuant to a salary reduction agreement and which are not includible in the gross income of the 8 15 Participant under Code Sections 125, 402(e)(3), 402(h)(1)(B), 403(b) or 457(b), and Employee contributions described in Code Section 414(h)(2) that are treated as Employer contributions. Additionally, the dollar threshold amounts specified in (b) and (c) above shall be adjusted at such time and in such manner as is provided in Regulations. In the case of such an adjustment, the dollar limits which shall be applied are those for the calendar year in which the "determination year" begins. In determining who is a Highly Compensated Employee, Employees who are non-resident aliens and who received no earned income (within the meaning of Code Section 911(d)(2)) from the Employer constituting United States source income within the meaning of Code Section 861(a)(3) shall not be treated as Employees. Additionally, all Affiliated Employers shall be taken into account as a single employer and Leased Employees within the meaning of Code Sections 414(n)(2) and 414(o)(2) shall be considered Employees unless such Leased Employees are covered by a plan described in Code Section 414(n)(5) and are not covered in any qualified plan maintained by the Employer. The exclusion of Leased Employees for this purpose shall be applied on a uniform and consistent basis for all of the Employer's retirement plans. Highly Compensated Former Employees shall be treated as Highly Compensated Employees without regard to whether they performed services during the "determination year." 1.29 "Highly Compensated Former Employee" means a former Employee who had a separation year prior to the "determination year" and was a Highly Compensated Employee in the year of separation from service or in any "determination year" after attaining age 55. Notwithstanding the foregoing, an Employee who separated from service prior to 1987 will be treated as a Highly Compensated Former Employee only if during the separation year (or year preceding the separation year) or any year after the Employee attains age 55 (or the last year ending before the Employee's 55th birthday), the Employee either received "415 Compensation" in excess of $50,000 or was a "five percent owner." For purposes of this Section, "determination year," "415 Compensation" and "five percent owner" shall be determined in accordance with Section 1.28. Highly Compensated Former Employees shall be treated as Highly Compensated Employees. The method set forth in this Section for determining who is a "Highly Compensated Former Employee" shall be applied on a uniform and consistent basis for all purposes for which the Code Section 414(q) definition is applicable. 1.30 "Highly Compensated Participant" means any Highly Compensated Employee who is eligible to participate in the Plan. 1.31 "Hour of Service" means each hour for which an Employee is paid or entitled to payment for the performance of duties for the Employer. 9 16 1.32 "Income" means the income or losses allocable to Excess Deferred Compensation, Excess Contributions or Excess Aggregate Contributions which amount shall be allocated in the same manner as income or losses are allocated pursuant to Section 4.4(e). 1.33 "Investment Manager" means an entity that (a) has the power to manage, acquire, or dispose of Plan assets and (b) acknowledges fiduciary responsibility to the Plan in writing. Such entity must be a person, firm, or corporation registered as an investment adviser under the Investment Advisers Act of 1940, a bank, or an insurance company. 1.34 "Key Employee" means an Employee as defined in Code Section 416(i) and the Regulations thereunder. Generally, any Employee or former Employee (as well as each of his Beneficiaries) is considered a Key Employee if he, at any time during the Plan Year that contains the "Determination Date" or any of the preceding four (4) Plan Years, has been included in one of the following categories: (a) an officer of the Employer (as that term is defined within the meaning of the Regulations under Code Section 416) having annual "415 Compensation" greater than 50 percent of the amount in effect under Code Section 415(b)(1)(A) for any such Plan Year. (b) one of the ten employees leaving annual "415 Compensation" from the Employer for a Plan Year greater than the dollar limitation in effect under Code Section 415(c)(1)(A) for the calendar year in which such Plan Year ends and owning (or considered as owning within the meaning of Code Section 318) both more than one-half percent interest and the largest interests in the Employer. (c) a "five percent owner" of the Employer. "Five percent owner" means any person who owns (or is considered as owning within the meaning of Code Section 318) more than five percent (5%) of the outstanding stock of the Employer or stock possessing more than five percent (5%) of the total combined voting power of all stock of the Employer or, in the case of an unincorporated business, any person who owns more than five percent (5% of the capital or profits interest in the Employer. In determining percentage ownership hereunder, employers that would otherwise be aggregated under Code Sections 414(b), (c), (m) and (o) shall be treated as separate employers. (d) a "one percent owner" of the Employer having an annual "415 Compensation" from the Employer of more than $150,000. "One percent owner" means any person who owns (or is considered as owning within the meaning of Code Section 318) more than one percent (1%) of the 10 17 outstanding stock of the Employer or stock possessing more than one percent (1%) of the total combined voting power of all stock of the Employer or, in the case of an unincorporated business, any person who owns more than one percent (1%) of the capital or profits interest in the Employer. In determining percentage ownership hereunder, employers that would otherwise be aggregated under Code Sections 414(b), (c), (m) and (o) shall be treated as separate employers. However, in determining whether an individual has "415 Compensation" of more than $150,000, "415 Compensation" from each employer required to be aggregated under Code Sections 414(b) (c) (m) and (o) shall be taken into account. For purposes of this Section, the determination of "415 Compensation" shall be made by including amounts which are contributed by the Employer pursuant to a salary reduction agreement and which are not includible in the gross income of the Participant under Code Sections 125, 402(e)(3), 402(h)(1)(B), 403(b) or 457(b), and Employee contributions described in Code Section 414(h)(2) that are treated as Employer contributions. 1.35 "Late Retirement Date" means the first day of the month coinciding with or next following a Participant's actual Retirement Date after having reached his Normal Retirement Date. 1.36 "Leased Employee" means any person (other than an Employee of the recipient) who Pursuant to an agreement between the recipient and any other person ("leasing organization") has performed services for the recipient (or for the recipient and related persons determined in accordance with Code Section 414(n)(6)) on a substantially full time basis for a period of at least one year, and such services are of a type historically performed by employees in the business field of the recipient employer. Contributions or benefits provided a Leased Employee by the leasing organization which are attributable to services performed for the recipient employer shall be treated as provided by the recipient employer. A Leased Employee shall not be considered an Employee of the recipient: (a) if such employee is covered by a money purchase pension plan providing: (1) a non-integrated employer contribution rate of at least 10% of compensation, as defined in Code Section 415(c)(3), but including amounts which are contributed by the Employer pursuant to a salary reduction agreement and which are not includible in the gross income of the Participant under Code Sections 125, 402(e)(3), 402(h)(1)(B), 403 (b) or 457(b), and Employee contributions described in Code Section 414(h)(2) that are treated as Employer contributions. 11 18 (2) immediate participation; and (3) full and immediate vesting; and (b) if Leased Employees do not constitute more than 20% of the recipient's non-highly compensated work force. 1.37 "Non-Elective Contribution" means the Employer contributions to the Plan excluding, however, contributions made pursuant to the Participant's deferral election provided for in Section 4.2 and any Qualified Non-Elective Contribution used in the "Actual Deferral Percentage" tests. 1.38 "Non-Highly Compensated Participant" means any Participant who is neither a Highly Compensated Employee nor a Family Member. 1.39 "Non-Key Employee" means any Employee or former Employee (and his Beneficiaries) who is not a Key Employee. 1.40 "Normal Retirement Age" means the Participant's 65th birthday. A Participant shall become fully Vested in his Participant's Account upon attaining his Normal Retirement Age. 1.41 "Normal Retirement Date" means the first day of the month coinciding with or next following the Participant's Normal Retirement Age. 1.42 "1-Year Break in Service" means a Period of Severance of at least 12 consecutive months. 1.43 "Participant" means any Eligible Employee who participates in the Plan and has not for any reason become ineligible to participate further in the Plan. 1.44 "Participant Direction Procedures" means such instructions, guidelines or policies, the terms of which are incorporated herein, as shall be established pursuant to Section 4.12 and observed by the Administrator and applied and provided to Participants who have Participant Directed Accounts. 1.45 "Participant's Account" means the account established and maintained by the Administrator for each Participant with respect to his total interest in the Plan and Trust resulting from the Employer Non-Elective Contributions. A separate accounting shall be maintained with respect to that portion of the Participant's Account attributable to Employer matching contributions made pursuant to Section 4.1(b), Employer discretionary contributions made pursuant to Section 4.1(d) and any Employer Qualified Non-Elective Contributions. 12 19 1.46 "Participant's Combined Account" means the total aggregate amount of each Participant's Elective Account and Participant's Account. 1.47 "Participant's Directed Account" means that portion of a Participant's interest in the Plan with respect to which the Participant has directed the investment in accordance with the Participant Direction Procedure. 1.48 "Participant's Elective Account" means the account established and maintained by the Administrator for each Participant with respect to his total interest in the Plan and Trust resulting from the Employer Elective Contributions used to satisfy the "Actual Deferral Percentage" tests. A separate accounting shall be maintained with respect to that portion of the Participant's Elective Account attributable to such Elective Contributions pursuant to Section 4.2 and any Employer Qualified Non-Elective Contributions. 1.49 "Period of Service" means the aggregate of all periods commencing with the Employee's first day of employment or reemployment with the Employer or Affiliated Employer and ending on the date a 1-Year Break in Service begins. The first day of employment or reemployment is the first day the Employee performs an Hour of Service. An Employee will also receive partial credit for any Period of Severance of less than 12 consecutive months. Fractional periods of a year will be expressed in terms of days. 1.50 "Period of Severance" means a continuous period of time during which the Employee is not employed by the Employer. Such period begins on the date the Employee retires, quits or is discharged, or if earlier, the 12 month anniversary of the date on which the Employee was otherwise first absent from service. In the case of an individual who is absent from work for maternity or paternity reasons, the 12-consecutive month period beginning on the first anniversary of the first day of such absence shall not constitute a 1-Year Break in Service. For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence (a) by reason of the pregnancy of the individual, (b) by reason of the birth of a child of the individual, (c) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (d) for purposes of caring for such child for a period beginning immediately following such birth or placement. 1.51 "Plan" means this instrument, including all amendments thereto. 1.52 "Plan Year" means the Plan's accounting year of twelve (12) months commencing on January 1st of each year and ending the following December 31st. 13 20 1.53 "Qualified Non-Elective Contribution" means any Employer contributions made pursuant to Section 4.1(c) and Section 4.6(b) and Section 4.8(h). Such contributions shall be considered an Elective Contribution for the purposes of the Plan and may be used to satisfy the "Actual Deferral Percentage" tests or the "Actual Contribution Percentage" tests. 1.54 "Regulation" means the Income Tax Regulations as promulgated by the Secretary of the Treasury or his delegate, and as amended from time to time. 1.55 "Retired Participant" means a person who has been a Participant, but who has become entitled to retirement benefits under the Plan. 1.56 "Retirement Date" means the date as of which a Participant retires for reasons other than Total and Permanent Disability, whether such retirement occurs on a Participant's Normal Retirement Date or Late Retirement Date (see Section 6.1). 1.57 "Shareholder-Employee" means a Participant who owns more than five percent (5%) of the Employer's outstanding capital stock during any year in which the Employer elected to be taxed as a Small Business Corporation under the applicable Code Section. 1.58 "Super Top Heavy Plan" means a plan described in Section 9.2(b). 1.59 "Terminated Participant" means a person who has been a Participant, but whose employment has been terminated other than by death, Total and Permanent Disability or retirement. 1.60 "Top Heavy Plan" means a plan described in Section 9.2(a). 1.61 "Top Heavy Plan Year" means a Plan Year during which the Plan is a Top Heavy Plan. 1.62 "Top Paid Group" means the top 20 percent of Employees who performed services for the Employer during the applicable year, ranked according to the amount of "415 Compensation" (determined for this purpose in accordance with Section 1.28) received from the Employer during such year. All Affiliated Employers shall be taken into account as a single employer, and Leased Employees within the meaning of Code Sections 414(n)(2) and 414(o)(2) shall be considered Employees unless such Leased Employees are covered by a plan described in Code Section 414(n)(5) and are not covered in any qualified plan maintained by the Employer. Employees who are non-resident aliens and who received no earned income (within the meaning of Code Section 911(d)(2)) from the Employer constituting United States source income within the meaning of Code Section 861(a)(3) shall not be treated as Employees. Additionally, for the purpose of determining the number of active Employees in any year, the following additional Employees shall also be 14 21 excluded; however, such Employees shall still he considered for the purpose of identifying the particular Employees in the Top Paid Group: (a) Employees with less than six (6) months of service; (b) Employees who normally work less than 17 1/2 hours per week; (c) Employees who normally work less than six (6) months during a year; and (d) Employees who have not yet attained age 21. In addition, if 90 percent or more of the Employees of the Employer are covered under agreements the Secretary of Labor finds to be collective bargaining agreements between Employee representatives and the Employer, and the Plan covers only Employees who are not covered under such agreements, then Employees covered by such agreements shall be excluded from both the total number of active Employees as well as from the identification of particular Employees in the Top Paid Group. The foregoing exclusions set forth in this Section shall be applied on a uniform and consistent basis for all purposes for which the Code Section 414(q) definition is applicable. 1.63 "Total and Permanent Disability" means a physical or mental condition of a Participant resulting from bodily injury, disease, or mental disorder which renders him incapable of continuing his usual and customary employment with the Employer. The disability of a Participant shall be determined by a licensed physician chosen by the Administrator. The determination shall be applied uniformly to all Participants. 1.64 "Trustee" means the person or entity named as trustee herein or in any separate trust forming a part of this Plan, and any successors. 1.65 "Trust Fund" means the assets of the Plan and Trust as the same shall exist from time to time. 1.66 "Valuation Date" means the Anniversary Date and such other date or dates deemed necessary by the Administrator. The Valuation Date may include any day during the Plan Year that the Trustee, any transfer agent appointed by the Trustee or the Employer and any stock exchange used by such agent are open for business. 1.67 "Vested" means the nonforfeitable portion of any account maintained on behalf of a Participant. 15 22 ARTICLE II ADMINISTRATION 2.1 POWERS AND RESPONSIBILITIES OF THE EMPLOYER (a) In addition to the general powers and responsibilities otherwise provided for in this Plan, the Employer shall be empowered to appoint and remove the Trustee and the Administrator from time to time as it deems necessary for the proper administration of the Plan to ensure that the Plan is being operated for the exclusive benefit of the Participants and their Beneficiaries in accordance with the terms of the Plan, the Code, and the Act. The Employer may appoint counsel, specialists, advisers, agents (including any nonfiduciary agent) and other persons as the Employer deems necessary or desirable in connection with the exercise of its fiduciary duties under this Plan. The Employer may compensate such agents or advisers from the assets of the Plan as fiduciary expenses (but not including any business (settlor) expenses of the Employer), to the extent not paid by the Employer. (b) The Employer shall establish a "funding policy and method," i.e., it shall determine whether the Plan has a short run need for liquidity (e.g., to pay benefits) or whether liquidity is a long run goal and investment growth (and stability of same) is a more current need, or shall appoint a qualified person to do so. The Employer or its delegate shall communicate such needs and goals to the Trustee, who shall coordinate such Plan needs with its investment policy. The communication of such a "funding policy and method" shall not, however, constitute a directive to the Trustee as to investment of the Trust Funds. Such "funding policy and method" shall be consistent with the objectives of this Plan and with the requirements of Title I of the Act. (c) The Employer shall periodically review the performance of any Fiduciary or other person to whom duties have been delegated or allocated by it under the provisions of this Plan or pursuant to procedures established hereunder. This requirement may be satisfied by formal periodic review by the Employer or by a qualified person specifically designated by the Employer, through day-to-day conduct and evaluation, or through other appropriate ways. 2.2 DESIGNATION OF ADMINISTRATIVE AUTHORITY The Employer shall be the Administrator. The Employer may appoint any person, including, but not limited to, the Employees of the Employer, to perform the duties of the Administrator. Any person so appointed shall signify his acceptance by filing written 16 23 acceptance with the Employer. Upon the resignation or removal of any individual performing the duties of the Administrator, the Employer may designate a successor. 2.3 POWERS AND DUTIES OF THE ADMINISTRATOR The primary responsibility of the Administrator is to administer the Plan for the exclusive benefit of the Participants and their Beneficiaries, subject to the specific terms of the Plan. The Administrator shall administer the Plan in accordance with its terms and shall have the power and discretion to construe the terms of the Plan and to determine all questions arising in connection with the administration, interpretation, and application of the Plan. Any such determination by the Administrator shall be conclusive and binding upon all persons. The Administrator may establish procedures, correct any defect, supply any information, or reconcile any inconsistency in such manner and to such extent as shall be deemed necessary or advisable to carry out the purpose of the Plan; provided, however, that any procedure, discretionary act, interpretation or construction shall be done in a nondiscriminatory manner based upon uniform principles consistently applied and shall be consistent with the intent that the Plan shall continue to be deemed a qualified plan under the terms of Code Section 401(a), and shall comply with the terms of the Act and all regulations issued pursuant thereto. The Administrator shall have all powers necessary or appropriate to accomplish his duties under this Plan. The Administrator shall be charged with the duties of the general administration of the Plan, including, but not limited to, the following: (a) the discretion to determine all questions relating to the eligibility of Employees to participate or remain a Participant hereunder and to receive benefits under the Plan; (b) to compute, certify, and direct the Trustee with respect to the amount and the kind of benefits to which any Participant shall be entitled hereunder; (c) to authorize and direct the Trustee with respect to all nondiscretionary or otherwise directed disbursements from the Trust; (d) to maintain all necessary records for the administration of the Plan; (e) to interpret the provisions of the Plan and to make and publish such rules for regulation of the Plan as are consistent with the terms hereof; (f) to determine the size and type of any Contract to be purchased from any insurer, and to designate the insurer from which such Contract shall be purchased; 17 24 (g) to compute and certify to the Employer and to the Trustee from time to time the sums of money necessary or desirable to be contributed to the Plan; (h) to consult with the Employer and the Trustee regarding the short and long-term liquidity needs of the Plan in order that the Trustee can exercise any investment discretion in a manner designed to accomplish specific objectives; (i) to prepare and implement a procedure to notify Eligible Employees that they may elect to have a portion of their Compensation deferred or paid to them in cash; (j) to act as the named Fiduciary responsible for communications with Participants as needed to maintain Plan compliance with ERISA Section 404(c), including but not limited to the receipt and transmitting of Participant's directions as to the investment of their account(s) under the Plan and the formulation of policies, rules, and procedures pursuant to which Participants may give investment instructions with respect to the investment of their accounts; (k) to assist any Participant regarding his rights, benefits, or elections available under the Plan. 2.4 RECORDS AND REPORTS The Administrator shall keep a record of all actions taken and shall keep all other books of account, records, policies, and other data that may be necessary for proper administration of the Plan and shall be responsible for supplying all information and reports to the Internal Revenue Service, Department of Labor, Participants, Beneficiaries and others as required by law. 2.5 APPOINTMENT OF ADVISERS The Administrator, or the Trustee with the consent of the Administrator, may appoint counsel, specialists, advisers, agents (including nonfiduciary agents) and other persons as the Administrator or the Trustee deems necessary or desirable in connection with the administration of this Plan, including but not limited to agents and advisers to assist with the administration and management of the Plan, and thereby to provide, among such other duties as the Administrator may appoint, assistance with maintaining Plan records and the providing of investment information to the Plan's investment fiduciaries and to Plan Participants. 18 25 2.6 PAYMENT OF EXPENSES All expenses of administration may be paid out of the Trust Fund unless paid by the Employer. Such expenses shall include any expenses incident to the functioning of the Administrator, or any person or persons retained or appointed by any Named Fiduciary incident to the exercise of their duties under the Plan, including, but not limited to, fees of accountants, counsel, Investment Managers, agents (including nonfiduciary agents) appointed for the purpose of assisting the Administrator or the Trustee in carrying out the instructions of Participants as to the directed investment of their accounts and other specialists and their agents, and other costs of administering the Plan. Until paid, the expenses shall constitute a liability of the Trust Fund. 2.7 CLAIMS PROCEDURE Claims for benefits under the Plan may be filed in writing with the Administrator. Written notice of the disposition of a claim shall be furnished to the claimant within 90 days after the application is filed. In the event the claim is denied, the reasons for the denial shall be specifically set forth in the notice in language calculated to be understood by the claimant, pertinent provisions of the Plan shall be cited, and, where appropriate, an explanation as to how the claimant can perfect the claim will be provided. In addition, the claimant shall be furnished with an explanation of the Plan's claims review procedure. 2.8 CLAIMS REVIEW PROCEDURE Any Employee, former Employee, or Beneficiary of either, who has been denied a benefit by a decision of the Administrator pursuant to Section 2.7 shall be entitled to request the Administrator to give further consideration to his claim by filing with the Administrator (on a form which may be obtained from the Administrator) a request for a hearing. Such request, together with a written statement of the reasons why the claimant believes his claim should be allowed, shall be filed with the Administrator no later than 60 days after receipt of the written notification provided for in Section 2.7. The Administrator shall then conduct a hearing within the next 60 days, at which the claimant may be represented by an attorney or any other representative of his choosing and at which the claimant shall have an opportunity to submit written and oral evidence and arguments in support of his claim. At the hearing (or prior thereto upon 5 business days written notice to the Administrator) the claimant or his representative shall have an opportunity to review all documents in the possession of the Administrator which are pertinent to the claim at issue and its disallowance. Either the claimant or the Administrator may cause a court reporter to attend the hearing and record the proceedings. In such event, a complete written transcript of the proceedings shall be furnished to both parties by the court reporter. The full expense of any such court reporter and 19 26 such transcripts shall be borne by the party causing the court reporter to attend the hearing. A final decision as to the allowance of the claim shall be made by the Administrator within 60 days of receipt of the appeal (unless there has been an extension of 60 days due to special circumstances, provided the delay and the special circumstances occasioning it are communicated to the claimant within the 60 day period). Such communication shall be written in a manner calculated to be understood by the claimant and shall include specific reasons for the decision and specific references to the pertinent Plan provisions on which the decision is based. ARTICLE III ELIGIBILITY 3.1 CONDITIONS OF ELIGIBILITY Any Eligible Employee shall be eligible to participate hereunder on the date of his employment with the Employer. 3.2 EFFECTIVE DATE OF PARTICIPATION An Eligible Employee shall become a Participant effective April 1, 1997, if employed on that date, otherwise as of the earlier of the first day of the Plan Year or the first day of the seventh month of such Plan Year coinciding with or next following the date such Employee met the eligibility requirements of Section 3.1, provided said Employee was still employed as of such date (or if not employed on such date, as of the date of rehire if a 1-Year Break in Service has not occurred). In the event an Employee who is not a member of an eligible class of Employees becomes a member of an eligible class, such Employee will participate immediately if such Employee would have otherwise previously become a Participant. 3.3 DETERMINATION OF ELIGIBILITY The Administrator shall determine the eligibility of each Employee for participation in the Plan based upon information furnished by the Employer. Such determination shall be conclusive and binding upon all persons, as long as the same is made pursuant to the Plan and the Act. Such determination shall be subject to review per Section 2.8. 3.4 TERMINATION OF ELIGIBILITY (a) In the event a Participant shall go from a classification of an Eligible Employee to an ineligible Employee, such Former Participant shall continue to vest in his interest in the Plan for each Period of Service completed while a noneligible Employee, until such time as his Participant's Account shall be forfeited or distributed pursuant to the terms of the Plan. 20 27 Additionally, his interest in the Plan shall continue to share in the earnings of the Trust Fund. (b) In the event a Participant is no longer a member of an eligible class of Employees and becomes ineligible to participate, such Employee will participate immediately upon returning to an eligible class of Employees. 3.5 OMISSION OF ELIGIBLE EMPLOYEE If, in any Plan Year, any Employee who should be included as a Participant in the Plan is erroneously omitted and discovery of such omission is not made until after a contribution by his Employer for the year has been made, the Employer shall make a subsequent contribution with respect to the omitted Employee in the amount which the said Employer would have contributed with respect to him had he not been omitted. Such contribution shall be made regardless of whether or not it is deductible in whole or in part in any taxable year under applicable provisions of the Code. 3.6 INCLUSION OF INELIGIBLE EMPLOYEE If, in any Plan Year, any person who should not have been included as a Participant in the Plan is erroneously included and discovery of such incorrect inclusion is not made until after a contribution for the year has been made, the Employer shall not be entitled to recover the contribution made with respect to the ineligible person regardless of whether or not a deduction is allowable with respect to such contribution. In such event, the amount contributed with respect to the ineligible person shall constitute a Forfeiture (except for Deferred Compensation which shall be distributed to the ineligible person) for the Plan Year in which the discovery is made. 3.7 ELECTION NOT TO PARTICIPATE An Employee may, subject to the approval of the Employer, elect voluntarily not to participate in the Plan. The election not to participate must be communicated to the Employer, in writing, at least thirty (30) days before the beginning of a Plan Year. ARTICLE IV CONTRIBUTION AND ALLOCATION 4.1 FORMULA FOR DETERMINING EMPLOYER CONTRIBUTION For each Plan Year, the Employer shall contribute to the Plan: (a) The amount of the total salary reduction elections of all Participants made pursuant to Section 4.2(a), which amount shall be deemed an Employer Elective Contribution. 21 28 (b) on behalf of each Participant who is eligible to share in matching contributions for the Plan Year, a discretionary matching contribution equal to a uniform percentage of each such Participant's Deferred Compensation, the exact percentage, if any, to be determined each year by the Employer, which amount, if any, shall be deemed an Employer Non-Elective Contribution. (c) On behalf of each Non-Highly Compensated Participant and Non-Key Employee who is eligible to share in the Qualified Non-Elective Contribution for the Plan Year, a discretionary Qualified Non-Elective Contribution equal to a uniform percentage of each eligible individual's Compensation, the exact percentage, if any, to be determined each year by the Employer. Any Employer Qualified Non-Elective Contribution shall be deemed an Employer Elective Contribution. (d) A discretionary amount, which amount, if any, shall be deemed an Employer Non-Elective Contribution. (e) Additionally, to the extent necessary, the Employer shall contribute to the Plan the amount necessary to provide the top heavy minimum contribution. All contributions by the Employer shall be made in cash. 4.2 PARTICIPANT'S SALARY REDUCTION ELECTION (a) Each Participant may elect to defer a portion of his Compensation which would have been received in the Plan Year (except for the deferral election) by up to the maximum amount which will not cause the Plan to violate the provisions of Sections 4.5(a) and 4.9. A deferral election (or modification of an earlier election) may not be made with respect to Compensation which is currently available on or before the date the Participant executed such election or, if later, the latest of the date the Employer adopts this cash or deferred arrangement, or the date such arrangement first became effective. For purposes of this Section, Compensation shall be determined prior to any reductions made pursuant to Code Sections 125, 402(e)(3), 402(h)(1)(B), 403(b) or 457(b), and Employee contributions described in Code Section 414(h)(2) that are treated as Employer contributions. The amount by which Compensation is reduced shall be that Participant's Deferred Compensation and be treated as an Employer Elective Contribution and allocated to that Participant's Elective Account. (b) The balance in each Participant's Elective Account shall be fully Vested at all times and shall not be subject to Forfeiture for any reason. 22 29 (c) Notwithstanding anything in the Plan to the contrary, amounts held in the Participant's Elective Account may not be distributable (including any offset of loans) earlier than: (1) a Participant's separation from service, Total and Permanent Disability, or death; (2) a Participant's attainment of age 59 1/2; (3) the termination of the Plan without the establishment or existence of a "successor plan," as that term is described in Regulation 1.401(k)-1(d)(3); (4) the date of disposition by the Employer to an entity that is not an Affiliated Employer of substantially all of the assets (within the meaning of Code Section 409(d)(2)) used in a trade or business of such corporation if such corporation continues to maintain this Plan after the disposition with respect to a Participant who continues employment with the corporation acquiring such assets; or (5) the date of disposition by the Employer or an Affiliated Employer who maintains the Plan of its interest in a subsidiary (within the meaning of Code Section 409(d)(3)) to an entity which is not an Affiliated Employer but only with respect to a Participant who continues employment with such subsidiary. (d) For each Plan Year, a Participant's Deferred Compensation made under this Plan and all other plans, contracts or arrangements of the Employer maintaining this Plan shall not exceed, during any taxable year of the Participant, the limitation imposed by Code Section 402(g), as in effect at the beginning of such taxable year. If such dollar limitation is exceeded, a Participant will be deemed to have notified the Administrator of such excess amount which shall be distributed in a manner consistent with Section 4.2(f). The dollar limitation shall he adjusted annually pursuant to the method provided in Code Section 415(d) in accordance with Regulations. (e) In the event a Participant has received a hardship distribution pursuant to Regulation 1.401(k)-l(d)(2)(iv)(B) from any other plan maintained by the Employer, then such Participant shall not be permitted to elect to have Deferred Compensation contributed to the Plan on his behalf for a period of twelve (12) months following the receipt of the 23 30 distribution. Furthermore, the dollar limitation under Code Section 402(g) shall be reduced, with respect to the Participant's taxable year following the taxable year in which the hardship distribution was made, by the amount of such Participant's Deferred Compensation, if any, pursuant to this Plan (and any other plan maintained by the Employer) for the taxable year of the hardship distribution. (f) If a Participant's Deferred Compensation under this Plan together with any elective deferrals (as defined in Regulation 1.402(g)-l(b)) under another qualified cash or deferred arrangement (as defined in Code Section 401(k)), a simplified employee pension (as defined in Code Section 408(k)), a salary reduction arrangement (within the meaning of Code Section 3121(a)(5)(D)), a deferred compensation plan under Code Section 457(b), or a trust described in Code Section 501(c)(18) cumulatively exceed the limitation imposed by Code Section 402(g) (as adjusted annually in accordance with the method provided in Code Section 415(d) pursuant to Regulations) for such Participant's taxable year, the Participant may, not later than March 1 following the close of the Participant's taxable year, notify the Administrator in writing of such excess and request that his Deferred Compensation under this Plan be reduced by an amount specified by the Participant. In such event, the Administrator may direct the Trustee to distribute such excess amount (and any income allocable to such excess amount) to the Participant not later than the first April 15th following the close of the Participant's taxable year. Any distribution of less than the entire amount of Excess Deferred Compensation and Income shall be treated as a pro rata distribution of Excess Deferred Compensation and Income. The amount distributed shall not exceed the Participant's Deferred Compensation under the Plan for the taxable year (and any Income allocable to such excess amount). Any distribution on or before the last day of the Participant's taxable year must satisfy each of the following conditions: (1) the distribution must be made after the date on which the Plan received the Excess Deferred Compensation; (2) the Participant shall designate the distribution as Excess Deferred Compensation; and (3) the Plan must designate the distribution as a distribution of Excess Deferred Compensation. 24 31 Matching contributions which relate to Excess Deferred Compensation which is distributed pursuant to this Section 4.2(f) shall be forfeited. (g) Notwithstanding Section 4.2(f) above, a Participant's Excess Deferred Compensation shall be reduced, but not below zero, by any distribution of Excess Contributions pursuant to Section 4.6(a) for the Plan Year beginning with or within the taxable year of the Participant. (h) At Normal Retirement Date, or such other date when the Participant shall be entitled to receive benefits, the fair market value of the Participant's Elective Account shall be used to provide additional benefits to the Participant or his Beneficiary. (i) Employer Elective Contributions made pursuant to this Section may be segregated into a separate account for each Participant in a federally insured savings account, certificate of deposit in a bank or savings and loan association, money market certificate, or other short-term debt security acceptable to the Trustee until such time as the allocations pursuant to Section 4.4 have been made. (j) The Employer and the Administrator shall implement the salary reduction elections provided for herein in accordance with the following: (1) A Participant must make his initial salary deferral election within a reasonable time, not to exceed thirty (30) days, after entering the Plan pursuant to Section 3.2. If the Participant fails to make an initial salary deferral election within such time, then such Participant may thereafter make an election in accordance with the rules governing modifications. The Participant shall make such an election by entering into a written salary reduction agreement with the Employer and filing such agreement with the Administrator. Such election shall initially be effective beginning with the pay period following the acceptance of the salary reduction agreement by the Administrator, shall not have retroactive effect and shall remain in force until revoked. (2) A Participant may modify a prior election at any time during the Plan Year and concurrently make a new election by filing a written notice with the Administrator within a reasonable time before the pay period for which such modification is to be effective. Any modification shall not 25 32 have retroactive effect and shall remain in force until revoked. (3) A Participant may elect to prospectively revoke his salary reduction agreement in its entirety at any time during the Plan Year by providing the Administrator with thirty (30) days written notice of such revocation (or upon such shorter notice period as may be acceptable to the Administrator). Such revocation shall become effective as of the beginning of the first pay period coincident with or next following the expiration of the notice period. Furthermore, the termination of the Participant's employment, or the cessation of participation for any reason, shall be deemed to revoke any salary reduction agreement then in effect, effective immediately following the close of the pay period within which such termination or cessation occurs. 4.3 TIME OF PAYMENT OF EMPLOYER CONTRIBUTION The Employer shall generally pay to the Trustee its contribution to the Plan for each Plan Year within the time prescribed by law, including extensions of time, for the filing of the Employer federal income tax return for the Fiscal Year. However, Employer Elective Contributions accumulated through payroll deductions shall be paid to the Trustee as of the earliest date on which such contributions can reasonably be segregated from the Employer general assets, but in any event within ninety (90) days from the date on which such amounts would otherwise have been payable to the Participant in cash. The provisions of Department of Labor regulations 2510.3-102 are incorporated herein by reference. Furthermore, any additional Employer contributions which are allocable to the Participant's Elective Account for a Plan Year shall be paid to the Plan no later than the twelve-month period immediately following the close of such Plan Year. 4.4 ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS (a) The Administrator shall establish and maintain an account in the name of each Participant to which the Administrator shall credit as of each Anniversary Date all amounts allocated to each such Participant as set forth herein. (b) The Employer shall provide the Administrator with all information required by the Administrator to make a proper allocation of the Employer contributions for each Plan Year. Within a reasonable period of time after the date of receipt by the Administrator of such 26 33 information, the Administrator shall allocate such contribution as follows: (1) With respect to the Employer Elective Contribution made pursuant to Section 4.1(a), to each Participant's Elective Account in an amount equal to each such Participant's Deferred Compensation for the year. (2) With respect to the Employer Non-Elective Contribution made pursuant to Section 4.1(b), to each Participant's Account in accordance with Section 4.1(b). Any Participant actively employed during the Plan Year shall be eligible to share in the matching contribution for the Plan Year. (3) With respect to the Employer Qualified Non-Elective Contribution made pursuant to Section 4.1(c), to each Participant's Elective Account when used to satisfy the "Actual Deferral Percentage" tests or Participant's Account in accordance with Section 4.1(c). Any Non-Highly Compensated Participant and Non-Key Employee actively employed during the Plan Year shall be eligible to share in the Qualified Non-Elective Contribution for the Plan Year. (4) With respect to the Employer Non-Elective Contribution made pursuant to Section 4.1(d), to each Participant's Account in the same proportion that each such Participant's Compensation for the year bears to the total Compensation of all Participants for such year. Only Participants who are actively employed on the last day of the Plan Year or who complete more than three (3) consecutive months of service during the Plan Year prior to terminating employment shall be eligible to share in the discretionary contribution for the year. (c) As of each Anniversary Date any amounts which became Forfeitures since the last Anniversary Date shall first be made available to reinstate previously forfeited account balances of Former Participants, if any, in accordance with Section 6.4(e)(2). The remaining Forfeitures, if any, shall be allocated to Participants' Accounts and used to reduce the contribution of the Employer hereunder for the Plan Year in which such Forfeitures occur in the following manner: 27 34 (1) Forfeitures attributable to Employer matching contributions made pursuant to Section 4.1(b) shall be used to reduce the Employer contribution for the Plan Year in which such Forfeitures occur. (2) Forfeitures attributable to Employer discretionary contributions made pursuant to Section 4.1(d) shall be allocated among the Participants' Accounts of Participants otherwise eligible to share in the allocation of discretionary contributions for the year in the same proportion that each such Participant's Compensation for the year bears to the total Compensation of all such Participants for the year. Provided, however, that in the event the allocation of Forfeitures provided herein shall cause the "annual addition" (as defined in Section 4.9) to any Participant's Account to exceed the amount allowable by the Code, the excess shall be reallocated in accordance with Section 4.10. (d) For any Top heavy Plan Year, Employees not otherwise eligible to share in the allocation of contributions and Forfeitures as provided above, shall receive the minimum allocation provided for in Section 4.4(g) if eligible pursuant to the provisions of Section 4.4(i). (e) As of each Valuation Date, before allocation of one-half of the Employer contributions for the entire Plan Year and after allocation of Forfeitures, any earnings or losses (net appreciation or net depreciation) of the Trust Fund shall be allocated in the same proportion that each Participant's and Former Participant's nonsegregated accounts bear to the total of all Participants, and Former Participants' nonsegregated accounts as of such date. Earnings or losses with respect to a Participants Directed Account shall be allocated in accordance with Section 4.12. Participants' transfers from other qualified plans deposited in the general Trust Fund shall share in any earnings and losses (net appreciation or net depreciation) of the Trust Fund in the same manner provided above. Each segregated account maintained on behalf of a Participant shall be credited or charged with its separate earnings and losses. (f) Participants' accounts shall be debited for any insurance or annuity premiums paid, if any, and credited with any dividends received on insurance contracts. 28 35 (g) Minimum Allocations Required for Top Heavy Plan Years: Notwithstanding the foregoing, for any Top Heavy Plan Year, the sum of the Employer contributions and Forfeitures allocated to the Participant's Combined Account of each Employee shall be equal to at least three percent (3%) of such Employee's "415 Compensation" (reduced by contributions and forfeitures, if any, allocated to each Employee in any defined contribution plan included with this plan in a Required Aggregation Group). However, if (1) the sum of the Employer contributions and Forfeitures allocated to the Participant's Combined Account of each Key Employee for such Top Heavy Plan Year is less than three percent (3%) of each Key Employee's "415 Compensation" and (2) this Plan is not required to be included in an Aggregation Group to enable a defined benefit plan to meet the requirements of Code Section 401(a)(4) or 410, the sum of the Employer contributions and Forfeitures allocated to the Participant's Combined Account of each Employee shall be equal to the largest percentage allocated to the Participant's Combined Account of any Key Employee. However, in determining whether a Non-Key Employee has received the required minimum allocation, such Non-Key Employee's Deferred Compensation and matching contributions needed to satisfy the "Actual Contribution Percentage" tests pursuant to Section 4.7(a) shall not be taken into account. However, no such minimum allocation shall be required in this Plan for any Employee who participates in another defined contribution plan subject to Code Section 412 included with this Plan in a Required Aggregation Group. (h) For purposes of the minimum allocations set forth above, the percentage allocated to the Participant's Combined Account of any Key Employee shall be equal to the ratio of the sum of the Employer contributions and Forfeitures allocated on behalf of such Key Employee divided by the "415 Compensation" for such Key Employee. (i) For any Top Heavy Plan Year, the minimum allocations set forth above shall be allocated to the Participant's Combined Account of all Employees who are Participants and who are employed by the Employer on the last day of the Plan Year, including Employees who have (1) failed to complete a Period of Service; and (2) declined to make mandatory contributions (if required) or, in the case of a cash or deferred arrangement, elective contributions to the Plan. (j) For the purposes of this Section, "415 Compensation" shall be limited to $150,000. Such amount 29 36 shall be adjusted for increases in the cost of living in accordance with Code Section 401(a)(17), except that the dollar increase in effect on January 1 of any calendar year shall be effective for the Plan Year beginning with or within such calendar year. For any short Plan Year the "415 Compensation" limit shall be an amount equal to the "415 Compensation" limit for the calendar year in which the Plan Year begins multiplied by the ratio obtained by dividing the number of full months in the short Plan Year by twelve (12). (k) Notwithstanding anything herein to the contrary, Participants who terminated employment for any reason during the Plan Year shall share in the salary reduction contributions made by the Employer for the year of termination without regard to the Hours of Service credited. (1) If a Former Participant is reemployed after five (5) consecutive 1-Year Breaks in Service, then separate accounts shall be maintained as follows: (1) one account for nonforfeitable benefits attributable to pre-break service; and (2) one account representing his status in the Plan attributable to post-break service. 4.5 ACTUAL DEFERRAL PERCENTAGE TESTS (a) Maximum Annual Allocation: For each Plan Year, the annual allocation derived from Employer Elective Contributions to a Participant's Elective Account shall satisfy one of the following tests: (1) The "Actual Deferral Percentage" for the Highly Compensated Participant group shall not be more than the "Actual Deferral Percentage" of the Non-Highly Compensated Participant group multiplied by 1.25, or (2) The excess of the "Actual Deferral Percentage" for the Highly Compensated Participant group over the "Actual Deferral Percentage" for the Non-Highly Compensated Participant group shall not be more than two percentage points. Additionally, the "Actual Deferral Percentage" for the Highly Compensated Participant group shall not exceed the "Actual Deferral Percentage" for the Non-Highly Compensated Participant group multiplied by 2. The provisions of Code Section 401(k)(3) and Regulation 1.401(k)-1(b) are incorporated herein by reference. 30 37 However, in order to prevent the multiple use of the alternative method described in (2) above and in Code Section 401(m)(9)(A), any Highly Compensated Participant eligible to make elective deferrals pursuant to Section 4.2 and to make Employee contributions or to receive matching contributions under this Plan or under any other plan maintained by the Employer or an Affiliated Employer shall have a combination of his actual deferral ratio and his actual contribution ratio reduced pursuant to Regulation 1.401(m)-2, the provisions of which are incorporated herein by reference. (b) For the purposes of this Section "Actual Deferral Percentage" means, with respect to the Highly Compensated Participant group and Non-Highly Compensated Participant group for a Plan Year, the average of the ratios, calculated separately for each Participant in such group, of the amount of Employer Elective Contributions allocated to each Participant's Elective Account for such Plan Year, to such Participant's "414(s) Compensation" for such Plan Year. The actual deferral ratio for each Participant and the "Actual Deferral Percentage" for each group shall be calculated to the nearest one-hundredth of one percent. Employer Elective Contributions allocated to each Non-Highly Compensated Participant's Elective Account shall be reduced by Excess Deferred Compensation to the extent such excess amounts are made under this Plan or any other plan maintained by the Employer. (c) For the purpose of determining the actual deferral ratio of a Highly Compensated Employee who is subject to the Family Member aggregation rules of Code Section 414(q)(6) because such Participant is either a "five percent owner" of the Employer or one of the ten (10) Highly Compensated Employees paid the greatest "415 Compensation" during the year, the following shall apply: (1) The combined actual deferral ratio for the family group (which shall be treated as one Highly Compensated Participant) shall be determined by aggregating Employer Elective Contributions and "414(s) Compensation" of all eligible Family Members (including Highly Compensated Participants). However, in applying the $150,000 limit to "414(s) Compensation," Family Members shall include only the affected Employee's spouse and any lineal descendants who have not attained age 19 before the close of the Plan Year. (2) The Employer Elective Contributions and "414(s) Compensation" of all Family Members shall 31 38 be disregarded for purposes of determining the "Actual Deferral Percentage" of the Non-Highly Compensated Participant group except to the extent taken into account in paragraph (1) above. (3) If a Participant is required to be aggregated as a member of more than one family group in a plan, all Participants who are members of those family groups that include the Participant are aggregated as one family group in accordance with paragraphs (1) and (2) above. (d) For the purposes of Sections 4.5(a) and 4.6, a Highly Compensated Participant and a Non-Highly Compensated Participant shall include any Employee eligible to make a deferral election pursuant to Section 4.2, whether or not such deferral election was made or suspended pursuant to Section 4.2. (e) For the purposes of this Section and Code Sections 401(a)(4), 410(b) and 401(k), if two or more plans which include cash or deferred arrangements are considered one plan for the purposes of Code Section 401(a)(4) or 410(b) (other than Code Section 410(b)(2)(A)(ii)), the cash or deferred arrangements included in such plans shall be treated as one arrangement. In addition, two or more cash or deferred arrangements may be considered as a single arrangement for purposes of determining whether or not such arrangements satisfy Code Sections 401(a)(4), 410(b) and 401(k). In such a case, the cash or deferred arrangements included in such plans and the plans including such arrangements shall be treated as one arrangement and as one plan for purposes of this Section and Code Sections 401(a)(4), 410(b) and 401(k). Plans may be aggregated under this paragraph (e) only if they have the same plan year. Notwithstanding the above, an employee stock ownership plan described in Code Section 4975(e)(7) or 409 may not be combined with this Plan for purposes of determining whether the employee stock ownership plan or this Plan satisfies this Section and Code Sections 401(a)(4), 410(b) and 401(k). (f) For the purposes of this Section, if a Highly Compensated Participant is a Participant under two or more cash or deferred arrangements (other than a cash or deferred arrangement which is part of an employee stock ownership plan as defined in Code Section 4975(e)(7) or 409) of the Employer or an Affiliated Employer, all such cash or deferred arrangements shall be treated as one cash or deferred arrangement for the purpose of determining the actual deferral ratio with respect to 32 39 such Highly Compensated Participant. However, if the cash or deferred arrangements have different plan years, this paragraph shall be applied by treating all cash or deferred arrangements ending with or within the same calendar year as a single arrangement. 4.6 ADJUSTMENT TO ACTUAL DEFERRAL PERCENTAGE TESTS In the event that the initial allocations of the Employer Elective Contributions made pursuant to Section 4.4 do not satisfy one of the tests set forth in Section 4.5(a), the Administrator shall adjust Excess Contributions pursuant to the options set forth below: (a) On or before the fifteenth day of the third month following the end of each Plan Year, the Highly Compensated Participant having the highest actual deferral ratio shall have his portion of Excess Contributions distributed to him until one of the tests set forth in Section 4.5(a) is satisfied, or until his actual deferral ratio equals the actual deferral ratio of the Highly Compensated Participant having the second highest actual deferral ratio. This process shall continue until one of the tests set forth in Section 4.5(a) is satisfied. For each Highly Compensated Participant, the amount of Excess Contributions is equal to the Elective Contributions used to satisfy the "Actual Deferral Percentage" tests on behalf of such Highly Compensated Participant (determined prior to the application of this paragraph) minus the amount determined by multiplying the Highly Compensated Participant's actual deferral ratio (determined after application of this paragraph) by his "414(s) Compensation." However, in determining the amount of Excess Contributions to be distributed with respect to an affected Highly Compensated Participant as determined herein, such amount shall be reduced pursuant to Section 4.2(f) by any Excess Deferred Compensation previously distributed to such affected Highly Compensated Participant for his taxable year ending with or within such Plan Year. (1) With respect to the distribution of Excess Contributions pursuant to (a) above, such distribution: (i) may be postponed but not later than the close of the Plan Year following the Plan Year to which they are allocable; (ii) shall be adjusted for Income; and 33 40 (iii) shall be designated by the Employer as a distribution of Excess Contributions (and Income). (2) Any distribution of less than the entire amount of Excess Contributions shall be treated as a pro rata distribution of Excess Contributions and Income. (3) The determination and correction of Excess Contributions of a Highly Compensated Participant whose actual deferral ratio is determined under the family aggregation rules shall be accomplished by reducing the actual deferral ratio as required herein, and the Excess Contributions for the family unit shall then be allocated among the Family Members in proportion to the Elective Contributions of each Family Member that were combined to determine the group actual deferral ratio. (4) Matching contributions which relate to Excess Contributions shall be forfeited unless the related matching contribution is distributed as an Excess Aggregate Contribution pursuant to Section 4.8. (b) Within twelve (12) months after the end of the Plan Year, the Employer may make a special Qualified Non-Elective Contribution on behalf of Non-Highly Compensated Participants electing salary reductions pursuant to Section 4.2 in an amount sufficient to satisfy one of the tests set forth in Section 4.5(a). Such contribution shall be allocated to the Participant's Elective Account of each Non-Highly Compensated Participant electing salary reductions pursuant to Section 4.2 in the same proportion that each such Non-Highly Compensated Participant's Deferred Compensation for the year bears to the total Deferred Compensation of all such Non-Highly Compensated Participants. (c) If during a Plan Year the projected aggregate amount of Elective Contributions to be allocated to all Highly Compensated Participants under this Plan would, by virtue of the tests set forth in Section 4.5(a), cause the Plan to fail such tests, then the Administrator may automatically reduce proportionately or in the order provided in Section 4.6(a) each affected Highly Compensated Participant's deferral election made pursuant to Section 4.2 by an amount necessary to satisfy one of the tests set forth in Section 4.5(a). 34 41 4.7 ACTUAL CONTRIBUTION PERCENTAGE TESTS (a) The "Actual Contribution Percentage" for the Highly Compensated Participant group shall not exceed the greater of: (1) 125 percent of such percentage for the Non-Highly Compensated Participant group; or (2) the lesser of 200 percent of such percentage for the Non-Highly Compensated Participant group, or such percentage for the Non-Highly Compensated Participant group plus 2 percentage points. However, to prevent the multiple use of the alternative method described in this paragraph and Code Section 401(m)(9)(A), any Highly Compensated Participant eligible to make elective deferrals pursuant to Section 4.2 or any other cash or deferred arrangement maintained by the Employer or an Affiliated Employer and to make Employee contributions or to receive matching contributions under this Plan or under any plan maintained by the Employer or an Affiliated Employer shall have a combination of his actual deferral ratio and his actual contribution ratio reduced pursuant to Regulation 1.401(m)-2. The provisions of Code Section 401(m) and Regulations 1.401(m)-l(b) and 1.401(m)-2 are incorporated herein by reference. (b) For the purposes of this Section and Section 4.8, "Actual Contribution Percentage" for a Plan Year means, with respect to the Highly Compensated Participant group and Non-Highly Compensated Participant group, the average of the ratios (calculated separately for each Participant in each group) of: (1) the sum of Employer matching contributions made pursuant to Section 4.1(b) on behalf of each such Participant for such Plan Year; to (2) the Participant's "414(s) Compensation" for such Plan Year. (c) For purposes of determining the "Actual Contribution Percentage" and the amount of Excess Aggregate Contributions pursuant to Section 4.8(d), only Employer matching contributions contributed to the Plan prior to the end of the succeeding Plan Year shall be considered. In addition, the Administrator may elect to take into account, with respect to Employees eligible to have Employer matching contributions pursuant to Section 4.1(b) allocated to their accounts, elective deferrals (as defined in Regulation 1.402(g)-l(b)) and qualified non-elective contributions (as defined in Code 35 42 Section 401(m)(4)(C)) contributed to any plan maintained by the Employer. Such elective deferrals and qualified non-elective contributions shall be treated as Employer matching contributions subject to Regulation 1.401(m)-1(b)(5) which is incorporated herein by reference. However, the Plan Year must be the same as the plan year of the plan to which the elective deferrals and the qualified non-elective contributions are made. (d) For the purpose of determining the actual contribution ratio of a Highly Compensated Employee who is subject to the Family Member aggregation rules of Code Section 414(q)(6) because such Employee is either a "five percent owner" of the Employer or one of the ten (10) Highly Compensated Employees paid the greatest "415 Compensation" during the year, the following shall apply: (1) The combined actual contribution ratio for the family group (which shall he treated as one Highly Compensated Participant) shall be determined by aggregating Employer matching contributions made pursuant to section 4.1(b) and "414(s) Compensation" of all eligible Family Members (including Highly Compensated Participants). However, in applying the $150,000 limit to "414(s) Compensation", Family Members shall include only the affected Employee's spouse and any lineal descendants who have not attained age 19 before the close of the Plan Year. (2) The Employer matching contributions made pursuant to Section 4.1(b) and "414(s) Compensation" of all Family Members shall be disregarded for purposes of determining the "Actual Contribution Percentage" of the Non-Highly Compensated Participant group except to the extent taken into account in paragraph (1) above. (3) If a Participant is required to be aggregated as a member of more than one family group in a plan, all Participants who are members of those family groups that include the Participant are aggregated as one family group in accordance with paragraphs (1) and (2) above. (e) For purposes of this Section and Code Sections 401(a)(4), 410(b) and 401(m), if two or more plans of the Employer to which matching contributions, Employee contributions, or both, are made are treated as one plan for purposes of Code Sections 401(a)(4) or 410(b) (other than the average benefits test under Code Section 410(b)(2)(A)(ii)), such plans shall be treated as one plan. In addition, two or more plans of the Employer to which matching contributions, Employee contributions, 36 43 or both, are made may be considered as a single plan for purposes of determining whether or not such plans satisfy Code Sections 401(a)(4), 410(b) and 401(m). In such a case, the aggregated plans must satisfy this Section and Code Sections 401(a)(4), 410(b) and 401(m) as though such aggregated plans were a singLe plan. Plans may be aggregated under this paragraph (e) only if they have the same plan year. Notwithstanding the above, an employee stock ownership plan described in Code Section 4975(e)(7) or 409 may not be aggregated with this Plan for purposes of determining whether the employee stock ownership plan or this Plan satisfies this Section and Code Sections 401(a)(4), 410(b) and 401(m). (f) If a Highly Compensated Participant is a Participant under two or more plans (other than an employee stock ownership plan as defined in Code Section 4975(e)(7) or 409) which are maintained by the Employer or an Affiliated Employer to which matching contributions, Employee contributions, or both, are made, all such contributions on behalf of such Highly Compensated Participant shall be aggregated for purposes of determining such Highly Compensated Participant's actual contribution ratio. However, if the plans have different plan years, this paragraph shall be applied by treating all plans ending with or within the same calendar year as a single plan. (g) For purposes of Sections 4.7(a) and 4.8, a Highly Compensated Participant and Non-Highly Compensated Participant shall include any Employee eligible to have Employer matching contributions pursuant to Section 4.1(b) (whether or not a deferral election was made or suspended pursuant to Section 4.2(e)) allocated to his account for the Plan Year. 4.8 ADJUSTMENT TO ACTUAL CONTRIBUTION PERCENTAGE TESTS (a) In the event that the "Actual Contribution Percentage" for the Highly Compensated Participant group exceeds the "Actual Contribution Percentage" for the Non-Highly Compensated Participant group pursuant to Section 4.7(a), the Administrator (on or before the fifteenth day of the third month following the end of the Plan Year, but in no event later than the close of the following Plan Year) shall direct the Trustee to distribute to the Highly Compensated Participant having the highest actual contribution ratio, his Vested portion of Excess Aggregate Contributions (and Income allocable to such contributions) and, if forfeitable, forfeit such non-Vested Excess Aggregate Contributions attributable to Employer matching contributions (and Income allocable to 37 44 such forfeitures) until either one of the tests set forth in Section 4.7(a) is satisfied, or until his actual contribution ratio equals the actual contribution ratio of the Highly Compensated Participant having the second highest actual contribution ratio. This process shall continue until one of the tests set forth in Section 4.7(a) is satisfied. If the correction of Excess Aggregate Contributions attributable to Employer matching contributions is not in proportion to the Vested and non-Vested portion of such contributions, then the Vested portion of the Participant's Account attributable to Employer matching contributions after the correction shall be subject to Section 6.5(f). (b) Any distribution and/or forfeiture of less than the entire amount of Excess Aggregate Contributions (and Income) shall be treated as a pro rata distribution and/or forfeiture of Excess Aggregate Contributions and Income. Distribution of Excess Aggregate Contributions shall be designated by the Employer as a distribution of Excess Aggregate Contributions (and Income). Forfeitures of Excess Aggregate Contributions shall be treated in accordance with Section 4.4. (c) Excess Aggregate Contributions, including forfeited matching contributions, shall be treated as Employer contributions for purposes of Code Sections 404 and 415 even if distributed from the Plan. Forfeited matching contributions that are reallocated to Participants' Accounts for the Plan Year in which the forfeiture occurs shall be treated as an "annual addition" pursuant to Section 4.9(b) for the Participants to whose Accounts they are reallocated and for the Participants from whose Accounts they are forfeited. (d) For each Highly Compensated Participant, the amount of Excess Aggregate Contributions is equal to the Employer matching contributions made pursuant to Section 4.1(b) and any qualified non-elective contributions or elective deferrals taken into account pursuant to Section 4.7(c) on behalf of the Highly Compensated Participant (determined prior to the application of this paragraph) minus the amount determined by multiplying the Highly Compensated Participant's actual contribution ratio (determined after application of this paragraph) by his "414(s) Compensation." The actual contribution ratio must be rounded to the nearest one-hundredth of one percent. In no case shall the amount of Excess Aggregate Contribution with respect to any Highly Compensated Participant exceed the amount of Employer matching 38 45 contributions made pursuant to Section 4.1(b) and any qualified non-elective contributions or elective deferrals taken into account pursuant to Section 4.7(c) on behalf of such Highly Compensated Participant for such Plan Year. (e) The determination of the amount of Excess Aggregate Contributions with respect to any Plan Year shall be made after first determining the Excess Contributions, if any, to be treated as voluntary Employee contributions due to recharacterization for the plan year of any other qualified cash or deferred arrangement (as defined in Code Section 401(k)) maintained by the Employer that ends with or within the Plan Year. (f) If the determination and correction of Excess Aggregate Contributions of a Highly Compensated Participant whose actual contribution ratio is determined under the family aggregation rules, then the actual contribution ratio shall be reduced and the Excess Aggregate Contributions for the family unit shall be allocated among the Family Members in proportion to the sum of Employer matching contributions made pursuant to Section 4.1(b) and any qualified non-elective contributions or elective deferrals taken into account pursuant to Section 4.7 (c) of each Family Member that were combined to determine the group actual contribution ratio. (g) If during a Plan Year the projected aggregate amount of Employer matching contributions to be allocated to all Highly Compensated Participants under this Plan would, by virtue of the tests set forth in Section 4.7(a), cause the Plan to fail such tests, then the Administrator may automatically reduce proportionately or in the order provided in Section 4.8(a) each affected Highly Compensated Participant's projected share of such contributions by an amount necessary to satisfy one of the tests set forth in Section 4.7(a). (h) Notwithstanding the above, within twelve (12) months after the end of the Plan Year, the Employer may make a special Qualified Non-Elective Contribution on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy one of the tests set forth in Section 4.7(a). Such contribution shall be allocated to the Participant's Account of each Non-Highly Compensated Participant in the same proportion that each Non-Highly Compensated Participant's Compensation for the year bears to the total compensation of all Non-Highly Compensated Participants. A separate accounting of any special Qualified Non-Elective Contribution shall be maintained in the Participant's Account. 39 46 4.9 MAXIMUM ANNUAL ADDITIONS (a) Notwithstanding the foregoing, the maximum "annual additions" credited to a Participant's accounts for any "limitation year" shall equal the lesser of: (1) $30,000 adjusted annually as provided in Code Section 415(d) pursuant to the Regulations, or (2) twenty-five percent (25%) of the Participant's "415 Compensation" for such "limitation year." For any short "limitation year," the dollar limitation in (1) above shall be reduced by a fraction, the numerator of which is the number of full months in the short "limitation year" and the denominator of which is twelve (12). (b) For purposes of applying the limitations of Code Section 415, "annual additions" means the sum credited to a Participant's accounts for any "limitation year" of (1) Employer contributions, (2) Employee contributions, (3) forfeitures, (4) amounts allocated, after March 31, 1984, to an individual medical account, as defined in Code Section 415(l)(2) which is part of a pension or annuity plan maintained by the Employer and (5) amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after such date, which are attributable to post-retirement medical benefits allocated to the separate account of a key employee (as defined in Code Section 419A(d)(3)) under a welfare benefit plan (as defined in Code Section 419(e)) maintained by the Employer. Except, however, the "415 Compensation" percentage limitation referred to in paragraph (a)(2) above shall not apply to: (1) any contribution for medical benefits (within the meaning of Code Section 419A(f)(2)) after separation from service which is otherwise treated as an "annual addition," or (2) any amount otherwise treated as an "annual addition" under Code Section 415(l)(1). (c) For purposes of applying the limitations of Code Section 415, the transfer of funds from one qualified plan to another is not an "annual addition." In addition, the following are not Employee contributions for the purposes of Section 4.9(b)(2): (1) rollover contributions (as defined in Code Sections 402(e)(6), 403(a)(4), 403(b)(8) and 408(d)(3)); (2) repayments of loans made to a Participant from the Plan; (3) repayments of distributions received by an Employee pursuant to Code Section 411(a)(7)(B) (cash-outs); (4) repayments of distributions received by an Employee pursuant to Code Section 411(a)(3)(D) (mandatory contributions); and (5) Employee contributions to a simplified employee pension excludable from gross income under Code Section 408(k)(6). 40 47 (d) For purposes of applying the limitations of Code Section 415, the "limitation year" shall be the Plan Year. (e) For the purpose of this Section, all qualified defined benefit plans (whether terminated or not) ever maintained by the Employer shall be treated as one defined benefit plan, and all qualified defined contribution plans (whether terminated or not) ever maintained by the Employer shall be treated as one defined contribution plan. (f) For the purpose of this Section, if the Employer is a member of a controlled group of corporations, trades or businesses under common control (as defined by Code Section 1563(a) or Code Section 414(b) and (c) as modified by Code Section 415(h)), is a member of an affiliated service group (as defined by Code Section 414(m)), or is a member of a group of entities required to be aggregated pursuant to Regulations under Code Section 414(o), all Employees of such Employers shall be considered to be employed by a single Employer. (g) For the purpose of this Section, if this Plan is a Code Section 413(c) plan, each Employer who maintains this Plan will be considered to be a separate Employer. (h)(1) If a Participant participates in more than one defined contribution plan maintained by the Employer which have different Anniversary Dates, the maximum "annual additions" under this Plan shall equal the maximum "annual additions" for the "limitation year" minus any "annual additions" previously credited to such Participant's accounts during the "limitation year." (2) If a Participant participates in both a defined contribution plan subject to Code Section 412 and a defined contribution plan not subject to Code Section 412 maintained by the Employer which have the same Anniversary Date, "annual additions" will be credited to the Participant's accounts under the defined contribution plan subject to Code Section 412 prior to crediting "annual additions" to the Participant's accounts under the defined contribution plan not subject to Code Section 412. (3) If a Participant participates in more than one defined contribution plan not subject to Code Section 412 maintained by the Employer which have the same Anniversary Date, the maximum "annual additions" under this Plan shall equal the product 41 48 of (A) the maximum "annual additions" for the "limitation year" minus any "annual additions" previously credited under subparagraphs (1) or (2) above, multiplied by (B) a fraction (i) the numerator of which is the "annual additions" which would be credited to such Participant's accounts under this Plan without regard to the limitations of Code Section 415 and (ii) the denominator of which is such "annual additions" for all plans described in this subparagraph. (i) If an Employee is (or has been) a Participant in one or more defined benefit plans and one or more defined contribution plans maintained by the Employer, the sum of the defined benefit plan fraction and the defined contribution plan fraction for any "limitation year" may not exceed 1.0. (j) The defined benefit plan fraction for any "limitation year" is a fraction, the numerator of which is the sum of the Participant's projected annual benefits under all the defined benefit plans (whether or not terminated) maintained by the Employer, and the denominator of which is the lesser of 125 percent of the dollar limitation determined for the "limitation year" under Code Sections 415(b) and (d) or 140 percent of the highest average compensation, including any adjustments under Code Section 415(b). Notwithstanding the above, if the Participant was a Participant as of the first day of the first "limitation year" beginning after December 31, 1986, in one or more defined benefit plans maintained by the Employer which were in existence on May 6, 1986, the denominator of this fraction will not be less than 125 percent of the sum of the annual benefits under such plans which the Participant had accrued as of the close of the last "limitation year" beginning before January 1, 1987, disregarding any changes in the terms and conditions of the plan after May 5, 1986. The preceding sentence applies only if the defined benefit plans individually and in the aggregate satisfied the requirements of Code Section 415 for all "limitation years" beginning before January 1, 1987. (k) The defined contribution plan fraction for any "limitation year" is a fraction, the numerator of which is the sum of the annual additions to the Participant's Account under all the defined contribution plans (whether or not terminated) maintained by the Employer for the current and all prior "limitation years" (including the annual additions attributable to the Participant's nondeductible Employee contributions to all defined benefit plans, whether or not terminated, maintained by 42 49 the Employer, and the annual additions attributable to all welfare benefit funds, as defined in Code Section 419(e), and individual medical accounts, as defined in code section 415(1)(2), maintained by the Employer), and the denominator of which is the sum of the maximum aggregate amounts for the current and all prior "limitation years" of service with the Employer (regardless of whether a defined contribution plan was maintained by the Employer). The maximum aggregate amount in any "limitation year" is the lesser of 125 percent of the dollar limitation determined under Code Sections 415(b) and (d) in effect under Code Section 415(c)(1)(A) or 35 percent of the Participant's Compensation for such year. If the Employee was a Participant as of the end of the first day of the first "limitation year" beginning after December 31, 1986, in one or more defined contribution plans maintained by the Employer which were in existence on May 6, 1986, the numerator of this fraction will be adjusted if the sum of this fraction and the defined benefit fraction would otherwise exceed 1.0 under the terms of this Plan. Under the adjustment, an amount equal to the product of (1) the excess of the sum of the fractions over 1.0 times (2) the denominator of this fraction, will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of the end of the last "limitation year" beginning before January 1, 1987, and disregarding any changes in the terms and conditions of the Plan made after May 5, 1986, but using the Code Section 415 limitation applicable to the first "limitation year" beginning on or after January 1, 1987. The annual addition for any "limitation year" beginning before January 1, 1987 shall not be recomputed to treat all Employee contributions as annual additions. (1) Notwithstanding anything contained in this Section to the contrary, the limitations, adjustments and other requirements prescribed in this Section shall at all times comply with the provisions of Code Section 415 and the Regulations thereunder, the terms of which are specifically incorporated herein by reference. 4.10 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS (a) if, as a result of the allocation of Forfeitures, a reasonable error in estimating a Participant's Compensation, a reasonable error in determining the amount of elective deferrals (within the meaning of Code Section 402(g)(3)) that may be made with respect to any Participant under the limits of Section 4.9 or other facts and circumstances to which Regulation 43 50 1.415-6(b)(6) shall be applicable, the "annual additions" under this Plan would cause the maximum "annual additions" to be exceeded for any Participant, the Administrator shall (1) distribute any elective deferrals (within the meaning of Code Section 402(g)(3)) or return any Employee contributions (whether voluntary or mandatory), and for the distribution of gains attributable to those elective deferrals and Employee contributions, to the extent that the distribution or return would reduce the "excess amount" in the Participant's accounts (2) hold any "excess amount" remaining after the return of any elective deferrals or voluntary Employee contributions in a "Section 415 suspense account" (3) use the "Section 415 suspense account" in the next "limitation year" (and succeeding "limitation years" if necessary) to reduce Employer contributions for that Participant if that Participant is covered by the Plan as of the end of the "limitation year," or if the Participant is not so covered, allocate and reallocate the "Section 415 suspense account" in the next "limitation year" (and succeeding "limitation years" if necessary) to all Participants in the Plan before any Employer or Employee contributions which would constitute "annual additions" are made to the Plan for such "limitation year" (4) reduce Employer contributions to the Plan for such "limitation year" by the amount of the "Section 415 suspense account" allocated and reallocated during such "limitation year." (b) For purposes of this Article, "excess amount" for any Participant for a "limitation year" shall mean the excess, if any, of (1) the "annual additions" which would be credited to his account under the terms of the Plan without regard to the limitations of Code Section 415 over (2) the maximum "annual additions" determined pursuant to Section 4.9. (c) For purposes of this Section, "Section 415 suspense account" shall mean an unallocated account equal to the sum of "excess amounts" for all Participants in the Plan during the "limitation year." The "Section 415 suspense account" shall not share in any earnings or losses of the Trust Fund. 4.11 TRANSFERS FROM QUALIFIED PLANS (a) with the consent of the Administrator, amounts may be transferred from other qualified plans by Eligible Employees, provided that the trust from which such funds are transferred permits the transfer to be made and the transfer will not jeopardize the tax exempt status of the Plan or Trust or create adverse tax consequences for the Employer. The amounts transferred shall be set up in a separate account herein referred to as a "Participant's 44 51 Rollover Account." Such account shall be fully Vested at all times and shall not be subject to Forfeiture for any reason. (b) Amounts in a Participant's Rollover Account shall be held by the Trustee pursuant to the provisions of this Plan and may not be withdrawn by, or distributed to the Participant, in whole or in part, except as provided in paragraphs (c) and (d) of this Section. (c) Except as permitted by Regulations (including Regulation 1.411(d)-4), amounts attributable to elective contributions (as defined in Regulation 1.401(k)-1 (g)(3)), including amounts treated as elective contributions, which are transferred from another qualified plan in a plan-to-plan transfer shall be subject to the distribution limitations provided for in Regulation 1.401(k)-l(d). (d) At Normal Retirement Date, or such other date when the Participant or his Beneficiary shall be entitled to receive benefits, the fair market value of the Participant's Rollover Account shall be used to provide additional benefits to the Participant or his Beneficiary. Any distributions of amounts held in a Participant's Rollover Account shall be made in a manner which is consistent with and satisfies the provisions of Section 6.5, including, but not limited to, all notice and consent requirements of Code Section 411(a)(11) and the Regulations thereunder. Furthermore, such amounts shall be considered as part of a Participant's benefit in determining whether an involuntary cash-out of benefits without Participant consent may be made. (e) The Administrator may direct that employee transfers made after a valuation date be segregated into a separate account for each Participant in a federally insured savings account, certificate of deposit in a bank or savings and loan association, money market certificate, or other short term debt security acceptable to the Trustee until such time as the allocations pursuant to this Plan have been made, at which time they may remain segregated or be invested as part of the general Trust Fund, to be determined by the Administrator. (f) For purposes of this Section, the term "qualified plan" shall mean any tax qualified plan under Code Section 401(a). The term "amounts transferred from other qualified plans" shall mean: (i) amounts transferred to this Plan directly from another qualified plan; (ii) distributions from another qualified plan which are eligible rollover distributions and which are either transferred by the Employee to this Plan within 45 52 sixty (60) days following his receipt thereof or are transferred pursuant to a direct rollover; (iii) amounts transferred to this Plan from a conduit individual retirement account provided that the conduit individual retirement account has no assets other than assets which (A) were previously distributed to the Employee by another qualified plan as a lump-sum distribution (B) were eligible for tax-free rollover to a qualified plan and (C) were deposited in such conduit individual retirement account within sixty (60) days of receipt thereof and other than earnings on said assets; and (iv) amounts distributed to the Employee from a conduit individual retirement account meeting the requirements of clause (iii) above, and transferred by the Employee to this Plan within sixty (60) days of his receipt thereof from such conduit individual retirement account. (g) Prior to accepting any transfers to which this Section applies, the Administrator may require the Employee to establish that the amounts to be transferred to this Plan meet the requirements of this Section and may also require the Employee to provide an opinion of counsel satisfactory to the Employer that the amounts to be transferred meet the requirements of this Section. (h) This Plan shall not accept any direct or indirect transfers (as that term is defined and interpreted under Code Section 401(a)(11) and the Regulations thereunder) from a defined benefit plan, money purchase plan (including a target benefit plan), stock bonus or profit sharing plan which would otherwise have provided for a life annuity form of payment to the Participant. (i) Notwithstanding anything herein to the contrary, a transfer directly to this Plan from another qualified plan (or a transaction having the effect of such a transfer) shall only be permitted if it will not result in the elimination or reduction of any "Section 411(d)(6) protected benefit" as described in Section 8.1. 4.12 DIRECTED INVESTMENT ACCOUNT (a) Participants may, subject to a procedure established by the Administrator (the Participant Direction Procedures) and applied in a uniform nondiscriminatory manner, direct the Trustee to invest all of their accounts in specific assets, specific funds or other investments permitted under the Plan and the Participant Direction Procedures. That portion of the interest of any Participant so directing will thereupon be considered a Participant's Directed Account. 46 53 (b) As of each Valuation Date, all Participant Directed Accounts shall be charged or credited with the net earnings, gains, losses and expenses as well as any appreciation or depreciation in the market value using publicly listed fair market values when available or appropriate. (1) To the extent that the assets in a Participant's Directed Account are accounted for as pooled assets or investments, the allocation of earnings, gains and losses of each Participant's Directed Account shall be based upon the total amount of funds so invested, in a manner proportionate to the Participant's share of such pooled investment. (2) To the extent that the assets in the Participant's Directed Account are accounted for as segregated assets, the allocation of earnings, gains and losses from such assets shall be made on a separate and distinct basis. (c) The Participant Direction Procedures shall provide an explanation of the circumstances under which Participants and their Beneficiaries may give investment instructions, including, but need not be limited to, the following: (1) the conveyance of instructions by the Participants and their Beneficiaries to invest Participant Directed Accounts in Directed Investments; (2) the name, address and phone number of the Fiduciary (and, if applicable, the person or persons designated by the Fiduciary to act on its behalf) responsible for providing information to the Participant or a Beneficiary upon request relating to the investments in Directed Investments; (3) applicable restrictions on transfers to and from any Designated Investment Alternative; (4) any restrictions on the exercise of voting, tender and similar rights related to a Directed Investment by the Participants or their Beneficiaries; (5) procedures for maintaining the confidentiality of information relating to the purchase, holding and sale of Employer securities, and the exercise of voting, tender and similar rights, by Participants and their Beneficiaries, 47 54 and the name, address and phone number of the Fiduciary responsible for monitoring compliance with these procedures; (6) a description of any, transaction fees and expenses which affect the balances in Participant Directed Accounts in connection with the purchase or sale of Directed Investments; and (7) general procedures for the dissemination of investment and other information relating to the Designated Investment Alternatives as deemed necessary or appropriate, including but not limited to a description of the following: (i) the investment vehicles available under the Plan, including specific information regarding any Designated Investment Alternative; (ii) any designated Investment Managers; and (iii) a description of the additional information which may be obtained upon request from the Fiduciary designated to provide such information. (d) Any information regarding investments available under the Plan, to the extent not required to be described in the Participant Direction Procedures, may be provided to the Participant in one or more written documents which are separate from the Participant Direction Procedures and are not thereby incorporated by reference into this Plan. (e) The Administrator may, at its discretion, include in or exclude by amendment or other action from the Participant Direction Procedures such instructions, guidelines or policies as it deems necessary or appropriate to ensure proper administration of the Plan, and may interpret the same accordingly. ARTICLE V VALUATIONS 5.1 VALUATION OF THE TRUST FUND The Administrator shall direct the Trustee, as of each Valuation Date, to determine the net worth of the assets comprising the Trust Fund as it exists on the Valuation Date. In determining such net worth, the Trustee shall value the assets comprising the Trust Fund at their fair market value as of the Valuation Date and shall deduct all expenses for which the Trustee has not yet 48 55 obtained reimbursement from the Employer or the Trust Fund. The Trustee may update the value of any shares held in the Participant Directed Account by reference to the number of shares held by that Participant, priced at the market value as of the Valuation Date. 5.2 METHOD OF VALUATION In determining the fair market value of securities held in the Trust Fund which are listed on a registered stock exchange, the Administrator shall direct the Trustee to value the same at the prices they were last traded on such exchange preceding the close of business on the Valuation Date. If such securities were not traded on the Valuation Date, or if the exchange on which they are traded was not open for business on the Valuation Date, then the securities shall be valued at the prices at which they were last traded prior to the Valuation Date. Any unlisted security held in the Trust Fund shall be valued at its bid price next preceding the close of business on the Valuation Date, which bid price shall be obtained from a registered broker or an investment banker. In determining the fair market value of assets other than securities for which trading or bid prices can be obtained, the Trustee may appraise such assets itself, or in its discretion, employ one or more appraisers for that purpose and rely on the values established by such appraiser or appraisers. ARTICLE VI DETERMINATION AND DISTRIBUTION OF BENEFITS 6.1 DETERMINATION OF BENEFITS UPON RETIREMENT Every Participant may terminate his employment with the Employer and retire for the purposes hereof on his Normal Retirement Date. However, a Participant may postpone the termination of his employment with the Employer to a later date, in which event the participation of such Participant in the Plan, including the right to receive allocations pursuant to Section 4.4, shall continue until his Late Retirement Date. Upon a Participant's Retirement Date or attainment of his Normal Retirement Date without termination of employment with the Employer, or as soon thereafter as is practicable, the Trustee shall distribute, at the election of the Participant, all amounts credited to such Participant's Combined Account in accordance with Section 6.5. 6.2 DETERMINATION OF BENEFITS UPON DEATH (a) Upon the death of a Participant before his Retirement Date or other termination of his employment, all amounts credited to such Participant's Combined Account shall become fully Vested. The Administrator shall direct the Trustee, in accordance with the provisions of Sections 6.6 and 6.7, to distribute the value of the deceased Participant's accounts to the Participant's Beneficiary. 49 56 (b) Upon the death of a Former Participant, the Administrator shall direct the Trustee, in accordance with the provisions of Sections 6.6 and 6.7, to distribute any remaining Vested amounts credited to the accounts of a deceased Former Participant to such Former Participant's Beneficiary. (c) Any security interest held by the Plan by reason of an outstanding loan to the Participant or Former Participant shall be taken into account in determining the amount of the death benefit. (d) The Administrator may require such proper proof of death and such evidence of the right of any person to receive payment of the value of the account of a deceased Participant or Former Participant as the Administrator may deem desirable. The Administrator's determination of death and of the right of any person to receive payment shall be conclusive. (e) The Beneficiary of the death benefit payable pursuant to this Section shall be the Participant's spouse. Except, however, the Participant may designate a Beneficiary other than his spouse if: (1) the spouse has waived the right to be the Participant's Beneficiary, or (2) the Participant is legally separated or has been abandoned (within the meaning of local law) and the Participant has a court order to such effect (and there is no "qualified domestic relations order" as defined in Code Section 414(p) which provides otherwise), or (3) the Participant has no spouse, or (4) the spouse cannot be located. In such event, the designation of a Beneficiary shall be made on a form satisfactory to the Administrator. A Participant may at any time revoke his designation of a Beneficiary or change his Beneficiary by filing written notice of such revocation or change with the Administrator. However, the Participant's spouse must again consent in writing to any change in Beneficiary unless the original consent acknowledged that the spouse had the right to limit consent only to a specific Beneficiary and that the spouse voluntarily elected to relinquish such right. In the event no valid designation of Beneficiary exists at the time of the Participant's death, the death benefit shall be payable to his estate. 50 57 (f) Any consent by the Participant's spouse to waive any rights to the death benefit must be in writing, must acknowledge the effect of such waiver, and be witnessed by a Plan representative or a notary public. Further, the spouse's consent must be irrevocable and must acknowledge the specific nonspouse Beneficiary. 6.3 DETERMINATION OF BENEFITS IN EVENT OF DISABILITY In the event of a Participant's Total and Permanent Disability prior to his Retirement Date or other termination of his employment, all amounts credited to such Participant's Combined Account shall become fully Vested. In the event of a Participant's Total and Permanent Disability, the Trustee, in accordance with the provisions of Sections 6.5 and 6.7, shall distribute to such Participant all amounts credited to such Participant's Combined Account as though he had retired. 6.4 DETERMINATION OF BENEFITS UPON TERMINATION (a) If a Participant's employment with the Employer is terminated for any reason other than death, Total and Permanent Disability or retirement, such Participant shall be entitled to such benefits as are provided hereinafter pursuant to this Section 6.4. In the event that the amount of the Vested portion of the Terminated Participant's Combined Account equals or exceeds the fair market value of any insurance Contracts, the Trustee, when so directed by the Administrator and agreed to by the Terminated Participant, shall assign, transfer, and set over to such Terminated Participant all Contracts on his life in such form or with such endorsements so that the settlement options and forms of payment are consistent with the provisions of Section 6.5. In the event that the Terminated Participant's Vested portion does not at least equal the fair market value of the Contracts, if any, the Terminated Participant may pay over to the Trustee the sum needed to make the distribution equal to the value of the Contracts being assigned or transferred, or the Trustee, pursuant to the Participant's election, may borrow the cash value of the Contracts from the insurer so that the value of the Contracts is equal to the Vested portion of the Terminated Participant's Account and then assign the Contracts to the Terminated Participant. Distribution of the funds due to a Terminated Participant shall be made on the occurrence of an event which would result in the distribution had the Terminated Participant remained in the employ of the Employer (upon the Participant's death, Total and Permanent Disability or Normal Retirement). However, at the election of the Participant, the Administrator shall direct the Trustee 51 58 to cause the entire Vested portion of the Terminated Participant's Combined Account to be payable to such Terminated Participant. Any distribution under this paragraph shall be made in a manner which is consistent with and satisfies the provisions of Section 6.5, including, but not limited to, all notice and consent requirements of Code Section 411(a)(11) and the Regulations thereunder. For purposes of this Section 6.4, if the value of a Terminated Participant's Vested benefit is zero, the Terminated Participant shall be deemed to have received a distribution of such Vested benefit. (b) The Vested portion of any Participant's Account shall be a percentage of the total amount credited to his Participant's Account determined on the basis of the Participant's number of whole years of his Period of Service according to the following schedules; Vesting Schedule Employer Discretionary Contributions
Periods of Service Percentage ------------------ ---------- Less than 2 0% 2 20% 3 40% 4 60% 5 80% 6 100%
Vesting Schedule Matching Contributions
Periods of Service Percentage ------------------ ---------- Less than 2 0% 2 20% 3 40% 4 60% 5 80% 6 100%
(c) Notwithstanding the vesting schedule above, upon the complete discontinuance of the Employer contributions to the Plan or upon any full or partial termination of the Plan, all amounts credited to the account of any affected Participant shall become 100% Vested and shall not thereafter be subject to Forfeiture. (d) The computation of a Participant's nonforfeitable percentage of his interest in the Plan shall not be reduced as the result of any direct or indirect amendment to this Plan. For this purpose, the Plan shall be treated as having been amended if the Plan 52 59 provides for an automatic change in vesting due to a change in top heavy status. In the event that the Plan is amended to change or modify any vesting schedule, a Participant with at least three (3) whole years of his Period of Service as of the expiration date of the election period may elect to have his nonforfeitable percentage computed under the Plan without regard to such amendment. If a Participant fails to make such election, then such Participant shall be subject to the new vesting schedule. The Participant's election period shall commence on the adoption date of the amendment and shall end 60 days after the latest of: (1) the adoption date of the amendment, (2) the effective date of the amendment, or (3) the date the Participant receives written notice of the amendment from the Employer or Administrator. (e)(1) If any Former Participant shall be reemployed by the Employer before a 1-Year Break in Service occurs, he shall continue to participate in the Plan in the same manner as if such termination had not occurred. (2) If any Former Participant shall be reemployed by the Employer before five (5) consecutive 1-Year Breaks in Service, and such Former Participant had received, or was deemed to have received, a distribution of his entire Vested interest prior to his reemployment, his forfeited account shall be reinstated only if he repays the full amount distributed to him before the earlier of five (5) years after the first date on which the Participant is subsequently reemployed by the Employer or the close of the first period of five (5) consecutive 1-Year Breaks in Service commencing after the distribution, or in the event of a deemed distribution, upon the reemployment of such Former Participant. In the event the Former Participant does repay the full amount distributed to him, or in the event of a deemed distribution, the undistributed portion of the Participant's Account must be restored in full, unadjusted by any gains or losses occurring subsequent to the Valuation Date coinciding with or preceding his termination. The source for such reinstatement shall first be any Forfeitures occurring during the year. If such source is insufficient, then the Employer shall contribute an amount which is sufficient to restore any such forfeited Accounts, provided, however, that if a discretionary 53 60 contribution is made for such year pursuant to Section 4.1(d), such contribution shall first be applied to restore any such Accounts and the remainder shall be allocated in accordance with Section 4.4. (3) If any Former Participant is reemployed after a 1-Year Break in Service has occurred, Periods of Service shall include Periods of Service prior to his 1-Year Break in Service subject to the following rules: (i) If a Former Participant has a 1-Year Break in Service, his pre-break and post-break service shall be used for computing Periods of Service for eligibility and for vesting purposes only after he has been employed for one (1) Period of Service following the date of his reemployment with the Employer; (ii) Any Former Participant who under the Plan does not have a nonforfeitable right to any interest in the Plan resulting from Employer contributions shall lose credits otherwise allowable under (i) above if his consecutive 1-Year Breaks in Service equal or exceed the greater of (A) five (5) or (B) the aggregate number of his pre-break Periods of Service; (iii) After five (5) consecutive 1-Year Breaks in Service, a Former Participant's Vested Account balance attributable to pre-break service shall not be increased as a result of post-break service; (iv) If a Former Participant is reemployed by the Employer, he shall participate in the Plan immediately on his date of reemployment; (v) If a Former Participant (a 1-Year Break in Service previously occurred, but employment had not terminated) is credited with an Hour of Service after the first eligibility computation period in which he incurs a 1-Year Break in Service, he shall participate in the Plan immediately. 6.5 DISTRIBUTION OF BENEFITS (a) The Administrator, pursuant to the election of the Participant, shall direct the Trustee to distribute to a Participant or his Beneficiary any amount to which 54 61 he is entitled under the Plan in one or more of the following methods: (1) one lump-sum payment in cash or in property. (2) Payments over a period certain in monthly, quarterly, semiannual, or annual cash installments. In order to provide such installment payments, the Administrator may (A) segregate the aggregate amount thereof in a separate, federally insured savings account, certificate of deposit in a bank or savings and loan association, money market certificate or other liquid short-term security or (B) purchase a nontransferable annuity contract for a term certain (with no life contingencies) providing for such payment. The period over which such payment is to be made shall not extend beyond the Participant's life expectancy (or the life expectancy of the Participant and his designated Beneficiary). (b) Any distribution to a Participant who has a benefit which exceeds, or has ever exceeded, $3,500 at the time of any prior distribution shall require such Participant's consent pursuant to this Section 6.5(b) if such distribution commences prior to the later of his Normal Retirement Age or age 62. With regard to this required consent: (1) The Participant must be informed of his right to defer receipt of the distribution. If a Participant fails to consent, it shall be deemed an election to defer the commencement of payment of any benefit. However, any election to defer the receipt of benefits shall not apply with respect to distributions which are required under Section 6.5(c). (2) Notice of the rights specified under this paragraph shall be provided no less than 30 days and no more than 90 days before the date the distribution commences. (3) Written consent of the Participant to the distribution must not be made before the Participant receives the notice and must not be made more than 90 days before the date the distribution commences. (4) No consent shall be valid if a significant detriment is imposed under the Plan on any Participant who does not consent to the distribution. 55 62 Any such distribution may commence less than 30 days after the notice required under Regulation 1.411(a)-11(c) is given, provided that: (1) the Administrator clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (2) the Participant, after receiving the notice, affirmatively elects a distribution. (c) Notwithstanding any provision in the Plan to the contrary, the distribution of a Participant's benefits shall be made in accordance with the following requirements and shall otherwise comply with Code Section 401(a)(9) and the Regulations thereunder (including Regulation 1.401(a)(9)-2), the provisions of which are incorporated herein by reference: (1) A Participant's benefits shall be distributed or must begin to be distributed to him not later than April 1st of the calendar year following the later of (i) the calendar year in which the Participant attains age 70 1/2 or (ii) the calendar year in which the Participant retires, provided, however, that this clause (ii) shall not apply in the case of a Participant who is a "five (5) percent owner" at any time during the five (5) Plan Year period ending in the calendar year in which he attains age 70 1/2 or, in the case of a Participant who becomes a "five (5) percent owner" during any subsequent Plan Year, clause (ii) shall no longer apply and the required beginning date shall be the April 1st of the calendar year following the calendar year in which such subsequent Plan Year ends. Such distributions shall be equal to or greater than any required distribution. Notwithstanding the foregoing, clause (ii) above shall not apply to any Participant unless the Participant had attained age 70 1/2 before January 1, 1988 and was not a "five (5) percent owner" at any time during the Plan Year ending with or within the calendar year in which the Participant attained age 66 1/2 or any subsequent Plan Year. Alternatively, distributions to a Participant must begin no later than the applicable April 1st as determined under the preceding paragraph and must be made over a period certain measured by the life expectancy of the Participant (or the life expectancies of the Participant and his designated Beneficiary) in accordance with Regulations. 56 63 (2) Distributions to a Participant and his Beneficiaries shall only be made in accordance with the incidental death benefit requirements of Code Section 401(a)(9)(G) and the Regulations thereunder. (d) For purposes of this Section, the life expectancy of a Participant and a Participant's spouse may, at the election of the Participant or the Participant's spouse, be redetermined in accordance with Regulations. The election, once made, shall be irrevocable. If no election is made by the time distributions must commence, then the life expectancy of the Participant and the Participant's spouse shall not be subject to recalculation. Life expectancy and joint and last survivor expectancy shall be computed using the return multiples in Tables V and VI of Regulation 1.72-9. (e) All annuity Contracts under this Plan shall be non-transferable when distributed. Furthermore, the terms of any annuity Contract purchased and distributed to a Participant or spouse shall comply with all of the requirements of the Plan. (f) If a distribution is made at a time when a Participant is not fully Vested in his Participant's Account and the Participant may increase the Vested percentage in such account: (1) a separate account shall be established for the Participant's interest in the Plan as of the time of the distribution; and (2) at any relevant time, the Participant's Vested portion of the separate account shall be equal to an amount ("XI") determined by the formula: X equals P(AB plus (R x D)) - (R x D) For purposes of applying the formula: P is the Vested percentage at the relevant time, AB is the account balance at the relevant time, D is the amount of distribution, and R is the ratio of the account balance at the relevant time to the account balance after distribution. 6.6 DISTRIBUTION OF BENEFITS UPON DEATH (a)(1) The death benefit payable pursuant to Section 6.2 shall be paid to the Participant's Beneficiary within a reasonable time after the Participant's death by either of the following methods, as elected by the Participant (or if no election has been 57 64 made prior to the Participant's death, by his Beneficiary) subject, however, to the rules specified in Section 6.6(b): (i) One lump-sum payment in cash or in property. (ii) Payment in monthly, quarterly, semi-annual, or annual cash installments over a period to be determined by the Participant or his Beneficiary. After periodic installments commence, the Beneficiary shall have the right to direct the Trustee to reduce the period over which such periodic installments shall be made, and the Trustee shall adjust the cash amount of such periodic installments accordingly. (2) In the event the death benefit payable pursuant to Section 6.2 is payable in installments, then, upon the death of the Participant, the Administrator may direct the Trustee to segregate the death benefit into a separate account, and the Trustee shall invest such segregated account separately, and the funds accumulated in such account shall be used for the payment of the installments. (b) Notwithstanding any provision in the Plan to the contrary, distributions upon the death of a Participant shall be made in accordance with the following requirements and shall otherwise comply with Code Section 401(a)(9) and the Regulations thereunder. If it is determined pursuant to Regulations that the distribution of a Participant's interest has begun and the Participant dies before his entire interest has been distributed to him, the remaining portion of such interest shall be distributed at least as rapidly as under the method of distribution selected pursuant to Section 6.5 as of his date of death. If a Participant dies before he has begun to receive any distributions of his interest under the Plan or before distributions are deemed to have begun pursuant to Regulations, then his death benefit shall be distributed to his Beneficiaries by December 31st of the calendar year in which the fifth anniversary of his date of death occurs. However, in the event that the Participant's spouse (determined as of the date of the Participant's death) is his Beneficiary, then in lieu of the preceding rules, distributions must be made over a period not extending beyond the life expectancy of the spouse and must commence on or before the later of: (1) December 31st of the calendar year immediately 58 65 following the calendar year in which the Participant died; or (2) December 31st of the calendar year in which the Participant would have attained age 70 1/2. If the surviving spouse dies before distributions to such spouse begin, then the 5-year distribution requirement of this Section shall apply as if the spouse was the Participant. (c) For purposes of this Section, the life expectancy of a Participant and a Participant's spouse may, at the election of the Participant or the Participant's spouse, be redetermined in accordance with Regulations. The election, once made, shall be irrevocable. If no election is made by the time distributions must commence, then the life expectancy of the Participant and the Participant's spouse shall not be subject to recalculation. Life expectancy and joint and last survivor expectancy shall be computed using the return multiples in Tables V and VI of Regulation 1.72-9. 6.7 TIME OF SEGREGATION OR DISTRIBUTION Except as limited by Sections 6.5 and 6.6, whenever the Trustee is to make a distribution or to commence a series of payments the distribution or series of payments may be made or begun as soon as is practicable. However, unless a Former Participant elects in writing to defer the receipt of benefits (such election may not result in a death benefit that is more than incidental), the payment of benefits shall begin not later than the 60th day after the close of the Plan Year in which the latest of the following events occurs: (a) the date on which the Participant attains the earlier of age 65 or the Normal Retirement Age specified herein; (b) the 10th anniversary of the year in which the Participant commenced participation in the Plan; or (c) the date the Participant terminates his service with the Employer. 6.8 DISTRIBUTION FOR MINOR BENEFICIARY In the event a distribution is to be made to a minor, then the Administrator may direct that such distribution be paid to the legal guardian, or if none, to a parent of such Beneficiary or a responsible adult with whom the Beneficiary maintains his residence, or to the custodian for such Beneficiary under the Uniform Gift to Minors Act or Gift to Minors Act, if such is permitted by the laws of the state in which said Beneficiary resides. Such a payment to the legal guardian, custodian or parent of a minor Beneficiary shall fully discharge the Trustee, Employer, and Plan from further liability on account thereof. 6.9 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN In the event that all, or any portion, of the distribution payable to a Participant or his Beneficiary hereunder shall, at the later of the Participant's attainment of age 62 or his Normal Retirement Age, remain unpaid solely by reason of the 59 66 inability of the Administrator, after sending a registered letter, return receipt requested, to the last known address, and after further diligent effort, to ascertain the whereabouts of such Participant or his Beneficiary, the amount so distributable shall be treated as a Forfeiture pursuant to the Plan. In the event a Participant or Beneficiary is located subsequent to his benefit being reallocated, such benefit shall be restored unadjusted for earnings or losses. 6.10 QUALIFIED DOMESTIC RELATIONS ORDER DISTRIBUTION All rights and benefits, including elections, provided to a Participant in this Plan shall he subject to the rights afforded to any "alternate payee" under a "qualified domestic relations order." Furthermore, a distribution to an "alternate payee" shall be permitted if such distribution is authorized by a "qualified domestic relations order," even if the affected Participant has not separated from service and has not reached the "earliest retirement age" under the Plan. For the purposes of this Section, "alternate payee," "qualified domestic relations order" and "earliest retirement age" shall have the meaning set forth under Code Section 414(p). ARTICLE VII TRUSTEE 7.1 BASIC RESPONSIBILITIES OF THE TRUSTEE (a) The Trustee shall have the following categories of responsibilities: (1) Consistent with the "funding policy and method" determined by the Employer, to invest, manage, and control the Plan assets subject, however, to the direction of a Participant with respect to his Participant Directed Accounts, the Employer or an Investment Manager if the Trustee should appoint such manager as to all or a portion of the assets of the Plan; (2) At the direction of the Administrator, to pay benefits required under the Plan to be paid to Participants, or, in the event of their death, to their Beneficiaries; and (3) To maintain records of receipts and disbursements and furnish to the Employer and/or Administrator for each Plan Year a written annual report per Section 7.7. (b) In the event that the Trustee shall be directed by a Participant (pursuant to the Participant Direction Procedures), or the Employer, or an Investment Manager with respect to the investment of any or all Plan 60 67 assets, the Trustee shall have no liability with respect to the investment Of such assets, but shall be responsible only to execute such investment instructions as so directed. (1) The Trustee shall be entitled to rely fully on the written instructions of a Participant (pursuant to the Participant Direction Procedures), or the Employer, or any Fiduciary or nonfiduciary agent of the Employer, in the discharge of such duties, and shall not be liable for any loss or other liability, resulting from such direction (or lack of direction) of the investment of any part of the Plan assets. (2) The Trustee may delegate the duty to execute such instructions to any nonfiduciary agent, which may be an affiliate of the Trustee or any Plan representative. (3) The Trustee may refuse to comply with any direction from the Participant in the event the Trustee, in its sole and absolute discretion, deems such directions improper by virtue of applicable law. The Trustee shall not be responsible or liable for any loss or expense which may result from the Trustee's refusal or failure to comply with any directions from the Participant. (4) Any costs and expenses related to compliance with the Participant's directions shall be borne by the Participant's Directed Account, unless paid by the Employer. (c) If there shall be more than one Trustee, they shall act by a majority of their number, but may authorize one or more of them to sign papers on their behalf. 7.2 INVESTMENT POWERS AND DUTIES OF THE TRUSTEE (a) The Trustee shall invest and reinvest the Trust Fund to keep the Trust Fund invested without distinction between principal and income and in such securities or property, real or personal, wherever situated, as the Trustee shall deem advisable, including, but not limited to, stocks, common or preferred, bonds and other evidences of indebtedness or ownership, and real estate or any interest therein. The Trustee shall at all times in making investments of the Trust Fund consider, among other factors, the short and long-term financial needs of the Plan on the basis of information furnished by the Employer. In making such investments, 61 68 the Trustee shall not be restricted to securities or other property of the character expressly authorized by the applicable law for trust investments; however, the Trustee shall give due regard to any limitations imposed by the Code or the Act so that at all times the Plan may qualify as a qualified Profit Sharing Plan and Trust. (b) The Trustee may employ a bank or trust company pursuant to the terms of its usual and customary bank agency agreement, under which the duties of such bank or trust company shall be of a custodial, clerical and record-keeping nature. (c) The Trustee, at the direction of the Administrator, shall ratably apply for, own, and pay premiums on Contracts on the lives of the Participants. If a life insurance policy is to be purchased for a Participant, the aggregate premium for ordinary life insurance for each Participant must be less than 50% of the aggregate of the contributions and Forfeitures to the credit of the Participant at any particular time. If term insurance is purchased with such contributions, the aggregate premium must be less than 25% of the aggregate contributions and Forfeitures allocated to a Participant's Combined Account. If both term insurance and ordinary life insurance are purchased with such contributions, the amount expended for term insurance plus one-half of the premium for ordinary life insurance may not in the aggregate exceed 25% of the aggregate contributions and Forfeitures allocated to a Participant's Combined Account. The Trustee must convert the entire value of the life insurance contracts at or before retirement into cash or provide for a periodic income so that no portion of such value may be used to continue life insurance protection beyond retirement, or distribute the Contracts to the Participant. In the event of any conflict between the terms of this Plan and the terms of any insurance Contract purchased hereunder, the Plan provisions shall control. (d) With respect to assets in a Participant's Directed Investment Account, the Participant or Beneficiary shall direct the Trustee with regard to any voting, tender and similar rights associated with the ownership of such assets, (i.e. the "Stock Right(s)") as follows: (1) Each Participant or Beneficiary shall direct the Trustee to vote or otherwise exercise such Stock Rights in accordance with the provisions, conditions and terms of any such Stock Right(s). (2) Such directions shall be provided to the Trustee by the Participant or Beneficiary in 62 69 accordance with the procedure as established by the Administrator. The Trustee shall vote or otherwise exercise such Stock Right(s) with respect to which it has received directions to do so under this Section. (3) To the extent to which a Participant or Beneficiary does not instruct the Trustee or does not issue valid directions to the Trustee to vote or otherwise exercise such Stock Right(s), such Participants or Beneficiaries shall be deemed to have directed the Trustee that such Stock Rights remain nonvoted and unexercised. 7.3 OTHER POWERS OF THE TRUSTEE The Trustee, in addition to all powers and authorities under common law, statutory authority, including the Act, and other provisions of the Plan, shall have the following powers and authorities, to be exercised in the Trustee's sole discretion: (a) To purchase, or subscribe for, any securities or other property and to retain the same. In conjunction with the purchase of securities, margin accounts may be opened and maintained; (b) To sell, exchange, convey, transfer, grant options to purchase, or otherwise dispose of any securities or other property held by the Trustee, by private contract or at public auction. No person dealing with the Trustee shall be bound to see to the application of the purchase money or to inquire into the validity, expediency, or propriety of any such sale or other disposition, with or without advertisement; (c) To vote upon any stocks, bonds, or other securities; to give general or special proxies or powers of attorney with or without power of substitution; to exercise any conversion privileges, subscription rights or other options, and to make any payments incidental thereto; to oppose, or to consent to, or otherwise participate in, corporate reorganizations or other changes affecting corporate securities, and to delegate discretionary powers, and to pay any assessments or charges in connection therewith; and generally to exercise any of the powers of an owner with respect to stocks, bonds, securities, or other property. However, the Trustee shall not vote proxies relating to securities for which it has not been assigned full investment management responsibilities. In those cases where another party has such investment authority or discretion, the Trustee will deliver all proxies to said party who will then have full responsibility for voting those proxies; 63 70 (d) To cause any securities or other property to be registered in the Trustee's own name or in the name of one or more of the Trustee's nominees, and to hold any investments in bearer form, but the books and records of the Trustee shall at all times show that all such investments are part of the Trust Fund; (e) To borrow or raise money for the purposes of the Plan in such amount, and upon such terms and conditions, as the Trustee shall deem advisable; and for any sum so borrowed, to issue a promissory note as Trustee, and to secure the repayment thereof by pledging all, or any part, of the Trust Fund; and no person lending money to the Trustee shall be bound to see to the application of the money lent or to inquire into the validity, expediency, or propriety of any borrowing; (f) To keep such portion of the Trust Fund in cash or cash balances as the Trustee may, from time to time, deem to be in the best interests of the Plan, without liability for interest thereon; (g) To accept and retain for such time as the Trustee may deem advisable any securities or other property received or acquired as Trustee hereunder, whether or not such securities or other property would normally be purchased as investments hereunder; (h) To make, execute, acknowledge, and deliver any and all documents of transfer and conveyance and any and all other instruments that may be necessary or appropriate to carry out the powers herein granted; (i) To settle, compromise, or submit to arbitration any claims, debts, or damages due or owing to or from the Plan, to commence or defend suits or legal or administrative proceedings, and to represent the Plan in all suits and legal and administrative proceedings; (j) To employ suitable agents and counsel and to pay their reasonable expenses and compensation, and such agent or counsel may or may not he agent or counsel for the Employer; (k) To apply for and procure from responsible insurance companies, to be selected by the Administrator, as an investment of the Trust Fund such annuity, or other Contracts (on the life of any Participant) as the Administrator shall deem proper; to exercise, at any time or from time to time, whatever rights and privileges may be granted under such annuity, or other Contracts; to collect, receive, and settle for the proceeds of all such annuity or other Contracts as and when entitled to do so under the provisions thereof; 64 71 (1) To invest funds of the Trust in time deposits or savings accounts bearing a reasonable rate of interest in the Trustee's bank; (m) To invest in Treasury Bills and other forms of United States government obligations; (n) To invest in shares of investment companies registered under the Investment Company Act of 1940; (o) To sell, purchase and acquire put or call options if the options are traded on and purchased through a national securities exchange registered under the Securities Exchange Act of 1934, as amended, or, if the options are not traded on a national securities exchange, are guaranteed by a member firm of the New York Stock Exchange; (p) To deposit monies in federally insured savings accounts or certificates of deposit in banks or savings and loan associations; (q) To pool all or any of the Trust Fund, from time to time, with assets belonging to any other qualified employee pension benefit trust created by the Employer or an affiliated company of the Employer, and to commingle such assets and make joint or common investments and carry joint accounts on behalf of this Plan and such other trust or trusts, allocating undivided shares or interests in such investments or accounts or any pooled assets of the two or more trusts in accordance with their respective interests; (r) To appoint a nonfiduciary agent or agents to assist the Trustee in carrying out any investment instructions of Participants and of any Investment Manager or Fiduciary, and to compensate such agent(s) from the assets of the Plan, to the extent not paid by the Employer; (s) To do all such acts and exercise all such rights and privileges, although not specifically mentioned herein, as the Trustee may deem necessary to carry out the purposes of the Plan. 7.4 LOANS TO PARTICIPANTS (a) The Trustee may, in the Trustee's discretion, make loans to Participants and Beneficiaries under the following circumstances: (1) loans shall be made available to all Participants and Beneficiaries on a reasonably equivalent basis; (2) loans shall not be made available to Highly Compensated Employees in an amount greater than the amount made available to other 65 72 Participants and Beneficiaries; (3) loans shall bear a reasonable rate of interest; (4) loans shall be adequately secured; and (5) shall provide for repayment over a reasonable period of time. (b) Loans shall not be made to any Shareholder-Employee unless an exemption for such loan is obtained pursuant to Act Section 408 and further provided that such loan would not be subject to tax pursuant to Code Section 4975. (c) Loans made pursuant to this Section (when added to the outstanding balance of all other loans made by the Plan to the Participant) shall be limited to the lesser of: (1) $50,000 reduced by the excess (if any) of the highest outstanding balance of loans from the Plan to the Participant during the one year period ending on the day before the date on which such loan is made, over the outstanding balance of loans from the Plan to the Participant on the date on which such loan was made, or (2) one-half (1/2) of the present value of the non-forfeitable accrued benefit of the Participant under the Plan. For purposes of this limit, all plans of the Employer shall be considered one plan. (d) Loans shall provide for level amortization with payments to be made not less frequently than quarterly over a period not to exceed five (5) years. However, loans used to acquire any dwelling unit which, within a reasonable time, is to be used (determined at the time the loan is made) as a principal residence of the Participant shall provide for periodic repayment over a reasonable period of time that may exceed five (5) years. For this purpose, a principal residence has the same meaning as a principal residence under Code Section 1034. (e) Any loans granted or renewed shall be made pursuant to a Participant loan program. Such loan program shall be established in writing and must include, but need not be limited to, the following: (1) the identity of the person or positions authorized to administer the Participant loan program; (2) a procedure for applying for loans; 66 73 (3) the basis on which loans will be approved or denied; (4) limitations, if any, on the types and amounts of loans offered; (5) the procedure under the program for determining a reasonable rate of interest; (6) the types of collateral which may secure a Participant loan; and (7) the events constituting default and the steps that will be taken to preserve Plan assets. Such Participant loan program shall be contained in a separate written document which, when properly executed, is hereby incorporated by reference and made a part of the Plan. Furthermore, such Participant loan program may be modified or amended in writing from time to time without the necessity of amending this Section. 7.5 DUTIES OF THE TRUSTEE REGARDING PAYMENTS At the direction of the Administrator, the Trustee shall, from time to time, in accordance with the terms of the Plan, make payments out of the Trust Fund. The Trustee shall not be responsible in any way for the application of such payments. 7.6 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES The Trustee shall be paid such reasonable compensation as shall from time to time be agreed upon in writing by the Employer and the Trustee. An individual serving as Trustee who already receives full-time pay from the Employer shall not receive compensation from the Plan. In addition, the Trustee shall be reimbursed for any reasonable expenses, including reasonable counsel fees incurred by it as Trustee. Such compensation and expenses shall be paid from the Trust Fund unless paid or advanced by the Employer. All taxes of any kind and all kinds whatsoever that may be levied or assessed under existing or future laws upon, or in respect of, the Trust Fund or the income thereof, shall be paid from the Trust Fund. 7.7 ANNUAL REPORT OF THE TRUSTEE Within a reasonable period of time after the later of the Anniversary Date or receipt of the Employer contribution for each Plan Year, the Trustee shall furnish to the Employer and Administrator a written statement of account with respect to the Plan Year for which such contribution was made setting forth: (a) the net income, or loss, of the Trust Fund; 67 74 (b) the gains, or losses, realized by the Trust Fund upon sales or other disposition of the assets; (c) the increase, or decrease, in the value of the Trust Fund; (d) all payments and distributions made from the Trust Fund; and (e) such further information as the Trustee and/or Administrator deems appropriate. The Employer, forthwith upon its receipt of each such statement of account, shall acknowledge receipt thereof in writing and advise the Trustee and/or Administrator of its approval or disapproval thereof. Failure by the Employer to disapprove any such statement of account within thirty (30) days after its receipt thereof shall be deemed an approval thereof. The approval by the Employer of any statement of account shall be binding as to all matters embraced therein as between the Employer and the Trustee to the same extent as if the account of the Trustee had been settled by judgment or decree in an action for a judicial settlement of its account in a court of competent jurisdiction in which the Trustee, the Employer and all persons having or claiming an interest in the Plan were parties; provided, however, that nothing herein contained shall deprive the Trustee of its right to have its accounts judicially settled if the Trustee so desires. 7.8 AUDIT (a) If an audit of the Plan's records shall be required by the Act and the regulations thereunder for any Plan Year, the Administrator shall direct the Trustee to engage on behalf of all Participants an independent qualified public accountant for that purpose. Such accountant shall, after an audit of the books and records of the Plan in accordance with generally accepted auditing standards, within a reasonable period after the close of the Plan Year, furnish to the Administrator and the Trustee a report of his audit setting forth his opinion as to whether any statements, schedules or lists that are required by Act Section 103 or the Secretary of Labor to be filed with the Plan's annual report, are presented fairly in conformity with generally accepted accounting principles applied consistently. All auditing and accounting fees shall be an expense of and may, at the election of the Administrator, be paid from the Trust Fund. (b) If some or all of the information necessary to enable the Administrator to comply with Act Section 103 is maintained by a bank, insurance company, or similar 68 75 institution, regulated and supervised and subject to periodic examination by a state or federal agency, it shall transmit and certify the accuracy of that information to the Administrator as provided in Act Section 103(b) within one hundred twenty (120) days after the end of the Plan Year or by such other date as may be prescribed under regulations of the Secretary of Labor. 7.9 RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE (a) The Trustee may resign at any time by delivering to the Employer, at least thirty (30) days before its effective date, a written notice of his resignation. (b) The Employer may remove the Trustee by mailing by registered or certified mail, addressed to such Trustee at his last known address, at least thirty (30) days before its effective date, a written notice of his removal. (c) Upon the death, resignation, incapacity, or removal of any Trustee, a successor may be appointed by the Employer; and such successor, upon accepting such appointment in writing and delivering same to the Employer, shall, without further act, become vested with all the estate, rights, powers, discretions, and duties of his predecessor with like respect as if he were originally named as a Trustee herein. Until such a successor is appointed, the remaining Trustee or Trustees shall have full authority to act under the terms of the Plan. (d) The Employer may designate one or more successors prior to the death, resignation, incapacity, or removal of a Trustee. In the event a successor is so designated by the Employer and accepts such designation, the successor shall, without further act, become vested with all the estate, rights, powers, discretions, and duties of his predecessor with the like effect as if he were originally named as Trustee herein immediately upon the death, resignation, incapacity, or removal of his predecessor. (e) Whenever any Trustee hereunder ceases to serve as such, he shall furnish to the Employer and Administrator a written statement of account with respect to the portion of the Plan Year during which he served as Trustee. This statement shall be either (i) included as part of the annual statement of account for the Plan Year required under Section 7.7 or (ii) set forth in a special statement. Any such special statement of account should be rendered to the Employer no later than the due date of the annual statement of account for the Plan Year. The 69 76 procedures set forth in Section 7.7 for the approval by the Employer of annual statements of account shall apply to any special statement of account rendered hereunder and approval by the Employer of any such special statement in the manner provided in Section 7.7 shall have the same effect upon the statement as the Employer's approval of an annual statement of account. No successor to the Trustee shall have any duty or responsibility to investigate the acts or transactions of any predecessor who has rendered all statements of account required by Section 7.7 and this subparagraph. 7.10 TRANSFER OF INTEREST Notwithstanding any other provision contained in this Plan, the Trustee at the direction of the Administrator shall transfer the Vested interest, if any, of such Participant in his account to another trust forming part of a pension, profit sharing or stock bonus plan maintained by such Participant's new employer and represented by said employer in writing as meeting the requirements of Code Section 401(a), provided that the trust to which such transfers are made permits the transfer to be made. 7.11 DIRECT ROLLOVER (a) Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Section, a distributee may elect, at the time and in the manner prescribed by the Administrator, to have any portion of an eligible rollover distribution that is equal to at least $500 paid directly to an eligible retirement plan specified by the distributee in a direct rollover. (b) For purposes of this Section the following definitions shall apply: (1) An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Code Section 401(a)(9); the portion of any other distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to 70 77 employer securities); and any other distribution that is reasonably expected to total less than $200 during a year. (2) An eligible retirement plan is an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a), or a qualified trust described in Code Section 401(a), that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (3) A distributee includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Code Section 414(p), are distributees with regard to the interest of the spouse or former spouse. (4) A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. ARTICLE VIII AMENDMENT, TERMINATION AND MERGERS 8.1 AMENDMENT (a) The Employer shall have the right at any time to amend the Plan, subject to the limitations of this Section. However, any amendment which affects the rights, duties or responsibilities of the Trustee and Administrator, other than an amendment to remove the Trustee or Administrator, may only be made with the Trustee's and Administrator's written consent. Any such amendment shall become effective as provided therein upon its execution. The Trustee shall not be required to execute any such amendment unless the Trust provisions contained herein are a part of the Plan and the amendment affects the duties of the Trustee hereunder. (b) No amendment to the Plan shall be effective if it authorizes or permits any part of the Trust Fund (other than such part as is required to pay taxes and administration expenses) to be used for or diverted to any purpose other than for the exclusive benefit of the Participants or their Beneficiaries or estates; or causes 71 78 any reduction in the amount credited to the account of any Participant; or causes or permits any portion of the Trust Fund to revert to or become property of the Employer. (c) Except as permitted by Regulations, no Plan amendment or transaction having the effect of a Plan amendment (such as a merger, plan transfer or similar transaction) shall be effective to the extent it eliminates or reduces any "Section 411(d)(6) protected benefit" or adds or modifies conditions relating to "Section 411(d)(6) protected benefits" the result of which is a further restriction on such benefit unless such protected benefits are preserved with respect to benefits accrued as of the later of the adoption date or effective date of the amendment. "Section 411(d)(6) protected benefits" are benefits described in Code Section 411(d)(6)(A), early retirement benefits and retirement-type subsidies, and optional forms of benefit. 8.2 TERMINATION (a) The Employer shall have the right at any time to terminate the Plan by delivering to the Trustee and Administrator written notice of such termination. Upon any full or partial termination, all amounts credited to the affected Participants' Combined Accounts shall become 100% Vested as provided in Section 6.4 and shall not thereafter be subject to forfeiture, and all unallocated amounts shall be allocated to the accounts of all Participants in accordance with the provisions hereof. (b) Upon the full termination of the Plan, the Employer shall direct the distribution of the assets of the Trust Fund to Participants in a manner which is consistent with and satisfies the provisions of Section 6.5. Distributions to a Participant shall be made in cash or in property or through the purchase of irrevocable nontransferable deferred commitments from an insurer. Except as permitted by Regulations, the termination of the Plan shall not result in the reduction of "Section 411(d)(6) protected benefits" in accordance with Section 8.1(c). 8.3 MERGER OR CONSOLIDATION This Plan and Trust may be merged or consolidated with, or its assets and/or liabilities may be transferred to any other plan and trust only if the benefits which would be received by a Participant of this Plan, in the event of a termination of the plan immediately after such transfer, merger or consolidation, are at least equal to the benefits the Participant would have received if the Plan had terminated immediately before the transfer, merger or consolidation, and such transfer, merger or consolidation does not 72 79 otherwise result in the elimination or reduction of any "Section 411(d)(6) protected benefits" in accordance with Section 8.1(c). ARTICLE IX TOP HEAVY 9.1 TOP HEAVY PLAN REQUIREMENTS For any Top Heavy Plan Year, the Plan shall provide the special vesting requirements of Code Section 416(b) pursuant to Section 6.4 of the Plan and the special minimum allocation requirements of Code Section 416(c) pursuant to Section 4.4 of the Plan. 9.2 DETERMINATION OF TOP HEAVY STATUS (a) This Plan shall be a Top Heavy Plan for any Plan Year in which, as of the Determination Date, (1) the Present Value of Accrued Benefits of Key Employees and (2) the sum of the Aggregate Accounts of Key Employees under this Plan and all plans of an Aggregation Group, exceeds sixty percent (60%) of the Present Value of Accrued Benefits and the Aggregate Accounts of all Key and Non-Key Employees under this Plan and all plans of an Aggregation Group. If any Participant is a Non-Key Employee for any Plan Year, but such Participant was a Key Employee for any prior Plan Year, such Participant's Present Value of Accrued Benefit and/or Aggregate Account balance shall not be taken into account for purposes of determining whether this Plan is a Top Heavy or Super Top Heavy Plan (or whether any Aggregation Group which includes this Plan is a Top Heavy Group). In addition, if a Participant or Former Participant has not performed any services for any Employer maintaining the Plan at any time during the five year period ending on the Determination Date, any accrued benefit for such Participant or Former Participant shall not be taken into account for the purposes of determining whether this Plan is a Top Heavy or Super Top Heavy Plan. (b) This Plan shall be a Super Top Heavy Plan for any Plan Year in which, as of the Determination Date, (1) the Present Value of Accrued Benefits of Key Employees and (2) the sum of the Aggregate Accounts of Key Employees under this Plan and all plans of an Aggregation Group, exceeds ninety percent (90%) of the Present value of Accrued Benefits and the Aggregate Accounts of all Key and Non-Key Employees under this Plan and all plans of an Aggregation Group. 73 80 (c) Aggregate Account: A Participant's Aggregate Account as of the Determination Date is the sum of: (1) his Participant's Combined Account balance as of the most recent valuation occurring within a twelve (12) month period ending on the Determination Date; (2) an adjustment for any contributions due as of the Determination Date. Such adjustment shall be the amount of any contributions actually made after the Valuation Date but due on or before the Determination Date, except for the first Plan Year when such adjustment shall also reflect the amount of any contributions made after the Determination Date that are allocated as of a date in that first Plan Year. (3) any Plan distributions made within the Plan Year that includes the Determination Date or within the four (4) preceding Plan Years. However, in the case of distributions made after the Valuation Date and prior to the Determination Date, such distributions are not included as distributions for top heavy purposes to the extent that such distributions are already included in the Participant's Aggregate Account balance as of the Valuation Date. Notwithstanding anything herein to the contrary, all distributions, including distributions under a terminated plan which if it had not been terminated would have been required to be included in an Aggregation Group, will be counted. Further, distributions from the Plan (including the cash value of life insurance policies) of a Participant's account balance because of death shall be treated as a distribution for the purposes of this paragraph. (4) any Employee contributions, whether voluntary or mandatory. However, amounts attributable to tax deductible qualified voluntary employee contributions shall not be considered to be a part of the Participant's Aggregate Account balance. (5) with respect to unrelated rollovers and plan-to-plan transfers (ones which are both initiated by the Employee and made from a plan maintained by one employer to a plan maintained by another employer), if this Plan provides the rollovers or plan-to-plan transfers, it shall always consider such rollovers or plan-to-plan transfers as a distribution for the purposes of this Section. If this Plan is the plan accepting such rollovers or plan-to-plan transfers, it shall 74 81 not consider such rollovers or plan-to-plan transfers as part of the Participant's Aggregate Account balance. (6) with respect to related rollovers and plan-to-plan transfers (ones either not initiated by the Employee or made to a plan maintained by the same employer), if this Plan provides the rollover or plan-to-plan transfer, it shall not be counted as a distribution for purposes of this Section. If this Plan is the plan accepting such rollover or plan-to-plan transfer, it shall consider such rollover or plan-to-plan transfer as part of the Participant's Aggregate Account balance, irrespective of the date on which such rollover or plan-to-plan transfer is accepted. (7) For the purposes of determining whether two employers are to be treated as the same employer in (5) and (6) above, all employers aggregated under Code Section 414(b), (c), (m) and (o) are treated as the same employer. (d) "Aggregation Group" means either a Required Aggregation Group or a Permissive Aggregation Group as hereinafter determined. (1) Required Aggregation Group: In determining a Required Aggregation Group hereunder, each plan of the Employer in which a Key Employee is a participant in the Plan Year containing the Determination Date or any of the four preceding Plan Years, and each other plan of the Employer which enables any plan in which a Key Employee participates to meet the requirements of Code Sections 401(a)(4) or 410, will he required to be aggregated. Such group shall be known as a Required Aggregation Group. In the case of a Required Aggregation Group, each plan in the group will be considered a Top Heavy Plan if the Required Aggregation Group is a Top Heavy Group. No plan in the Required Aggregation Group will be considered a Top Heavy Plan if the Required Aggregation Group is not a Top Heavy Group. (2) Permissive Aggregation Group: The Employer may also include any other plan not required to be included in the Required Aggregation Group, provided the resulting group, taken as a whole, would continue to satisfy the provisions of code Sections 401(a)(4) and 410. Such group shall be known as a Permissive Aggregation Group. 75 82 In the case of a Permissive Aggregation Group, only a plan that is part of the Required Aggregation Group will be considered a Top Heavy Plan if the Permissive Aggregation Group is a Top Heavy Group. No plan in the Permissive Aggregation Group will be considered a Top Heavy Plan if the Permissive Aggregation Group is not a Top Heavy Group. (3) Only those plans of the Employer in which the Determination Dates fall within the same calendar year shall be aggregated in order to determine whether such plans are Top Heavy Plans. (4) An Aggregation Group shall include any terminated plan of the Employer if it was maintained within the last five (5) years ending on the Determination Date. (e) "Determination Date" means (a) the last day of the preceding Plan Year, or (b) in the case of the first Plan Year, the last day of such Plan Year. (f) Present Value of Accrued Benefit: In the case of a defined benefit plan, the Present Value of Accrued Benefit for a Participant other than a Key Employee, shall be as determined using the single accrual method used for all plans of the Employer and Affiliated Employers, or if no such single method exists, using a method which results in benefits accruing not more rapidly than the slowest accrual rate permitted under Code Section 411(b)(1)(C). The determination of the Present Value of Accrued Benefit shall be determined as of the most recent Valuation Date that falls within or ends with the 12-month period ending on the Determination Date except as provided in Code Section 416 and the Regulations thereunder for the first and second plan years of a defined benefit plan. (g) "Top Heavy Group" means an Aggregation Group in which, as of the Determination Date, the sum of: (1) the Present Value of Accrued Benefits of Key Employees under all defined benefit plans included in the group, and (2) the Aggregate Accounts of Key Employees under all defined contribution plans included in the group, exceeds sixty percent (60%) of a similar sum determined for all Participants. 76 83 ARTICLE X MISCELLANEOUS 10.1 PARTICIPANT'S RIGHTS This Plan shall not be deemed to constitute a contract between the Employer and any Participant or to be a consideration or an inducement for the employment of any Participant or Employee. Nothing contained in this Plan shall be deemed to give any Participant or Employee the right to be retained in the service of the Employer or to interfere with the right of the Employer to discharge any Participant or Employee at any time regardless of the effect which such discharge shall have upon him as a Participant of this Plan. 10.2 ALIENATION (a) Subject to the exceptions provided below, no benefit which shall be payable out of the Trust Fund to any person (including a Participant or his Beneficiary) shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge the same shall be void; and no such benefit shall in any manner be liable for, or subject to, the debts, contracts, liabilities, engagements, or torts of any such person, nor shall it be subject to attachment or legal process for or against such person, and the same shall not be recognized by the Trustee, except to such extent as may be required by law. (b) This provision shall not apply to the extent a Participant or Beneficiary is indebted to the Plan, as a result of a loan from the Plan. At the time a distribution is to be made to or for a Participant's or Beneficiary's benefit, such proportion of the amount distributed as shall equal such loan indebtedness shall be paid by the Trustee to the Trustee or the Administrator, at the direction of the Administrator, to apply against or discharge such loan indebtedness. Prior to making a payment, however, the Participant or Beneficiary must be given written notice by the Administrator that such loan indebtedness is to be so paid in whole or part from his Participant's Combined Account. If the Participant or Beneficiary does not agree that the loan indebtedness is a valid claim against his Vested Participant's Combined Account, he shall be entitled to a review of the validity of the claim in accordance with procedures provided in Sections 2.7 and 2.8. (c) This provision shall not apply to a "qualified domestic relations order" defined in Code Section 414(p), 77 84 and those other domestic relations orders permitted to be so treated by the Administrator under the provisions of the Retirement Equity Act of 1984. The Administrator shall establish a written procedure to determine the qualified status of domestic relations orders and to administer distributions under such qualified orders. Further, to the extent provided under a "qualified domestic relations order," a former spouse of a Participant shall be treated as the spouse or surviving spouse for all purposes under the Plan. 10.3 CONSTRUCTION OF PLAN This Plan and Trust shall be construed and enforced according to the Act and the laws of the State of Washington, other than its laws respecting choice of law, to the extent not preempted by the Act. 10.4 GENDER AND NUMBER Wherever any words are used herein in the masculine, feminine or neuter gender, they shall be construed as though they were also used in another gender in all cases where they would so apply, and whenever any words are used herein in the singular or plural form, they shall be construed as though they were also used in the other form in all cases where they would so apply. 10.5 LEGAL ACTION In the event any claim, suit, or proceeding is brought regarding the Trust and/or Plan established hereunder to which the Trustee, the Employer or the Administrator may be a party, and such claim, suit, or proceeding is resolved in favor of the Trustee, the Employer or the Administrator, they shall be entitled to be reimbursed from the Trust Fund for any and all costs, attorney's fees, and other expenses pertaining thereto incurred by them for which they shall have become liable. 10.6 PROHIBITION AGAINST DIVERSION OF FUNDS (a) Except as provided below and otherwise specifically permitted by law, it shall be impossible by operation of the Plan or of the Trust, by termination of either, by power of revocation or amendment, by the happening of any contingency, by collateral arrangement or by any other means, for any part of the corpus or income of any trust fund maintained pursuant to the Plan or any funds contributed thereto to be used for, or diverted to, purposes other than the exclusive benefit of Participants, Retired Participants, or their Beneficiaries. (b) In the event the Employer shall make an excessive contribution under a mistake of fact pursuant 78 85 to Act Section 403(c)(2)(A), the Employer may demand repayment of such excessive contribution at any time within one (1) year following the time of payment and the Trustees shall return such amount to the Employer within the one (1) year period. Earnings of the Plan attributable to the excess contributions may not be returned to the Employer but any losses attributable thereto must reduce the amount so returned. 10.7 BONDING Every Fiduciary, except a bank or an insurance company, unless exempted by the Act and regulations thereunder, shall be bonded in an amount not less than 10% of the amount of the funds such Fiduciary handles; provided, however, that the minimum bond shall be $1,000 and the maximum bond, $500,000. The amount of funds handled shall be determined at the beginning of each Plan Year by the amount of funds handled by such person, group, or class to be covered and their predecessors, if any, during the preceding Plan Year, or if there is no preceding Plan Year, then by the amount of the funds to be handled during the then current year. The bond shall provide protection to the Plan against any loss by reason of acts of fraud or dishonesty by the Fiduciary alone or in connivance with others. The surety shall be a corporate surety company (as such term is used in Act Section 412(a)(2)), and the bond shall be in a form approved by the Secretary of Labor. Notwithstanding anything in the Plan to the contrary, the cost of such bonds shall be an expense of and may, at the election of the Administrator, be paid from the Trust Fund or by the Employer. 10.8 EMPLOYER'S AND TRUSTEE'S PROTECTIVE CLAUSE Neither the Employer, the Administrator, nor the Trustee, nor their successors shall be responsible for the validity of any Contract issued hereunder or for the failure on the part of the insurer to make payments provided by any such Contract, or for the action of any person which may delay payment or render a Contract null and void or unenforceable in whole or in part. 10.9 INSURER'S PROTECTIVE CLAUSE Any insurer who shall issue Contracts hereunder shall not have any responsibility for the validity of this Plan or for the tax or legal aspects of this Plan. The insurer shall be protected and held harmless in acting in accordance with any written direction of the Trustee, and shall have no duty to see to the application of any funds paid to the Trustee, nor be required to question any actions directed by the Trustee. Regardless of any provision of this Plan, the insurer shall not be required to take or permit any action or allow any benefit or privilege contrary to the terms of any Contract which it issues hereunder, or the rules of the insurer. 79 86 10.10 RECEIPT AND RELEASE FOR PAYMENTS Any payment to any Participant, his legal representative, Beneficiary, or to any guardian or committee appointed for such Participant or Beneficiary in accordance with the provisions of the Plan, shall, to the extent thereof, be in full satisfaction of all claims hereunder against the Trustee and the Employer, either of whom may require such Participant, legal representative, Beneficiary, guardian or committee, as a condition precedent to such payment, to execute a receipt and release thereof in such form as shall be determined by the Trustee or Employer. 10.11 ACTION BY THE EMPLOYER Whenever the Employer under the terms of the Plan is permitted or required to do or perform any act or matter or thing, it shall be done and performed by a person duly authorized by its legally constituted authority. 10.12 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY The "named Fiduciaries" of this Plan are (1) the Employer, (2) the Administrator and (3) the Trustee. The named Fiduciaries shall have only those specific powers, duties, responsibilities, and obligations as are specifically given them under the Plan or as accepted by or assigned to them pursuant to any procedure provided under the Plan, including but not limited to any agreement allocating or delegating their responsibilities, the terms of which are incorporated herein by reference. In general, unless otherwise indicated herein or pursuant to such agreements, the Employer shall have the duties specified in Article II hereof, as the same may be allocated or delegated thereunder, including but not limited to the responsibility for making the contributions provided for under Section 4.1; and shall have the authority to appoint and remove the Trustee and the Administrator; to formulate the Plan's "funding policy and method"; and to amend or terminate, in whole or in part, the Plan. The Administrator shall have the responsibility for the administration of the Plan, including but not limited to the items specified in Article IT of the Plan, as the same may be allocated or delegated thereunder. The Administrator shall act as the named Fiduciary responsible for communicating with the Participant according to the Participant Direction Procedures. The Trustee shall have the responsibility of management and control of the assets held under the Trust, except to the extent directed pursuant to Article II or with respect to those assets, the management of which has been assigned to an Investment Manager, who shall be solely responsible for the management of the assets assigned to it, all as specifically provided in the Plan and any agreement with the Trustee. Each named Fiduciary warrants that any directions given, information furnished, or action taken by it shall be in accordance with the provisions of the Plan, authorizing or providing for such direction, information or action. Furthermore, each named Fiduciary may rely upon any such direction, information or action of another 80 87 named Fiduciary as being proper under the Plan, and is not required under the Plan to inquire into the propriety of any such direction, information or action. It is intended under the Plan that each named Fiduciary shall be responsible for the proper exercise of its own powers, duties, responsibilities and obligations under the Plan as specified or allocated herein. No named Fiduciary shall guarantee the Trust Fund in any manner against investment loss or depreciation in asset value. Any person or group may serve in more than one Fiduciary capacity. In the furtherance of their responsibilities hereunder, the "named Fiduciaries" shall be empowered to interpret the Plan and Trust and to resolve ambiguities, inconsistencies and omissions, which findings shall be binding, final and conclusive. 10.13 HEADINGS The headings and subheadings of this Plan have been inserted for convenience of reference and are to be ignored in any construction of the provisions hereof. 10.14 APPROVAL BY INTERNAL REVENUE SERVICE (a) Notwithstanding anything herein to the contrary, contributions to this Plan are conditioned upon the initial qualification of the Plan under Code Section 401. If the Plan receives an adverse determination with respect to its initial qualification, then the Plan may return such contributions to the Employer within one year after such determination, provided the application for the determination is made by the time prescribed by law for filing the Employer's return for the taxable year in which the Plan was adopted, or such later date as the Secretary of the Treasury may prescribe. (b) Notwithstanding any provisions to the contrary, except Sections 3.5, 3.6, and 4.1(e), any contribution by the Employer to the Trust Fund is conditioned upon the deductibility of the contribution by the Employer under the Code and, to the extent any such deduction is disallowed, the Employer may, within one (1) year following the disallowance of the deduction, demand repayment of such disallowed contribution and the Trustee shall return such contribution within one (1) year following the disallowance. Earnings of the Plan attributable to the excess contribution may not be returned to the Employer, but any losses attributable thereto must reduce the amount so returned- 10.15 UNIFORMITY All provisions of this Plan shall be interpreted and applied in a uniform, nondiscriminatory manner. In the event of any 81 88 conflict between the terms of this Plan and any Contract purchased hereunder, the Plan provisions shall control. ARTICLE XI PARTICIPATING EMPLOYERS 11.1 ADOPTION BY OTHER EMPLOYERS Notwithstanding anything herein to the contrary, with the consent of the Employer and Trustee, any other corporation or entity, whether an affiliate or subsidiary or not, may adopt this Plan and all of the provisions hereof, and participate herein and be known as a Participating Employer, by a properly executed document evidencing said intent and will of such Participating Employer. 11.2 REQUIREMENTS OF PARTICIPATING EMPLOYERS (a) Each such Participating Employer shall be required to use the same Trustee as provided in this Plan. (b) The Trustee may, but shall not be required to, commingle, hold and invest as one Trust Fund all contributions made by Participating Employers, as well as all increments thereof. However, the assets of the Plan shall, on an ongoing basis, be available to pay benefits to all Participants and Beneficiaries under the Plan without regard to the Employer or Participating Employer who contributed such assets. (c) The transfer of any Participant from or to an Employer participating in this Plan, whether he be an Employee of the Employer or a Participating Employer, shall not affect such Participant's rights under the Plan, and all amounts credited to such Participant's Combined Account as well as his accumulated service time with the transferor or predecessor, and his length of participation in the Plan, shall continue to his credit. (d) All rights and values forfeited by termination of employment shall inure only to the benefit of the Participants of the Employer or Participating Employer by which the forfeiting Participant was employed, except if the Forfeiture is for an Employee whose Employer is an Affiliated Employer, then said Forfeiture shall inure to the benefit of the Participants of those Employers who are Affiliated Employers. Should an Employee of one ("First") Employer be transferred to an associated ("Second") Employer which is an Affiliated Employer, such transfer shall not cause his account balance (generated while an Employee of "First" Employer) in any manner, or by any amount to be forfeited. Such Employee's Participant Combined Account balance for all purposes of 82 89 the Plan, including length of service, shall be considered as though he had always been employed by the "Second" Employer and as such had received contributions, forfeitures, earnings or losses, and appreciation or depreciation in value of assets totaling the amount so transferred. (e) Any expenses of the Trust which are to be paid by the Employer or borne by the Trust Fund shall be paid by each Participating Employer in the same proportion that the total amount standing to the credit of all Participants employed by such Employer bears to the total standing to the credit of all Participants. 11.3 DESIGNATION OF AGENT Each Participating Employer shall be deemed to be a party to this Plan; provided, however, that with respect to all of its relations with the Trustee and Administrator for the purpose of this Plan, each Participating Employer shall be deemed to have designated irrevocably the Employer as its agent. Unless the context of the Plan clearly indicates the contrary, the word "Employer" shall be deemed to include each Participating Employer as related to its adoption of the Plan. 11.4 EMPLOYEE TRANSFERS It is anticipated that an Employee may be transferred between Participating Employers, and in the event of any such transfer, the Employee involved shall carry with him his accumulated service and eligibility. No such transfer shall effect a termination of employment hereunder, and the Participating Employer to which the Employee is transferred shall thereupon become obligated hereunder with respect to such Employee in the same manner as was the Participating Employer from whom the Employee was transferred. 11.5 PARTICIPATING EMPLOYER CONTRIBUTION Any contribution subject to allocation during each Plan Year shall be allocated only among those Participants of the Employer or Participating Employer making the contribution, except it the contribution is made by an Affiliated Employer, in which event such contribution shall be allocated among all Participants of all Participating Employers who are Affiliated Employers in accordance with the provisions of this Plan. On the basis of the information furnished by the Administrator, the Trustee shall keep separate books and records concerning the affairs of each Participating Employer hereunder and as to the accounts and credits of the Employees of each Participating Employer. The Trustee may, but need not, register Contracts so as to evidence that a particular Participating Employer is the interested Employer hereunder, but in the event of an Employee transfer from one 83 90 Participating Employer to another, the employing Employer shall immediately notify the Trustee thereof. 11.6 AMENDMENT Amendment of this Plan by the Employer at any time when there shall be a Participating Employer hereunder shall only be by the written action of each and every Participating Employer and with the consent of the Trustee where such consent is necessary in accordance with the terms of this Plan. 11.7 DISCONTINUANCE OF PARTICIPATION Any Participating Employer shall be permitted to discontinue or revoke its participation in the Plan. At the time of any such discontinuance or revocation, satisfactory evidence thereof and of any applicable conditions imposed shall be delivered to the Trustee. The Trustee shall thereafter transfer, deliver and assign Contracts and other Trust Fund assets allocable to the Participants of such Participating Employer to such new Trustee as shall have been designated by such Participating Employer, in the event that it has established a separate pension plan for its Employees, provided however, that no such transfer shall be made if the result is the elimination or reduction of any "Section 411(d)(6) protected benefits" in accordance with Section 8.1(c). If no successor is designated, the Trustee shall retain such assets for the Employees of said Participating Employer pursuant to the provisions of Article VII hereof. In no such event shall any part of the corpus or income of the Trust as it relates to such Participating Employer be used for or diverted to purposes other than for the exclusive benefit of the Employees of such Participating Employer. 11.8 ADMINISTRATOR'S AUTHORITY The Administrator shall have authority to make any and all necessary rules or regulations, binding upon all Participating Employers and all Participants, to effectuate the purpose of this Article. 84 91 IN WITNESS WHEREOF, this Plan has been executed the day and year first above written. Signed, sealed, and delivered in the presence of: bsquare consulting, inc. /s/ JOSEPH NOTARANGELO By /s/ WILLIAM BAXTER - ----------------------------------- -------------------------------------- EMPLOYER Joseph Notarangelo - ----------------------------------- WITNESSES AS TO EMPLOYER /s/ ERIC CHRISTOFFERSEN /s/ [Illegible Signature] (SEAL) - ----------------------------------- ---------------------------------------- TRUSTEE Eric Christoffersen - ----------------------------------- WITNESSES AS TO TRUSTEE /s/ CAPRICE A. PINE /s/ PETER GREGORY SEAL) - ----------------------------------- ---------------------------------------- TRUSTEE Caprice A. Pine - ----------------------------------- WITNESSES AS TO TRUSTEE /s/ JOSEPH NOTARANGELO /s/ WILLIAM BAXTER (SEAL) - ----------------------------------- ---------------------------------------- TRUSTEE Joseph Notarangelo - ----------------------------------- WITNESSES AS TO TRUSTEE 85 EX-10.4 8 FORM OF INDEMNIFICATION AGREEMENT 1 EXHIBIT 10.4 INDEMNIFICATION AGREEMENT This Indemnification Agreement (this "Agreement") dated as of ___________, 19__, is made between BSQUARE CORPORATION, a Washington corporation (the "Company"), and _________________ ("Indemnitee"). RECITALS A. Indemnitee is an officer or director of the Company and in such capacity is performing valuable services for the Company. B. The Company and Indemnitee recognize the difficulty in obtaining directors' and officers' liability insurance, the significant cost of such insurance and the general reduction in the coverage of such insurance. C. The Company and Indemnitee further recognize the substantial increase in litigation subjecting officers and directors to expensive litigation risks at the same time that such liability insurance has been severely limited. D. The shareholders of the Company have adopted articles of incorporation (the "Articles") and bylaws (the "Bylaws") providing for indemnification of the officers, directors, agents and employees of the Company to the full extent permitted by the Washington Business Corporation Act (the "Statute"). E. The Articles, Bylaws and the Statute specifically provide that they are not exclusive, and thereby contemplate that contracts may be entered into between the Company and the members of its Board of Directors and its officers with respect to indemnification of such directors and officers. F. The Company desires to provide Indemnitee with specific contractual assurance of Indemnitee's rights to full indemnification against litigation risks and expenses (regardless, among other things, of any amendment to or revocation of the Company's Articles or Bylaws or any change in the ownership of the Company or the composition of its Board of Directors), which indemnification is intended to be greater than that which is afforded by the Company's Articles, Bylaws and, to the extent insurance is available, the coverage of Indemnitee under the Company's director and officers liability insurance policies, but in no event shall such indemnification be greater than that allowed by law. G. In order to induce Indemnitee to continue to serve as an officer and/or director, as the case may be, of the Company, the Company has agreed to enter into this Agreement with Indemnitee. AGREEMENT in consideration of the recitals above, the mutual covenants and agreements herein contained, and Indemnitee's continued service as an officer and/or director, as the case may be, of the Company after the date hereof, the parties to this Agreement agree as follows. - 1 - 2 1. INDEMNITY OF INDEMNITEE 1.1 SCOPE The Company agrees to hold harmless and indemnify Indemnitee to the full extent permitted by law. notwithstanding that such indemnification is not specifically authorized by this Agreement, the Articles, the Bylaws, the Statute or otherwise. In the event of any change, after the date of this Agreement, in any applicable law, statute or rule regarding the right of a Washington corporation to indemnify a member of its board of directors or an officer, such changes, to the extent that they would expand Indemnitee's rights hereunder, shall be within the purview of Indemnitee's rights and the Company's obligations hereunder, and, to the extent that they would narrow Indemnitee's rights hereunder, shall be excluded from this Agreement; provided, however, that any change that is required by applicable laws, statutes or rules to be applied to this Agreement shall be so applied regardless of whether the effect of such change is to narrow Indemnitee's rights hereunder. 1.2 NONEXCLUSIVITY The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Articles, the Bylaws, any agreement, any vote of shareholders or disinterested directors, the Statute, or otherwise, whether as to action in Indemnitee's official capacity or otherwise. 1.3 ADDITIONAL INDEMNITY if Indemnitee was or is made a party, or is threatened to be made a party, to or is otherwise involved (including, without limitation, as a witness) in any Proceeding (as defined below), the Company shall hold harmless and indemnify Indemnitee from and against any and all losses, claims, damages, liabilities or expenses (including reasonable attorneys' fees, judgments, fines, ERISA excise taxes or penalties, amounts paid in settlement and other expenses incurred in connection with such Proceeding) (collectively, "Damages"). 1.4 DEFINITION OF PROCEEDING For purposes of this Agreement, "Proceeding" shall mean any actual, pending or threatened action, suit, arbitration, alternative dispute resolution process, claim or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal, in which Indemnitee is, was or becomes involved by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company or that, being or having been such a director, officer, employee or agent, Indemnitee is or was serving at the request of the Company as a director, officer, employee, trustee or agent of another corporation or of a partnership, joint venture, trust or other enterprise (collectively a "Related Company"), including service with respect to an employee benefit plan, whether the basis of such proceeding is alleged action (or inaction) by Indemnitee in an official capacity as a director, officer, employee, trustee or agent or in any other capacity while serving as a director, officer, employee, trustee or agent; provided, however, that, except with respect to an action to enforce the provisions of this Agreement, "Proceeding" shall not include any action, suit, claim or proceeding instituted by or at the direction of Indemnitee unless such action, suit, claim or proceeding is or was authorized by the Company's Board of Directors. - 2 - 3 1.5 DETERMINATION OF ENTITLEMENT In the event that a determination of Indemnitee's entitlement to indemnification is required pursuant to Section 23B.08.550 of the Statute or any successor thereto or pursuant to other applicable law, the appropriate decision-maker shall make such determination; provided, however, that Indemnitee shall initially be presumed in all cases to be entitled to indemnification, that Indemnitee may establish a conclusive presumption of any fact necessary to such a determination by delivering to the Company a declaration made under penalty of perjury that such fact is true and that, unless the Company shall deliver to Indemnitee written notice of a determination that Indemnitee is not entitled to indemnification within twenty (20) days of the Company's receipt of Indemnitee's initial written request for indemnification, such determination shall conclusively be deemed to have been made in favor of the Company's provision of indemnification and Company hereby agrees not to assert otherwise. 1.6 SURVIVAL The indemnification provided under this Agreement shall apply to any and all Proceedings, notwithstanding that Indemnitee has ceased to be a director, officer, employee, trustee or agent of the Company or a Related Company. 2. EXPENSE ADVANCES 2.1 GENERALLY The right to indemnification of Damages conferred by Section 1 shall include the right to have the Company pay Indemnitee's expenses in any Proceeding as such expenses are incurred and in advance of such Proceeding's final disposition (such right is referred to hereinafter as an "Expense Advance"). 2.2 CONDITIONS TO EXPENSE ADVANCE The Company's obligation to provide an Expense Advance is subject to the following conditions: 2.2.1 UNDERTAKING If the Proceeding arose in connection with Indemnitee's service as a director or officer of the Company (and not in any other capacity in which Indemnitee rendered service, including service to any Related Company), then Indemnitee or his or her representative shall have executed and delivered to the Company an undertaking, which need not be secured and shall be accepted without reference to Indemnitee's financial ability to make repayment, by or on behalf of Indemnitee to repay all Expense Advances if and to the extent that it shall ultimately be determined by a final, unappealable decision rendered by a court having jurisdiction over the parties and the question that Indemnitee is not entitled to be indemnified for such Expense Advance under this Agreement or otherwise. 2.2.2 COOPERATION Indemnitee shall give the Company such information and cooperation as it may reasonably request and as shall be within Indemnitee's power. - 3 - 4 2.2.3 AFFIRMATION Indemnitee shall furnish, upon request by the Company and if required under applicable law, a written affirmation of Indemnitee's good faith belief that any applicable standards of conduct have been met by Indemnitee. 3. PROCEDURES FOR ENFORCEMENT 3.1 ENFORCEMENT In the event that a claim for indemnity, an Expense Advance or otherwise is made hereunder and is not paid in full within sixty days (twenty days for an Expense Advance) after written notice of such claim is delivered to the Company, Indemnitee may, but need not, at any time thereafter bring suit against the Company to recover the unpaid amount of the claim (an "Enforcement Action"). 3.2 PRESUMPTIONS IN ENFORCEMENT ACTION In any Enforcement Action the following presumptions (and limitation on presumptions) shall apply: (a) The Company shall conclusively be presumed to have entered into this Agreement and assumed the obligations imposed on it hereunder in order to induce Indemnitee to continue as an officer and/or director, as the case may be, of the Company; (b) Neither (i) the failure of the Company (including the Company's Board of Directors, independent or special legal counsel or the Company's shareholders) to have made a determination prior to the commencement of the Enforcement Action that indemnification of Indemnitee is proper in the circumstances nor (ii) an actual determination by the Company, its Board of Directors, independent or special legal counsel or shareholders that Indemnitee is not entitled to indemnification shall be a defense to the Enforcement Action or create a presumption that Indemnitee is not entitled to indemnification hereunder; and (c) If Indemnitee is or was serving as a director, officer, employee, trustee or agent of a corporation of which a majority of the shares entitled to vote in the election of its directors is held by the Company or in an executive or management capacity in a partnership, joint venture, trust or other enterprise of which the Company or a wholly owned subsidiary of the Company is a general partner or has a majority ownership, then such corporation, partnership, joint venture, trust or enterprise shall conclusively be deemed a Related Company and Indemnitee shall conclusively be deemed to be serving such Related Company at the request of the Company. 3.3 ATTORNEYS' FEES AND EXPENSES FOR ENFORCEMENT ACTION In the event Indemnitee is required to bring an Enforcement Action, the Company shall indemnify and hold harmless Indemnitee against all of Indemnitee's fees and expenses in bringing and pursuing the Enforcement Action (including reasonable attorneys' fees at any stage, including on appeal); provided, however, that the Company shall not be required to provide such indemnity for such attorneys' fees or expenses if a court of competent jurisdiction determines that each of the material assertions made by Indemnitee in such Enforcement Action was not made in good faith or was frivolous. - 4 - 5 4. LIMITATIONS ON INDEMNITY; MUTUAL ACKNOWLEDGEMENT 4.1 LIMITATION ON INDEMNITY No indemnity pursuant to this Agreement shall be provided by the Company: (a) On account of any suit in which a final, unappealable judgment is rendered against Indemnitee for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Company in violation of the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto; (b) For Damages that have been paid directly to Indemnitee by an insurance carrier under a policy of officers' and directors' liability insurance maintained by the Company; (c) On account of Indemnitee's conduct which is finally adjudged to have been intentional misconduct, a knowing violation of law or the RCW 23B.08310 or any successor provision of the Statute, or a transaction from which Indemnitee derived benefit in money, property or services to which Indemnitee is not legally entitled; or (d) If a final decision by a court having jurisdiction in the matter shall determine that such indemnification is not lawful. 4.2 MUTUAL ACKNOWLEDGEMENT The Company and Indemnitee acknowledge that, in certain instances, federal law or public policy may override applicable state law and prohibit the Company from indemnifying Indemnitee under this Agreement or otherwise. For example, the Company and Indemnitee acknowledge that the Securities and Exchange Commission (the "SEC") has taken the position that indemnification is not permissible for liabilities arising under certain federal securities laws, and federal legislation prohibits indemnification for certain ERISA violations. Furthermore, Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the SEC to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 5. NOTIFICATION AND DEFENSE OF CLAIM 5.1 NOTIFICATION Promptly after receipt by Indemnitee of notice of the commencement of any Proceeding, Indemnitee will, if a claim in respect thereof is to be made against the Company under this Agreement, notify the Company of the commencement thereof; but the omission so to notify the Company will not relieve the Company from any liability which it may have to Indemnitee under this Agreement unless and only to the extent that such omission can be shown to have prejudiced the Company's ability to defend the Proceeding. 5.2 DEFENSE OF CLAIM With respect to any such Proceeding as to which Indemnitee notifies the Company of the commencement thereof: (a) The Company may participate therein at its own expense; (b) The Company, jointly with any other indemnifying party similarly notified, may assume the defense thereof, with counsel satisfactory to Indemnitee. After notice from the Company to Indemnitee of its election so to assume the defense thereof, the Company shall not be liable to Indemnitee under this Agreement for any legal or other expenses (other than reasonable costs of investigation) subsequently incurred by Indemnitee in connection with the defense thereof unless (i) the employment of counsel by Indemnitee has been authorized by the Company, (ii) Indemnitee shall have reasonably concluded that there may be a conflict - 5 - 6 of interest between the Company and Indemnitee in the conduct of the defense of such action, or (iii) the Company shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of counsel shall be at the expense of the Company. The Company shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of the Company or as to which Indemnitee shall have made the conclusion provided for in (ii) above; (c) The Company shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any Proceeding effected without its written consent; (d) The Company shall not settle any action or claim in any manner which would impose any penalty or limitation on Indemnitee without Indemnitee's written consent; and (e) Neither the Company nor Indemnitee will unreasonably withhold its, his or her consent to any proposed settlement. 6. SEVERABILITY Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fall to do any act in violation of applicable law. The Company's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable, as provided in this Section 6. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms. 7. REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to Indemnitee as follows: (a) Authority. The Company has all necessary power and authority to enter into, and be bound by the terms of, this Agreement, and the execution, delivery and performance of the undertakings contemplated by this Agreement have been duly authorized by the Company. (b) Enforceability. This Agreement, when executed and delivered by the Company in accordance with the provisions hereof, shall be a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, moratorium, reorganization or similar laws affecting the enforcement of creditors' rights generally. 8. GOVERNING LAW; BINDING EFFECT; AMENDMENT AND TERMINATION (a) This Agreement shall be interpreted and enforced in accordance with the laws of the State of Washington. (b) This Agreement shall be binding upon Indemnitee and upon the Company, its successors and assigns, and shall inure to the benefit of Indemnitee, Indemnitee's heirs, personal representatives and assigns and to the benefit of the Company, its successors and assigns. (c) No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto. - 6 - 7 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. COMPANY: BSQUARE CORPORATION By ____________________________________ INDEMNITEE: By ____________________________________ - 7 - EX-10.5 9 LOAN & SECURITY AGREEMENT 1 EXHIBIT 10.5 - -------------------------------------------------------------------------------- bsquare corporation LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
Page ---- 1. DEFINITIONS AND CONSTRUCTION.................................................. 2 1.1 Definitions............................................................ 2 1.2 Accounting Terms....................................................... 7 2. LOAN AND TERMS OF PAYMENT..................................................... 7 2.1 Credit Extensions...................................................... 7 2.2 Overadvances........................................................... 10 2.3 Interest Rates, Payments, and Calculations............................. 10 2.4 Crediting Payments..................................................... 11 2.5 Fees................................................................... 11 2.6 Additional Costs....................................................... 11 2.7 Term................................................................... 12 3. CONDITIONS OF LOANS........................................................... 12 3.1 Conditions Precedent to Initial Credit Extension....................... 12 3.2 Conditions Precedent to all Credit Extensions.......................... 12 4. CREATION OF SECURITY INTEREST................................................. 13 4.1 Grant of Security Interest............................................. 13 4.2 Delivery of Additional Documentation Required.......................... 13 4.3 Right to Inspect....................................................... 13 5. REPRESENTATIONS AND WARRANTIES................................................ 13 5.1 Due Organization and Qualification..................................... 13 5.2 Due Authorization; No Conflict......................................... 13 5.3 No Prior Encumbrances.................................................. 13 5.4 Bona Fide Eligible Accounts............................................ 13 5.5 Merchantable Inventory................................................. 14 5.6 Name; Location of Chief Executive Office............................... 14 5.7 Litigation............................................................. 14 5.8 No Material Adverse Change in Financial Statements..................... 14 5.9 Solvency............................................................... 14 5.10 Regulatory Compliance.................................................. 14 5.11 Environmental Condition................................................ 14 5.12 Taxes.................................................................. 14 5.13 Subsidiaries........................................................... 14 5.14 Government Consents.................................................... 15 5.15 Full Disclosure........................................................ 15 6. AFFIRMATIVE COVENANTS......................................................... 15 6.1 Good Standing.......................................................... 15 6.2 Government Compliance.................................................. 15 6.3 Financial Statements, Reports, Certificates............................ 15 6.4 Inventory; Returns..................................................... 16 6.5 Taxes.................................................................. 16 6.6 Insurance.............................................................. 16 6.7 Principal Depository................................................... 16 6.8 Quick Ratio............................................................ 16 6.9 Tangible Net Worth..................................................... 16 6.10 Debt Service Coverage:................................................. 16 6.11 Registration of Intellectual Property Rights........................... 17
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Page ---- 6.12 Further Assurances..................................................... 17 7. NEGATIVE COVENANTS............................................................ 17 7.1 Dispositions........................................................... 17 7.2 Change in Business..................................................... 17 7.3 Mergers or Acquisitions................................................ 17 7.4 Indebtedness........................................................... 18 7.5 Encumbrances........................................................... 18 7.6 Distributions.......................................................... 18 7.7 Investments............................................................ 18 7.8 Transactions with Affiliates........................................... 18 7.9 Subordinated Debt...................................................... 18 7.10 Inventory.............................................................. 18 7.11 Compliance............................................................. 18 8. EVENTS OF DEFAULT............................................................. 18 8.1 Payment Default........................................................ 18 8.2 Covenant Default....................................................... 18 8.3 Material Adverse Change................................................ 19 8.4 Attachment............................................................. 19 8.5 Insolvency............................................................. 19 8.6 Other Agreements....................................................... 19 8.7 Judgments.............................................................. 19 8.8 Misrepresentations..................................................... 19 8.9 Guaranty............................................................... 19 9. BANK'S RIGHTS AND REMEDIES.................................................... 20 9.1 Rights and Remedies.................................................... 20 9.2 Power of Attorney...................................................... 21 9.3 Accounts Collection.................................................... 21 9.4 Bank Expenses.......................................................... 21 9.5 Bank's Liability for Collateral........................................ 21 9.6 Remedies Cumulative.................................................... 21 9.7 Demand; Protest........................................................ 22 10. NOTICES ...................................................................... 22 11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.................................... 22 12. GENERAL PROVISIONS............................................................ 22 12.1 Successors and Assigns................................................. 22 12.2 Indemnification........................................................ 23 12.3 Time of Essence........................................................ 23 12.4 Severability of Provisions............................................. 23 12.5 Amendments in Writing, Integration..................................... 23 12.6 Counterparts........................................................... 23 12.7 Survival............................................................... 23 13. JUDICIAL REFERENCE............................................................ 23
1 4 This LOAN AND SECURITY AGREEMENT is entered into as of February 11, 1998, by and between IMPERIAL BANK ("Bank") and bsquare corporation ("Borrower"). RECITALS Borrower wishes to obtain credit from time to time from Bank, and Bank desires to extend credit to Borrower. This Agreement sets forth the terms on which Bank will advance credit to Borrower, and Borrower will repay the amounts owing to Bank. AGREEMENT The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION 1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions: "Accounts" means all presently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to Borrower arising out of the sale or lease of goods (including, without limitation, the licensing of software and other technology) or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower's Books relating to any of the foregoing. "Advance" or "Advances" means a cash advance under the Revolving Facility. "Affiliate" means, with respect to any Person, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person, and each of such Person's senior executive officers, directors, and partners. "Bank Expenses" means all: reasonable costs or expenses (including reasonable attorneys' fees and expenses) incurred in connection with the preparation, negotiation, administration, and enforcement of the Loan Documents; and Bank's reasonable attorneys' fees and expenses incurred in amending, enforcing or defending the Loan Documents (including fees and expenses of appeal), whether or not suit is brought. "Borrower's Books" means all of Borrower's books and records including: ledgers; records concerning Borrower's assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information. "Borrowing Base" means an amount equal to eighty percent (80%) of Eligible Accounts, as determined by Bank with reference to the most recent Borrowing Base Certificate delivered by Borrower. "Business Day" means any day that is not a Saturday, Sunday, or other day on which banks in the State of California are authorized or required to close. "Closing Date" means the date of this Agreement. "Code" means the California Uniform Commercial Code. 2 5 "Collateral" means the property described on Exhibit A attached hereto. "Committed Revolving Line" means a credit extension of up to Two Million Dollars ($2,000,000). "Contingent Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any indebtedness, lease, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit issued for the account of that Person; and (iii) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term "Contingent Obligation" shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement. "Credit Extension" means each Advance, Letter of Credit, Term Loan, Exchange Contract or any other extension of credit by Bank for the benefit of Borrower hereunder. "Current Assets" means, as of any applicable date, all amounts that should, in accordance with GAAP, be included as current assets on the consolidated balance sheet of Borrower and its Subsidiaries as at such date. "Current Liabilities" means, as of any applicable date, all amounts that should, in accordance with GAAP, be included as current liabilities on the consolidated balance sheet of Borrower and its Subsidiaries, as at such date, plus, to the extent not already included therein, all outstanding Advances made under this Agreement, including all Indebtedness that is payable upon demand or within one year from the date of determination thereof unless such Indebtedness is renewable or extendable at the option of Borrower or any Subsidiary to a date more than one year from the date of determination, but excluding Subordinated Debt. "Daily Balance" means the amount of the Obligations owed at the end of a given day. "Eligible Accounts" means those Accounts that arise in the ordinary course of Borrower's business that comply with all of Borrower's representations and warranties to Bank set forth in Section 5.4; provided, that standards of eligibility may be fixed and revised from time to time by Bank in Bank's reasonable judgment and upon notification thereof to Borrower in accordance with the provisions hereof. Unless otherwise agreed to by Bank, Eligible Accounts shall not include the following: (a) Accounts that the account debtor has failed to pay within ninety (90) days of invoice date; (b) Accounts with respect to an account debtor, twenty-five percent (25%) of whose Accounts the account debtor has failed to pay within ninety (90) days of invoice date; (c) Accounts with respect to which the account debtor is an officer, employee, or agent of Borrower; 3 6 (d) Accounts with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale, on approval, bill and hold, or other terms by reason of which the payment by the account debtor may be conditional; (e) Accounts with respect to which the account debtor is an Affiliate of Borrower; (f) Accounts with respect to which the account debtor does not have its principal place of business in the United States, except for Eligible Foreign Accounts; (g) Accounts with respect to which the account debtor is the United States or any department, agency, or instrumentality of the United States; (h) Accounts with respect to which Borrower is liable to the account debtor for goods sold or services rendered by the account debtor to Borrower, but only to the extent of any amounts owing to the account debtor; (i) Accounts with respect to an account debtor, including Subsidiaries and Affiliates, whose total obligations to Borrower exceed twenty-five percent (25%) of all Accounts, to the extent such obligations exceed the aforementioned percentage; except that the concentration limit for Accounts owing by Microsoft Corporation shall be forty-five percent (45%), and except as approved in writing by Bank; (j) Accounts with respect to which the account debtor disputes liability or makes any claim with respect thereto as to which Bank believes, in its sole discretion, that there may be a basis for dispute (but only to the extent of the amount subject to such dispute or claim), or is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business; and (k) Accounts the collection of which Bank reasonably determines to be doubtful. "Eligible Foreign Accounts" means Accounts with respect to which the account debtor does not have its principal place of business in the United States and (1) that have sales in excess of Five Hundred Million Dollars ($500,000,000) per year; or (2) that Bank approves on a case-by-case basis. "Equipment" means all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, software and related general intangibles, parts and attachments in which Borrower has any interest. "ERISA" means the Employment Retirement Income Security Act of 1974, as amended, and the regulations thereunder. "Equipment Advance" has the meaning set forth in Section 2.1.4. "Equipment Line" means a credit extension of up to Five Hundred Thousand Dollars ($500,000). "Equipment Maturity Date" means October 30, 2001. "GAAP" means generally accepted accounting principles as in effect from time to time. 4 7 "Indebtedness" means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations and (d) all Contingent Obligations. "Insolvency Proceeding" means any proceeding commenced by or against any person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. "Inventory" means all present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or at any time hereafter owned by or in the custody or possession, actual or constructive, of Borrower, including such inventory as is temporarily out of its custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and Borrower's Books relating to any of the foregoing. "Investment" means any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person. "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "Lien" means any mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance. "Loan Documents" means, collectively, this Agreement, any note or notes executed by Borrower, and any other agreement entered into between Borrower and Bank in connection with this Agreement, all as amended or extended from time to time. "Material Adverse Effect" means a material adverse effect on (i) the business operations or condition (financial or otherwise) of Borrower and its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the Obligations or otherwise perform its obligations under the Loan Documents. "Negotiable Collateral" means all of Borrower's present and future letters of credit of which it is a beneficiary, notes, drafts, instruments, securities, documents of title, and chattel paper, and Borrower's Books relating to any of the foregoing. "Obligations" means all debt, principal, interest, Bank Expenses and other amounts owed to Bank by Borrower pursuant to this Agreement or any other agreement, whether absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an Insolvency Proceeding and including any debt, liability, or obligation owing from Borrower to others that Bank may have obtained by assignment or otherwise. "Periodic Payments" means all installments or similar recurring payments that Borrower may now or hereafter become obligated to pay to Bank pursuant to the terms and provisions of any instrument, or agreement now or hereafter in existence between Borrower and Bank. 5 8 "Permitted Indebtedness" means: (a) Indebtedness of Borrower in favor of Bank arising under this Agreement or any other Loan Document; (b) Indebtedness existing on the Closing Date and disclosed in the Schedule; (c) Indebtedness secured by a lien described in clause (c) of the defined term "Permitted Liens," provided such Indebtedness does not exceed the lesser of the cost or fair market value of the equipment financed with such Indebtedness. (d) Subordinated Debt; (e) Indebtedness to trade creditors incurred in the ordinary course of business; and (f) Other Indebtedness in an outstanding principal amount not to exceed $200,000. "Permitted Investment" means: (a) Investments existing on the Closing Date disclosed in the Schedule; and (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (ii) commercial paper maturing no more than one (1) year from the date of creation thereof and currently having the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii) certificates of deposit maturing no more than one (1) year from the date of investment therein issued by Bank. "Permitted Liens" means the following: (a) Any Liens existing on the Closing Date and disclosed in the Schedule or arising under this Agreement or the other Loan Documents; (b) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings, provided the same have no priority over any of Bank's security interests; (c) Liens (i) upon or in any equipment acquired or held by Borrower or any of its Subsidiaries to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of financing the acquisition of such equipment, or (ii) existing on such equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment; (d) liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by liens of the type described in clauses (a) through (c) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase. "Person" means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, 6 9 institution, public benefit corporation, firm, joint Stock company, estate, entity or governmental agency. "Prime Rate" means the variable rate of interest, per annum, most recently announced by Bank, as its "prime rate," whether or not such announced rate is the lowest rate available from Bank. "Quick Assets" means, at any date as of which the amount thereof shall be determined, the consolidated cash, cash-equivalents, accounts receivable and investments, with maturities not to exceed 90 days, of Borrower determined in accordance with GAAP. "Responsible Officer" means each of the Chief Executive Officer, the Chief Financial Officer and the Controller of Borrower. "Revolving Maturity Date" means the date immediately preceding the first anniversary of the date of this Agreement. "Revolving Facility" means the facility under which Borrower may request Bank to issue Advances, as specified in Section 2.1 hereof. "Schedule" means the schedule of exceptions attached hereto, if any. "Subordinated Debt" means any debt incurred by Borrower that is subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank (and identified as being such by Borrower and Bank). "Subsidiary" means any corporation or partnership in which (i) any general partnership interest or (ii) more than 50% of the stock of which by the terms thereof ordinary voting power to elect the Board of Directors, managers or trustees of the entity shall, at the time as of which any determination is being made, be owned by Borrower, either directly or through an Affiliate. "Tangible Net Worth" means at any date as of which the amount thereof shall be determined, the sum of the capital stock and additional paid-in capital plus retained earnings (or minus accumulated deficit) of Borrower and its Subsidiaries minus intangible assets, plus Subordinated Debt, on a consolidated basis determined in accordance with GAAP. "Total Liabilities" means at any date as of which the amount thereof shall be determined, all obligations that should, in accordance with GAAP be classified as liabilities on the consolidated balance sheet of Borrower, including in any event all Indebtedness. 1.2 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP and all calculations made hereunder shall be made in accordance with GAAP. When used herein, the terms "financial statements" shall include the notes and schedules thereto. 2. LOAN AND TERMS OF PAYMENT 2.1 Credit Extensions. Borrower promises to pay to the order of Bank, in lawful money of the United States of America, the aggregate unpaid principal amount of all Credit Extensions made by Bank to Borrower hereunder. Borrower shall also pay interest on the unpaid principal amount of such Credit Extensions at rates in accordance with the terms hereof. 7 10 2.1.1 Revolving Advances. (a) Subject to and upon the terms and conditions of this Agreement, Bank agrees to make Advances to Borrower in an aggregate outstanding amount not to exceed (i) the Committed Revolving Line or the Borrowing Base, whichever is less, minus (ii) the face amount of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit, and minus (iii) the Foreign Exchange Reserve. Subject to the terms and conditions of this Agreement, amounts borrowed pursuant to this Section 2.1.1 may be repaid and reborrowed at any time prior to the Revolving Maturity Date. (b) Whenever Borrower desires an Advance, Borrower will notify Bank by facsimile transmission or telephone no later than 3:00 p.m. Pacific time, on the Business Day that the Advance is to be made. Each such notification shall be promptly confirmed by a Payment/Advance Form in substantially the form of Exhibit B hereto. Bank is authorized to make Advances under this Agreement, based upon instructions received from a Responsible Officer or a designee of a Responsible Officer, or without instructions if in Bank's discretion such Advances are necessary to meet Obligations which have become due and remain unpaid. Bank shall be entitled to rely on any telephonic notice given by a person who Bank reasonably believes to be a Responsible Officer or a designee thereof, and Borrower shall indemnify and hold Bank harmless for any damages or loss suffered by Bank as a result of such reliance. Bank will credit the amount of Advances made under this Section 2.1.1 to Borrower's deposit account. (c) The Committed Revolving Line shall terminate on the Revolving Maturity Date, at which time all Advances under this Section 2.1.1 shall be immediately due and payable. 2.1.2 Letters of Credit. (a) Subject to the terms and conditions of this Agreement, Bank agrees to issue or cause to be issued Letters of Credit for the account of Borrower in an aggregate outstanding face amount not to exceed (i) the lesser of the Committed Revolving Line or the Borrowing Base, minus (ii) the then outstanding principal balance of the Advances, provided that the face amount of outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve) shall not in any case exceed Five Hundred Thousand Dollars ($500,000). Each Letter of Credit shall have an expiry date no later than the Revolving Maturity Date. All Letters of Credit shall be, in form and substance, acceptable to Bank in its sole discretion and shall be subject to the terms and conditions of Bank's form of standard Application and Letter of Credit Agreement. (b) The obligation of Borrower to immediately reimburse Bank for drawings made under Letters of Credit shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement and such Letters of Credit, under all circumstances whatsoever. Borrower shall indemnify, defend, protect and hold Bank harmless from any loss, cost, expense or liability, including, without limitation, reasonable attorneys' fees, arising out of or in connection with any Letters of Credit. (c) Borrower may request that Bank issue a Letter of Credit payable in a currency other than United States Dollars. If a demand for payment is made under any such Letter of Credit, Bank shall treat such demand as an Advance to Borrower of the equivalent of the amount thereof (plus cable charges) in United States currency at the then prevailing rate of exchange in San Francisco, California, for sales of that other currency for cable transfer to the country of which it is the currency. 8 11 (d) Upon the issuance of any Letter of Credit payable in a currency other than United States Dollars, Bank shall create a reserve under the Committed Revolving Line for Letters of Credit against fluctuations in currency exchange rates, in an amount equal to ten percent (10%) of the face amount of such Letter of Credit. The amount of such reserve may be amended by Bank from time to time to account for fluctuations in the exchange rate. The availability of funds under the Committed Revolving Line shall be reduced by the amount of such reserve for so long as such Letter of Credit remains outstanding. 2.1.3 Foreign Exchange Contract; Foreign Exchange Settlements. (a) Subject to the terms of this Agreement, Borrower may enter into foreign exchange contracts (the "Exchange Contracts") not to exceed an aggregate amount of Seventy-Five Thousand Dollars ($75,000) (the "Contract Limit"), pursuant to which Bank shall sell to or purchase from Borrower foreign currency on a spot or future basis. Borrower shall not request any Exchange Contracts at any time it is out of compliance with any of the provisions of this Agreement. All Exchange Contracts must provide for delivery of settlement on or before the Revolving Maturity Date. The amount available under the Committed Revolving Line at any time shall be reduced by the following amounts (the "Foreign Exchange Reserve") on any given day (the "Determination Date"): (i) on all outstanding Exchange Contracts on which delivery is to be effected or settlement allowed more than two (2) Business Days after the Determination Date, ten percent (10%) of the gross amount of the Exchange Contracts; plus (ii) on all outstanding Exchange Contracts on which delivery is to be effected or settlement allowed within two (2) Business Days after the Determination Date, one hundred percent (100%) of the gross amount of the Exchange Contracts. (b) Bank may, in its discretion, terminate the Exchange Contracts at any time (a) that an Event of Default occurs or (b) that there is no sufficient availability under the Committed Revolving Line and Borrower does not have available funds in its bank account to satisfy the Foreign Exchange Reserve. If Bank terminates the Exchange Contracts, and without limitation of any applicable indemnities, Borrower agrees to reimburse Bank for any and all fees, costs and expenses relating thereto or arising in connection therewith. (c) Borrower shall not permit the total gross amount of all Exchange Contracts on which delivery is to be effected and settlement allowed in any two (2) Business Day period to be more than Seventy-Five Thousand Dollars ($75,000) (the "Settlement Limit"), nor shall Borrower permit the total gross amount of all Exchange Contracts to which Borrower is a party, outstanding at any one time, to exceed the Contract Limit. Notwithstanding the above, however, the amount which may be settled in any two (2) Business Day period may be increased above the Settlement Limit up to, but in no event to exceed, the amount of the Contract Limit under either of the following circumstances: (i) if there is sufficient availability under the Committed Revolving Line in the amount of the Foreign Exchange Reserve as of each Determination Date, provided that Bank in advance shall reserve the full amount of the Foreign Exchange Reserve against the Committed Revolving Line; or (ii) if there is insufficient availability under the Committed Revolving Line, as to settlements within any two (2) Business Day period, provided that Bank, in its sole discretion, may: (A) verify good funds overseas prior to crediting Borrower's deposit account with Bank (in the case of Borrower's sale of foreign currency); or (B) debit Borrower's deposit account with Bank prior to delivering foreign currency overseas (in the case of Borrower's purchase of foreign currency). (d) In the case of Borrower's purchase of foreign currency, Borrower in advance shall instruct Bank upon settlement either to treat the settlement amount as an advance under the Committed Revolving Line, or to debit Borrower's account for the amount settled. 9 12 (e) Borrower shall execute all standard form applications and agreements of Bank in connection with the Exchange Contracts and, without limiting any of the terms of such applications and agreements, Borrower will pay all standard fees and charges of Bank in connection with the Exchange Contracts. (f) Without limiting any of the other terms of this Agreement or any such standard form applications and agreements of Bank, Borrower agrees to indemnify Bank and hold it harmless from and against any and all claims, debts, liabilities, demands, obligations, actions, costs and expenses (including, without limitation, attorneys' fees of counsel of Bank's choice), of every nature and description which it may sustain or incur, based upon, arising out of, or in any way relating to any of the Exchange Contracts or any transactions relating thereto or contemplated thereby. 2.1.4 Equipment Advances. (a) Subject to and upon the terms and conditions of this Agreement, at any time from the date hereof through October 30, 1998, Bank agrees to make advances (each an "Equipment Advance" and, collectively, the "Equipment Advances") to Borrower in an aggregate outstanding amount not to exceed the Equipment Line. The Equipment Advances shall be used only to purchase Equipment approved from time to time by Bank purchased on or after ninety (90) days prior to the date hereof, and shall not exceed eighty percent (80%) of the invoice amount of such equipment, excluding taxes, shipping, warranty charges, freight discounts and installation expense. Not more than twenty-five percent (25%) of the aggregate outstanding Equipment Advances shall be used to finance the acquisition or licensing of software. (b) Interest shall accrue from the date of each Equipment Advance at the rate specified in Section 2.3(a), and shall be payable monthly for each month through October 1998. Any Equipment Advances that are outstanding on October 30, 1998 shall be payable in thirty-six (36) equal monthly installments of principal, plus all accrued interest, beginning on November 30, 1998, and continuing on the same day of each month thereafter through October 30, 2001, at which time all amounts due under this Section 2.1.4 and any other amounts due under this Agreement shall be immediately due and payable. Equipment Advances, once repaid, may not be reborrowed. (c) When Borrower desires to obtain a Equipment Advance, Borrower shall notify Bank (which notice shall be irrevocable) by facsimile transmission to be received no later than 3:00 p.m. Pacific time one (1) Business Day before the day on which the Equipment Advance is to be made. Such notice shall be substantially in the form of Exhibit B. The notice shall be signed by a Responsible Officer or its designee and include a copy of the invoice for any Equipment to be financed. 2.2 Overadvances. If, at any time or for any reason, the amount of Obligations owed by Borrower to Bank pursuant to Section 2.1.1 of this Agreement is greater than the lesser of (i) the Committed Revolving Line or (ii) the Borrowing Base, Borrower shall immediately pay to Bank, in cash, the amount of such excess. 2.3 Interest Rates, Payments, and Calculations. (a) Interest Rates. (i) Advances' Except as set forth in Section 2.3(b), any Advances shall bear interest, on the average daily balance thereof, at a rate equal to the Prime Rate. (ii) Equipment Advances. Except as set forth in Section 2.3(b), any Equipment Advances shall bear interest, on the average daily balance thereof, at a rate equal to one quarter of a percentage point (0.25%) above the Prime Rate. 10 13 (b) Default Rate. All Obligations shall bear interest, from and after the occurrence of an Event of Default, at a rate equal to five (5) percentage points above the interest rate applicable immediately prior to the occurrence of the Event of Default. (c) Payments. Interest hereunder shall be due and payable on the last Business Day of each month during the term hereof. Bank shall, at its option, charge such interest, all Bank Expenses, and all Periodic Payments against any of Borrower's deposit accounts or against the Committed Revolving Line, in which case those amounts shall thereafter accrue interest at the rate then applicable hereunder. Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder. (d) Computation. In the event the Prime Rate is changed from time to time hereafter, the applicable rate of interest hereunder shall be increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is changed, by an amount equal to such change in the Prime Rate. AU interest chargeable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed. 2.4 Crediting Payments. Prior to the occurrence of an Event of Default, Bank shall credit a wire transfer of funds, check or other item of payment to such deposit account or Obligation as Borrower specifies. After the occurrence of an Event of Default, the receipt by Bank of any wire transfer of funds, check, or other item of payment shall be immediately applied to conditionally reduce Obligations, but shall not be considered a payment on account unless such payment is of immediately available federal funds or unless and until such check or other item of payment is honored when presented for payment. Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by Bank after 12:00 noon California time shall be deemed to have been received by Bank as of the opening of business on the immediately following Business Day. Whenever any payment to Bank under the Loan Documents would otherwise be due (except by reason of acceleration) on a date that is not a Business Day, such payment shall instead be due on the next Business Day, and additional fees or interest, as the case may be, shall accrue and be payable for the period of such extension. 2.5 Fees. Borrower shall pay to Bank the following: (a) Facility Fee. A Facility Fee equal to Twelve Thousand Five Hundred Dollars ($12,500), which fee shall be due on the Closing Date and shall be fully earned and nonrefundable; (b) Financial Examination and Apraisal Fees. Bank's customary fees and out-of-pocket expenses for Bank's audits of Borrower's Accounts, and for each appraisal of Collateral and financial analysis and examination of Borrower performed from time to time by Bank or its agents; (c) Bank Expenses. Upon the date hereof, all Bank Expenses incurred through the Closing Date, including reasonable attorneys' fees and expenses, and, after the date hereof, all Bank Expenses, including reasonable attorneys' fees and expenses, as and when they become due. 2.6 Additional Costs. In case any change in any law, regulation, treaty or official directive or the interpretation or application thereof by any court or any governmental authority charged with the administration thereof or the compliance with any guideline or request of any central bank or other governmental authority (whether or not having the force of law), in each case after the date of this Agreement: (a) subjects Bank to any tax with respect to payments of principal or interest or any other amounts payable hereunder by Borrower or otherwise with respect to the 11 14 transactions contemplated hereby (except for taxes on the overall net income of Bank imposed by the United States of America or any political subdivision thereof); (b) imposes, modifies or deems applicable any deposit insurance, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, Bank; or (c) imposes upon Bank any other condition with respect to its performance under this Agreement, and the result of any of the foregoing is to increase the cost to Bank, reduce the income receivable by Bank or impose any expense upon Bank with respect to any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank the amount of such increase in cost, reduction in income or additional expense as and when such cost, reduction or expense is incurred or determined, upon presentation by Bank of a statement of the amount and setting forth Bank's calculation thereof, all in reasonable detail, which statement shall be deemed true and correct absent manifest error. 2.7 Term. This Agreement shall become effective on the Closing Date and, subject to Section 12.7, shall continue in full force and effect for a term ending on the Equipment Maturity Date. Notwithstanding the foregoing, Bank shall have the right to terminate its obligation to make Credit Extensions under this Agreement immediately and without notice upon the occurrence and during the continuance of an Event of Default. Notwithstanding termination, Bank's Lien on the Collateral shall remain in effect for so long as any Obligations are outstanding. 3. CONDITIONS OF LOANS 3.1 Conditions Precedent to Initial Credit Extension. The obligation of Bank to make the initial Credit Extension is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, the following: (a) this Agreement; (b) a certificate of the Secretary of Borrower with respect to incumbency and resolutions authorizing the execution and delivery of this Agreement; (c) financing statement (Form UCC-1); (d) insurance certificate; (e) payment of the fees and Bank Expenses then due specified in Section 2.5 hereof; (f) an audit of the Collateral, the results of which shall be satisfactory to Bank; and (g) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate. 3.2 Conditions Precedent to all Credit Extensions. The obligation of Bank to make each Credit Extension, including the initial Credit Extension, is further subject to the following conditions: (a) timely receipt by Bank of the Payment/Advance Form as provided in Section 2.1; and 12 15 (b) the representations and warranties contained in Section 5 shall be true and correct in all material respects on and as of the date of such Payment/Advance Form and on the effective date of each Credit Extension as though made at and as of each such date, and no Event of Default shall have occurred and be continuing, or would result from such Credit Extension. The making of each Credit Extension shall be deemed to be a representation and warranty by Borrower on the date of such Credit Extension as to the accuracy of the facts referred to in this Section 3.2(b). 4. CREATION OF SECURITY INTEREST 4.1 Grant of Security Interest. Borrower grants and pledges to Bank a continuing security interest in all presently existing and hereafter acquired or arising Collateral in order to secure prompt repayment of any and all Obligations and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. Except as set forth in the Schedule, such security interest constitutes a valid, first priority security interest in the presently existing Collateral, and will constitute a valid, first priority security interest in Collateral acquired after the date hereof. 4.2 Delivery of Additional Documentation Required. Borrower shall from time to time execute and deliver to Bank, at the request of Bank, all Negotiable Collateral, all financing statements and other documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and continue perfected Bank's security interests in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents. 4.3 Right to Inspect. Bank (through any of its officers, employees, or agents) shall have the right, upon reasonable prior notice, from time to time during Borrower's usual business hours, to inspect Borrower's Books and to make copies thereof and to check, test, and appraise the Collateral in order to verify Borrower's financial condition or the amount, condition of, or any other matter relating to, the Collateral. 5. REPRESENTATIONS AND WARRANTIES Borrower represents and warrants as follows: 5.1 Due Organization and Qualification. Borrower and each Subsidiary is a corporation duly existing and in good standing under the laws of its state of incorporation and qualified and licensed to do business in, and is in good standing in, any state in which the conduct of its business or its ownership of property requires that it be so qualified. 5.2 Due Authorization; No Conflict. The execution, delivery, and performance of the Loan Documents are within Borrower's powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in Borrower's Articles of Incorporation or Bylaws, nor will they constitute an event of default under any material agreement to which Borrower is a party or by which Borrower is bound. Borrower is not in default under any agreement to which it is a party or by which it is bound, which default could have a Material Adverse Effect. 5.3 No Prior Encumbrances. Borrower has good and indefeasible title to the Collateral, free and clear of Liens, except for Permitted Liens. 5.4 Bona Fide Eligible Accounts. The Eligible Accounts are bona fide existing obligations. The services or property giving rise to such Eligible Accounts have been rendered or delivered to the account debtor or to the account debtor's agent for immediate shipment to and unconditional acceptance by the account debtor. Borrower has not received notice of actual or imminent Insolvency Proceeding of any account debtor that is included in any Borrowing Base Certificate as an Eligible Account. 13 16 5.5 Merchantable Inventory. All Inventory is in all material respects of good and marketable quality, free from all material defects. 5.6 Name; Location of Chief Executive Office. Except as disclosed in the Schedule, Borrower has not done business under any name other than that specified on the signature page hereof. The chief executive office of Borrower is located at the address indicated in Section 10 hereof. 5.7 Litigation. Except as set forth in the Schedule, there are no actions or proceedings pending by or against Borrower or any Subsidiary before any court or administrative agency in which an adverse decision could have a Material Adverse Effect or a material adverse effect on Borrower's interest or Bank's security interest in the Collateral. Borrower does not have knowledge of any such pending or threatened actions or proceedings. 5.8 No Material Adverse Change in Financial Statements. All consolidated financial statements related to Borrower and any Subsidiary that have been delivered by Borrower to Bank fairly present in all material respects Borrower's consolidated financial condition as of the date thereof and Borrower's consolidated results of operations for the period then ended. There has not been a material adverse change in the consolidated financial condition of Borrower since the date of the most recent of such financial statements submitted to Bank. 5.9 Solvency. Borrower is solvent and able to pay its debts (including trade debts) as they mature. 5.10 Regulatory Compliance. Borrower and each Subsidiary has met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. No event has occurred resulting from Borrower's failure to comply with ERISA that is reasonably likely to result in Borrower's incurring any liability that could have a Material Adverse Effect. Borrower is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940. Borrower is not engaged principally, or as one of the important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations G, T and U of the Board of Governors of the Federal Reserve System). Borrower has complied with all the provisions of the Federal Fair Labor Standards Act. Borrower has not violated any statutes, laws, ordinances or rules applicable to it, violation of which could have a Material Adverse Effect. 5.11 Environmental Condition. None of Borrower's or any Subsidiary's properties or assets has ever been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous owners or operators, in the disposal of, or to produce, store, handle, treat, release, or transport, any hazardous waste or hazardous substance other than in accordance with applicable law; to the best of Borrower's knowledge, none of Borrower's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a hazardous waste or hazardous substance disposal site, or a candidate for closure pursuant to any environmental protection statute; no lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned by Borrower or any Subsidiary; and neither Borrower nor any Subsidiary has received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal, state or other governmental agency concerning any action or omission by Borrower or any Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste or hazardous substances into the environment. 5.12 Taxes. Borrower and each Subsidiary has filed or caused to be filed all tax returns required to be filed, and has paid, or has made adequate provision for the payment of, all taxes reflected therein. 5.13 Subsidiaries. Borrower does not own any stock, partnership interest or other equity securities of any Person, except for Permitted Investments. 14 17 5.14 Government Consents. Borrower and each Subsidiary has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of Borrower's business as currently conducted. 5.15 Full Disclosure. No representation, warranty or other statement made by Borrower in any certificate or written statement furnished to Bank contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading. 6. AFFIRMATIVE COVENANTS Borrower covenants and agrees that, until payment in full of all outstanding Obligations, and for so long as Bank may have any commitment to make a Credit Extension hereunder, Borrower shall do all of the following: 6.1 Good Standing. Borrower shall maintain its and each of its Subsidiaries' corporate existence and good standing in its jurisdiction of incorporation and maintain qualification in each jurisdiction in which the failure to so qualify could have a Material Adverse Effect. Borrower shall maintain, and shall cause each of its Subsidiaries to maintain, to the extent consistent with prudent management of Borrower's business, in force all licenses, approvals and agreements, the loss of which could have a Material Adverse Effect. 6.2 Government Compliance. Borrower shall meet, and shall cause each Subsidiary to meet, the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. Borrower shall comply, and shall cause each Subsidiary to comply, with all statutes, laws, ordinances and government rules and regulations to which it is subject, noncompliance with which could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral. 6.3 Financial Statements, Reports, Certificates. Borrower shall deliver to Bank: (a) as soon as available, but in any event within twenty-five (25) days after the end of each fiscal quarter of Borrower, a company prepared consolidated balance sheet and income statement covering Borrower's consolidated operations during such period, in a form and certified by a Responsible Officer; (b) as soon as available, but in any event within ninety (90) days after the end of Borrower's fiscal year, beginning with the year ending December 31, 1997, audited consolidated financial statements of Borrower prepared in accordance with GAAP, consistently applied; (c) within five (5) days of filing, copies of all statements, reports and notices sent or made available generally by Borrower to its security holders or to any holders of Subordinated Debt and all reports on Form 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission; (d) promptly upon receipt of notice thereof, a report of any legal actions pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of Fifty Thousand Dollars ($50,000) or more; and (e) such budgets, sales projections, operating plans or other financial information as Bank may reasonably request from time to time. Within fifteen (15) days after the last day of each month, Borrower shall deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of Exhibit C hereto, together with aged listings of accounts receivable and accounts payable. Borrower shall deliver to Bank with the quarterly financial statements a Compliance Certificate signed by a Responsible Officer in substantially the form of Exhibit D hereto. Bank shall have a right from time to time hereafter to audit Borrower's Accounts and appraise Collateral at Borrower's expense, provided that such audits will be conducted no more often than every six (6) months unless an Event of Default has occurred and is continuing. 15 18 6.4 Inventory; Returns. Borrower shall keep all Inventory in good and marketable condition, free from all material defects. Returns and allowances, if any, as between Borrower and its account debtors shall be on the same basis and in accordance with the usual customary practices of Borrower, as they exist at the time of the execution and delivery of this Agreement. Borrower shall promptly notify Bank of all returns and recoveries and of all disputes and claims, where the return, recovery, dispute or claim involves more than Fifty Thousand Dollars ($50,000). 6.5 Taxes. Borrower shall make, and shall cause each Subsidiary to make, due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Bank, on demand, appropriate certificates attesting to the payment or deposit thereof; and Borrower will make, and will cause each Subsidiary to make, timely payment or deposit of all material tax payments and withholding taxes required of it by applicable laws, including, but not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Bank with proof satisfactory to Bank indicating that Borrower or a Subsidiary has made such payments or deposits; provided that Borrower or a Subsidiary need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings and is reserved against (to the extent required by GAAP) by Borrower. 6.6 Insurance. (a) Borrower, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses conducted in the locations where Borrower's business is conducted on the date hereof. Borrower shall also maintain insurance relating to Borrower's ownership and use of the Collateral in amounts and of a type that are customary to businesses similar to Borrower's. (b) AR such policies of insurance shall be in such form, with such companies, and in such amounts as reasonably satisfactory to Bank. All such policies of property insurance shall contain a lender's loss payable endorsement, in a form satisfactory to Bank, showing Bank as an additional loss payee thereof and all liability insurance policies shall show the Bank as an additional insured, and shall specify that the insurer must give at least twenty (20) days notice to Bank before canceling its policy for any reason. Upon Bank's request, Borrower shall deliver to Bank certified copies of such policies of insurance and evidence of the payments of all premiums therefor. All proceeds payable under any such policy shall, at the option of Bank, be payable to Bank to be applied on account of the Obligations. 6.7 Principal Depository. Borrower shall maintain its principal depository, investment, and operating accounts with Bank. 6.8 Quick Ratio. Borrower shall maintain, as of the last day of each fiscal quarter, a ratio of Quick Assets to Current Liabilities, of at least 1.00 to 1.00. 6.9 Tangible Net Worth. Borrower shall maintain, as of the last day of each fiscal quarter, a Tangible Net Worth plus Subordinated Debt of not less than Two Million Five Hundred Thousand Dollars ($2,500,000). 6.10 Debt Service Coverage. Borrower shall maintain, as of the last day of each fiscal quarter, a Debt Service Coverage of at least 1.5 to 1.0. "Debt Service Coverage" means, as of any date of determination, a ratio of (a) the sum of (i) earnings after tax plus (ii) interest and non-cash (i.e., depreciation and amortization) expense, annualized for the preceding fiscal quarter to (b) the sum of (i) current portion of long term debt and capitalized leases plus (ii) interest expense. 16 19 6.11 Registration of Intellectual Property Rights. (a) Borrower shall register or cause to be registered (to the extent not already registered) with the United States Patent and Trademark Office or the United States Copyright Office, as applicable, those intellectual property rights listed on Exhibits A, B and C to the intellectual Property Security Agreement delivered to Bank by Borrower in connection with this Agreement within sixty (60) days of the date of this Agreement. Borrower shall register or cause to be registered with the United States Patent and Trademark Office or the United States Copyright Office, as applicable, those additional intellectual property rights developed or acquired by Borrower from time to time in connection with any product prior to the sale or licensing of such product to any third party, including without limitation revisions or additions to the intellectual property rights listed on such Exhibits A, B and C. (b) Borrower shall execute and deliver such additional instruments and documents from time to time as Bank shall reasonably request to perfect Bank's security interest in the Intellectual Property Collateral. (c) Borrower shall (i) protect, defend and maintain the validity and enforceability of the Trademarks, Patents and Copyrights, (ii) use its best efforts to detect infringements of the Trademarks, Patents and Copyrights and promptly advise Bank in writing of material infringements detected and (iii) not allow any Trademarks, Patents or Copyrights to be abandoned, forfeited or dedicated to the public without the written consent of Bank, which shall not be unreasonably withheld, unless Bank determines that reasonable business practices suggest that abandonment is appropriate. (d) Bank shall have the right, but not the obligation, to take, at Borrower's sole expense, any actions that Borrower is required under this Section 6.11 to take but which Borrower fails to take, after fifteen (15) days' notice to Borrower. Borrower shall reimburse and indemnify Bank for all reasonable costs and reasonable expenses incurred in the reasonable exercise of its rights under this Section 6.11. 6.12 Further Assurances. At any time and from time to time Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement. 7. NEGATIVE COVENANTS Borrower covenants and agrees that, so long as any credit hereunder shall be available and until payment in full of the outstanding Obligations or for so long as Bank may have any commitment to make any Credit Extensions, Borrower will not do any of the following: 7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, other than: (i) Transfers of Inventory in the ordinary course of business; (ii) Transfers of non-exclusive licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries; or (iii) Transfers of worn-out or obsolete Equipment. 7.2 Change in Business. Engage in any business, or permit any of its Subsidiaries to engage in any business, other than the businesses currently engaged in by Borrower and any business substantially similar or related thereto (or incidental thereto), or suffer a material change of no more than fifty percent (50%) in Borrower's ownership. Borrower will not, without thirty (30) days prior written notification to Bank, relocate its chief executive office. 7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or 17 20 permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person. 7.4 Indebtedness. Create, incur, assume or be or remain liable with respect to any Indebtedness, or permit any Subsidiary so to do, other than Permitted Indebtedness. 7.5 Encumbrances. Create, incur, assume or suffer to exist any Lien with respect to any of its property, or assign or otherwise convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries so to do, except for Permitted Liens. 7.6 Distributions. Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock, except that Borrower may pay dividends to its shareholders in such amounts as are necessary to cover personal tax liabilities of such shareholders. 7.7 Investments. Directly or indirectly acquire or own, or make any Investment in or to any Person, or permit any of its Subsidiaries so to do, other than Permitted Investments. 7.8 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm's length transaction with a nonaffiliated Person. 7.9 Subordinated Debt. Make any payment in respect of any Subordinated Debt, or permit any of its Subsidiaries to make any such payment, except in compliance with the terms of such Subordinated Debt, or amend any provision contained in any documentation relating to the Subordinated Debt without Bank's prior written consent. 7.10 Inventory. Store the Inventory with a bailee, warehouseman, or similar party unless Bank has received a pledge of the warehouse receipt covering such Inventory. Except for Inventory sold in the ordinary course of business and except for such other locations as Bank may approve in writing, Borrower shall keep the Inventory only at the location set forth in Section 10 hereof and such other locations of which Borrower gives Bank prior written notice and as to which Borrower signs and files a financing statement where needed to perfect Bank's security interest. 7.11 Compliance. Become an "investment company" controlled by an "investment company," within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of any Credit Extension for such purpose. Fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail to comply with the Federal Fair Labor Standards Act or violate any law or regulation, which violation could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral, or permit any of its Subsidiaries to do any of the foregoing. 8. EVENTS OF DEFAULT Any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement: 8.1 Payment Default. If Borrower fails to pay, when due, any of the Obligations; 8.2 Covenant Default. If Borrower fails to perform any obligation under Article 6 or violates any of the covenants contained in Article 7 of this Agreement, or fails or neglects to perform, keep, or observe any other material term, provision, condition, covenant, or agreement 18 21 contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between Borrower and Bank and as to any default under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure such default within ten (10) days after Borrower receives notice thereof or any officer of Borrower becomes aware thereof; provided, however, that if the default cannot by its nature be cured within the ten (10) day period or cannot after diligent attempts by Borrower be cured within such ten (10) day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional reasonable period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default (provided that no Credit Extensions will be required to be made during such cure period); 8.3 Material Adverse Change. If there occurs a material adverse change in Borrower's business or financial condition, or if there is a material impairment of the prospect of repayment of any portion of the Obligations or a material impairment of the value or priority of Bank's security interests in the Collateral; 8.4 Attachment. If any material portion of Borrower's assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within ten (10) days, or if Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of Borrower's assets, or if a notice of lien, levy, or assessment is filed of record with respect to any of Borrower's assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within ten (10) days after Borrower receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by Borrower (provided that no Credit Extensions will be required to be made during such cure period); 8.5 Insolvency. If Borrower becomes insolvent, or if an Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced against Borrower and is not dismissed or stayed within ten (10) days (provided that no Credit Extensions will be made prior to the dismissal of such Insolvency Proceeding); 8.6 Other Agreements. If there is an uncured default in any agreement to which Borrower is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of One Hundred Thousand Dollars ($100,000) or that could have a Material Adverse Effect; 8.7 Judgments. If a judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least One Hundred Thousand Dollars ($100,000) shall be rendered against Borrower and shall remain unsatisfied and unstayed for a period of ten (10) days (provided that no Credit Extensions will be made prior to the satisfaction or stay of such judgment); or 8.8 Misrepresentations. If any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth herein or in any certificate delivered to Bank by any Responsible Officer pursuant to this Agreement or to induce Bank to enter into this Agreement or any other Loan Document. 8.9 Guaranty. Any guaranty of all or a portion of the Obligations ceases for any reason to be in full force and effect, or any guarantor fails to perform any obligation under any guaranty of all or a portion of the Obligations, or any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth in any guaranty of all 19 22 or a portion of the Obligations or in any certificate delivered to Bank in connection with such guaranty. 9. BANK'S RIGHTS AND REMEDIES 9.1 Rights and Remedies. Upon the occurrence and during the continuance of an Event of Default, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable (provided that upon the occurrence of an Event of Default described in Section 8.5 all Obligations shall become immediately due and payable without any action by Bank); (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement or under any other agreement between Borrower and Bank; (c) Demand that Borrower (i) deposit cash with Bank in an amount equal to the amount of any Letters of Credit remaining undrawn, as collateral security for the repayment of any future drawings under such Letters of Credit, and Borrower shall forthwith deposit and pay such amounts, and (ii) pay in advance all Letters of Credit fees scheduled to be paid or payable over the remaining term of the Letters of Credit; (d) Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order that Bank reasonably considers advisable; (e) Without notice to or demand upon Borrower, make such payments and do such acts as Bank considers necessary or reasonable to protect its security interest in the Collateral. Borrower agrees to assemble the Collateral if Bank so requires, and to make the Collateral available to Bank as Bank may designate. Borrower authorizes Bank to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Bank's determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of Borrower's owned premises, Borrower hereby grants Bank a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of Bank's rights or remedies provided herein, at law, in equity, or otherwise; (f) Without notice to Borrower set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Bank, or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Bank; (g) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Bank is hereby granted a license or other right, solely pursuant to the provisions of this Section 9.1, to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank's exercise of its rights under this Section 9.1, Borrower's rights under all licenses and all franchise agreements shall inure to Bank's benefit; (h) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as is commercially reasonable, and apply any proceeds to the Obligations in whatever manner or order Bank deems appropriate; 20 23 (i) Bank may credit bid and purchase at any public sale; and (j) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrower. 9.2 Power of Attorney. Effective only upon the occurrence and during the continuance of an Event of Default, Borrower hereby irrevocably appoints Bank (and any of Bank's designated officers, or employees) as Borrower's true and lawful attorney to: (a) send requests for verification of Accounts or notify account debtors of Bank's security interest in the Accounts; (b) endorse Borrower's name on any checks or other forms of payment or security that may come into Bank's possession; (c) sign Borrower's name on any invoice or bill of lading relating to any Account, drafts against account debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to account debtors; (d) make, settle, and adjust all claims under and decisions with respect to Borrower's policies of insurance; and (e) settle and adjust disputes and claims respecting the accounts directly with account debtors, for amounts and upon terms which Bank determines to be reasonable; provided Bank may exercise such power of attorney to sign the name of Borrower on any of the documents described in Section 4.2 regardless of whether an Event of Default has occurred. The appointment of Bank as Borrower's attorney in fact, and each and every one of Bank's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed and Bank's obligation to provide advances hereunder is terminated. 9.3 Accounts Collection. At any time from the date of this Agreement, Bank may notify any Person owing funds to Borrower of Bank's security interest in such funds and verify the amount of such Account. Borrower shall collect all amounts owing to Borrower for Bank, receive in trust all payments as Bank's trustee, and immediately deliver such payments to Bank in their original form as received from the account debtor, with proper endorsements for deposit. 9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities within ten (10) days of when such payment is due, to the extent required under the terms of this Agreement, then Bank may do any or all of the following: (a) make payment of the same or any part thereof; (b) set up such reserves under the Revolving Facility as Bank deems necessary to protect Bank from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type discussed in Section 6.6 of this Agreement, and take any action with respect to such policies as Bank deems prudent. Any amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Bank shall not constitute an agreement by Bank to make similar payments in the future or a waiver by Bank of any Event of Default under this Agreement. 9.5 Bank's Liability for Collateral. So long as Bank complies with reasonable banking practices, Bank shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of loss, damage or destruction of the Collateral shall be borne by Borrower. 9.6 Remedies Cumulative. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be effective unless made in a written document signed on behalf of Bank and then shall be effective only in the specific instance and for the specific purpose for which it was given. 21 24 9.7 Demand; Protest. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Bank on which Borrower may in any way be liable. 10. NOTICES Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by a recognized overnight delivery service, certified mail, postage prepaid, return receipt requested, or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses set forth below: If to Borrower: bsquare corporation 3633 136th Place SE, Suite 100 Bellevue, WA 98006 Attn: Ms. Leila Kirske FAX: (425) 519-5999 If to Bank: Imperial Bank 777 108th Avenue NE, Suite 1670 Bellevue, WA 98004 Attn: Mr. Jim Ellison FAX: (425) 454-6224 The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. 11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of law. Each of Borrower and Bank hereby submits to the exclusive jurisdiction of the state and Federal courts located in the County of Santa Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. 12. GENERAL PROVISIONS 12.1 Successors and Assigns. This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties; provided, however, that neither this Agreement nor any rights hereunder may be assigned by Borrower without Bank's prior written consent, which consent may be granted or withheld in Bank's sole discretion. Bank shall have the right without the consent of or notice to Borrower to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank's obligations, rights and benefits hereunder. 22 25 12.2 Indemnification. Borrower shall defend, indemnify and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by this Agreement; and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank as a result of or in any way arising out of, following, or consequential to transactions between Bank and Borrower whether under this Agreement, or otherwise (including without limitation reasonable attorneys fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct. 12.3 Time of Essence. Time is of the essence for the performance of all obligations set forth in this Agreement. 12.4 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 12.5 Amendments in Writing, Integration. This Agreement cannot be amended or terminated orally. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement, if any, are merged into this Agreement and the Loan Documents. 12.6 Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. 12.7 Survival. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations remain outstanding. The obligations of Borrower to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 12.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run. 12.8 Confidentiality. In handling any confidential information Bank shall exercise the same degree of care that it exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any non-public information thereby received or received pursuant to this Agreement except that disclosure of such information may be made (i) to the subsidiaries or affiliates of Bank in connection with their present or prospective business relations with Borrower, (ii) to prospective transferees or purchasers of any interest in the Loans, provided that they have entered into a comparable confidentiality agreement in favor of Borrower and have delivered a copy to Borrower, (iii) as required by law, regulations, rule or order, subpoena, judicial order or similar order, (iv) as may be required in connection with the examination, audit or similar investigation of Bank and (v) as Bank may determine in connection with the enforcement of any remedies hereunder. Confidential information hereunder shall not include information that either: (a) is in the public domain or in the knowledge or possession of Bank when disclosed to Bank, or become part of the public domain after disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank by a third party, provided Bank does not have actual knowledge that such third party is prohibited from disclosing such information. 13. JUDICIAL REFERENCE. (a) Other than (i) nonjudicial foreclosure and all matters in connection therewith regarding security interests in real or personal property; or (ii) the appointment of a receiver, or the exercise of other provisional remedies (any and all of which may be initiated pursuant to applicable law), each controversy, dispute or claim between the parties arising out of or relating to this Agreement, which controversy, dispute or claim is not settled in writing within thirty (30) days after 23 26 the "Claim Date" (defined as the date on which a party subject to this Agreement gives written notice to all other parties that a controversy, dispute or claim exists), will be settled by a reference proceeding in California in accordance with the provisions of Section 638 et seq. of the California Code of Civil Procedure, or their successor section ("CCP"), which shall constitute the exclusive remedy for the settlement of any controversy, dispute or claim concerning this Agreement, including whether such controversy, dispute or claim is subject to the reference proceeding and except as set forth above, the parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court in the County where the Real Property, if any, is located or Los Angeles County if none (the "Court"). The referee shall be a retired Judge of the Court selected by mutual agreement of the parties, and if they cannot so agree within forty-five (45) days after the Claim Date, the referee shall be promptly selected by the Presiding Judge of the Court (or his representative). The referee shall be appointed to sit as a temporary judge, with all of the powers for a temporary judge, as authorized by law, and upon selection should take and subscribe to the oath of office as provided for in Rule 244 of the California Rules of the Court (or any subsequently enacted Rule). Each party shall have one peremptory challenge pursuant to CCP Section 170.6. The referee shall (a) be requested to set the matter for hearing within sixty (60) days after the date of selection of the referee and (b) try any and all issues of law or fact and report a statement of decision upon them, if possible, within ninety (90) days of the Claim Date. Any decision rendered by the referee will be final, binding and conclusive and judgment shall be entered pursuant to CCP Section 644 in any court in the State of California having jurisdiction. Any party may apply for a reference proceeding at any time after thirty (30) days following notice to any other party of the nature of the controversy, dispute or claim, by filing a petition for a hearing and/or trial. All discovery permitted by this Agreement shall be completed no later than fifteen (15) days before the first hearing date established by the referee. The referee may extend such period in the event of a party's refusal to provide requested discovery or unavailability of a witness due to absence or illness. No party shall be entitled to "priority" in conducting discovery. Depositions may be taken by either party upon seven (7) days written notice, and request for production or inspection of documents which cannot be resolved by the parties shall be submitted to the referee as provided herein. The Superior Court is empowered to issue temporary and/or provisions remedies, as appropriate. (b) Except as expressly set forth in this Agreement, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceeding. AU proceedings and hearings conducted before the referee, except for trial, shall be conducted without a court reporter except that when any party so requests, a court reporter will be used at any hearing conducted before the referee. The party making such a request shall have the obligation to arrange for and pay for the court reporter. The costs of the court reporter at the trial shall be borne equally by the parties. (c) The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the State of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The referee shall issue a single judgment at the close of the reference proceeding which shall dispose of all of the claims of the parties that are the subject of the reference. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the referee. The parties hereto expressly reserve the right to findings of fact, conclusions of laws, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a reference proceeding under this provisions. (d) In the event that the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by the reference procedure herein described will be resolved and determined by arbitration. The arbitration will be conducted by a retired judge of the 24 27 Court, in accordance with the California Arbitration Act, Section 1280 through Section 1294.2 of the CCP as amended from time to time. The limitations with respect to discovery as set forth hereinabove shall apply to any such arbitration proceedings IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. bsquare corporation By: /s/ William T. Baxter --------------------------------- Title: CEO ------------------------------ IMPERIAL By: /s/ [SIGNATURE ILLEGIBLE] --------------------------------- Title: SR. VP ------------------------------ 25 28 EXHIBIT A The Collateral shall consist of all right, title and interest of Borrower in and to the following: (a) All goods and equipment now owned or hereafter acquired, including, without limitation, all machinery, fixtures, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located; (b) All inventory, now owned or hereafter acquired, including, without limitation, all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products including such inventory as is temporarily out of Borrower's custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and Borrower's Books relating to any of the foregoing; (c) All contract rights and general intangibles now owned or hereafter acquired, including, without limitation, goodwill, trademarks, servicemarks, trade styles, trade names, patents, patent applications, leases, license agreements, franchise agreements, blueprints, drawings, purchase orders, customer lists, route lists, infringements, claims, computer programs, computer discs, computer tapes, literature, reports, catalogs, design rights, income tax refunds, payments of insurance and rights to payment of any kind; (d) All now existing and hereafter arising accounts, contract rights, royalties, license rights and all other forms of obligations owing to Borrower arising out of the sale or lease of goods, the licensing of technology or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower's Books relating to any of the foregoing. (e) All documents, cash, deposit accounts, securities, financial assets, investment property, securities accounts, securities entitlements, letters of credit, certificates of deposit, instruments and chattel paper now owned or hereafter acquired and Borrower's Books relating to any of the foregoing. 26 29 EXHIBIT B LOAN PAYMENT ADVANCE TELEPHONE REQUEST FORM DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T. TO: EMERGING GROWTH INDUSTRIES DATE:___________________ FAX#: (425) 454-6224 TIME:___________________ FROM: bsquare corporation ------------------------------------------------------------------------- CLIENT NAME (BORROWER) REQUESTED BY:_________________________________________________________________ AUTHORIZED SIGNER'S NAME AUTHORIZED SIGNATURE:_________________________________________________________ PHONE NUMBER:_________________________________________________________________ FROM ACCOUNT #________________________ TO ACCOUNT #_______________________ REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT PRINCIPAL INCREASE (ADVANCE) $_______________________________ PRINCIPAL PAYMENT (ONLY) $_______________________________ INTEREST PAYMENT (ONLY) $_______________________________ PRINCIPAL AND INTEREST (PAYMENT) $_______________________________ OTHER INSTRUCTIONS:___________________________________________________________ ______________________________________________________________________________ All representations and warranties of Borrower stated in the Loan Agreement are true, correct and complete in all material respects as of the date of the telephone request for and Advance confirmed by this Borrowing Certificate; provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date. BANK USE ONLY TELEPHONE REQUEST: The following person is authorized to request the loan payment transfer/loan advance on the advance designated account and is known to me. __________________________________ _________________________________ Authorized Requester Phone # __________________________________ _________________________________ Received By (Bank) Phone # _____________________________________________ Authorized Signature (Bank) 27 30 EXHIBIT C BORROWING BASE CERTIFICATE - -------------------------------------------------------------------------------- Borrower: bsquare corporation Lender: Imperial Bank Commitment Amount: $2,500,000 - -------------------------------------------------------------------------------- ACCOUNTS RECEIVABLE 1. Accounts Receivable Book Value as of $__________ 2. Additions (please explain on reverse) $__________ 3. TOTAL ACCOUNTS RECEIVABLE $__________ ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication) 4. Amounts over 90 days due $__________ 5. Balance of 25% over 90 day accounts $__________ 6. Concentration Limits $__________ 7. Foreign Accounts $__________ 8. Governmental Accounts $__________ 9. Contra Accounts $__________ 10. Promotion or Demo Accounts $__________ 11. Intercompany/Employee Accounts $__________ 12. Other (please explain on reverse) $__________ 13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $__________ 14. Eligible Accounts (#3 minus #13) $__________ 15. LOAN VALUE OF ACCOUNTS (80% of #14) $__________ BALANCES 16. Maximum Loan Amount $__________ 17. Total Funds Available [Lesser of #16 or #15] $__________ 18. Present balance owing on Line of Credit $__________ 19. Outstanding under Sublimits ( ) $__________ 20. RESERVE POSITION (#17 minus #18 and #19) $__________
The undersigned represents and warrants that the foregoing is true, complete and correct, and that the information reflected in this Borrowing Base Certificate complies with the representations and warranties set forth in the Loan and Security Agreement between the undersigned and Imperial Bank. COMMENTS: BANK USE ONLY Rec'd By:______________ Auth. Signer bsquare corporation Date:__________________ Verified:______________ Auth. Signer By:_______________________________ Date:__________________ Authorized Signer 28 31 EXHIBIT D COMPLIANCE CERTIFICATE TO: IMPERIAL BANK FROM: bsquare corporation The undersigned authorized officer of bsquare corporation hereby certifies that in accordance with the terms and conditions of the Loan and Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in complete compliance for the period ending _________ with all required covenants except as noted below and (ii) all representations and warranties of Borrower stated in the Agreement are true and correct in all material respects as of the date hereof. Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes. PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES' COLUMN.
REPORTING COVENANT REQUIRED COMPLIES - ------------------ -------- -------- Quarterly financial statements Quarterly within 25 days Yes No Annual (CPA Audited) FYE within 90 days Yes No A/R & A/P Agings Monthly within 15 days Yes No A/R Audit Initial and Semi-Annual Yes No
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES - ------------------ -------- ------ -------- Maintain on a Quarterly Basis: Minimum Quick Ratio 1.0:1.0 ____:1.0 Yes No Minimum Tangible Net Worth $2,500,000 $_______ Yes No Maximum Debt Service Coverage 1.50:1.0 ____:1.0 Yes No
BANK USE ONLY COMMENTS REGARDING EXCEPTIONS: See Attached. Received by:_____________________ Sincerely, AUTHORIZED SIGNER __________________________________ SIGNATURE Date:____________________________ __________________________________ Verified:________________________ TITLE AUTHORIZED SIGNER __________________________________ DATE Date:____________________________ Compliance Status: Yes No
29 32 INTELLECTUAL PROPERTY SECURITY AGREEMENT This Intellectual Property Security Agreement is entered into as of February 11, 1998, by and between IMPERIAL SANK ("Bank") and bsquare corporation ("Grantor"). RECITALS A. Bank has agreed to make certain advances of money and to extend certain financial accommodation to Grantor (the "Loans") in the amounts and manner set forth in that certain Loan and Security Agreement by and between Bank and Grantor dated of even date herewith (as the same may be amended, modified or supplemented from time to time, the "Loan Agreement"; capitalized terms used herein are used as defined in the Loan Agreement). Bank is willing to make the Loans to Grantor, but only upon the condition, among others, that Grantor shall grant to Bank a security interest in certain Copyrights, Trademarks and Patents to secure the obligations of Grantor under the Loan Agreement. B. Pursuant to the terms of the Loan Agreement, Grantor has granted to Bank a security interest in all of Grantor's right, title and interest, whether presently existing or hereafter acquired, in, to and under all of the Collateral. NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged, and intending to be legally bound, as collateral security for the prompt and complete payment when due of its obligations under the Loan Agreement, Grantor hereby represents, warrants, covenants and agrees as follows: AGREEMENT To secure its obligations under the Loan Agreement, Grantor grants and pledges to Bank a security interest in all of Grantor's right, title and interest in, to and under its Intellectual Property Collateral (including without limitation those Copyrights, Patents and Trademarks listed on Schedules A, B and C hereto), and including without limitation all proceeds thereof (such as, by way of example but not by way of limitation, license royalties and proceeds of infringement suits), the right to sue for past, present and future infringements, all rights corresponding thereto throughout the world and all re-issues, divisions continuations, renewals, extensions and continuations-in-part thereof. This security interest is granted in conjunction with the security interest granted to Bank under the Loan Agreement. The rights and remedies of Bank with respect to the security interest granted hereby are in addition to those set forth in the Loan Agreement and the other Loan Documents, and those which are now or hereafter available to Bank as a matter of law or equity. Each right, power and remedy of Bank provided for herein or in the Loan Agreement or any of the Loan Documents, or now or hereafter existing at law or in equity shall be cumulative and concurrent and shall be in addition to every right, power or remedy provided for herein and the exercise by Bank of any one or more of the rights, powers or remedies provided for in this Intellectual Property Security Agreement, the Loan Agreement or any of the other Loan Documents, or now or hereafter existing at law or in equity, shall not preclude the simultaneous or later exercise by any person, including Bank, of any or all other rights, powers or remedies. 30 33 IN WITNESS WHEREOF, the parties have cause this Intellectual Property Security Agreement to be duly executed by its officers thereunto duly authorized as of the first date written above. GRANTOR: Address of Grantor: bsquare corporation 3633 136th Place SE, Suite 100 By: [SIGNATURE ILLEGIBLE] Bellevue, WA 98006 --------------------------------- Title: CEO ------------------------------ Attn: Ms. Leila Kirske BANK: Address of Bank: IMPERIAL BANK 777 108th Avenue NE, Suite 1670 By: [SIGNATURE ILLEGIBLE] Bellevue, WA 98004 --------------------------------- Title: SR. VP Attn: Mr. James Ellison ------------------------------ 2 34 EXHIBIT A BSQUARE DEVELOPMENT COPYRIGHTS - - BSQUARE FAX EXPRESS (a.k.a., bFAX Express), 1996, 1997 and 1998: Send-only fax application for Windows CE. Support faxing and previewing bitmaps, text and Microsoft Pocket Word documents. This application has been adapted to the H/PC and the P/PC. This application is sold through reseller channels. The P/PC version is due for release in 1Q98. - - BSQUARE FAX PRO (a.k.a., bFAX Pro): Send and receive fax application for Windows CE. Supports faxing and previewing of faxes containing multiple documents to multiple recipients. This product is bundled with certain H/PCs. This application is sold through reseller channels. - - BSQUARE FAX LITE (a.k.a., bFAX Lite), 1996, 1997 and 1998: A version of bFAX Pro that has certain features disabled. This product was developed to provide a free evaluation of bFAX to customers. This product is distributed free of charge on the Web and by certain H/PC OEMs. - - BSQUARE FAX ENHANCED (a.k.a., bFAX Enhanced): A version of bFAX Pro that has certain features disabled. This product was developed to bundle with the Casio Casseopiea A-10 and A-11. This product is no longer in production. - - BSQUARE MOBILE (a.k.a., bMOBILE, bMOBILE Wireless Internet): This is a driver and control panel application that allows Windows CE to communicate with a Motorola Personal Messenger 100C CDPD (cellular digital packet data) modem. The control panel interface allows for modem control and monitoring. - - BSQUARE NET (a.k.a., bNET): This is a driver and control panel application which is very similar to bMOBILE, but extends this capability to the 3COM Etherlink III (3C589) and the NE2000 ethernet adapters. - - BSQUARE PRINT (a.k.a., bPRINT): This product enables Windows CE Version 1 to print the same file formats bFAX supports while faxing. - - BSQUARE PRINT PRO (a.k.a., bPRINT Pro): This product enables printing as does bPRINT, but extends print spooling to any application which supports printing. It supports printing to IRdA-compliant devices, and supports printing to various printers not already supported by Windows CE. It also provides for a print-to-fax capability so that any application can print to bFAX Pro. It is due for release in 1Q98. - - BSQUARE FIND (a.k.a., bFIND): This is a global search utility for Windows CE that allow search of all data sources and controls the execution of application to continue the search. This application is sold through reseller channels and is also bundled with all Hewlett-Packard H/PCs. - - BSQUARE TRACK (a.k.a., bTRACK): This is a time, expanse and car mileage tracking application for Windows CE. It provides a set of desktop APIs the enable third parties to integrate the expense information into customer applications and corporate information systems. It has been adapted to both the H/PC and the P/PC. It is due for release in 2Q98. 35 - - BSQUARE READY (a.k.a., bREADY): This is a information management, online book authoring and reader application. It has two components. The desktop component sits on the desktop which allows for the authoring of electronic books. The authoring application contains Wizards that assist the user to acquire content from the Internet and produce an electronic book. The client-side application allows users to read electronic books produced with the desktop application. The reader has a Auto-scrolling feature which is used for reading books and speeches. The reader application supports bookmarks, annotations, searching, and indexing. It is due for release in 2Q98. - - BSQUARE MOBILE NEWS (a.k.a., bMOBILE News, bNEWS): This is a USENET Newsreader application for Windows CE. It was acquired from AdageUS. All rights, title and interest are owned by BSQUARE. This application is sold through reseller channels. - - BSQUARE MOBILE CHAT (a.k.a., bMOBILE Chat, bCHAT). This is an Internet Relay Chat program for Windows CE. It was acquired from AdageUS. All rights, title and interest are owned by BSQUARE. This application is sold through reseller channels. - - BSQUARE FAX APIS (a.k.a., bFAX APIs): These are a set of low-level application programming interfaces that provide the capability of integrating faxing capabilities into other software applications. The purpose of these APIs is to allow 3rd party independent software vendors to integrate faxing capabilities into their applications. They require that the end-user license a copy of bFAX Pro to utilize the functionality. These APIs are currently being used by Odyssey Computing and Communications Intelligence Corporation. - - BSQUARE IMAGING APIS: These are a set of low-level application programming interfaces that provide the capability of extending the imaging capabilities of bFAX, bVIEW and bPRINT. Only BSQUARE uses these capabilities. - - MIMIC: This a graphical user interface testing framework used by BSQUARE Development to test applications. - - PACKET DRIVER TECHNOLOGY: This is the basis for bMOBILE and bNET which enable those drivers to translate PPP (point to point protocol) into serial-line internet protocol (SLIP) and ethernet, respectively. This technology could, conceivably, be adapted to various other protocols. 36 BSQUARE INTEGRATION COPYRIGHTS: - - CE XPRESS KITS FOR SC400 (a.k.a., BSQUARE OAK for SC400, BSQUARE Value Added OAK for SC400): An adaptation of Windows CE to the AMD Elan SC400 Microcontroller. It has been adapted to various board-level devices using the SC400. - - CE XPRESS KITS FOR VR4300 (a.k.a., BSQUARE OAK for VR4300, BSQUARE Value Added OAK for VR4300): An adaptation of Windows CE to the NEC VR4300 MIPS Processor. It has been adapted to NEC Nile 3 Chipset. - - CE XPRESS KITS FOR MEDIAGX (a.k.a., BSQUARE OAK for MediaGX, BSQUARE Value Added OAK for MediaGX): An adaptation of Windows CE to the Cyrix MediaGX Processor. It has been adapted to various reference devices using the MediaGX. - - BSQUARE FIRMWARE: A set of firmware utilities and tools which facilitate the adaptation of Windows CE to various microprocessors. This includes a client-side firmware stub called the "brainstem" and a Windows NT-hosted application capable of interacting with the brainstem. This firmware provides mechanisms for flashing Windows CE images into a device, debugging the device, and application programming interfaces which enable the development of testing software which is source-code compatible across all devices running the brainstem. - - DECOMPRESSING BOOT LOADER: An OS loader capable of loading a compressed Windows CE image (using BSQUARE proprietary file format) into volatile storage which maps the image so that it can execute in place in the volatile storage. BSQUARE COPYRIGHTS: - - BSQUARE INTRANET (a.k.a., bWEB): This is BSQUARE Corporation's Intranet Web Site which contains content necessary for disseminating information to BSQUARE Employees. This information includes, but is not limited to, Newsletters, organization structure, procedures, policies and forms, as well as help desk software. - - BSQUARE HELP (a.k.a., bHELP): A component of bWEB which provides employees a network administration help desk which allows them to interact with BSQUARE Network Administrators. - - BSQUARE OPS (a.k.a., bOPS): A component of bWEB, similar to bHELP, which provides a facilities/operations help desk to operations and facilities management. - - BSQUARE WORLD WIDE WEB SITE (a.k.a., www.bsquare.com): BSQUARE's Corporate Homepage. - - BSQUARE Marketing Collateral: This includes all brochures and the like for marketing BSQUARE Corporation's business divisions. 37 EXHIBIT C TRADEMARKS - - BSQUARE: Registered in US Class 42 #2,105,093 Class 9 application #75/157,017, application in Canada #827,659 - - BSQUARE VIEW: application in US #75/157,019, application in Canada #826,625 - - BVIEW: Registered in Canada #TMA485,548, application in US #75/157,018 - - BFAX: application in US #75/157,020, application in Canada #826,626 - - BFIND, BMOBILE, BTRACK, BREADY, BPRINT: applications pending in US - - CE XPRESS: application pending in US 38 AGREEMENT TO PROVIDE INSURANCE TO: IMPERIAL BANK Date: February 11, 1998 226 Airport Parkway Borrower: bsquare corporation San Jose, California 95110 In consideration of a loan in the amount of $2,500,000, secured by all tangible personal property including inventory and equipment. I/We agree to obtain adequate insurance coverage to remain in force during the term of the loan. I/We also agree to advise the below named agent to add Imperial Bank as loss payee on the new or existing insurance policy, and to furnish Bank at above address with a copy of said policy/endorsements and any subsequent renewal policies. I/We understand that the policy must contain: 1. Fire and extended coverage in an amount sufficient to cover: (a) The amount of the loan, OR (b) All existing encumbrances, whichever is greater, But not in excess of the replacement value of the improvements on the real property. 2. Lender's "Loss Payable" Endorsement Form 438 BFU in favor of Imperial Bank, or any other form acceptable to Bank. INSURANCE INFORMATION Insurance Co. /Agent Telephone No.: Agent's Address: Signature of Obligor: /s/ [Signature Illegible] ________________________________________ Signature of Obligor:________________________________________ ________________________________________________________________________________ FOR BANK USE ONLY INSURANCE VERIFICATION: Date:___________ Person Spoken to:_______________________ Policy Number:__________________________ Effective Form:_________ To:____________ Verified By:____________________________ 39 ISSUE DATE (02/11/09) ACORD EVIDENCE OF PROPERTY INSURANCE - -------------------------------------------------------------------------------- THIS IS EVIDENCE THAT INSURANCE AS IDENTIFIED BELOW HAS BEEN ISSUED, IS IN FORCE, AND CONVEYS ALL THE RIGHTS AND PRIVILEGES AFFORDED UNDER THE POLICY - -------------------------------------------------------------------------------- PRODUCER COMPANY PARKER, SMITH & FEEK, INC. FIDELITY & GUARANTY INSURANCE COMPANY 999 Third Avenue, 17th Floor Seattle, Washington 98104 (206) 382-7900 Code Sub-Code Agency Customer ID# - -------------------------------------------------------------------------------- INSURED LOAN NUMBER POLICY NUMBER BSQUARE CORPORATION N/A 1MP 30137731800 3633 - 136TH PLACE SE BELLEVUE, WASHINGTON 98006 EFF. DATE EXP. DATE CONTINUOUS 6/16/97 06/16/98 UNTIL THIS REPLACES PRIOR EVIDENCE TERMINATED IF DATED:________________ CHECKED __
- -------------------------------------------------------------------------------- PROPERTY INFORMATION LOCATION/DESCRIPTION BLANKET LIEN ON BUSINESS PERSONAL PROPERTY. COVERAGE INFORMATION - --------------------------------------------------------------------------------
Coverages/Perils/Forms Amount of Ins. Deductible Blanket Business Personal Property $ 1,550,000 $250 Causes of Loss - Special Form Replacement Cost/Agreed Value REMARKS (INCLUDING SPECIAL CONDITIONS)
IMPERIAL BANK IS INCLUDED AS LOSS PAYEE PER ENDORSEMENT 438BFU ATTACHED. CANCELLATION The Policy is subject to the premiums, forms, and rules in effect for policy period. Should the Policy be terminated, the Company will give the additional interest identified below 45 days written notice, and will send notification of any changes to the policy that would affect that interest, in accordance with the Policy provisions or as required by law. CONDITIONAL INTEREST IMPERIAL BANK __Mortgagee __Additional Insured 9920 SOUTH LACIENEGA BLVD., SUITE 628 X Loss Payee INGLEWOOD, CA 90301 Loan #N/A ATTENTION: LENDING SERVICES ------------------------------------- Authorized Representative /s/ KAREN M. GRIFFITH ACORD CORPORATION
40 LENDERS'S LOSS PAYABLE ENDORSEMENT 1. Loss or damage, if any, under this policy shall be paid to IMPERIAL BANK, 9920 South Lacienega Blvd., Suite 628, Inglewood, CA 90301, Attention: Lending Services its successors and assigns, hereinafter referred to as "the Lender," in whatever form or capacity its interests may appear and whether said interest be vested in said Lender in its individual or in its disclosed or undisclosed fiduciary or representative capacity, or otherwise, or vested in a nominee or trustee of said Lender. 2. The insurance under this policy, or any rider or endorsement attached thereto, as to the interest only of the Lender, its successors and assigns, shall not be invalidated nor suspended: (a) by any error, omission, or change respecting the ownership, description, possession or location of the subject of the insurance or the interest therein, or the title thereto; (b) by the commencement of foreclosure proceedings or the giving of notice of sale of any of the property covered by this policy by virtue of any mortgage or trust deed; (c) by any breach of warranty, act, omission, neglect, or non-compliance with any of the provisions of this policy, including any and all riders now or hereafter thereto, by the named insured, the borrower, mortgagor, trustor, vendee, owner, tenant, warehouseman, custodian, occupant, or by the agents of either or any of them or by the happening of any event permitted by them or either of them, or their agents, or which they failed to prevent, whether occurring before or after the attachment of this endorsement, or whether before or after a loss, which under the provisions of this policy of insurance or of any rider or endorsement attached thereto would invalidate or suspend the insurance as to the named insured, excluding herefrom, however, any act or omissions of the lender while exercising active control and management of the property. 3. In the event of failure of the insured to pay any premium or additional premium which shall be or become due under the terms of this policy or on account of any change in occupancy or increase in hazard not permitted by this policy, this Company agrees to give written notice to the Lender of such non-payment of premium after sixty (60) days from and within one hundred and twenty (120) days after due date of such premium and it is a condition of the continuance of the rights of the Lender hereunder that the Lender when so notified in writing by this Company of the failure of the insured to pay such premium shall pay or cause to be paid the premium due within ten (10) days following receipt of the Company's demand in writing therefor. If the Lender shall decline to pay said premium or additional premium, the rights of the Lender under this Lender's Loss Payable Endorsement shall not be terminated before ten (10) days after receipt of said written notice by the Lender. 4. Whenever this Company shall pay to the Lender any sum for loss or damage under this policy and shall claim that as to the insured no liability therefore exists, this Company, at its option, may pay to the Lender the whole principal sum and interest and other indebtedness due or to become due from the insured, whether secured or unsecured, (with refund of all interest not accrued), and this Company, to the extent of such payment, shall thereupon receive a full assignment and transfer, without recourse, of the debt and all rights and securities held as collateral thereto. If there be any other insurance upon the within described property, this Company shall be liable under this policy as to the Lender for the proportion of such loss or damage that the sum hereby insured bears to the entire insurance of similar character on said property under policies held by, payable to and expressly consented to by the Lender. Any Contribution Clause included in any Fallen Building Clause Waiver or any Extended Coverage Endorsement attached to this contract of insurance is hereby nullified, and also any Contribution Clause in any other endorsement or rider attached to this contract of insurance is hereby nullified except Contribution Clauses for the compliance with which the insured has received reduction in the rate charged or has received extension of the coverage to include hazards other than fire and compliance with such Contribution Clause is made a part of the consideration for insuring such other hazards. The Lender upon the payment to it of the full amount of its claim, will subrogate this Company (pro rata with all other insurers contributing to said payment) to all of the Lender's rights of contribution under said other insurance. 6. This Company reserves the right to cancel this policy at any time, as provided by its terms, but in such case this policy shall continue in force for the benefit of the Lender for ten (10) days after written notice of such cancellation is received by the Lender and shall then cease. 7. This policy shall remain in full force and effect as to the interest of the Lender for a period of ten (10) days after its expiration unless an acceptable policy in renewal thereof with loss thereunder payable to the Lender in accordance with the terms of this Lender's Loss Payable Endorsement, shall have been issued by some insurance company and accepted by the Lender. 8. Should legal title to and beneficial ownership of any of the property covered under this policy become vested in the Lender or its agents, insurance under this policy shall continue for the term thereof for the benefit of the Lender but, in such event, any privileges granted by this Lender's Loss Payable Endorsement which are not also granted the insured under the terms and conditions of this policy and/or under other riders or endorsements attached thereto shall not apply to the insurance hereunder as respects such property. 9. All notices herein provided to be given by the Company to the Lender in connection with this policy and this Lender's Loss Payable Endorsement shall be mailed to or delivered to the Lender at its office or branch at ____________ or, if not be specified, at its head office at ____________. Attached to Policy No. 1MP 30137731800 of FIDELITY & GUARANTY INSURANCE COMPANY Issued to BSQUARE CORPORATION Agency at SEATTLE, WASHINGTON Date: February 11, 1998 /s/ [Signature Illegible] -------------------------- PARKER, SMITH & PEEK, INC. 41 IMPERIAL BANK Member FDIC ITEMIZATION OF AMOUNT FINANCED DISBURSEMENT INSTRUCTIONS Borrower: WAVTRACE, INC., fica Date: December 9, 1997 American Wireless Corporation $ paid to you directly by Cashiers Check No. $1,750,000.00 credited to deposit Account No. 36-001-038 (when advances are requested from the Facility A Commitment). $ paid on Loan(s) No. $ amounts paid to Bank for: Amounts paid to others on your behalf: $ to ____________ Title Insurance Company $ to Public Officials $ to $ to $ to $ to $1,750,000.00 SUBTOTAL (LOAN AMOUNT) LESS $ Prepaid Finance Charge (Loan fee) $1,750,000.00 TOTAL (AMOUNT FINANCED) Upon consummation of this transaction, this document will also serve as the authorization for Imperial Bank to disburse the loan proceeds as stated above. WAVTRACE, INC., a Washington corporation By: /s/ ROBERT A. LUNDY ----------------------------------------- Robert A. Lundy President and Chief Executive Officer 42 IMPERIAL BANK Member FDIC ITEMIZATION OF AMOUNT FINANCED DISBURSEMENT INSTRUCTIONS NAME(S): bsquare corporation Date: February 11, 1998 $ paid to you directly by Cashiers Check No. $ credited to deposit account No. 0036001283 when Advances are requested $ paid on Loan(s) No. $ amounts paid to Bank for Amounts paid on your behalf: $ to Accounts receivable audit $ 500 to Imperial Bank documentation fee $2,232 to Gray Cary Ware & Freidenrich fees and expenses $2,732 TOTAL (AMOUNT FINANCED) Upon consummation of this transaction, this document will also serve as the authorization for Imperial Bank to disburse the loan proceeds or automatically debit from Borrower's Account No. 0036001283 as stated above. $____________ Disburse From Loan Proceeds $____________ Debit From Account (Check One. Payments will be disbursed from loan proceeds unless directed otherwise.) /s/ [Signature Illegible] --------------------------------- --------------------------------- Signature Signature 43 [GRAY CARY WARE - FREIDENRICH LLP LETTERHEAD] February 12, 1998 1090371-903300 Imperial Bank Attn: Jim Ellison 777 - 109th Ave. NE, Suite 1670 Bellevue, WA 98004-5118 STATEMENT Re: bsquare corporation Professional Services Rendered from October 24, 1997 through February 11, 1998: Fees $1,900 Costs UCC Searches $142 Other 190 ---- 332 Total $2,232
PLEASE SEND PAYMENT ATTN: JOHN B. HALE 44 - -------------------------------------------------------------------------------- IMPERIAL BANK California's Business Banks AUTOMATIC DEBIT AUTHORIZATION Member FDIC - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- To: Imperial Bank Re: Loan #________________ You are hereby authorized and instructed to charge account No. 0036001283 in the name of bsquare corporation for principal and interest payments due on above referenced loan as set forth below and credit the loan referenced above. [X] Debit each interest payment as it becomes due according to the terms of the note and any renewals or amendments thereof. [ ] Debit each principal payment as it becomes due according to the terms of the note and any renewals or amendments thereof. This Authorization is to remain in full force and effect until revoked in writing. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Borrower Signature Date /s/ [Signature Illegible] 2-24-98 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 45 - -------------------------------------------------------------------------------- [IMPERIAL BANK LOGO] AUTOMATIC DEBIT AUTHORIZATION - -------------------------------------------------------------------------------- To: IMPERIAL BANK Re: LOAN #______________________ You are hereby authorized and instructed to charge account No. 0036001283 in the name of BSQUARE CORPORATION for principal and interest payments due on above referenced loan as set forth below and credit the loan referenced above. [X] Debit each interest payment as it becomes due according to the terms of the note and any renewals or amendments thereof. [X] Debit each principal payment as it becomes due according to the terms of the note and any renewals or amendments thereof. This Authorization is to remain in full force and effect until revoked in writing. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Borrower Signature Date /s/ [Signature Illegible] 2/24/98 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 46 This UCC-1 FINANCING STATEMENT is presented for filing pursuant to the WASHINGTON UNIFORM COMMERCIAL CODE, chapter 62A.9 RCW, to perfect a security interest in the below named collateral. PLEASE TYPE FORM FILING FEE: $12.00.
- ------------------------------------------------------------------------------------------------------------------------------------ 1. DEBTOR(S) (see instruction #2) | 2. FOR OFFICE USE ONLY -- DO NOT WRITE IN THIS BOS | [ ] PERSONAL (Last, first, middle name and address) | | [x] BUSINESS (legal business name and address) | | BSQUARE CORPORATION | 3633 136TH PLACE SE SUITE 100 | BELLEVUE WA 98006 | | | | TRADE NAME, DBA, AKA: | | - ------------------------------------------------------------------------------------------------------------------------------------ 2. SECURED PARTY(IES) (name and address) | 4. ASSIGNEE(S) of SECURED PARTY(IES) if applicable | (name and address) | IMPERIAL BANK | 226 AIRPORT PARKWAY | SAN JOSE CA 95110 | | - ------------------------------------------------------------------------------------------------------------------------------------ 5. SECURED PARTY CONTACT PERSON:_________________________________________________ Phone: ______________________ - ------------------------------------------------------------------------------------------------------------------------------------ 6. CHECK ONLY IF APPLICABLE: (For definitions of TRANSMITTING UTILITY AND PRODUCTS OF COLLATERAL, see instruction sheet) [ ] Debtor is a Transmitting Utility [ ] Products of Collateral are also covered - ------------------------------------------------------------------------------------------------------------------------------------ 7. THIS FINANCING STATEMENT covers the following collateral: (Attach additional 8-1/2" x 11" sheet(s) if needed.) See Exhibit A attached hereto for Collateral Description. - ------------------------------------------------------------------------------------------------------------------------------------ | 8. RETURN ACKNOWLEDGMENT COPY TO: (name and address) | 9. FILE WITH: | UNIFORM COMMERCIAL CODE IMPERIAL BANK | DEPARTMENT OF LICENSING 9920 SOUTH LA CIENEGA BLVD. SUITE 628 | P.O. BOX 9660 INGLEWOOD CA 90301 | OLYMPIA, WA 98507-9660 | (206) 753-2523 | | MAKE CHECKS PAYABLE TO THE | DEPARTMENT OF LICENSING | |------------------------------------------- | 10. FOR OFFICE USE ONLY IMAGES TO | | | BE FILMED | | - ------------------------------------------------------------------------------------------------------------------------------------ 11. If collateral is described below, this statement may be signed by the Secured Party instead of the Debtor. Please check the appropriate box, complete the adjacent lines and box 13, if collateral is: - ------------------------------------------------------------------------------------------------------------------------------------ a. [ ] already subject to a security interest in another jurisdiction when it was brought into this state or when the debtor's location was changed to this state. (complete adjacent lines 1 and 2) 1._____________________________________________ ORIGINAL FILING NUMBER b. [ ] proceeds of the original collateral described above in which a security interest was perfected. 2._____________________________________________ (complete adjacent lines 1, 2 and 3) FILING OFFICE WHERE FILED c. [ ] listed on a filing which has lapsed. 3._____________________________________________ (complete adjacent lines 1 and 2) FORMER NAME OR DEBTOR(S) d. [ ] acquired after a change of name, identity, or corporate structure of the debtor(s). (complete adjacent lines 1, 2 and 3) - ------------------------------------------------------------------------------------------------------------------------------------ | 12. DEBTOR NAME(S) AND SIGNATURE(S): | 13. SECURED PARTY NAME(S) AND SIGNATURE(S) ARE REQUIRED IF | BOX 11 HAS BEEN COMPLETED. | BSQUARE CORPORATION | 1. ------------------------------------------------------------- | ------------------------------------------------------ TYPE NAME(S) OF DEBTOR(S) AS IT APPEARS IN BOX 1. | TYPE NAME(S) OF SECURED PARTY(IES) AS IT APPEARS | IN BOX 3 OR 4. [Signature Illegible] | | 2. ------------------------------------------------------------- | ------------------------------------------------------ SIGNATURE(S) OF DEBTOR(S) | SIGNATURE(S) OF SECURED PARTY(IES) | | 3. ------------------------------------------------------------- | ------------------------------------------------------ SIGNATURE OF DEBTOR(S) | SIGNATURE(S) OF SECURED PARTY(IES) |
FORM APPROVED FOR USE IN THE STATE OF WASHINGTON (R/7/93) WASHINGTON USS-1 47 EXHIBIT A DEBTOR. BSQUARE CORPORATION SECURED PARTY: IMPERIAL BANK The Collateral shall consist of all right, title and interest of Debtor in and to the following: (a) All goods and equipment now owned or hereafter acquired, including, without limitation, all machinery, fixtures, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located; (b) All inventory, now owned or hereafter acquired, including, without limitation, all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products including such inventory as is temporarily out of Debtor's custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and Debtor's Books relating to any of the foregoing; (c) All contract rights and general intangibles now owned or hereafter acquired, including, without limitation, goodwill, trademarks, servicemarks, trade styles, trade names, patents, patent applications, leases, license agreements, franchise agreements, blueprints, drawings, purchase orders, customer lists, route lists, infringements, claims, computer programs, computer discs, computer tapes, literature, reports, catalogs, design rights, income tax refunds, payments of insurance and rights to payment of any kind; (d) All now existing and hereafter arising accounts, contract rights, royalties, license rights and all other forms of obligations owing to Debtor arising out of the sale or lease of goods, the licensing of technology or the rendering of services by Debtor, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Debtor and Debtor's Books relating to any of the foregoing. 48 Oct. 28, 1997 Page 1 CAL TITLE-SEARCH INC. UCC Search Report The following represents a listing of the documentation you requested through a careful search of effective UCC filings recorded in the Office of the Secretary of State of Washington, purchased and maintained in computerized form and available thru our offices. Variations of the Name and Address of the search key may appear on this report as a result of the search findings and your individual request for that information. These documents may include but are not limited to Financing Statements and Tax Liens effective Oct. 13, 1997. State of Washington UCC Debtor Name Search results performed on the following Search Key : Name = BSQUARE Exp./Term. Liens = No 1. Requested Party not on file. Because we cannot independently verify the accuracy of the public information maintained by the responsible government agency, we make no guaranties, representations, or warranties as to the accuracy or completeness of this report. Therefore, we accept no liability for errors or omissions CAL TITLE-SEARCH INC. (916) 448-1397 49 Oct. 28, 1997 Page 1 CAL TITLE-SEARCH INC. UCC Search Report The following represents a listing of the documentation you requested through a careful search of effective UCC filings recorded in the Office of the Secretary of State of Washington, purchased and maintained in computerized form and available thru our offices. Variations of the Name and Address of the search key may appear on this report as a result of the search findings and your individual request for that information. These documents may include but are not limited to Financing Statements and Tax Liens effective Oct. 13, 1997. State of Washington UCC Debtor Name Search results performed on the following Search Key : Name = BSQUARE CONSULTING Exp./Term. Liens = No 1. Requested Party not on file. Because we cannot independently verify the accuracy of the public information maintained by the responsible government agency, we make no guaranties, representations, or warranties as to the accuracy or completeness of this report, Therefore, we accept no liability for errors or omissions. CAL TITLE-SEARCH INC. (916) 448-1397 50 ARTICLES OF CORRECTION OF BSQUARE CORPORATION Pursuant to RCW 23B.01.240, BSQUARE CORPORATION (the "Company"), hereby makes the following corrections to its Certificate of Amendment to its Articles of Incorporation as filed with the Office of the Secretary of State of the State of Washington on January 29, 1998: FIRST: The Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock of BSQUARE CORPORATION (the "Certificate of Designation"), as filed with the Office of the Secretary of the State of Washington on January 29, 1998, contained incorrect information and the Company is hereby submitting for correction the corrected section as set forth below. SECOND: The Certificate of Designation incorrectly referenced a Redemption Agreement, dated as of January 30, 1998: Section 6. Restrictions and Limitations. (iv) directly or indirectly redeem, purchase, or otherwise acquire for consideration any shares of its Common Stock or any other class of its capital stock except (A) for the redemption of Convertible Preferred Shares pursuant to and as provided in Sections 2, 4 and 5 hereof, (B) as contemplated by Sections 1.2, 4.6, and 5.2 of that certain Stock Purchase and Shareholders Agreement, dated as of January 30, 1998 or (C) as contemplated by the Corporation's standard form of agreement, as approved by the Board of Directors, to be executed by employees, officers, and consultants of the Corporation upon the grant to such employees, officers, and consultants of options under the Plan, IN WITNESS WHEREOF, the Company has caused these Articles of Correction to be signed by Albert T. Dosser, its Senior Vice President, as of this 3rd day of February, 1998. BSQUARE CORPORATION, a Washington corporation /s/ ALBERT T. DOSSER ------------------------------------ Albert T. Dosser Vice President 51 ARTICLES OF AMENDMENT OF BSQUARE CONSULTING, INC. Pursuant to RCW 23B.10.060, the undersigned corporation adopts the following Articles of Amendment to its Articles of Incorporation: FIRST: The name of the corporation is bsquare consulting, inc. (the "Corporation"). SECOND: The Articles of Incorporation are hereby amended as follows: ARTICLE I NAME The name of the corporation is bsquare corporation. THIRD: The amendment does not provide for an exchange, reclassification, or cancellation of issued shares. FOURTH: The foregoing amendment was adopted by the Board of Directors of the Corporation on June 25, 1997 without shareholder action. Pursuant to RCW 23B.10.020, shareholder action with regard to the amendment of the Articles of Incorporation of the Corporation is not required. Dated: June 27, 1997. bsquare consulting, inc. /s/ WILLIAM T. BAXTER ------------------------------------ William T. Baxter, President 52 ARTICLES OF INCORPORATION OF BSQUARE CONSULTING, INC. The undersigned individuals, Albert T. Dosser, Peter R. Gregory and William T. Baxter, for the purpose of forming a corporation under the laws OF the State of Washington, and in pursuance thereof, hereby execute the following Articles of Incorporation in duplicate form and state as follows: I. NAME The name of this corporation shall be: BSQUARE CONSULTING, INC. II. AUTHORIZED SHARES The number of shares this corporation shall be authorized to issue will be 100,000 shares of a single class. III. REGISTERED AGENT The street address of this corporation's initial registered office is 777 108th Avenue N.E., Suite 1900, Bellevue, Washington 98004, and the name of its initial registered agent located at the above address is Patricia A. Murray, Esq. IV. INCORPORATORS The names and addresses of the incorporators are set forth below: Albert T. Dosser 16340 N.E. 83rd Street, Apt. E-125 Redmond, Washington 98052 Peter R. Gregory 13423 N.E. 115th Court Redmond, Washington 98052 -1- 53 William T. Baxter 3233 168th Place S.E. Bellevue, Washington 98008 V. PURPOSE This corporation has the purpose of engaging in any lawful business activity under the Washington Business Corporation Act but is being formed more specifically for the purpose of providing computer software consulting services. VI. POWERS This corporation shall have the same powers as an individual to do all things necessary or convenient to carry out its business and affairs, including, without limitation power: (1) to sue and be sued, complain and defend in its corporate name; (2) to have a corporate seal, which may be altered at will, and to use it, or a facsimile of it, by impressing or affixing it or in any other manner reproducing it; (3) to make and amend bylaws, not inconsistent with these Articles of Incorporation or with the laws of this state, for managing the business and regulating the affairs of the corporation; (4) to purchase, receive, lease, or otherwise acquire, and own, hold, improve, use, and otherwise deal with, real or personal property, or any legal or equitable interest in property, wherever located; (5) to sell, convey, mortgage, pledge, lease, exchange, and otherwise dispose of all or any part of its property; (6) to purchase, receive, subscribe for, or otherwise acquire, own, hold, vote, use, sell, mortgage, lend, pledge, or otherwise dispose of, and deal in and with shares or other interests in, or obligations of, any person; -2- 54 (7) to make contracts, incur liabilities, borrow money, issue notes, bonds, and other obligations (which may be convertible into or include the option to purchase other securities of the corporation), and secure any of its obligations by mortgage or pledge of any of its property, franchises, or income; (8) to make guarantees respecting the contracts, securities, or obligations of any person (including, but not limited to, any shareholder, affiliated or unaffiliated individual, domestic or foreign corporation, partnership, association, joint venture or trust) to the extent permitted by the Washington Business Corporation Act as amended from time to time; (9) to lend money, invest and reinvest its funds, and receive and hold real and personal property as security for repayment; (10) to be a promoter, partner, member, associate, or manager of any partnership, joint venture, trust, or other entity; (11) to conduct its business, locate offices, and exercise the powers granted by this title within or without this state; (12) to elect, appoint, or hire officers, employees, and other agents of the corporation, define their duties, fix their compensation, and lend them money and credit; (13) to fix the compensation of directors, and lend them money and credit; (14) to pay pensions and establish pension plans, pension trusts, profit sharing plans, share bonus plans, share option plans, and benefit or incentive plans for any or all of its current or former directors, officers, employees, and agents; (15) to make donations for the public welfare or for charitable, scientific, or educational purposes; (16) to transact any lawful business that will aid governmental policy; and -3- 55 (17) to make payments or donations, or do any other act, not inconsistent with law, that furthers the business and affairs of the corporation. VII. DURATION This corporation shall have perpetual existence. VIII. DIRECTORS The number of directors of this corporation shall be determined in the manner provided in the Bylaws of the corporation, and may be increased or decreased from time to time as specified in the Bylaws. There shall always be at least one (1) director. The initial Board of Directors shall consist of three (3) directors and the names and addresses of the persons who shall serve as directors until the first annual meeting of shareholders or until their successors are elected and qualified, unless they sooner resign or are removed, are: Albert T. Dosser 16340 N.E. 83rd Street, Apt. E-125 Redmond, Washington 98052 Peter R. Gregory 13423 N.E. 115th Court Redmond, Washington 98052 William T. Baxter 3233 168th Place S.E. Bellevue, Washington 98008 IX. BYLAWS The Board of Directors shall adopt initial Bylaws of this corporation that are not inconsistent with the Washington Business Corporation Act or these Articles of Incorporation. The Board of Directors shall also have the power to alter, amend or repeal the Bylaws or to adopt new Bylaws subject to repeal or change by action of the shareholders. -4- 56 IN WITNESS WHEREOF, the incorporator hereunto executed this document as of this 13th day of July, 1994. /s/ ALBERT T. DOSSER ------------------------------------ Albert T. Dosser, Incorporator /s/ PETER R. GREGORY ------------------------------------ Peter R. Gregory, Incorporator /s/ WILLIAM T. BAXTER ------------------------------------ William T. Baxter, Incorporator -5- 57 ARTICLES OF AMENDMENT OF BSQUARE CONSULTING, INC. Pursuant to RCW 23B.10.060, the undersigned corporation adopts the following Articles of Amendment to its Articles of Incorporation: FIRST: The name of the corporation is bsquare consulting, inc. (the "Corporation"). SECOND: The Articles of Incorporation are hereby amended by deleting Article II in its entirety and replacing it with a new Article II to read as follows: II. Authorized Shares 2.1 Authorized Capital. The aggregate number of shares which the Corporation shall have the authority to issue is 60,000,000 shares of stock, consisting of up to fifty million (50,000,000) shares of Common Stock and up to ten million (10,000,000) shares of Preferred Stock. 2.2 Issuance of Preferred Stock in Series. The Preferred Stock may be issued from time to time in one or more series in any manner permitted by law and the provisions of these Restated Articles of Incorporation, as determined from time to time by the Board of Directors and stated in the resolution or resolutions providing for the issuance thereof, prior to the issuance of any shares thereof. The Board of Directors shall have the authority to fix and determine and to amend, subject to the provisions hereof, the designations, powers, preferences and relative, participating, optional or other rights, if any, and qualifications, limitations or other restrictions of the shares of any series that is wholly unissued or to be established and the number of shares constituting any such series. Unless otherwise specifically provided in the resolution establishing any series, the Board of Directors shall further have the authority, after the issuance of shares of a series whose number it has designated, to amend the resolution establishing such series to decrease the number of shares of that series, but not below the number of shares of such series then outstanding. (a) Dividends. The holders of shares of the Preferred Stock shall be entitled to receive dividends, out of the funds of the corporation legally available therefor, at the rate and at the time or times as may be provided by the Board of Directors in designating a particular series of Preferred Stock. The holders of the Preferred Stock shall not be entitled to receive any dividends thereon, unless otherwise provided by the Board of Directors in designating a particular series of Preferred Stock. (b) Liquidation. In the event of any liquidation, dissolution or winding up of the affairs of the corporation, whether voluntary or involuntary, then, before any distribution shall be made to the holders of the Common Stock, the holders of the Preferred Stock at the time outstanding shall be entitled to be paid the preferential amount or amounts per share as may be provided by the Board of Directors in designating a particular series of Preferred Stock, plus 58 dividends accrued thereon to the date of such payment. In designating a particular series of Preferred Stock, the Board of Directors may also provide that such series is senior, on a par with or subordinate in order of priority to any other existing or later issued series of Preferred Stock in respect of distribution of amounts upon the liquidation, dissolution or winding up of the affairs of the corporation. The holders of the Preferred Stock shall not be entitled to receive any distributive amounts upon the liquidation, dissolution or winding up of the affairs of the corporation, unless otherwise provided by the Board of Directors in designating a particular series of Preferred Stock. (c) Conversion. Shares of Preferred Stock may be convertible to shares of Common Stock at such rate and subject to such adjustments as may be provided by the Board of Directors in designating a particular series of Preferred Stock. (d) Redemption. The Preferred Stock may be redeemable in such amounts, and at such time or times as may be provided by the Board of Directors in designating a particular series of Preferred Stock. In any event, such Preferred Stock may be repurchased by the corporation only to the extent legally permissible. (e) Voting Rights. Holders of Preferred Stock shall have such voting rights as may be provided by the Board of Directors in designating a particular series of Preferred Stock. THIRD: The amendment does not provide for an exchange, reclassification, or cancellation of issued shares. FOURTH: The foregoing amendment was adopted by the Board of Directors of the Corporation on April 17, 1997, and was duly approved by the shareholders of the Corporation on April 17, 1997 in accordance with RCW 23B.10.030 and RCW 23B.10.040, respectively. Dated: April 17 1997. bsquare consulting, inc. By: /s/ WILLIAM T. BAXTER --------------------------------- Its: President & CEO ----------------------------- -2- 59 ARTICLES OF AMENDMENT OF bsquare consulting, inc. Pursuant to RCW 23B.10.060, the undersigned corporation adopts the following Articles of Amendment to its Articles of Incorporation: FIRST: The name of the corporation is bsquare consulting, inc. (the "Corporation"). SECOND: The Articles of Incorporation are hereby amended as follows: ARTICLE I NAME The name of the corporation is bsquare corporation. THIRD: The amendment does not provide for an exchange, reclassification, or cancellation of issued shares. FOURTH: The foregoing amendment was adopted by the Board of Directors of the Corporation on June 25, 1997 without shareholder action. Pursuant to RCW 23B.10.020, shareholder action with regard to the amendment of the Articles of Incorporation of the Corporation is not required. Dated: June 27, 1997. bsquare consulting, inc. /s/ WILLIAM T. BAXTER ------------------------------------ William T. Baxter, President 60 STATE of WASHINGTON [LOGO] SECRETARY of STATE I, RALPH MUNRO, Secretary of State of the State of Washington and custodian of its seal, hereby issue this CERTIFICATE OF AMENDMENT to BSQUARE CONSULTING, INC. a Washington Profit corporation. Articles of Amendment were filed for record in this office on the date indicated below. UBI Number: 601 559 419 Date: April 30,1997 [SEAL] Given under my hand and the Seal of the State of Washington at Olympia, the State Capital /s/ RALPH MUNRO ------------------------------------ Ralph Munro, Secretary of State 61 ARTICLES OF AMENDMENT OF BSQUARE CONSULTING, INC. Pursuant to RCW 23B.10.060, the undersigned corporation adopts the following Articles of Amendment to its Articles of Incorporation: FIRST: The name of the corporation is bsquare consulting, inc. (the "Corporation"). SECOND: The Articles of Incorporation are hereby amended by deleting Article II in its entirety and replacing it with a new Article II to read as follows: II. Authorized Shares 2.1 Authorized Capital. The aggregate number of shares which the Corporation shall have the authority to issue is 60,000,000 shares of stock, consisting of up to fifty million (50,000,000) shares of Common Stock and up to ten million (10,000,000) shares of Preferred Stock. 2.2 Issuance of Preferred Stock in Series. The Preferred Stock may be issued from time to time in one or more series in any manner permitted by law and the provisions of these Restated Articles of Incorporation, as determined from time to time by the Board of Directors and stated in the resolution or resolutions providing for the issuance thereof, prior to the issuance of any shares thereof. The Board of Directors shall have the authority to fix and determine and to amend, subject to the provisions hereof, the designations, powers, preferences and relative, participating, optional or other rights, if any, and qualifications, limitations or other restrictions of the shares of any series that is wholly unissued or to be established and the number of shares constituting any such series. Unless otherwise specifically provided in the resolution establishing any series, the Board of Directors shall further have the authority, after the issuance of shares of a series whose number it has designated, to amend the resolution establishing such series to decrease the number of shares of that series, but not below the number of shares of such series then outstanding. (a) Dividends. The holders of shares of the Preferred Stock shall be entitled to receive dividends, out of the funds of the corporation legally available therefor, at the rate and at the time or times as may be provided by the Board of Directors in designating a particular series of Preferred Stock. The holders of the Preferred Stock shall not be entitled to receive any dividends thereon, unless otherwise provided by the Board of Directors in designating a particular series of Preferred Stock. (b) Liquidation. In the event of any liquidation, dissolution or winding up of the affairs of the corporation, whether voluntary or involuntary, then, before any distribution shall be made to the holders of the Common Stock, the holders of the Preferred Stock at the time outstanding shall be entitled to be paid the preferential amount or amounts per share as may be provided by the Board of Directors in designating a particular series of Preferred Stock, plus 62 dividends accrued thereon to the date of such payment. In designating a particular series of Preferred Stock, the Board of Directors may also provide that such series is senior, on a par with or subordinate in order of priority to any other existing or later issued series of Preferred Stock in respect of distribution of amounts upon the liquidation, dissolution or winding up of the affairs of the corporation. The holders of the Preferred Stock shall not be entitled to receive any distributive amounts upon the liquidation, dissolution or winding up of the affairs of the corporation, unless otherwise provided by the Board of Directors in designating a particular series of Preferred Stock. (c) Conversion. Shares of Preferred Stock may be convertible to shares of Common Stock at such rate and subject to such adjustments as may be provided by the Board of Directors in designating a particular series of Preferred Stock. (d) Redemption. The Preferred Stock may be redeemable in such amounts, and at such time or times as may be provided by the Board of Directors in designating a particular series of Preferred Stock. In any event, such Preferred Stock may be repurchased by the corporation only to the extent legally permissible. (e) Voting Rights. Holders of Preferred Stock shall have such voting rights as may be provided by the Board of Directors in designating a particular series of Preferred Stock. THIRD: The amendment does not provide for an exchange, reclassification, or cancellation of issued shares. FOURTH: The foregoing amendment was adopted by the Board of Directors of the Corporation on April 17, 1997, and was duly approved by the shareholders of the Corporation April 17, 1997 in accordance with RCW 23B.10.030 and RCW 23B.10.040, respectively. Dated: April 17, 1997. bsquare consulting, inc. By: /s/ WILLIAM T. BAXTER --------------------------------- Its: President & CEO ----------------------------- 63 [LOGO] - -------------------------------------------------------------------------------- STATE of WASHINGTON SECRETARY of STATE - -------------------------------------------------------------------------------- I, RALPH MUNRO, Secretary of State of the State of Washington and custodian of its seal, hereby issue this CERTIFICATE OF INCORPORATION to BSQUARE CONSULTING, INC. a Washington Profit corporation. Articles of Incorporation were filed for record in this office on the date indicated below: U.B.I. Number: 601 559 419 Date: JULY 15, 1994 [SEAL] Given under my hand and the seal of the State of Washington, at Olympia, the State Capitol /s/ RALPH MUNRO ------------------------------------ Ralph Munro, Secretary of State 64 ARTICLES OF CORPORATION OF BSQUARE CONSULTING, INC. The undersigned individuals, Albert T. Dosser, Peter R. Gregory and William T. Baxter, for the purpose of forming a corporation under the laws of the State of Washington, and in pursuance thereof, hereby execute the following Articles of Incorporation in duplicate form and state as follows: I. NAME The name of this corporation shall be: BSQUARE CONSULTING, INC. II. AUTHORIZED SHARES The number of shares this corporation shall be authorized to issue will be 100,000 shares of a single class. III. REGISTERED AGENT The street address of this corporation's initial registered office is 777 108th Avenue N.E., Suite 1900, Bellevue, Washington 98004, and the name of its initial registered agent located at the above address is Patricia A. Murray, Esq. IV. INCORPORATORS The names and addresses of the incorporators are set forth below: Albert T. Dosser 16340 N.E. 83rd Street, Apt. E-125 Redmond, Washington 98052 Peter R. Gregory 13423 N.E. 115th Court Redmond, Washington 98052 65 William T. Baxter 3233 168th Place S.E. Bellevue, Washington 98008 V. PURPOSE This corporation has the purpose of engaging in any lawful business activity under the Washington Business Corporation Act but is being formed more specifically for the purpose of providing computer software consulting services. VI. POWERS This corporation shall have the same powers as an individual to do all things necessary or convenient to carry out its business and affairs, including, without limitation power: (1) to sue and be sued, complain and defend in its corporate name; (2) to have a corporate seal, which may be altered at will, and to use it, or a facsimile of it, by impressing or affixing it or in any other manner reproducing it; (3) to make and amend bylaws, not inconsistent with these Articles of Incorporation or with the laws of this state, for managing the business and regulating the affairs of the corporation; (4) to purchase, receive, lease, or otherwise acquire, and own, hold, improve, use, and otherwise deal with, real or personal property, or any legal or equitable interest in property, wherever located; (5) to sell, convey, mortgage, pledge, lease, exchange, and otherwise dispose of all or any part of its property; (6) to purchase, receive, subscribe for, or otherwise acquire, own, hold, vote, use, sell, mortgage, lend, pledge, or otherwise dispose of, and deal in and with shares or other interests in, or obligations of, any person; -2- 66 (7) to make contracts, incur liabilities, borrow money, issue notes, bonds, and other obligations (which may be convertible into or include the option to purchase other securities of the corporation), and secure any of its obligations by mortgage or pledge of any of its property, franchises, or income; (8) to make guarantees respecting the contracts, securities, or obligations of any person (including, but not limited to, any shareholder, affiliated or unaffiliated individual, domestic or foreign corporation, partnership, association, joint venture or trust) to the extent permitted by the Washington Business Corporation Act as amended from time to time; (9) to lend money, invest and reinvest its funds, and receive and hold real and personal property as security for repayment; (10) to be a promoter, partner, member, associate, or manager of any partnership, joint venture, trust, or other entity; (11) to conduct its business, locate offices, and exercise the powers granted by this title within or without this state; (12) to elect, appoint, or hire officers, employees, and other agents of the corporation, define their duties, fix their compensation, and lend them money and credit; (13) to fix the compensation of directors, and lend them money and credit; (14) to pay pensions and establish pension plans, pension trusts, profit sharing plans, share bonus plans, share option plans, and benefit or incentive plans for any or all of its current or former directors, officers, employees, and agents; (15) to make donations for the public welfare or for charitable, scientific, or educational purposes; (16) to transact any lawful business that will aid governmental policy; and -3- 67 (17) to make payments or donations, or do any other act, not inconsistent with law, that furthers the business and affairs of the corporation. VII. DURATION This corporation shall have perpetual existence. VII. DIRECTORS The number of directors of this corporation shall be determined in the manner provided in the Bylaws of the corporation, and may be increased or decreased from time to time as specified in the Bylaws. There shall always be at least one (1) director. The initial Board of Directors shall consist of three (3) directors and the names and addresses of the persons who shall serve as directors until the first annual meeting of shareholders or until their successors are elected and qualified, unless they sooner resign or are removed, are: Albert T. Dosser 16340 N.E. 83rd Street, Apt. E-125 Redmond, Washington 98052 Peter R. Gregory 13423 N.E. 115th Court Redmond, Washington 98052 William T. Baxter 3233 168th Place S.E. Bellevue, Washington 98008 IX. BYLAWS The Board of Directors shall adopt initial Bylaws of this corporation that are not inconsistent with the Washington Business Corporation Act or these Articles of Incorporation. The Board of Directors shall also have the power to alter, amend or repeal the Bylaws or to adopt new Bylaws subject to repeal or change by action of the shareholders. -4- 68 IN WITNESS WHEREOF, the incorporator hereunto executed this document as of this 13th day of July, 1994. /s/ ALBERT T. DOSSER ------------------------------------ Albert T. Dosser, Incorporator /s/ PETER R. GREGORY ------------------------------------ Peter R. Gregory, Incorporator /s/ WILLIAM T. BAXTER ------------------------------------ William T. Baxter, Incorporator -5- 69 [IMPERIAL BANK LETTERHEAD] October 17, 1997 Leila Kirske Director of Finance bSquare, Inc. 3633 136th Place SE, Suite 100 Bellevue, WA 99006 Dear Leila: This letter sets forth a commitment from Imperial Bank ("Bank") to provide to bSquare, Inc. ("Borrower") the credit described below. The credit facility will be subject to the terms and conditions of the Bank's definitive loan documents which will include (but not be limited to) the following in detail: 1. CREDIT FACILITY A. Line: A $2,000,000 Revolving Line of Credit ("Line") to support working capital with a $500,000 sublimit for issuance of trade-related commercial and standby letters of credit and a $75,000 sublimit to support foreign exchange contracts. L/Cs and FX contracts to be negotiated at Bank's standard pricing. B. Term: A $500,000 Term Loan ("Term Loan") to finance the purchase of equipment, software, furniture and acquisitions. 2. MATURITY A. Line: 364 days from completion of definitive Bank loan documents. B. Term Loan: 48 months from completion of definitive Bank loan documents. 3. TERMS A. Line: Interest payable monthly, principal plus interest due at maturity. B. Term Loan: Available for draws for a period of twelve (12) months following completion of definitive Bank loan documents. Interest is payable monthly during draw period followed by thirty-six (36) equal Monthly payments of principal plus interest. 70 bSquare, inc. 10/17/97 page 2 4. COLLATERAL Bank to have a blanket first priority security interest in all assets perfected by UCC-1 and Security Agreement filings. 5. BORROWING FORMULA A. Line: Advances will be limited to the lesser of: (i) 80% of Eligible Accounts, or (ii) the amount available under the Line. As used herein, "Eligible Accounts" will include those domestic and pre-approved foreign accounts receivable of Borrower which are outstanding less than 90 days from invoice date subject to certain exclusions for contra, US government and inter-company accounts. Approved foreign accounts receivable include foreign companies with sales greater than $500 million per year. Additional foreign accounts receivable will be eligible to the extent they are approved in writing by Bank. Any account which alone exceeds 25% of total accounts will have the amount in excess of 25% excluded unless approved in writing by Bank. Any account 25% or more of which is outstanding over 90 days from invoice date will be excluded in its entirety. B. Term Loan: Advances will be at 80% against invoice price (less tax and freight) of equipment purchased. Advances against software will be limited to 25% of total outstandings under the Term Loan at any one time. Advances to support acquisitions must be approved by Bank in writing. 6. PRICING A. Interest Rate: 1) Line: Bank's Prime Rate per annum. 2) Term Loan: Bank's Prime Rate + 0.25 per annum. B. Facility Fee: 1) Line: 0.50% per annum, of $10,000. 2) Term Loan: 0.25%, or 2,500. 7. COVENANTS A. Borrower to maintain on a quarterly basis unless otherwise noted: 1) Minimum Quick Ratio(1) of 1.00 to 1.00. 2) Minimum Tangible Net Worth(2) of $2,500,000. 3) Minimum Debt Service(3) of 1.50 to 1.00. Definitions: (1) "Quick Ratio" is defined as cash plus accounts receivable divided by current liabilities. 71 bSquare, inc. 10/17/97 page 3 (2) "Tangible Net Worth" is defined as the financial statement net worth of the Borrower prepared according to generally accepted accounting principles less intangible assets, plus indebtedness fully subordinated to the debt due to the Bank. (3) "Debt Service" is defined as earnings after tax plus interest and non-cash expenses annualized for the preceding quarter, divided by current portion of long term debt and capitalized, plus interest. B. Borrower to provide Bank: 1) Unqualified audited financial statements within 90 days after each fiscal year end beginning with the year ended December 31, 1997. 2) Company prepared quarterly financial statements and Compliance Certificate within 25 days after the end of each quarter. 3) Monthly agings of accounts receivable and accounts payable with Borrowing Base Certificate within 15 days after the end of each month. C. Other Covenants: 1) Borrower's primary banking and investment accounts to be maintained at Bank. 2) Without Bank's prior approval, Borrower shall not: a. Enter into any mergers or acquisitions or major debt agreements, except for equipment leases. b. Repurchase stock or pay cash dividends except as required to cover personal tax liabilities of shareholder's. c. Hypothecate existing assets. d. Loan money or guarantee loans of others. 3) Borrower shall notify Bank in writing of any legal action commenced against it which may result in damages over $50,000. Borrower shall provide Bank with such notice immediately upon Borrower's receipt of notice of such legal action. 4) Borrower shall provide Bank proof of insurance on all tangible corporate assets and a Lender's Loss Payable Clause with Bank as loss payee. 8. OTHER CONDITIONS A. Prior to Line disbursement, Bank shall conduct an initial collateral audit by Bank's designated agent at Borrower's expense, with results satisfactory to Bank. Thereafter, Bank shall conduct annual collateral audits by Bank's designated agent at Borrower's expense, with results satisfactory to Bank. B. All reasonable expenses of Bank for legal fees, documentation fees, UCC searches and filing fees, and all other costs involved with documenting and enforcing the loans, including the expenses of Bank's outside counsel, shall be borne by the Borrower, whether or not the Credit Facilities close. This letter is provided solely for your information and is delivered to you with the understanding that neither it nor its substance shall be disclosed to any third person, except those who are in confidential relationship with you, or where the same is required by law. 72 BSquare, inc. 10/17/97 page 4 If the terms set forth above are acceptable to you, please so indicate by signing and returning the original of this letter to us, along with the $10,000 in loan fees referred to above. Unless a signed copy of this letter indicating your acceptance has been returned by no later than October 24, 1997, the terms herein will expire and be of no further affect. Upon return of this letter and the payment, the Bank will prepare drafts of definitive loan documents for your review. If you and the Bank do not enter into definitive loan documents, the Bank will refund to you the amount of the loan fee payment less the amount of the Bank's expenses for the foregoing. This letter is intended to set forth the terms of the credit facility currently under discussion between us. It is intended that all legal rights and obligations of the Bank and you would be set forth in the signed definitive loan documents. On behalf of the Senior Management of the Bank, we are delighted to propose making this credit facility available to Borrower and look forward to a long and mutually rewarding relationship. Please don't hesitate to call if you have any questions or problems. Sincerely, /s/ JAMES E. ELLISON James E. Ellison Edgerton Scott II Senior Vice President/Manager President Emerging Growth Industries Division Emerging Growth Industries Division Accepted and agreed to: BSQUARE, INC. By: /s/ ALBERT DOSSER ----------------------------- Title: Sr. Vice President -------------------------- Date: 10-22-97 --------------------------- 73 bSquare, Inc. 10/17/97 page 5 With return of this letter, please provide us with a copy of your filed Articles of Incorporation and the following information: Tax I.D. #: 91-1650880 ---------- Names and Title of Authorized Corporate Signers: William Baxter Peter Gregory ------------------------------- ------------------------------- Name Name President Sr. Vice President ------------------------------- ------------------------------- Title Title Al Dosser Leila Kirske ------------------------------- ------------------------------- Name Name Sr. Vice President Director of Finance ------------------------------- ------------------------------- Title Title Number needed to sign: 1 ------- Who will execute docs: Al Dosser ------------------------------- Sr. VP & Treasurer ------------------------------- Name of Corporate Secretary: Peter Gregory ------------------------------- Is Secretary an Authorized signer? Yes X No --- --- Automatically Debit Account #36001283 for interest payments each month. Disburse loan advances to Account #36001283 when advances are requested. 74 CORPORATE RESOLUTIONS TO BORROW - -------------------------------------------------------------------------------- Borrower: bsquare corporation - -------------------------------------------------------------------------------- 1, the undersigned Secretary or Assistant Secretary of bsquare corporation (the "Corporation"), HEREBY CERTIFY that the Corporation is organized and existing under and by virtue of the laws of the State of Washington. I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true and complete copies of the Certificate of Incorporation and Bylaws of the Corporation, each of which is in full force and effect on the date hereof. I FURTHER CERTIFY that at a meeting of the Directors of the Corporation, duly called and held, at which a quorum was present and voting (or by other duly authorized corporate action in lieu of a meeting), the following resolutions were adopted. BE IT RESOLVED, that any one (1) of the following named officers, employees, or agents of this Corporation, whose actual signatures are shown below: NAMES POSITIONS ACTUAL SIGNATURES WILLIAM T. BAXTER PRESIDENT, CEO /s/ WILLIAM T. BAXTER ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- ---------------------- acting for an on behalf of this Corporation and as its act and deed be, and they hereby are, authorized and empowered: BORROW MONEY. To borrow from time to time from Imperial Bank ("Bank"), on such terms as may be agreed upon between the officers, employees, or agents and Bank, such sum or sums of money as in their judgment should be borrowed, without limitations including such sums as are specified in that certain Loan and Security Agreement dated as of February 11, 1998 (the "Loan Agreement")- EXECUTE NOTES. To execute and deliver to Bank the promissory note or notes of the Corporation, on Bank's forms, at such rates of interest and on such terms as may be agreed upon, evidencing the sums of money so borrowed or any indebtedness of the Corporation to ]Bank, and also to execute and deliver to Bank one or More renewals, extensions, modifications, refinancings, consolidations, or substitutions for one or more of the notes, or any portion of the notes. GRANT SECURITY. To grant a security interest to Bank in the Collateral described in the Loan Agreement, which security interest shall secure all of the Corporation's Obligations, as described in the Loan Agreement. NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts, trade acceptances, promissory notes, or other evidences of indebtedness payable to or belonging to the Corporation or in which die Corporation may have an 1 75 interest, and either to receive cash for the same or to cause such proceeds to be credited to the account of the Corporation with Bank, or to cause such other disposition of the proceeds derived therefrom as they may deem advisable. LETTERS OF CREDIT, FOREIGN EXCHANGE. To execute letters of credit applications, foreign exchange agreements and other related documents pertaining to Bank's issuance of letters of credit and foreign exchange contracts. FURTHER ACTS. In the case of lines of credit, to designate additional or alternate individuals as being authorized to request advances thereunder, and in all cases, to do and perform such other acts and things, to pay any and all fees and costs, and to execute and deliver such other documents and agreements as they may in their discretion deem reasonably necessary or proper in order to carry into effect the provisions of these Resolutions. BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these resolutions and performed prior to the passage of these resolutions are hereby ratified and approved, that these Resolutions shall remain in full force and effect and Bank may rely on these Resolutions until written notice of their revocation shall have been delivered to and received by Bank. Any such notice shall not affect any of the Corporation's agreements or commitments in effect at the time notice is given. I FURTHER CERTIFY that the officers, employees, and agents named above are duly elected, appointed, or employed by or for the Corporation, as the case may be, and occupy the positions set forth opposite their respective names; that the foregoing Resolutions now stand of record on the books of the Corporation; and that the Resolutions are in full force and effect and have not been modified or revoked in any manner whatsoever. IN WITNESS WHEREOF, I have hereunto set my hand on 2/4, 1998 and attest that the signatures set opposite the names listed above are their genuine signatures. CERTIFIED TO AND ATTESTED BY: /s/ PETER GREGORY ------------------------------------ Peter Gregory - -------------------------------------------------------------------------------- 2 76 [IMPERIAL BANK LOGO] SPECIAL LOAN MINUTES REPORT - -------------------------------------------------------------------------------- Banking Office/Department Name/Number Date Total Commitment Emerging Growth Industry - #3605 October 10, 1997 $2,500,000 - -------------------------------------------------------------------------------- Prepared By Assigned Officer Debbie Constantine-Skouras Jim Ellison - --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------- BORROWER(S) NAME & CUSTOMER NUMBER(S) LINE NO. CLASS AMOUNT MATURITY OWING RATE - --------------------------------------------------------------------------------------------------------------- bSquare, Inc. (01) OT-N $2,000,000 364 days $ -0- P + 0.0% Consulting and Training Services $10,000 fee 3633 136th Place SE, Suite 100 (02) OT-N $500,000 60 mos. $ -0- P + .25% Bellevue, WA 98006 $2,000 fee (425)519-5900 -------------------------------------------------------------------- Guarantor(s) Name and Customer Number(s) Loan Administration Use Only None. - --------------------------------------------------------------------------------------------------------------- (Direct and Indirect Liability, Including Real Estate, Installment Loans, Letters of Credit & Charge TOTAL $
APPLICATION, PURPOSE, REPAYMENT, COLLATERAL, AMORTIZATION (1) Requesting new $2,000,000 Revolving Line of Credit to support working capital with a $500,000 sublimit for issuance of trade-related commercial and standby letters of credit and a $75,000 sublimit to support foreign exchange contracts. L/Cs and FX contract to be negotiated at Bank's standard pricing. Line will mature 364 days from closing with interest payment monthly and principal plus interest due at maturity. Advances will be limited to the lesser of: (i) 80% of Eligible accounts, or (ii) the amount available under the Line. As used herein, "Eligible Accounts" will include those domestic and pre-approved foreign accounts receivable of Borrower which are outstanding less than 90 days from invoice date subject to certain exclusions for contra, US government and inter-company accounts. Approved foreign accounts receivable include foreign companies with sales greater than $500 million per year. Additional foreign accounts receivable will be eligible to the extent they are approved in writing by Bank. Any account which alone exceeds 25% of total accounts will have the amount in excess of 25% excluded unless approved in writing by Bank. Any account 25% or more of which is outstanding over 90 days from invoice date will be excluded in its entirety. (02) Requesting new $500,000 Term Loan to finance the purchase of equipment, software, furniture and bank approved acquisitions. Available for draws for a period of twelve (12) months following completion of definitive Bank loan documents. Interest is payable monthly during draw period followed by thirty-six (36) equal monthly payments of principal plus interest. Advances will be at 80% against invoice price (less tax and freight) of equipment purchased. Advances against software will be limited to 25% of total outstanding under the Term Loan at any one time. Advances to support acquisitions must be approved by Bank in writing. Bank to have a cross-collateralized and cross-defaulted blanket first priority security interest in all assets perfected by UCC-1 and IP Security Agreement filings. [ ] If checked, the maturity date will be extended to using Unilateral or Bilateral Extension Letter. - ----------------------------------------------------------------------- Month Pl PAS Number Loan Grade - ----------------------------------------------------------------------- Direct Accounting Relationship Borrowing History (Prior 12 Months) - ----------------------------------------------------------------------- Ledger Average High Credit - ----------------------------------------------------------------------- Avg Coll Bal Low Credit - ----------------------------------------------------------------------- Line Balance Days Out Debt - ----------------------------------------------------------------------- Net Account Profit Customer Since - ----------------------------------------------------------------------- CRA Purpose Code Risk Rate SIC Code CRA Income - -----------------------------------------------------------------------
- ----------------------------------------------------------------------- Recommended By Date /s/ [Signature Illegible] 10/10/97 - ----------------------------------------------------------------------- Recommended By Date Recommended By Date x - ----------------------------------------------------------------------- Approved By Date Concur Date x CLA x CLA - ----------------------------------------------------------------------- Concur Date Concur Date x CLA x EVP - ----------------------------------------------------------------------- Concur Date Concur Date x Director x Director - -----------------------------------------------------------------------
77 IMPERIAL BANK CREDIT SUPPORT COMMENTS & CLARIFICATIONS - -------------------------------------------------------------------------------- BORROWER'S NAME: Date: October 10, 1997 Comments Prepared By: Jim Ellison, Emerging Growth Industry Covenants:
PROPOSED ACTUAL AS OF 8/31/97 -------- -------------------- 1) Minimum Quick Ratio[1] 0.80 to 1.00 3.17 2) Minimum Tangible Net Worth[2] $2,000,000 $3,176,578 3) Maximum Total Liabilities[3] to Tangible Net Worth 1.50 to 1.00 0.26 4) Profitability Quarterly $2,635,239 YTD 5) Minimum Debt Service[4] 1.50 to 1.00 n/a
Definitions: (1) "Quick Ratio" is defined as cash plus accounts receivable divided by current liabilities less deferred revenue. (2) "Tangible Net Worth" is defined as the financial statement net worth of the Borrower prepared according to generally accepted accounting principles less intangible assets, plus indebtedness fully subordinated to the debt due to the Bank. (3) "Total Liabilities" are defined as all the Borrower's liabilities except for deferred revenue and indebtedness fully subordinated to the debt due to the Bank. (4) "Debt Service" is defined as earnings after tax plus interest and non-cash expenses annualized for the preceding quarter, divided by current portion of long term debt and capitalized, plus interest. Reporting: 1) Unqualified audit of financial statements within 90 days after each fiscal year end beginning with the year ended December 31, 1997. 2) Company prepared quarterly financial statements and Compliance within 25 days after the end of each quarter. 3) Monthly agings of accounts receivable and accounts payable with Borrowing Base Certificate within 15 days after the end of each month. Other: 1) Borrower's primary banking and investment accounts to be maintained at Bank. 2) Proof of insurance naming Bank as loss payee. Conditions Precedent to Lending: 1) Prior to Line disbursement, Bank shall conduct an initial collateral audit by Bank's designated agent at Borrower's expense, with results satisfactory to Bank. Thereafter, Bank shall conduct annual collateral audits by Bank's designed agent at Borrower's expense, with results satisfactory to Bank. 2) All reasonable expenses of Bank for legal fees, documentation fee, UCC searches and filling fees, and all other costs involved with documenting and enforcing the loans, including the expenses of Bank's outside counsel, shall be borne by the Borrower, whether or not the Credit Facilities close. ================================================================================ QUESTIONNAIRE: Answer All of the following questions. Answers which appear in parentheses () require an explanation in the remarks section below. CREDIT CHECKINGS YES NO DATE OF MOST RECENT CREDIT CHECKINGS _________ DATE OF MOST RECENT BANK CHECKINGS_________ ( ) X 1. Does borrower's previous business record show any bankruptcies or arrangements with creditors; are there any suits pending or tax liens existing? X ( ) 2. Is borrower's trade payment record uniformly prompt or better? X ( ) 3. Are bank loans confined to us? X ( ) 4. Are accounts confined to us? ADVERSE CHECKINGS SHOULD BE EXPLAINED IN REMARKS SECTION EXPERIENCE NA ( ) 1. Have prior loans been handled satisfactorily and account relationships conducted properly? NA ( ) 2. Are accounts profitable? NA ( ) 3. Are Federal payroll and excise taxes paid through Imperial Bank? OWNERSHIP ( ) X 1. Has there been a material change in ownership? ( ) X 2. Is borrower either a subsidiary or controlled by another entity? ( ) X 3. Has there been a major change in management personal? ( ) X 4. Are there questions concerning the ability of management? X ( ) 5. Is management experienced in this line of business? ================================================================================ REMARKS: - -------------------------------------------------------------------------------- 78 [IMPERIAL BANK LOGO] LOAN SUMMARY Borrower Name Date Approved bSquare, Inc. - --------------------------------------------------------------------------------------------------------------------- Banking Office/Department or Real Estate Center Total Commitments Loan Numbers (This Request) Emerging Growth Industries $2,500,000. - --------------------------------------------------------------------------------------------------------------------- Account Officer Regional Vice President Loan Type(This Request) Loan Amount (This Request) Jim Ellison Edgie Scott, SVP $2,500,000 - ---------------------------------------------------------------------------------------------------------------------
COMMITMENT OUTSTANDING INTEREST COLLATERAL Financial Information as of LOAN# AMOUNT AMOUNT RATE TYPE COLLATERAL VALUE (8 Months) (08/31/97) - --------------------------------------------------------------------------------------------------------------------- 01 $2,000,000 $0 P+0.0 UCC-1 $ Total Assets $3,989 02 $500,000 $0 P+.25 UCC-1 $ Net Worth $3,177 03 $ $ P+ UCC-1 $ Net Sales $7,577 04 $ $ $ Net Profit $2,635 Other $ $ $ Cash Flow $2,775 Purpose (This Request): (1) To support working capital. (2) To finance the purchase of equipment, software, furniture and acquisitions. CPLTD $-0- Source of Repayment (This Request): (1) Turn over of trading assets and liquidation of corporate assets. (2) Cash flow from operations and liquidation of corporate assets. Current Radio 3.32 Comments Quick Ratio 3.17 Debt/Tangible 0.26 Net Worth A/P (Days) A/R (Days) Inventory (Days)
REAL ESTATE LOAN DETAIL FOR THIS REQUEST Project Location Loan Term Pricing Yield @ %AO Project Type Equity (Cash) Equity (Appraisal) $ $ Gross Building Area Net Rentable Area Land Area Proforma GSI Vacancy Sq.ft. Sq.ft. Sq.ft. Purpose of Loan EGI Expenses NOI Appraised Value Date % Preleased Cap Rate Value/Sq.Ft. $ Collateral Position Loan/Value Loan/Sq.Ft. Gross Rent/Sq.Ft./Month Balance of Senior Liens Participation Amount Debt Coverage Ratio Annual Expenses/Sq.Ft. Loan Constant $ $ $ Additional Collateral Other Ratios Comments
79 [IMPERIAL BANK LOGO] SPECIAL LOAN MINUTES REPORT
======================================================================================================== Banking Office/Department Name/Number Date Total Commitment Emerging Growth Industry - #3805 October 10, 1997 $2,500,000 - -------------------------------------------------------------------------------------------------------- Prepared By Assigned Officer Debbie Constantine-Skouras Jim Ellison ======================================================================================================== BORROWER(S) NAME & CUSTOMER NUMBER(S) LINE NO. CLASS AMOUNT MATURITY OWING RATE - -------------------------------------------------------------------------------------------------------- P+0.0% bSquare, Inc. (01) OT-N $2,000,000 364 days $-0- $10,000 fee Consulting and Training Services. 3633 138th Place SE, Suite 100 (02) OT-N $500,000 60 mos. $-0- P+.25% Bellevue, WA 98006 $2,000 fee (425) 519-5900 --------------------------------------------------------- Guarantor(s) Name and Customer Number(s) Loan Administration Use Only None. APPROVED COMMERCIAL LOAN ADMINISTRATION DATE: OCT 20, 1997 ------------------------- --------------------------------------------------------- ======================================================================================================== Direct and Indirect Liability, Including Real Estate, Installment Loans, Letters of Credit & Charge Cards) TOTAL $ ======================================================================================================== APPLICATION [ILLEGIBLE], REPAYMENT, COLLATERAL, AMORTIZATION - --------------------------------------------------------------------------------------------------------
(1) Requesting new $2,000,000 Revolving Line of Credit to support working capital with a $500,000 submit for issuance of trade-related commercial and standby letters of credit and a $75,000 sublimit to support foreign exchange contracts. L/Cs and FX contract to be negotiated at Bank's standard pricing. Line will mature 364 days from closing with interest payable monthly and principal plus interest due at maturity. Advances will be limited to the lesser of: (i) 80% of Eligible accounts, or (ii) the amount available under the Line. As used herein, "Eligible Accounts" will include those domestic and pre-approved foreign accounts receivable of Borrower which are outstanding less than 90 days from invoice date subject to certain exclusions for contra, US government and inter-company accounts. Approved foreign accounts receivable include foreign companies with sales greater than $500 million per year. Additional foreign accounts receivable will be eligible to the extent they are approved in writing by Bank. Any account which alone exceeds 25% of total accounts will have the amount in excess of 25% excluded unless approved in writing by Bank. Any account 25% or more of which is outstanding over 90 days from invoice date will be excluded in its entirety. (02) Requesting new $500,000 Term Loan to finance the purchase of equipment, software, furniture and bank approved acquisitions. Available for draws for a period of twelve (12) months following completion of definitive Bank loan documents. Interest is payable monthly during draw period followed by thirty-six (36) equal monthly payments of principal plus interest. Advances will be at 80% against invoice price (less tax and freight) of equipment purchased. Advances against software will be limited to 25% of total outstandings under the Term Loan at any one time. Advances to support acquisitions must be approved by Bank in writing. Bank to have a cross-collateralized and cross-defaulted blanket first priority security interest in all assets perfected by UCC-1 and IP Security Agreement filings. - -------------------------------------------------------------------------------------------------------- [ ] If checked, the maturity date will be extended to using Unilateral or Bilateral Extension Letter. ======================================================================================================== Month PI PAS Number Loan Grade Recommended by Date X [SIG] 10/10/97 ======================================================================================================== Recommended By Date Recommended By Date [ILLEGIBLE] [ILLEGIBLE] - ---------------------------------------------- [ILLEGIBLE] High Credit X X ------------------------------------------------------ - ---------------------------------------------- Approved By Date Concur Date Avg Coll Bal Low Credit X [SIG] 10/16/97 CLA X - ---------------------------------------------- ------------------------------------------------------ Time Balance Days Out of Debt Concur Date Concur Date - ---------------------------------------------- X [SIG] 10/20/97 CLA X Net Account Profit Customer Since ------------------------------------------------------
80 CREDIT MEMORANDUM FOR bsquare CORPORATION BACKGROUND bsquare is a S corporation located in Bellevue, Washington which specializes in consulting services and software development for the Windows CE operating environment. The company was referred to Imperial by Arthur Anderson who is currently on a consulting engagement with the company to evaluate and improve their information systems, evaluate a conversion to a C corporation and ready the company for a 1997 audit with the intent of raising outside equity in 1998 to assist the company in expanding its software development business. PRODUCTS/TECHNOLOGY The company has bootstrapped its growth to date and accumulated retained earnings of $3.5 million largely through the consulting services it provides to the major semiconductor manufacturers who retain the company's services to write the Windows CE software compilers for their next generation processors. Customers include: AMD, ARM, IBM, Motorola, Phillips, Hitachi and NEC. Given bsquare's Windows CE expertise and the accelerated acceptance of CE as an operating system platform for an ever increasing number of portable devices and software applications, the company has begun developing applications software for the handheld PC (HPC) market and systems development tools for use by hardware and software vendors adapting the CE operating system to the target platform of their choice. Market: The Windows CE platform has established a healthy set of entry-level hardware, foundation-level software and services from major players of the wireline and wireless services. One thousand CE developers are claimed to have registered with Microsoft and over 100 titles have already been announced. Microsoft is working hard to capture more developers by making public the tools for CE development and licensing with companies such as bsquare who can provide enhanced CE development tool kits for the development of embedded applications. Growth in the CE market place in 1997 has been apparent. Casio alone expects to sell over 500,000 units by mid 1998, with the majority of the units being purchased here in the US. Together, Casio and Compaq have shipped more HPCs than all the hardware and software shipped in the entire life history of Apple's Newton, which has established CE as a viable OS. Notwithstanding, CE is still early in its evolution with no reference designs or off-the-shelf Windows CE motherboards yet available, and with no standard ICs to support the OS except for RISC CPUs, the expertise and infrastructure provided by systems integrators and tools developers such as bsquare will become necessary for hardware and software vendors bringing CE-based products to market. Competition: There are a number competitors in the market with embedded operating systems, the most notable of which is Geoworks with their GEOS offering. Among its competitors, CE boasts the best balance of a hard-core embedded real-time characteristics and general purpose functionality. Additionally, CE has the reputation, relationships, financial resources and marketing muscle of Microsoft behind it. 81 MANAGEMENT: President & CEO: Bill Baxter Senior Vice President: Al Dosier Controller: Leila Kirske: Kirske joined bsquare in September, 1997. Previously, Kirske was Director of Corporate Accounting for Midcom, a provider of long distance voice and data based telecom services with annual revenues of $150 million. Prior to Midcom, Kirske was the Assistant Controller for Mosaix, a high growth telecom hardware and software provider with worldwide sales of $70 million;, and Manager, Financial Reporting for Spacelabs Medical Inc., a manufacturer and distributor of critical care medical equipment and clinical information systems with worldwide revenues of $250 million. Kirske began her career with Coopers & Lybrand where she spent seven years reached the position of General Practice Manager before leaving in 1992. FINANCIAL: To date, the company's financial statements have been compiled. Arthur Anderson has been retained on a consulting basis to upgrade the company's accounting system and prepare the company for an audit of 1997. Additionally, Arthur Anderson is consulting the company on the conversion from an S to a C corporation in anticipation of a equity financing in 1998. The company limits distributions to only those necessary to cover the tax liabilities of its partners. As of the eight months ended August 31, 1997, bsquare posted net income of $2.6 million on revenues of $7.6 million. Approximately 95% of the company's revenues resulted from consulting services with the balance split between development and integration. Operating expenses for the period of $5.0 million were primarily related to salaries which made of $3.5 million, or 46%, of total expenses. As of August 31, 1997, the company had assets of $4.0 million which were largely comprised of cash totaling $740.0, accounts receivable totaling $1.8 million and net property and equipment totaling $1.2 million. bsquare currently has no long term debt. The company's liabilities are limited to payables and accruals. Given the concentration of quick assets and absence of debt, the company's balance sheet is extremely strong as evidenced by a quick ratio of 3.17, TNW of $3.2 million and D/TN-W of 0.26. Though the company is currently well capitalized, they plan raise as much as $3 to $5 million in outside equity in 1998 to support growth their development and integration businesses. The company has recently hired Leila Kirske as VP of Finance. Upon her arrival, the company has began its budgeting process for 1998. Kirske expects the first pass on the budget to be completed by the end of October leading to a final budget for next year by mid to late November. Preliminarily, she has indicated the company will looking for revenue growth to come from integration and development activities. Additionally, she expects profitability to continue, but at a reduced rate as a result of investments the company will be making to support the growth within integration and development. 82 ACCOUNTS RECEIVABLE: As of September 30, 1997, bsquare had accounts receivable totaling $1.5 million. Of this amount, $1.4 million, or 88%, are current, and $167.0, or 11% are within 60 days. Top accounts are as follows: Medtronic $ 777.0 Philips 288.0 Motorola 142.0 Hitachi 50.0 Advanced RISC Machines 40.0 Microsoft 40.0 -------- TOTAL 1,337.0 ========
A collateral audit will be performed prior to advances under the Line. REFERENCES: Arthur Anderson: Brent Johnson of Arthur Anderson was contacted regarding his firms consulting engagement at bsquare. He indicated their review of bsquare's books and records only produced minor adjustments to the company's financial statements which should lead to a smooth audit of 1997. Dain Bosworth: Jeff Canin of Dain Bosworth was contacted regarding discussions his firm is having with bsquare on the underwriting of a private placement in 1998. Jeff pointed out that discussions up to this point have been preliminary and as a result his firm has not yet engaged in extensive due diligence. However, he indicated that Dain is extremely bullish about CE and feels bsquare is very well positioned as one of the technical leaders in a rapidly emerging market space. His firm feels bsquare will be a strong play for their institutional and mezzanine investors and as a result they will be working very hard to get the engagement. 83 BSQUARE (B2260000) SIC Code. Summary Balance Sheet - Actual
Statement Date 12/31/95 12/31/96 06/30/97 08/31/97 Months Covered 12 12 6 8 Audit Method Compiled Compiled Co.Prep'd Co.Prep'd Accountant Analyst -------- -------- --------- --------- ASSETS Cash & Equivalents 103 189 927 741 Accts/Notes Rec-Trade (Net) 385 591 1,446 1,843 Other Inventory -- 6 19 15 Operating Current Assets -- 7 71 101 ------ ------ ------ ------ TOTAL CURRENT ASSETS 488 793 2,463 2,700 Net Fixed Assets 19 233 921 1,234 Op Non-Current Assets 5 32 55 55 Intangibles - Net 1 -- -- -- ------ ------ ------ ------ TOTAL NON-CURRENT ASSETS 25 265 976 1,289 ------ ------ ------ ------ TOTAL ASSETS 513 1,058 3,439 3,989 ------ ------ ------ ------ LIABILITIES/NET WORTH Accounts Payable - Trade 8 -- 63 81 Other Accruals 23 133 375 561 Operating Current Liabs 222 -- 286 171 ------ ------ ------ ------ TOTAL CURRENT LIABILITIES 253 133 724 813 ------ ------ ------ ------ ------ ------ ------ ------ TOTAL LIABILITIES 253 133 724 813 Stock 2 17 2 2 Other Equity (498) (1,819) (1,819) (2,188) Retained Earnings 756 2,727 4,532 5,362 ------ ------ ------ ------ TOTAL NET WORTH 260 925 2,715 3,176 ------ ------ ------ ------ TOTAL LIABS & NET WORTH 513 1,058 3,439 3,989 ====== ====== ====== ======
84 BSQUARE (B2260000) SIC Code. Summary Income Statement - Actual
Statement Date 12/31/95 12/31/96 06/30/97 08/31197 Months Covered 12 12 6 8 Audit Method Compiled Compiled Co.Prep'd Co.Prep'd Accountant Analyst - -------------- -------- -------- --------- --------- Sales/Revenues 1,596 4,175 4,917 7,579 ----- ----- ----- ----- GROSS PROFIT 1,596 4,175 4,917 7,579 S,G & A Expense -- 184 244 369 Operating Expense 886 1,996 2,776 4,438 Depreciation 19 35 98 141 ----- ----- ----- ----- TOTAL OPERATING EXP(INC) 905 2,215 3,118 4,948 ----- ----- ----- ----- NET OPERATING PROFIT 691 1,960 1,799 2,631 Interest Income 2 11 6 4 NET PROFIT 693 1,971 1,805 2,635 ===== ===== ===== =====
85 BSQUARE (B2260000) SIC Code. Summary FAS 95 Stmt of Cash Flows (Direct)
Statement Date 12/31/95 12/31/96 06/30/97 08/31/97 Months Covered 12 12 6 8 Analyst - -------------- -------- -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Sales 4,175 4,917 7,579 Chg in Net Receivables (206) (855) (1,252) ------ ------ ------ CASH RECEIVED FROM CUSTOMERS 3,969 4,062 6,327 Chg in Inventories (6) (13) (9) Chg in Accts Payable-Trade & Othr (8) 63 81 Operating Expenses (2,180) (3,020) (4,807) Chg in Prepaids/Deferreds (34) (87) (117) Chg in Accruals 110 242 428 Chg in Other Open Assets and Liabs (222) 286 171 ------ ------ ------ CASH PAID TO SUPPLIERS & EMPLOYEES (2,340) (2,529) (4,253) INTEREST PAID -- -- -- INCOME TAXES PAID -- -- -- INTEREST & DIVIDENDS RECEIVED 11 6 4 MISC CASH RECEIVED(PAID) -- -- -- ------ ------ ------ NET CASH PROV BY OPERATIONS 1,640 1,539 2,078 CASH FLOWS FROM INVESTING ACTIVITIES: Chg in Net Fixed Assets (249) (786) (1,142) Chg in Net Intangibles 1 -- ------ ------ ------ NET CASH USED IN INVESTING (248) (786) (1,142) CASH FLOWS FROM FINANCING ACTIVITIES: Chg in Capital(Less Non-Cash) (1,306) (15) (384) ------ ------ ------ NET CASH PROV BY FINANCING (1,306) (15) (384) ------ ------ ------ NET CHANGE IN CASH & EQUIVALENTS 86 738 552 ADD:CASH AND EQUIVALENTS AT BOP 103 189 189 ------ ------ ------ CASH AND EQUIVALENTS AT EOP 189 927 741 ====== ====== ======
86 BSQUARE (B226000) SIC Code. Summary Ratios
Statement Date 12/31/95 12/31/96 06/30/97 08/31/97 Months Covered 12 12 6 8 Analyst -------- -------- -------- -------- LIQUIDITY Working Capital 235 660 1,739 1,887 Quick Ratio 1.93 5.86 3.28 3.18 Current Ratio 1.93 5.96 3.40 3.32 LEVERAGE / COVERAGE Net Worth-Actual 260 925 2,715 3,176 Tang Net Worth-Actual 259 925 2,715 3,176 Eff Tang Net Worth-Actual 259 925 2,715 3,176 Debt/Worth 0.97 0.14 0.27 0.26 Debt/Tang Worth 0.98 0.14 0.27 0.26 Debt Less Sub Debt-Liab/Eff Tg Wth 0.98 0.14 0.27 0.26 Total Liabilities Total Assets 0.49 0.13 0.21 0.20 Interest Coverage n/a n/a n/a n/a Funds Flow Coverage n/a n/a n/a n/a Funds Flow/Prior Period CPLTD n/a n/a n/a UCA Cash Flow Coverage n/a n/a n/a UCA Cash Flow/Prior Period CPLTD n/a n/a n/a PROFITABILITY Return on Assets 135.09 186.29 104.97 99.08 Return on Equity 266.54 213.08 132.97 124.45 Gross Margin 100.00 100.00 100.00 100.00 Operating Profit Margin 43.30 46.95 36.59 34.71 Profit Margin 43.42 47.21 36.71 34.77 ACTIVITY Net Accounts Receivable Days 88.05 51.67 53.67 59.17 Accounts Payable Days 1.83 -- 2.34 2.60 Net Sales/Total Assets 3.11 3.95 2.86 2.85 Net Sales/Working Capital 6.79 6.33 5.65 6.02 Net Sales/Net Worth 6.14 4.51 3.62 3.58 Net Sales/Net Fixed Assets 84.00 17.92 10.68 9.21 Profit Before Tax/Total Assets 135.09 186.29 104.97 99.08 GROWTH (%) Total Assets Growth 106.24 225.05 277.03 Total Liabilities Growth (47.43) 444.36 511.28 Net Worth Growth 255.77 193.51 243.35 Net Sales Growth 161.59 135.54 172.30 Operating Profit Growth 183.65 83.57 101.35 Net Profit Growth 184.42 83.16 100.53 ====== ====== ====== ======
87 Albert T. Dosser 16340 NE 83rd St. #E125 Redmond, WA 98007 Home: 206-883-4093 Work: 206-865-8813 Born: March 29, 1957 Education: Received B.S., Magna Cum Laude, in June of 1980 from East Tennessee State University. Majored in Computer and Information Science, Minored in Mathematics. Inducted into Kappa Mu Epsilon Mathematics Honor Society in May of 1977. Attended Code Optimization and Code Generation course taught by Graham, Hennessy, and Ullman, sponsored by the Stanford Department of Computer Science in August, 1989. Attended Optimizing Compilers for RISC and Pipelined Architectures course taught by A. Nicolau, sponsored by UC Irvine in January of 1990 . Other courses attended through UC San Diego Extension: Introduction to Neural Networks, Prolog Programming, Chaos and Fractals. Experience with: Languages: Ada, C, C++, PL/I, FORTRAN, Pascal, Prolog OS: UNIX (Various), Multics, Windows NT Architectures: Alpha, Ix86, I80960, MC88100, SPARC, MIPS, Cray X-MP, CRAY-2 Employment History: Digital Equipment Corp. June 1992 to Present Palo Alto, CA and Bellevue, WA Software Principal Engineer assigned to the Compiler Group at the DECwest Engineering facility in Bellevue. Worked with researchers (including John Ellis of Xerox PARC and Ben Zoin of the University of Colorado) at Digital's Systems Research Center in Palo Alto to develop a practical garbage collector for C and C++ programs. Implemented a fully configurable collector for Alpha/OSF systems and released it for internal use within Digital. Assumed support and maintenance of a re-targetable code generator for C and C++ compilers targeting Digital Alpha and Intel x86 systems running Windows NT. Completed pending work on the code generators, implemented C++ exceptions for Intel x86 targets, and assisted in the productization and field test release of the compiler. 88 Participated in the adapt of Microsoft's Visual C++ product for Digital's Alpha/Windows NT systems. Implemented the C++ exception model for this environment. Telesoft August 1984 to May 1992 San Diego, CA Senior Software Engineer: member of a team engaged in the implementation and maintenance of a code generator for the Intel I80960 (MC, XA, MX). Also responsible for the maintenance and enhancement of a code generator for the Motorola MC88100. Developed an instruction scheduler for RISC targets using the Gibbons and Muchnick heuristics for list scheduling. Scheduler was largely target independent and was adapted for the MC88100, SPARC, MIPS, and I80960. Developed an unused subprogram eliminator for MC88100 which was later adapted for SPARC. Participated in design, code, and maintenance of components of the code generators and run-time systems of Telesoft's Cray and SPARC Ada compilers. Other shorter term assignments have involved maintenance tasks on other components of the compiler including the middle pass and debugger. NCR June 1982 to July 1984 Falls Church, VA and Dayton, OH Lead Systems Analyst in northeast region for the OEM Systems Division. Consultant on UNIX and C to VARs who were developing applications software for the NCR Tower. Organized a team of three support analysts in the northeast region and coordinated their activities. Promoted to Tower Product Specialist reporting to national OEM Product Manager in the Winter of 1983. Responsible for tracking features of the NCR Tower and its competitors. Principal technical consultant to the OEM Systems Division national product management group on technical issues relating to UNIX and the UNIX marketplace. Softech Sept 1980 to June 1982 Waltham, MA Associate Software Engineer, under contract to federal and commercial clients. Promoted to Software Engineer in the Fall of 1981. 89 Worked on the design and development of an interactive database manager for the storage and analysis of communications protocol information. Worked on the development and maintenance of a structured cross-assembler, linkage editor, and automated configuration control system to be used in the development of a digital communications switch. Member of the design team and coauthor of the technical proposal for the development of a communications Network Control Program (NCP) Generator for a major computer manufacturer. Team leader of four staff programmers working on the development of the central component of the NCP Generator. 90 William Baxter - -------------------------------------------------------------------------------- 1988 MS Computer Science, University of Wyoming, Laramie 1988-1989 Topologix, Denver Colorado 1989-1989 Evan & Southerland, Mountain View, California 1989-1993 Intergraph, Palo Alto, California 1993-1994 Digital Equipment Company, Bellevue, Washington 1994 - Present BSQUARE Corporation, Bellevue, Washington 91 WILLIAM BAXTER - - EDUCATION - BS/MS Computer Science, 1988 - - PAST ACCOMPLISHMENTS - Pioneer in vectorization/parallelization - Published Author - Lead developer/manager of Hitachi SH project - - CURRENT FOCUS - Establishing BSQUARE corporate structure and strategy 8/12/97 BSQUARE CONFIDENTIAL 7 92 PETER GREGORY - - EDUCATION - BA in Computer Science, 1984. - - BSQUARE CONTRIBUTIONS - Founded & managed QA at BSQUARE - Led the early employee recruiting effort. - - CURRENT FOCUS - Providing Leadership and Management for BSQUARE QA organization. 8/12/97 BSQUARE CONFIDENTIAL 6 EX-10.6 10 ONE BELLEVUE CENTER OFFICE LEASE 1 EXHIBIT 10.6 ONE BELLEVUE CENTER OFFICE LEASE BETWEEN EOP NORTHWEST PROPERTIES, L.L.C. A DELAWARE LIMITED LIABILITY COMPANY ("LANDLORD") AND BSQUARE CORPORATION, A WASHINGTON CORPORATION ("TENANT") 2 TABLE OF CONTENTS I. Basic Lease Information; Definitions............................... 1 II. Lease Grant........................................................ 2 III. Adjustment of Commencement Date/Possession......................... 2 IV. Use................................................................ 3 V. Rent............................................................... 3 VI. Security Deposit................................................... 7 VII. Services to be Furnished by Landlord............................... 7 VIII. Leasehold Improvements............................................. 7 IX. Repairs and Alterations by Tenant.................................. 8 X. Use of Electrical Services by Tenant............................... 8 XI. Entry by Landlord.................................................. 8 XII. Assignment and Subletting.......................................... 9 XIII. Liens.............................................................. 9 XIV. Indemnity and Waiver of Claims..................................... 9 XV. Tenant's Insurance................................................. 10 XVI. Subrogation........................................................ 10 XVII. Casualty Damage.................................................... 10 XVIII. Demolition......................................................... 11 XIX. Condemnation....................................................... 11 XX. Events of Default.................................................. 12 XXI. Remedies........................................................... 12 XXII. LIMITATION OF LIABILITY............................................ 13 XXIII. No Waiver.......................................................... 13 XXIV. Relocation......................................................... 13 XXV. Holding Over....................................................... 13 XXVI. Subordination to Mortgages; Estoppel Certificate................... 13 XXVII. Notice............................................................. 14 XXVIII. Landlord's Lien.................................................... 14 XXIX. Excepted Rights.................................................... 14 XXX. Surrender of Premises.............................................. 15 XXXI. Miscellaneous...................................................... 15 XXXII. Entire Agreement................................................... 16
EXHIBIT A-Outline and Location of Premises EXHIBIT A-2-Legal Description of Property EXHIBIT B-Building Rules and Regulations EXHIBIT C-Intentionally Omitted EXHIBIT D-Intentionally Omitted EXHIBIT E-Other Provisions i 3 OFFICE LEASE AGREEMENT This Office Lease Agreement (the "Lease") is made and entered into as of the 14th day of December, 1998, by and between EOP Northwest Properties, L.L.C., a Delaware limited liability company ("Landlord") and BSQUARE Corporation, a Washington corporation ("Tenant"), whose address for the purpose of notices to Tenant prior to commencement of the Term of this Lease shall be at 3633 136th Place SE, Suite 100, Bellevue, Washington 98006. I. BASIC LEASE INFORMATION; DEFINITIONS. A. The following is some of the basic lease information and defined terms used in this Lease. 1. "Additional Base Rental" shall mean Tenant's Pro Rata Share of Basic Costs and any other sums (exclusive of Base Rental) that are required to be paid by Tenant to Landlord hereunder. Additional Base Rental and Base Rental sometimes collectively are referred to herein as "Rent". 2. "Base Rental" shall mean the sum of Two Hundred Ninety-Three Thousand Four Hundred Twenty-Nine and 00/100 Dollars ($293,429.00), payable by Tenant to Landlord in Nine (9) monthly installments as follows: a. One installment of Eighteen Thousand Nine Hundred Ninety-Nine and 00/100 Dollars ($18,999.00, i.e. $1,055.50 per diem x 18 days) payable upon the execution of this Lease by Tenant for the period beginning December 14, 1998 and ending December 31, 1998. b. Five (5) equal installments of Thirty One Thousand Six Hundred Sixty Five and no/100 Dollars ($31,665.00), each payable on or before the first day of each month during the period beginning January 1, 1999 and ending May 31, 1999. c. Three (3) equal installments of Thirty Eight Thousand Seven Hundred One and 67/100 Dollars ($38,701.67), each payable on or before the first day of each month during the period beginning June 1, 1999 and ending August 31, 1999. 3. "Base Year" shall mean 1999. 4. "Building" shall mean the office building located at 411 108th Avenue, NE Bellevue, 98004, King County, State of Washington, commonly known as One Bellevue Center. 5. The "Commencement Date," "Lease Term" and "Termination Date" shall have the meanings set forth in subsection I.A.5.a. below: a. The "Lease Term" shall mean a period of eight (8) months and eighteen (18) days commencing on December 14, 1998 (the "Commencement Date") and, unless sooner terminated as provided herein, ending on August 31, 1999 (the "Termination Date"). b. INTENTIONALLY OMITTED. 6. INTENTIONALLY OMITTED. 7. "Notice Addresses" shall mean the Premises for Tenant after the commencement of the Term of this Lease, and, for Landlord, shall mean: 1 4 EOP Northwest Properties, L.L.C. c/o Wright Runstad Associates Limited Partnership One Bellevue Center 411 108th Avenue NE, Suite 1980 Bellevue, WA 98004 Attention: Building Manager With a copy to: Equity Office Properties Trust Two North Riverside Plaza Suite 2200 Chicago, Illinois 60606 Attention: Regional Counsel - West Region Payments of Rent only shall be made payable to the order of: EQUITY OFFICE PROPERTIES at the following address: EOP Northwest Properties, L.L.C. One Bellevue Center P.O. Box 3834 Seattle, WA 98124-3834 8. "Permitted Use" shall mean: general office use. 9. "Premises" shall mean the area located on the sixth (6th) floor of the Building and outlined on Exhibit A attached hereto and incorporated herein and known as Suite #600. Landlord and Tenant hereby stipulate and agree that the "Rentable Area of the Premises" shall mean 16,888 square feet and the "Rentable Area of the Building" shall mean approximately 344,715 square feet. 10. "Tenant's Pro Rata Share" shall mean four and eight thousand nine hundred ninety one ten-thousandths percent (4.8991%), which is the quotient (expressed as a percentage) derived by dividing the Rentable Area of the Premises by the Rentable Area of the Building. B. The following are additional definitions of some of the defined terms used in the Lease: (1) "Common Areas" shall mean those areas provided by Landlord for the common use or benefit of all tenants generally and/or the public; (2) "Owner" shall mean the entity(ies), from time to time, which own the Property or any portion thereof; (3) "Prime Rate" shall mean the per annum interest rate publicly announced by The First National Bank of Chicago or any successor thereof from time to time (whether or not charged in each instance) as its prime or base rate in Chicago, Illinois; and (4) "Property" shall mean the Building and the parcel of land on which it is located and, at Landlord's discretion, the Building garage, and all other improvements serving the Building and the tenants thereof and the parcel(s) of land on which they are located. II. LEASE GRANT. Subject to and upon the terms herein set forth, Landlord leases to Tenant and Tenant leases from Landlord the Premises. III. POSSESSION. A. INTENTIONALLY OMITTED. B. Tenant shall be entitled to possession of Premises on the Commencement Date and Landlord assures that Premises are in working condition. By taking possession of the Premises, Tenant is deemed to have: (1) accepted the 2 5 Premises and agreed that, subject to Landlord's assurance as set forth above, the Premises is in good order and satisfactory condition, with no representation or warranty by Landlord, except as set forth above, as to the condition of the Premises or the Building or suitability thereof for Tenant's use; and (2) agreed that Landlord, subject to Landlord's assurance as set forth above, has no obligation to clean, decorate, alter, remodel, improve or repair the Premises or the Building unless said obligation is specifically set forth in this Lease. If Tenant takes possession of the Premises prior to the Commencement Date for any reason whatsoever, such possession shall be subject to all the terms and conditions of the Lease and Tenant shall pay Base Rental and Additional Base Rental to Landlord on a per diem basis for each day of occupancy prior to the Commencement Date. Notwithstanding the foregoing, if Tenant, with Landlord's prior approval, takes possession of the Premises prior to the Commencement Date for the sole purpose of performing any Landlord-approved improvements therein or installing furniture, equipment or other personal property of Tenant, such possession shall be subject to all of the terms and conditions of the Lease, except that Tenant shall not be required to pay Base Rental or Additional Base Rental with respect to the period of time prior to the Commencement Date. Tenant shall, however, be liable for the cost of any services (e.g. electricity, HVAC, freight elevators) that are provided to Tenant or the Premises during the period of Tenant's possession prior to the Commencement Date. IV. USE. The Premises shall be used for the Permitted Use and for no other purpose. Tenant agrees not to use or permit the use of the Premises for any purpose which is illegal, dangerous or which, in Landlord's opinion, creates a nuisance or which would increase the cost of insurance coverage with respect to the Building. Tenant shall conduct its business and control its agents, servants, contractors, employees, customers, licensees, and invitees (collectively, the "Tenant Related Parties") in such a manner as not to interfere with, annoy or disturb other tenants, or in any way interfere with Landlord in the management and operation of the Building. Tenant will maintain the Premises in a clean and healthful condition, and comply with all laws, ordinances, orders, rules and regulations of any governmental entity with reference to the operation of Tenant's business and to the use, condition, configuration or occupancy of the Premises, including without limitation, the Americans with Disabilities Act (collectively referred to as "Laws"). Tenant, within ten (10) days after receipt thereof, shall provide Landlord with copies of any notices it receives with respect to a violation or alleged violation of any Laws. Tenant will comply with the rules and regulations of the Building attached hereto as Exhibit B and such other rules and regulations adopted and altered by Landlord from time to time and will cause all Tenant Related Parties to do so. V. RENT. A. During each calendar year, or portion thereof, falling within the Lease Term, Tenant shall pay to Landlord as Additional Base Rental hereunder the sum of (1) Tenant's Pro Rata Share of the amount, if any, by which Taxes (hereinafter defined) for the applicable calendar year exceed Taxes for the Base Year plus (2) Tenant's Pro Rata Share of the amount, if any, by which Expenses (hereinafter defined) for the applicable calendar year exceed Expenses for the Base Year. For purposes hereof, "Expenses" shall mean all Basic Costs with the exception of Taxes. Tenant's Pro Rata Share of increases in Taxes and Tenant's Pro Rata Share of increases in Expenses shall be computed separate and independent of each other prior to being added together to determine the "Excess." In the event that Taxes and/or Expenses, as the case may be, in any calendar year decrease below the amount of Taxes or Expenses for the Base Year, Tenant's Pro Rata Share of Taxes and/or Expenses, as the case may be, for such calendar year shall be deemed to be $0, it being understood that Tenant shall not be entitled to any credit or offset if Taxes and/or Expenses decrease below the corresponding amount for the Base Year. Prior to the Commencement Date and prior to January 1 of each calendar year during the Lease Term, or as soon thereafter as practical, Landlord shall make a good faith estimate of the Excess for the applicable calendar year and Tenant's Pro Rata Share thereof. On or before the first day of each month during such calendar year, Tenant shall pay to Landlord, as Additional Base Rental, a monthly installment equal to one-twelfth of Tenant's Pro Rata Share of Landlord's 3 6 estimate of the Excess. Landlord shall have the right from time to time during any such calendar year to revise the estimate of Basic Costs and the Excess for such year and provide Tenant with a revised statement therefor, and thereafter the amount Tenant shall pay each month shall be based upon such revised estimate. If Landlord does not provide Tenant with an estimate of the Basic Costs and the Excess by January 1 of any calendar year, Tenant shall continue to pay a monthly installment based on the previous year's estimate until such time as Landlord provides Tenant with an estimate of Basic Costs and the Excess for the current year. Upon receipt of such current year's estimate, an adjustment shall be made for any month during the current year with respect to which Tenant paid monthly installments of Additional Base Rental based on the previous year's estimate. Tenant shall pay Landlord for any underpayment upon demand. Any overpayment shall, at Landlord's option, be refunded to Tenant or credited against the installment of Additional Base Rental due for the months immediately following the furnishing of such estimate. Any amounts paid by Tenant based on any estimate shall be subject to adjustment pursuant to the immediately following paragraph when actual Basic Costs are determined for such calendar year. As soon as is practical following the end of each calendar year during the Lease Term, Landlord shall furnish to Tenant a statement of Landlord's actual Basic Costs and the actual Excess for the previous calendar year. If the estimated Excess actually paid by Tenant for the prior year is in excess of Tenant's actual Pro Rata Share of the Excess for such prior year, then Landlord shall apply such overpayment against Additional Base Rental due or to become due hereunder, provided if the Lease Term expires prior to the determination of such overpayment, Landlord shall refund such overpayment to Tenant after first deducting the amount of any Rent due hereunder. Likewise, Tenant shall pay to Landlord, on demand, any underpayment with respect to the prior year, whether or not the Lease has terminated prior to receipt by Tenant of a statement for such underpayment, it being understood that this clause shall survive the expiration of the Lease. B. Basic Costs shall mean all costs and expenses paid or incurred in each calendar year in connection with operating, maintaining, repairing, managing and owning the Building and the Property, including, but not limited to, the following: 1. All labor costs for all persons performing services required or utilized in connection with the operation, repair, replacement and maintenance of and control of access to the Building and the Property, including but not limited to amounts incurred for wages, salaries and other compensation for services, payroll, social security, unemployment and other similar taxes, workers' compensation insurance, uniforms, training, disability benefits, pensions, hospitalization, retirement plans, group insurance or any other similar or like expenses or benefits. 2. All management fees, the cost of equipping and maintaining a management office at the Building, accounting services, legal fees not attributable to leasing and collection activity, and all other administrative costs relating to the Building and the Property. If management services are not provided by a third party, Landlord shall be entitled to a management fee comparable to that due and payable to third parties provided Landlord or management companies owned by, or management divisions of, Landlord perform actual management services of a comparable nature and type as normally would be performed by third parties. 3. All rental and/or purchase costs of materials, supplies, tools and equipment used in the operation, repair, replacement and maintenance and the control of access to the Building and the Property. 4. All amounts charged to Landlord by contractors and/or suppliers for services, replacement parts, components, materials, equipment and supplies furnished in connection with the operation, repair, maintenance, replacement of and control of access to any part of the Building, or the 4 7 Property generally, including the heating, air conditioning, ventilating, plumbing, electrical, elevator and other systems and equipment. At Landlord's option, major repair items may be amortized over a period of up to five (5) years. 5. All premiums and deductibles paid by Landlord for fire and extended coverage insurance, earthquake and extended coverage insurance, liability and extended coverage insurance, rental loss insurance, elevator insurance, boiler insurance and other insurance customarily carried from time to time by lessors of comparable office buildings or required to be carried by Landlord's Mortgagee. 6. Charges for all utilities, including but not limited to water, electricity, gas and sewer, but excluding those charges for which Landlord is otherwise reimbursed by tenants. 7. "Taxes", which for purposes hereof, shall mean: (a) all real estate taxes and assessments on the Property, the Building or the Premises, and taxes and assessments levied in substitution or supplementation in whole or in part of such taxes, (b) all personal property taxes for the Building's personal property, including license expenses, (c) all taxes imposed on services of Landlord's agents and employees, (d) all other taxes, fees or assessments now or hereafter levied by any governmental authority on the Property, the Building or its contents or on the operation and use thereof (except as relate to specific tenants), and (e) all costs and fees incurred in connection with seeking reductions in or refunds in Taxes including, without limitation, any costs incurred by Landlord to challenge the tax valuation of the Building, but excluding income taxes. For the purpose of determining real estate taxes and assessments for any given calendar year, the amount to be included in Taxes for such year shall be as follows: (1) with respect to any special assessment that is payable in installments, Taxes for such year shall include the amount of the installment (and any interest) due and payable during such year; and (2) with respect to all other real estate taxes, Taxes for such year shall, at Landlord's election, include either the amount accrued, assessed or otherwise imposed for such year or the amount due and payable for such year, provided that Landlord's election shall be applied consistently throughout the Lease Term. If a reduction in Taxes is obtained for any year of the Lease Term during which Tenant paid its Pro Rata Share of Basic Costs, then Basic Costs for such year will be retroactively adjusted and Landlord shall provide Tenant with a credit, if any, based upon such adjustment. Likewise, if a reduction is subsequently obtained for the tax component of Basic Costs for the Base Year (if Tenant's Pro Rata Share is based upon increases in Basic Costs over a Base Year), Basic Costs for the Base Year shall be restated and the Excess for all subsequent years recomputed. Tenant shall pay Landlord Tenant's Pro Rata Share of any such increase in the Excess within thirty (30) days after Tenant's receipt of a statement therefor from Landlord. 8. All landscape expenses and costs of maintaining, repairing, resurfacing and striping of the parking areas and garages of the Property, if any. 9. Cost of all maintenance service agreements, including those for equipment, alarm service, window cleaning, drapery or venetian blind cleaning, janitorial services, pest control, uniform supply, plant maintenance, landscaping, and any parking equipment. 10. Cost of all other repairs, replacements and general maintenance of the Property and Building neither specified above nor directly billed to tenants. 11. The amortized cost of capital improvements made to the Building or the Property which are: (a) primarily for the purpose of reducing operating expense costs or otherwise improving the operating efficiency of the Property or Building; or (b) required to comply with any laws, rules or 5 8 regulations of any governmental authority or a requirement of Landlord's insurance carrier. The cost of such capital improvements shall be amortized over a period of five (5) years and shall, at Landlord's option, include interest at a rate that is reasonably equivalent to the interest rate that Landlord would be required to pay to finance the cost of the capital improvement in question as of the date such capital improvement is performed, provided if the payback period for any capital improvement is less than five (5) years, Landlord may amortize the cost of such capital improvement over the payback period. 12. Any other expense or charge of any nature whatsoever which, in accordance with general industry practice with respect to the operation of a first-class office building, would be construed as an operating expense. In addition, if Landlord incurs any costs and expenses in connection with the operation, maintenance, repair, management or ownership of the Building and one or more other buildings, such costs and expenses shall be equitably prorated between the Building and such other buildings and the Building's equitable share thereof shall be included in Basic Costs. If the Building is not at least ninety-five percent (95%) occupied during the Base Year (if applicable) or any calendar year of the Lease Term or if Landlord is not supplying services to at least ninety-five percent (95%) of the total Rentable Area of the Building at any time during the Base Year (if applicable) or any calendar year of the Lease Term, actual Basic Costs for purposes hereof shall, at Landlord's option, be determined as if the Building had been ninety-five percent (95%) occupied and Landlord had been supplying services to ninety-five percent (95%) of the Rentable Area of the Building during such year. C. If Basic Costs for any calendar year increase by more than five percent (5%) over Basic Costs for the immediately preceding calendar year, Tenant, within ninety (90) days after receiving Landlord's statement of actual Basic Costs for a particular calendar year, shall have the right to provide Landlord with written notice (the "Review Notice") of its intent to review Landlord's books and records relating to the Basic Costs for such calendar year. Within a reasonable time after receipt of a timely Review Notice, Landlord shall make such books and records available to Tenant or Tenant's agent for its review at either Landlord's home office or the office of the Building, provided that if Tenant retains an agent to review Landlord's books and records for any calendar year, such agent must be CPA firm licensed to do business in the state in which the Building is located. If Tenant fails to give Landlord written notice of objection within thirty (30) days after its review or fails to provide Landlord with a Review Notice within the ninety (90) day period provided above, Tenant shall be deemed to have approved Landlord's statement of Basic Costs in all respects and shall thereafter be barred from raising any claims with respect thereto. Any information obtained by Tenant pursuant to the provisions of this Section shall be treated as confidential. Notwithstanding anything herein to the contrary, Tenant shall not be permitted to examine Landlord's books and records or to dispute any statement of Basic Costs unless Tenant has paid to Landlord the amount due as shown on Landlord's statement of actual Basic Costs, said payment being a condition precedent to Tenant's right to examine Landlord's books and records. D. Tenant covenants and agrees to pay to Landlord during the Lease Term, without any setoff or deduction whatsoever, the full amount of all Base Rental and Additional Base Rental due hereunder. In addition, Tenant shall pay and be liable for, as additional rent, all rental, sales and use taxes or other similar taxes, if any, levied or imposed by any city, state, county or other governmental body having authority, such payments to be in addition to all other payments required to be paid to Landlord by Tenant under the terms and conditions of this Lease. Any such payments shall be paid concurrently with the payments of the Rent on which the tax is based. The Base Rental, Tenant's Pro Rata Share of Basic Costs and any recurring monthly charges due hereunder shall be due and payable in advance on the first day of each calendar month during the Lease Term without demand, provided that the installment of Base Rental for the first full calendar month of the Lease Term shall be payable upon the execution of 6 9 this Lease by Tenant. All other items of Rent shall be due and payable by Tenant on or before ten (10) days after billing by Landlord. If the Lease Term commences on a day other than the first day of a calendar month or terminates on a day other than the last day of a calendar month, then the monthly Base Rental and Tenant's Pro Rata Share of Basic Costs for such month shall be prorated for the number of days in such month occurring within the Term based on a fraction, the numerator of which is the number of days of the Lease Term that fell within such calendar month and the denominator of which is thirty (30). E. All Rent not paid when due and payable shall bear interest from the date due until paid at the lesser of: (1) eighteen percent (18%) per annum; or (2) the greatest per annum rate of interest permitted from time-to-time under applicable law. In addition, if Tenant fails to pay any installment of Rent when due and payable hereunder, a service fee equal to five percent (5%) of such unpaid amount will be due and payable immediately by Tenant to Landlord. VI. SECURITY DEPOSIT. A Security Deposit of ZERO and no/100 Dollars ($0.00) shall be delivered to Landlord upon the execution of this Lease by Tenant and shall be held by Landlord without liability for interest and as security for the performance of Tenant's obligations under this Lease. Landlord may, from time to time, without prejudice to any other remedy, use all or a portion of the Security Deposit to make good any arrearages of Rent, to repair damages to the Premises caused by Tenant, to clean the Premises upon termination of this Lease or otherwise to satisfy any other covenant or obligation of Tenant hereunder. Following any such application of the Security Deposit, Tenant shall pay to Landlord on demand the amount so applied in order to restore the Security Deposit to its original amount. If Tenant is not in default at the termination of this Lease, after Tenant surrenders the Premises to Landlord in accordance with this Lease and all amounts due Landlord from Tenant are finally determined and paid by Tenant or through application of the Security Deposit, the balance of the Security Deposit shall be returned to Tenant. If Landlord transfers its interest in the Premises during the Lease Term, Landlord may assign the Security Deposit to the transferee and thereafter shall have no further liability for the return of such Security Deposit. Landlord shall not be required to segregate the Security Deposit from its other accounts. VII. SERVICES TO BE FURNISHED BY LANDLORD. Landlord, as part of Basic Costs, agrees to furnish Tenant the following services: (a) cold water at those points of supply provided for general use of tenants in the Building; (b) central heat and air conditioning in season during Landlord's normal business hours; (c) routine maintenance and electric lighting service for all Common Areas of the Building; (d) janitor service on business days exclusive of Saturdays, Sundays and holidays; and (e) elevator service in common with other tenants of the Building for ingress and egress to and from the floor of the Premises during Landlord's normal business hours. The failure by Landlord to any extent to furnish, or the interruption or termination of these services in whole or in part, shall not render Landlord liable in any respect nor be construed as an eviction of Tenant or breach of any implied warranty of habitability, nor give rise to an abatement of Rent, nor relieve Tenant from the obligation to fulfill any covenant or agreement hereof. Tenant expressly acknowledges that if Landlord, from time to time, elects to provide security services, Landlord shall not be deemed to have warranted the efficiency of any such security personnel, service, procedures or equipment and Landlord shall not be liable in any manner for the failure of any such security personnel, services, procedures or equipment to prevent or control, or apprehend any one suspected of personal injury, property damage or criminal conduct in, on or around the Property. VIII. LEASEHOLD IMPROVEMENTS. Any and all alterations, additions and improvements to the Premises, all attached furniture, equipment and non-trade fixtures except for Computer Associates' modular furniture (collectively, "Leasehold Improvements") shall be owned and insured by Landlord and shall remain upon the Premises, all without compensation to Tenant. Any unattached and movable equipment or furniture, trade fixtures or other personality ("Tenant's Property") shall be owned and insured by Tenant. Landlord acknowledges that the existing Steel Case modular furniture is personal property belonging to Computer Associates. Landlord further acknowledges that Computer Associates shall 7 10 have the right to enter the Premises upon termination of the Lease and remove all of such Steel Case modular furniture. Tenant shall not be liable or responsible for removing any of the Computer Associates' Steel Case modular furniture nor for any damage to the Premises or Building resulting from any actions or inactions of Computer Associates in connection with the removal, or failure to remove, the Steel Case modular furniture. IX. REPAIRS AND ALTERATIONS BY TENANT. A. Tenant shall, at Tenant's own cost and expense, keep the Premises in good condition and repair, ordinary wear and tear and damage by fire and casualty excepted. Such repairs shall restore the Premises to as good a condition as it was at the Commencement Date and shall be effected in compliance with the reasonable directions of Landlord. If Tenant fails to make such repairs to the Premises promptly, Landlord may, at its option, make such repairs, and Tenant shall pay the cost thereof to the Landlord on demand as additional Rent. B. Tenant shall not make or allow to be made any alterations, additions or improvements ("Alterations") to the Premises, without first obtaining the written consent of Landlord. Prior to commencing any such work and as a condition to obtaining Landlord's consent, Tenant must furnish Landlord with plans and specifications; names and addresses of contractors; copies of contracts; necessary permits; evidence of contractor's and subcontractor's insurance in a type and amount acceptable to Landlord; and payment bond or other security, all in form and amount satisfactory to Landlord. All such Alterations shall be installed in a good workmanlike manner using new materials. Landlord shall have the right to designate the time when any such alterations, additions and improvements may be performed and to otherwise designate reasonable rules, regulations and procedures for the performance of work in the Building. Upon completion, Tenant shall furnish "as-built" plans, contractor's affidavits and full and final waivers of lien and receipted bills covering all labor and materials. All Alterations shall comply with all insurance requirements, codes, ordinances, laws and regulations, including without limitation, the Americans with Disabilities Act. Tenant shall reimburse Landlord upon demand as additional Rent for all sums expended by Landlord for examination of the architectural, mechanical, electric and plumbing plans for any Alterations. If Landlord so requests, Tenant shall permit Landlord to supervise construction operations, but no such supervision shall impose any liability upon Landlord. In the event Landlord supervises such construction, Landlord shall be entitled to a supervisory fee in the amount of ten percent (10%) of the cost of such construction. Landlord's approval of Tenant's plans and specifications or supervision of any work performed for or on behalf of Tenant shall not be deemed to be a representation by Landlord that such plans and specifications comply with applicable insurance requirements, building codes, ordinances, laws or regulations or that any such alterations, additions and improvements will be adequate for Tenant's use, X. USE OF ELECTRICAL SERVICES BY TENANT. All electricity used by Tenant in the Premises shall, at Landlord's option, be paid for by Tenant either (a) through inclusion in Base Rental or Basic Costs, or (b) by a separate charge billed directly to Tenant by Landlord and payable by Tenant as additional Rent, or (c) by a separate charge billed by the utility company supplying electricity and payable by Tenant directly to such utility company. Tenant's use of electrical service in the Premises shall not exceed, either in voltage, rated capacity, use or overall load, that which Landlord deems to be standard for the Building. Landlord shall have the right to separately meter electrical usage for the Premises at any time during the Lease Term or to use any other method of measuring electrical usage that Landlord reasonably deems to be appropriate. XI. ENTRY BY LANDLORD. Landlord and its agents or representatives shall have the right to enter the Premises to inspect the same, or to show the Premises to prospective purchasers, mortgagees, tenants or insurers, or to clean or make repairs, alterations or additions thereto, including any work that Landlord deems necessary for the safety, protection or preservation of the Building or any occupants thereof, or to facilitate repairs, alterations or additions to the Building or any other 8 11 tenants' premises. If reasonably necessary for the protection and safety of Tenant and its employees, Landlord shall have the right to temporarily close the Premises to perform repairs, alterations or additions in the Premises. Entry by Landlord hereunder shall not constitute a constructive eviction or entitle Tenant to any abatement or reduction of Rent by reason thereof. XII. ASSIGNMENT AND SUBLETTING. Tenant shall not assign, sublease, transfer or encumber this Lease or any interest therein or grant any license, concession or other right of occupancy of the Premises or any portion thereof or otherwise permit the use of the Premises or any portion thereof by any party other than Tenant (any of which events is hereinafter called a "Transfer") without the prior written consent of Landlord. If Tenant requests Landlord's consent to a Transfer, Tenant, together with such consent, shall provide Landlord with the name of the proposed transferee and the nature of the business of the proposed transferee, the term, use, rental rate and all other material terms and conditions of the proposed Transfer, including, without limitation, a copy of the proposed assignment, sublease or other contractual documents and evidence satisfactory to Landlord that the proposed transferee is financially responsible. Landlord may, within forty-five (45) days after receipt of all information and documentation required herein, (a) consent to or refuse to consent to such Transfer in writing; or (b) negotiate directly with the proposed transferee and upon execution of a lease with such transferee, terminate this Lease (in part or in whole, as appropriate) upon thirty (30) days' notice; or (c) cancel and terminate this Lease, in whole or in part as appropriate, upon thirty (30) days' notice. In the event Landlord consents to any such Transfer, Tenant shall bear all costs and expenses incurred by Landlord in connection with the review and approval of such documentation, which costs and expenses shall be deemed to be at least Seven Hundred Fifty Dollars ($750.00). Tenant hereby covenants and agrees to pay to Landlord all rent and other consideration which it receives which is in excess of the Rent payable hereunder within ten (10) days following receipt thereof by Tenant. In addition to any other rights Landlord may have, Landlord shall have the right to contact any transferee and require that all payments made pursuant to the Transfer shall be made directly to Landlord. For purposes of this Article XII, an assignment shall be deemed to include a change in the majority control of Tenant, if Tenant is a partnership or a corporation whose stock is not traded publicly. Any Transfer consented to by Landlord in accordance with this Article XII shall be only for the Permitted Use and for no other purpose, and in no event shall any Transfer release or relieve Tenant or any Guarantors from any obligations under this Lease. XIII. LIENS. Tenant will not permit any mechanic's liens or other liens to be placed upon the Premises or Tenant's leasehold interest therein, the Building, or the real estate associated therewith. In the event any such lien does attach, Tenant shall, within five (5) days of notice of the filing of said lien, discharge such lien to the satisfaction of Landlord and Landlord's Mortgagee (as hereinafter defined). If Tenant shall fail to so discharge such lien, then, in addition to any other right or remedy of Landlord, Landlord may, but shall not be obligated to, discharge the same. Any amount paid by Landlord for any of the aforesaid purposes, including reasonable attorneys' fees, shall be paid by Tenant to Landlord on demand as additional Rent. Landlord shall have the right to post and keep posted on the Premises any notices that may be provided by law or which Landlord may deem to be proper for the protection of Landlord, the Premises and the Building from such liens. XIV. INDEMNITY AND WAIVER OF CLAIMS. A. Tenant shall indemnify, defend and hold Landlord, its members, principals, beneficiaries, partners, officers, directors, employees, Mortgagee(s) (if any) and agents, and the respective principals and members of any such agents, (collectively the "Landlord Related Parties") harmless against and from all liabilities, obligations, damages, penalties, claims, costs, charges and expenses, including, without limitation, reasonable attorneys' fees and other professional fees (if and to the extent permitted by law), which may be imposed upon, incurred by, or asserted against Landlord or any of the Landlord Related Parties and arising, directly or indirectly, out of or in connection with the acts and omissions of Tenant or any of its Transferees, agents, servants, contractors, employees, licensees or invitees and/or the use, occupancy or maintenance of the Premises by, through or under Tenant. 9 12 B. Tenant waives all claims for loss or damage to Tenant's business or damage to person or property sustained by Tenant or any person claiming by, through or under Tenant [including Tenant's principals, agents and employees, (collectively, the "Tenant Related Parties")] resulting from any accident or occurrence in, on or about the Premises, the Building or the Property, including, without limitation, claims for loss, theft or damage resulting from: (1) the Premises, Building, or Property, or any equipment or appurtenances becoming out of repair; (2) force majeure; (3) any defect in or failure to operate, for whatever reason, any sprinkler, heating or air-conditioning equipment, electric wiring, gas, water or steam pipes; (4) any act, omission or negligence of other tenants, licensees or any other persons or occupants of the Building or of adjoining or contiguous buildings, of owners of adjacent or contiguous property or the public, or by construction of any private, public or quasi-public work; or (5) any other cause of any nature except, as to items 1.-5., where such loss or damage is due to Landlord's negligence or wrongful conduct or Landlord's willful failure to make repairs required to be made pursuant to other provisions of this Lease, after the expiration of a reasonable time after written notice to Landlord of the need for such repairs. XV. TENANT'S INSURANCE. Tenant shall, at all times, carry and maintain, at its sole cost and expense: (a) Commercial General Liability Insurance applicable to the Premises and its appurtenances providing, on an occurrence basis, a minimum combined single limit of Two Million Dollars ($2,000,000.00); (b) All Risks of Physical Loss Insurance written at replacement cost value and with a replacement cost endorsement covering all of Tenant's Property in the Premises; (c) Workers' Compensation Insurance as required by the state in which the Premises is located and in amounts as may be required by applicable statute, and Employers Liability Coverage of One Million Dollars ($1,000,000.00) per occurrence; (d) additional insurance as reasonably required by Landlord. Any company writing any insurance to be maintained pursuant to the terms of this Lease (all such insurance being referred to as "Tenant's Insurance"), as well as the form of such insurance, shall at all times be subject to Landlord's approval. All policies evidencing Tenant's Insurance (except for Workers' Compensation) shall specify Tenant and the "owner(s) of the Building and its (or their) respective members, principals, beneficiaries, partners, officers, directors, employees, agents (and their respective members and principals) and mortgagee(s)" (and any other designees of Landlord as the interest of such designees shall appear) as additional insureds. All policies of Tenant's Insurance shall contain endorsements that the insurer(s) will give to Landlord and its designees at least thirty (30) days' advance written notice of any change, cancellation, termination or lapse of said insurance. Tenant shall deliver to Landlord at least fifteen (15) days prior to the time Tenant's Insurance is first required to be carried by Tenant, and upon renewals at least fifteen (15) days prior to the expiration of any such insurance coverage, a certificate of insurance of all policies procured by Tenant in compliance with its obligations under this Lease. The limits of Tenant's Insurance shall in no event limit Tenant's liability under this Lease. XVI. SUBROGATION. Notwithstanding anything set forth in this Lease to the contrary, Landlord and Tenant do hereby agree to cause their respective insurance carriers to waive any and all right of recovery, claim, action or cause of action against the other, their respective principals, beneficiaries, partners, officers, directors, agents, and employees, and, with respect to Landlord, its Mortgagee(s), for any loss or damage that may occur to Landlord or Tenant or any party claiming by, through or under Landlord or Tenant, as the case may be, with respect to their respective property, the Building, the Property or the Premises or any addition or improvements thereto, or any contents therein including the negligence of Landlord or Tenant, or their respective principals, beneficiaries, partners, officers, directors, agents and employees and, with respect to Landlord, its Mortgagee(s), which loss or damage is (or would have been, had the insurance required by this Lease been carried) covered by insurance. XVII. CASUALTY DAMAGE. Landlord, during the Lease Term, shall maintain standard so-called "all risk" property insurance covering the Building in an amount equal to ninety percent (90%) of the replacement cost thereof (including Leasehold Improvements approved by Landlord) at the time in question. If the Premises or any part thereof shall be damaged by fire or other casualty, Tenant shall give 10 13 prompt written notice thereof to Landlord. In case the Building shall be so damaged that substantial alteration or reconstruction of the Building shall, in Landlord's sole opinion, be required (whether or not the Premises shall have been damaged by such casualty) or in the event the Premises have been damaged and there is less than two (2) years of the Lease Term remaining on the date of such casualty or in the event any Mortgagee should require that the insurance proceeds payable as a result of a casualty be applied to the payment of the mortgage debt or in the event of any material uninsured loss to the Building or in the event Landlord will not be permitted by applicable law to rebuild the Building in substantially the same form as existed prior to the fire or casualty, Landlord may, at its option, terminate this Lease by notifying Tenant in writing of such termination within ninety (90) days' after the date of such casualty, provided that Landlord may not terminate this Lease if the Premises is not damaged by any such casualty if (i) Landlord elects to repair or reconstruct the Building, and (ii) Tenant is permitted by applicable laws and regulations to remain in occupancy of the Premises while the remainder of the Building is being reconstructed or repaired, and (iii) Tenant's continued occupancy of the Premises does not substantially adversely impact the work to be performed by Landlord in repairing or constructing the Building. Such termination shall be effective as of the date of fire or casualty, with respect to any portion of the Premises that was rendered untenantable, and the date specified in Landlord's notice, with respect to any portion of the Premises that remained tenantable. If Landlord does not elect to terminate this Lease, Landlord shall commence and proceed with reasonable diligence to restore the Premises (but excluding any improvements, alterations or additions made by Tenant in violation of this Lease) to substantially the same condition they were in immediately prior to the happening of the casualty. Notwithstanding the foregoing, Landlord's obligation to restore the Building, and the Leasehold Improvements, if any, shall not require Landlord to expend for such repair and restoration work more than the insurance proceeds actually received by the Landlord as a result of the casualty, When the repairs have been completed by Landlord, Tenant shall complete the restoration or replacement of all Tenant's Property necessary to permit Tenant's reoccupancy of the Premises, and Tenant shall present Landlord with evidence satisfactory to Landlord of Tenant's ability to pay such costs prior to Landlord's commencement of repair and restoration of the Premises. Landlord shall not be liable for any inconvenience or annoyance to Tenant or injury to the business of Tenant resulting in any way from such damage or the repair thereof, except that, subject to the provisions of the next sentence, Landlord shall allow Tenant a fair diminution of Rent on a per diem basis during the time and to the extent any damage to the Premises causes the Premises to be rendered untenantable. If the Premises or any other portion of the Building is damaged by fire or other casualty resulting from the fault or negligence of Tenant or any of Tenant's agents, employees, or contractors, the Rent hereunder shall not be diminished during any period during which the Premises, or any portion thereof, is untenantable, and Tenant shall be liable to Landlord for the cost of the repair and restoration of the Building caused thereby to the extent such cost and expense is not covered by insurance proceeds plus any uninsured amount resulting from (i) the insurance deductible and (ii) any deficiency in coverage resulting from the Building not being insured for 100% of the replacement value, and Landlord waives all claims against Tenant therefor. Landlord and Tenant hereby waive the provisions of any law from time to time in effect during the Lease Term relating to the effect upon leases of partial or total destruction of leased property. Landlord and Tenant agree that their respective rights in the event of any damage to or destruction of the Premises or Building shall be those specifically set forth herein. XVIII. DEMOLITION. (INTENTIONALLY OMITTED) XIX. CONDEMNATION. If (a) the whole or any substantial part of the Premises or (b) any portion of the Building or Property which would leave the remainder of the Building unsuitable for use as an office building comparable to its use on the Commencement Date, shall be taken or condemned for any public or quasi-public use, then Landlord may, at its option, terminate this Lease effective as of the date the physical taking of said Premises or said portion of the Building or Property shall occur. In the event this Lease is not terminated, the Rentable Area of the Building, the Rentable Area of the Premises and Tenant's Pro Rata Share shall be appropriately adjusted. In addition, Rent for any portion of the Premises so taken or condemned shall be abated during the unexpired term of this Lease effective when the physical taking of said portion of the Premises shall occur. All compensation awarded for any such taking or condemnation, or sale proceeds in lieu thereof, shall be the property of Landlord, and Tenant shall have no claim thereto, the same being hereby expressly waived by Tenant. 11 14 XX. EVENTS OF DEFAULT. The following events shall be deemed to be events of default under this Lease: (a) Tenant shall fail to pay when due any Base Rental, Additional Base Rental or other Rent under this Lease and such failure shall continue for three (3) days after written notice from Landlord (hereinafter sometimes referred to as a "Monetary Default"); (b) any failure by Tenant (other than a Monetary Default) to comply with any term, provision or covenant of this Lease, which failure is not cured within ten (10) days after delivery to Tenant of notice of the occurrence of such failure, provided that if any such failure creates a hazardous condition, such failure must be cured immediately; provided, however, notwithstanding the foregoing in subsections (a) and (b) above, if Tenant fails to comply with any particular provision or covenant of this Lease on three (3) occasions during any twelve (12) month period, any subsequent violation of such provision or covenant shall be considered to be an incurable default by Tenant; (c) Tenant or any Guarantor shall become insolvent, or shall make a transfer in fraud of creditors, or shall commit an act of bankruptcy or shall make an assignment for the benefit of creditors, or Tenant or any Guarantor shall admit in writing its inability to pay its debts as they become due; (d) the leasehold estate hereunder shall be taken on execution or other process of law or equity in any action against Tenant; (e) Tenant shall abandon or vacate any substantial portion of the Premises without the prior written permission of Landlord; (f) Tenant shall fail to take possession of and occupy the Premises within thirty (30) days following the Commencement Date; or (g) Tenant shall be in default beyond any notice and cure period under any other lease with Landlord. XXI. REMEDIES. A. Upon the occurrence of any event or events of default under this Lease, whether enumerated in Article XX or not, Landlord shall have the option to pursue any one or more of the following remedies without any notice (except as expressly prescribed herein): 1. Terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord. If Tenant fails to surrender the Premises upon termination of the Lease hereunder, Landlord may enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying said Premises, or any part thereof, by force, if necessary, without being liable for prosecution or any claim of damages therefor, and Tenant hereby agrees to pay to Landlord on demand the amount of all loss and damage, including consequential damages, which Landlord may suffer by reason of such termination, whether through inability to relet the Premises on satisfactory terms or otherwise, specifically including but not limited to all costs of reletting (which for purposes of this Lease shall include all costs of preparing the Premises for occupancy and all costs of concessions and brokerage commissions in connection with any new lease for the Premises) and any deficiency that may arise by reason of any reletting or failure to relet. 2. Enter upon and take possession of the Premises and expel or remove Tenant or any other person who may be occupying said Premises, or any part thereof, without liability therefor and without terminating this Lease. Landlord may (but shall be under no obligation to) relet the Premises or any part thereof for the account of Tenant, upon such terms, conditions and uses as Landlord in its absolute discretion may determine, and Landlord may collect and receive any rents payable by reason of such reletting. Tenant agrees to pay Landlord on demand all costs of reletting and any deficiency that may arise by reason of such reletting or failure to relet. Landlord shall not be responsible or liable for any failure to relet the Premises. No such re-entry or taking of possession of the Premises by Landlord shall be construed as an election on Landlord's part to terminate this Lease unless a written notice of such termination is given to Tenant. 3. Terminate this Lease, in which event, Tenant shall immediately surrender the Premises to Landlord and pay to Landlord the sum of: (a) all Rent accrued hereunder through the date of termination, and, upon Landlord's 12 15 determination thereof, (b) an amount equal to the total Rent that Tenant would have been required to pay for the remainder of the Lease Term discounted to present value at the prime rate then in effect, minus the then present fair rental value of the Premises for the remainder of the Lease Term, similarly discounted, after deducting all anticipated costs of reletting. Landlord's determination of such amount shall be conclusive and binding on Tenant, and shall be deemed to have been made in good faith, subject only to manifest error. B. No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder or now or hereafter existing by agreement, applicable law or in equity. Tenant shall be liable for all costs, expenses, and reasonable attorneys' fees incurred by Landlord in connection with the exercise of any of its remedies hereunder. XXII. LIMITATION OF LIABILITY. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS LEASE, THE LIABILITY OF LANDLORD (AND OF ANY SUCCESSOR LANDLORD HEREUNDER) TO TENANT SHALL BE LIMITED TO THE INTEREST OF LANDLORD IN THE BUILDING, AND TENANT AGREES TO LOOK SOLELY TO LANDLORD'S INTEREST IN THE BUILDING FOR THE RECOVERY OF ANY JUDGMENT OR AWARD AGAINST THE LANDLORD, IT BEING INTENDED THAT NEITHER LANDLORD NOR ANY MEMBER, PRINCIPAL, PARTNER, SHAREHOLDER, OFFICER, DIRECTOR OR BENEFICIARY OF LANDLORD SHALL BE PERSONALLY LIABLE FOR ANY JUDGMENT OR DEFICIENCY. TENANT HEREBY COVENANTS THAT, PRIOR TO THE FILING OF ANY SUIT FOR AN ALLEGED DEFAULT BY LANDLORD HEREUNDER, IT SHALL GIVE LANDLORD AND ALL MORTGAGEES WHOM TENANT HAS BEEN NOTIFIED HOLD MORTGAGES OR DEED OF TRUST LIENS ON THE PROPERTY, BUILDING OR PREMISES NOTICE AND REASONABLE TIME TO CURE SUCH ALLEGED DEFAULT BY LANDLORD. XXIII. NO WAIVER. Failure of Landlord to declare any default immediately upon its occurrence, or delay in taking any action in connection with an event of default shall not constitute a waiver of such default, nor shall it constitute an estoppel against Landlord. Failure by Landlord to enforce its rights with respect to any one default shall not constitute a waiver of its rights with respect to any subsequent default. Receipt by Landlord of Tenant's keys to the Premises shall not constitute an acceptance or surrender of the Premises. XXIV. RELOCATION. (INTENTIONALLY OMITTED) XXV. HOLDING OVER. In the event of holding over by Tenant after expiration or other termination of this Lease or Tenant's right to possession, occupancy of the Premises subsequent to such termination or expiration shall be that of a tenancy at sufferance and in no event for month-to-month or year to-year, but Tenant shall, throughout the entire holdover period, be subject to all the terms and provisions of this Lease and shall pay for its use and occupancy an amount (on a per month basis without reduction for any partial months during any such holdover) equal to twice the sum of the Base Rental and Additional Base Rental due for the period immediately preceding such holding over. No holding over by Tenant or payments of money by Tenant to Landlord after the expiration of the term of this Lease shall be construed to extend the Lease Term or prevent Landlord from recovery of immediate possession of the Premises by summary proceedings or otherwise. In addition to the obligation to pay the amounts set forth above during any such holdover period, Tenant shall also be liable to Landlord for all damage, including any consequential damage, which Landlord may suffer by reason of any holding over by Tenant. XXVI. SUBORDINATION TO MORTGAGES; ESTOPPEL CERTIFICATE. Tenant accepts this Lease subject and subordinate to any mortgage, deed of trust, ground lease or other lien presently existing or hereafter arising upon the Premises, or upon the Building and/or the Property and to any renewals, modifications, refinancings and extensions 13 16 thereof (any such mortgage, deed of trust, lease or other lien being hereinafter referred to as a "Mortgage", and the person or entity having the benefit of same being referred to hereinafter as a "Mortgagee"), but Tenant agrees that any such Mortgagee shall have the right at any time to subordinate such Mortgage to this Lease on such terms and subject to such conditions as such Mortgagee may deem appropriate in its discretion. This clause shall be self-operative and no further instrument of subordination shall be required. If any person shall succeed to all or part of Landlord's interests in the Premises whether by purchase, foreclosure, deed in lieu of foreclosure, power of sale, termination of lease or otherwise, and if and as so requested or required by such successor-in-interest, Tenant shall, without charge, attorn to such successor- in-interest. Tenant agrees that it will from time to time upon request by Landlord and, within five (5) days of the date of such request, execute and deliver to such persons as Landlord shall request a subordination agreement or an estoppel certificate or other similar statement in recordable form certifying that this Lease is unmodified and in full force and effect, stating the dates to which Rent and other charges payable under this Lease have been paid, stating that Landlord is not in default hereunder and further stating such other matters as Landlord shall reasonably require. XXVII. NOTICE. Whenever any demand, request, approval, consent or notice ("Notice") shall or may be given to either of the parties by the other, each such Notice shall be in writing and shall be sent by registered or certified mail with return receipt requested, or sent by overnight courier service (such as Federal Express) provided that if Tenant has vacated the Premises or is in default of this Lease Landlord may serve notice by any manner permitted by Law. Any Notice under this Lease delivered by registered or certified mail shall be deemed to have been given and effective on the earlier of (a) the third day following the day on which the same shall have been mailed with sufficient postage prepaid or (b) the delivery date indicated on the return receipt. Notice sent by overnight courier service shall be deemed given and effective upon the day after such notice is delivered to or picked up by the overnight courier service. Either party may, at any time, change its Notice Address by giving the other party Notice stating the change and setting forth the new address. XXVIII. LANDLORD'S LIEN. INTENTIONALLY OMITTED, PROVIDED THAT THE DELETION OF THIS ARTICLE SHALL NOT BE CONSTRUED TO BE A WAIVER OF LANDLORD'S LIEN RIGHTS AS PROVIDED BY LAW. XXIX. EXCEPTED RIGHTS. This Lease does not grant any rights to light or air over or about the Building. Landlord specifically excepts and reserves to itself the use of such areas within the Premises as are required for installation of utility lines and other installations required to serve any occupants of the Building and the right to maintain and repair the same, and no rights with respect thereto are conferred upon Tenant unless otherwise specifically provided herein. Landlord further reserves to itself the right from time to time: (a) to change the Building's name or street address; (b) to install, fix and maintain signs on the exterior and interior of the Building; (c) to designate and approve window coverings; (d) to make any decorations, alterations, additions, improvements to the Building, or any part thereof (including the Premises) which Landlord shall desire, or deem necessary for the safety, protection, preservation or improvement of the Building, or as Landlord may be required to do by law; (e) to retain at all times and to use passkeys to all locks within and into the Premises (subject to Tenant's Security Rights as set forth below in this paragraph); (f) to approve the weight, size, or location of heavy equipment and articles in and about the Premises; (g) to close or restrict access to the Building at all times other than normal business hours subject to Tenant's right to admittance at all times under such regulations as Landlord may prescribe from time to time, or to close (temporarily or permanently) any of the entrances to the Building subject to Tenant's security rights as set forth in Exhibit B.5. of this Lease; (h) to change the arrangement and/or location of entrances of passageways, doors and doorways, and Common Areas of the Building; (i) if Tenant has vacated the Premises during the last six (6) months of the Lease Term, to perform additions, alterations and improvements to the Premises in connection with a reletting or anticipated reletting thereof without being responsible or liable for the value or preservation of any then existing improvements to the Premises; and (j) to grant to anyone the exclusive right to conduct any business or undertaking in the Building. Tenant shall have the right ("Tenant's Security Rights") to install such security systems in or about the Premises to control access to and from the Premises, including but not limited to camera surveillance systems, controlling and monitoring access to and from the Premises, all of 14 17 which may be independent of Landlord's access control system, and Tenant shall have the right to limit and restrict access thereto; provided that Landlord shall be provided a card or key(s) for access in emergencies or as otherwise permitted pursuant to this Lease; provided that any such other or additional security systems installed by Tenant shall not interfere with Landlord's security system with respect to other tenant's in the Building. The cost of Tenant's security system shall be at Tenant's sole cost. XXX. SURRENDER OF PREMISES. At the expiration or earlier termination of this Lease or Tenant's right of possession hereunder, Tenant shall remove all Tenant's Property from the Premises, remove all Required Removables designated by Landlord and quit and surrender the Premises to Landlord, broom clean, and in good order, condition and repair, ordinary wear and tear and damage by fire or casualty OR BY COMPUTER ASSOCIATES excepted. If Tenant fails to remove any of Tenant's Property within one (1) day after the termination of this Lease or Tenant's right to possession hereunder, Landlord, at Tenant's sole cost and expense, shall be entitled to remove and/or store such Tenant's Property and Landlord shall in no event be responsible for the value, preservation or safekeeping thereof. Tenant shall pay Landlord, upon demand, any and all expenses caused by such removal and all storage charges against such property so long as the same shall be in the possession of Landlord or under the control of Landlord. In addition, if Tenant fails to remove any Tenant's Property from the Premises or storage, as the case may be, within ten (10) days after written notice from Landlord, Landlord, at its option, may deem all or any part of such Tenant's Property to have been abandoned by Tenant and title thereof shall immediately pass to Landlord. XXXI. MISCELLANEOUS. Landlord and Tenant hereby agree that: (a) If any term or provision of this Lease shall, to any extent, be invalid or unenforceable, the remainder of this Lease shall not be affected thereby, and each term and provision of this Lease shall be valid and enforced to the fullest extent permitted by law; (b) Tenant shall not record this Lease or any memorandum hereof; (c) This Lease shall be interpreted, construed, and enforced in accordance with the laws of the state in which the Building is located; (d) Events of "Force Majeure" shall include strikes, riots, acts of God, shortages of labor or materials, war, governmental law, regulations or restrictions and any other cause whatsoever that is beyond the control of Landlord and whenever a period of time is herein prescribed for the taking of any action by Landlord, Landlord shall not be liable or responsible for, and there shall be excluded from the computation of such period of time, any delays due to events of Force Majeure; (e) Landlord shall have the right to transfer and assign, in whole or in part, all of its rights and obligations hereunder and in the Building and Property referred to herein, and in such event and upon such transfer Landlord shall be released from any further obligations hereunder, and Tenant agrees to look solely to such successor in interest of Landlord for the performance of such obligations; (f)(1) Tenant hereby represents to Landlord that it has dealt directly with and only with the Broker as a broker in connection with this Lease, Tenant agrees to indemnify and hold Landlord and the Landlord Related Parties harmless from all claims of any brokers claiming to have represented Tenant in connection with this Lease. Landlord agrees to indemnify and hold Tenant and the Tenant Related Parties harmless from all claims of any brokers claiming to have represented Landlord in connection with this Lease. Landlord agrees to pay a brokerage commission to Broker in accordance with the terms of a written commission agreement between Landlord and Broker. (2) Agency Disclosure. At the signing of this Lease, Landlord's leasing agent, Donald Matt, of Wright Runstad & Company, represented (X) Landlord. At the signing of this Lease, Tenant's agent, Ron Leibsohn, of Leibsohn & Company, represented (X) Tenant. Each party signing this document confirms that the prior oral and/or written disclosure of agency was provided to such party in this transaction, as required by RCW 18.86.030(l)(g). (3) Landlord and Tenant, by their execution of this Lease, each acknowledge and agree that they have timely received a pamphlet on the law of real estate agency as required under RCW 18.86.030(1)(f); (g) If there is more than one Tenant, or if the Tenant is comprised of more than one person or entity, the obligations hereunder imposed upon Tenant shall be joint and several obligations of all such parties and all notices, payments, and agreements given or made by, with or to any one of such persons or entities shall be deemed to have been given or made by, with or to all of them; (h) In the event Tenant is a corporation (including any form of professional association), partnership (general or limited), or other form of organization other than an individual (each such entity is individually referred to herein as an "Organizational Entity"), then each individual executing or attesting this Lease on behalf of Tenant hereby covenants, warrants and represents: (1) that 15 18 such individual is duly authorized to execute or attest and deliver this Lease on behalf of Tenant in accordance with the organizational documents of Tenant; (2) that this Lease is binding upon Tenant; (3) that Tenant is duly organized and legally existing in the state of its organization, and is qualified to do business in the state in which the Premises is located; (4) that the execution and delivery of this Lease by Tenant will not result in any breach of, or constitute a default under, any mortgage, deed of trust, lease, loan, credit agreement, partnership agreement or other contract or instrument to which Tenant is a party or by which Tenant may be bound; (j) With respect to all required acts of Tenant, time is of the essence of this Lease; (k) This Lease and the covenants and conditions herein contained shall inure to the benefit of and be binding upon Landlord and Tenant and their respective permitted successors and assigns; (l) Notwithstanding anything to the contrary contained in this Lease, the expiration of the Lease Term, whether by lapse of time or otherwise, shall not relieve Tenant from Tenant's obligations accruing prior to the expiration of the Lease Term and such obligations shall survive any such expiration or other termination of the Lease Term; (m) The headings and titles to the paragraphs of this Lease are for convenience only and shall have no effect upon the construction or interpretation of any part hereof; (n) This Lease may be modified only by a written agreement signed by Landlord and Tenant; (o) Landlord has delivered a copy of this Lease to Tenant for Tenant's review only, and the delivery hereof does not constitute an offer to Tenant or option. This Lease shall not be effective until an original of this Lease executed by both Landlord and Tenant and an original Guaranty, if any, executed by each Guarantor is delivered to and accepted by Landlord, and this Lease has been approved by Landlord's Mortgagees, if required. XXXII. ENTIRE AGREEMENT. This Lease Agreement, including the following Exhibits, constitutes the entire agreement between the parties hereto with respect to the subject matter of this Lease: (a) Exhibit A-Outline and Location of Premises; (a-2) Exhibit A-2-Legal Description of Property; (b) Exhibit B-Rules and Regulations; (c) Exhibit C-Commencement Letter (Intentionally Omitted); (d) Exhibit D-Work Letter Agreement (Intentionally Omitted); and (e) Exhibit E-Additional Provisions. 16 19 LANDLORD: EOP NORTHWEST PROPERTIES, L.L.C. a Delaware limited liability company By: EOP Northwest Properties, Inc., a Delaware corporation, its manager By: /s/ KIM KOEHN -------------------------------------- Name: Kim Koehn Title: Regional Vice President TENANT: BSQUARE CORPORATION, a Washington corporation By: /s/ ALBERT T. DOSSER ------------------------------------------- Name: Albert T. Dosser ------------------------------------------- Title: Senior Vice President Operations ------------------------------------------- LANDLORD ACKNOWLEDGMENTS STATE OF COLORADO ) ) ss. COUNTY OF ARAPAHOE ) I, the undersigned, a Notary Public, in and for the County and State aforesaid, do hereby certify that Kim Koehn, personally known to me to be the Vice President of EOP Northwest Properties, Inc., a Delaware corporation, manager of EOP Northwest Properties, L.L.C. a Delaware limited liability company, and personally known to me to be the same person whose name is subscribed to the foregoing instrument, appeared before me this day in person and acknowledged that as such officer of said entities being authorized so to do, (s)he executed the foregoing instrument on behalf of said entities, by subscribing the name of such entities by (her)himself as such officer, as a free and voluntary act, and as the free and voluntary act and deed of said entities, for the uses and purposes therein set forth. GIVEN under my hand and official seal this 14th day of December, 1998. Notary Public /s/ SHAWNDEL SPONABLE Printed Name Shawndel Sponable Residing at 10001 E. Evans In the state of Colorado [SEAL] My Commission Expires: 2/18/02 TENANT ACKNOWLEDGMENTS STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) On this the 11th day of December, 1998, before me a Notary Public duly authorized in and for the said County in the State aforesaid to take acknowledgments personally appeared Albert T. Dosser known to me to be Senior Vice President of Operations, BSQUARE Corporation, one of the parties described in the foregoing instrument, and acknowledged that as such officer, being authorized so to do, (s)he executed the foregoing instrument on behalf of said corporation by subscribing the name of such corporation by himself/herself as such officer and caused the corporate seal of said corporation to be affixed thereto, as a free and voluntary act, and as the free and voluntary act of said corporation, for the uses and purposes therein set forth. IN WITNESS WHEREOF, I hereunto set my hand and official seal as of the date set forth above. /s/ CAMILLA J. ALSON -------------------------------------- Notary Public My Commission Expires: June 6, 2002 17 20 EXHIBIT A OUTLINE AND LOCATION OF PREMISES This exhibit is attached to and made a part of the Lease dated December 14, 1998, by and between EOP NORTHWEST PROPERTIES, L.L.C., A DELAWARE LIMITED LIABILITY COMPANY ("Landlord") and BSQUARE CORPORATION, A WASHINGTON CORPORATION ("Tenant") for space in the building located at 411 108th Avenue SE, Bellevue, WA 98004. [FLOORPLAN] ONE BELLEVUE CENTER FLOOR 6 11/21/98 18 21 EXHIBIT A-2 LEGAL DESCRIPTION OF PROPERTY This Exhibit is attached to and made a part of the Lease dated ________________, 1998, EOP Northwest Properties, L.L.C., a Delaware limited liability company ("Landlord") and BSQUARE Corporation, a Washington corporation ("Tenant") for space in the Building located at 411 108th Avenue SE, Bellevue, WA 98004. Lot 1, as delineated on City of Bellevue Short Plat No. 81-08 R, recorded under King County Recording No. 8201069002 (as amended by instrument recorded under King County Recording No. 8202040368), being more particularly described as follows: That portion of the South one-half of Lot 3 in Block 2 of Cheriton Fruit Gardens, Plat No. 1 as per plat recorded in Volume 7 of plats, page 47, records of King County, EXCEPT the East 230 feet of the North 100 feet, and EXCEPT the East 30 feet thereof deeded to King County for road by deeds recorded under Auditor's File Nos. 913743 and 913775 records of King County, Washington, and less the South 13.5 feet thereof, more particularly described as follows: Beginning at the most southeasterly corner of the above described parcel of land; thence North 88 degrees 51'21" West along the South line of the above described parcel of land, 231.75 feet; thence North 01 degrees 11'05" East, 285.52 feet; thence South 88 degrees 46'31" East, 26.31 feet; thence South 00 degrees 06'00" West, 84.00 feet; thence South 88 degrees 48'55" East, 200.04 feet to the East line of the above described parcel of land; thence South 00 degrees 06'00" West along said East line, 201.39 feet to the Point of Beginning. The above property being situated in the Northeast quarter of the Northwest quarter of Section 32, Township 25 North, Range 5 East, W.M., City of Bellevue, King County, Washington. 19 22 EXHIBIT B BUILDING RULES AND REGULATIONS The following rules and regulations shall apply, where applicable, to the Premises, the Building, the parking garage associated therewith (if any), the Property and the appurtenances thereto: 1. Sidewalks, doorways, vestibules, halls, stairways and other similar areas shall not be obstructed by Tenant or used by Tenant for any purpose other than ingress and egress to and from the Premises. No rubbish, litter, trash, or material of any nature shall be placed, emptied, or thrown in those areas. At no time shall Tenant permit Tenant's employees to loiter in common areas or elsewhere in or about the Building or Property. 2. Plumbing fixtures and appliances shall be used only for the purposes for which designed, and no sweepings, rubbish, rags or other unsuitable material shall be thrown or placed therein. Damage resulting to any such fixtures or appliances from misuse by Tenant or its agents, employees or invitees, shall be paid for by Tenant, and Landlord shall not in any case be responsible therefor. 3. No signs, advertisements or notices shall be painted or affixed on or to any windows, doors or other parts of the Building, except those of such color, size, style and in such places as shall be first approved in writing by Landlord. No nails, hooks or screws shall be driven or inserted into any part of the Premises or Building except by the Building maintenance personnel except for the purpose of hanging pictures and normal office decorations, nor shall any part of the Building be defaced by Tenant. 4. Landlord may provide and maintain in the first floor (main lobby) of the Building an alphabetical directory board listing all Tenants, and no other directory shall be permitted unless previously consented to by Landlord in writing. 5. Intentionally Omitted 6. All contractors, contractor's representatives, and installation technicians performing work in the Building shall be subject to Landlord's prior approval and shall be required to comply with Landlord's standard rules, regulations, policies and procedures, as the same may be revised from time to time. Tenant shall be solely responsible for complying with all applicable laws, codes and ordinances pursuant to which said work shall be performed. 7. Movement in or out of the Building of furniture or office equipment, or dispatch or receipt by Tenant of any merchandise or materials which require the use of elevators, stairways, lobby areas, or loading dock areas, shall be restricted to hours designated by Landlord. Tenant must seek Landlord's prior approval by providing in writing a detailed listing of any such activity. If approved by Landlord, such activity shall be under the supervision of Landlord and performed in the manner stated by Landlord. Landlord may prohibit any article, equipment or any other item from being brought into the Building. Tenant is to assume all risk for damage to articles moved and injury to any persons resulting from such activity. If any equipment, property, and/or personnel of Landlord or of any other tenant is damaged or injured as a result of or in connection with such activity, Tenant shall be solely liable for any and all damage or loss resulting therefrom. 8. Landlord shall have the power to prescribe the weight and position of safes and other heavy equipment or items, which in all cases shall not in the opinion of Landlord exceed acceptable floor loading and weight distribution requirements. All damage done to the Building by the installation, maintenance, operation, existence or removal of any property of Tenant shall be repaired at the expense of Tenant. 9. Corridor doors, when not in use, shall be kept closed. 10. Tenant shall not: (1) make or permit any improper, objectionable or unpleasant noises or odors in the Building, or otherwise interfere in any way with other tenants or persons having business with them; (2) solicit business or distribute, or cause to be distributed, 20 23 in any portion of the Building any handbills, promotional materials or other advertising; or (3) conduct or permit any other activities in the Building that might constitute a nuisance. 11. No animals, except seeing eye dogs, shall be brought into or kept in, on or about the Premises. 12. No inflammable, explosive or dangerous fluid or substance shall be used or kept by Tenant in the Premises or Building. Tenant shall not, without Landlord's prior written consent, use, store, install, spill, remove, release or dispose of within or about the Premises or any other portion of the Property, any asbestos-containing materials or any solid, liquid or gaseous material now or hereafter considered toxic or hazardous under the provisions of 42 U.S.C. Section 9601 et seq. or any other applicable environmental law which may now or hereafter be in effect except for normal office and cleaning supplies used under all applicable laws. If Landlord does give written consent to Tenant pursuant to the foregoing sentence, Tenant shall comply with all applicable laws, rules and regulations pertaining to and governing such use by Tenant, and shall remain liable for all costs of cleanup or removal in connection therewith. 13. Tenant shall not use or occupy the Premises in any manner or for any purpose which would injure the reputation or impair the present or future value of the Premises or the Building; without limiting the foregoing, Tenant shall not use or permit the Premises or any portion thereof to be used for lodging, sleeping or for any illegal purpose. 14. Tenant shall not take any action which would violate Landlord's labor contracts affecting the Building or which would cause any work stoppage, picketing, labor disruption or dispute, or any interference with the business of Landlord or any other tenant or occupant of the Building or with the rights and privileges of any person lawfully in the Building. Tenant shall take any actions necessary to resolve any such work stoppage, picketing, labor disruption, dispute or interference and shall have pickets removed and, at the request of Landlord, immediately terminate at any time any construction work being performed in the Premises giving rise to such labor problems, until such time as Landlord shall have given its written consent for such work to resume. Tenant shall have no claim for damages of any nature against Landlord or any of the Landlord Related Parties in connection therewith, nor shall the date of the commencement of the Term be extended as a result thereof. 15. Tenant shall utilize the termite and pest extermination service designated by Landlord to control termites and pests in the Premises except as included in Basic Costs. Tenant shall bear the cost and expense of such extermination services. 16. Tenant shall not install, operate or maintain in the Premises or in any other area of the Building, any electrical equipment which does not bear the U/L (Underwriters Laboratories) seal of approval, or which would overload the electrical system or any part thereof beyond its capacity for proper, efficient and safe operation as determined by Landlord, taking into consideration the overall electrical system and the present and future requirements therefor in the Building. Tenant shall not furnish any cooling or heating to the Premises, including, without limitation, the use of any electronic or gas heating devices, without Landlord's prior written consent. Tenant shall not use more than its proportionate share of telephone lines available to service the Building. 17. Tenant shall not operate or permit to be operated on the Premises any coin or token operated vending machine or similar device (including, without limitation, telephones, lockers, toilets, scales, amusement devices and machines for sale of beverages, foods, candy, cigarettes or other goods), except for those vending machines or similar devices which are for the sole and exclusive use of Tenant's employees, and then only if such operation does not violate the lease of any other tenant of the Building. 18. Bicycles and other vehicles are not permitted inside or on the walkways outside the Building, except in those areas specifically designated by Landlord for such purposes. 19. Landlord may from time to time adopt appropriate systems and procedures for the security or safety of the Building, its occupants, entry and use, or its contents. Tenant, Tenant's agents, employees, contractors, guests and invitees shall comply with Landlord's reasonable requirements relative thereto subject to Tenant's Security Rights as set forth above. 21 24 20. Landlord shall have the right to prohibit the use of the name of the Building or any other publicity by Tenant that in Landlord's opinion may tend to impair the reputation of the Building or its desirability for Landlord or other tenants. Upon written notice from Landlord, Tenant will refrain from and/or discontinue such publicity immediately. 21. Tenant shall carry out Tenant's permitted repair, maintenance, alterations, and improvements in the Premises only during times agreed to in advance by Landlord and in a manner which will not interfere with the rights of other tenants in the Building. 22. Canvassing, soliciting, and peddling in or about the Building is prohibited. Tenant shall cooperate and use its best efforts to prevent the same. 23. At no time shall Tenant permit or shall Tenant's agents, employees, contractors, guests, or invitees smoke in any common area of the Building, unless such common area has been declared a designated smoking area by Landlord. 24. Tenant shall observe Landlord's rules with respect to maintaining standard window coverings at all windows in the Premises so that the Building presents a uniform exterior appearance. Tenant shall ensure that to the extent reasonably practicable, window coverings are closed on all windows in the Premises while they are exposed to the direct rays of the sun. 25. All deliveries to or from the Premises shall be made only at such times, in the areas and through the entrances and exits designated for such purposes by Landlord. Tenant shall not permit the process of receiving deliveries to or from the Premises outside of said areas or in a manner which may interfere with the use by any other tenant of its premises or of any common areas, any pedestrian use of such area, or any use which is inconsistent with good business practice. 26. The work of cleaning personnel shall not be hindered by Tenant after 5:30 P.M., and such cleaning work may be done at any time when the offices are vacant. Windows, doors and fixtures may be cleaned at any time. Tenant shall provide adequate waste and rubbish receptacles necessary to prevent unreasonable hardship to Landlord regarding cleaning service. 22 25 EXHIBIT C (Intentionally Omitted) 23 26 EXHIBIT D WORK LETTER (Intentionally Omitted) 24 27 EXHIBIT E ADDITIONAL PROVISIONS This Exhibit is attached to and made a part of the Lease dated December 14, 1998, by and between EOP Northwest Properties, L.L.C., a Delaware limited liability company ("Landlord") and BSQUARE Corporation, a Washington corporation ("Tenant"), for space in the Building located at 411 108th Avenue NE, Bellevue, Washington 98004. I. PARKING. A. During the initial Lease Term, Landlord shall lease to Tenant, or cause the operator (the "Operator") of the garage servicing the Building (the "Garage") to lease to Tenant, and Tenant shall lease from Landlord or such Operator, up to twenty five (25) unreserved parking spaces in the Garage (the "Spaces") for the use of Tenant and its employees. The Spaces shall be leased at the rate of $105.00 per Space, per month, plus applicable tax thereon. Should Tenant's occupancy at One Bellevue Center be extended past November 30, 1999, the parking rate, effective December 1, 1999, shall be the then current market rate, which rate may be adjusted from time to time to reflect the then current rate for parking in the Garage. If requested by Landlord, Tenant shall execute and deliver to Landlord the standard parking agreement used by Landlord or the Operator (the "Parking Agreement") in the Garage for such Spaces. B. No deductions or allowances shall be made for days when Tenant or any of its employees does not utilize the parking facilities or for Tenant utilizing less than all of the Spaces. Tenant shall not have the right to lease or otherwise use more than the number of reserved and unreserved Spaces set forth above. C. Except for particular spaces and areas designated by Landlord or the Operator for reserved parking, all parking in the Garage shall be on an unreserved, first-come, first-served basis. D. Neither Landlord nor the Operator shall be responsible for money, jewelry, automobiles or other personal property lost in or stolen from the Garage or the surface parking areas regardless of whether such loss or theft occurs when the Garage or other areas therein are locked or otherwise secured. Except as caused by the negligence or willful misconduct of Landlord and without limiting the terms of the preceding sentence, Landlord shall not be liable for any loss, injury or damage to persons using the Garage or the surface parking areas or automobiles or other property therein, it being agreed that, to the fullest extent permitted by law, the use of the Spaces shall be at the sole risk of Tenant and its employees. E. Landlord or its Operator shall have the right from time to time to designate the location of the Spaces and to promulgate reasonable rules and regulations regarding the Garage, the surface parking areas, if any, the Spaces and the use thereof, including, but not limited to, rules and regulations controlling the flow of traffic to and from various parking areas, the angle and direction of parking and the like. Tenant shall comply with and cause its employees to comply with all such rules and regulations, all reasonable additions and amendments thereto, and the terms and provisions of the Parking Agreement. F. Tenant shall not store or permit its employees to store any automobiles in the Garage or on the surface parking areas without the prior written consent of Landlord. Except for emergency repairs, Tenant and its employees shall not perform any work on any automobiles while located in the Garage or on the Property. If it is necessary for Tenant or its employees to leave an automobile in the Garage or on the surface parking areas overnight, Tenant shall provide Landlord with prior notice thereof designating the license plate number and model of such automobile. G. Landlord or the Operator shall have the right to temporarily close the Garage or certain areas therein in order to perform necessary repairs, maintenance and improvements to the Garage or the surface parking areas, if any. H. Tenant shall not assign or sublease any of the Spaces without the consent of Landlord. Landlord shall have the right to terminate the agreement contained in this Section I or in the Parking Agreement with respect to any Spaces that Tenant desires to sublet or assign. 25 28 I. Landlord may elect to provide parking cards or keys to control access to the Garage or surface parking areas, if any. In such event, Landlord shall provide Tenant with one card or key for each Space that Tenant is leasing hereunder, provided that Landlord shall have the right to require Tenant or its employees to place a deposit on such access cards or keys and to pay a fee for any lost or damaged cards or keys. II. RENEWAL OPTION A. The Lease Term shall be automatically extended for six (6) consecutive periods of one (1) month each commencing on the day following the Termination Date of the initial Lease Term (each such month being a "Renewal Term") unless sooner terminated by Tenant by written notice of termination delivered to Landlord, provided that: 1. Landlord must receive written notice from Tenant of Tenant's intent to vacate the Premises not less than one (1) full calendar month prior to the expiration of the initial Lease Term or any Renewal Term; and 2. If Tenant is in default under the Lease beyond any applicable cure periods Landlord shall have all rights set forth in Article XXI; and 3. No part of the Premises may be sublet by Tenant during any Renewal Term; and 4. The Lease may not be assigned during any Renewal Term. B. The terms of the Lease for the Premises during the Renewal Term shall be the same terms and conditions described in the Lease, except as stated in Section III.B hereunder, and the Base Rental for each Renewal Term shall be the same Base Rent payable in the last month of the Initial Term. III. CONTINGENCIES A. This Lease is contingent upon the termination of that certain lease dated January 24, 1994 (the "Prior Tenant Lease"), by and between Landlord (as successor in interest to One Bellevue Center Joint Venture, a Washington general partnership), and Computer Associates International, Inc. a Delaware corporation (as successor in interest to Legent Corporation, a Delaware corporation) ("Prior Tenant") relating to approximately 21,106 rentable square feet (the "Prior Tenant Space") on the 5th and 6th floors of the Building, which Prior Tenant Space includes all or a portion of the Premises to be leased to Tenant pursuant to the terms of this Lease. Landlord currently is negotiating the terms of an agreement with Prior Tenant to terminate the Prior Tenant Lease (the "Prior Tenant Termination Agreement"). If Landlord fails to enter into, and notify Tenant thereof, the Prior Tenant Termination Agreement with Prior Tenant on or before the December 13, 1998, then Landlord or Tenant may terminate this Lease by providing written notice thereof to the other party on or before December 14, 1998. B. Provided that this Section III.B. does not apply if Landlord acts in bad faith and Landlord withdraws from negotiations, Section II.B. above and Section I.A.2. of this Lease are strictly contingent upon Landlord's receipt on or before June 1, 1999, of a copy of a fully executed lease agreement for approximately 94,000 (or more) square feet of office space between Tenant and the landlord for the property known as Sunset North, located at the NE corner of the intersection of 139th Avenue SE and SE 32nd St. in Bellevue, King County, Washington. In the event, Tenant is unable to enter into said lease agreement, or deliver a copy thereof to Landlord as described above in this Section III.B, then Section I.A.2. of this Lease shall be automatically deleted and the following substituted therefor: "Base Rental" shall mean the sum of THREE HUNDRED TWENTY-NINE THOUSAND THREE HUNDRED NINETY-TWO and 53/100 Dollars ($329,392.53), payable by Tenant to Landlord in NINE (9) monthly installments as follows: 26 29 a. ONE (1) installment of TWENTY THOUSAND THIRTY AND 63/100 DOLLARS ($20,030.63, I.E. $1,112.81 PER DIEM X 18 DAYS) payable upon the execution of this Lease by Tenant for the period beginning DECEMBER 14, 1998 and ending DECEMBER 31, 1998. b. FIVE (5) equal installments of THIRTY THREE THOUSAND THREE HUNDRED EIGHTY FOUR and 38/100 Dollars ($33,384.38), each payable on or before the first day of each month during the period beginning JANUARY 1, 1999, and ending MAY 31, 1999, provided that the Base Rental for the first full calendar month of the Lease Term shall be payable upon the execution of this Lease by Tenant. c. THREE (3) equal installments of FORTY SEVEN THOUSAND FOUR HUNDRED EIGHTY and NO/100 Dollars ($47,480.00), each payable on or before the first day of each month during the period beginning JUNE 1, 1999 and ending AUGUST 31, 1999. IN WITNESS WHEREOF, Landlord and Tenant have executed this exhibit as of the day and year first above written. LANDLORD: EOP NORTHWEST PROPERTIES, L.L.C. a Delaware limited liability company By: EOP Northwest Properties, Inc., a Delaware corporation, its manager By: /s/ KIM KOEHN ----------------------------------- Name: Kim Koehn Title: Regional Vice President TENANT: BSQUARE Corporation, a Washington corporation By: /s/ ALBERT T. DOSSER ----------------------------------------- Name: Albert T. Dosser ----------------------------------------- Title: S.VP Operations ----------------------------------------- 27 EX-10.7 11 MERCER ISLAND PARTNERS ASSOCIATES BUILDING LEASE 1 EXHIBIT 10.7 MERCER ISLAND PARTNERS ASSOCIATES BUILDING LEASE AGREEMENT BETWEEN MERCER ISLAND PARTNERS ASSOCIATES, LLC LANDLORD AND BSQUARE CORPORATION, INC. TENANT 2 TABLE OF CONTENTS 1. LEASE DATA AND EXHIBITS ............................................................... 1 (a) Building ......................................................................... 1 (b) Premises ......................................................................... 1 (c) Tenant's Pro Rata Share .......................................................... 1 (d) Basic Plans Delivery Date ........................................................ 1 (e) Final Plans Delivery Date ........................................................ 1 (f) Commencement Date ................................................................ 1 (g) Expiration Date .................................................................. 1 (h) Rent ............................................................................. 1 (i) Security Deposit ................................................................. 1 (j) Damage Deposit ................................................................... 1 (k) Base Year ........................................................................ 1 (l) Landlord's/Tenant's Leasing Broker/Agent........................................ 2 (m) Parking .......................................................................... 2 (n) Notice Address ................................................................... 2 (o) Payment Address .................................................................. 2 (p) Exhibits ......................................................................... 2 2. PREMISES ............................................................................. 2 3. COMMENCEMENT AND EXPIRATION DATES .................................................... 2 (a) Commencement Dates ............................................................... 2 (b) Delays ........................................................................... 3 (c) Confirmation of Commencement Date ................................................ 3 (d) Expiration Date .................................................................. 3 4. ACCEPTANCE OF PREMISES ............................................................... 3 5. RENT AND ADDITIONAL RENT ............................................................. 3 6. SECURITY DEPOSIT ..................................................................... 3 7. PARKING .............................................................................. 4 8. USES ................................................................................. 4 9. SERVICES AND UTILITIES ............................................................... 4 (a) Standard Services ................................................................ 4 (b) Normal Business Hours ............................................................ 5 (c) Interruption of Services ......................................................... 5 (d) Additional Services .............................................................. 5 (e) Costs of Additional Services ..................................................... 5 10. COSTS OF OPERATIONS AND REAL ESTATE TAXES ............................................ 5 (a) Additional Rent .................................................................. 5 (b) Definitions ...................................................................... 5 (c) Estimated Costs .................................................................. 6 (d) Actual Costs ..................................................................... 6 (e) Records and Adjustments .......................................................... 7 (f) Personal Property Taxes .......................................................... 7 11. CARE OF PREMISES ..................................................................... 7 12. ACCESS ............................................................................... 7 13. DAMAGE OR DESTRUCTION ................................................................ 8 (a) Damage and Repair ................................................................ 8 (b) Destruction During Last Year of Term ............................................. 8 (c) Tenant Improvements .............................................................. 8 14. WAIVER OF SUBROGATION ................................................................ 8 15. INDEMNIFICATION ...................................................................... 8 16. INSURANCE ............................................................................ 9 (a) Liability Insurance .............................................................. 9 (b) Property Insurance ............................................................... 9 (c) Insurance Policy Requirements .................................................... 9 (d) Certificate of Insurance ......................................................... 9 (e) Primary Policies ................................................................. 9 17. ASSIGNMENT AND SUBLETTING ............................................................ 9 (a) Assignment of Sublease ........................................................... 9 (b) Landlord Right to Terminate Portion of Lease ..................................... 10 (c) Tenant Transfer of Lease ......................................................... 10 (d) Assignee Obligations ............................................................. 10
i 3 (e) Subleasee Obligations ............................................................ 10 18. SIGNS ................................................................................ 11 19. LIENS AND INSOLVENCY ................................................................. 11 (a) Liens ............................................................................ 11 (b) Insolvency ....................................................................... 11 20. DEFAULT .............................................................................. 11 (a) Cummulative Remedies ............................................................. 11 (b) Tenant's Right to Cure ........................................................... 11 (c) Landlord's Reentry ............................................................... 12 (d) Reletting the Premises ........................................................... 12 (e) Trade Fixtures ................................................................... 12 21. PRIORITY ............................................................................. 12 22. SURRENDER OF POSSESSION .............................................................. 13 23. REMOVAL OF PROPERTY .................................................................. 13 24. NON-WAIVER ........................................................................... 13 25. HOLDOVER ............................................................................. 13 26. CONDEMNATION ......................................................................... 14 (a) Entire Taking .................................................................... 14 (b) Constructive Taking of Entire Premises ........................................... 14 (c) Awards and Damages ............................................................... 14 27. NOTICES .............................................................................. 14 28. COSTS AND ATTORNEY'S FEES ............................................................ 14 29. ESTOPPEL AND CERTIFICATES ............................................................ 15 30. TRANSFER OF LANDLORD'S INTEREST ...................................................... 15 31 RIGHT TO PERFORM ...................................................................... 15 32. QUIET ENJOYMENT ...................................................................... 15 33. CORPORATE AUTHORITY .................................................................. 16 34. HAZARDOUS MATERIALS .................................................................. 16 (a) Tenant Obligations ............................................................... 16 (b) Landlord Representations ......................................................... 16 35. TELECOMMUNICATIONS LINES AND EQUIPMENT ............................................... 16 (a) Location of Tenant's Equipment and Landlord Consent .............................. 16 (b) Limitation of Liability .......................................................... 17 (c) Electromagnetic Fields ........................................................... 17 36. GENERAL .............................................................................. 17 (a) Headings ......................................................................... 17 (b) Successors and Assigns ........................................................... 17 (c) Payment of Brokers ............................................................... 17 (d) Entire Agreement ................................................................. 18 (e) Severability ..................................................................... 18 (f) Overdue Payments ................................................................. 18 (g) Force Majeure .................................................................... 18 (h) Right to Change Public Spaces .................................................... 18 (i) Governing Law .................................................................... 18 (j) Building Name .................................................................... 18
ii 4 LEASE AGREEMENT MERCER ISLAND PARTNERS ASSOCIATES BUILDING THIS LEASE made this 30 day of, January 1998, between MERCER ISLAND PARTNERS ASSOCIATES, LLC, a Washington limited liability company ("Landlord"), and BSQUARE CORPORATION, INC., 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 Mercer Island Partners Associates Building, or such other name as the Landlord may designate from time to time, situated on a portion of the real property more particularly described in Section 2 hereof, with an address of 12822 SE 32nd Street, Bellevue, Washington 98005. (b) PREMISES: Consisting of all of the second (2nd) floor of the Building, as outlined on the floor plan attached hereto as Exhibit A, including tenant improvements to be constructed as described in Exhibit B. (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 15,105 square feet, including a load factor of 9.88%, and Tenant's Pro Rata Share of the finished area of the Building is deemed to be 50.49%. (d) BASIC PLANS DELIVERY DATE: February 16, 1998 ------------------------------- (e) FINAL PLANS DELIVERY DATE: February 25, 1998 ------------------------------- (f) COMMENCEMENT DATE: The date as provided in Section 3 hereof. The Target Commencement Date is April 1, 1998. (g) EXPIRATION DATE: Five (5) years following the Commencement Date subject to the terms of Exhibit C hereto. (h) RENT: $24.00 per net rentable square foot per year, for a payment of $30,210.00, payable monthly in advance on the first day of the month. The base rent shall be fixed at $24.00 for years 1, 2 and 3. The base rent shall be increased to $25.50 per net rentable square foot for years 4 and 5 for a payment of $32,098.00 per month. Rent-related expenses shall be adjusted from time to time pursuant to Sections 9 and 10 of the Lease. Tenant has deposited with Landlord on the date hereof $60,420.00 to be applied to the first two Rent payments due hereunder. (i) SECURITY DEPOSIT: $64,196.00 in the form of a letter of credit. (k) BASE YEAR: For purposes of this Lease, the Base Year shall be the 12-month period beginning date of Certificate of Occupancy, 1998. -1- 5 (L) LANDLORD'S/TENANT'S LEASING BROKER/AGENT: Ron Leibsohn, Leibsohn & Company (Tenant's Leasing Agent). Bret Jordan, Colliers Macaulay Nicolls International (Landlord's Leasing Agent). (m) PARKING: Tenant shall have the right to occupy up to 65 exterior parking spaces to park automobiles without additional charge. Said spaces shall be unmarked and allocated to Tenant as an open, unreserved allotment. Overflow parking is available at an adjacent location. In the event up to 65 stalls are not available for Tenant's use, Tenant agrees to utilize the overflow parking on the lot across 128th Avenue NE to the west. (n) NOTICE ADDRESSES: Landlord: Mercer Island Partners Associates, LLC 12822 SE 32nd Street Bellevue, Washington 98005 Tenant: Bsquare Corporation, Inc. 3633 136th Place SE, Suite 100 Bellevue, Washington 98006 (o) PAYMENT ADDRESSES: Landlord: Mercer Island Partners Associates, LLC 12822 SE 32nd Street Bellevue, Washington 98005 Tenant: Bsquare Corporation, Inc. 3633 136th Place SE, Suite 100 Bellevue, Washington 98006 (p) EXHIBITS: The following exhibits or riders are made a part of this Lease: Exhibit A - Floor Plan of Premises Exhibit B - Tenant Improvements Exhibit C - Addendum to Lease
2. PREMISES: Landlord does hereby lease to Tenant, and Tenant does hereby lease from Landlord, upon the terms and conditions herein set forth, the Premises described in Section 1(b) hereof as shown on Exhibit A attached hereto and incorporated herein, together with rights of ingress and egress over common areas on the land and in the Building located on the land ("Land") more particularly described as: LOT 2, CITY OF BELLEVUE SHORT PLAT NUMBER 81-22, RECORDED UNDER KING COUNTY RECORDING NUMBER 8211179001, BEING A PORTION OF TRACT 25, MERCER SLOUGH GARDEN TRACTS, ACCORDING TO THE PLAT THEREOF RECORDED IN VOLUME 8 OF PLATS, PAGE 91, IN KING COUNTY, WASHINGTON. Tax Account No.: 545330-0230-07 3. COMMENCEMENT AND EXPIRATION DATES: (a) COMMENCEMENT DATE: Landlord and Tenant shall use their respective best efforts to complete Tenant improvements in the Premises in accordance with Exhibit B hereto on the date specified in Section 1(f) or as soon thereafter as practicable. The Commencement Date shall be the earlier of the date of acceptance of the Premises by Tenant pursuant to Section 4 hereof, or the date Tenant actually occupies the Premises, excluding Tenant's vendors and Tenant installing voice/data - 2 - 6 cabling and equipment prior to the Certificate of Occupancy being issued by the City of Bellevue or the date when the Premises would have been completed except for delays caused by the failure of Tenant to fulfill any obligation pursuant to the terms of this Lease or any exhibit hereto, including without limitation Tenant's failure to comply with the Plan Delivery Dates described in Section 1(d) and (c) and Exhibit B. (b) DELAYS: In the event, due to delays from any cause other than Tenant's failure to comply with the terms of this Lease, the Commencement Date has not occurred within three (3) months following the Target Commencement Date specified in Section 1(f), Tenant may terminate this Lease by written notice; provided, however, that such three (3) month period shall be extended for delays due to causes beyond the reasonable control of Landlord, excluding the payment of money owed by Landlord. Termination under this Section 3(b) shall be Tenant's sole remedy and Tenant shall have no other rights or claims hereunder at law or in equity. (c) CONFIRMATION OF COMMENCEMENT DATE: In the event the Commencement Date is established as provided for in Section 3 as a later or earlier date than the date provided in Section 1(f) hereof, Landlord shall confirm the same to Tenant in writing. (d) EXPIRATION DATE: This Lease shall expire on the date specified in Section 1(g), subject to Tenant's right to extend the Term as set forth on Exhibit C attached hereto. 4. ACCEPTANCE OF PREMISES: If this Lease shall be entered into prior to the completion of Tenant improvements in the Premises, the acceptance of the Premises by Tenant shall be deferred until the giving of written notice by Landlord to Tenant of the completion of such construction of the Tenant Improvements and the receipt by Tenant of a Certificate of Occupancy from the City of Bellevue. Within five (5) days ("Inspection Period") after Landlord gives such notice, Tenant shall make such inspection of the Premises as Tenant deems appropriate. Except as otherwise specified by Tenant in writing to Landlord within the Inspection Period and except for latent defects discovered within six (6) months of Commencement Date, which shall be promptly corrected after discovery by Tenant, Tenant shall be deemed to have accepted the Premises at the end of the Inspection Period. If, as a result of such inspection, Tenant discovers minor deviations or variations from the plans and specifications for Tenant's improvements which do not materially affect Tenant's use of the Premises and are of a nature commonly found on a "punchlist" (as that term is used in the construction industry), Tenant shall, during the Inspection Period, notify Landlord in writing of such deviations. Landlord shall promptly repair all punchlist items. The existence of such punch list items shall not postpone the Commencement Date of this Lease nor the obligation of Tenant to pay Rent. 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 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 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: As security for the performance of this Lease by Tenant, Tenant will provide to Landlord within five (5) business days following the date of execution of this Lease by all parties the - 3 - 7 Security Deposit as specified in Section 1(i) hereof. Landlord may apply all or any part of the Security Deposit to the payment of any sum in default or any other sum which Landlord may in its reasonable discretion deem necessary to spend or incur by reason of Tenant's default. In such event, Tenant shall, within five (5) days of written demand therefore by Landlord, deposit with Landlord the amount so applied. The letter of credit shall terminate thirty (30) days after the expiration or sooner termination of this Lease. Landlord shall not be required to keep any Security Deposit separate from its general funds and Tenant shall not be entitled to any interest thereon. 7. PARKING: Except as provided for in Section 1(m), use of parking in the Building by Tenant shall be subject to such reasonable rules and regulations as Landlord or the City of Bellevue may publish from time to time. Except as provided for in Section 1(m), all rules and regulations established by Landlord shall be equally applicable to all tenants of the Building and shall not provide for reserved parking stalls for any other tenants of the Building, except for Landlord's three (3) assigned stalls. 8. USES: The Premises are to be used only for general office purposes including computer and software programming and research and development ("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 sole 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. Tenant shall not commit any act that will increase the then existing cost of insurance on the Building without Landlord's prior written 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 disruptive noise, vibration or fumes. Tenant shall not permit smoking in the Premises; Landlord has designated all internal portions of the Building as a smoke-free zone. If any of Tenant's office machines or equipment should disturb the quiet enjoyment of any other tenant in the Building, then Tenant shall provide, at Tenant's sole expense, 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 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. Landlord shall use its best efforts to cause all other tenants and occupants of the Building to be bound by similar covenants and restrictions, and Landlord shall enforce the same all to the extent that Tenant shall not be disturbed in its quiet enjoyment of the Premises. 9. SERVICES AND UTILITIES: (a) STANDARD SERVICES: Landlord shall maintain the Building, the Land and the Premises and the public and common areas of the Building in good order and condition consistent with the operation and maintenance of a first-class office building in Bellevue, Washington. Landlord shall furnish the Premises with electricity for normal office use and the permitted uses, including lighting and operation of low power usage office machines, water and elevator service at all times during the term of the Lease. Landlord shall also provide lamp replacement service for building standard light fixtures, toilet room supplies, window washing at reasonable intervals, and customary building janitorial service. No janitorial service shall be provided for Saturdays, Sundays or legal holidays. The costs of any janitorial or other service provided by Landlord to Tenant which - 4 - 8 are in addition to the services ordinarily provided Building tenants or as required by this Section 9(a) shall be repaid by Tenant as Additional Rent upon receipt of billings therefor. (b) NORMAL BUSINESS HOURS: From 8:00 a.m. to 8:00 p.m. on weekdays, 9:00 a.m. to 3:00 p.m. on Saturdays, excluding legal holidays ("Normal Business Hours"), Landlord shall furnish to the Premises heat and air conditioning. If requested by Tenant, Landlord shall furnish heat and air conditioning at times other than Normal Business Hours and the cost of such services as incurred by Landlord 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 terms of this Lease (24 hours of all days) access to the Premises. (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 except for Landlord's intentional wrongful conduct or failure to pay the costs therefor. 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; or give rise to any liability of Landlord. Landlord shall use its best efforts in good faith 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 2.5 watts per square foot. 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. (e) COSTS OF ADDITIONAL SERVICES: In addition, Tenant shall in advance, on the first day of each month during the Lease term, pay Landlord as Additional Rent the reasonable amount estimated by Landlord as the cost of furnishing electricity for the operation of equipment or lights consuming in aggregate in excess of 2.5 watts per square foot of electricity and the reasonable amount estimated by Landlord as the costs of operation and maintenance of supplementary air conditioning units necessitated by Tenant's use of such equipment or lights. Landlord shall be entitled to install and operate at Tenant's cost a monitoring/metering system in the Premises to measure the added demand on electricity, heating, ventilation, and air conditioning systems resulting from such equipment or lights and from Tenant's after-hours heating, ventilation and air conditioning service requirements. Tenant shall comply with Landlord's reasonable instructions for the use of drapes, blinds and thermostats in the Building. 10. COSTS OF OPERATIONS AND REAL ESTATE TAXES: (a) ADDITIONAL RENT: Tenant shall pay as Additional Rent its pro rata share of increases in Taxes and Operating Costs in excess of Six and 25/100 Dollars ($6.25) per rentable square foot of the Premises, which shall be defined as the Base Amount ("Base Amounts"). Increases in Taxes and in Operating Costs over the applicable Base Amounts shall be determined and shall be payable separately under 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 or fiscal year, based on the actual assessment period, with respect to the Land, the Building and - 5 - 9 all property of landlord, real or personal, used directly in the operation of the Building and located in the Building or on the Land, 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, business and occupation or franchise tax) ("Taxes"). (ii) For purposes of this Section, "Operating Costs" or "Costs" shall mean all expenses of Landlord for maintaining, operating and repairing the Land and Building and the personal property used in connection therewith, including without limitation all insurance premiums, utilities, security costs, janitorial services, landscaping, refuse disposal, management fees and other expenses but all not to exceed in the aggregate the usual and customary charges for similar first class office buildings in tile City of Bellevue which in accordance with generally accepted accounting and management practices would be considered an expense of maintaining, replacing, 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; and (III) Costs of improvements required to be capitalized in accordance with generally accepted accounting improvement 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 but in no event shall such Operating Costs for such improvement exceed the amount of such savings, (IV) principal or interest on payments of loans; (V) costs associated with other tenants, including tenant improvement costs and legal and other fees associated with any default by such other tenants, and (VI) amortization and depreciation (except as set forth above); or, (B) which are 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 audited or arose after tile 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. (iii) "Year" shall mean the calendar year. (c) ESTIMATED COSTS: At the beginning of each year after the Base Year, Landlord shall furnish Tenant a written statement of estimated Operating Costs and Taxes for such year; a calculation of the amount, if any, by which such estimated Operating Costs and Taxes will exceed the relevant Base Amounts; and a calculation of Tenant's Pro Rata Share of any such amount. 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. (d) ACTUAL COSTS: Included in the Base Amount rent is a $6.25 per rentable square foot per year allowance for Operating Costs and Taxes. Charges to tenants for increased Operating Costs and Taxes will not be increased until actual costs, including the reasonable management fee as described above, exceed $6.25 per net rentable square foot per year. Within ninety (90) days after the end of each year after the Base Year or as soon thereafter as practicable, Landlord shall deliver to Tenant a written statement including a detailed breakdown setting forth Tenant's Pro Rata Share of the actual Operating Costs and Taxes in excess of the Base Amounts during the preceding year. If the actual Operating Costs and Taxes in excess of the Base Amount, exceed the estimates 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 and Taxes in excess of the Base Amount is less that the estimates paid by Tenant during the year, Landlord shall apply any excess to the next rental payment due by Tenant. -6- 10 (e) RECORDS AND ADJUSTMENTS: Landlord shall keep records showing all expenditures made in connection with Operating Costs and Taxes, and such records shall be available for inspection and audit once per calendar year at tile Landlord's office by Tenant, during normal business hours within six (6) months after receipt of the statement of actual costs; Landlord and Tenant agree the results of any such audit or review shall remain confidential; provided that Tenant may disclose such information to its attorneys or consultants in connection with any dispute between Landlord and Tenant and as may be otherwise required by any order of Court. Tenant hereby waives any right to any adjustment of sums paid under this Section 10 unless a claim in writing specifying the reasons therefor is delivered to Landlord no later than nine (9) months after receipt of statement of actual costs Operating Costs and Taxes shall be prorated for any portion of a year at the beginning or end of tile term of this Lease. Notwithstanding this Section 10, the Rent payable by Tenant shall in no event be less than the Rent specified in Section 1(h) hereof. (f) PERSONAL PROPERTY TAXES: Tenant shall pay all personal property taxes with respect to property of Tenant located on tile 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. 11. CARE OF PREMISES: Landlord shall perform all normal maintenance and repairs reasonably necessary to maintain the Premises and the Building as a first-class office building; provided that Landlord shall not be required to maintain or repair any property of Tenant or any appliances (such as refrigerators, water heaters, microwave ovens, and the like) which are part of the Premises. Tenant shall take good care of the Premises. Tenant shall not make any alterations, additions or improvements ("Alterations") in or to the Premises, or make changes to locks on doors, except for re-keying or altering security entrance provisions provided Tenant promptly provides Landlord copies of new entrance provisions and keys, or add, disturb or in any way change any plumbing or wiring, excluding data and low voltage wiring, ("Changes") without first obtaining the written consent of Landlord and, where appropriate, in accordance with plans and specifications reasonably approved by Landlord. As a condition to its approval, Landlord may require Tenant to remove such Alterations or Changes upon the expiration or earlier termination of tile Term and to restore the Premises or Land 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. Any Alterations or Changes required to be made to Tenant's Premises by any amendment to any applicable building, health, safety, fire, nondiscrimination, or similar law or regulation ("law"), or any new law shall be made at Tenant's sole expense and shall be subject to the prior written consent of Landlord, which consent cannot be unreasonably withheld or delayed. Tenant shall reimburse Landlord for any reasonable sums expended for examination and approval of the architectural and mechanical plans and specifications of the Alterations and Changes 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. 12. ACCESS: Tenant shall permit Landlord and its agents to enter into and upon tile Premises at all reasonable times with a Tenant escort, except in the event of an emergency for the purpose of inspecting the same or for the purpose of cleaning, repairing, altering or improving the Premises or tile Building. Upon reasonable notice, Landlord shall have tile right to enter the Premises for tile purpose of showing tile Premises to prospective tenants within the period of one hundred eighty (180) days prior to the expiration or sooner termination of the Lease term. - 7 - 11 13. DAMAGE OR DESTRUCTION: (a) DAMAGE AND REPAIR: If the Building is damaged by fire or any other cause to such extent that the cost of restoration, as reasonably estimated by Landlord, will equal or exceed thirty percent (30%) of tile replacement value of the Building (exclusive of foundations) just prior to tile occurrence of the damage, or if insurance proceeds plus deductibles sufficient for restoration are for any reason unavailable, then Landlord may no later than the sixtieth day following the damage, give Tenant a notice of election to terminate this Lease. In the event of such election, this Lease shall be deemed to terminate on the third day after the giving of said notice, and Tenant shall surrender possession of the Premises within a reasonable time thereafter, and the Rent and Additional Rent shall be apportioned as of the date of said damage and any Rent and Additional Rent paid for any period beyond such date shall be repaid to Tenant. If the cost of restoration as estimated by Landlord shall amount to less than thirty percent (30%) of said replacement value of the Building and insurance proceeds plus deductibles sufficient for restoration are available, or if Landlord does not elect to terminate this Lease, Landlord shall restore the Building and the Premises (to the extent of improvements to the Premises originally provided by Landlord hereunder) with reasonable promptness, subject to delays beyond Landlord's control and delays in the making of insurance adjustments by Landlord, and Tenant shall have no right to terminate this Lease except as herein provided. To the extent that the Premises are rendered untenantable, the Rent and Additional Rent shall proportionately abate. No damages, compensation or claim shall be payable by Landlord for inconvenience, loss of business or annoyance arising from any repair or restoration of any portion of the Premises or of the Building, unless caused by the intentional wrongful act of Landlord. (b) DESTRUCTION DURING LAST YEAR OF TERM: In case tile building shall be substantially destroyed by fire or other cause at any time during tile last twelve (12) months of the terms of this Lease, Landlord or Tenant may terminate this Lease (effective on the date of such substantial destruction) upon written notice to the other party hereto given within sixty (60) days of the date of such destruction. (c) TENANT IMPROVEMENTS: Landlord will not carry insurance of any kind on Tenant's furniture personal property, fixtures or equipment or furnishings or on any fixtures, equipment, or appurtenances of Tenant under this Lease, and Landlord shall not be obligated to repair any damage thereto or replace the same unless caused by Landlord's intentional wrongful act. 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 (i) 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 tile perils which are covered by their respective insurance policies, and (ii) any loss resulting from business interruption at the Premises or loss of rental income from the Building, arising out of or incident to tile 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 use its best efforts to cause its insurance carrier to consent to tile foregoing waiver of rights of subrogation against the other party. Not withstanding 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 tile carrier's right to be subrogated. 15. INDEMNIFICATION: (a) Landlord and Tenant shall indemnify and hold each other, their officers, members, managers, owners, employees and agents harmless from and against liabilities, actions, damages, losses, claims and expenses, including reasonable attorneys' fees, (collectively "Claims"), arising from (i) any breach of this Lease by the indemnitor or (ii) the negligent or wrongful acts or omissions of or attributable to the indemnitor, except to tile extent the Claim is caused by the - 8 - 12 negligent or wrongful acts or omissions of the indemnitee. Also, Tenant shall indemnify and hold Landlord, its officers, members, managers, owners, employees and agents harmless from and against any Claims arising from injury or damage to persons or property occurring in tile Premises during the term of the Lease, except to the extent the Claim is caused by the negligent or wrongful acts of the Landlord. The foregoing provisions shall not be construed to make either party responsible for losses, damage, liability or expense to the extent resulting from injuries to third parties caused by the sole or concurrent negligence of the other party, or its officers, owners, members, managers, licensees, agents and employees. 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, gas, steam and/or refrigerant lines), sprinklers, tanks, drains, drinking fountains or washstands or other similar cause in, above, upon or about tile Premises or tile Building unless caused by the intentional wrongful act of Landlord. This Paragraph 15 shall survive termination of the Lease. 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 One Million Dollars ($1,000,000) per Occurrence and Two Million Dollars ($2,000,000) in the aggregate. Landlord shall be named as additional insureds. (b) PROPERTY INSURANCE: Tenant shall, throughout the terms of this Lease and 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 Tenant's personal property, fixtures and equipment in an amount not less than one hundred percent (100%) of the replacement value thereof. (c) INSURANCE POLICY REQUIREMENTS: All insurance required under this Section 16 shall be with companies rated AX or better for 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 nonpayment of premium. All policies shall have deductible amounts no greater than Two Thousand, Five Hundred Dollars ($2,500). (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 as additional insured 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. 17. ASSIGNMENT AND SUBLETTING: (a) ASSIGNMENT OR SUBLEASE: 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. Any and all costs incurred with space reconfiguration or redistribution and or - 9 - 13 costs required to comply with any applicable building codes in connection with such assignment or subletting shall be the sole and complete responsibility of the Tenant. Subject to Section 17(b), below, such consent shall not be unreasonably withheld or delayed, except: (1) Landlord may withhold its consent if in Landlord's judgment occupancy by any proposed assignee, subtenant, or other transferee (i) 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 (ii) is likely to cause disturbance to the normal use and occupancy of the Building, (iii) the financial condition of the proposed Transferee is not at least as strong as Tenant in Landlord's reasonable judgment unless Tenant is not relieved of liability on this Lease as a result of such assignment or sublease and Rent and Additional Rent is paid by Tenant and not by proposed sublessee or assignee; (2) 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 tile Premises by Tenant or any subtenant; (3) Landlord may withhold its consent to the extent it deems necessary to comply with any restriction on use of the Premises, tile Building, or the Land contained in any applicable laws or in any lease, mortgage, or other agreement or instrument by which tile 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 not to exceed $1,000 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 and other information regarding the transfer agreement and the proposed Transferee as is requested by the Landlord acting reasonably. (b) LANDLORD RIGHT TO TERMINATE PORTION OF LEASE: If such consent is requested, Landlord reserves the right to terminate this Lease, or if consent is requested for subletting less than the entire Premises to terminate this Lease with respect to the Portion for which such consent is requested, at the proposed effective date of such Subletting, in which event Landlord may enter into the relationship of landlord and tenant with any such proposed subtenant or assignee, based on the rent (and/or other compensation) and the terms agreed to by such subtenant or assignee and otherwise upon the terms and conditions of this Lease. (c) TENANT TRANSFER OF LEASE: If a Tenant is a corporation, or any other entity, any transfer of this Lease by merger, consolidation or liquidation, (except for a merger, consolidation or liquidation resulting in a majority of the current shareholders [based upon ownership percentage interest] owning a majority interest, based upon percentage interest, in any successor entity, or owning a majority interest of all assets received in consolidation or liquidation) or power to vote a majority of its outstanding voting stock, partnership interests, or other ownership interests, shall constitute an assignment for the purpose of this Section. If Tenant is a partnership, conversion of Tenant to a limited liability company or partnership or to a corporation (or to another entity by which the parties in Tenant would be relieved of liability to any creditors of Tenant) shall constitute an assignment for purposes of this Section. (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 arising or first due after the effective date of such assignment and shall be jointly and severally liable with Tenant 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 arising or first due after the effective date of such assignment as to that portion of the Premises which is subleased and shall be jointly and severally liable with Tenant for rental and other payments and performance of all terms, covenants, and conditions of this Lease with respect to such portion of the Premises. If requested by Landlord, sublessee shall pay all rent and charges owed directly to Landlord. - 10- 14 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, such consent to be at Landlord's sole discretion. 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 signage within or outside Premises which is consistent in Landlord's opinion with the Building's image and signage and graphics program. Signage other than Building directory or building standard elevator lobby directory signage is at Tenant's sole expense. Tenant shall have the right to install signage on the street monument subject to Landlord's approval of the design, materials, size and location, which approval shall not be unreasonably withheld or delayed. Tenant shall further have the right to install non-illuminated building signage subject to Landlord's approval of the design, materials, size and location, which approval shall not be unreasonably withheld or delayed. All signage shall be subject to approval by the City of Bellevue. 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 and holds Landlord harmless from any liability from any such lien, including without limitation, liens arising from the work performed pursuant to Section IV of Exhibit B hereto. 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 within thirty (30) days of said filing, and at Tenant's expense, immediately cause such lien to be released of record 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, 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 herein enumerated shall be to the extent permitted by law cumulative, and none shall exclude any other right or remedy allowed by law. In addition to the other remedies provided in this Lease, Landlord 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 ten (10) days from the date of written - 11 - 15 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 ten (10) days Tenant shall have such time so long as Tenant is diligently pursuing the cure thereof. (c) LANDLORD'S REENTRY: Upon 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 Landlord shall have such rights and remedies as shall be available in law or equity. 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. (d) 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 which are recoverable as damages from Tenant and including, but not limited to, reasonable attorneys' fees, advertising fees and brokerage fees, and to the payment of any repairs, renovations, remodeling, redecoration, alterations and changes in the Premises (but only to the extent the same are recoverable as damages from Tenant); 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 of 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 present value of the then fair market rental value of the Premises of the same period, plus all court costs and reasonable attorneys' fees incurred by Landlord in the collection of the same. (e) TRADE FIXTURES: Tenant shall have no right to, and Tenant agrees that it will not, remove any trade fixtures or movable furniture from the Premises at any time while Tenant is in default hereunder. 21. PRIORITY: (a) Tenant agrees that this Lease shall be subordinate to any first mortgage or deed of trust now existing or hereafter placed upon the Premises or the Building created by or at instance of Landlord and to any and all advances to be made thereunder and to interest thereon and all renewals, and extensions thereof ("Landlord's Mortgage"). Upon demand by Landlord or the holder of any Landlord's Mortgage ("Holder"), Tenant shall execute and deliver subordination and attornment agreements in form and substance satisfactory to such Holder. 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 - 12 - 16 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 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. (b) Upon request, Tenant shall attorn to the Holder of any Landlord's Mortgage or any person or persons purchasing or otherwise acquiring the Land, Building or Premises at any sale or other proceeding under any Landlord's Mortgage. Tenant shall properly execute, acknowledge and deliver instruments which the holder of any Landlord's Mortgage may reasonable require to effectuate the provisions of this Section. 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 pursuant to Section 11, above), reasonable wear and tear and damage by insured fire and casualty 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 such term, covenant, or condition or 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 fifty percent (150%) of the Rent and Additional Rent in effect upon the date of such expiration as stated herein, and to be bound by all of the terms, covenants and conditions herein specified, so far as applicable. Acceptance by Landlord of Rent and Additional Rent after such expiration or earlier termination shall not result in a renewal of this Lease. The foregoing provisions of this Section 25 are in addition to and do not affect Landlord's right of re-entry or any rights of Landlord hereunder or as otherwise provided by law. If Tenant shall hold over after the expiration or earlier termination of this Lease without the written consent of Landlord, such occupancy shall be deemed an unlawful detainer of the Premises subject to the applicable laws of the state in which the Building is located and, in addition, Tenant shall be liable for any costs, damages, losses and expenses incurred by Landlord as a result of Tenant's failure to surrender the Premises in accordance with this Lease. - 13 - 17 26. CONDEMNATION: (a) Entire Taking: If all of the Premises or such portions of the Land or Building as may be required for the reasonable use of the Premises, are taken by eminent domain or purchase in lieu of condemnation, 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 by eminent domain or purchase in lieu of condemnation of a material part of but less than all of the Building, where Landlord shall reasonably determine that the remaining portion of the Premises cannot be economically and effectively used by it (whether on account of physical, economic, aesthetic or other reasons), or if, in the reasonable opinion of Landlord, the Building should be restored in such a way as to alter the Premises materially, Landlord shall forward a written notice to Tenant of such determination not more than sixty (60) days after the date of taking. In such event, the term of this Lease shall expire upon the date of such taking. (c) Partial Taking: In case of taking of a part of the Premises, or a portion of the Building or Land 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 or use of the Premises is reduced, if any, 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, Building or Land 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 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 of 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 bring its own action at its sole cost and expense 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 aforesaid shall be deemed given on the date of such mailing or delivery to the nationally recognized courier, properly addressed and postage or courier charge prepaid. 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 - 14 - 18 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 attorney's fees shall be deemed to have accrued on the commencement of such action. 29. 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 of Landlord; that the security deposit is as stated in the Lease; that Tenant does not have any options or rights (i) to lease other space in the Building, (ii) to extend the Lease except as shown on Lease document, (iii) to purchase some or all of the Building or Land; and such other matters as Landlord may reasonably request. 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) days of receipt by Tenant of a written request by Landlord as herein provided, Tenant shall be deemed to have given such certificates 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, that there are no options as specified above, and that not more than one month's Rent has been paid in advance. 30. 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 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 transfer 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. 31. 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 his 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. 32. 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. - 15 - 19 33. AUTHORITY: If Tenant is a corporation, limited liability company, limited liability partnership or limited or general partnership, each individual executing this Lease on behalf of Tenant represents and warrants that he or she 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. 34. 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 office buildings 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 and hold harmless Landlord against any and all losses, liabilities, suits, obligations, fines, damages, judgments, penalties, claims, charges, cleanup costs, remedial actions, costs and expense (including without limitation, consultant fees, attorneys' fees and disbursements) which may be imposed on, incurred or paid by Landlord, its members, managers, agents, employees, and representatives, or asserted in connection with (a) any misrepresentation, breach of warranty or other default by Tenant under this Section, or (b) the acts or omissions of Tenant, its officers, agents, employees, contractors, customers, and invitees, or any subtenant or other person for whom Tenant would otherwise be liable, resulting in the release of any hazardous waste or materials on the Land. (b) LANDLORD REPRESENTATIONS: Landlord represents to Tenant that, to the best of Landlord's knowledge, no hazardous waste or materials exist in, on or under the Land, Building, Premises or have been generated, stored or disposed of on the Premises other than in compliance with all applicable laws. 35. 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, which consent shall not be unreasonably withheld. Tenant shall locate all electronic telecommunications equipment within the Premises. (ii) Without in any way limiting Landlord's right to withhold its consent, Landlord may consider the following factors, among others, in making its determination: (A) whether or not the proposed work will interfere with the use of any then existing Lines at the Building; (B) 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; (C) whether the proposed work or - 16 - 20 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; (D) whether the work or resulting Lines would adversely affect the Land, Building or any space in the Building in any manner. (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. (IV) as soon as the work is completed, Tenant shall submit "as built" drawings to Landlord. (v) Landlord reserves the right to require that Tenant remove all 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 three (3) days after written notice. (b) LIMITATION OF LIABILITY: Except to the extent arising from the gross 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, disconnection, loss or damage caused by the installation, maintenance, or replacement, use 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 requirements of the Lines or any associated equipment, or any other problems associated with any Lines by any other cause; (ii) any failure to any Lines to satisfy Tenant's requirements; or (iii) 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 damage arising 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. (c) 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 therefore (including riser cables) to prevent such excessive electromagnetic fields or radiation. 36. 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 the commissions due those real estate brokers or agents named in Section 1(k). 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. - 17 - 21 (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 hereby 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 five (5) days after such amount is due, then Tenant shall pay Landlord, as Additional Rent, a late charge ("Late Charge") equal to 5% 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 12% 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 $100.00. In addition, if payments are received by check or draft from Tenant, and two (2) or more of such checks or drafts are dishonored by the bank or other financial institution they were drawn upon in any twelve (12) month period, Landlord may thereafter require all Rent and other payments due hereunder from Tenant to Landlord to be made by bank cashier's or bank certified check or other similar means of payment and Landlord shall not be required to accept any checks or drafts of Tenant which do not comply with such requirements. (g) FORCE MAJEURE: Except for the payment of Rent, Additional Rent and other sums payable by Tenant, time periods for Tenant's or Landlord's performance under any provisions of this Lease shall be extended for periods of time during which Tenant's or Landlord's performance is prevented due to circumstances beyond Tenant's or Landlord's reasonable control. (h) RIGHT TO CHANGE PUBLIC SPACES: Landlord shall have the right at any time, without thereby creating an actual or constructive eviction or incurring any liability to Tenant therefor, 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 as well as parking and access areas on the Land. Nevertheless, in no event shall Landlord diminish any service, change the 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 or reasonable use of the Premises or change the character of the Building from that of a first-class office building. (i) GOVERNING LAW: This Lease shall be governed by and construed in accordance with the laws of the State of Washington. (j) BUILDING NAME: The Building shall be known by such name as Landlord may designate from time to time. - 18 - 22 IN WITNESS WHEREOF, this Lease has been executed the day and year first above set forth. TENANT: BSQUARE CORPORATION, INC. By: [ILLEGIBLE] ---------------------------------------- Its: CEO ------------------------------- By: ---------------------------------------- Its: ------------------------------- LANDLORD: MERCER ISLAND PARTNERS ASSOCIATES, LLC a Washington limited liability company By: /s/ PHILIP T. FELDSINE ---------------------------------------- Philip T. Feldsine, Manager - 19 - 23 TENANT CORPORATE ACKNOWLEDGMENT STATE OF WASHINGTON ) )SS. COUNTY OF ) THIS IS TO CERTIFY that on this 2nd day of February, 1998, before me, the undersigned, a notary public in and for the State of Washington, duly commissioned and sworn, personally appeared William T. Baxter to me known to be the President/CEO respectively, of BSQUARE 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 Signature: /s/ CAMILLA J. ALSON [SEAL] Printed Name: Camilla J. Alson Notary Public in and for the State of Washington Residing at:11100 NE 11th St D408 Bellevue WA ---------------------------------------------------------- My appointment expires: 6-6-98 LANDLORD ACKNOWLEDGMENT STATE OF WASHINGTON ) )SS. COUNTY OF KING ) THIS TO CERTIFY that I know or have satisfactory evidence that Philip T. Feldsize is the person who appeared before me, and said person acknowledged that he signed this instrument, on oath stated that he was authorized to execute the instrument and acknowledged it as the Manager of Mercer Island Partners Associates, a limited liability company, and acknowledged said instrument to be the free and voluntary act and deed of said company for the uses and purposes therein mentioned. WITNESS MY HAND AND OFFICIAL SEAL this 3rd day of February, 1998. Signature: /s/ DAVID W. BOWERS Printed Name: David W. Bowers Notary public in and for the State of Washington, Residing at: 3011 11th Ave W. Seattle, WA 98117 My appointment expires: 11/5/01 - 20 - 24 EXHIBIT A Addendum to Lease between MERCER ISLAND PARTNERS ASSOCIATES, LLC (Landlord) and BSQUARE CORPORATION, INC. (Tenant) FLOOR PLAN OF PREMISES FLOOR 2 15,105 Net Rentable Square Feet 13,748 Usable Square Feet BIOCONTROL SYSTEMS BUILDING [DIAGRAM] TOP FLOOR PLAN EXHIBIT A PAGE 1 OF 1 25 EXHIBIT B TO MERCER ISLAND PARTNERS ASSOCIATES, LLC LEASE AGREEMENT TENANT IMPROVEMENTS I. IMPROVEMENTS PROVIDED BY LANDLORD: Landlord has provided the following improvements in the Premises: A. Completed Public and/or Core Areas finished in accordance with plans and specifications of the Building. (1) PLUMBING: Men's restrooms, women's restrooms, and drinking fountains installed in accordance with the plans and specifications for the Building. (2) ELECTRICAL DISTRIBUTION SYSTEM: Landlord shall provide the house panel and main breakers for the building. There is a 400 amp metered service in the basement which feeds a 200 amp panel for HVAC and a 200 amp panel for power and lights. (3) PHONE SERVICE: Landlord shall provide phone service to the building shell. (a) POWER CAPABILITIES: Extending the wiring for lighting including the junction boxes and general power from the appropriate panel in the building electrical room to the point of use shall be considered Tenant Improvements. B. Tenant's Usable Area as outlined in Exhibit A shall be completed as follows: (1) MECHANICAL: Landlord shall install the vertical distribution of the HVAC and the horizontal distribution to and including the control boxes to the Premises including thermostats and provide for removal of the return air from the plenum. (a) HVAC Capacities: 385 square feet per ton. (b) The Building standard mechanical system is designed to accommodate heating loads generated by lights and equipment up to 2.5 watts per square foot. If Tenant's design or use of the Premises results in concentrated loads in excess of 2.5 watts per square foot (e.g., data processing areas, conference rooms and machine rooms), then any additional engineering design and installation of mechanical equipment and/or controls required to accommodate such expenses shall be provided by Tenant's cost pursuant to Section II of this Exhibit B. (2) FINISHES: The Landlord shall provide the following: i. Concrete floor slab which shall be flat and level within recognized industry standards and shall be left broom clean. ii. Exterior perimeter walls which are to receive interior finishes shall be insulated per code with drywalled screwed on, ready for final mud and sanding. iii. Interior partitions around vertical shafts shall be covered with gypsum wall board and fire taped. iv. Doors and hardware shall be installed at all vertical shafts used as exits. V. Horizontal blinds on exterior windows. vi. Ceiling grid installed. vii. Parabolic light fixtures purchased and stacked on floor. EXHIBIT B PAGE 1 OF 6 26 viii. Ceiling tiles purchased and stacked on floor. (3) FIRE SPRINKLERS: Primary distribution loop to Tenant's Usable Area with sprinkler heads turned up. All modifications to this equipment or systems resulting from the Tenant's occupancy and space design shall be considered Tenant Improvements. The sprinkler heads are turned up to protect the structure. II. IMPROVEMENTS BY TENANT/REIMBURSEMENT BY LANDLORD: Design and construction of all improvements in the Premises beyond those listed in Section I or this Exhibit B shall be provided at Tenant's expense. Landlord shall pay the cost of such additional improvements up to an amount equal to $20.00 per usable square foot of Tenant's Premises outlined on the floor plan(s) in Exhibit A, for a total payment by Landlord of $274,960.00 ("Tenant Improvement Allowance"). The Premises are comprised of 13,748 usable square feet. The Tenant Improvement Allowance shall be applied to the cost of design and construction of such improvements including but not be limited to (but excluding those items to be supplied by Landlord as provided above in Section I): Architectural and engineering design, partitions, doors, door frames, re-lites, hardware, paint, wall coverings, base, ceiling tile placement, lights, mechanical distribution, diffusers, thermostats, sprinkler heads, emergency speakers, fire extinguishers and cabinets, telephone, computer and electrical cabling and outlets, light switches, floor coverings, and all applicable permit fees and sales tax. Landlord will provide space planning services by the building architect or Tenant's space planner not to exceed $0.12 per useable square foot upon agreement of the basic terms and conditions of the lease. Such allowance shall be deducted from the Tenant Improvement allowance. Tenant may provide its own space planning services subject to Landlord's approval of service provider. Tenant may install, at Tenant's sole expense, a satellite dish in mechanical well of the roof subject to Landlord's approval, acting reasonably, of size, weight location and installation method. Any satellite dish installation must comply with all applicable building and zoning codes. Tenant shall be solely responsible for maintenance, replacement, and/or removal of said satellite dish. The Tenant Improvement Allowance shall also be applied to mutually agreeable construction management services. Such construction manager shall manage the bidding of Tenant improvements, 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. Tenant may add its construction vendors to the bidders list subject to Landlord's reasonable approval of qualifications and reputation. Landlord shall competitively bid the Tenant Improvements and award the contract to the lowest bidder. If Tenant wishes to utilize its own contractor and its contractor was not the lowest bid, Tenant shall be responsible for paying any costs over the lowest bid. III. BUILDING STANDARD IMPROVEMENTS: Tenant shall use the following Building Standard items: blinds (required by Landlord); carpet and base; hardware; lighting fixtures; and heating, ventilating, and air conditioning distribution and controls. IV. DESIGN OF TENANT IMPROVEMENTS: The Tenant Improvement Allowance shall be applied to Tenant retaining the services of a qualified office planner or architect, approved by the Landlord, 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 EXHIBIT B Page 2 of 6 27 Tenant improvements in Tenant's Usable Area. All Tenant's Plans shall be subject to approval of Landlord, which shall not be unreasonably withheld, in accordance with section IV(C) of this Exhibit B. Tenant's office planner or architect 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 the Landlord's reasonable approval and the cost in excess of the allowance thereof shall 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 (provided that the dates set forth below shall be extended by such number of days, if any, as Tenant shall be delayed due to (I) any inaccuracy in the as-built plans and specifications delivered by Landlord to Tenant, (II) any delay in Landlord's reasonable review beyond a reasonable period, comment and approval of plans provided by Tenant, (III) any delay in completing the plans or obtaining all necessary governmental permits due to any act or omission of Landlord): A. BASIC PLANS DELIVERY DATE: FEBRUARY 16, 1998 . The Basic Plan 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: FEBRUARY 20, 1998 . On or before this date and as part of Tenant Improvement Allowance, Tenant's office planner or architect 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. 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. The Tenant Improvement Allowance shall be applied to the cost of all engineering and design for plumbing, electrical, heating, air conditioning and structural plans ("Engineering Drawings") for the Tenant's improvements based on the signed Working Drawings. C. FINAL PLANS REVIEW DATE: FEBRUARY 25, 1998 . On this date, Tenant's office planner or architect 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 or architect's title block in the lower right-hand corner 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 the final form and include a Keying Schedule indicating which doors are locked and which EXHIBIT B PAGE 3 OF 6 28 key(s) open each lock, 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. (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: FEBRUARY 25, 1998. The four (4) sets of Final Plans approved by Landlord and Tenant and due on or before 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 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. However, Tenant shall not be responsible for unreasonable delays and unreasonable additional costs caused by Landlord. V. CONSTRUCTION OF TENANT IMPROVEMENTS: A. AUTHORIZATION TO PROCEED: Within two (2) days following delivery of the final plans to Landlord, Landlord shall submit the Final Plans to Construction Associates, Waters & Wood Construction and a reputable, bonded contractor of Tenant's choice. Upon receipt of the bids for construction of the Tenant Improvements pursuant to the Final Plans, Landlord shall submit such bids to Tenant. Tenant shall have the right to choose which of the general contractors submitting bids to use (provided that in such event all costs of construction in excess of the minimum bid secured by Landlord as set forth above shall be paid by Tenant). Concurrently with the selection of the contractor by Tenant, Tenant shall give Landlord written authorization to enter into a construction contract with such contractor and commence construction of the Tenant Improvements in accordance with the Final Plans delivered by Tenant. Tenant may in such authorization delete any or all items of extra cost; however, if Landlord deems these changes to be extensive, at its option, Landlord may 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, Landlord shall not be obligated to commence work on the Premises and Tenant shall be responsible for any cost due to any resulting delay in completion of the Premises and as provided in Section 3(b) of the Lease. B. PAYMENTS: Prior to commencement of Tenant Improvements and if the price for such improvements is greater than the Tenant Improvement Allowance defined in Section II above, Tenant shall deposit with Landlord fifty percent (50%) of any additional cost above the Tenant Improvement Allowance (the "Additional Cost Deposit"). Landlord shall direct Landlord's contractor to complete Tenant's improvements in accordance with Tenant's approved Final Plans as modified in accordance with Section V.a above. Payments shall be made: First, by applying the entire Tenant Improvement Allowance provided by Landlord against the monthly progress payments due, secondly by applying Tenant's Additional Cost Deposit, and then third, Tenant shall pay within ten (10) days after receipt of contractor's draw request approved by Landlord, the full amount of such contractor's draw request in cash. The progress billings may include a retainage amount up to ten percent (10%) of the work ("Retainage"). Final billing shall be EXHIBIT B PAGE 4 OF 6 29 rendered and payable within ten (10) days after acceptance of the Premises by Tenant in Accordance with the terms of the Lease. Retainage pursuant to the terms of this Paragraph shall be payable with such final billing. In the event acceptance of the Premises is subject to punchlist items as provided in the Lease, a portion of the retainage equal to the cost to complete each outstanding punchlist item may be retained until such punchlist item is complete. C. FINAL PLANS AND MODIFICATIONS: If Tenant shall request any change in the Final Plans, 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 a written price for the cost of engineering and design services to incorporate the change in Tenant's Final Plans. If Tenant approves such price in writing, Landlord shall have such Final Plans changes made and Tenant shall promptly pay Landlord for this cost. Promptly upon completion of such changes in the Final Plans, Landlord shall notify Tenant in writing of the costs, if any, which shall be chargeable or credited to Tenant for such change, addition or deletion. If Tenant wishes to proceed with such changes, Tenant shall promptly so notify Landlord in writing and pay to Landlord fifty percent (50%) of the amount of any additional costs occasioned thereby and the balance due at time of demand from the contractor. 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(b) 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 Tenant Improvements on the Premises by Tenant or Tenant's contractor: (1) Such work shall proceed upon Landlord's written approval (which shall not be unreasonably withheld or delayed) of (i) Tenant's contractor, (ii) public liability and property damage insurance satisfactory to Landlord carried by Tenant's contractor, (iii) detailed plans and specifications for such work, and (iv) amount of general conditions to be paid by Tenant to Landlord for the services still provided by Landlord's contractor. (2) All work shall be done in conformity with a valid permit when required, a copy of which shall be furnished to 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 of 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 scheduled through Landlord. (4) Tenant or Tenant's contractor shall arrange for necessary utility, hoisting and elevator service with Landlord's contractor and shall pay such reasonable charges for such services as may be charged by Landlord's contractor. This will be included in the general conditions of Subsection C(1)(iv) above. (5) Tenant shall promptly reimburse Landlord for costs incurred by Landlord due to faulty work done by Tenant or its contractors, or by reason of any delays caused by such work, or by reason of inadequate clean-up. (6) 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 Landlord's contractors 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 Land and Building. As a condition of approving EXHIBIT B PAGE 5 OF 6 30 Tenant's contractor of any subcontractor, Landlord may require one or more payment or performance bonds covering such work reasonably satisfactory to Landlord. (7) 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 or architect, licensees, agents, servants, employees, guests, invitees, or visitors. F. TENANT'S TELEPHONE AND COMPUTER/DATA SERVICE: Tenant is responsible for Tenant's telephone service, computer and data service, and related cabling. Tenant shall select and coordinate installation of such communication and information systems with the Landlord pursuant to Section 35 of the Lease. EXHIBIT B PAGE 6 OF 6 31 EXHIBIT C ADDENDUM TO LEASE BETWEEN MERCER ISLAND PARTNERS ASSOCIATES, LLC AND BSQUARE CORPORATION, INC. ADDITIONAL LEASE TERMS 1. OPTION TO EXTEND LEASE TERM: Tenant shall have the right, but said right shall be subordinated to the preferential first rights to occupy the Premises after the end of the original Lease Term of BioControl Systems, Inc. and its related organizations/assigns, to be exercised as hereinafter provided, to extend the initial Lease Term ("Extension Option") for the entire Premises for one (1) additional period of five (5) years, provided that: (a) Tenant shall not be in default in the performance of any term, covenant or condition herein contained at the time of the Exercise of the Option and on the last day of the preceding Lease Term; (b) The rental rate for the extended term shall be the projected fair market rental rate for comparable term-extensions in comparable first-class buildings along the I-90 corridor on the effective date of the Extension Option Term , provided, however, that such rental rate shall not be less than the then current rental rate (base rent plus escalation) for the Premises. (c) Refurbishment allowances shall be commensurate with the refurbishment allowances found in the market for similar size renewals in Class A buildings along the I-90 corridor. NOTICE: No later than six (6) months prior to the expiration of the initial Lease Term, Tenant shall notify Landlord in writing of its intention to extend the Lease Term. Within one (1) month of Tenant's notice to extend, Landlord and Tenant shall agree upon the rent for the Extension Option Term. If Landlord and Tenant cannot agree upon the rent for the Extension Option Term within one (1) month of Landlord's receipt of Tenant's written notice of its extension to extend the Lease Term, this Extension Option shall lapse and terminate and the lease shall expire at the end of the initial Term as outlined in Section 1(g). EXERCISE: Tenant shall exercise the Extension Option by written notice to Landlord no later than two (2) months from the date of Landlord's notification of terms and conditions. If Tenant does not so exercise the Extension Option, the Lease shall expire at the end of the initial Lease Term. LEASE TERMS: Upon exercise of the Extension Option, all of the terms and conditions set forth in this Lease shall continue, with the exception of the Lease Term which shall be extended as set forth above, and with the exception of Rent which shall be determined as set forth above. EXHIBIT C PAGE 1 OF 1 EX-10.8 12 OFFICE LEASE AGREEMENT 1 EXHIBIT 10.8 ADDENDUM TO DELPHI OFFICE BUILDING AGREEMENT LEASE: DATED NOVEMBER 15, 1996 LANDLORD: SEATTLE OFFICE ASSOCIATES, LLC TENANT: BSQUARE CONSULTING, INC. The undersigned Landlord and Tenant agree to the establishment of the following dates as they are used in the above referenced lease agreement: Lease Commencement Date: December 13, 1996 Rent Commencement Date: December 13, 1996 Lease Termination Date: December 12, 2001 Extension Option Notification Date June 12, 2001 EXCEPT as herein specifically amended, the lease shall in all respects remain in full force and effect. Dated: December 16, 1996 Landlord Tenant SEATTLE OFFICE ASSOCIATES LLC BSQUARE CONSULTING, INC. by: [ILLEGIBLE] by: [ILLEGIBLE] ------------------------------- ------------------------------- its: MEMBER its: PRESIDENT & CEO ------------------------------ ------------------------------ 2 OFFICE LEASE AGREEMENT BETWEEN Seattle Office Associates, LLC LANDLORD and bsquare consulting, inc. TENANT 3 TABLE OF CONTENTS 1. BASIC LEASE INFORMATION AND EXHIBITS...................................................... 1 (a) Lease Date............................................................................ 1 (b) Tenant................................................................................ 1 (c) Address of Tenant..................................................................... 1 (d) Landlord.............................................................................. 1 (e) Address of Landlord................................................................... 1 (f) Premises.............................................................................. 1 (g) Project............................................................................... 1 (h) Land.................................................................................. 1 (i) Lease Term............................................................................ 1 (j) Right to Extend....................................................................... 1 (j) Basic Rent............................................................................ 2 (k) Additional Rent....................................................................... 2 (1) Security Deposit...................................................................... 2 (m) Rentable Square Feet in the Premises.................................................. 2 (n) Rentable Square Feet in the Project................................................... 2 (o) Tenant's Percentage................................................................... 2 (p) Parking............................................................................... 2 (q) Brokers............................................................................... 2 (r) Construction Completion Date.......................................................... 3 (s) Signage............................................................................... 3 (t) Expansion Rights...................................................................... 3 (u) Exhibits.............................................................................. 3 2. PREMISES.................................................................................. 3 3. COMMENCEMENT AND EXPIRATION DATES......................................................... 3 4. RENT...................................................................................... 4 (a) Rent.................................................................................. 4 5. COSTS OF OPERATIONS AND REAL ESTATE TAXES................................................. 4 (a) Definitions........................................................................... 4 (b) Additional Rent for Estimated Increases in Operating Costs............................ 5 (c) Determinations........................................................................ 6 (d) Personal Property Taxes............................................................... 6 6. SERVICES AND UTILITIES.................................................................... 6 (a) Standard Services..................................................................... 6 (b) Interruption of Services.............................................................. 7 (c) Additional Services................................................................... 7 7. SECURITY DEPOSIT.......................................................................... 8 8. USES...................................................................................... 8 (a) Uses.................................................................................. 8 (b) Compliance With Law................................................................... 8 (c) Compliance With Rules and Regulations................................................. 9 9. IMPROVEMENTS.............................................................................. 9 10. TENANT IMPROVEMENTS; ACCEPTANCE OF PREMISES............................................... 9 11. CARE OF PREMISES.......................................................................... 9 12. ALTERATIONS AND ADDITIONS................................................................. 10 13. ACCESS.................................................................................... 11 14. DAMAGE OR DESTRUCTION..................................................................... 11 (a) Damage and Repair..................................................................... 11 (b) Destruction During Last Year of Term.................................................. 11 (c) Business Interruption................................................................. 12 (d) Tenant Improvements................................................................... 12 15. CONDEMNATION.............................................................................. 12 (a) Taking................................................................................ 12 (b) Awards and Damages.................................................................... 12 16. INDEMNIFICATION........................................................................... 12 (a) Indemnity............................................................................. 12 (b) Exemption of Landlord From Liability.................................................. 13
4 (c) Waiver of Subrogation............................................................... 13 17. HAZARDOUS SUBSTANCES.................................................................... 13 18. INSURANCE............................................................................... 14 (a) Required Policies................................................................... 14 (b) Insurance Policy Requirements....................................................... 15 (c) Landlord's Insurance................................................................ 15 19. ASSIGNMENT AND SUBLETTING............................................................... 15 20. LIENS AND INSOLVENCY.................................................................... 16 (a) Liens............................................................................... 16 (b) Insolvency.......................................................................... 17 21. DEFAULT................................................................................. 17 (a) Default By Tenant................................................................... 17 (b) Remedies Cumulative: Injunction..................................................... 17 (c) Landlord's Remedies Upon Tenant Default............................................. 17 (d) Waiver of Redemption Rights......................................................... 19 (e) Nonpayment of Additional Rent....................................................... 19 (f) Interest............................................................................ 19 22. PRIORITY................................................................................ 19 (a) Subordination of Lease.............................................................. 19 23. ESTOPPEL CERTIFICATES................................................................... 20 (a) Delivery of Estoppel................................................................ 20 (b) Failure to Deliver Estoppel......................................................... 20 24. SURRENDER OF POSSESSION................................................................. 20 25. NON-WAIVER.............................................................................. 21 26. HOLDOVER................................................................................ 21 27. LANDLORD'S LIABILITY.................................................................... 21 28. TRANSFER OF LANDLORD'S INTEREST......................................................... 21 29. RIGHT TO PERFORM........................................................................ 21 30. GENERAL................................................................................. 21 (a) Headings............................................................................ 22 (b) Heirs and Assigns................................................................... 22 (c) Authority........................................................................... 22 (d) No Brokers.......................................................................... 22 (e) Entire Agreement.................................................................... 22 (f) Severability........................................................................ 22 (g) Force Majeure....................................................................... 22 (h) Notices............................................................................. 22 (i) Costs and Attorneys Fees............................................................ 23 (j) Governing Law....................................................................... 23 (k) Recording........................................................................... 23 (1) Waivers............................................................................. 23 (m) Time of Essence..................................................................... 23 (n) Merger.............................................................................. 23 (o) Right to Change Public Spaces....................................................... 23 (p) Name................................................................................ 23 (q) Overdue Payments.................................................................... 24 (r) Relocation of Premises.............................................................. 24 (s) Advertising......................................................................... 24 (t) Parking............................................................................. 25 (u) Execution of Lease by Landlord...................................................... 25 31. LANDLORD'S COVENANTS.................................................................... 25 (a) Quiet Enjoyment..................................................................... 25 (b) Hazardous Waste or Materials........................................................ 25 (c) Rentable Square Feet................................................................ 25 32. GUARANTY OF LEASE....................................................................... 25
Exhibits 5 A - Legal Description of Land B - Space Plan of Premises C - Tenant Improvements D - Building Rules and Regulations E - Guarantees of Lease 6 OFFICE LEASE AGREEMENT THIS LEASE is made this ____ day of October, 1996 between Seattle Office Associates LLC, a Washington Limited Liability Company ("Landlord"), and bsquare consulting, inc., a Washington Corporation ("Tenant"). Landlord and Tenant agree: 1. BASIC LEASE INFORMATION 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) Lease Date: _____________,1996. (b) Tenant: bsquare consulting, inc. a Washington Corporation. (c) Address of Tenant: 13228 NE 20th Street Suite C Bellevue, WA 98005 (d) Landlord: Seattle Office Associates, LLC (e) Address of Landlord: 3633 - 136th Place SE Suite 205 Bellevue, WA 98006 (f) Premises: Suite No. 200, located at 3633 - 136th Place SE, Bellevue, (the "Building") as shown on Exhibit B attached hereto. (g) Project: The Building and all related improvements known as the Delphi Building, located at 3633 - 136th Place SE, Bellevue, which are situated on the Land as defined below. (h) Land: The real property more particularly described on Exhibit A attached hereto. (i) Lease Term: 60 months, commencing on December 15, 1996, or such earlier or later date as provided in Section 3 hereof, (the "Commencement Date") and terminating on the day prior to the fifth anniversary of the Commencement Date, ("the Termination Date"). Landlord and Tenant agree to execute an addendum to this lease setting forth the Commencement Date and the Termination Date. (j) Right to Extend: a. Provided Tenant (i) is not in default hereunder at the time of the exercise of the extension and at the commencement of the renewal term, (ii) has not been in a monetary default more than five times during the term of the lease, and (iii) has given Landlord six (6) months prior written notice of its intent to exercise its rights under this Section, Tenant shall have the right to extend the term of this Lease for one (1) additional period of five years (the "Extended Term") on the same terms and conditions as in this Lease except that the Basic Rent during the Extended Term shall be a sum equal to the fair 1 7 market rent ("Market Rent") of the Leased Premises at the time of the commencement of the Extended Term as determined either by agreement between Landlord and Tenant or by arbitration as hereinafter described. b. In the event that tenant desires to exercise such option, Landlord and Tenant agree to negotiate in good faith to reach agreement on the Market Rent of the Premises for such Extended Term. If, for any reason, the Landlord and Tenant fail to agree to a market rent for the term at least thirty (30) days prior to the end of the initial Term, then market rent for the term shall be determined by arbitration pursuant to this lease and RCW 7.04, et.seq. The arbitrator shall be a licensed MAI appraiser, whom the Parties shall select by mutual agreement. If the Parties are unable to agree on an arbitrator, the arbitrator shall be selected by the King County Superior Court. As part of the submittals to the arbitrator, each Party to the arbitration will present a proposed market rent for the term which the submitting Party deems to be fair and reasonable. The arbitrator is directed to select within twenty-one (21) days one of the proposed market rents submitted and has no discretion to determine any other market rent. The arbitrator's decision shall be final, binding and non-appealable. Notwithstanding the above, the market rent for the extended term shall not be less than the rate for the initial term. Until the arbitrator renders his award, the Tenant shall continue to pay the same market rent per month of the term as it paid for the last month of the initial term. The Tenant shall pay any shortfall in market rent payments for the term within ten (10) days after the arbitrator renders his award; and Landlord shall credit Tenant within ten (10) days any overpayment of Base Rent for the term against future monthly market rent, as determined by the arbitration award. (k) Basic Rent: $18,816.04 per month, $225,792.50 per year ($18.50 PSF). (1) Additional Rent: The increase in Operating Costs described in Section 5 and all other costs, other than Basic Rent, payable by Tenant to Landlord hereunder. (m) Security Deposit: $37,632.08 upon lease execution, of which $18,816.04 shall be applied to the 1st month's rent. (n) Rentable Square Feet in the Premises: 12,205. (o) Rentable Square Feet in the Project: 69,596. (p) Tenant's Percentage: 17.54%. (p) Parking: 51 parking stalls of which 11 will be reserved under the Building for the Tenant's exclusive use. (r) Brokers: Tenant was represented in this transaction by CB Commercial Real Estate Group, a licensed real estate Broker; Landlord was represented in this transaction by Langly Associates Inc., a licensed real estate broker. 2 8 (r) Construction Completion Date: December 15, 1996. (t) Signage: Tenant, at its expense, may install one parapet sign, subject to City of Bellevue approval. All signage is subject to local sign code requirements and Landlord's approval of the sign's size, design, installation and appearance, such approval not to be unreasonably withheld or delayed. Tenant will not be required to remove sign upon expiration of the lease. If Landlord and Tenant fail to agree to a market rent, the terms of paragraph 1.j.b. shall apply. (u) Expansion Rights: Tenant will have a 15-day right of first offer to lease any available contiguous space during the primary term and during the renewal term, subject to Landlord's right to extend or renew the lease for any current tenant of such space. For purposes of this subparagraph, suite 205 and the conference room adjacent to suite 205 are considered to be contiguous space. Additional space will be at fair market value, but not less than the rate paid on tenant's existing leased space. The term of any such expansion space shall be coterminus with this lease. (v) Exhibits: The following exhibits are attached hereto and are hereby made a part of this Lease. Exhibit A - Legal Description of Land Exhibit B - Space Plan of Premises Exhibit C - Tenant Improvements Exhibit D - Building Rules and Regulations Exhibit E - Guarantees of Lease 2. PREMISES. Landlord does hereby lease to Tenant, and Tenant does hereby lease from Landlord, upon the terms and conditions herein set forth, the Premises described in Section 1(f) hereof as shown on Exhibit B attached hereto and incorporated herein, together with rights of ingress and egress over common areas in the Building and on the Land. 3. COMMENCEMENT AND EXPIRATION DATES. The term of this Lease shall commence on the earliest of the following dates (the "Commencement Date"): (a) the Construction Completion Date as defined in Section 1(r) above; (b) the date on which the Premises would have been substantially completed but for delay caused by Tenant or any agent, employee or contractor of Tenant; (c) the date on which the Premises are actually occupied by Tenant or (d) the date set forth in section 1.(i). Upon request of Landlord, Tenant shall enter into a memorandum stipulating the actual Commencement Date. If for any reason other than Tenant's failure to fulfill its obligations hereunder, Landlord cannot deliver possession of the Premises to Tenant on the Commencement Date, Landlord shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Tenant hereunder or extend the Termination Date, but in such case Tenant shall not be obligated to pay Rent until possession of the Premises is tendered to Tenant. If Tenant's tenant improvements are not completed on the Commencement Date due to the failure of Tenant to fulfill any obligation pursuant to the terms of this Lease or any exhibit hereto, including without limitation 3 9 Tenant's failure to comply with the terms of Exhibit C, the Lease shall be deemed to have commenced upon the Commencement Date. If Tenant occupies the Premises prior to the Commencement Date, such occupancy shall be subject to all provisions hereof, such occupancy shall not advance the Termination Date, and Tenant shall pay Rent for such period at the initial rates set forth in the Basic Lease Information. In the event the Commencement Date is established as a later or earlier date than the date provided in Section 1(i) hereof, Landlord shall confirm the same to Tenant in writing. The Lease shall expire upon the Termination Date specified in Section 1(i). In the event Landlord is unable to deliver possession of premises within 30 days of Lease Commencement date, Tenant shall have the right to cancel this Lease. 4. RENT. (a) Rent. Tenant shall pay Landlord without notice the Basic Rent stated in Section 1(j) hereof in advance without demand, deduction or offset on the first day of each calendar month during the term at the address specified in Section 1(e) or such address as may be specified by Landlord. Basic Rent and Additional Rent (together "Rent") for any partial month shall be prorated in proportion to the number of days in such month. (b) Basic Rent Adjustment. The Basic Rent shall remained fixed for the initial term of the lease. 5. COSTS OF OPERATIONS AND REAL ESTATE TAXES. (a) Definitions. In addition to the Basic Rent provided in Section 1(j)) of this Lease, Tenant shall pay to Landlord increases under this Section 5 as "Additional Rent," utilizing the following definitions: (i) "Operating Costs" shall mean all taxes and assessments on real and personal property; any taxes levied or assessed (or any installment thereof due during the Lease Year) in addition to or in lieu of such real property or personal property taxes, or any other tax (except any federal or state net income tax or any business or occupation tax) upon leasing of the Project or rents collected; and all other expenses paid or incurred by Landlord for managing, maintaining, operating and repairing the Project and the personal property used in conjunction therewith, including without limitation, the following: (A) electricity, water, gas, sewers, refuse collection, telephone charges not charged to individual tenants and similar utility services; (B) the cost of maintaining, rehabilitating or replacing heating, mechanical, ventilating, escalator and elevator systems and restriping, repairing and repaving parking areas; (C) the cost of repairs, janitorial and cleaning services, window washing, landscape maintenance, and other general maintenance or cleaning; (D) the cost of fire, extended coverage, boiler, sprinkler, public liability, property damage, rent, earthquake (if required by any lender on the building and if such expense is included in the base year) and other insurance; (E) wages, salaries and other labor costs, including employee benefits, of all persons who perform duties in connection with the operation, maintenance and repair of the Project; (F) fees, charges and other costs, including management fees, consulting fees, legal fees and 4 10 accounting fees, of all independent contractors reasonably engaged by Landlord; (G) management fees not to exceed 5% of gross revenues charged by Landlord if Landlord performs management services in connection with the Project; (H) the costs for the subject period (amortized over the useful life in accordance with the Internal Revenue Code) of any capital improvements made to the Project after the date of this Lease which are either designed to increase the operating efficiency of the Project or are required by applicable law; (I) cost of all licenses, permits and inspections required by governmental bodies with jurisdiction over the Premises, Project and Land; and (J) the amortized costs of renovating the carpet, paint and lighting of common hallways and lobbies; (K) deductible amounts (not to exceed $25,000) under any insurance maintained by Landlord with respect to repair or rebuilding of the Project, and (L) any other expenses or charges whether or not hereinabove described, which in accordance with generally accepted accounting and management practices would be considered an expense of managing, maintaining, operating, or repairing the Project. (ii) "Operating Costs" shall not include the following: (a) Costs of any special services rendered to individual tenants (but not all tenants in the building) for which a special charge is made. (b) Leasing commissions and other leasing expenses. (c) Legal fees, accounting fees and other costs and expenses associated with a breach or default by any tenant. (ii) "Lease Year" shall mean the twelve-month period commencing January 1 and ending December 31. (iii) "Actual Operating Costs" means the actual expenses paid or incurred by Landlord for Operating Costs during any Lease Year of the term hereof. (iv) "Actual Operating Costs Allocable to the Premises" means the Tenant's share of the Actual Operating Costs determined by dividing the Rentable Square Feet in the Premises as set forth in Section 1(m) by the Rentable Square Feet in the Project and multiplying the resulting quotient by the Actual Operating Costs. (v) "Estimated Operating Costs Allocable to the Premises" means Landlord's estimate of Actual Operating Costs Allocable to the Premises for the following Lease Year to be given by Landlord to Tenant pursuant to Section 5(b)(i) below. (vi) "Base Service Year" shall mean the calendar year 1997. (b) Additional Rent for Estimated Increases in Operating Costs. (i) On or before the first (1st) day of March of each Lease Year after the Base Service Year, during the term hereof, Landlord shall furnish Tenant a written statement of the Estimated Operating Costs Allocable to the Premises for such Lease Year, and a calculation of the Additional Rent for such costs as follows: one-twelfth 5 11 (1/12) of the amount, if any, by which such amount exceeds the Operating Costs Allocable to the Premises for the Base Service Year shall be Additional Rent payable each month by Tenant as provided in Section 4. Any shortfall for elapsed portion of the Lease Year in question shall be made up with the next monthly payment. Landlord reserves the right to adjust this estimate from time to time. (ii) Within ninety (90) days after the close of each Lease Year, or as soon thereafter as practicable, Landlord shall deliver to Tenant a written statement setting forth the Actual Operating Costs Allocable to the Premises during the preceding Lease Year. If such costs for any Lease Year exceed Estimated Operating Costs Allocable to the Premises paid by Tenant to Landlord pursuant to subsection (b)(i) above, Tenant shall pay the amount of such excess to Landlord as Additional Rent within fifteen (15) days after receipt of such statement by Tenant. If such statement shows such costs to be less than the amount paid by Tenant to Landlord pursuant to subsection (b)(i) above, then the amount of such overpayment by Tenant shall be credited by Landlord to the next Rent payable by Tenant. In no event shall the Rent payable by Tenant hereunder be less than the Rent specified in Section 1(j) of this Lease. (iii) If this Lease shall terminate on a day other than the last day of a Lease Year, the amount of any adjustment between Estimated and Actual Operating Costs Allocable to the Premises with respect to the Lease Year in which such termination occurs shall be prorated on the basis which the number of days from the commencement of such Lease Year to and including such termination date bears to 365, and any amount payable by Landlord to Tenant or Tenant to Landlord with respect to such adjustment shall be payable within fifteen (15) days after delivery of the statement of Actual Operating Costs Allocable to the Premises with respect to such Lease Year. (c) Determinations. The determination of Actual Operating Costs and Estimated Operating Costs Allocable to the Premises shall be made by Landlord. Landlord or its agent shall keep records in reasonable detail showing all expenditures made for the items enumerated above, which records shall be available for inspection by Tenant at any reasonable time during the two year period following receipt of the Landlord's statement referred to in Section 5(b)(ii). (d) Personal Property Taxes. Tenant shall pay, prior to delinquency, all Personal Property Taxes payable with respect to all property of Tenant located on the Premises, the Building, or the Project including any improvements paid for by Tenant, and promptly, upon request of Landlord, shall provide written proof of such payment. As used herein, "Property of Tenant" shall include all improvements which are paid for by Tenant. "Personal Property Taxes" shall include all property taxes assessed against the property of Tenant, whether assessed as real or personal property. 6. SERVICES AND UTILITIES. (a) Standard Services. Landlord shall maintain the Premises and the public and common areas of the Building (including the roof, exterior portions of the building, parking and landscaping) in reasonably good order and condition, except for damage occasioned by the negligent or willful act or omission of Tenant or its contractors, 6 12 agents, invitees, licensees or employees, the repair of which damage shall be paid by Tenant, subject to the provisions of Section 16(c). Landlord shall furnish the Premises with electricity for normal office use, water, elevator service and reasonable 5 day per week janitorial services during the term of the Lease. Electricity use beyond normal office use and any separate metering required thereby shall be paid for by Tenant. The Basic Rent stated in Section 1(j) hereof does not include the costs of any janitorial or other service provided or caused to be provided by Landlord to Tenant which are in addition to the services ordinarily provided Building tenants. Landlord shall furnish the Premises with heat and air conditioning during the following hours: Monday to Friday 7:00 a.m. to 6:00 p.m., Saturday 8:00 a.m. - 5:00 p.m. and Sunday 9:00 a.m. to 1:00 p.m. Tenant may request provision of these services for other hours by giving Landlord at least 48 hours prior written notice and by paying all additional costs incurred by Landlord for such services with the next due installment of Rent at Landlord's then current overtime rate, which is currently $30 per hour. During other than normal business hours (as designated by Landlord), 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. (b) 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 such services due to any cause whatsoever, or from failure to make any repairs or perform any maintenance, and rent shall not abate as a result thereof. No temporary interruption or failure of such services 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. (c) Additional Services. Before installing lights and equipment in the Premises which in the aggregate exceed normal levels of usage (including without limitations, computer and data processing equipment), 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. Notwithstanding the above, Landlord may not refuse to grant permission for equipment which, in the aggregate, does not require electrical power in excess of five (5) watts per rentable SF. In addition, Tenant shall in advance, on the first day of each month during the Lease term, pay Landlord the reasonable amount estimated by Landlord as the cost of furnishing electricity for the operation of such equipment or lights and the reasonable amount estimated by Landlord as the cost of operation and maintenance of supplementary air conditioning units necessitated by Tenant's use of such equipment or lights. The Rent stated in Section 1(j) hereof does not include any amount to cover the cost of furnishing electricity or such additional air conditioning for such purposes and such costs will be paid by Tenant as Additional Rent. Landlord shall be entitled to install and operate at Tenant's cost a monitoring/metering system in the Premises to measure the added demands on electrical, heating, ventilation and air conditioning systems resulting from such equipment 7 13 and lights and from Tenant's after-hours heating, ventilation and air conditioning service requirements. Tenant shall comply with Landlord's instructions for the use of drapes and thermostats in the Building. 7. SECURITY DEPOSIT. As security for the full and faithful performance of every covenant and condition of this Lease to be performed by Tenant, Tenant has paid to Landlord the Security Deposit as specified in Section 1(m) hereof. If Tenant defaults in any respect under this Lease, Landlord may apply all or any part of the Security Deposit to the payment of any sum in default or any other sum which Landlord may be required or may in its reasonably discretion deems necessary to spend or incur by reason of Tenant's default. In such event, Tenant shall, within five (5) days of written demand therefor by Landlord, deposit with Landlord the amount so applied. If Tenant shall have fully complied with all of the covenants and conditions of this Lease, the amount of the Security Deposit to the extent not applied by Landlord under this Section 7 shall be repaid to Tenant (or, at Landlord's option, to the last assignee of Tenant's interest hereunder) within thirty (30) days after the expiration or sooner termination of this Lease. In the event of Tenant's default under this Lease, Landlord's right to retain the Security Deposit shall be deemed to be in addition to any and all other rights and remedies at law or in equity available to Landlord. Landlord shall not be required to keep any Security Deposit separate from its general funds and Tenant shall not be entitled to any interest thereon. 8. USES. (a) Uses. The Premises are to be used only for general office purposes ("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 sole 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, the Project or the Land contained in any lease, mortgage or other agreement or instrument by which the Landlord is bound or to which any of such property is subject, Tenant shall not commit any act that will increase the then existing rate of insurance on the Building or the Project and will immediately pay any such increase. Tenant shall promptly pay upon demand the amount of any increase in insurance rates 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. 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. (b) Compliance With Law. Tenant shall, at Tenant's expense, comply promptly with all applicable statutes, ordinances, rules, regulations, orders and requirements, including without limitation laws and regulations prohibiting discrimination on the basis of race, gender, religion, national origin, age or disability, in effect during the term 8 14 hereof regulating the use, occupancy or improvement of the Premises by Tenant, Landlord or otherwise and Tenant shall be fully responsible for the cost of complying therewith. (c) Compliance With Rules and Regulations. Tenant shall observe and comply with all reasonable rules and regulations put into effect by Landlord. Landlord shall not be responsible to Tenant for the non-compliance with the rules and regulations of any other tenant or occupant of the Project. 9. IMPROVEMENTS. Upon expiration or sooner termination of this Lease, all improvements and additions to the Premises, except Tenant's trade fixtures, shall be deemed the property of Landlord. 10. TENANT IMPROVEMENTS; ACCEPTANCE OF PREMISES. The Premises shall be completed in accordance with the plans and specifications attached hereto as Exhibit C. All necessary construction shall be commenced by Landlord following Landlord's execution of this Lease and Tenant's delivery of the first month's Basic Rent, the guarantees and the Security Deposit. Landlord will exert commercially reasonable efforts to have improvements substantially completed by the date set forth in Section 1(r). Within five (5) days ("Inspection Period") after Landlord informs Tenant of such completion, Tenant shall make such inspection of the Premises as Tenant deems appropriate. Except as otherwise specified by Tenant in writing to Landlord within the Inspection Period, Tenant shall be deemed to have accepted the Premises in their then condition. If, as a result of such inspection, Tenant discovers minor deviations or variations from the plans and specifications for Tenant's improvements of a nature commonly found on a "punch list" (as the term is used in the construction industry), Tenant shall, during the Inspection Period, notify Landlord of such deviations. Landlord shall promptly repair all punch list items. The existence of such punch list items shall not postpone the Commencement Date of this Lease or the obligation of Tenant to pay Rent. Tenant acknowledges that neither Landlord nor Landlord's agent has made any representation or warranty as to the suitability of the Premises for the conduct of Tenant's business, and Tenant hereby waives any rights, claims or actions against Landlord under any express or implied warranties of suitability. 11. CARE OF PREMISES. Tenant shall, at Tenant's sole cost and expense, keep the Premises and every part thereof in good condition and repair, damage thereto from causes beyond the reasonable control of Tenant and ordinary wear and tear and damage by fire and other casualty not intentionally caused by Tenant excepted. Tenant shall be responsible for the cleaning of any common areas of the Building and the Project if such cleaning is necessary due to Tenant's use of such common areas in a manner other than the normal, reasonable use of such areas. All damages or injury done to the Premises, Building or Project by Tenant or by any persons who may be in or upon the Premises, Building or Project 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 and Tenant shall pay for all damage to the Project caused by acts or omissions of Tenant or Tenant's officers, contractors, agents, invitees, licensees, or employees subject to the provisions of section 16(c). If Tenant fails to perform Tenant's obligations under this Section 11, Landlord may at Landlord's option enter upon the Premises after ten (10) days' prior notice to Tenant and put the affected portion of the Project in good order, condition and repair and the cost thereof together with interest thereon at the rate of 15% 9 15 per annum shall be due and payable as Additional Rent to Landlord together with Tenant's next installment of Basic Rent. All normal repairs shall be those reasonably determined by Landlord as necessary to maintain the Project as a first-class office building complex. 12. ALTERATIONS AND ADDITIONS. (a) Tenant shall not make any alterations, improvements, additions, or utility installations in or about the Premises or make changes to locks on doors, or add, disturb or in any way change any floor covering, wall covering, fixtures, plumbing or wiring (collectively, "Alterations") without first obtaining the written consent of Landlord and, where appropriate, in accordance with plans and specifications approved by Landlord. Any such Alterations shall not adversely affect either the strength or exterior appearance, or the mechanical, electrical, or plumbing services of the Building and the Project. Any alterations required to be made to the Premises by any applicable building, health, safety, fire, nondiscrimination, or similar law or regulation ("law"), but only to the extent such alterations are not also required to be made generally throughout the building, shall be made at Tenant's sole expense and shall be subject to the prior written consent of Landlord. Tenant shall reimburse Landlord for any sums expended for examination and approval of architectural or mechanical plans and specifications of the Alterations. Tenant shall also pay Landlord a sum equal to the direct costs incurred during any inspection or supervision of the Alterations. Landlord may require a lien and completion bond for such construction, or require the improvements (except for any cabling installed by the Tenant) be removed at the expiration of the Term. Tenant acknowledges and agrees that a material condition to the granting of approval of Landlord to any alterations and/or improvements and/or repairs required under this Lease or desired by Tenant is that the contractors who perform such work shall carry a Comprehensive Liability Policy covering both bodily injury, in the amount of $100,000 per person and $300,000 aggregate, and property damages, in the amount of $300,000, at Tenant's expense. Landlord may require proof of such insurance coverage from each contractor at the time of submission of Tenant's request for Landlord's consent to commence work. Landlord's approval of the plans, specifications and working drawings for Tenant's alterations shall create no responsibility or liability on the part of Landlord for their completeness, design sufficiency, or compliance with all laws, rules and regulations of governmental agencies or authorities. Tenant shall indemnify and hold Landlord harmless from any liability, claim or suit, including attorneys' fees, arising from any injury, damage, cost or loss sustained by persons or property as a result of any defect in design, material or workmanship. (b) Tenant shall pay, when due, all claims for labor or materials furnished to or for Tenant at or for use in the Premises, which claims are or may be secured by any mechanics' or materialmen's liens against the Premises or any interest therein. Within ten (10) days after notice thereof, Tenant shall remove or cause to be removed all liens filed against the Project or any portion thereof in connection with any Alterations or other work performed by or at the request of Tenant. (c) Tenant shall not put curtains, draperies or other hangings or signs on or beside the windows in the Premises. 10 16 (d) Unless Landlord requires their removal, all Alterations (other than trade fixtures and movable equipment) which may be made on the Premises shall become the property of Landlord and remain upon and be surrendered with the Premises at the expiration of the term. 13. ACCESS. Tenant shall permit Landlord and its agents to enter the Premises at all reasonable times for the purpose of inspecting, cleaning, repairing, altering or improving the Premises or the Building. Nothing contained in this Section 13 shall be deemed to impose any obligation upon Landlord not expressly stated elsewhere in this Lease. Landlord may temporarily close any portion of the Building or Project without liability to Tenant by reason of such closure, and such closure shall not constitute an eviction of Tenant or release Tenant from any Rent or other obligations hereunder, provided that the Landlord does not preclude Tenant's access to the premises and such closure does not materially interfere with Tenant's use and occupancy of the premises. Landlord shall have the right to enter the Premises for the purpose of showing the Premises to prospective purchasers or mortgagees at all reasonable times. 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. 14. DAMAGE OR DESTRUCTION. (a) Damage and Repair. If the Building is damaged by fire or any other cause to such extent that the cost of restoration, as reasonably estimated by Landlord, will equal or exceed thirty percent (30%) of the replacement value of the Building, or if insurance proceeds sufficient for restoration are for any reason unavailable, then Landlord may, no later than the sixtieth day following the damage, give Tenant a notice of Landlord's election to terminate this Lease. In the event of such election this Lease shall be deemed to terminate on the third day after the giving of such notice, Tenant shall surrender possession of the Premises within a reasonable time thereafter, the Rent and Additional Rent shall be apportioned as of the date of Tenant's surrender and any Rent paid for any period beyond such date shall be repaid to Tenant. If the cost of restoration as estimated by Landlord shall amount to less than thirty percent (30%) of said replacement value of the Building and insurance proceeds sufficient for restoration are available, or if Landlord does not elect to terminate this lease, Landlord shall restore the Building and the Premises (to the extent of the improvement of the Premises originally provided by Landlord hereunder) with reasonable promptness, subject to delays beyond Landlord's control and delays in the making of insurance adjustments by Landlord. To the extent that the Premises are rendered untenantable, the Rent shall proportionately abate, except in the event such damage resulted from the willful or intentional act or omission of Tenant, in which event Rent shall abate only to the extent Landlord receives proceeds from any rental income insurance policy to compensate Landlord for loss of Rent hereunder. (b) Destruction During Last Year of Term. In case the Building shall be substantially destroyed by fire or other cause at any time during the last Lease Year of this Lease, Landlord may terminate this Lease upon written notice to Tenant if given within sixty (60) days of the date of such destruction. 11 17 (c) Business Interruption. No damages, compensation or claim shall be payable by Landlord for inconvenience, loss of business or annoyance arising from any repair or restoration of any portion of the Premises, the Building or the Project. Landlord shall use its best efforts to effect such repairs promptly. (d) Tenant Improvements. Landlord will not carry insurance of any kind on any improvements paid for by Tenant as provided in Exhibit C or on Tenant's furniture, furnishings, fixtures, equipment or appurtenances of Tenant under this Lease and Landlord shall not be obligated to repair any damage thereto or replace the same. 15. CONDEMNATION. (a) Taking. If all of the Premises or such portions of the Building or Project 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. In the event of a taking of a material part, but less than all, of the Building or Project, where Landlord shall determine that the remaining portions of the Building or Project cannot be economically and effectively used by it (whether on account of physical, economic, aesthetic or other reasons) or where Landlord determines the Building should be restored in such a way as to materially alter the Premises, Landlord shall forward a written notice to Tenant 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 Landlord shall specify in such notice but not earlier than sixty (60) days after the date of such notice. In case of taking of a part of the Premises, or a portion of the Building or Project 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; however, if the floor area of the premises is reduced by more than five percent (5%), Tenant may terminate this Lease upon thirty (30) days notice to Landlord. (b) 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 (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. 16. INDEMNIFICATION. (a) Indemnity. Subject to provisions of section 16.c, Tenant shall indemnify, defend and hold Landlord harmless from and against all loss, cost and expense, including attorneys fees, arising from any act, omission, or negligence of Tenant or its officers, contractors, licensees, agents, servants, employees, guests, invitees, or visitors in or about the Premises or Project, or arising from any injury or damage to any person or 12 18 property, occurring in or about the Premises or Project as a result of any act, omission or negligence of Tenant, or its officers, contractors, licensees, agents, employees, guests, or visitors or arising from any breach or default under this Lease by Tenant. The foregoing provisions shall not be construed to make Tenant responsible for loss, damage, liability or expense resulting from injuries to third parties caused solely by the gross negligence of Landlord, or its officers, contractors, licensees, agents, employees, invitees or other tenant of the Project. (b) Exemption of Landlord From Liability. As a material part of the consideration to Landlord, Tenant hereby agrees that, notwithstanding anything to the contrary in Section 16(a) above, Landlord shall in no event be liable for injury to Tenant's business or assets or any loss of income therefrom or for damage to Tenant's employees, invitees, customers, or any other person in or about the Premises, whether such damage, loss or injury results from conditions arising upon the Premises or upon other portions of the Project of which Premises are a part (including, without limitation, damage caused by the Project or any portion thereof or a appurtenance thereto being out of repair, or the bursting, leakage of any water, gas, sewer or steam pipe), or from other sources or places, and regardless of whether the cause of such damage, loss or injury or the means of repairing the same is inaccessible to Tenant. Tenant further agrees that notwithstanding anything to the contrary in Section 16(a) above, Landlord shall in no event be liable for any injury or damage to any person or property of Tenant, Tenant's employees, invitees, customers, agents or contractors caused by theft or arising from any act, omission or neglect of any tenant or occupant of the Project or any other third person. (c) Waiver of Subrogation. Each party agrees to use commercially reasonable efforts to cause its insurance carriers to consent to a waiver of rights of subrogation against the other party. If such waiver shall be obtainable only at a premium over that chargeable without such a waiver, the party seeking such policy shall notify the other and the party in whose favor the waiver is desired shall pay the additional premium. Each party shall look first to any insurance in its favor before making claim against the other party. Whether the 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 (i) any loss or damage to the real or personal property of either located anywhere in the Project, including the Project itself, arising out of or incident to the occurrence of any of the perils which are covered by their respective property and related insurance policies, and (ii) any loss resulting from business interruption at the Premises or loss of rental income from the Project, arising out of or incident to the occurrence of any of the perils which may be covered by any business interruption insurance policy or by any loss of rental income insurance policy held by Landlord or Tenant, to the extent to which it is covered, or is required under the provisions of this Lease to be covered by a policy or policies containing a waiver of subrogation or permission to release liability. 17. HAZARDOUS SUBSTANCES. Tenant shall not dispose of or otherwise allow the release of any hazardous waste or materials in, on or under the Premises, the Project or any adjacent property, except for 13 19 normal office products used and disposed of in accordance with applicable laws. 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 or the Project of any hazardous waste or materials, except for normal office products used and disposed of in accordance with applicable laws. As used herein, the term "hazardous waste or materials" means any material or substance that, as of the date of this Agreement, is defined or classified under federal, state, or local laws as: (a) a "hazardous substance" pursuant to section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601(4), section 311 of the Federal Water Pollution Control Act, 33 U.S.C. Section 1321; (b) a "hazardous waste" pursuant to section 1004 or section 3001 of the Resource Conservation and Recovery Act, 42 U.S.C. sections 6903,6921; (c) a toxic pollutant under section 307(a)(1) of the Federal Water Pollution Control Act, 33 U.S.C. Section 1317(a)(1); (d) a "hazardous air pollutant" under section 112 of the Clean Air Act, 42 U.S.C. Section 7412; (e) a "hazardous Material" under the Hazardous Materials Transportation Uniform Safety Act of 1990, 49 U.S.C. App. Section 1802(4); (f) toxic or hazardous pursuant to regulations promulgated under the aforementioned laws; or (g) presenting a risk to the environment under other applicable federal, state, or local laws, ordinances, or regulations. "Hazardous Substances" specifically include, but is not limited to, asbestos, polychlorinated biphenyls ("PCBs"), petroleum and petroleum-based derivatives, and urea formaldehyde. Tenant shall promptly comply with all applicable laws and with all orders, decrees or judgments of governmental authorities or courts having jurisdiction relating to hazardous waste or materials. Tenant agrees to indemnify, defend and hold harmless Landlord against any and all loss, cost and expense (including, without limitation, consultants' fees, attorneys' fees and disbursements) which may be imposed on, incurred or paid by, or asserted against Landlord or the Premises or the Project by reason of, or in connection with (i) any misrepresentation, breach of warranty or other default by Tenant under this Lease, or (ii) the acts or omissions by Tenant under this Lease, or (iii) the acts or omissions of Tenant, or any sublessee or other person for whom Tenant would otherwise be liable, resulting in the release of any hazardous waste or materials. 18. INSURANCE. (a) Required Policies. Tenant shall, throughout the term of this Lease and any renewal hereof, at its own expense, keep and maintain in full force and effect: (i) a policy of commercial liability insurance including a contractual liability endorsement covering Tenant's obligations under Section 16 and 17, with a limit of not less than One Million Dollars ($1,000,000) combined single limit (the limits of said insurance shall not, however, limit the liability of Tenant hereunder); and (ii) what is commonly referred to as "all risk" coverage insurance (but excluding earthquake and flood) on Tenant's leasehold improvements in an amount not less than the current One Hundred Percent (100%) replacement value thereof; and (iii) business interruption insurance in an amount sufficient to cover costs, expenses, costs due hereunder, damages and lost income should the Premises not be fully usable for a period of up to 6 months. Such policy shall name Landlord as an additional insured and shall contain a provision or endorsement providing that the insurance afforded by such policy for the benefit of Landlord shall be primary as respects any claims, losses or liabilities arising out of the use of the Premises or the 14 20 Building or the Common Areas by the Tenant or by tenant's operation and that any insurance carried by Landlord shall be excess and non-contributing. (b) Insurance Policy Requirements. Insurance policies required hereunder shall be issued by companies which are currently rated AXII or better in "Best's Insurance Guide." No insurance policy required under this Section 18 shall be canceled or reduced in coverage and each insurance policy shall provide that it is not subject to cancellation or a reduction in coverage except after thirty (30) days prior written notice to Landlord. Tenant shall deliver to Landlord upon the Commencement Date and from time to time thereafter, copies of policies of such insurance or certificates evidencing the existence and amounts of same containing loss payable clauses satisfactorily to Landlord and naming Landlord as Additional Insured thereunder. (c) Landlord's Insurance. Landlord agrees to acquire, maintain and pay for, during the full term of this Lease, "all risk" property damage insurance against such risks and hazards as are customarily insured against by others similarly situated and operating like properties, but excluding earthquake and flood, covering the Building, including the Premises for such amounts and upon such terms as would a prudent owner of such property similar to and in the general area of the Building, and shall name Tenant as an additional insured thereon. Such insurance shall be acquired from a company authorized to do business in the State of Washington and rated as AXII or better in "Best's Insurance Guide." Upon request by Tenant, Landlord shall notify Tenant of the amount and type of insurance carried by Landlord pursuant to this section. 19. ASSIGNMENT AND SUBLETTING. (a) Tenant shall not assign, mortgage, encumber or otherwise transfer this Lease or sublet the whole or any part of the Premises without in each case first obtaining Landlord's prior written consent, which Landlord may not unreasonably withhold. Without limiting the foregoing, Landlord may withhold its consent if in Landlord's judgment occupancy by any proposed assignee, subtenant or other transferee: (i) is not consistent with the maintenance and operation of a first-class suburban office building due to the proposed occupant's nature or manner of conducting business or its experience or reputation in the community, or (ii) is likely to cause disturbance to the normal use and occupancy of the Building or Project by other tenants, their employees, customers, clients or other guests or visitors. Landlord may withhold in its absolute and sole discretion, consent to any mortgage, hypothecation, pledge or other encumbrance of any interest in this Lease by Tenant or any subtenant, whereby this Lease or any interest therein becomes collateral for any obligation of Tenant or any other person. (b) In the event Tenant should desire to assign this Lease or sublet the Premises or any part hereof, Tenant shall give Landlord written notice at least forty five (45) days in advance of the date on which Tenant desires to make such assignment or sublease, which notice shall specify, (i) the name and business of the proposed assignee or sublessee, (ii) the amount and location of the space affected, (iii) the proposed effective date and duration of the subletting or assignment, and (iv) the proposed rental to be paid to 15 21 Tenant by such sublessee or assignee. Landlord shall then have a period of twenty (20) days following receipt of such notice within which to notify Tenant in writing that Landlord elects either (1) to terminate this Lease as to the space so affected as of the date so specified by Tenant and reclaim that portion of the Premises (in which event Landlord may enter into a lease with any such proposed subtenant or assignee upon the rent and terms agreed to by each subtenant or assignee or on such other terms as may be agreed upon by Landlord and such subtenant or assignee) or, (2) to permit Tenant to assign or sublet such space, in which event if the proposed rental rate between Tenant and sublessee is greater than the rental rate of this Lease, then such excess rental to be deemed additional rent owed by Tenant to Landlord under this Lease, and the amount of such excess, including any subsequent increases due to escalation or otherwise, to be paid by Tenant to Landlord in the same manner that Tenant pays the rental hereunder and in addition thereto, or (3) to withhold consent to Tenant's assignment or subleasing such space and to continue this Lease in full force and effect as to the entire Premises. (c) Except as provided above, no 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. In connection with each request for an assignment or subletting, Tenant shall pay the reasonable cost of processing such assignment or subletting, including attorneys fees, upon demand of Landlord. Tenant shall provide Landlord with copies of all assignments, subleases and assumption instruments. If Tenant is a corporation or partnership, any transfer of a controlling ownership interest in Tenant or any transfer of this Lease by merger, consolidation or liquidation, shall be deemed an assignment under this Section 19. Any assignee or subtenant shall assume all of Tenant's obligations under this Lease and be jointly and severally liable with Tenant hereunder. 20. LIENS AND INSOLVENCY. (a) Liens. Tenant shall keep its interest in this Lease and any Property of Tenant (other than unattached personal property) and the Premises, and the Project free from any liens arising out of any work performed or materials ordered or obligations incurred by or on behalf of Tenant and hereby indemnifies and holds Landlord harmless from any liability from any such lien. In the event any lien is filed against the Premises, the Project or any portion thereof by any person claiming by, through or under Tenant, Tenant shall, upon request of Landlord, at Tenant's expense, immediately either cause such lien to be released of record or furnish to Landlord a bond in form and amount and issued by a surety satisfactory to Landlord, indemnifying Landlord, and the Project 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 and for Tenant, if, and only if, such proceedings suspend the collection thereof against Landlord, Tenant and the Premises and neither the Premises, nor the Project, nor any part thereof or interest therein is or will be in any danger of being sold, forfeited or lost. 16 22 (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, 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. 21. DEFAULT. (a) Default By Tenant. The occurrence of any one or more of the following events shall constitute a material default and breach of this Lease by Tenant: (i) the abandonment of the Premises by Tenant or the vacating of the Premises for more than thirty (30) consecutive days; (ii) the failure by Tenant to make any payment of Rent or any other payment required to be made by Tenant hereunder, within five (5) days of date due; (iii) the failure by Tenant to observe or perform any of the other covenants, conditions or provisions of the Lease, where such failure shall continue for a period of twenty (20) days; provided, however, if more than twenty (20) days are reasonably required for its cure then Tenant shall not be deemed to be in default if Tenant commences such cure within said 20-day period and thereafter diligently prosecutes such cure to completion; (iv) the making by Tenant of any general assignment or general arrangement for the benefit of creditors; (v) the filing by or against Tenant of a petition to have Tenant adjudged bankrupt or a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days); (vi) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in the Lease, where possession is not restored to Tenant within thirty (30) days; or (vii) the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged within thirty (30) days. The above notice periods may, at the election of Landlord, run concurrently with any statutorily required notice periods. (b) Remedies Cumulative; Injunction. All rights and remedies of Landlord herein enumerated shall be cumulative, and none shall exclude any other right or remedy allowed by law or in equity. In addition to the other remedies in this Lease provided, Landlord shall be entitled to restrain by injunction the violation or attempted violation of any of the covenants, agreements or conditions of this Lease. (c) Landlord's Remedies Upon Tenant Default. Upon an uncured default of this Lease by Tenant, Landlord, besides other rights or remedies it may have, at its option, may enter the Premises or any part thereof, either with or without process of law, and expel, remove or put out Tenant or any other persons who may be thereon, together with all personal property found therein. No such reentry shall be construed as an election on Landlord's part to terminate this Lease unless a written notice of such intention is given to Tenant. Landlord may terminate this Lease, or it may from time to time, without terminating this Lease and as agent of Tenant, 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 17 23 hereinafter set forth. In the case of any default, re-entry and/or dispossession, by summary proceedings or otherwise, all Rent and Additional Rent shall become due thereupon and be paid up to the time of such re-entry or dispossession, 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 30(q) hereof, accruing from the date of any such expenditure by Landlord. 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 and 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 or refusal 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, however, Landlord shall have the obligation to exert reasonable efforts to mitigate damages, provided that Landlord shall not be required to relet the Premises prior to leasing any other space owned by the Landlord, or its affiliates, within a one mile radius. 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. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for such previous breach and default. Should Landlord at any time terminate this Lease by reason of any default, in addition to any other remedy it may have, it may recover from Tenant the present value, using a ten percent (10%) discount rate, of the amount of Rent and Additional Rent reserved in this Lease for the balance of the Term, as it may have been extended, less the amount that Tenant proves could be collected for the remainder of the Term, plus all court costs and attorneys fees incurred by Landlord in the collection of the same. Tenant acknowledges that certain benefits or concessions provided by Landlord are conditioned upon Tenant's timely, full and faithful performance of each and every obligation, covenant, representation and warranty of this Lease throughout the entire term of this Lease, even though such benefits or concessions may be realized by Tenant over less than the entire term of this Lease. Accordingly, notwithstanding anything to the contrary contained herein, in the event Landlord brings an action against Tenant for default under this Lease which results in a termination of this Lease and eviction of Tenant, Landlord shall become immediately entitled to receive from Tenant as Additional Rent the amount of all such benefits and concessions allocable to the balance of the Lease term on a pro rata basis, i.e. an amount equal to the product of (x) the sum of (a) any amounts 18 24 theretofore or thereafter paid by Landlord to Tenant or to any third party, or any amounts credited to Tenant or to any third party, for or on account of (i) any moving, tenant improvement, decorating or other allowance or credit granted to Tenant but only to the extent such tenant improvements are demolished for the next occupant of the premises, (ii) any real estate commission paid on account of this Lease, and (iii) any expenses or costs related to assumption by Landlord of any other lease, plus (b) an amount equal to the difference between the rent as specified in Section 4 above and rent for any period for which this Lease provides any lesser amount including zero or nominal rent, including for any period of early occupancy of the Premises prior to the commencement of the term of this Lease, plus (c) the amount spent by Landlord for any tenant improvements to the Premises but only to the extent such tenant improvements are demolished for the next occupant of the premises; multiplied by (y) a fraction, the numerator of which is the number of days of the term of this Lease remaining between the date of default and the expiration of the term of this Lease, and the denominator of which is the total number of days of the term of this Lease. By way of example, if Tenant receives a moving allowance of $1,000, the Lease term is 3 years (1,095 days) and a default occurs at the end of the first year such that there were 2 years (730 days) remaining, the Tenant shall pay as additional rent the sum of $666.67, which is computed as follows: ($1,000 x 730)/1,095 = $666.67. (d) Waiver of Redemption Rights. Tenant, for itself, and on behalf of any and all persons claiming through or under it, including creditors of all kinds, does hereby waive and surrender all right and privilege which they or any of them might have under or by reason of any present or future law, to redeem the Premises or to have a continuance of this Lease for the term hereof, as it may have been extended, after having been dispossessed or ejected therefrom by process of law or under the terms of this Lease or after the termination of this Lease as herein provided. (e) Nonpayment of Additional Rent. All costs and expenses which Tenant assumes or agrees to pay to Landlord pursuant to this Lease shall be deemed Additional Rent and, in the event of nonpayment thereof, Landlord shall have all the rights and remedies herein provided for in case of nonpayment of Rent. (f) Interest. All past due Rent shall bear interest at the rate of 15% per annum. 22. PRIORITY. (a) Subordination of Lease. This Lease shall be subordinate to any mortgage or deed of trust now existing or hereafter placed upon the Premises or the Project or any portion thereof containing the Premises, created by or at the instance of Landlord, and to any and all advances to be made thereunder and to interest thereon and all modifications, renewals and replacements or extensions thereof ("Landlord's Mortgage") provided however, that the holder of any Landlord's Mortgage or any person or persons purchasing or otherwise acquiring the Premises, the Project or any portion thereof containing the Premises at any sale or other proceeding under any Landlord's Mortgage may elect to continue this Lease in full force and effect; and in such event, Tenant shall attorn to such person or persons. Tenant shall properly execute, acknowledge and deliver documents which the holder of any Landlord's Mortgage may require to effectuate the 19 25 provisions of this Section 22 within five (5) days after Landlord's request. Not withstanding the above, Landlord shall use commercially reasonable efforts to cause any holder of Landlord's mortgage to enter into a Nondisturbance Agreement with Tenant which shall provide in essence that upon any foreclosure of any mortgage or deed of trust by such holder of Landlord's mortgage, that such holder will not disturb Tenant's rights pursuant to this Lease, so long as Tenant is not in default pursuant to the provisions of this Lease. 23. ESTOPPEL CERTIFICATES. (a) Delivery of Estoppel. Tenant shall, from time to time, upon written request of Landlord, execute, acknowledge and deliver to Landlord or its designee a written statement 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 Basic Rent and the amount of Additional Rent currently being paid towards increases in Operating Costs, and the date to which such Rent has been paid; and certifying: (i) whether this Lease is in full force and effect and has not been assigned or amended in any way (or specifying the date and terms of agreement so affecting this Lease); (ii) whether this Lease represents the entire agreement between the parties as to this leasing; that all obligations under this Lease to be performed by the Landlord have been satisfied or specifying those that have not been satisfied; (iii) whether on this date there are no existing claims, defenses or offsets which the Tenant has against the enforcement of this Lease by the Landlord; (iv) whether no Rent has been paid more than one month in advance; and that no security has been deposited with Landlord (or, if so, the amount thereof); and (v) such other items as Landlord shall reasonably request. It is intended that any such statement delivered pursuant to this Section may be relied upon by a prospective purchaser of Landlord's interest or holder of any mortgage upon Landlord's interest in the Building or the Project. (b) Failure to Deliver Estoppel. If Tenant shall fail to respond within ten (10) 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 to have certified 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. 24. SURRENDER OF POSSESSION. Subject to the terms of Section 14 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 "broom-clean" and in as good condition as when received by Tenant from Landlord or as thereafter improved, damage thereto from causes beyond the reasonable control of Tenant, ordinary wear and tear and damage by fire or casualty not intentionally caused by Tenant excepted. Tenant shall remove all of its personal property and trade fixtures from the Premises and the Project at the expiration of the term and repair any damage caused by such removal; any property not so removed shall be deemed abandoned and may be sold or otherwise disposed of as Landlord deems advisable. 20 26 25. NON-WAIVER. Waiver by Landlord of any term, covenant or condition herein contained or any breach thereof shall not be deemed to be a waiver of such term, covenant, or condition or of any subsequent breach of the same or any other term, covenant, or condition herein contained. The subsequent acceptance of Rent or Additional Rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular Rent or Additional Rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such Rent or Additional Rent. 26. HOLDOVER. If Tenant remains in possession of the Premises or any part thereof after the expiration of the term of this Lease with the express written consent of Landlord, such occupancy shall be a tenancy from month-to-month at a rental in the amount equal to one and one-half (1-1/2) times the last monthly rental plus all other charges payable under this Lease, and subject to all of the terms, covenants and conditions of this Lease applicable to a month-to-month tenancy. Tenant acknowledges and agrees that this Section 26 does not grant any right to Tenant to holdover. 27. 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, but are made and intended for the purpose of binding only the Landlord's interest in the Premises and Building, as the same may from time to time be encumbered. No personal liability or personal responsibility is assumed by, nor shall at any time be asserted or enforceable against Landlord or its partners or their respective heirs, legal representatives, successors or assigns on account of the Lease or on account of any covenant, undertaking or agreement of Landlord in this Lease contained. 28. TRANSFER OF LANDLORD'S INTEREST. In the event of any transfer of Landlord's interest in the Premises or in the Building, the transferor shall 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. 29. RIGHT TO PERFORM. If Tenant shall fail to pay any sum of money 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. 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 29 as in the case of default by Tenant in the payment of Rent. 30. GENERAL. 21 27 (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) Heirs 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 heirs, executors, administrators, successors and assigns. (c) Authority. Each individual executing this Lease on behalf of Tenant represents and warrants that he or she is duly authorized to execute and deliver this Lease on behalf of Tenant, and that this Lease is binding upon Tenant in accordance with its terms. (d) No Brokers. Except as set forth in Section 1(q), Tenant represents and warrants to Landlord that it has not engaged any broker, finder or other person who would be entitled to any commission or fees in respect of the negotiation, execution or delivery of this Lease and shall indemnify and hold harmless Landlord against any loss, cost, liability or expense incurred by Landlord as a result of any claim asserted by any such broker, finder or other person on the basis of any arrangements or agreements made or alleged to have been made by or on behalf of Tenant. (e) Entire Agreement. This Lease is the final and complete expression of Landlord and Tenant relating in any manner to the leasing, use and occupancy of the Premises, to Tenant's use of the Project or portions thereof, 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 both Landlord and Tenant. (f) Severability. Any provision of this Lease which shall prove to be 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. (g) Force Majeure. Except for the payment of Rent, Additional Rent or other sums payable by Tenant to Landlord, 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 control, including without limitation, strikes, unavailability or delay in obtaining fuel, labor or materials, accidents, floods, defective materials, fire or other casualty, adverse weather conditions, inability to obtain building or use and occupancy certificates, embargoes, governmental regulations, acts of God, war or other strife, or other causes similar or dissimilar. (h) Notices. All notices under this Lease shall be in writing and delivered in person or sent by registered or certified mail, postage prepaid, to Landlord and to Tenant at the Addresses provided respectively in Section 1(e) and 1(c) (provided that after the Commencement Date any such notice shall be mailed or delivered by hand to Tenant at the Premises) 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 22 28 designated by any such party in writing. Notices mailed as aforesaid shall be deemed given on the date of such mailing. (i) 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. (j) Governing Law. This Lease shall be governed by and construed in accordance with the internal laws of the state of Washington. (k) Recording. Tenant shall not record this Lease or a memorandum hereof without Landlord's prior written consent and such recordation shall, at the option of Landlord, constitute a non-curable default of Tenant hereunder. (1) Waivers. No waiver by Landlord of any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Tenant of the same or any other provision. Landlord's consent to or approval of any act shall not be deemed to render unnecessary the obtaining of Landlord's consent to or approval of any subsequent act by Tenant. The acceptance of rent hereunder by Landlord shall not be a waiver of any preceding breach at the time of acceptance of such rent. (m) Time of Essence. Time is of the essence for the performance of all of the obligations specified hereunder. (n) Merger. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger and shall, at the option of Landlord, terminate all or any existing subtenancies or may, at the option of Landlord, operate as an assignment to Landlord of any or all of such subtenancies. (o) Right to Change Public Spaces. Landlord shall have the right at any time, without thereby creating an actual or constructive eviction or incurring any liability to tenant therefor, 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 the arrangement or location of the elevators serving the Premises, make any change which shall diminish the area of the Premises, or make any change which shall change the character of the Building from that of a first-class office building. (p) Name. The Building and the Project will be known by such name as Landlord may designate from time to time. Landlord reserves the right to name and rename the Building and/or the Project from time to time and to install signs accordingly, without compensation or prior notice to Tenant. 23 29 (q) Overdue Payments. Any Rent, Additional Rent or other sums payable by Tenant to Landlord under this Lease which shall not be paid when due thereof, shall bear interest at a rate equal to fifteen percent (15%), calculated from the original due date thereof to the date of payment. Any late payment of Rent (i.e. Not paid within five (5) days when due) shall also be subject to a collection fee equal to the greater of $100.00 or five percent (5%) of the amount due. (r) Relocation of Premises. During the term of the Lease Landlord may relocate the Tenant's Premises within the Project. Said relocation shall be at the total cost and expense of Landlord. In the event Landlord so elects to relocate Tenant, Landlord shall notify Tenant, specifying the relocation space to Tenant. Tenant shall have fifteen (15) days from the receipt of said notice to alert to accept said relocation. In the event that the relocation proposal is accepted by Tenant, Landlord and Tenant shall revise the Tenant's Lease to reflect the new space. Upon such relocation, such new space shall be deemed the Premises hereunder for all purposes and the Lease shall be deemed amended to that effect without further formality. Rental rates for the new space shall be the same as those agreed to in the original Lease Agreement, subject to adjustment for additional space, or less space, as agreed to by the parties. All other terms and conditions of the original Lease shall remain in full force and effect. In the event that Tenant elects not to accept the relocation of its Premises, Tenant shall so notify Landlord in writing. Landlord shall then have the option for thirty (30) days to terminate Tenant's Lease, or to allow Tenant to remain in its present Premises. If Tenant accepts such relocation, the following conditions will apply: (i) Landlord will bear all costs and expenses resulting from the move, including but not limited to - replace or relocate communication, computer and phone connections - reprint letterhead, cards and forms - move building signage - move furniture, equipment, partitions, etc. (ii) Landlord will provide comparable space, to include: - similar linear feet of window line - similar functional layout and flow - similar quantity and quality of improvements (iii) A rental credit of $55,000 will be provided by Landlord for the next rent due under the Lease and (iv) the move will occur during periods between Friday 5:00 PM and Monday 6:00 AM. (s) Advertising. Tenant shall not inscribe any inscription, or post, place or in any manner display any sign, notice, picture, placard or poster, or any advertising matter whatsoever in or about the Premises or the Building or the Project at places visible (either directly or indirectly as an outline or shadow on a glass pane) from anywhere outside the Premises without first obtaining Landlord's written consent thereto. Any such consent by Landlord shall be upon the understanding and condition that Tenant will remove the same at the expiration or sooner termination of this Lease and Tenant shall repair any damage to the Premises, the Building or the Project caused thereby. 24 30 (t) Parking. Parking shall at all times be governed by reasonable rules and regulations as set forth in Exhibit D, which shall be published from time to time by Landlord. Parking may be on a reserved stall and/or undesignated stall--"window sticker" basis, and may be self-service and/or attendant service, as determined from time to time by Landlord. Tenant shall have the right to use that number of parking stalls as set forth in Section 1(p). (u) Execution of Lease by Landlord. The submission of this document for examination and negotiation does not constitute an offer to lease, or a reservation of, or option for the Premises, and this document shall become effective and binding only upon execution and delivery by Landlord. No act or omission of any employee or agent of Landlord or of Landlord's broker shall alter, change or modify any of the provisions hereof. 31. LANDLORD'S COVENANTS. (a) 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, so long as Tenant is not in default hereunder. (b) Hazardous Waste or Materials. Landlord represents to Tenant that to the best of Landlord's actual knowledge no hazardous waste or materials have been generated, stored or disposed of by Landlord on the land or in or on the Building, other than in compliance with applicable laws. (c) Rentable Square Feet. Landlord warrants that the rentable square feet of the Project is 69,596 square feet, and the rentable square feet of the Premises is 12,205 square feet. Landlord further warrants that such square feet have been calculated in accordance with BOMA Standards (1996 version). 32. GUARANTY OF LEASE. In order to induce Landlord to execute this Lease, Tenant has agreed to deliver to Landlord a Guaranty of Lease, in the form attached hereto as Exhibit E, from William T. Baxter, Albert T. Dosser and Peter R. Gregory. 25 31 IN WITNESS WHEREOF this Lease has been executed the day and year first above set forth. LANDLORD: SEATTLE OFFICE ASSOCIATES L.L.C. a Washington Limited Liability company By /s/ P. LANGSTON SLIGH JR. ------------------------------- Its Member ----------------------------- TENANT: bsquare consulting, inc. a Washington Corporation By /s/ WILLIAM T. BAXTER ------------------------------- Its President & CEO ----------------------------- 26 32 LANDLORD ACKNOWLEDGMENT STATE OF WASHINGTON ) ) SS COUNTY OF KING ) I certify that I know or have satisfactory evidence that P. Langston Sligh Jr is the person who appeared before me, and said person acknowledged that said person signed this instrument, on oath stated that said person was authorized to execute the instrument and acknowledged it as a managing member of Seattle Office Associates, a limited liability company, to be the free and voluntary act of such limited liability company for the uses and purposes mentioned in the instrument. Dated this 15th day of November, 1996 /s/ [Illegible Signature] ------------------------------------ Notary Public, in and for state of Washington, residing at Kirkland WA My appointment expires 8/29/00 TENANT CORPORATE ACKNOWLEDGMENT STATE OF WASHINGTON ) ) SS COUNTY OF KING ) I certify that I know or have satisfactory evidence that William T. Baxter is the person who appeared before me, and said persons acknowledged that they signed this instrument, on oath stated that they were authorized to execute the instrument and acknowledged it as the President and CEO of a corporation, to be the free and voluntary act of such corporation for the uses and purposes mentioned in the instrument. Dated this 15th day of November, 1996 Notary Public and for state of Washington, residing at Kirkland WA My appointment expires 8/29/00 27 33 EXHIBIT A LEGAL DESCRIPTION OF LAND That portion of the northeast quarter of the southwest quarter of Section 10, Township 24 North, Range 5 East, W.M., in King County, Washington, lying southerly of the south line of the frontage road right-of-way known as S.E. 36th Street on the south side of primary State Highway No. 2 as shown on State of Washington, Department of Highways Map, SR 90, MP 7.71 to MP 11.72, Richards Road to Lake Sammamish, sheet 3 of 35, latest revision date March 31, 1977, on file at the office of the Department of Transportation, Olympia, Washington, except that portion lying westerly of the west line of an electric transmission easement, granted to Puget Sound Power & Light Company by instrument recorded under Auditor's File No. 2545297, also subject to an easement for a petroleum pipeline, as recorded under Auditor's File No. 5785336, and also subject to a perpetual slope easement, as acquired under Superior Court Cause No. 7733237. 34 EXHIBIT B SPACE PLAN OF PREMISES [DIAGRAM] 35 EXHIBIT C TENANT IMPROVEMENTS Landlord to complete the following tenant improvements at its cost before ______,1996: a. carpet and paint entire premises. Carpet to be building standard (Mohawk RIO 30/36 in "Federal Blue" #511). Carpet is to be cut pile in offices and loop pile in hallways/corridors as specified by Tenant. Paint color to be chosen by Tenant subject to approval by Landlord. Vinyl to be placed in kitchen and lunchroom area will be building standard (Armstrong Corlon in "Suffield Slate" #86807). New rubber cove base to be installed (Robbe "Gray" #50) in all areas. b. Clean up/touch up of kitchen cabinet fronts. c. Building standard signage to be provided for Tenant door and for main building directory. d. Replacement of broken, discolored or stained ceiling tiles. e. Placement of locks on selected interior office doors, to be determined by Tenant. f. Remove current demising wall in corridor in NW corner of space. g. Open fire door currently separating space in SE corner. h. Make sure that all interior lighting is fully operational. i. Clean all window blinds. j. Landlord may elect at its option to replace all interior light fixture lenses with 1" paragrid lens covers. The Landlord will cause the following improvements to be done and completed before _______ __, 1996 at the sole cost of the Tenant. Tenant shall approve all costs prior to the start of the work. a. Remove the wall between the two offices in the SW corner of the space. Remove the extra door and patch wall as required. Relite next to door is to remain if possible depending upon the construction of the door/relite unit. Additional work as required to finish out the space and repair the demolition. b. Place the extra door from a. above into a newly enlarged doorway between the File/Shipping rooms where there currently exists only a doorway. Frame and trim as required. 36 EXHIBIT D RULES AND REGULATIONS 1. Except as specifically provided in the Lease to which these Rules and Regulations are attached, no sign, placard, picture, advertisement, name or notice shall be installed or displayed on any part of the outside or inside of the Building without the prior written consent of Landlord. Landlord shall have the right to remove, at Tenant's expense and without notice, any sign installed or displayed in violation of this rule. All approved signs or lettering on doors and walls shall be printed, painted, affixed or inscribed at the expense of Tenant by a person and in a form approved by Landlord. 2. If Landlord objects in writing to any curtains, blinds, shades, screens or hanging plants or other similar objects attached to or used in connection with any window or door of the Premises, or placed on any windowsill which is visible from the exterior of the Premises, Tenant shall immediately discontinue such use. Tenant shall not place anything against or near glass partitions or doors or windows which may appear unsightly from outside the Premises. 3. Tenant shall not obstruct any sidewalks, halls, passages, exits, entrances, elevators or stairways of the Building. The halls, passages, exits, entrances, elevators, and stairways are not open to the general public, but are open, subject to reasonable regulation, to Tenant's business invitees. Landlord shall in all cases retain the right to control and prevent access thereto of all persons whose presence in the judgment of Landlord would be prejudicial to the safety, character, reputation and interest of the Building and its tenants; providing that nothing herein contained shall be construed to prevent such access to persons with whom any tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal or unlawful activities. No tenant and no employee or invitee of any tenant shall go upon the roof of the Building. 4. The directory of the Building will be provided exclusively for the display of the name and location of tenants only, and Landlord reserves the right to exclude any other names, including individual's names, therefrom. 5. All cleaning and janitorial services for the Building and the Premises shall be provided exclusively through Landlord, and except with the written consent of Landlord, no person or persons other than those approved by Landlord shall be employed by Tenant or permitted to enter the Building for the purpose of cleaning the same. Tenant shall not cause any unnecessary labor by carelessness or indifference to the good order and cleanliness of the Premises. 6. Landlord will furnish Tenant, free of charge, with eight keys to each door lock in the Premises. Landlord may make a reasonable charge for any additional keys. Tenant shall not alter any lock or install a new additional lock or bolt on any door of its Premises. Tenant, upon the termination of its tenancy, shall deliver to Landlord the keys of all doors which have been furnished to Tenant, and in the event of loss of any keys so furnished, shall pay Landlord therefore. 7. If Tenant requires telegraphic, telephonic, burglar alarm or similar services, it shall first obtain, and comply with, Landlord's instructions in their installation. 8. The Building elevator shall be available for use by all tenants in the Building, subject to such reasonable scheduling as Landlord, in its discretion, shall deem appropriate. No equipment, materials, furniture, packages, supplies, merchandise or other property will be received in the Building or carried in the elevators except between such hours and in such elevators as may be designated by Landlord. Tenant's initial move in and 37 subsequent deliveries of bulky items, such as furniture, safes and similar items shall, unless otherwise agreed by Landlord, be made during the hours of 6P.M. to 6A.M.or on Saturday or Sunday. Deliveries during normal office hours shall be limited to normal office supplies and other small items. No deliveries shall be made which impede or interfere with other tenants or the operation of the Building. 9. Tenant shall not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry and which is allowed by law. Landlord shall have the right to prescribe the weight, size and position of all equipment, materials, furniture or other property brought into the Building. Heavy objects shall, if considered necessary by Landlord, stand on such platforms as determined by Landlord to be necessary to properly distribute the weight, which platforms shall be provided at Tenant's expense. Business machines and mechanical equipment belonging to Tenant, which cause noise or vibration that may be transmitted to the structure of the Building or to any space therein, to such a degree as to be objectionable to Landlord or to any tenants in the Building, shall be placed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devices sufficient to eliminate noise or vibration. The persons employed to move such equipment in or out of the Building must be acceptable to Landlord. Landlord will not be responsible for loss of, or damage to, any such equipment or other property from any cause, and all damage done to the Building by maintaining or moving such equipment or other property shall be repaired at the expense of Tenant. 10. Tenant shall not use or keep in the Premises any kerosene, gasoline or inflammable or combustible fluid or material other than those limited quantities necessary for the operation or maintenance of office equipment. Tenant shall not use or permit to be used in the Premises any foul or noxious gas or substance, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors or vibrations, nor shall Tenant bring into or keep in or about the Premises any birds or animals. 11. Tenant shall not use any method of heating or air conditioning other than that supplied by Landlord. 12. Tenant shall not waste electricity, water or air conditioning and agrees to cooperate fully with Landlord to assure the most effective operation of the Building's heating and air conditioning and to comply with any governmental energy-saving rules, laws or regulations of which Tenant has actual notice, and shall refrain from attempting to adjust controls. Tenant shall keep corridor doors closed, and shall close window coverings at the end of each business day. 13. Landlord reserves the right, exercisable without notice and without liability to Tenant, to change the name and street address of the Building. 14. Landlord reserves the right to exclude from the Building between the hours of 6 P.M. and 7 A.M. the following day, or such other hours as may be established from time to time by Landlord, and on Sundays and legal holidays, any person unless that person is known to the person or employee in charge of the Building and has a pass or is properly identified. Tenant shall be responsible for all persons for whom it requests passes and shall be liable to Landlord for all acts of such persons. Landlord shall not be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. Landlord reserves the right to prevent access to the Building in case of invasion, mob, riot, public excitement or other commotion by closing the doors or by other appropriate action. 15. Tenant shall close and lock the doors of its Premises and entirely shut off all water faucets or other water apparatus, and electricity, gas or air outlets before tenant and its employees leave the Premises. Tenant shall be responsible for any damage or injuries 32 38 sustained by other tenants or occupants of the Building or by Landlord for noncompliance with this rule. 16. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein. The expense of any breakage, stoppage or damage resulting from violation of this rule shall be borne by the tenant who, or whose employees or invitees, shall have caused it. 17. Tenant shall not sell, or permit the sale at retail, of newspapers, magazines, periodicals, theater tickets or any other goods or merchandise to the general public in or on the Premises. Tenant shall not make any room-to-room solicitation of business from other tenants in the Building. Tenant shall not use the Premises for any business or activity other than that specifically provided for in Tenant's Lease. 18. Tenant shall not install any radio or television antenna, loudspeaker or other devices on the roof or exterior walls of the Building. Tenant shall not interfere with radio or television broadcasting or reception from or in the Building or elsewhere. 19. Tenant shall not mark, drive nails, screw or drill into the partitions, woodwork or plaster, or in any way deface the Premises or any part thereof, except in accordance with the provisions of the Lease pertaining to alterations. Landlord reserves the right to direct electricians as to where and how telephone and telegraph wires are to be introduced to the Premises. Tenant shall not cut or bore holes for wires. Tenant shall not affix any floor covering to the floor of the Premises in any manner except as approved by Landlord. 20. Tenant shall repair any damage resulting from noncompliance with this rule. Tenant shall not install, maintain or operate upon the Premises any vending machines without the written consent of Landlord. 21. Canvassing, soliciting and distribution of handbills or any other written material, and peddling in the Building are prohibited, and Tenant shall cooperate to prevent such activities. 22. Landlord reserves the right to exclude or expel from the Building any person who, in Landlord's judgment, is intoxicated or under the influence of liquor or drugs or who is in violation of any of the Rules and Regulations of the Building. 23. Tenant shall store all its trash and garbage within its Premises or in other facilities provided by Landlord. Tenant shall not place in any trash box or receptacle any material which cannot be disposed of in the ordinary and customary manner of trash and garbage disposal. All garbage and refuse disposal shall be made in accordance with directions issued from time to time by Landlord. Tenant will take advantage of any recycling available at the site. 24. The Premises shall not be used for the storage of merchandise held for sale to the general public, or for lodging or for manufacturing of any kind, nor shall the Premises be used for any improper, immoral or objectionable purpose. No cooking shall be done or permitted on the Premises without Landlord's consent, except that use by Tenant of Underwriters' Laboratory-approved equipment for brewing coffee, tea, hot chocolate and similar beverages, or use of microwave ovens for employee use shall be permitted, provided that such equipment and use is in accordance with all applicable federal, state, county and city laws, codes, ordinances, rules and regulations. 25. Tenant shall not use in any space or in the public halls of the Building, any hand truck except those equipped with rubber tires and side guards or such other material- 33 39 handling equipment as Landlord may approve. Tenant shall not bring any other vehicles of any kind into the Building. 26. Without the written consent of Landlord, Tenant shall not use the name of the Building in connection with or in promoting or advertising the business of Tenant except as Tenant's address. 27. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency. 28. Tenant assumes any and all responsibility for protecting its Premises from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Premises closed. 29. Tenant's requirements will be attended to only upon appropriate application to the Building management office by an authorized individual. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord, and no employee of Landlord will admit any person (Tenant or otherwise) to any office without specific instructions from Tenant. 30. Tenant shall comply with all parking requirements of the property, and will not park more vehicles at the property than provided in Tenant's lease. Landlord reserves the right to ticket and/or tow vehicles, at Tenant's expense, not displaying a valid parking permit. a) Parking stickers or any other device or form of identification supplied by Landlord as a condition of the use of the parking facilities shall remain the property of Landlord. Such parking identification device must be displayed as requested and may not be mutilated in any manner. The serial number of the parking identification device may not be obliterated. Devices are not transferable, and any device in the possession of an unauthorized holder and will be void. b) Loss or theft of parking identification devices from automobiles must be reported immediately, and a lost or stolen report must be filed by the customer at that time. Landlord has the right to exclude any vehicle from the parking facilities that does not have an identification device. c) Tenant shall not park or permit the parking of any vehicle under its control in any parking areas designated by Landlord as areas for parking by visitors to the Building. Tenant or its customers, suppliers, employees, or invitees shall not use motor homes or other similar vehicles in the parking areas and shall not leave vehicles in the parking areas overnight or for any extended period of time, nor park any vehicles in the parking areas other than automobiles, motorcycles, motor driven or nonmotor driven bicycles or four-wheeled trucks not more than 20 feet in length. Provided that, from time to time, Tenant may park passenger automobiles overnight. d) Washing, waxing, cleaning or servicing of any vehicle in any area not specifically reserved for such purpose is prohibited. e) Vehicles must be parked entirely within the painted stall lines of a single parking stall. f) Parking is prohibited: i) in areas not striped for parking; ii) in aisles 34 40 iii) where "no parking" signs are posted; iv) on ramps; v) in cross hatched areas; and vi) in such other areas as may be designated by Landlord or Landlord's agent from time to time. g) Landlord or its agents shall have the right to cause to be removed any car of Tenant, its employees, invitees, licensee, or agent, that may be parked in unauthorized area, and Tenant agrees to save and hold harmless Landlord, its agent and employees from any and all claims, losses, damages and demands asserted or arising in respect to or in connection with the removal of any such vehicle and for all expenses incurred by Landlord in connection with such removal. Tenant will from time to time, upon request of Landlord, supply Landlord with a list of license plate numbers or vehicle owned or operated by its employees and agents. h) Landlord reserves the right to modify and/or adopt such other reasonable and non-discriminatory Rules and Regulations for the parking facilities as it deems necessary for the operation of the parking facilities. Landlord may refuse to permit any person who violates these Rules and Regulations to park in the parking facilities, and any violation shall subject the car to removal at the owner's expense. 31. Tenant shall be responsible for maintaining and, if necessary, replacing any appliances that were provided in any Tenant Improvements (i.e. microwaves and dishwashers, etc.). 32. Landlord may waive any one or more of these Rules and Regulations for the benefit of Tenant or any other tenant, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of Tenant or any other tenant, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all of the tenants of the Building. 33. These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of Tenant's lease of its Premises in the Building. 34. Landlord reserves the right to amend these rules and to make such other and reasonable Rules and Regulations as, in its judgment, may from time to time be needed for safety and security, for care and cleanliness of the Building and for the preservation of good order therein. Tenant agrees to abide by all such Rules and Regulations hereinabove stated and any additional rules and regulations which are adopted. 35. Tenant shall be responsible for the observance of all of the foregoing rules by Tenant's employees, agents, clients, customers, invitees and guests. 35 41 EXHIBIT E GUARANTY OF LEASE William T. Baxter ("Guarantor"), hereby agrees with Seattle Office Associates LLC ("Landlord"), as follows: 1. Consideration: Guarantor has agreed to make and deliver this guarantee to Landlord in order to induce Landlord to enter into a new lease ("Lease"), dated ________, 1996, with bsquare consulting, inc. (Tenant), as tenant, pursuant to which the obligations hereby guaranteed have been created. Guarantor hereby acknowledges that it has and will derive a direct financial benefit from Landlord's entering into the Lease. 2. Guarantee: Guarantor hereby guarantees the Lease, as originally executed and as thereafter modified or amended, as follows: Guarantor hereby guarantees and undertakes with Landlord that in the event that the Tenant shall default in the payments of any sums due and owing to Landlord from Tenant on account of the Lease or in the event that the Tenant shall default in the full and faithful performance of Tenant's obligations, undertakings and covenants contained in the Lease, then Guarantor shall pay to Landlord, within ten days of demand, any and all sums so due to Landlord (not to exceed the limitation set forth below) and any damages incurred by Landlord on account thereof. This guaranty is absolute and unconditional. Guarantor's total obligation under this guarantee is limited to $125,000. 3. Term: Guarantor's obligations and undertakings herein contained shall remain in full force and effect and shall survive termination of the Lease. 4. Rights of Landlord: Without diminishing, releasing or discharging Guarantor's obligations hereunder, Landlord shall have the right to exercise the following powers and rights in Landlord's sole discretion: Landlord may change, alter, cancel, renew, extend, decrease or increase the obligations of Tenant to Landlord (increases in the obligation of the Tenant to Landlord will not increase the $125,000 maximum limitation under this guaranty). Landlord may add other guarantors or procure additional guarantees, release other guarantors or guarantees and apply monies or properties received from Tenant upon debts regardless of whether the same may be guaranteed hereby, otherwise secured, barred by statutes of limitation or discharged other than by payment. Landlord may exercise rights hereunder in the event of Tenant's insolvency, bankruptcy, receivership or assignment for benefit of creditors, in which event all of Tenant's liabilities and indemnities to Landlord shall be satisfied in full before Guarantor shall be entitled to participation in the distribution of Tenant's assets. Landlord may deal with Tenant, Guarantor and any other person liable on the indebtedness, obligation or liabilities to Landlord as Landlord deems advisable. 5. Default of Tenant: Notice of acceptance of this Guarantee and of defaults, breaches, demands, presentments, protest, and amendment to or modification or cancellation of the Lease, and of any other kind is fully waived by Guarantor. Upon default by Tenant on any of its obligations to Landlord, then at Landlord's option, without notice 42 or demand upon Guarantor and without exercising any other right or remedy Landlord may have, Landlord may proceed directly against Guarantor or any other guarantor to enforce Landlord's rights hereunder. Without releasing or affecting Guarantor's obligations hereunder, Landlord may enforce any rights it may have against any persons and properties liable. 6. Impairment of Rights: Landlord's rights shall be cumulative and not exclusive. No impairment, limitation or modification or Tenant's liabilities or obligations or of its trustee or receiver or any such impairment, limitation or modification of Landlord's remedies by virtue of the operation of bankruptcy or similar laws or decisions or any court or courts nor any disaffirmance of the Landlord's obligations under the Lease in such proceedings shall affect Landlord's rights against Guarantor hereunder. 7. Successor and Assigns The obligations of Guarantor shall inure to the benefit of the Landlord's assigns and successors in interest in the Lease and shall be binding upon Guarantor's heirs, successors and assigns. Reference to Tenant herein includes any assignee of or successor to Tenant's interest under the terms of the Lease or any subtenant or any other party who is now or in the future may be a tenant under the Lease. 8. Costs and Attorney's Fees: Guarantor shall pay all costs, expenses and charges, including all attorneys fees, which Landlord may incur in the enforcement of the provisions hereof. 9. Notices: Any notice hereunder may be given to Guarantor by mail addressed to: William T. Baxter 3233 - 168TH Place SE Bellevue, WA 98008 or other address as Guarantor shall designate to Landlord in writing. Dated this _______ day of _______, 19__. GUARANTOR by ------------------------------- William T. Baxter EX-10.9 13 OFFICE LEASE AGREEMENT 1 EXHIBIT 10.9 OFFICE LEASE AGREEMENT BETWEEN Seattle Office Associates, LLC LANDLORD AND bsquare consulting, inc. TENANT 2 ADDENDUM TO DELPHI OFFICE BUILDING AGREEMENT LEASE: DATED MARCH 24, 1997 PREMISES: SUITE 310 LANDLORD: SEATTLE OFFICE ASSOCIATES, LLC TENANT: bsquare consulting, inc. The undersigned Landlord and Tenant agree to the establishment of the following dates as they are used in the above referenced lease agreement: Lease Commencement Date: June 15, 1997 Rent Commencement Date: June 15, 1997 Lease Termination Date: June 30, 2002 Extension Option Notification Date January 1, 2002 EXCEPT as herein specifically amended, the lease shall in all respects remain in full force and effect. Dated: September 3rd, 1997 Landlord Tenant SEATTLE OFFICE ASSOCIATES LLC bsquare consulting, inc. by: [ILLEGIBLE] by: /s/ ALBERT DOSSER ------------------------------- ------------------------------- its: controller its: Sr. Vice President ------------------------------ ------------------------------ 3 TABLE OF CONTENTS 1. BASIC LEASE INFORMATION AND EXHIBITS.....................................................1 (a) Lease Date...........................................................................1 (b) Tenant...............................................................................1 (c) Address of Tenant....................................................................1 (d) Landlord.............................................................................1 (e) Address of Landlord..................................................................1 (d) Premises:............................................................................1 (g) Project..............................................................................1 (h) Land.................................................................................1 (i) Lease Term...........................................................................1 (j) Right to Extend......................................................................1 (k) Basic Rent...........................................................................2 (1) Additional Rent......................................................................2 (m) Security Deposit.....................................................................2 (n) Rentable Square Feet in the Premises.................................................2 (o) Rentable Square Feet in the Project..................................................3 (p) Tenant's Percentage..................................................................3 (q) Parking..............................................................................3 (r) Brokers..............................................................................3 (s) Construction Completion Date.........................................................3 (t) Signage..............................................................................3 (u) Expansion Rights.....................................................................3 (v) Exhibits.............................................................................3 2. PREMISES.................................................................................3 3. COMMENCEMENT AND EXPIRATION DATES........................................................3 4. RENT.....................................................................................4 (a) Rent.................................................................................4 5. COSTS OF OPERATIONS AND REAL ESTATE TAXES................................................4 (a) Definitions..........................................................................5 (b) Additional Rent for Estimated Increases in Operating Costs...........................6 (c) Determinations.......................................................................7 (d) Personal Property Taxes..............................................................7 6. SERVICES AND UTILITIES...................................................................7 (a) Standard Services....................................................................7 (b) Interruption of Services.............................................................7 (c) Additional Services..................................................................8 7. SECURITY DEPOSIT.........................................................................8 8. USES.....................................................................................9 (a) Uses.................................................................................9 (b) Compliance With Law..................................................................9 (c) Compliance With Rules and Regulations................................................9 9. IMPROVEMENTS.............................................................................9 10. TENANT IMPROVEMENTS; ACCEPTANCE OF PREMISES.............................................9 11. CARE OF PREMISES ......................................................................10 12. ALTERATIONS AND ADDITIONS .............................................................10 13. ACCESS ................................................................................11 14. DAMAGE OR DESTRUCTION..................................................................12 (a) Damage and Repair...................................................................12 (b) Destruction During Last Year of Term................................................12 (c) Business Interruption...............................................................12 (d) Tenant Improvements.................................................................12 15. CONDEMNATION...........................................................................13 (a) Taking..............................................................................13 (b) Awards and Damages..................................................................13 16. INDEMNIFICATION........................................................................13 (a) Indemnity...........................................................................13 (b) Exemption of Landlord From Liability ...............................................14
4 (c) Waiver of Subrogation...............................................................14 17. HAZARDOUS SUBSTANCES...................................................................14 18. INSURANCE..............................................................................15 (a) Required Policies...................................................................15 (b) Insurance Policy Requirements.......................................................15 (c) Landlord's Insurance................................................................16 19. ASSIGNMENT AND SUBLETTING..............................................................16 20. LIENS AND INSOLVENCY...................................................................17 (a) Liens...............................................................................17 (b) Insolvency..........................................................................17 21. DEFAULT................................................................................18 (a) Default By Tenant...................................................................18 (b) Remedies Cumulative; Injunction.....................................................18 (c) Landlord's Remedies Upon Tenant Default.............................................18 (d) Waiver of Redemption Rights.........................................................20 (e) Nonpayment of Additional Rent.......................................................20 (f) Interest............................................................................20 22. PRIORITY...............................................................................20 (a) Subordination of Lease..............................................................20 23. ESTOPPEL CERTIFICATES..................................................................21 (a) Delivery of Estoppel................................................................21 (b) Failure to Deliver Estoppel.........................................................21 24. SURRENDER OF POSSESSION................................................................21 25. NON-WAIVER.............................................................................22 26. HOLDOVER...............................................................................22 27. LANDLORD'S LIABILITY...................................................................22 28. TRANSFER OF LANDLORD'S INTEREST........................................................22 29. RIGHT TO PERFORM.......................................................................22 30. GENERAL................................................................................23 (a) Headings............................................................................23 (b) Heirs and Assigns...................................................................23 (c) Authority...........................................................................23 (d) No Brokers..........................................................................23 (e) Entire Agreement....................................................................23 (f) Severability........................................................................23 (g) Force Majeure.......................................................................23 (h) Notices.............................................................................24 (i) Costs and Attorneys Fees............................................................24 (j) Governing Law.......................................................................24 (k) Recording...........................................................................24 (1) Waivers.............................................................................24 (m) Time of Essence.....................................................................24 (n) Merger..............................................................................24 (o) Right to Change Public Spaces.......................................................25 (p) Name................................................................................25 (q) Overdue Payments....................................................................25 (r) Relocation of Premises..............................................................25 (s) Advertising.........................................................................26 (t) Parking.............................................................................26 (u) Execution of Lease by Landlord......................................................26 31. LANDLORD'S COVENANTS...................................................................26 (a) Quiet Enjoyment.....................................................................26 (b) Hazardous Waste or Materials........................................................26 (c) Rentable Square Feet................................................................27 32. GUARANTY OF LEASE......................................................................27
5 Exhibits A - Legal Description of Land B - Space Plan of Premises C - Tenant Improvements D - Building Rules and Regulations E - Guarantees of Lease 6 OFFICE LEASE AGREEMENT THIS LEASE is made this ___ day of March, 1997 between Seattle Office Associates LLC, a Washington Limited Liability Company ("Landlord"), and bsquare consulting, inc., a Washington Corporation ("Tenant"). Landlord and Tenant agree: 1. BASIC LEASE INFORMATION 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) Lease Date: ______________, 1997. (b) Tenant: bsquare consulting, inc. a Washington Corporation. (c) Address of Tenant: 3633 - 136th Place SE Suite 200 Bellevue, WA 98006 (d) Landlord: Seattle Office Associates, LLC (e) Address of Landlord: 3633 - 136th Place SE Suite 205 Bellevue, WA 98006 (f) Premises: Suite No. 310, located at 3633 - 136th Place SE, Bellevue, (the "Building") as shown on Exhibit B attached hereto. (g) Project: The Building and all related improvements known as the Delphi Building, located at 3633 - 136th Place SE, Bellevue, which are situated on the Land as defined below. (h) Land: The real property more particularly described on Exhibit A attached hereto. (i) Lease Term: approximately 62 months, commencing the "Commencement Date" and terminating on June 30, 2002, ("the Termination Date"). Landlord and Tenant agree to execute an addendum to this lease setting forth the Commencement Date and the Termination Date. (j) Right to Extend: a. Provided Tenant (i) is not in default hereunder at the time of the exercise of the extension and at the commencement of the renewal term, (ii) has not been in a monetary default more than five times during the term of the lease, and (iii) has given Landlord six (6) months prior written notice of its intent to exercise its rights under this Section, Tenant shall have the right to extend the term of this Lease for one (1) additional period of five years (the "Extended Term") on the same terms and conditions as in this Lease except that the Basic Rent during the Extended Term shall be a sum equal to the fair market rent ("Market Rent") of the Leased Premises at the time of the 1 7 commencement of the Extended Term as determined either by agreement between Landlord and Tenant or by arbitration as hereinafter described. b. In the event that tenant desires to exercise such option, Landlord and Tenant agree to negotiate in good faith to reach agreement on the Market Rent of the Premises for such Extended Term. If, for any reason, the Landlord and Tenant fail to agree to a market rent for the term at least thirty (30) days prior to the end of the initial Term, then market rent for the term shall be determined by arbitration pursuant to this lease and RCW 7.04, et.seq. The arbitrator shall be a licensed MAI appraiser, whom the Parties shall select by mutual agreement. If the Parties are unable to agree on an arbitrator, the arbitrator shall be selected by the King County Superior Court. As part of the submittals to the arbitrator, each Party to the arbitration will present a proposed market rent for the term which the submitting Party deems to be fair and reasonable. The arbitrator is directed to select within twenty-one (21) days one of the proposed market rents submitted and has no discretion to determine any other market rent. The arbitrator's decision shall be final, binding and non-appealable. Notwithstanding the above, the market rent for the extended term shall not be less than the rate for the initial term. Until the arbitrator renders his award, the Tenant shall continue to pay the same market rent per month of the term as it paid for the last month of the initial term. The Tenant shall pay any shortfall in market rent payments for the term within ten (10) days after the arbitrator renders his award; and Landlord shall credit Tenant within ten (10) days any overpayment of Base Rent for the term against future monthly market rent, as determined by the arbitration award. (k) Basic Rent: $17,025.58 per month, $204,307.00 per year ($19.00 PSF). In addition, the Basic Rent will be adjusted effective July 1, 2000 as provided in Section 4.b. (1) Additional Rent: The increase in Operating Costs described in Section 5 and all other costs, other than Basic Rent, payable by Tenant to Landlord hereunder. (m) Security Deposit: $17,025.58 upon lease execution. (n) Rentable Square Feet in the Premises: 10,753. (o) Rentable Square Feet in the Project: 69,596. (p) Tenant's Percentage: 15.45%. (q) Parking: 45 parking stalls of which 10 will be reserved under the Building for the Tenant's exclusive use. (r) Brokers: Tenant was not represented in this transaction by a licensed real estate Broker; Landlord was represented in this transaction by Langly Associates Inc., a licensed real estate broker. (s) Construction Completion Date: May 15,1997. 2 8 (t) Signage: Tenant will not have any rights to exterior signage as relates to this lease. If, however, the Tenant installs a sign on the Building in connection with its lease for Suite 200, such sign will be allowed to remain on the Building as long as the Tenant has a valid lease for a minimum of 10,000 SF. (u) Expansion Rights: Tenant will not have any specific expansion rights as relates to this lease. (v) Exhibits: The following exhibits are attached hereto and are hereby made a part of this Lease. Exhibit A - Legal Description of Land Exhibit B - Space Plan of Premises Exhibit C - Tenant Improvements Exhibit D - Building Rules and Regulations Exhibit E - Restated Guaranty of Lease 2. PREMISES. Landlord does hereby lease to Tenant, and Tenant does hereby lease from Landlord, upon the terms and conditions herein set forth, the Premises described in Section 1(f) hereof as shown on Exhibit B attached hereto and incorporated herein, together with rights of ingress and egress over common areas in the Building and on the Land. 3. COMMENCEMENT AND EXPIRATION DATES. The term of this Lease shall commence on the earliest of the following dates (the "Commencement Date"): (a) the date of substantial completion of construction of the tenant improvements to the Premises as listed in Exhibit B; (b) the date on which the Premises would have been substantially completed but for delay caused by Tenant or any agent, employee or contractor of Tenant; (c) the date on which the Premises are actually occupied by Tenant or (d) the date set forth in Section 1.(i). Upon request of Landlord, Tenant shall enter into a memorandum stipulating the actual Commencement Date. If for any reason other than Tenant's failure to fulfill its obligations hereunder, Landlord cannot deliver possession of the Premises to Tenant on the Commencement Date, Landlord shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Tenant hereunder or extend the Termination Date, but in such case Tenant shall not be obligated to pay Rent until possession of the Premises is tendered to Tenant. If Tenant's tenant improvements are not completed by the Construction Completion Date due to the failure of Tenant to fulfill any obligation pursuant to the terms of this Lease or any exhibit hereto, including without limitation Tenant's failure to comply with the terms of Exhibit C, the Lease shall be deemed to have commenced upon the Construction Completion Date. If Tenant occupies the Premises prior to the Construction Completion Date, such occupancy shall be subject to all provisions hereof, such occupancy shall not advance the Termination Date, and Tenant shall pay Rent for such period at the initial rates set forth in the Basic Lease Information. In the event the Commencement Date is established as a later or earlier date than the date provided in Section 1(i) hereof, Landlord shall confirm the same to Tenant in writing. The Lease shall expire upon the Termination Date specified in Section 1(s). In the event Landlord is unable to deliver possession of 3 9 premises within 30 days of Lease Commencement date, Tenant shall have the right to cancel this Lease. 4. RENT. (a) Rent. Tenant shall pay Landlord without notice the Basic Rent stated in Section 1(k) hereof in advance without demand, deduction or offset on the first day of each calendar month during the term at the address specified in Section 1(e) or such address as may be specified by Landlord. Basic Rent and Additional Rent (together "Rent") for any partial month shall be prorated in proportion to the number of days in such month. (b) Basic Rent Adjustment. Commencing July 1, 2000, the monthly Basic Rent for Suite 310 shall equal $17,025.58 multiplied by a fraction, the numerator of which is the "Index" (as hereinafter defined) most recently published prior to July 1, 2000, and the denominator of which is the Index most recently published prior to March 1, 1997, provided that in no event shall the Basic Rent for Suite 310 be less than $17,025.58 per month. "Index" as used herein shall mean the "Consumer Price Index (United States City Average for All Urban Consumers)-All Items (Reference Base 1982-84 = 100)" published by the United States Department of Labor, Bureau of Labor Statistics. In the event the Index shall hereafter be converted to a different standard reference base or otherwise revised, the determination of the percentage increase shall be made with the use of such conversion factor, formula or table for converting such Index as may be published by the Bureau of labor Statistics or, if said Bureau shall not publish the same, then with the use of such conversion factor, formula or table as may be published by Prentice Hall, Inc. or any other nationally recognized publisher of similar statistical information. In the event any such Index shall cease to be published, then for the purpose of this Section, there shall be substituted such other index as Landlord shall acting reasonably designate which is similar to the Index. 5. COSTS OF OPERATIONS AND REAL ESTATE TAXES. (a) Definitions. In addition to the Basic Rent provided in Section 1(k) of this Lease, Tenant shall pay to Landlord increases under this Section 5 as "Additional Rent," utilizing the following definitions: (i) "Operating Costs" shall mean all taxes and assessments on real and personal property; any taxes levied or assessed (or any installment thereof due during the Lease Year) in addition to or in lieu of such real property or personal property taxes, or any other tax {except any federal or state net income tax or any business or occupation tax) upon leasing of the Project or rents collected; and all other expenses paid or incurred by Landlord for managing, maintaining, operating and repairing the Project and the personal property used in conjunction therewith, including without limitation, the following: (A) electricity, water, gas, sewers, refuse collection, telephone charges not charged to individual tenants and similar utility services; (B) the cost of maintaining, rehabilitating or replacing heating, mechanical, ventilating, escalator and 4 10 elevator systems and restriping, repairing and repaving parking areas; (C) the cost of repairs, janitorial and cleaning services, window washing, landscape maintenance, and other general maintenance or cleaning; (D) the cost of fire, extended coverage, boiler, sprinkler, public liability, property damage, rent, earthquake (if required by any lender on the building and if such expense is included in the base year) and other insurance; (E) wages, salaries and other labor costs, including employee benefits, of all persons who perform duties in connection with the operation, maintenance and repair of the Project; (F) fees, charges and other costs, including management fees, consulting fees, legal fees and accounting fees, of all independent contractors reasonably engaged by Landlord, (G) management fees not to exceed 5% of gross revenues charged by Landlord if Landlord performs management services in connection with the Project; (H) the costs for the subject period (amortized over the useful life in accordance with the Internal Revenue Code) of any capital improvements made to the Project after the date of this Lease which are either designed to increase the operating efficiency of the Project or are required by applicable law; (I) cost of all licenses, permits and inspections required by governmental bodies with jurisdiction over the Premises, Project and Land; and (J) the amortized costs of renovating the carpet, paint and lighting of common hallways and lobbies; (K) deductible amounts (not to exceed $25,000) under any insurance maintained by Landlord with respect to repair or rebuilding of the Project, and (L) any other expenses or charges whether or not hereinabove described, which in accordance with generally accepted accounting and management practices would be considered an expense of managing, maintaining, operating, or repairing the Project. (ii) "Operating Costs" shall not include the following: (a) Costs of any special services rendered to individual tenants (but not all tenants in the building) for which a special charge is made. (b) Leasing commissions and other leasing expenses. (c) Legal fees, accounting fees and other costs and expenses associated with a breach or default by any tenant. (ii) "Lease Year" shall mean the twelve-month period commencing January 1 and ending December 31. (iii) "Actual Operating Costs" means the actual expenses paid or incurred by Landlord for Operating Costs during any Lease Year of the term hereof. (iv) "Actual Operating Costs Allocable to the Premises" means the Tenant's share of the Actual Operating Costs determined by dividing the Rentable Square Feet in the Premises as set forth in Section 1(n) by the Rentable Square Feet in the Project and multiplying the resulting quotient by the Actual Operating Costs. (v) "Estimated Operating Costs Allocable to the Premises" means Landlord's estimate of Actual Operating Costs Allocable to the Premises for the following Lease Year to be given by Landlord to Tenant pursuant to Section 5(b)(i) below. 5 11 (vi) "Base Service Year" shall mean the calendar year 1997. (b) Additional Rent for Estimated Increases in Operating Costs. (i) On or before the first (1st) day of March of each Lease Year after the Base Service Year, during the term hereof, Landlord shall furnish Tenant a written statement of the Estimated Operating Costs Allocable to the Premises for such Lease Year, and a calculation of the Additional Rent for such costs as follows: one-twelfth (1/12) of the amount, if any, by which such amount exceeds the Operating Costs Allocable to the Premises for the Base Service Year shall be Additional Rent payable each month by Tenant as provided in Section 4. Any shortfall for elapsed portion of the Lease Year in question shall be made up with the next monthly payment. Landlord reserves the right to adjust this estimate from time to time. (ii) Within ninety (90) days after the close of each Lease Year, or as soon thereafter as practicable, Landlord shall deliver to Tenant a written statement setting forth the Actual Operating Costs Allocable to the Premises during the preceding Lease Year. If such costs for any Lease Year exceed Estimated Operating Costs Allocable to the Premises paid by Tenant to Landlord pursuant to subsection (b)(i) above, Tenant shall pay the amount of such excess to Landlord as Additional Rent within fifteen (15) days after receipt of such statement by Tenant. If such statement shows such costs to be less than the amount paid by Tenant to Landlord pursuant to subsection (b)(i) above, then the amount of such overpayment by Tenant shall be credited by Landlord to the next Rent payable by Tenant. In no event shall the Rent payable by Tenant hereunder be less than the Rent specified in Section 1(k) of this Lease. (iii) If this Lease shall terminate on a day other than the last day of a Lease Year, the amount of any adjustment between Estimated and Actual Operating Costs Allocable to the Premises with respect to the Lease Year in which such termination occurs shall be prorated on the basis which the number of days from the commencement of such Lease Year to and including such termination date bears to 365, and any amount payable by Landlord to Tenant or Tenant to Landlord with respect to such adjustment shall be payable within fifteen (15) days after delivery of the statement of Actual Operating Costs Allocable to the Premises with respect to such Lease Year. (c) Determinations. The determination of Actual Operating Costs and Estimated Operating Costs Allocable to the Premises shall be made by Landlord. Landlord or its agent shall keep records in reasonable detail showing all expenditures made for the items enumerated above, which records shall be available for inspection by Tenant at any reasonable time during the two year period following receipt of the Landlord's statement referred to in Section 5(b)(ii). (d) Personal Property Taxes. Tenant shall pay, prior to delinquency, all Personal Property Taxes payable with respect to all property of Tenant located on the Premises, the Building, or the Project including any improvements paid for by Tenant, and promptly, upon request of Landlord, shall provide written proof of such payment. As used herein, "Property of Tenant" shall include all improvements which are paid for by Tenant. 6 12 "Personal Property Taxes" shall include all property taxes assessed against the property of Tenant, whether assessed as real or personal property. 6. SERVICES AND UTILITIES. (a) Standard Services. Landlord shall maintain the Premises and the public and common areas of the Building (including the roof, exterior portions of the building, parking and landscaping) in reasonably good order and condition, except for damage occasioned by the negligent or willful act or omission of Tenant or its contractors, agents, invitees, licensees or employees, the repair of which damage shall be paid by Tenant, subject to the provisions of Section 16(c). Landlord shall furnish the Premises with electricity for normal office use, water, elevator service and reasonable 5 day per week janitorial services during the term of the Lease. Electricity use beyond normal office use and any separate metering required thereby shall be paid for by Tenant. The Basic Rent stated in Section 1(k) hereof does not include the costs of any janitorial or other service provided or caused to be provided by Landlord to Tenant which are in addition to the services ordinarily provided Building tenants. Landlord shall furnish the Premises with heat and air conditioning during the following hours; Monday to Friday 7:00 a.m. to 6:00 p.m., Saturday 8:00 a.m. - 5:00 p.m. and Sunday 9:00 a.m. to 1:00 p.m. Tenant may request provision of these services for other hours by giving Landlord at least 48 hours prior written notice and by paying all additional costs incurred by Landlord for such services with the next due installment of Rent at Landlord's then current overtime rate, which is currently $30 per hour. During other than normal business hours (as designated by Landlord), 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. (b) 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 such services due to any cause whatsoever, or from failure to make any repairs or perform any maintenance, and rent shall not abate as a result thereof. No temporary interruption or failure of such services 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. (c) Additional Services. Before installing lights and equipment in the Premises which in the aggregate exceed normal levels of usage (including without limitations, computer and data processing equipment), 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. Notwithstanding the above, Landlord may not refuse to grant permission for equipment which, in the aggregate, does not require electrical power in excess of five (5) watts per rentable SF. 7 13 In addition, Tenant shall in advance, on the first day of each month during the Lease term, pay Landlord the reasonable amount estimated by Landlord as the cost of furnishing electricity for the operation of such equipment or lights and the reasonable amount estimated by Landlord as the cost of operation and maintenance of supplementary air conditioning units necessitated by Tenant's use of such equipment or lights. The Rent stated in Section 1(k) hereof does not include any amount to cover the cost of furnishing electricity or such additional air conditioning for such purposes and such costs will be paid by Tenant as Additional Rent. Landlord shall be entitled to install and operate at Tenant's cost a monitoring/metering system in the Premises to measure the added demands on electrical, heating, ventilation and air conditioning systems resulting from such equipment and lights and from Tenant's after-hours heating, ventilation and air conditioning service requirements. Tenant shall comply with Landlord's instructions for the use of drapes and thermostats in the Building. 7. SECURITY DEPOSIT. As security for the full and faithful performance of every covenant and condition of this Lease to be performed by Tenant. Tenant has paid to Landlord the Security Deposit as specified in Section 1(m) hereof. If Tenant defaults in any respect under this Lease, Landlord may apply all or any part of the Security Deposit to the payment of any sum in default or any other sum which Landlord may be required or may in its reasonable discretion deems necessary to spend or incur by reason of Tenant's default. In such event, Tenant shall, within five (5) days of written demand therefor by Landlord, deposit with Landlord the amount so applied. If Tenant shall have fully complied with all of the covenants and conditions of this Lease, the amount of the Security Deposit to the extent not applied by Landlord under this Section 7 shall be repaid to Tenant (or, at Landlord's option, to the last assignee of Tenant's interest hereunder) within thirty (30) days after the expiration or sooner termination of this Lease. In the event of Tenant's default under this Lease, Landlord's right to retain the Security Deposit shall be deemed to be in addition to any and all other rights and remedies at law or in equity available to Landlord. Landlord shall not be required to keep any Security Deposit separate from its general funds and Tenant shall not be entitled to any interest thereon. 8. USES. (a) Uses. The Premises are to be used only for general office purposes ("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 sole 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, the Project or the Land contained in any lease, mortgage or other agreement or instrument by which the Landlord is bound or to which any of such property is subject. Tenant shall not commit any act that will increase the then existing rate of insurance on the Building or the Project and will immediately pay any such increase. Tenant shall promptly pay upon demand the amount of any increase in insurance rates 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, 8 14 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. 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. (b) Compliance With Law. Tenant shall, at Tenant's expense, comply promptly with all applicable statutes, ordinances, rules, regulations, orders and requirements, including without limitation laws and regulations prohibiting discrimination on the basis of race, gender, religion, national origin, age or disability, in effect during the term hereof regulating the use, occupancy or improvement of the Premises by Tenant, Landlord or otherwise and Tenant shall be fully responsible for the cost of complying therewith. (c) Compliance With Rules and Regulations. Tenant shall observe and comply with all reasonable rules and regulations put into effect by Landlord. Landlord shall not be responsible to Tenant for the non-compliance with the rules and regulations of any other tenant or occupant of the Project. 9. IMPROVEMENTS. Upon expiration or sooner termination of this Lease, all improvements and additions to the Premises, except Tenant's trade fixtures, shall be deemed the property of Landlord. 10. TENANT IMPROVEMENTS; ACCEPTANCE OF PREMISES. The Premises shall be completed in accordance with the plans and specifications attached hereto as Exhibit C. All necessary construction shall be commenced by Landlord following Landlord's execution of this Lease and Tenant's delivery of the first month's Basic Rent, the guarantees and the Security Deposit. Landlord will exert commercially reasonable efforts to have improvements substantially completed by the date set forth in Section 1(s). Within five (5) days ("Inspection Period") after Landlord informs Tenant of such completion, Tenant shall make such inspection of the Premises as Tenant deems appropriate. Except as otherwise specified by Tenant in writing to Landlord within the Inspection Period, Tenant shall be deemed to have accepted the Premises in their then condition. If, as a result of such inspection, Tenant discovers minor deviations or variations from the plans and specifications for Tenant's improvements of a nature commonly found on a "punch list" (as the term is used in the construction industry), Tenant shall, during the Inspection Period, notify Landlord of such deviations. Landlord shall promptly repair all punch list items. The existence of such punch list items shall not postpone the Commencement Date of this Lease or the obligation of Tenant to pay Rent. Tenant acknowledges that neither Landlord nor Landlord's agent has made any representation or warranty as to the suitability of the Premises for the conduct of Tenant's business, and Tenant hereby waives any rights, claims or actions against Landlord under any express or implied warranties of suitability. 11. CARE OF PREMISES. Tenant shall, at Tenant's sole cost and expense, keep the Premises and every part thereof in good condition and repair, damage thereto from causes beyond the reasonable control of Tenant and ordinary wear and tear and damage by fire and other casualty not intentionally caused by Tenant excepted. Tenant shall be responsible for the cleaning of any common areas of the Building and the Project if such cleaning is necessary due to Tenant's use of such common areas in a manner other 9 15 than the normal, reasonable use of such areas. All damages or injury done to the Premises, Building or Project by Tenant or by any persons who may be in or upon the Premises, Building or Project 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 and Tenant shall pay for all damage to the Project caused by acts or omissions of Tenant or Tenant's officers, contractors, agents, invitees, licensees, or employees subject to the provisions of section 16(c). If Tenant fails to perform Tenant's obligations under this Section 11, Landlord may at Landlord's option enter upon the Premises after ten (10) days' prior notice to Tenant and put the affected portion of the Project in good order, condition and repair and the cost thereof together with interest thereon at the rate of 15% per annum shall be due and payable as Additional Rent to Landlord together with Tenant's next installment of Basic Rent. All normal repairs shall be those reasonably determined by Landlord as necessary to maintain the Project as a first-class office building complex. 12. ALTERATIONS AND ADDITIONS. (a) Tenant shall not make any alterations, improvements, additions, or utility installations in or about the Premises or make changes to locks on doors, or add, disturb or in any way change any floor covering, wall covering, fixtures, plumbing or wiring (collectively, "Alterations") without first obtaining the written consent of Landlord and, where appropriate, in accordance with plans and specifications approved by Landlord. Any such Alterations shall not adversely affect either the strength or exterior appearance, or the mechanical, electrical, or plumbing services of the Building and the Project. Any alterations required to be made to the Premises by any applicable building, health, safety, fire, nondiscrimination, or similar law or regulation ("law"), but only to the extent such alterations are not also required to be made generally throughout the building, shall be made at Tenant's sole expense and shall be subject to the prior written consent of Landlord. Tenant shall reimburse Landlord for any sums expended for examination and approval of architectural or mechanical plans and specifications of the Alterations. Tenant shall also pay Landlord a sum equal to the direct costs incurred during any inspection or supervision of the Alterations. Landlord may require a lien and completion bond for such construction, or require the improvements (except for any cabling installed by the Tenant) be removed at the expiration of the Term. Tenant acknowledges and agrees that a material condition to the granting of approval of Landlord to any alterations and/or improvements and/or repairs required under this Lease or desired by Tenant is that the contractors who perform such work shall carry a Comprehensive Liability Policy covering both bodily injury, in the amount of $100,000 per person and $300,000 aggregate, and property damages, in the amount of $300,000, at Tenant's expense. Landlord may require proof of such insurance coverage from each contractor at the time of submission of Tenant's request for Landlord's consent to commence work. Landlord's approval of the plans, specifications and working drawings for Tenant's alterations shall create no responsibility or liability on the part of Landlord for their completeness, design sufficiency, or compliance with all laws, rules and regulations of governmental agencies or authorities. Tenant shall indemnify and hold Landlord harmless from any liability, claim or suit, including attorneys' fees, arising from any injury, damage, cost or loss sustained by persons or property as a result of any defect in design, material or workmanship. 10 16 (b) Tenant shall pay, when due, all claims for labor or materials furnished to or for Tenant at or for use in the Premises, which claims are or may be secured by any mechanics' or materialmen's liens against the Premises or any interest therein. Within ten (10) days after notice thereof, Tenant shall remove or cause to be removed all liens filed against the Project or any portion thereof in connection with any Alterations or other work performed by or at the request of Tenant. (c) Tenant shall not put curtains, draperies or other hangings or signs on or beside the windows in the Premises. (d) Unless Landlord requires their removal, all Alterations (other than trade fixtures and movable equipment) which may be made on the Premises shall become the property of Landlord and remain upon and be surrendered with the Premises at the expiration of the term. 13. ACCESS. Tenant shall permit Landlord and its agents to enter the Premises at all reasonable times for the purpose of inspecting, cleaning, repairing, altering or improving the Premises or the Building. Nothing contained in this Section 13 shall be deemed to impose any obligation upon Landlord not expressly stated elsewhere in this Lease. Landlord may temporarily close any portion of the Building or Project without liability to Tenant by reason of such closure, and such closure shall not constitute an eviction of Tenant or release Tenant from any Rent or other obligations hereunder, provided that the Landlord does not preclude Tenant's access to the premises and such closure does not materially interfere with Tenant's use and occupancy of the premises. Landlord shall have the right to enter the Premises for the purpose of showing the Premises to prospective purchasers or mortgagees at all reasonable times. 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. 14. DAMAGE OR DESTRUCTION. (a) Damage and Repair. If the Building is damaged by fire or any other cause to such extent that the cost of restoration, as reasonably estimated by Landlord, will equal or exceed thirty percent (30%) of the replacement value of the Building, or if insurance proceeds sufficient for restoration are for any reason unavailable, then Landlord may, no later than the sixtieth day following the damage, give Tenant a notice of Landlord's election to terminate this Lease. In the event of such election this Lease shall be deemed to terminate on the third day after the giving of such notice, Tenant shall surrender possession of the Premises within a reasonable time thereafter, the Rent and Additional Rent shall be apportioned as of the date of Tenant's surrender and any Rent paid for any period beyond such date shall be repaid to Tenant. If the cost of restoration as estimated by Landlord shall amount to less than thirty percent (30%) of said replacement value of the Building and insurance proceeds sufficient for restoration are available, or if Landlord does not elect to terminate this lease, Landlord shall restore the Building and the Premises (to the extent of the improvement of the Premises originally provided by Landlord hereunder) with reasonable promptness, subject to delays beyond Landlord's control and delays in the making of insurance adjustments by Landlord. To the extent that the Premises are 11 17 rendered untenantable, the Rent shall proportionately abate, except in the event such damage resulted from the willful or intentional act or omission of Tenant, in which event Rent shall abate only to the extent Landlord receives proceeds from any rental income insurance policy to compensate Landlord for loss of Rent hereunder. (b) Destruction During Last Year of Term. In case the Building shall be substantially destroyed by fire or other cause at any time during the last Lease Year of this Lease, Landlord may terminate this Lease upon written notice to Tenant if given within sixty (60) days of the date of such destruction. (c) Business Interruption. No damages, compensation or claim shall be payable by Landlord for inconvenience, loss of business or annoyance arising from any repair or restoration of any portion of the Premises, the Building or the Project. Landlord shall use its best efforts to effect such repairs promptly. (d) Tenant Improvements. Landlord will not carry insurance of any kind on any improvements paid for by Tenant as provided in Exhibit C or on Tenant's furniture, furnishings, fixtures, equipment or appurtenances of Tenant under this Lease and Landlord shall not be obligated to repair any damage thereto or replace the same. 15. CONDEMNATION. (a) Taking. If all of the Premises or such portions of the Building or Project 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. In the event of a taking of a material part, but less than all, of the Building or Project, where Landlord shall determine that the remaining portions of the Building or Project cannot be economically and effectively used by it (whether on account of physical, economic, aesthetic or other reasons) or where Landlord determines the Building should be restored in such a way as to materially alter the Premises, Landlord shall forward a written notice to Tenant 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 Landlord shall specify in such notice but not earlier than sixty (60) days after the date of such notice. In case of taking of a part of the Premises, or a portion of the Building or Project 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; however, if the floor area of the premises is reduced by more than five percent (5%), Tenant may terminate this Lease upon thirty (30) days notice to Landlord. (b) 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 (not including Tenant's leasehold interest) provided that such damages may be claimed only if they are awarded separately 12 18 in the eminent domain proceedings and not out of or as part of the damages recoverable by Landlord. 16. INDEMNIFICATION. (a) Indemnity. Subject to provisions of section 16.c, Tenant shall indemnify, defend and hold Landlord harmless from and against all loss, cost and expense, including attorneys fees, arising from any act, omission, or negligence of Tenant or its officers, contractors, licensees, agents, servants, employees, guests, invitees, or visitors in or about the Premises or Project, or arising from any injury or damage to any person or property, occurring in or about the Premises or Project as a result of any act, omission or negligence of Tenant, or its officers, contractors, licensees, agents, employees, guests, or visitors or arising from any breach or default under this Lease by Tenant. The foregoing provisions shall not be construed to make Tenant responsible for loss, damage, liability or expense resulting from injuries to third parties caused solely by the gross negligence of Landlord, or its officers, contractors, licensees, agents, employees, invitees or other tenant of the Project. (b) Exemption of Landlord From Liability. As a material part of the consideration to Landlord, Tenant hereby agrees that, notwithstanding anything to the contrary in Section 16(a) above, Landlord shall in no event be liable for injury to Tenant's business or assets or any loss of income therefrom or for damage to Tenant's employees, invitees, customers, or any other person in or about the Premises, whether such damage, loss or injury results from conditions arising upon the Premises or upon other portions of the Project of which Premises are a part (including, without limitation, damages caused by the Project or any portion thereof or a appurtenance thereto being out of repair, or the bursting, leakage of any water, gas, sewer or steam pipe), or from other sources or places, and regardless of whether the cause of such damage, loss or injury or the means of repairing the same is inaccessible to Tenant. Tenant further agrees that notwithstanding anything to the contrary in Section 16(a) above, Landlord shall in no event be liable for any injury or damage to any person or property of Tenant, Tenant's employees, invitees, customers, agents or contractors caused by theft or arising from any act, omission or neglect of any tenant or occupant of the Project or any other third person. (c) Waiver of Subrogation. Each party agrees to use commercially reasonable efforts to cause its insurance carriers to consent to a waiver of rights of subrogation against the other party. If such waiver shall be obtainable only at a premium over that chargeable without such a waiver, the party seeking such policy shall notify the other and the party in whose favor the waiver is desired shall pay the additional premium. Each party shall look first to any insurance in its favor before making claim against the other party. Whether the 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 (i) any loss or damage to the real or personal property of either located anywhere in the Project, including the Project itself, arising out of or incident to the occurrence of any of the perils which are covered by their respective property and related insurance policies, and (ii) any loss resulting from business interruption at the Premises or loss of rental income from the Project, arising out of or incident to the 13 19 occurrence of any of the perils which may be covered by any business interruption insurance policy or by any loss of rental income insurance policy held by Landlord or Tenant, to the extent to which it is covered, or is required under the provisions of this Lease to be covered by a policy or policies containing a waiver of subrogation or permission to release liability. 17. HAZARDOUS SUBSTANCES: Tenant shall not dispose of or otherwise allow the release of any hazardous waste or materials in, on or under the Premises, the Project or any adjacent property, except for normal office products used and disposed of in accordance with applicable laws. 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 or the Project of any hazardous waste or materials, except for normal office products used and disposed of in accordance with applicable laws. As used herein, the term "hazardous waste or materials" means any material or substance that, as of the date of this Agreement, is defined or classified under federal, state, or local laws as: (a) a "hazardous substance" pursuant to section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601(4), section 311 of the Federal Water Pollution Control Act, 33 U.S.C. Section 1321; (b) a "hazardous waste" pursuant to section 1004 or section 3001 of the Resource Conservation and Recovery Act, 42 U.S.C. sections 6903, 6921; (c) a toxic pollutant under section 307(a)(1) of the Federal Water Pollution Control Act, 33 U.S.C. Section 1317(a)(1); (d) a "hazardous air pollutant" under section 112 of the Clean Air Act, 42 U.S.C. Section 7412; (e) a "hazardous Material" under the Hazardous Materials Transportation Uniform Safety Act of 1990, 49 U.S.C. App. Section 1802 (4); (f) toxic or hazardous pursuant to regulations promulgated under the aforementioned laws; of (g) presenting a risk to the environment under other applicable federal, state, or local laws, ordinances, or regulations. "Hazardous Substances" specifically include, but is not limited to, asbestos, polychlorinated biphenyls ("PCBs"), petroleum and petroleum-based derivatives, and urea formaldehyde. Tenant shall promptly comply with all applicable laws and with all orders, decrees or judgments of governmental authorities or courts having jurisdiction relating to hazardous waste or materials. Tenant agrees to indemnify, defend and hold harmless Landlord against any and all loss, cost and expense (including, without limitation, consultants' fees, attorneys' fees and disbursements) which may be imposed on, incurred or paid by, or asserted against Landlord or the Premises or the Project by reason of, or in connection with (i) any misrepresentation, breach of warranty or other default by Tenant under this Lease, or (ii) the acts or omissions by Tenant under this Lease, or (ii) the acts or omissions of Tenant, or any sublessee or other person for whom Tenant would otherwise be liable, resulting in the release of any hazardous waste or materials. 18. INSURANCE. (a) Required Policies. Tenant shall, throughout the term of this Lease and any renewal hereof, at its own expense, keep and maintain in full force and effect: (i) a policy of commercial liability insurance including a contractual liability endorsement covering Tenant's obligations under Section 16 and 17, with a limit of not less than One 14 20 Million Dollars ($1,000,000) combined single limit (the limits of said insurance shall not, however, limit the liability of Tenant hereunder); and (ii) what is commonly referred to as "all risk" coverage insurance (but excluding earthquake and flood) on Tenant's leasehold improvements in an amount not less than the current One Hundred Percent (100%) replacement value thereof, and (iii) business interruption insurance in an amount sufficient to cover costs, expenses, costs due hereunder, damages and lost income should the Premises not be fully usable for a period of up to 6 months. Such policy shall name Landlord as an additional insured and shall contain a provision or endorsement providing that the insurance afforded by such policy for the benefit of Landlord shall be primary as respects any claims, losses or liabilities arising out of the use of the Premises or the Building or the Common Areas by the Tenant or by tenant's operation and that any insurance carried by Landlord shall be excess and non-contributing. (b) Insurance Policy Requirements. Insurance policies required hereunder shall be issued by companies which are currently rated AXII or better in "Best's Insurance Guide." No insurance policy required under this Section 18 shall be canceled or reduced in coverage and each insurance policy shall provide that it is not subject to cancellation or a reduction in coverage except after thirty (30) days prior written notice to Landlord. Tenant shall deliver to Landlord upon the Commencement Date and from time to time thereafter, copies of policies of such insurance or certificates evidencing the existence and amounts of same containing loss payable clauses satisfactorily to Landlord and naming Landlord as Additional Insured thereunder. (c) Landlord's Insurance. Landlord agrees to acquire, maintain and pay for, during the full term of this Lease, "all risk" property damage insurance against such risks and hazards as are customarily insured against by others similarly situated and operating like properties, but excluding earthquake and flood, covering the Building, including the Premises for such amounts and upon such terms as would a prudent owner of such property similar to and in the general area of the Building, and shall name Tenant as an additional insured thereon. Such insurance shall be acquired from a company authorized to do business in the State of Washington and rated as AXII or better in "Best's Insurance Guide." Upon request by Tenant, Landlord shall notify Tenant of the amount and type of insurance carried by Landlord pursuant to this section. 19. ASSIGNMENT AND SUBLETTING. (a) Tenant shall not assign, mortgage, encumber or otherwise transfer this Lease or sublet the whole or any part of the Premises without in each case first obtaining Landlord's prior written consent, which Landlord may not unreasonably withhold. Without limiting the foregoing, Landlord may withhold its consent if in Landlord's judgment occupancy by any proposed assignee, subtenant or other transferee: (i) is not consistent with the maintenance and operation of a first-class suburban office building due to the proposed occupant's nature or manner of conducting business or its experience or reputation in the community, or (ii) is likely to cause disturbance to the normal use and occupancy of the Building or Project by other tenants, their employees, customers, clients or other guests or visitors. Landlord may withhold in its absolute and sole discretion, 15 21 consent to any mortgage, hypothecation, pledge or other encumbrance of any interest in this Lease by Tenant or any subtenant, whereby this Lease or any interest therein becomes collateral for any obligation of Tenant or any other person. (b) In the event Tenant should desire to assign this Lease or sublet the Premises or any part hereof, Tenant shall give Landlord written notice at least forty five (45) days in advance of the date on which Tenant desires to make such assignment or sublease, which notice shall specify, (i) the name and business of the proposed assignee or sublessee, (ii) the amount and location of the space affected, (iii) the proposed effective date and duration of the subletting or assignment, and (iv) the proposed rental to be paid to Tenant by such sublessee or assignee. Landlord shall then have a period of twenty (20) days following receipt of such notice within which to notify Tenant in writing that Landlord elects either (1) to terminate this Lease as to the space so affected as of the date so specified by Tenant and reclaim that portion of the Premises (in which event Landlord may enter into a lease with any such proposed subtenant or assignee upon the rent and terms agreed to by each subtenant or assignee or on such other terms as may be agreed upon by Landlord and such subtenant or assignee) or, (2) to permit Tenant to assign or sublet such space, in which event if the proposed rental rate between Tenant and sublessee is greater than the rental rate of this Lease, then such excess rental to be deemed additional rent owed by Tenant to Landlord under this Lease, and the amount of such excess, including any subsequent increases due to escalation or otherwise, to be paid by Tenant to Landlord in the same manner that Tenant pays the rental hereunder and in addition thereto, or (3) to withhold consent to Tenant's assignment or subleasing such space and to continue this Lease in full force and effect as to the entire Premises. (c) Except as provided above, no 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. In connection with each request for an assignment or subletting, Tenant shall pay the reasonable cost of processing such assignment or subletting, including attorneys fees, upon demand of Landlord. Tenant shall provide Landlord with copies of all assignments, subleases and assumption instruments. If Tenant is a corporation or partnership, any transfer of a controlling ownership interest in Tenant or any transfer of this Lease by merger, consolidation or liquidation, shall be deemed an assignment under this Section 19. Any assignee or subtenant shall assume all of Tenant's obligations under this Lease and be jointly and severally liable with Tenant hereunder. 20. LIENS AND INSOLVENCY. (a) Liens. Tenant shall keep its interest in this Lease and any Property of Tenant (other than unattached personal property) and the Premises, and the Project free from any liens arising out of any work performed or materials ordered or obligations incurred by or on behalf of Tenant and hereby indemnities and holds Landlord harmless from any liability from any such lien. In the event any lien is filed against the Premises, the Project or any portion thereof by any person claiming by, through or under Tenant, Tenant shall, upon request of Landlord, at Tenant's expense, immediately either cause such lien to be released of record or furnish to Landlord a bond in form and amount and issued by a 16 22 surety satisfactory to Landlord, indemnifying Landlord, and the Project 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 and for Tenant, if, and only if, such proceedings suspend the collection thereof against Landlord, Tenant and the Premises and neither the Premises, nor the Project, 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, 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. 21. DEFAULT. (a) Default By Tenant. The occurrence of any one or more of the following events shall constitute a material default and breach of this Lease by Tenant: (i) the abandonment of the Premises by Tenant or the vacating of the Premises for more than thirty (30) consecutive days; (ii) the failure by Tenant to make any payment of Rent or any other payment required to be made by Tenant hereunder, within five (5) days of date due; (iii) the failure by Tenant to observe or perform any of the other covenants, conditions or provisions of the Lease, where such failure shall continue for a period of twenty (20) days; provided, however, if more than twenty (20) days are reasonably required for its cure then Tenant shall not be deemed to be in default if Tenant commences such cure within said 20-day period and thereafter diligently prosecutes such cure to completion; (iv) the making by Tenant of any general assignment or general arrangement for the benefit of creditors; (v) the filing by or against Tenant of a petition to have Tenant adjudged bankrupt or a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days); (vi) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in the Lease, where possession is not restored to Tenant within thirty (30) days; (vii) the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged within thirty (30) days. The above notice periods may, at the election of Landlord, run concurrently with any statutorily required notice periods. (b) Remedies Cumulative; Injunction. All rights and remedies of Landlord herein enumerated shall be cumulative, and none shall exclude any other right or remedy allowed by law or in equity. In addition to the other remedies in this Lease provided, Landlord shall be entitled to restrain by injunction the violation or attempted violation of any of the covenants, agreements or conditions of this Lease. 17 23 (c) Landlord's Remedies Upon Tenant Default. Upon an uncured default of this Lease by Tenant, Landlord, besides other rights or remedies it may have, at its option, may enter the Premises or any part thereof, either with or without process of law, and expel, remove or put out Tenant or any other persons who may be thereon, together with all personal property found therein. No such reentry shall be construed as an election on Landlord's part to terminate this Lease unless a written notice of such intention is given to Tenant. Landlord may terminate this Lease, or it may from time to time, without terminating this Lease and as agent of Tenant, 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, re-entry and/or dispossession, by summary proceedings or otherwise, all Rent and Additional Rent shall become due thereupon and be paid up to the time of such re-entry or dispossession, 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 30(q) hereof, accruing from the date of any such expenditure by Landlord. 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 and 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 or refusal 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, however, Landlord shall have the obligation to exert reasonable efforts to mitigate damages, provided that Landlord shall not be required to relet the Premises prior to leasing any other space owned by the Landlord, or its affiliates, within a one mile radius. 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. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for such previous breach and default. Should Landlord at any time terminate this Lease by reason of any default, in addition to any other remedy it may have, it may recover from Tenant the present value, using a ten percent (10%) discount rate, of the amount of Rent and Additional Rent reserved in this Lease for the balance of the Term, as it may have been extended, less the amount that Tenant proves could be collected for the remainder of the 18 24 Term, plus all court costs and attorneys fees incurred by Landlord in the collection of the same. Tenant acknowledges that certain benefits or concessions provided by Landlord are conditioned upon Tenant's timely, full and faithful performance of each and every obligation, covenant, representation and warranty of this Lease throughout the entire term of this Lease, even though such benefits or concessions may be realized by Tenant over less than the entire term of this Lease. Accordingly, notwithstanding anything to the contrary contained herein, in the event Landlord brings an action against Tenant for default under this Lease which results in a termination of this Lease and eviction of Tenant, Landlord shall become immediately entitled to receive from Tenant as Additional Rent the amount of all such benefits and concessions allocable to the balance of the Lease term on a pro rata basis, i.e. an amount equal to the product of (x) the sum of (a) any amounts theretofore or thereafter paid by Landlord to Tenant or to any third party, or any amounts credited to Tenant or to any third party, for or on account of (i) any moving, tenant improvement, decorating or other allowance or credit granted to Tenant but only to the extent such tenant improvements are demolished for the next occupant of the premises, (ii) any real estate commission paid on account of this Lease, and (iii) any expenses or costs related to assumption by Landlord of any other lease, plus (b) an amount equal to the difference between the rent as specified in Section 4 above and rent for any period for which this Lease provides any lesser amount including zero or nominal rent, including for any period of early occupancy of the Premises prior to the commencement of the term of this Lease, plus (c) the amount spent by Landlord for any tenant improvements to the Premises but only to the extent such tenant improvements are demolished for the next occupant of the premises; multiplied by (y) a fraction, the numerator of which is the number of days of the term of this Lease remaining between the date of default and the expiration of the term of this Lease, and the denominator of which is the total number of days of the term of this Lease. By way of example, if Tenant receives a moving allowance of $1,000, the Lease term is 3 years (1,095 days) and a default occurs at the end of the first year such that there were 2 years (730 days) remaining, the Tenant shall pay as additional rent the sum of $666.67, which is computed as follows: ($1,000 x 730)/1,095 = $666.67. (d) Waiver of Redemption Rights. Tenant, for itself, and on behalf of any and all persons claiming through or under it, including creditors of all kinds, does hereby waive and surrender all right and privilege which they or any of them might have under or by reason of any present or future law, to redeem the Premises or to have a continuance of this Lease for the term hereof, as it may have been extended, after having been dispossessed or ejected therefrom by process of law or under the terms of this Lease or after the termination of this Lease as herein provided. (e) Nonpayment of Additional Rent. All costs and expenses which Tenant assumes or agrees to pay to Landlord pursuant to this Lease shall be deemed Additional Rent and, in the event of nonpayment thereof, Landlord shall have all the rights and remedies herein provided for in case of nonpayment of Rent. (f) Interest. All past due Rent shall bear interest at the rate of 15% per annum. 19 25 22. PRIORITY. (a) Subordination of Lease. This Lease shall be subordinate to any mortgage or deed of trust now existing or hereafter placed upon the Premises or the Project or any portion thereof containing the Premises, created by or at the instance of Landlord, and to any and all advances to be made thereunder and to interest thereon and all modifications, renewals and replacements or extensions thereof ("Landlord's Mortgage") provided however, that the holder of any Landlord's Mortgage or any person or persons purchasing or otherwise acquiring the Premises, the Project or any portion thereof containing the Premises at any sale or other proceeding under any Landlord's Mortgage may elect to continue this Lease in full force and effect; and in such event, Tenant shall attorn to such person or persons. Tenant shall properly execute, acknowledge and deliver documents which the holder of any Landlord's Mortgage may require to effectuate the provisions of this Section 22 within five (5) days after Landlord's request. Notwithstanding the above, Landlord shall use commercially reasonable efforts to cause any holder of Landlord's mortgage to enter into a Nondisturbance Agreement with Tenant which shall provide in essence that upon any foreclosure of any mortgage or deed of trust by such holder of Landlord's mortgage, that such holder will not disturb Tenant's rights pursuant to this Lease, so long as Tenant is not in default pursuant to the provisions of this Lease 23. ESTOPPEL CERTIFICATES. (a) Delivery of Estoppel. Tenant shall, from time to time, upon written request of Landlord, execute, acknowledge and deliver to Landlord or its designee a written statement 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 Basic Rent and the amount of Additional Rent currently being paid towards increases in Operating Costs, and the date to which such Rent has been paid; and certifying: (i) whether this Lease is in full force and effect and has not been assigned or amended in any way (or specifying the date and terms of agreement so affecting this Lease); (ii) whether this Lease represents the entire agreement between the parties as to this leasing; that all obligations under this Lease to be performed by the Landlord have been satisfied or specifying those that have not been satisfied; (iii) whether on this date there are no existing claims, defenses or offsets which the Tenant has against the enforcement of this Lease by the Landlord; (iv) whether no Rent has been paid more than one month in advance; and that no security has been deposited with Landlord (or, if so, the amount thereof); and (v) such other items as Landlord shall reasonably request. It is intended that any such statement delivered pursuant to this Section may be relied upon by a prospective purchaser of Landlord's interest or holder of any mortgage upon Landlord's interest in the Building or the Project. (b) Failure to Deliver Estoppel. If Tenant shall fail to respond within ten (10) 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 to have certified that this Lease is in full force and effect, that there are no uncured defaults in Landlord's performance, that the security 20 26 deposit is as stated in the Lease, and that not more than one month's Rent has been paid in advance. 24. SURRENDER OF POSSESSION. Subject to the terms of Section 14 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 "broom-clean" and in as good condition as when received by Tenant from Landlord or as thereafter improved, damage thereto from causes beyond the reasonable control of Tenant, ordinary wear and tear and damage by fire or casualty not intentionally caused by Tenant excepted. Tenant shall remove all of its personal property and trade fixtures from the Premises and the Project at the expiration of the term and repair any damage caused by such removal; any property not so removed shall be deemed abandoned and may be sold or otherwise disposed of as Landlord deems advisable. 25. NON-WAIVER. Waiver by Landlord of any term, covenant or condition herein contained or any breach thereof shall not be deemed to be a waiver of such term, covenant, or condition or of any subsequent breach of the same or any other term, covenant, or condition herein contained. The subsequent acceptance of Rent or Additional Rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular Rent or Additional Rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such Rent or Additional Rent. 26. HOLDOVER. If Tenant remains in possession of the Premises or any part thereof after the expiration of the term of this Lease with the express written consent of Landlord, such occupancy shall be a tenancy from month-to-month at a rental in the amount equal to one and one-half (1-1/2) times the last monthly rental plus all other charges payable under this Lease, and subject to all of the terms, covenants and conditions of this Lease applicable to a month-to-month tenancy. Tenant acknowledges and agrees that this Section 26 does not grant any right to Tenant to holdover. 27. 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, but are made and intended for the purpose of binding only the Landlord's interest in the Premises and Building, as the same may from time to time be encumbered. No personal liability or personal responsibility is assumed by, nor shall at any time be asserted or enforceable against Landlord or its partners or their respective heirs, legal representatives, successors or assigns on account of the Lease or on account of any covenant, undertaking or agreement of Landlord in this Lease contained. 28. TRANSFER OF LANDLORD'S INTEREST. In the event of any transfer of Landlord's interest in the Premises or in the Building, the transferor shall 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 21 27 respect to any matter occurring or arising prior to the date of such transfer. Tenant agrees to attorn to the transferee. 29. RIGHT TO PERFORM. If Tenant shall fail to pay any sum of money 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. 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 29 as in the case of default by Tenant in the payment of Rent. 30. 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) Heirs 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 heirs, executors, administrators, successors and assigns. (c) Authority. Each individual executing this Lease on behalf of Tenant represents and warrants that he or she is duly authorized to execute and deliver this Lease on behalf of Tenant, and that this Lease is binding upon Tenant in accordance with its terms. (d) No Brokers. Except as set forth in Section 1(r), Tenant represents and warrants to Landlord that it has not engaged any broker, finder or other person who would be entitled to any commission or fees in respect of the negotiation, execution or delivery of this Lease and shall indemnify and hold harmless Landlord against any loss, cost, liability or expense incurred by Landlord as a result of any claim asserted by any such broker, finder or other person on the basis of any arrangements or agreements made or alleged to have been made by or on behalf of Tenant. (e) Entire Agreement. This Lease is the final and complete expression of Landlord and Tenant relating in any manner to the leasing, use and occupancy of the Premises, to Tenant's use of the Project or portions thereof, 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 both Landlord and Tenant. (f) Severability. Any provision of this Lease which shall prove to be 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. (g) Force Majeure. Except for the payment of Rent, Additional Rent or other sums payable by Tenant to Landlord, time periods for Tenant's or Landlord's 22 28 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 control, including without limitation, strikes, unavailability or delay in obtaining fuel, labor or materials, accidents, floods, defective materials, fire or other casualty, adverse weather conditions, inability to obtain building or use and occupancy certificates, embargoes, governmental regulations, acts of God, war or other strife, or other causes similar or dissimilar. (h) Notices. All notices under this Lease shall be in writing and delivered in person or sent by registered or certified mail, postage prepaid, to Landlord and to Tenant at the Addresses provided respectively in Section 1(e) and 1(c) (provided that after the Commencement Date any such notice shall be mailed or delivered by hand to Tenant at the Premises) 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 date of such mailing. (i) 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. (j) Governing Law. This Lease shall be governed by and construed in accordance with the internal laws of the state of Washington. (k) Recording. Tenant shall not record this Lease or a memorandum hereof without Landlord's prior written consent and such recordation shall, at the option of Landlord, constitute a non-curable default of Tenant hereunder. (l) Waivers. No waiver by Landlord of any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Tenant of the same or any other provision. Landlord's consent to or approval of any act shall not be deemed to render unnecessary the obtaining of Landlord's consent to or approval of any subsequent act by Tenant. The acceptance of rent hereunder by Landlord shall not be a waiver of any preceding breach at the time of acceptance of such rent. (m) Time of Essence. Time is of the essence for the performance of all of the obligations specified hereunder. (n) Merger. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger and shall, at the option of Landlord, terminate all or any existing subtenancies or may, at the option of Landlord, operate as an assignment to Landlord of any or all of such subtenancies. 23 29 (o) Right to Change Public Spaces. Landlord shall have the right at any time, without thereby creating an actual or constructive eviction or incurring any liability to tenant therefor, 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 the arrangement or location of the elevators serving the Premises, make any change which shall diminish the area of the Premises, or make any change which shall change the character of the Building from that of a first-class office building. (p) Name. The Building and the Project will be known by such name as Landlord may designate from time to time. Landlord reserves the right to name and rename the Building and/or the Project from time to time and to install signs accordingly, without compensation or prior notice to Tenant. (q) Overdue Payments. Any Rent, Additional Rent or other sums payable by Tenant to Landlord under this Lease which shall not be paid when due thereof, shall bear interest at a rate equal to fifteen percent (15%), calculated from the original due date thereof to the date of payment. Any late payment of Rent (i.e., not paid within five (5) days when due) shall also be subject to a collection fee equal to the greater of $100.00 or five percent (5%) of the amount due. (r) Relocation of Premises. During the term of the Lease Landlord may relocate the Tenant's Premises within the Project. Said relocation shall be at the total cost and expense of Landlord. In the event Landlord so elects to relocate Tenant, Landlord shall notify Tenant, specifying the relocation space to Tenant. Tenant shall have fifteen (15) days from the receipt of said notice to accept said relocation. In the event that the relocation proposal is accepted by Tenant, Landlord and Tenant shall revise the Tenant's Lease to reflect the new space. Upon such relocation, such new space shall be deemed the Premises hereunder for all purposes and the Lease shall be deemed amended to that effect without further formality. Rental rates for the new space shall be the same as those agreed to in the original Lease Agreement, subject to adjustment for additional space, or less space, as agreed to by the parties. All other terms and conditions of the original Lease shall remain in full force and effect. In the event that Tenant elects not to accept the relocation of its Premises, Tenant shall so notify Landlord in writing. Landlord shall then have the option for thirty (30) days to terminate Tenant's Lease, or to allow Tenant to remain in its present Premises. If Tenant accepts such relocation, the following conditions will apply: (i) Landlord will bear all costs and expenses resulting from the move, including but not limited to - replace or relocate communication, computer and phone connections - reprint letterhead, cards and forms - move building signage - move furniture, equipment, partitions, etc. (ii) Landlord will provide comparable space, to include: - similar linear feet of window line 24 30 - similar functional layout and flow - similar quantity and quality of improvements (iii) A rental credit of $49,767 will be provided by Landlord for the next rent due under the Lease and (iv) the move will occur during periods between Friday 5:00 PM and Monday 6:00 AM. (s) Advertising. Tenant shall not inscribe any inscription, or post, place or in any manner display any sign, notice, picture, placard or poster, or any advertising matter whatsoever in or about the Premises or the Building or the Project at places visible (either directly or indirectly as an outline or shadow on a glass pane) from anywhere outside the Premises without first obtaining Landlord's written consent thereto. Any such consent by Landlord shall be upon the understanding and condition that Tenant will remove the same at the expiration or sooner termination of this Lease and Tenant shall repair any damage to the Premises, the Building or the Project caused thereby. (t) Parking. Parking shall at all times be governed by reasonable rules and regulations as set forth in Exhibit D, which shall be published from time to time by Landlord. Parking may be on a reserved stall and/or undesignated stall -- "window sticker" basis, and may be self-service and/or attendant service, as determined from time to time by Landlord. Tenant shall have the right to use that number of parking stalls as set forth in Section 1(q). (u) Execution of Lease by Landlord. The submission of this document for examination and negotiation does not constitute an offer to lease, or a reservation of, or option for the Premises, and this document shall become effective and binding only upon execution and delivery by Landlord. No act or omission of any employee or agent of Landlord or of Landlord's broker shall alter, change or modify any of the provisions hereof. 31. LANDLORD'S COVENANTS. (a) 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, so long as Tenant is not in default hereunder. (b) Hazardous Waste or Materials. Landlord represents to Tenant that to the best of Landlord's actual knowledge no hazardous waste or materials have been generated, stored or disposed of by Landlord on the land or in or on the Building, other than in compliance with applicable laws. (c) Rentable Square Feet. Landlord warrants that the rentable square feet of the Project is 69,596 square feet, and the rentable square feet of the Premises is 10,753 square feet. Landlord further warrants that such square feet have been calculated in accordance with BOMA Standards (1996 version). 32. GUARANTY OF LEASE. In order to induce Landlord to execute this Lease, Tenant has agreed to deliver to Landlord a Restated Guaranty of Lease, in the form attached hereto as Exhibit E, from William T. Baxter, Albert T. Dosser and Peter R. Gregory. 25 31 IN WITNESS WHEREOF this Lease has been executed the day and year first above set forth. LANDLORD: SEATTLE OFFICE ASSOCIATES L.L.C. a Washington Limited Liability company By [Signature Illegible] -------------------------------------- Its Member ----------------------------------- TENANT: bsquare consulting, inc. a Washington Corporation By /s/ William T. Baxter -------------------------------------- Its President and CEO ----------------------------------- 26 32 LANDLORD ACKNOWLEDGMENT STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) I certify that I know or have satisfactory evidence that P. Langston Sligh is the person who appeared before me, and said person acknowledged that said person signed this instrument, on oath stated that said person was authorized to execute the instrument and acknowledged it as a managing member of Seattle Office Associates, a limited liability company, to be the free and voluntary act of such limited liability company for the uses and purposes mentioned in the instrument. Dated this 24th day of March, 1997 [Signature Illegible] ---------------------------------------- Notary Public in and for the state of Washington, residing at Kirkland, WA My appointment expires 8-29-00 TENANT CORPORATE ACKNOWLEDGMENT STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) I certify that I know or have satisfactory evidence that William Baxter is the person who appeared before me, and said person acknowledged that he signed this instrument, on oath stated that he was authorized to execute the instrument and acknowledged it as the President and CEO respectively, of a corporation, to be the free and voluntary act of such corporation for the uses and purposes mentioned in the instrument. Dated this 21st day of March, 1997. [Signature Illegible] ---------------------------------------- Notary Public in and for the state of Washington, residing at Kirkland, WA My appointment expires 8-29-00 27 33 EXHIBIT A LEGAL DESCRIPTION OF LAND That portion of the northeast quarter of the southwest quarter of Section 10, Township 24 North, Range 5 East, W.M., in King County, Washington, lying southerly of the south line of the frontage road right-of-way known as S.E. 36th Street on the south side of primary State Highway No. 2 as shown on State of Washington, Department of Highways Map, SR 90, MP 7.71 to MP 11.72, Richards Road to Lake Sammamish, sheet 3 of 35, latest revision date March 31, 1977, on file at the office of the Department of Transportation, Olympia, Washington, except that portion lying westerly of the west line of an electric transmission easement, granted to Puget Sound Power & Light Company by instrument recorded under Auditor's File No. 2545297, also subject to an easement for a petroleum pipeline, as recorded under Auditor's File No. 5785336, and also subject to a perpetual slope easement, as acquired under Superior Court Cause No. 7733237. 34 EXHIBIT B SPACE PLAN OF PREMISES 35 EXHIBIT C TENANT IMPROVEMENTS Landlord to complete the following tenant improvements at its cost: a. carpet and paint entire premises. Carpet to be building standard (Mohawk RIO 30/36 in "Federal Blue" #511). Carpet is to be cut pile in offices and loop pile in hallways/corridors as specified by Tenant. Paint color to be chosen by Tenant subject to approval by Landlord. Vinyl to be placed in kitchen and lunchroom area will be building standard (Armstrong Corlon in "Suffield Slate" #86807). New rubber cove base to be installed (Robbe "Gray" #50) in all areas. b. Clean up/touch up of kitchen cabinet fronts. c. Building standard signage to be provided for Tenant door and for main building directory. d. Replacement of all ceiling tiles and straightening/replacement of ceiling grid as required. e. Placement of locks on selected interior office doors, to be determined by Tenant. f. Make sure that all interior lighting is fully operational. g. Clean all window blinds and interior windows. h. Landlord to refurbish common area corridor from elevator lobby to east stairwell so as to match new corridor from elevator lobby to west stairwell. i. Landlord to provide space planning services including working drawings as necessary to acquire permits to complete space. Landlord will also provide space planning design for adjacent suite of approximately 1754 rentable square feet. j. Demolition of areas as required to complete the construction of the desired improvements as shown in Exhibit B. The Landlord will cause the following improvements to be done and completed at the sole cost of the Tenant. Tenant shall have the right to approve all costs prior to the start of the work. a. Construction of new offices as required to match site plan for space as shown on Exhibit B-2. New doors and relites as required will match the existing trim. b. Electrical and mechanical work as required to match new office layout. Tenant to provide electrical specifications prior to start of work. c. Depending upon total costs involved, Tenant may elect to complete the improvement work in phases to match its expected occupancy needs. 36 EXHIBIT D RULES AND REGULATIONS 1. Except as specifically provided in the Lease to which these Rules and Regulations are attached, no sign, placard, picture, advertisement, name or notice shall be installed or displayed on any part of the outside or inside of the Building without the prior written consent of Landlord. Landlord shall have the right to remove, at Tenant's expense and without notice, any sign installed or displayed in violation of this rule. All approved signs or lettering on doors and walls shall be printed, painted, affixed or inscribed at the expense of Tenant by a person and in a form approved by Landlord. 2. If Landlord objects in writing to any curtains, blinds, shades, screens or hanging plants or other similar objects attached to or used in connection with any window or door of the Premises, or placed on any windowsill which is visible from the exterior of the Premises, Tenant shall immediately discontinue such use. Tenant shall not place anything against or near glass partitions or doors or windows which may appear unsightly from outside the Premises. 3. Tenant shall not obstruct any sidewalks, halls, passages, exits, entrances, elevators or stairways of the Building. The halls, passages, exits, entrances, elevators, and stairways are not open to the general public, but are open, subject to reasonable regulation, to Tenant's business invitees. Landlord shall in all cases retain the right to control and prevent access thereto of all persons whose presence in the judgment of Landlord would be prejudicial to the safety, character, reputation and interest of the Building and its tenants; providing that nothing herein contained shall be construed to prevent such access to persons with whom any tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal or unlawful activities. No tenant and no employee or invitee of any tenant shall go upon the roof of the Building. 4. The directory of the Building will be provided exclusively for the display of the name and location of tenants only, and Landlord reserves the right to exclude any other names, including individual's names, therefrom. 5. All cleaning and janitorial services for the Building and the Premises shall be provided exclusively through Landlord, and except with the written consent of Landlord, no person or persons other than those approved by Landlord shall be employed by Tenant or permitted to enter the Building for the purpose of cleaning the same. Tenant shall not cause any unnecessary labor by carelessness or indifference to the good order and cleanliness of the Premises. 6. Landlord will furnish Tenant, free of charge, with eight keys to each door lock in the Premises. Landlord may make a reasonable charge for any additional keys. Tenant shall not alter any lock or install a new additional lock or bolt on any door of its Premises. Tenant, upon the termination of its tenancy, shall deliver to Landlord the keys of all doors which have been furnished to Tenant, and in the event of loss of any keys so furnished, shall pay Landlord therefore. 7. If Tenant requires telegraphic, telephonic, burglar alarm or similar services, it shall first obtain, and comply with, Landlord's instructions in their installation. 8. The Building elevator shall be available for use by all tenants in the Building, subject to such reasonable scheduling as Landlord, in its discretion, shall deem appropriate. No equipment, materials, furniture, packages, supplies, merchandise or other property will be received in the Building or carried in the elevators except between such hours and in such elevators as may be designated by Landlord. Tenant's initial move in and 37 subsequent deliveries of bulky items, such as furniture, safes and similar items shall, unless otherwise agreed by Landlord, be made during the hours of 6 P.M. to 6 A.M. or on Saturday or Sunday. Deliveries during normal office hours shall be limited to normal office supplies and other small items. No deliveries shall be made which impede or interfere with other tenants or the operation of the Building. 9. Tenant shall not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry and which is allowed by law. Landlord shall have the right to prescribe the weight, size and position of all equipment, materials, furniture or other property brought into the Building. Heavy objects shall, if considered necessary by Landlord, stand on such platforms as determined by Landlord to be necessary to properly distribute the weight, which platforms shall be provided at Tenant's expense. Business machines and mechanical equipment belonging to Tenant, which cause noise or vibration that may be transmitted to the structure of the Building or to any space therein, to such a degree as to be objectionable to Landlord or to any tenants in the Building, shall be placed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devices sufficient to eliminate noise or vibration. The persons employed to move such equipment in or out of the Building must be acceptable to Landlord. Landlord will not be responsible for loss of, or damage to, any such equipment or other property from any cause, and all damage done to the Building by maintaining or moving such equipment or other property shall be repaired at the expense of Tenant. 10. Tenant shall not use or keep in the Premises any kerosene, gasoline or inflammable or combustible fluid or material other than those limited quantities necessary for the operation or maintenance of office equipment. Tenant shall not use or permit to be used in the Premises any foul or noxious gas or substance, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors or vibrations, nor shall Tenant bring into or keep in or about the Premises any birds or animals. 11. Tenant shall not use any method of heating or air conditioning other than that supplied by Landlord. 12. Tenant shall not waste electricity, water or air conditioning and agrees to cooperate fully with Landlord to assure the most effective operation of the Building's heating and air conditioning and to comply with any governmental energy-saving rules, laws or regulations of which Tenant has actual notice, and shall refrain from attempting to adjust controls. Tenant shall keep corridor doors closed, and shall close window coverings at the end of each business day. 13. Landlord reserves the right, exercisable without notice and without liability to Tenant, to change the name and street address of the Building. 14. Landlord reserves the right to exclude from the Building between the hours of 6 P.M. and 7 A.M. the following day, or such other hours as may be established from time to time by Landlord, and on Sundays and legal holidays, any person unless that person is known to the person or employee in charge of the Building and has a pass or is properly identified. Tenant shall be responsible for all persons for whom it requests passes and shall be liable to Landlord for all acts of such persons. Landlord shall not be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. Landlord reserves the right to prevent access to the Building in case of invasion, mob, riot, public excitement or other commotion by closing the doors or by other appropriate action. 15. Tenant shall close and lock the doors of its Premises and entirely shut off all water faucets or other water apparatus, and electricity, gas or air outlets before tenant and its employees leave the Premises. Tenant shall be responsible for any damage or injuries 32 38 sustained by other tenants or occupants of the Building or by Landlord for noncompliance with this rule. 16. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein. The expense of any breakage, stoppage or damage resulting from violation of this rule shall be borne by the tenant who, or whose employees or invitees, shall have caused it. 17. Tenant shall not sell, or permit the sale at retail, of newspapers, magazines, periodicals, theater tickets or any other goods or merchandise to the general public in or on the Premises. Tenant shall not make any room-to-room solicitation of business from other tenants in the Building. Tenant shall not use the Premises for any business or activity other than that specifically provided for in Tenant's Lease. 18. Tenant shall not install any radio or television antenna, loudspeaker or other devices on the roof or exterior walls of the Building. Tenant shall not interfere with radio or television broadcasting or reception from or in the Building or elsewhere. 19. Tenant shall not mark, drive nails, screw or drill into the partitions, woodwork or plaster, or in any way deface the Premises or any part thereof, except in accordance with the provisions of the Lease pertaining to alterations. Landlord reserves the right to direct electricians as to where and how telephone and telegraph wires are to be introduced to the Premises. Tenant shall not cut or bore holes for wires. Tenant shall not affix any floor covering to the floor of the Premises in any manner except as approved by Landlord. 20. Tenant shall repair any damage resulting from noncompliance with this rule. Tenant shall not install, maintain or operate upon the Premises any vending machines without the written consent of Landlord. 21. Canvassing, soliciting and distribution of handbills or any other written material, and peddling in the Building are prohibited, and Tenant shall cooperate to prevent such activities. 22. Landlord reserves the right to exclude or expel from the Building any person who, in Landlord's judgment, is intoxicated or under the influence of liquor or drugs or who is in violation of any of the Rules and Regulations of the Building. 23. Tenant shall store all its trash and garbage within its Premises or in other facilities provided by Landlord. Tenant shall not place in any trash box or receptacle any material which cannot be disposed of in the ordinary and customary manner of trash and garbage disposal. All garbage and refuse disposal shall be made in accordance with directions issued from time to time by Landlord. Tenant will take advantage of any recycling available at the site. 24. The Premises shall not be used for the storage of merchandise held for sale to the general public, or for lodging or for manufacturing of any kind, nor shall the Premises be used for any improper, immoral or objectionable purpose. No cooking shall be done or permitted on the Premises without Landlord's consent, except that use by Tenant of Underwriters' Laboratory-approved equipment for brewing coffee, tea, hot chocolate and similar beverages, or use of microwave ovens for employee use shall be permitted, provided that such equipment and use is in accordance with all applicable federal, state, county and city laws, codes, ordinances, rules and regulations. 25. Tenant shall not use in any space or in the public halls of the Building, any hand truck except those equipped with rubber tires and side guards or such other material- 33 39 handling equipment as Landlord may approve. Tenant shall not bring any other vehicles of any kind into the Building. 26. Without the written consent of Landlord, Tenant shall not use the name of the Building in connection with or in promoting or advertising the business of Tenant except as Tenant's address. 27. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency. 28. Tenant assumes any and all responsibility for protecting its Premises from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Premises closed. 29. Tenant's requirements will be attended to only upon appropriate application to the Building management office by an authorized individual. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord, and no employee of Landlord will admit any person (Tenant or otherwise) to any office without specific instructions from Tenant. 30. Tenant shall comply with all parking requirements of the property, and will not park more vehicles at the property than provided in Tenant's lease. Landlord reserves the right to ticket and/or tow vehicles, at Tenant's expense, not displaying a valid parking permit. a) Parking stickers or any other device or form of identification supplied by Landlord as a condition of the use of the parking facilities shall remain the property of Landlord. Such parking identification device must be displayed as requested and may not be mutilated in any manner. The serial number of the parking identification device may not be obliterated. Devices are not transferable, and any device in the possession of an unauthorized holder and will be void. b) Loss or theft of parking identification devices from automobiles must be reported immediately, and a lost or stolen report must be filed by the customer at that time. Landlord has the right to exclude any vehicle from the parking facilities that does not have an identification device. c) Tenant shall not park or permit the parking of any vehicle under its control in any parking areas designated by Landlord as areas for parking by visitors to the Building. Tenant or its customers, suppliers, employees, or invitees shall not use motor homes or other similar vehicles in the parking areas and shall not leave vehicles in the parking areas overnight or for any extended period of time, nor park any vehicles in the parking areas other than automobiles, motorcycles, motor driven or nonmotor driven bicycles or four-wheeled trucks not more than 20 feet in length. Provided that, from time to time, Tenant may park passenger automobiles overnight. d) Washing, waxing, cleaning or servicing of any vehicle in any area not specifically reserved for such purpose is prohibited. e) Vehicles must be parked entirely within the painted stall lines of a single parking stall. f) Parking is prohibited: i) in areas not striped for parking; ii) in aisles 34 40 iii) where "no parking" signs are posted; iv) on ramps; v) in cross hatched areas; and vi) in such other areas as may be designated by Landlord or Landlord's agent from time to time. g) Landlord or its agents shall have the right to cause to be removed any car of Tenant, its employees, invitees, licensee, or agent, that may be parked in unauthorized area, and Tenant agrees to save and hold harmless Landlord, its agent and employees from any and all claims, losses, damages and demands asserted or arising in respect to or in connection with the removal of any such vehicle and for all expenses incurred by Landlord in connection with such removal. Tenant will from time to time, upon request of Landlord, supply Landlord with a list of license plate numbers or vehicle owned or operated by its employees and agents. h) Landlord reserves the right to modify and/or adopt such other reasonable and non-discriminatory Rules and Regulations for the parking facilities as it deems necessary for the operation of the parking facilities. Landlord may refuse to permit any person who violates these Rules and Regulations to park in the parking facilities, and any violation shall subject the car to removal at the owner's expense. 31. Tenant shall be responsible for maintaining and, if necessary, replacing any appliances that were provided in any Tenant Improvements (i.e. microwaves and dishwashers, etc.). 32. Landlord may waive any one or more of these Rules and Regulations for the benefit of Tenant or any other tenant, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of Tenant or any other tenant, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all of the tenants of the Building. 33. These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of Tenant's lease of its Premises in the Building. 34. Landlord reserves the right to amend these rules and to make such other and reasonable Rules and Regulations as, in its judgment, may from time to time be needed for safety and security, for care and cleanliness of the Building and for the preservation of good order therein. Tenant agrees to abide by all such Rules and Regulations hereinabove stated and any additional rules and regulations which are adopted. 35. Tenant shall be responsible for the observance of all of the foregoing rules by Tenant's employees, agents, clients, customers, invitees and guests. 35 41 EXHIBIT E RESTATED GUARANTY OF LEASE William T. Baxter ("Guarantor"), hereby agrees with Seattle Office Associates LLC ("Landlord"), as follows: 1. Consideration: Guarantor has agreed to make and deliver this Guaranty to Landlord in order to induce Landlord to enter into a new lease dated March __, 1997 with bsquare consulting, inc. (Tenant) with respect to Suite 100 of the Delphi Building in Bellevue, WA (the "Suite 100 Lease"), and also to induce Landlord to enter into a new lease dated March __, 1997 with Tenant with respect to Suite 310 of the Delphi Building (the "Suite 310 Lease"). Landlord and Tenant are also parties to a lease dated November 15, 1996, as amended, with respect to Suite 200 of the Delphi Building (the "Suite 200 Lease"). The Suite 100 Lease, the Suite 200 Lease and the Suite 310 Lease are collectively referred to as the "Leases", and are the Leases under which the obligations hereby guaranteed have been created. Guarantor hereby acknowledges that it has and will derive a direct financial benefit from Landlord's entering into the Leases. This Guaranty replaces and supersedes in its entirety the Guaranty of Lease from Guarantor to Landlord for the Suite 200 Lease dated November 15, 1996. 2. Guarantee: Guarantor hereby guarantees the Leases, as originally executed and as thereafter modified or amended, as follows: Guarantor hereby guarantees and undertakes with Landlord that in the event that the Tenant shall default in the payments of any sums due and owing to Landlord from Tenant on account of any of the Leases or in the event that the Tenant shall default in the full and faithful performance of Tenant's obligations, undertakings and covenants contained in the Leases, then Guarantor shall pay to Landlord, within ten days of demand, any and all sums so due to Landlord (not to exceed the limitation set forth below) and any damages incurred by Landlord on account thereof. This guaranty is absolute and unconditional. Guarantor's total obligation under this guarantee is limited to $299,000 (the "Limit Amount"). 3. Reductions in Limit Amount: Guarantor shall have the right to reduce the Limit Amount by $2.32 for each $1.00 in cash deposited by Guarantor with Landlord, provided that the maximum amount Guarantor may reduce the Limit Amount by cash deposit may not exceed $174,000 ($75,000 in cash). Any cash deposited by Guarantor with Landlord to reduce the Limit Amount shall accrue interest at the rate of 5% per annum, which interest shall be credited to the cash deposit on a monthly basis. Any cash deposited with Landlord to reduce the Limit Amount shall be held by Landlord with landlord's other funds, and shall be available to Landlord on the same terms and conditions as the security deposits under the Leases. Any remaining portion of the cash deposit (and any accrued interest thereon) shall be returned to Guarantor only after all of the Leases have expired and all of the obligations of Tenant thereunder have been satisfied in full. Any reduction in the Limit Amount arising from a cash deposit with Landlord shall only be effective as to obligations arising under this Guaranty accruing after the date of deposit. Obligations which have accrued under the Guaranty prior to or as of the date of a cash deposit with Landlord shall still be subject to the full Limit Amount. Thus, following a default by Tenant under a Lease, Guarantor may not make a cash deposit with Landlord to reduce the Limit Amount applicable to such default. The Limit Amount shall also be reduced $3,472.22 per month for each month which the Tenant is not in default under any of the Leases, provided that in no event shall the Limit Amount be reduced by more than $125,000 by operation of this provision. This monthly reduction is to begin December 13, 1996. 4. Term: Guarantor's obligations and undertakings herein contained shall remain in full force and effect and shall survive termination of the Leases. 5. Rights of Landlord: Without diminishing, releasing or discharging Guarantor's obligations hereunder, Landlord shall have the right to exercise the following powers and rights in Landlord's sole discretion: Landlord may change, alter, cancel, renew, extend, decrease or increase the obligations of Tenant to Landlord (increases in the Page l 42 obligation of the Tenant to Landlord will not increase the Limit Amount under this guaranty). Landlord may add other guarantors or procure additional guarantees, release other guarantors or guarantees and apply monies or properties received from Tenant upon debts regardless of whether the same may be guaranteed hereby, otherwise secured, barred by statutes of limitation or discharged other than by payment. Landlord may exercise rights hereunder in the event of Tenant's insolvency, bankruptcy, receivership or assignment for benefit of creditors, in which event all of Tenant's liabilities and indemnities to Landlord shall be satisfied in full before Guarantor shall be entitled to participation in the distribution of Tenant's assets. Landlord may deal with Tenant, Guarantor and any other person liable on the indebtedness, obligation or liabilities to Landlord as Landlord deems advisable. 6. Default of Tenant: Notice of acceptance of this Guaranty and of defaults, breaches, demands, presentments, protest, and amendment to or modification or cancellation of the Leases, and of any other kind is fully waived by Guarantor. Upon default by Tenant on any of its obligations to Landlord, then at Landlord's option, without notice or demand upon Guarantor and without exercising any other right or remedy Landlord may have, Landlord may proceed directly against Guarantor or any other guarantor to enforce Landlord's rights hereunder. Without releasing or affecting Guarantor's obligations hereunder, Landlord may enforce any rights it may have against any persons and properties liable. 7. Impairment of Rights: Landlord's rights shall be cumulative and not exclusive. No impairment, limitation or modification or Tenant's liabilities or obligations or of its trustee or receiver or any such impairment, limitation or modification of Landlord's remedies by virtue of the operation of bankruptcy or similar laws or decisions of any court or courts nor any disaffirmance of the Landlord's obligations under the Leases in such proceedings shall affect Landlord's rights against Guarantor hereunder. 8. Successor and Assigns: The obligations of Guarantor shall inure to the benefit of the Landlord's assigns and successors in interest in the Leases and shall be binding upon Guarantor's heirs, successors and assigns. Reference to Tenant herein includes any assignee of or successor to Tenant's interest under the terms of the Leases or any subtenant or any other party who is now or in the future may be a tenant under any of the Leases. 9. Costs and Attorney's Fees: Guarantor shall pay all costs, expenses and charges, including all reasonable attorneys fees, which Landlord may incur in the enforcement of the provisions hereof. Such costs or reasonable attorneys fees shall be payable irrespective of the Limit Amount hereunder. 10. Notices: Any notice hereunder may be given to Guarantor by mail addressed to: William T. Baxter 3233 - 168th Place SE Bellevue, WA 98008 or other address as Guarantor shall designate to Landlord in writing, Dated this _____ day of March, 1997. GUARANTOR by______________________________________ William T. Baxter Page 2 EX-10.10 14 OFFICE LEASE AGREEMENT 1 EXHIBIT 10.10 ADDENDUM TO DELPHI OFFICE BUILDING LEASE AGREEMENT LEASE: DATED MARCH 24, 1997 LANDLORD: SEATTLE OFFICE ASSOCIATES, LLC TENANT: BSQUARE CONSULTING, INC. The undersigned Landlord and Tenant agree to the establishment of the following dates as they are used in the above referenced lease agreement: Lease Commencement Date: April 24, 1997 Rent Commencement Date: April 24, 1997 Lease Termination Date: December 12, 2001 Extension Option Notification Date: June 12, 2001 EXCEPT as herein specifically amended, the lease shall in all respects remain in full force and effect. Dated: April 28, 1997 Landlord SEATTLE OFFICE ASSOCIATES LLC by: /s/ [SIGNATURE ILLEGIBLE] ------------------------------- its: MEMBER ------------------------------- Tenant BSQUARE CONSULTING, INC. by: /s/ [SIGNATURE ILLEGIBLE] ------------------------------- its: PRESIDENT & CEO ------------------------------- 2 OFFICE LEASE AGREEMENT BETWEEN Seattle Office Associates, LLC LANDLORD and bsquare consulting, inc. TENANT 3 TABLE OF CONTENTS 1. BASIC LEASE INFORMATION AND EXHIBITS........................................1 (a) Lease Date..............................................................1 (b) Tenant..................................................................1 (c) Address of Tenant.......................................................1 (d) Landlord................................................................1 (e) Address of Landlord.....................................................1 (f) Premises................................................................1 (g) Project.................................................................1 (h) Land....................................................................1 (i) Lease Term..............................................................1 (j) Right to Extend.........................................................1 (k) Basic Rent..............................................................2 (1) Additional Rent.........................................................2 (m) Security Deposit........................................................2 (n) Rentable Square Feet in the Premises....................................2 (o) Rentable Square Feet in the Project.....................................3 (p) Tenant's Percentage.....................................................3 (q) Parking.................................................................3 (r) Brokers.................................................................3 (s) Construction Completion Date............................................3 (t) Signage.................................................................3 (u) Expansion Rights........................................................3 (v) Exhibits................................................................3 2. PREMISES....................................................................3 3. COMMENCEMENT AND EXPIRATION DATES...........................................3 4. RENT........................................................................4 (a) Rent....................................................................4 5. COSTS OF OPERATIONS AND REAL ESTATE TAXES...................................4 (a) Definitions.............................................................4 (b) Additional Rent for Estimated Increases in Operating Costs..............6 (c) Determinations..........................................................6 (d) Personal Property Taxes.................................................6 6. SERVICES AND UTILITIES......................................................7 (a) Standard Services.......................................................7 (b) Interruption of Services................................................7 (c) Additional Services.....................................................7 7. SECURITY DEPOSIT............................................................8 8. USES........................................................................8 (a) Uses....................................................................8 (b) Compliance With Law.....................................................9 (c) Compliance With Rules and Regulations...................................9 9. IMPROVEMENTS................................................................9 10. TENANT IMPROVEMENTS; ACCEPTANCE OF PREMISES.................................9 11. CARE OF PREMISES............................................................10 12. ALTERATIONS AND ADDITIONS...................................................10 13. ACCESS......................................................................11 14. DAMAGE OR DESTRUCTION.......................................................11 (a) Damage and Repair.......................................................11 (b) Destruction During Last Year of Term....................................12 (c) Business Interruption...................................................12 (d) Tenant Improvements.....................................................12 15. CONDEMNATION................................................................12 (a) Taking..................................................................12 (b) Awards and Damages......................................................13 16. INDEMNIFICATION.............................................................13 (a) Indemnity...............................................................13 (b) Exemption of Landlord From Liability....................................13
4 (c) Waiver of Subrogation...................................................14 17. HAZARDOUS SUBSTANCES........................................................14 18. INSURANCE...................................................................15 (a) Required Policies.......................................................15 (b) Insurance Policy Requirements...........................................15 (c) Landlord's Insurance....................................................15 19. ASSIGNMENT AND SUBLETTING...................................................16 20. LIENS AND INSOLVENCY........................................................17 (a) Liens...................................................................17 (b) Insolvency..............................................................17 21. DEFAULT.....................................................................17 (a) Default By Tenant.......................................................17 (b) Remedies Cumulative; Injunction.........................................18 (c) Landlord's Remedies Upon Tenant Default.................................18 (d) Waiver of Redemption Rights.............................................20 (e) Nonpayment of Additional Rent...........................................20 (f) Interest................................................................20 22. PRIORITY....................................................................20 (a) Subordination of Lease..................................................20 23. ESTOPPEL CERTIFICATES.......................................................20 (a) Delivery of Estoppel....................................................20 (b) Failure to Deliver Estoppel.............................................21 24. SURRENDER OF POSSESSION.....................................................21 25. NON-WAIVER..................................................................21 26. HOLDOVER....................................................................22 27. LANDLORD'S LIABILITY........................................................22 28. TRANSFER OF LANDLORD'S INTEREST.............................................22 29. RIGHT TO PERFORM............................................................22 30. GENERAL.....................................................................22 (a) Headings................................................................22 (b) Heirs and Assigns.......................................................22 (c) Authority...............................................................23 (d) No Brokers..............................................................23 (e) Entire Agreement........................................................23 (f) Severability............................................................23 (g) Force Majeure...........................................................23 (h) Notices.................................................................23 (i) Costs and Attorneys Fees................................................24 (j) Governing Law...........................................................24 (k) Recording...............................................................24 (1) Waivers.................................................................24 (m) Time of Essence.........................................................24 (n) Merger..................................................................24 (o) Right to Change Public Spaces...........................................24 (p) Name....................................................................25 (q) Overdue Payments........................................................25 (r) Relocation of Premises..................................................25 (s) Advertising.............................................................25 (t) Parking.................................................................26 (u) Execution of Lease by Landlord..........................................26 31. LANDLORD'S COVENANTS........................................................26 (a) Quiet Enjoyment.........................................................26 (b) Hazardous Waste or Materials............................................26 (c) Rentable Square Feet....................................................26 32. GUARANTY OF LEASE...........................................................26
5 Exhibits A - Legal Description of Land B - Space Plan of Premises C - Tenant Improvements D - Building Rules and Regulations E - Guarantees of Lease 6 OFFICE LEASE AGREEMENT THIS LEASE is made this ____ day of March, 1997 between Seattle Office Associates LLC, a Washington Limited Liability Company ("Landlord"), and bsquare consulting, inc., a Washington Corporation ("Tenant"). Landlord and Tenant agree: 1. BASIC LEASE INFORMATION 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) Lease Date: _____________,1997. (b) Tenant: bsquare consulting, inc. a Washington Corporation. (c) Address of Tenant: 3633 - 136th Place SE Suite 200 Bellevue, WA 98006 (d) Landlord: Seattle Office Associates, LLC (e) Address of Landlord: 3633 - 136th Place SE Suite 205 Bellevue, WA 98006 (f) Premises: Suite No. 100, located at 3633 - 136th Place SE, Bellevue, (the "Building") as shown on Exhibit B attached hereto. (g) Project: The Building and all related improvements known as the Delphi Building, located at 3633 - 136th Place SE, Bellevue, which are situated on the Land as defined below. (h) Land: The real property more particularly described on Exhibit A attached hereto. (i) Lease Term: approximately 56 months, commencing on the "Commencement Date" and terminating on December 12, 2001, ("the Termination Date"). Landlord and Tenant agree to execute an addendum to this lease setting forth the Commencement Date and the Termination Date. (j) Right to Extend: a. Provided Tenant (i) is not in default hereunder at the time of the exercise of the extension and at the commencement of the renewal term, (ii) has not been in a monetary default more than five times during the term of the lease, and (iii) has given Landlord six (6) months prior written notice of its intent to exercise its rights under this Section, Tenant shall have the right to extend the term of this Lease for one (1) additional period of five years (the "Extended Term") on the same terms and conditions as in this Lease except that the Basic Rent during the Extended Term shall be a sum equal to the fair market rent ("Market Rent") of the Leased Premises at the time of the 1 7 commencement of the Extended Term as determined either by agreement between Landlord and Tenant or by arbitration as hereinafter described. b. In the event that tenant desires to exercise such option, Landlord and Tenant agree to negotiate in good faith to reach agreement on the Market Rent of the Premises for such Extended Term. If, for any reason, the Landlord and Tenant fail to agree to a market rent for the term at least thirty (30) days prior to the end of the initial Term, then market rent for the term shall be determined by arbitration pursuant to this lease and RCW 7.04, et.seq. The arbitrator shall be a licensed MAI appraiser, whom the Parties shall select by mutual agreement. If the Parties are unable to agree on an arbitrator, the arbitrator shall be selected by the King County Superior Court. As part of the submittals to the arbitrator, each Party to the arbitration will present a proposed market rent for the term which the submitting Party deems to be fair and reasonable. The arbitrator is directed to select within twenty-one (21) days one of the proposed market rents submitted and has no discretion to determine any other market rent. The arbitrator's decision shall be final, binding and non-appealable. Notwithstanding the above, the market rent for the extended term shall not be less than the rate for the initial term. Until the arbitrator renders his award, the Tenant shall continue to pay the same market rent per month of the term as it paid for the last month of the initial term. The Tenant shall pay any shortfall in market rent payments for the term within ten (10) days after the arbitrator renders his award; and Landlord shall credit Tenant within ten (10) days any overpayment of Base Rent for the term against future monthly market rent, as determined by the arbitration award. (k) Basic Rent: $9,541.38 per month, $114,496.50 per year ($18.50 PSF). (1) Additional Rent: The increase in Operating Costs described in Section 5 and all other costs, other than Basic Rent, payable by Tenant to Landlord hereunder. (m) Security Deposit: $9,541.38 upon lease execution. (n) Rentable Square Feet in the Premises: 6,189. (o) Rentable Square Feet in the Project: 69,596. (p) Tenant's Percentage: 8.89%. (q) Parking: 26 parking stalls of which 6 will be reserved under the Building for the Tenant's exclusive use. (r) Brokers: Tenant was not represented in this transaction by a licensed real estate Broker; Landlord was represented in this transaction by Langly Associates Inc., a licensed real estate broker. (s) Construction Completion Date: April 15, 1997. (t) Signage: Tenant will not have any rights to exterior signage as relates to this lease. If, however, the Tenant installs a sign on the 2 8 Building in connection with its lease for Suite 200, such sign will be allowed to remain on the Building as long as the Tenant has a valid lease for a minimum of 10,000 SF. (u) Expansion Rights: Tenant will not have any specific expansion rights as relates to this lease. (v) Exhibits: The following exhibits are attached hereto and are hereby made a part of this Lease. Exhibit A - Legal Description of Land Exhibit B - Space Plan of Premises Exhibit C - Tenant Improvements Exhibit D - Building Rules and Regulations Exhibit E - Restated Guaranty of Lease 2. PREMISES. Landlord does hereby lease to Tenant, and Tenant does hereby lease from Landlord, upon the terms and conditions herein set forth, the Premises described in Section 1(f) hereof as shown on Exhibit B attached hereto and incorporated herein, together with rights of ingress and egress over common areas in the Building and on the Land. 3. COMMENCEMENT AND EXPIRATION DATES. The term of this Lease shall commence on the earliest of the following dates (the "Commencement Date"): (a) the date of substantial completion of construction of the tenant improvements to the Premises as listed in Exhibit B; (b) the date on which the Premises would have been substantially completed but for delay caused by Tenant or any agent, employee or contractor of Tenant; (c) the date on which the Premises are actually occupied by Tenant or (d) the date set forth in section 1.(i). Upon request of Landlord, Tenant shall enter into a memorandum stipulating the actual Commencement Date. If for any reason other than Tenant's failure to fulfill its obligations hereunder, Landlord cannot deliver possession of the Premises to Tenant by the Construction Completion Date, Landlord shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Tenant hereunder or extend the Termination Date, but in such case Tenant shall not be obligated to pay Rent until possession of the Premises is tendered to Tenant. If Tenant's tenant improvements are not completed by the Construction Completion Date due to the failure of Tenant to fulfill any obligation pursuant to the terms of this Lease or any exhibit hereto, including without limitation Tenant's failure to comply with the terms of Exhibit C, the Lease shall be deemed to have commenced upon the Construction Completion Date. If Tenant occupies the Premises prior to the Construction Completion Date, such occupancy shall be subject to all provisions hereof, such occupancy shall not advance the Termination Date, and Tenant shall pay Rent for such period at the initial rates set forth in the Basic Lease Information. In the event the Commencement Date is established as a later or earlier date than the date provided in Section 1(s) hereof, Landlord shall confirm the same to Tenant in writing. The Lease shall expire upon the Termination Date specified in Section 1(i). In the event Landlord is unable to deliver possession of premises within 30 days of the Construction Completion Date. Tenant shall have the right to cancel this Lease. 3 9 4. RENT. (a) Rent. Tenant shall pay Landlord without notice the Basic Rent stated in Section 1(k) hereof in advance without demand, deduction or offset on the first day of each calendar month during the term at the address specified in Section 1(e) or such address as may be specified by Landlord. Basic Rent and Additional Rent (together "Rent") for any partial month shall be prorated in proportion to the number of days in such month. (b) Basic Rent Adjustment. The Basic Rent shall remained fixed for the initial term of the lease. 5. COSTS OF OPERATIONS AND REAL ESTATE TAXES. (a) Definitions. In addition to the Basic Rent provided in Section 1(k) of this Lease, Tenant shall pay to Landlord increases under this Section 5 as "Additional Rent," utilizing the following definitions: (i) "Operating Costs" shall mean all taxes and assessments on real and personal property; any taxes levied or assessed (or any installment thereof due during the Lease Year) in addition to or in lieu of such real property or personal property taxes, or any other tax (except any federal or state net income tax or any business or occupation tax) upon leasing of the Project or rents collected; and all other expenses paid or incurred by Landlord for managing, maintaining, operating and repairing the Project and the personal property used in conjunction therewith, including without limitation, the following: (A) electricity, water, gas, sewers, refuse collection, telephone charges not charged to individual tenants and similar utility services; (B) the cost of maintaining, rehabilitating or replacing heating, mechanical, ventilating, escalator and elevator systems and restriping, repairing and repaving parking areas; (C) the cost of repairs, janitorial and cleaning services, window washing, landscape maintenance, and other general maintenance or cleaning; (D) the cost of fire, extended coverage, boiler, sprinkler, public liability, property damage, rent, earthquake (if required by any lender on the building and if such expense is included in the base year) and other insurance; (E) wages, salaries and other labor costs, including employee benefits, of all persons who perform duties in connection with the operation, maintenance and repair of the Project; (F) fees, charges and other costs, including management fees, consulting fees, legal fees and accounting fees, of all independent contractors reasonably engaged by Landlord; (G) management fees not to exceed 5% of gross revenues charged by Landlord if Landlord performs management services in connection with the Project; (H) the costs for the subject period (amortized over the useful life in accordance with the Internal Revenue Code) of any capital improvements made to the Project after the date of this Lease which are either designed to increase the operating efficiency of the Project or are required by applicable law; (I) cost of all licenses, permits and inspections required by governmental bodies with jurisdiction over the Premises, Project and Land; and (J) the amortized costs of renovating the carpet, paint and lighting of common hallways and lobbies; (K) deductible amounts (not to exceed $25,000) under any insurance maintained by Landlord with respect to repair or rebuilding of the Project, and (L) any other expenses or charges whether or not 4 10 hereinabove described, which in accordance with generally accepted accounting and management practices would be considered an expense of managing, maintaining, operating, or repairing the Project. (ii) "Operating Costs" shall not include the following: (a) Costs of any special services rendered to individual tenants (but not all tenants in the building) for which a special charge is made. (b) Leasing commissions and other leasing expenses. (c) Legal fees, accounting fees and other costs and expenses associated with a breach or default by any tenant. (ii) "Lease Year" shall mean the twelve-month period commencing January 1 and ending December 31. (iii) "Actual Operating Costs" means the actual expenses paid or incurred by Landlord for Operating Costs during any Lease Year of the term hereof. (iv) "Actual Operating Costs Allocable to the Premises" means the Tenant's share of the Actual Operating Costs determined by dividing the Rentable Square Feet in the Premises as set forth in Section 1(n) by the Rentable Square Feet in the Project and multiplying the resulting quotient by the Actual Operating Costs. (v) "Estimated Operating Costs Allocable to the Premises" means Landlord's estimate of Actual Operating Costs Allocable to the Premises for the following Lease Year to be given by Landlord to Tenant pursuant to Section 5(b)(i) below. (vi) "Base Service Year" shall mean the calendar year 1997. (b) Additional Rent for Estimated Increases in Operating Costs. (i) On or before the first (1st) day of March of each Lease Year after the Base Service Year, during the term hereof, Landlord shall furnish Tenant a written statement of the Estimated Operating Costs Allocable to the Premises for such Lease Year, and a calculation of the Additional Rent for such costs as follows: one-twelfth (1/12) of the amount, if any, by which such amount exceeds the Operating Costs Allocable to the Premises for the Base Service Year shall be Additional Rent payable each month by Tenant as provided in Section 4. Any shortfall for elapsed portion of the Lease Year in question shall be made up with the next monthly payment. Landlord reserves the right to adjust this estimate from time to time. (ii) Within ninety (90) days after the close of each Lease Year, or as soon thereafter as practicable, Landlord shall deliver to Tenant a written statement setting forth the Actual Operating Costs Allocable to the Premises during the preceding Lease Year. If such costs for any Lease Year exceed Estimated Operating Costs Allocable to the Premises paid by Tenant to Landlord pursuant to subsection (b)(i) 5 11 above, Tenant shall pay the amount of such excess to Landlord as Additional Rent within fifteen (15) days after receipt of such statement by Tenant. If such statement shows such costs to be less than the amount paid by Tenant to Landlord pursuant to subsection (b)(i) above, then the amount of such overpayment by Tenant shall be credited by Landlord to the next Rent payable by Tenant. In no event shall the Rent payable by Tenant hereunder be less than the Rent specified in Section 1(k) of this Lease. (iii) If this Lease shall terminate on a day other than the last day of a Lease Year, the amount of any adjustment between Estimated and Actual Operating Costs Allocable to the Premises with respect to the Lease Year in which such termination occurs shall be prorated on the basis which the number of days from the commencement of such Lease Year to and including such termination date bears to 365, and any amount payable by Landlord to Tenant or Tenant to Landlord with respect to such adjustment shall be payable within fifteen (15) days after delivery of the statement of Actual Operating Costs Allocable to the Premises with respect to such Lease Year. (c) Determinations. The determination of Actual Operating Costs and Estimated Operating Costs Allocable to the Premises shall be made by Landlord. Landlord or its agent shall keep records in reasonable detail showing all expenditures made for the items enumerated above, which records shall be available for inspection by Tenant at any reasonable time during the two year period following receipt of the Landlord's statement referred to in Section 5(b)(ii). (d) Personal Property Taxes. Tenant shall pay, prior to delinquency, all Personal Property Taxes payable with respect to all property of Tenant located on the Premises, the Building, or the Project including any improvements paid for by Tenant, and promptly, upon request of Landlord, shall provide written proof of such payment. As used herein, "Property of Tenant" shall include all improvements which are paid for by Tenant. "Personal Property Taxes" shall include all property taxes assessed against the property of Tenant, whether assessed as real or personal property. 6. SERVICES AND UTILITIES. (a) Standard Services. Landlord shall maintain the Premises and the public and common areas of the Building (including the roof, exterior portions of the building, parking and landscaping) in reasonably good order and condition, except for damage occasioned by the negligent or willful act or omission of Tenant or its contractors, agents, invitees, licensees or employees, the repair of which damage shall be paid by Tenant, subject to the provisions of Section 16(c). Landlord shall furnish the Premises with electricity for normal office use, water, elevator service and reasonable 5 day per week janitorial services during the term of the Lease. Electricity use beyond normal office use and any separate metering required thereby shall be paid for by Tenant. The Basic Rent stated in Section 1(k) hereof does not include the costs of any janitorial or other service provided or caused to be provided by Landlord to Tenant which are in addition to the services ordinarily provided Building tenants. Landlord shall furnish the Premises with heat and air conditioning during the following hours; Monday to Friday 7:00 a.m. to 6:00 p.m., Saturday 8:00 a.m. - 5:00 p.m. 6 12 and Sunday 9:00 a.m. to 1:00 p,m. Tenant may request provision of these services for other hours by giving Landlord at least 48 hours prior written notice and by paying all additional costs incurred by Landlord for such services with the next due installment of Rent at Landlord's then current overtime rate, which is currently $30 per hour. During other than normal business hours (as designated by Landlord), 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. (b) 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 such services due to any cause whatsoever, or from failure to make any repairs or perform any maintenance, and rent shall not abate as a result thereof. No temporary interruption or failure of such services 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. (c) Additional Services. Before installing lights and equipment in the Premises which in the aggregate exceed normal levels of usage (including without limitations, computer and data processing equipment), 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. Notwithstanding the above, Landlord may not refuse to grant permission for equipment which, in the aggregate, does not require electrical power in excess of five (5) watts per rentable SF. In addition, Tenant shall in advance, on the first day of each month during the Lease term, pay Landlord the reasonable amount estimated by Landlord as the cost of furnishing electricity for the operation of such equipment or lights and the reasonable amount estimated by Landlord as the cost of operation and maintenance of supplementary air conditioning units necessitated by Tenant's use of such equipment or lights. The Rent stated in Section 1(k) hereof does not include any amount to cover the cost of furnishing electricity or such additional air conditioning for such purposes and such costs will be paid by Tenant as Additional Rent. Landlord shall be entitled to install and operate at Tenant's cost a monitoring/metering system in the Premises to measure the added demands on electrical, heating, ventilation and air conditioning systems resulting from such equipment and lights and from Tenant's after-hours heating, ventilation and air conditioning service requirements. Tenant shall comply with Landlord's instructions for the use of drapes and thermostats in the Building. 7. SECURITY DEPOSIT. As security for the full and faithful performance of every covenant and condition of this Lease to be performed by Tenant, Tenant has paid to Landlord the Security Deposit as specified in Section 1(m) hereof. If Tenant defaults in any respect under this Lease, Landlord may apply all or any part of the Security Deposit to the payment of any sum in default or any other sum which Landlord may be required or may in its reasonably discretion deems necessary to spend or incur by reason of Tenant's default. In such event, Tenant shall, within five (5) days of written demand therefor by Landlord, 7 13 deposit with Landlord the amount so applied. If Tenant shall have fully complied with all of the covenants and conditions of this Lease, the amount of the Security Deposit to the extent not applied by Landlord under this Section 7 shall be repaid to Tenant (or, at Landlord's option, to the last assignee of Tenant's interest hereunder) within thirty (30) days after the expiration or sooner termination of this Lease. In the event of Tenant's default under this Lease, Landlord's right to retain the Security Deposit shall be deemed to be in addition to any and all other rights and remedies at law or in equity available to Landlord. Landlord shall not be required to keep any Security Deposit separate from its general funds and Tenant shall not be entitled to any interest thereon. 8. USES. (a) Uses. The Premises are to be used only for general office purposes ("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 sole 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, the Project or the Land contained in any lease, mortgage or other agreement or instrument by which the Landlord is bound or to which any of such property is subject. Tenant shall not commit any act that will increase the then existing rate of insurance on the Building or the Project and will immediately pay any such increase. Tenant shall promptly pay upon demand the amount of any increase in insurance rates 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. 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. (b) Compliance With Law. Tenant shall, at Tenant's expense, comply promptly with all applicable statutes, ordinances, rules, regulations, orders and requirements, including without limitation laws and regulations prohibiting discrimination on the basis of race, gender, religion, national origin, age or disability, in effect during the term hereof regulating the use, occupancy or improvement of the Premises by Tenant, Landlord or otherwise and Tenant shall be fully responsible for the cost of complying therewith. (c) Compliance With Rules and Regulations. Tenant shall observe and comply with all reasonable rules and regulations put into effect by Landlord. Landlord shall not be responsible to Tenant for the non-compliance with the rules and regulations of any other tenant or occupant of the Project. 9. IMPROVEMENTS. Upon expiration or sooner termination of this Lease, all improvements and additions to the Premises, except Tenant's trade fixtures, shall be deemed the property of Landlord. 8 14 10. TENANT IMPROVEMENTS; ACCEPTANCE OF PREMISES. The Premises shall be completed in accordance with the plans and specifications attached hereto as Exhibit C. All necessary construction shall be commenced by Landlord following Landlord's execution of this Lease and Tenant's delivery of the first month's Basic Rent, the guarantees and the Security Deposit. Landlord will exert commercially reasonable efforts to have improvements substantially completed by the date set forth in Section 1(s). Within five (5) days ("Inspection Period") after Landlord informs Tenant of such completion, Tenant shall make such inspection of the Premises as Tenant deems appropriate. Except as otherwise specified by Tenant in writing to Landlord within the Inspection Period, Tenant shall be deemed to have accepted the Premises in their then condition. If, as a result of such inspection, Tenant discovers minor deviations or variations from the plans and specifications for Tenant's improvements of a nature commonly found on a "punch list" (as the term is used in the construction industry), Tenant shall, during the Inspection Period, notify Landlord of such deviations. Landlord shall promptly repair all punch list items. The existence of such punch list items shall not postpone the Commencement Date of this Lease or the obligation of Tenant to pay Rent. Tenant acknowledges that neither Landlord nor Landlord's agent has made any representation or warranty as to the suitability of the Premises for the conduct of Tenant's business, and Tenant hereby waives any rights, claims or actions against Landlord under any express or implied warranties of suitability. 11. CARE OF PREMISES. Tenant shall, at Tenant's sole cost and expense, keep the Premises and every part thereof in good condition and repair, damage thereto from causes beyond the reasonable control of Tenant and ordinary wear and tear and damage by fire and other casualty not intentionally caused by Tenant excepted. Tenant shall be responsible for the cleaning of any common areas of the Building and the Project if such cleaning is necessary due to Tenant's use of such common areas in a manner other than the normal, reasonable use of such areas. All damages or injury done to the Premises, Building or Project by Tenant or by any persons who may be in or upon the Premises, Building or Project 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 and Tenant shall pay for all damage to the Project caused by acts or omissions of Tenant or Tenant's officers, contractors, agents, invitees, licensees, or employees subject to the provisions of section 16(c). If Tenant fails to perform Tenant's obligations under this Section 11, Landlord may at Landlord's option enter upon the Premises after ten (10) days' prior notice to Tenant and put the affected portion of the Project in good order, condition and repair and the cost thereof together with interest thereon at the rate of 15% per annum shall be due and payable as Additional Rent to Landlord together with Tenant's next installment of Basic Rent. All normal repairs shall be those reasonably determined by Landlord as necessary to maintain the Project as a first-class office building complex. 12. ALTERATIONS AND ADDITIONS. (a) Tenant shall not make any alterations, improvements, additions, or utility installations in or about the Premises or make changes to locks on doors, or add, disturb or in any way change any floor covering, wall covering, fixtures, plumbing or wiring (collectively, "Alterations") without first obtaining the written consent of Landlord and, where appropriate, in accordance with plans and specifications approved by Landlord. Any such 9 15 Alterations shall not adversely affect either the strength or exterior appearance, or the mechanical, electrical, or plumbing services of the Building and the Project. Any alterations required to be made to the Premises by any applicable building, health, safety, fire, nondiscrimination, or similar law or regulation ("law"), but only to the extent such alterations are not also required to be made generally throughout the building, shall be made at Tenant's sole expense and shall be subject to the prior written consent of Landlord. Tenant shall reimburse Landlord for any sums expended for examination and approval of architectural or mechanical plans and specifications of the Alterations. Tenant shall also pay Landlord a sum equal to the direct costs incurred during any inspection or supervision of the Alterations. Landlord may require a lien and completion bond for such construction, or require the improvements (except for any cabling installed by the Tenant) be removed at the expiration of the Term. Tenant acknowledges and agrees that a material condition to the granting of approval of Landlord to any alterations and/or improvements and/or repairs required under this Lease or desired by Tenant is that the contractors who perform such work shall carry a Comprehensive Liability Policy covering both bodily injury, in the amount of $100,000 per person and $300,000 aggregate, and property damages, in the amount of $300,000, at Tenant's expense. Landlord may require proof of such insurance coverage from each contractor at the time of submission of Tenant's request for Landlord's consent to commence work. Landlord's approval of the plans, specifications and working drawings for Tenant's alterations shall create no responsibility or liability on the part of Landlord for their completeness, design sufficiency, or compliance with all laws, rules and regulations of governmental agencies or authorities. Tenant shall indemnify and hold Landlord harmless from any liability, claim or suit, including attorneys' fees, arising from any injury, damage, cost or loss sustained by persons or property as a result of any defect in design, material or workmanship. (b) Tenant shall pay, when due, all claims for labor or materials furnished to or for Tenant at or for use in the Premises, which claims are or may be secured by any mechanics' or materialmen's liens against the Premises or any interest therein. Within ten (10) days after notice thereof, Tenant shall remove or cause to be removed all liens filed against the Project or any portion thereof in connection with any Alterations or other work performed by or at the request of Tenant. (c) Tenant shall not put curtains, draperies or other hangings or signs on or beside the windows in the Premises. (d) Unless Landlord requires their removal, all Alterations (other than trade fixtures and movable equipment) which may be made on the Premises shall become the property of Landlord and remain upon and be surrendered with the Premises at the expiration of the term. 13. ACCESS. Tenant shall permit Landlord and its agents to enter the Premises at all reasonable times for the purpose of inspecting, cleaning, repairing, altering or improving the Premises or the Building. Nothing contained in this Section 13 shall be deemed to impose any obligation upon Landlord not expressly stated elsewhere in this Lease. Landlord may temporarily close any portion of the Building or Project without liability to Tenant by reason of such closure, and such closure shall not constitute an eviction of Tenant or release Tenant from any Rent or other obligations hereunder, 10 16 provided that the Landlord does not preclude Tenant's access to the premises and such closure does not materially interfere with Tenant's use and occupancy of the premises. Landlord shall have the right to enter the Premises for the purpose of showing the Premises to prospective purchasers or mortgagees at all reasonable times. 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. 14. DAMAGE OR DESTRUCTION. (a) Damage and Repair. If the Building is damaged by fire or any other cause to such extent that the cost of restoration, as reasonably estimated by Landlord, will equal or exceed thirty percent (30%) of the replacement value of the Building, or if insurance proceeds sufficient for restoration are for any reason unavailable, then Landlord may, no later than the sixtieth day following the damage, give Tenant a notice of Landlord's election to terminate this Lease. In the event of such election this Lease shall be deemed to terminate on the third day after the giving of such notice, Tenant shall surrender possession of the Premises within a reasonable time thereafter, the Rent and Additional Rent shall be apportioned as of the date of Tenant's surrender and any Rent paid for any period beyond such date shall be repaid to Tenant. If the cost of restoration as estimated by Landlord shall amount to less than thirty percent (30%) of said replacement value of the Building and insurance proceeds sufficient for restoration are available, or if Landlord does not elect to terminate this lease, Landlord shall restore the Building and the Premises (to the extent of the improvement of the Premises originally provided by Landlord hereunder) with reasonable promptness, subject to delays beyond Landlord's control and delays in the making of insurance adjustments by Landlord. To the extent that the Premises are rendered untenantable, the Rent shall proportionately abate, except in the event such damage resulted from the willful or intentional act or omission of Tenant, in which event Rent shall abate only to the extent Landlord receives proceeds from any rental income insurance policy to compensate Landlord for loss of Rent hereunder. (b) Destruction During Last Year of Term. In case the Building shall be substantially destroyed by fire or other cause at any time during the last Lease Year of this Lease, Landlord may terminate this Lease upon written notice to Tenant if given within sixty (60) days of the date of such destruction. (c) Business Interruption. No damages, compensation or claim shall be payable by Landlord for inconvenience, loss of business or annoyance arising from any repair or restoration of any portion of the Premises, the Building or the Project. Landlord shall use its best efforts to effect such repairs promptly. (d) Tenant Improvements. Landlord will not carry insurance of any kind on any improvements paid for by Tenant as provided in Exhibit C or on Tenant's furniture, furnishings, fixtures, equipment or appurtenances of Tenant under this Lease and Landlord shall not be obligated to repair any damage thereto or replace the same. 15. CONDEMNATION. 11 17 (a) Taking. If all of the Premises or such portions of the Building or Project 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. In the event of a taking of a material part, but less than all, of the Building or Project, where Landlord shall determine that the remaining portions of the Building or Project cannot be economically and effectively used by it (whether on account of physical, economic, aesthetic or other reasons) or where Landlord determines the Building should be restored in such a way as to materially alter the Premises, Landlord shall forward a written notice to Tenant 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 Landlord shall specify in such notice but not earlier than sixty (60) days after the date of such notice. In case of taking of a part of the Premises, or a portion of the Building or Project 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; however, if the floor area of the premises is reduced by more than five percent (5%), Tenant may terminate this Lease upon thirty (30) days notice to Landlord. (b) 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 (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. 16. INDEMNIFICATION. (a) Indemnity. Subject to provisions of section 16.c, Tenant shall indemnify, defend and hold Landlord harmless from and against all loss, cost and expense, including attorneys fees, arising from any act, omission, or negligence of Tenant or its officers, contractors, licensees, agents, servants, employees, guests, invitees, or visitors in or about the Premises or Project, or arising from any injury or damage to any person or property, occurring in or about the Premises or Project as a result of any act, omission or negligence of Tenant, or its officers, contractors, licensees, agents, employees, guests, or visitors or arising from any breach or default under this Lease by Tenant. The foregoing provisions shall not be construed to make Tenant responsible for loss, damage, liability or expense resulting from injuries to third parties caused solely by the gross negligence of Landlord, or its officers, contractors, licensees, agents, employees, invitees or other tenant of the Project. (b) Exemption of Landlord From Liability. As a material part of the consideration to Landlord, Tenant hereby agrees that, notwithstanding anything to the contrary in Section 16(a) above, Landlord shall in no event be liable for injury to Tenant's business or assets or any loss of income therefrom or for damage to Tenant's employees, 12 18 invitees, customers, or any other person in or about the Premises, whether such damage, loss or injury results from conditions arising upon the Premises or upon other portions of the Project of which Premises are a part (including, without limitation, damage caused by the Project or any portion thereof or a appurtenance thereto being out of repair, or the bursting, leakage of any water, gas, sewer or steam pipe), or from other sources or places, and regardless of whether the cause of such damage, loss or injury or the means of repairing the same is inaccessible to Tenant. Tenant further agrees that notwithstanding anything to the contrary in Section 16(a) above, Landlord shall in no event be liable for any injury or damage to any person or property of Tenant, Tenant's employees, invitees, customers, agents or contractors caused by theft or arising from any act, omission or neglect of any tenant or occupant of the Project or any other third person. (c) Waiver of Subrogation. Each party agrees to use commercially reasonable efforts to cause its insurance carriers to consent to a waiver of rights of subrogation against the other party. If such waiver shall be obtainable only at a premium over that chargeable without such a waiver, the party seeking such policy shall notify the other and the party in whose favor the waiver is desired shall pay the additional premium. Each party shall look first to any insurance in its favor before making claim against the other party. Whether the 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 (i) any loss or damage to the real or personal property of either located anywhere in the Project, including the Project itself, arising out of or incident to the occurrence of any of the perils which are covered by their respective property and related insurance policies, and (ii) any loss resulting from business interruption at the Premises or loss of rental income from the Project, arising out of or incident to the occurrence of any of the perils which may be covered by any business interruption insurance policy or by any loss of rental income insurance policy held by Landlord or Tenant, to the extent to which it is covered, or is required under the provisions of this Lease to be covered by a policy or policies containing a waiver of subrogation or permission to release liability. 17. HAZARDOUS SUBSTANCES. Tenant shall not dispose of or otherwise allow the release of any hazardous waste or materials in, on or under the Premises, the Project or any adjacent property, except for normal office products used and disposed of in accordance with applicable laws. 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 or the Project of any hazardous waste or materials, except for normal office products used and disposed of in accordance with applicable laws. As used herein, the term "hazardous waste or materials" means any material or substance that, as of the date of this Agreement, is defined or classified under federal, state, or local laws as: (a) a "hazardous substance" pursuant to section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601(4), section 311 of the Federal Water Pollution Control Act, 33 U.S.C. Section 1321; (b) a "hazardous waste" pursuant to section 1004 or section 3001 of the Resource Conservation and Recovery Act, 42 U.S.C. sections 6903,6921; (c) a toxic pollutant under section 307(a)(1) of the Federal Water Pollution Control Act, 33 U.S.C. 13 19 Section 1317(a)(1); (d) a "hazardous air pollutant" under section 112 of the Clean Air Act, 42 U.S.C. Section 7412; (e) a "hazardous Material" under the Hazardous Materials Transportation Uniform Safety Act of 1990, 49 U.S.C. App. Section 1802(4); (f) toxic or hazardous pursuant to regulations promulgated under the aforementioned laws; or (g) presenting a risk to the environment under other applicable federal, state, or local laws, ordinances, or regulations. "Hazardous Substances" specifically include, but is not limited to, asbestos, polychlorinated biphenyls ("PCBs"), petroleum and petroleum-based derivatives, and urea formaldehyde. Tenant shall promptly comply with all applicable laws and with all orders, decrees or judgments of governmental authorities or courts having jurisdiction relating to hazardous waste or materials. Tenant agrees to indemnify, defend and hold harmless Landlord against any and all loss, cost and expense (including, without limitation, consultants' fees, attorneys' fees and disbursements) which may be imposed on, incurred or paid by, or asserted against Landlord or the Premises or the Project by reason of, or in connection with (i) any misrepresentation, breach of warranty or other default by Tenant under this Lease, or (ii) the acts or omissions by Tenant under this Lease, or (iii) the acts or omissions of Tenant, or any sublessee or other person for whom Tenant would otherwise be liable, resulting in the release of any hazardous waste or materials. 18. INSURANCE. (a) Required Policies. Tenant shall, throughout the term of this Lease and any renewal hereof, at its own expense, keep and maintain in full force and effect: (i) a policy of commercial liability insurance including a contractual liability endorsement covering Tenant's obligations under Section 16 and 17, with a limit of not less than One Million Dollars ($1,000,000) combined single limit (the limits of said insurance shall not, however, limit the liability of Tenant hereunder); and (ii) what is commonly referred to as "all risk" coverage insurance (but excluding earthquake and flood) on Tenant's leasehold improvements in an amount not less than the current One Hundred Percent (100%) replacement value thereof; and (iii) business interruption insurance in an amount sufficient to cover costs, expenses, costs due hereunder, damages and lost income should the Premises not be fully usable for a period of up to 6 months. Such policy shall name Landlord as an additional insured and shall contain a provision or endorsement providing that the insurance afforded by such policy for the benefit of Landlord shall be primary as respects any claims, losses or liabilities arising out of the use of the Premises or the Building or the Common Areas by the Tenant or by tenant's operation and that any insurance carried by Landlord shall be excess and non-contributing. (b) Insurance Policy Requirements. Insurance policies required hereunder shall be issued by companies which are currently rated AXII or better in "Best's Insurance Guide." No insurance policy required under this Section 18 shall be canceled or reduced in coverage and each insurance policy shall provide that it is not subject to cancellation or a reduction in coverage except after thirty (30) days prior written notice to Landlord. Tenant shall deliver to Landlord upon the Commencement Date and from time to time thereafter, copies of policies of such insurance or certificates evidencing the existence 14 20 and amounts of same containing loss payable clauses satisfactorily to Landlord and naming Landlord as Additional Insured thereunder. (c) Landlord's Insurance. Landlord agrees to acquire, maintain and pay for, during the full term of this Lease, "all risk" property damage insurance against such risks and hazards as are customarily insured against by others similarly situated and operating like properties, but excluding earthquake and flood, covering the Building, including the Premises for such amounts and upon such terms as would a prudent owner of such property similar to and in the general area of the Building, and shall name Tenant as an additional insured thereon. Such insurance shall be acquired from a company authorized to do business in the State of Washington and rated as AXII or better in "Best's Insurance Guide." Upon request by Tenant, Landlord shall notify Tenant of the amount and type of insurance carried by Landlord pursuant to this section. 19. ASSIGNMENT AND SUBLETTING. (a) Tenant shall not assign, mortgage, encumber or otherwise transfer this Lease or sublet the whole or any part of the Premises without in each case first obtaining Landlord's prior written consent, which Landlord may not unreasonably withhold. Without limiting the foregoing, Landlord may withhold its consent if in Landlord's judgment occupancy by any proposed assignee, subtenant or other transferee: (i) is not consistent with the maintenance and operation of a first-class suburban office building due to the proposed occupant's nature or manner of conducting business or its experience or reputation in the community, or (ii) is likely to cause disturbance to the normal use and occupancy of the Building or Project by other tenants, their employees, customers, clients or other guests or visitors. Landlord may withhold in its absolute and sole discretion, consent to any mortgage, hypothecation, pledge or other encumbrance of any interest in this Lease by Tenant or any subtenant, whereby this Lease or any interest therein becomes collateral for any obligation of Tenant or any other person. (b) In the event Tenant should desire to assign this Lease or sublet the Premises or any part hereof, Tenant shall give Landlord written notice at least forty five (45) days in advance of the date on which Tenant desires to make such assignment or sublease, which notice shall specify, (i) the name and business of the proposed assignee or sublessee, (ii) the amount and location of the space affected, (iii) the proposed effective date and duration of the subletting or assignment, and (iv) the proposed rental to be paid to Tenant by such sublessee or assignee. Landlord shall then have a period of twenty (20) days following receipt of such notice within which to notify Tenant in writing that Landlord elects either (1) to terminate this Lease as to the space so affected as of the date so specified by Tenant and reclaim that portion of the Premises (in which event Landlord may enter into a lease with any such proposed subtenant or assignee upon the rent and terms agreed to by each subtenant or assignee or on such other terms as may be agreed upon by Landlord and such subtenant or assignee) or, (2) to permit Tenant to assign or sublet such space, in which event if the proposed rental rate between Tenant and sublessee is greater than the rental rate of this Lease, then such excess rental to be deemed additional rent owed by Tenant to Landlord under this Lease, and the amount of such excess, including any subsequent increases due to escalation or otherwise, to be paid by Tenant to Landlord in the same manner that Tenant pays the rental hereunder and in addition thereto, or (3) to 15 21 withhold consent to Tenant's assignment or subleasing such space and to continue this Lease in full force and effect as to the entire Premises. (c) Except as provided above, no 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. In connection with each request for an assignment or subletting, Tenant shall pay the reasonable cost of processing such assignment or subletting, including attorneys fees, upon demand of Landlord. Tenant shall provide Landlord with copies of all assignments, subleases and assumption instruments. If Tenant is a corporation or partnership, any transfer of a controlling ownership interest in Tenant or any transfer of this Lease by merger, consolidation or liquidation, shall be deemed an assignment under this Section 19. Any assignee or subtenant shall assume all of Tenant's obligations under this Lease and be jointly and severally liable with Tenant hereunder. 20. LIENS AND INSOLVENCY. (a) Liens. Tenant shall keep its interest in this Lease and any Property of Tenant (other than unattached personal property) and the Premises, and the Project free from any liens arising out of any work performed or materials ordered or obligations incurred by or on behalf of Tenant and hereby indemnifies and holds Landlord harmless from any liability from any such lien. In the event any lien is filed against the Premises, the Project or any portion thereof by any person claiming by, through or under Tenant, Tenant shall, upon request of Landlord, at Tenant's expense, immediately either cause such lien to be released of record or furnish to Landlord a bond in form and amount and issued by a surety satisfactory to Landlord, indemnifying Landlord, and the Project 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 and for Tenant, if, and only if, such proceedings suspend the collection thereof against Landlord, Tenant and the Premises and neither the Premises, nor the Project, 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, 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. 21. DEFAULT. (a) Default By Tenant. The occurrence of any one or more of the following events shall constitute a material default and breach of this Lease by Tenant: (i) the abandonment of the Premises by Tenant or the vacating of the Premises for more than thirty (30) consecutive days; (ii) the failure by Tenant to make any payment of Rent or any 16 22 other payment required to be made by Tenant hereunder, within five (5) days of date due; (iii) the failure by Tenant to observe or perform any of the other covenants, conditions or provisions of the Lease, where such failure shall continue for a period of twenty (20) days; provided, however, if more than twenty (20) days are reasonably required for its cure then Tenant shall not be deemed to be in default if Tenant commences such cure within said 20-day period and thereafter diligently prosecutes such cure to completion; (iv) the making by Tenant of any general assignment or general arrangement for the benefit of creditors; (v) the filing by or against Tenant of a petition to have Tenant adjudged bankrupt or a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days); (vi) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in the Lease, where possession is not restored to Tenant within thirty (30) days; (vii) the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged within thirty (30) days. The above notice periods may, at the election of Landlord, run concurrently with any statutorily required notice periods. (b) Remedies Cumulative; Injunction. All rights and remedies of Landlord herein enumerated shall be cumulative, and none shall exclude any other right or remedy allowed by law or in equity. In addition to the other remedies in this Lease provided, Landlord shall be entitled to restrain by injunction the violation or attempted violation of any of the covenants, agreements or conditions of this Lease. (c) Landlord's Remedies Upon Tenant Default. Upon an uncured default of this Lease by Tenant, Landlord, besides other rights or remedies it may have, at its option, may enter the Premises or any part thereof, either with or without process of law, and expel, remove or put out Tenant or any other persons who may be thereon, together with all personal property found therein. No such reentry shall be construed as an election on Landlord's part to terminate this Lease unless a written notice of such intention is given to Tenant. Landlord may terminate this Lease, or it may from time to time, without terminating this Lease and as agent of Tenant, 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, re-entry and/or dispossession, by summary proceedings or otherwise, all Rent and Additional Rent shall become due thereupon and be paid up to the time of such re-entry or dispossession, 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 30(q) hereof, accruing from the date of any such expenditure by Landlord. 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 17 23 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 and 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 or refusal 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, however, Landlord shall have the obligation to exert reasonable efforts to mitigate damages, provided that Landlord shall not be required to relet the Premises prior to leasing any other space owned by the Landlord, or its affiliates, within a one mile radius. 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. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for such previous breach and default. Should Landlord at any time terminate this Lease by reason of any default, in addition to any other remedy it may have, it may recover from Tenant the present value, using a ten percent (10%) discount rate, of the amount of Rent and Additional Rent reserved in this Lease for the balance of the Term, as it may have been extended, less the amount that Tenant proves could be collected for the remainder of the Term, plus all court costs and attorneys fees incurred by Landlord in the collection of the same. Tenant acknowledges that certain benefits or concessions provided by Landlord are conditioned upon Tenant's timely, full and faithful performance of each and every obligation, covenant, representation and warranty of this Lease throughout the entire term of this Lease, even though such benefits or concessions may be realized by Tenant over less than the entire term of this Lease. Accordingly, notwithstanding anything to the contrary contained herein, in the event Landlord brings an action against Tenant for default under this Lease which results in a termination of this Lease and eviction of Tenant, Landlord shall become immediately entitled to receive from Tenant as Additional Rent the amount of all such benefits and concessions allocable to the balance of the Lease term on a pro rata basis, i.e. an amount equal to the product of (x) the sum of (a) any amounts theretofore or thereafter paid by Landlord to Tenant or to any third party, or any amounts credited to Tenant or to any third party, for or on account of (i) any moving, tenant improvement, decorating or other allowance or credit granted to Tenant but only to the extent such tenant improvements are demolished for the next occupant of the premises, (ii) any real estate commission paid on account of this Lease, and (iii) any expenses or costs related to assumption by Landlord of any other lease, plus (b) an amount equal to the difference between the rent as specified in Section 4 above and rent for any period for which this Lease provides any lesser amount including zero or nominal rent, including for any period of early occupancy of the Premises prior to the commencement of the term of this Lease, plus (c) the amount spent by Landlord for any tenant improvements to the Premises but only to the extent such tenant improvements are demolished for the next 18 24 occupant of the premises; multiplied by (y) a fraction, the numerator of which is the number of days of the term of this Lease remaining between the date of default and the expiration of the term of this Lease, and the denominator of which is the total number of days of the term of this Lease. By way of example, if Tenant receives a moving allowance of $1,000, the Lease term is 3 years (1,095 days) and a default occurs at the end of the first year such that there were 2 years (730 days) remaining, the Tenant shall pay as additional rent the sum of $666.67, which is computed as follows: ($1,000 x 730) / 1,095 = $666.67. (d) Waiver of Redemption Rights. Tenant, for itself, and on behalf of any and all persons claiming through or under it, including creditors of all kinds, does hereby waive and surrender all right and privilege which they or any of them might have under or by reason of any present or future law, to redeem the Premises or to have a continuance of this Lease for the term hereof, as it may have been extended, after having been dispossessed or ejected therefrom by process of law or under the terms of this Lease or after the termination of this Lease as herein provided. (e) Nonpayment of Additional Rent. All costs and expenses which Tenant assumes or agrees to pay to Landlord pursuant to this Lease shall be deemed Additional Rent and, in the event of nonpayment thereof, Landlord shall have all the rights and remedies herein provided for in case of nonpayment of Rent. (f) Interest. All past due Rent shall bear interest at the rate of 15% per annum. 22. PRIORITY. (a) Subordination of Lease. This Lease shall be subordinate to any mortgage or deed of trust now existing or hereafter placed upon the Premises or the Project or any portion thereof containing the Premises, created by or at the instance of Landlord, and to any and all advances to be made thereunder and to interest thereon and all modifications, renewals and replacements or extensions thereof ("Landlord's Mortgage") provided however, that the holder of any Landlord's Mortgage or any person or persons purchasing or otherwise acquiring the Premises, the Project or any portion thereof containing the Premises at any sale or other proceeding under any Landlord's Mortgage may elect to continue this Lease in full force and effect; and in such event, Tenant shall attorn to such person or persons. Tenant shall properly execute, acknowledge and deliver documents which the holder of any Landlord's Mortgage may require to effectuate the provisions of this Section 22 within five (5) days after Landlord's request. Not withstanding the above, Landlord shall use commercially reasonable efforts to cause any holder of Landlord's mortgage to enter into a Nondisturbance Agreement with Tenant which shall provide in essence that upon any foreclosure of any mortgage or deed of trust by such holder of Landlord's mortgage, that such holder will not disturb Tenant's rights pursuant to this Lease, so long as Tenant is not in default pursuant to the provisions of this Lease. 23. ESTOPPEL CERTIFICATES. (a) Delivery of Estoppel. Tenant shall, from time to time, upon written request of Landlord, execute, acknowledge and deliver to Landlord or its designee a written 19 25 statement 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 Basic Rent and the amount of Additional Rent currently being paid towards increases in Operating Costs, and the date to which such Rent has been paid; and certifying: (i) whether this Lease is in full force and effect and has not been assigned or amended in any way (or specifying the date and terms of agreement so affecting this Lease); (ii) whether this Lease represents the entire agreement between the parties as to this leasing; that all obligations under this Lease to be performed by the Landlord have been satisfied or specifying those that have not been satisfied; (iii) whether on this date there are no existing claims, defenses or offsets which the Tenant has against the enforcement of this Lease by the Landlord; (iv) whether no Rent has been paid more than one month in advance; and that no security has been deposited with Landlord (or, if so, the amount thereof); and (v) such other items as Landlord shall reasonably request. It is intended that any such statement delivered pursuant to this Section may be relied upon by a prospective purchaser of Landlord's interest or holder of any mortgage upon Landlord's interest in the Building or the Project. (b) Failure to Deliver Estoppel. If Tenant shall fail to respond within ten (10) 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 to have certified 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. 24. SURRENDER OF POSSESSION. Subject to the terms of Section 14 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 "broom-clean" and in as good condition as when received by Tenant from Landlord or as thereafter improved, damage thereto from causes beyond the reasonable control of Tenant, ordinary wear and tear and damage by fire or casualty not intentionally caused by Tenant excepted. Tenant shall remove all of its personal property and trade fixtures from the Premises and the Project at the expiration of the term and repair any damage caused by such removal; any property not so removed shall be deemed abandoned and may be sold or otherwise disposed of as Landlord deems advisable. 25. NON-WAIVER. Waiver by Landlord of any term, covenant or condition herein contained or any breach thereof shall not be deemed to be a waiver of such term, covenant, or condition or of any subsequent breach of the same or any other term, covenant, or condition herein contained. The subsequent acceptance of Rent or Additional Rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular Rent or Additional Rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such Rent or Additional Rent. 20 26 26. HOLDOVER. If Tenant remains in possession of the Premises or any part thereof after the expiration of the term of this Lease with the express written consent of Landlord, such occupancy shall be a tenancy from month-to-month at a rental in the amount equal to one and one-half (1-1/2) times the last monthly rental plus all other charges payable under this Lease, and subject to all of the terms, covenants and conditions of this Lease applicable to a month-to-month tenancy. Tenant acknowledges and agrees that this Section 26 does not grant any right to Tenant to holdover. 27. 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, but are made and intended for the purpose of binding only the Landlord's interest in the Premises and Building, as the same may from time to time be encumbered. No personal liability or personal responsibility is assumed by, nor shall at any time be asserted or enforceable against Landlord or its partners or their respective heirs, legal representatives, successors or assigns on account of the Lease or on account of any covenant, undertaking or agreement of Landlord in this Lease contained. 28. TRANSFER OF LANDLORD'S INTEREST. In the event of any transfer of Landlord's interest in the Premises or in the Building, the transferor shall 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. 29. RIGHT TO PERFORM. If Tenant shall fail to pay any sum of money 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. 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 29 as in the case of default by Tenant in the payment of Rent. 30. 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) Heirs 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 heirs, executors, administrators, successors and assigns. (c) Authority. Each individual executing this Lease on behalf of Tenant represents and warrants that he or she is duly authorized to execute and deliver this Lease 21 27 on behalf of Tenant, and that this Lease is binding upon Tenant in accordance with its terms. (d) No Brokers. Except as set forth in Section 1(r), Tenant represents and warrants to Landlord that it has not engaged any broker, finder or other person who would be entitled to any commission or fees in respect of the negotiation, execution or delivery of this Lease and shall indemnify and hold harmless Landlord against any loss, cost, liability or expense incurred by Landlord as a result of any claim asserted by any such broker, finder or other person on the basis of any arrangements or agreements made or alleged to have been made by or on behalf of Tenant. (e) Entire Agreement. This Lease is the final and complete expression of Landlord and Tenant relating in any manner to the leasing, use and occupancy of the Premises, to Tenant's use of the Project or portions thereof, 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 both Landlord and Tenant. (f) Severability. Any provision of this Lease which shall prove to be 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. (g) Force Majeure. Except for the payment of Rent, Additional Rent or other sums payable by Tenant to Landlord, 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 control, including without limitation, strikes, unavailability or delay in obtaining fuel, labor or materials, accidents, floods, defective materials, fire or other casualty, adverse weather conditions, inability to obtain building or use and occupancy certificates, embargoes, governmental regulations, acts of God, war or other strife, or other causes similar or dissimilar. (h) Notices. All notices under this Lease shall be in writing and delivered in person or sent by registered or certified mail, postage prepaid, to Landlord and to Tenant at the Addresses provided respectively in Section 1(e) and 1(c) (provided that after the Commencement Date any such notice shall be mailed or delivered by hand to Tenant at the Premises) 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 date of such mailing. (i) 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. 22 28 (j) Governing Law. This Lease shall be governed by and construed in accordance with the internal laws of the state of Washington. (k) Recording. Tenant shall not record this Lease or a memorandum hereof without Landlord's prior written consent and such recordation shall, at the option of Landlord, constitute a non-curable default of Tenant hereunder. (1) Waivers. No waiver by Landlord of any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Tenant of the same or any other provision. Landlord's consent to or approval of any act shall not be deemed to render unnecessary the obtaining of Landlord's consent to or approval of any subsequent act by Tenant. The acceptance of rent hereunder by Landlord shall not be a waiver of any preceding breach at the time of acceptance of such rent. (m) Time of Essence. Time is of the essence for the performance of all of the obligations specified hereunder. (n) Merger. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger and shall, at the option of Landlord, terminate all or any existing subtenancies or may, at the option of Landlord, operate as an assignment to Landlord of any or all of such subtenancies. (o) Right to Change Public Spaces. Landlord shall have the right at any time, without thereby creating an actual or constructive eviction or incurring any liability to tenant therefor, 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 the arrangement or location of the elevators serving the Premises, make any change which shall diminish the area of the Premises, or make any change which shall change the character of the Building from that of a first-class office building. (p) Name. The Building and the Project will be known by such name as Landlord may designate from time to time. Landlord reserves the right to name and rename the Building and/or the Project from time to time and to install signs accordingly, without compensation or prior notice to Tenant. (q) Overdue Payments. Any Rent, Additional Rent or other sums payable by Tenant to Landlord under this Lease which shall not be paid when due thereof, shall bear interest at a rate equal to fifteen percent (15%), calculated from the original due date thereof to the date of payment. Any late payment of Rent (i.e. Not paid within five (5) days when due) shall also be subject to a collection fee equal to the greater of $100.00 or five percent (5%) of the amount due. (r) Relocation of Premises. During the term of the Lease Landlord may relocate the Tenant's Premises within the Project. Said relocation shall be at the total cost and expense of Landlord. In the event Landlord so elects to relocate Tenant, Landlord 23 29 shall notify Tenant, specifying the relocation space to Tenant. Tenant shall have fifteen (15) days from the receipt of said notice to accept said relocation. In the event that the relocation proposal is accepted by Tenant, Landlord and Tenant shall revise the Tenant's Lease to reflect the new space. Upon such relocation, such new space shall be deemed the Premises hereunder for all purposes and the Lease shall be deemed amended to that effect without further formality. Rental rates for the new space shall be the same as those agreed to in the original Lease Agreement, subject to adjustment for additional space, or less space, as agreed to by the parties. All other terms and conditions of the original Lease shall remain in full force and effect. In the event that Tenant elects not to accept the relocation of its Premises, Tenant shall so notify Landlord in writing. Landlord shall then have the option for thirty (30) days to terminate Tenant's Lease, or to allow Tenant to remain in its present Premises. If Tenant accepts such relocation, the following conditions will apply: (i) Landlord will bear all costs and expenses resulting from the move, including but not limited to - replace or relocate communication, computer and phone connections - reprint letterhead, cards and forms - move building signage - move furniture, equipment, partitions, etc. (ii) Landlord will provide comparable space, to include: - similar linear feet of window line - similar functional layout and flow - similar quantity and quality of improvements (iii) A rental credit of $27,900 will be provided by Landlord for the next rent due under the Lease and (iv) the move will occur during periods between Friday 5:00 PM and Monday 6:00 AM. (s) Advertising. Tenant shall not inscribe any inscription, or post, place or in any manner display any sign, notice, picture, placard or poster, or any advertising matter whatsoever in or about the Premises or the Building or the Project at places visible (either directly or indirectly as an outline or shadow on a glass pane) from anywhere outside the Premises without first obtaining Landlord's written consent thereto. Any such consent by Landlord shall be upon the understanding and condition that Tenant will remove the same at the expiration or sooner termination of this Lease and Tenant shall repair any damage to the Premises, the Building or the Project caused thereby. (t) Parking. Parking shall at all times be governed by reasonable rules and regulations as set forth in Exhibit D, which shall be published from time to time by Landlord. Parking may be on a reserved stall and/or undesignated stall--"window sticker" basis, and may be self-service and/or attendant service, as determined from time to time by Landlord. Tenant shall have the right to use that number of parking stalls as set forth in Section 1(q). (u) Execution of Lease by Landlord. The submission of this document for examination and negotiation does not constitute an offer to lease, or a reservation of, or option for the Premises, and this document shall become effective and binding only upon 24 30 execution and delivery by Landlord. No act or omission of any employee or agent of Landlord or of Landlord's broker shall alter, change or modify any of the provisions hereof. 31. LANDLORD'S COVENANTS. (a) 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, so long as Tenant is not in default hereunder. (b) Hazardous Waste or Materials. Landlord represents to Tenant that to the best of Landlord's actual knowledge no hazardous waste or materials have been generated, stored or disposed of by Landlord on the land or in or on the Building, other than in compliance with applicable laws. (c) Rentable Square Feet. Landlord warrants that the rentable square feet of the Project is 69,596 square feet, and the rentable square feet of the Premises is 6,189 square feet. Landlord further warrants that such square feet have been calculated in accordance with BOMA Standards (1996 version). 32. GUARANTY OF LEASE. In order to induce Landlord to execute this Lease, Tenant has agreed to deliver to Landlord a Restated Guaranty of Lease, in the form attached hereto as Exhibit E, from William T. Baxter, Albert T. Dosser and Peter R. Gregory. IN WITNESS WHEREOF this Lease has been executed the day and year first above set forth. LANDLORD: SEATTLE OFFICE ASSOCIATES L.L.C. a Washington Limited Liability company By /s/ P. LANGSTON SLIGH, JR. --------------------------------- Its Member ------------------------------- TENANT: bsquare consulting, inc. a Washington Corporation By /s/ WILLIAM T. BAXTER --------------------------------- Its President & CEO ------------------------------- 25 31 LANDLORD ACKNOWLEDGMENT STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) I certify that I know or have satisfactory evidence that P. LANGSTON SLIGN is the person who appeared before me, and said person acknowledged that said person signed this instrument, on oath stated that said person was authorized to execute the instrument and acknowledged it as a managing member of SEATTLE OFFICE ASSOCIATES, a limited liability company, to be the free and voluntary act of such limited liability company for the uses and purposes mentioned in the instrument. Dated this 24TH day of MARCH, 1997. /s/ [SIGNATURE ILLEGIBLE] ------------------------------------ Notary Public in and for the state of Washington, residing at [ILLEGIBLE] ------------------------------------ My appointment expires 8.29.00 -------------- TENANT CORPORATE ACKNOWLEDGMENT STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) I certify that I know or have satisfactory evidence that WILLIAM BAXTER is the person who appeared before me, and said person acknowledged that he signed this instrument, on oath stated that he was authorized to execute the instrument and acknowledged it as the President and CEO respectively, of a corporation, to be the free and voluntary act of such corporation for the uses and purposes mentioned in the instrument. Dated this 24th day of March, 1997. /s/ [SIGNATURE ILLEGIBLE] ------------------------------------ Notary Public in and for the state of Washington, residing at [ILLEGIBLE] ------------------------------------ My appointment expires 8.29.00 -------------- 26 32 EXHIBIT A LEGAL DESCRIPTION OF LAND That portion of the northeast quarter of the southwest quarter of Section 10, Township 24 North, Range 5 East, W.M., in King County, Washington, lying southerly of the south line of the frontage road right-of-way known as S.E. 36th Street on the south side of primary State Highway No. 2 as shown on State of Washington, Department of Highways Map, SR 90, MP 7.71 to MP 11.72, Richards Road to Lake Sammamish, sheet 3 of 35, latest revision date March 31, 1977, on file at the office of the Department of Transportation, Olympia, Washington, except that portion lying westerly of the west line of an electric transmission easement, granted to Puget Sound Power & Light Company by instrument recorded under Auditor's File No. 2545297, also subject to an easement for a petroleum pipeline, as recorded under Auditor's File No. 5785336, and also subject to a perpetual slope easement, as acquired under Superior Court Cause No. 7733237. 33 EXHIBIT B SPACE PLAN OF PREMISES 34 EXHIBIT C TENANT IMPROVEMENTS Landlord to complete the following tenant improvements at its cost. a. carpet and paint entire premises. Carpet to be building standard (Mohawk RIO 30/36 in "Federal Blue" #511). Carpet is to be cut pile in offices and loop pile in hallways/corridors as specified by Tenant. Paint color to be chosen by Tenant subject to approval by Landlord. Vinyl to be placed in kitchen and lunchroom area will be building standard (Armstrong Corlon in "Suffield Slate" #86807). New rubber cove base to be installed (Robbe "Gray" #50) in all areas. b. Clean up/touch up of kitchen cabinet fronts. c. Building standard signage to be provided for Tenant door and for main building directory. d. Replacement of broken, discolored or stained ceiling tiles. e. Placement of locks on selected interior office doors, to be determined by Tenant. f. Make sure that all interior lighting is fully operational. g. Clean all window blinds and interior windows. The Landlord will cause the following improvements to be done and completed at the sole cost of the Tenant. Tenant shall have the right to approve all costs prior to the start of the work. a. Demolition and construction of new offices as required to match site plan for space as shown on Exhibit B. New doors and relites as required will match the existing trim. b. Electrical and mechanical work as required to match new office layout. Tenant to provide electrical specifications prior to start of work. c. Tenant may elect to have border or insert carpet work done in reception area and conference room. Landlord to provide basic design layout of work. 35 EXHIBIT D RULES AND REGULATIONS 1. Except as specifically provided in the Lease to which these Rules and Regulations are attached, no sign, placard, picture, advertisement, name or notice shall be installed or displayed on any part of the outside or inside of the Building without the prior written consent of Landlord. Landlord shall have the right to remove, at Tenant's expense and without notice, any sign installed or displayed in violation of this rule. All approved signs or lettering on doors and walls shall be printed, painted, affixed or inscribed at the expense of Tenant by a person and in a form approved by Landlord. 2. If Landlord objects in writing to any curtains, blinds, shades, screens or hanging plants or other similar objects attached to or used in connection with any window or door of the Premises, or placed on any windowsill which is visible from the exterior of the Premises, Tenant shall immediately discontinue such use. Tenant shall not place anything against or near glass partitions or doors or windows which may appear unsightly from outside the Premises. 3. Tenant shall not obstruct any sidewalks, halls, passages, exits, entrances, elevators or stairways of the Building. The halls, passages, exits, entrances, elevators, and stairways are not open to the general public, but are open, subject to reasonable regulation, to Tenant's business invitees. Landlord shall in all cases retain the right to control and prevent access thereto of all persons whose presence in the judgment of Landlord would be prejudicial to the safety, character, reputation and interest of the Building and its tenants; providing that nothing herein contained shall be construed to prevent such access to persons with whom any tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal or unlawful activities. No tenant and no employee or invitee of any tenant shall go upon the roof of the Building. 4. The directory of the Building will be provided exclusively for the display of the name and location of tenants only, and Landlord reserves the right to exclude any other names, including individual's names, therefrom. 5. All cleaning and janitorial services for the Building and the Premises shall be provided exclusively through Landlord, and except with the written consent of Landlord, no person or persons other than those approved by Landlord shall be employed by Tenant or permitted to enter the Building for the purpose of cleaning the same. Tenant shall not cause any unnecessary labor by carelessness or indifference to the good order and cleanliness of the Premises. 6. Landlord will furnish Tenant, free of charge, with eight keys to each door lock in the Premises. Landlord may make a reasonable charge for any additional keys. Tenant shall not alter any lock or install a new additional lock or bolt on any door of its Premises. Tenant, upon the termination of its tenancy, shall deliver to Landlord the keys of all doors which have been furnished to Tenant, and in the event of loss of any keys so furnished, shall pay Landlord therefore. 7. If Tenant requires telegraphic, telephonic, burglar alarm or similar services, it shall first obtain, and comply with, Landlord's instructions in their installation. 8. The Building elevator shall be available for use by all tenants in the Building, subject to such reasonable scheduling as Landlord, in its discretion, shall deem appropriate. No equipment, materials, furniture, packages, supplies, merchandise or other property will be received in the Building or carried in the elevators except between such hours and in such elevators as may be designated by Landlord. Tenant's initial move in and 36 subsequent deliveries of bulky items, such as furniture, safes and similar items shall, unless otherwise agreed by Landlord, be made during the hours of 6 P.M. to 6 A.M. or on Saturday or Sunday. Deliveries during normal office hours shall be limited to normal office supplies and other small items. No deliveries shall be made which impede or interfere with other tenants or the operation of the Building. 9. Tenant shall not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry and which is allowed by law. Landlord shall have the right to prescribe the weight, size and position of all equipment, materials, furniture or other property brought into the Building. Heavy objects shall, if considered necessary by Landlord, stand on such platforms as determined by Landlord to be necessary to properly distribute the weight, which platforms shall be provided at Tenant's expense. Business machines and mechanical equipment belonging to Tenant, which cause noise or vibration that may be transmitted to the structure of the Building or to any space therein, to such a degree as to be objectionable to Landlord or to any tenants in the Building, shall be placed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devices sufficient to eliminate noise or vibration. The persons employed to move such equipment in or out of the Building must be acceptable to Landlord. Landlord will not be responsible for loss of, or damage to, any such equipment or other property from any cause, and all damage done to the Building by maintaining or moving such equipment or other property shall be repaired at the expense of Tenant. 10. Tenant shall not use or keep in the Premises any kerosene, gasoline or inflammable or combustible fluid or material other than those limited quantities necessary for the operation or maintenance of office equipment. Tenant shall not use or permit to be used in the Premises any foul or noxious gas or substance, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors or vibrations, nor shall Tenant bring into or keep in or about the Premises any birds or animals. 11. Tenant shall not use any method of heating or air conditioning other than that supplied by Landlord. 12. Tenant shall not waste electricity, water or air conditioning and agrees to cooperate fully with Landlord to assure the most effective operation of the Building's heating and air conditioning and to comply with any governmental energy-saving rules, laws or regulations of which Tenant has actual notice, and shall refrain from attempting to adjust controls. Tenant shall keep corridor doors closed, and shall close window coverings at the end of each business day. 13. Landlord reserves the right, exercisable without notice and without liability to Tenant, to change the name and street address of the Building. 14. Landlord reserves the right to exclude from the Building between the hours of 6 P.M. and 7 A.M. the following day, or such other hours as may be established from time to time by Landlord, and on Sundays and legal holidays, any person unless that person is known to the person or employee in charge of the Building and has a pass or is properly identified. Tenant shall be responsible for all persons for whom it requests passes and shall be liable to Landlord for all acts of such persons. Landlord shall not be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. Landlord reserves the right to prevent access to the Building in case of invasion, mob, riot, public excitement or other commotion by closing the doors or by other appropriate action. 15. Tenant shall close and lock the doors of its Premises and entirely shut off all water faucets or other water apparatus, and electricity, gas or air outlets before tenant and its employees leave the Premises. Tenant shall be responsible for any damage or injuries 31 37 sustained by other tenants or occupants of the Building or by Landlord for noncompliance with this rule. 16. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein. The expense of any breakage, stoppage or damage resulting from violation of this rule shall be borne by the tenant who, or whose employees or invitees, shall have caused it. 17. Tenant shall not sell, or permit the sale at retail, of newspapers, magazines, periodicals, theater tickets or any other goods or merchandise to the general public in or on the Premises. Tenant shall not make any room-to-room solicitation of business from other tenants in the Building. Tenant shall not use the Premises for any business or activity other than that specifically provided for in Tenant's Lease. 18. Tenant shall not install any radio or television antenna, loudspeaker or other devices on the roof or exterior walls of the Building. Tenant shall not interfere with radio or television broadcasting or reception from or in the Building or elsewhere. 19. Tenant shall not mark, drive nails, screw or drill into the partitions, woodwork or plaster, or in any way deface the Premises or any part thereof, except in accordance with the provisions of the Lease pertaining to alterations. Landlord reserves the right to direct electricians as to where and how telephone and telegraph wires are to be introduced to the Premises. Tenant shall not cut or bore holes for wires. Tenant shall not affix any floor covering to the floor of the Premises in any manner except as approved by Landlord. 20. Tenant shall repair any damage resulting from noncompliance with this rule. Tenant shall not install, maintain or operate upon the Premises any vending machines without the written consent of Landlord. 21. Canvassing, soliciting and distribution of handbills or any other written material, and peddling in the Building are prohibited, and Tenant shall cooperate to prevent such activities. 22. Landlord reserves the right to exclude or expel from the Building any person who, in Landlord's judgment, is intoxicated or under the influence of liquor or drugs or who is in violation of any of the Rules and Regulations of the Building. 23. Tenant shall store all its trash and garbage within its Premises or in other facilities provided by Landlord. Tenant shall not place in any trash box or receptacle any material which cannot be disposed of in the ordinary and customary manner of trash and garbage disposal. All garbage and refuse disposal shall be made in accordance with directions issued from time to time by Landlord. Tenant will take advantage of any recycling available at the site. 24. The Premises shall not be used for the storage of merchandise held for sale to the general public, or for lodging or for manufacturing of any kind, nor shall the Premises be used for any improper, immoral or objectionable purpose. No cooking shall be done or permitted on the Premises without Landlord's consent, except that use by Tenant of Underwriters' Laboratory-approved equipment for brewing coffee, tea, hot chocolate and similar beverages, or use of microwave ovens for employee use shall be permitted, provided that such equipment and use is in accordance with all applicable federal, state, county and city laws, codes, ordinances, rules and regulations. 25. Tenant shall not use in any space or in the public halls of the Building, any hand truck except those equipped with rubber tires and side guards or such other material- 32 38 handling equipment as Landlord may approve. Tenant shall not bring any other vehicles of any kind into the Building. 26. Without the written consent of Landlord, Tenant shall not use the name of the Building in connection with or in promoting or advertising the business of Tenant except as Tenant's address. 27. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency. 28. Tenant assumes any and all responsibility for protecting its Premises from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Premises closed. 29. Tenant's requirements will be attended to only upon appropriate application to the Building management office by an authorized individual. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord, and no employee of Landlord will admit any person (Tenant or otherwise) to any office without specific instructions from Tenant. 30. Tenant shall comply with all parking requirements of the property, and will not park more vehicles at the property than provided in Tenant's lease. Landlord reserves the right to ticket and/or tow vehicles, at Tenant's expense, not displaying a valid parking permit. a) Parking stickers or any other device or form of identification supplied by Landlord as a condition of the use of the parking facilities shall remain the property of Landlord. Such parking identification device must be displayed as requested and may not be mutilated in any manner. The serial number of the parking identification device may not be obliterated. Devices are not transferable, and any device in the possession of an unauthorized holder and will be void. b) Loss or theft of parking identification devices from automobiles must be reported immediately, and a lost or stolen report must be filed by the customer at that time. Landlord has the right to exclude any vehicle from the parking facilities that does not have an identification device. c) Tenant shall not park or permit the parking of any vehicle under its control in any parking areas designated by Landlord as areas for parking by visitors to the Building. Tenant or its customers, suppliers, employees, or invitees shall not use motor homes or other similar vehicles in the parking areas and shall not leave vehicles in the parking areas overnight or for any extended period of time, nor park any vehicles in the parking areas other than automobiles, motorcycles, motor driven or nonmotor driven bicycles or four-wheeled trucks not more than 20 feet in length. Provided that, from time to time, Tenant may park passenger automobiles overnight. d) Washing, waxing, cleaning or servicing of any vehicle in any area not specifically reserved for such purpose is prohibited. e) Vehicles must be parked entirely within the painted stall lines of a single parking stall. f) Parking is prohibited: i) in areas not striped for parking; ii) in aisles 33 39 iii) where "no parking" signs are posted; iv) on ramps; v) in cross hatched areas; and vi) in such other areas as may be designated by Landlord or Landlord's agent from time to time. g) Landlord or its agents shall have the right to cause to be removed any car of Tenant, its employees, invitees, licensee, or agent, that may be parked in unauthorized area, and Tenant agrees to save and hold harmless Landlord, its agent and employees from any and all claims, losses, damages and demands asserted or arising in respect to or in connection with the removal of any such vehicle and for all expenses incurred by Landlord in connection with such removal. Tenant will from time to time, upon request of Landlord, supply Landlord with a list of license plate numbers or vehicle owned or operated by its employees and agents. h) Landlord reserves the right to modify and/or adopt such other reasonable and non-discriminatory Rules and Regulations for the parking facilities as it deems necessary for the operation of the parking facilities. Landlord may refuse to permit any person who violates these Rules and Regulations to park in the parking facilities, and any violation shall subject the car to removal at the owner's expense. 31. Tenant shall be responsible for maintaining and, if necessary, replacing any appliances that were provided in any Tenant Improvements (i.e. microwaves and dishwashers, etc.). 32. Landlord may waive any one or more of these Rules and Regulations for the benefit of Tenant or any other tenant, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of Tenant or any other tenant, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all of the tenants of the Building. 33. These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of Tenant's lease of its Premises in the Building. 34. Landlord reserves the right to amend these rules and to make such other and reasonable Rules and Regulations as, in its judgment, may from time to time be needed for safety and security, for care and cleanliness of the Building and for the preservation of good order therein. Tenant agrees to abide by all such Rules and Regulations hereinabove stated and any additional rules and regulations which are adopted. 35. Tenant shall be responsible for the observance of all of the foregoing rules by Tenant's employees, agents, clients, customers, invitees and guests. 34 40 EXHIBIT E RESTATED GUARANTY OF LEASE William T. Baxter ("Guarantor"), hereby agrees with Seattle Office Associates LLC ("Landlord"), as follows: 1. Consideration: Guarantor has agreed to make and deliver this Guaranty to Landlord in order to induce Landlord to enter into a new lease dated March , 1997 with bsquare consulting, inc. (Tenant) with respect to Suite 100 of the Delphi Building in Bellevue, WA (the "Suite 100 Lease"), and also to induce Landlord to enter into a new lease dated March , 1997 with Tenant with respect to Suite 310 of the Delphi Building (the "Suite 310 Lease"). Landlord and Tenant are also parties to a lease dated November 15, 1996, as amended, with respect to Suite 200 of the Delphi Building (the "Suite 200 Lease"). The Suite 100 Lease, the Suite 200 Lease and the Suite 310 Lease are collectively referred to as the "Leases", and are the Leases under which the obligations hereby guaranteed have been created. Guarantor hereby acknowledges that it has and will derive a direct financial benefit from Landlord's entering into the Leases. This Guaranty replaces and supersedes in its entirety the Guaranty of Lease from Guarantor to Landlord for the Suite 200 Lease dated November 15, 1996. 2. Guarantee: Guarantor hereby guarantees the Leases, as originally executed and as thereafter modified or amended, as follows: Guarantor hereby guarantees and undertakes with Landlord that in the event that the Tenant shall default in the payments of any sums due and owing to Landlord from Tenant on account of any of the Leases or in the event that the Tenant shall default in the full and faithful performance of Tenant's obligations, undertakings and covenants contained in the Leases, then Guarantor shall pay to Landlord, within ten days of demand, any and all sums so due to Landlord (not to exceed the limitation set forth below) and any damages incurred by Landlord on account thereof. This guaranty is absolute and unconditional. Guarantor's total obligation under this guarantee is limited to $299,000 (the "Limit Amount"). 3. Reductions in Limit Amount: Guarantor shall have the right to reduce the Limit Amount by $2.32 for each $1.00 in cash deposited by Guarantor with Landlord, provided that the maximum amount Guarantor may reduce the Limit Amount by cash deposit may not exceed $174,000 ($75,000 in cash). Any cash deposited by Guarantor with Landlord to reduce the Limit Amount shall accrue interest at the rate of 5% per annum, which interest shall be credited to the cash deposit on a monthly basis. Any cash deposited with Landlord to reduce the Limit Amount shall be held by Landlord with landlord's other funds, and shall be available to Landlord on the same terms and conditions as the security deposits under the Leases. Any remaining portion of the cash deposit (and any accrued interest thereon) shall be returned to Guarantor only after all of the Leases have expired and all of the obligations of Tenant thereunder have been satisfied in full. Any reduction in the Limit Amount arising from a cash deposit with Landlord shall only be effective as to obligations arising under this Guaranty accruing after the date of deposit. Obligations which have accrued under the Guaranty prior to or as of the date of a cash deposit with Landlord shall still be subject to the full Limit Amount. Thus, following a default by Tenant under a Lease, Guarantor may not make a cash deposit with Landlord to reduce the Limit Amount applicable to such default. The Limit Amount shall also be reduced $3,472.22 per month for each month which the Tenant is not in default under any of the Leases, provided that in no event shall the Limit Amount be reduced by more than $125,000 by operation of this provision. This monthly reduction is to begin December 13, 1996. 4. Term: Guarantor's obligations and undertakings herein contained shall remain in full force and effect and shall survive termination of the Leases. 5. Rights of Landlord: Without diminishing, releasing or discharging Guarantor's obligations hereunder, Landlord shall have the right to exercise the following powers and rights in Landlord's sole discretion: Landlord may change, alter, cancel, renew, extend, decrease or increase the obligations of Tenant to Landlord (increases in the Page 1 41 obligation of the Tenant to Landlord will not increase the Limit Amount under this guaranty). Landlord may add other guarantors or procure additional guarantees, release other guarantors or guarantees and apply monies or properties received from Tenant upon debts regardless of whether the same may be guaranteed hereby, otherwise secured, barred by statutes of limitation or discharged other than by payment. Landlord may exercise rights hereunder in the event of Tenant's insolvency, bankruptcy, receivership or assignment for benefit of creditors, in which event all of Tenant's liabilities and indemnities to Landlord shall be satisfied in full before Guarantor shall be entitled to participation in the distribution of Tenant's assets. Landlord may deal with Tenant, Guarantor and any other person liable on the indebtedness, obligation or liabilities to Landlord as Landlord deems advisable. 6. Default of Tenant: Notice of acceptance of this Guaranty and of defaults, breaches, demands, presentments, protest, and amendment to or modification or cancellation of the Leases, and of any other kind is fully waived by Guarantor. Upon default by Tenant on any of its obligations to Landlord, then at Landlord's option, without notice or demand upon Guarantor and without exercising any other right or remedy Landlord may have, Landlord may proceed directly against Guarantor or any other guarantor to enforce Landlord's rights hereunder. Without releasing or affecting Guarantor's obligations hereunder, Landlord may enforce any rights it may have against any persons and properties liable. 7. Impairment of Rights: Landlord's rights shall be cumulative and not exclusive. No impairment, limitation or modification or Tenant's liabilities or obligations or of its trustee or receiver or any such impairment, limitation or modification of Landlord's remedies by virtue of the operation of bankruptcy or similar laws or decisions of any court or courts nor any disaffirmance of the Landlord's obligations under the Leases in such proceedings shall affect Landlord's rights against Guarantor hereunder. 8. Successor and Assigns: The obligations of Guarantor shall inure to the benefit of the Landlord's assigns and successors in interest in the Leases and shall be binding upon Guarantor's heirs, successors and assigns. Reference to Tenant herein includes any assignee of or successor to Tenant's interest under the terms of the Leases or any subtenant or any other party who is now or in the future may be a tenant under any of the Leases. 9. Costs and Attorney's Fees: Guarantor shall pay all costs, expenses and charges, including all reasonable attorneys fees, which Landlord may incur in the enforcement of the provisions hereof. Such costs or reasonable attorneys fees shall be payable irrespective of the Limit Amount hereunder. 10. Notices: Any notice hereunder may be given to Guarantor by mail addressed to: William T. Baxter 3233 - 168th Place SE Bellevue, WA 98008 or other address as Guarantor shall designate to Landlord in writing. Dated this day of March, 1997. GUARANTOR by --------------------------------- William T. Baxter Page 2 EX-10.11 15 SUNSET NORTH CORPORATE CAMPUS LEASE AGREEMENT 1 EXHIBIT 10.11 SUNSET NORTH CORPORATE CAMPUS LEASE AGREEMENT BETWEEN WRC SUNSET NORTH LLC ("LANDLORD") AND BSQUARE CORPORATION ("TENANT") 2 OFFICE LEASE AGREEMENT This Office Lease Agreement (the "Lease") is made and entered into as of the 15th day of January, 1999, by and between WRC SUNSET NORTH LLC, a Washington limited liability company ("Landlord") and BSQUARE CORPORATION, a Washington corporation ("Tenant"). ARTICLE 1. BASIC LEASE INFORMATION; DEFINITION. A. The following are some of the basic lease information and defined terms used in this Lease. 1. "ADDITIONAL BASE RENTAL" shall mean Tenant's Pro Rata Share of Basic Costs and any other sums (exclusive of Base Rental) that are required to be paid by Tenant to Landlord hereunder, which sums are deemed to be additional rent under this Lease. Additional Base Rental and Base Rental are sometimes collectively referred to herein as "Rent". 2. "BASE RENTAL" shall mean Twenty and no/100 Dollars ($20.00) per rentable square foot of the Premises per year during year one (1) of the Lease Term; Twenty-One and no/100 Dollars ($21.00) per rentable square foot of the Premises per year during years two (2) and three (3) of the Lease Term; Twenty-Two and no/100 Dollars ($22.00) per rentable square foot of the Premises per year during years four (4) and five (5) of the Lease Term; Twenty-Three and no/100 Dollars ($23.00) per rentable square foot of the Premises per year during years six (6) and seven (7) of the Lease Term; Twenty-Four and no/100 Dollars ($24.00) per rentable square foot of the Premises per year during years eight (8) and nine (9) of the Lease Term; and Twenty-Five and no/100 Dollars ($25.00) per rentable square foot of the Premises per year during year ten (10) of the Lease Term. 3. "BUILDING" shall mean the office building commonly known as Building 4 of Sunset North Corporate Campus, located at the Northeast corner of 139th Avenue Southeast and Southeast 32nd Street, Bellevue, King County, Washington. "BUILDINGS" means the Building and Building 3 and Building 5, collectively. 4. "CAMPUS" means the Sunset North Corporate Campus located at the Northeast corner of 139th Avenue Southeast and Southeast 32nd Street in Bellevue, King County, Washington. The Campus contains the Building (commonly known as Building 4), and the office buildings commonly known as BUILDING 3 AND BUILDING 5. 5. The "COMMENCEMENT DATE," "INITIAL LEASE TERM," "LEASE TERM" and "TERMINATION DATE" shall have the following meanings: The "INITIAL LEASE TERM" shall mean a period of one hundred twenty (120) months commencing on the Commencement Date, as defined in Section 3(A) (the "COMMENCEMENT DATE"). The target commencement date is August 15, 1999 (the "TARGET COMMENCEMENT DATE"). The "TERMINATION DATE" shall, unless sooner terminated as provided herein, mean the last day of the Lease Term. Notwithstanding the foregoing, if the Termination Date, as determined herein, does not occur on the last day of a calendar month, the Lease Term shall be extended by the number of days necessary to cause the Termination Date to occur on the last day of the last calendar month of the Lease Term. Tenant shall pay Base Rental and Additional Base Rental for such additional days at the same rate 1 3 payable for the portion of the last calendar month immediately preceding such extension. Tenant has the option of extending the term of this Lease beyond the Initial Lease Term pursuant to the provisions of Section 5(C) below. The term of this Lease, as so extended, is referred to in this Lease as the "LEASE TERM." 6. "INDEX" shall mean the "Consumer Price Index (United States City Average for All Urban Consumers) -- All Items (Reference Base 1982-84=100)" published by the United States Department of Labor, Bureau of Labor Statistics. In the event the Index shall hereafter be converted to a different standard reference base or otherwise revised, the determination of the percentage increase shall be made with the use of such conversion factor, formula or table for converting such index as may be published by the Bureau of Labor Statistics or, if said Bureau shall not publish the same, then with the use of such conversion, factor, formula or table as may be published by Prentice Hall, Inc. or any other nationally recognized publisher of similar statistical information. In the event any such index shall cease to be published, then for the purposes of this Section, there shall be substituted such other index as Landlord and Tenant shall reasonably agree. References to the Index as of a particular date shall mean the Index most recently published on such date. 7. "INITIAL PREMISES" shall mean the area located on the entire third (3rd), fourth (4th) and fifth (5th) floors of the Building, as outlined on Exhibit A attached hereto and incorporated herein, containing approximately ninety-four thousand one hundred eighty-two (94,182) rentable square feet of area and eighty-four thousand eight hundred forty-nine (84,849) usable square feet of area, measured on a single tenant per floor basis, using BOMA standards. The area of the Premises may be adjusted or expanded in accordance with the provisions of Section 5(A) below. The Initial Premises, as later modified or expanded, is referred to in this Lease as the "PREMISES." 8. "PERMITTED USE" shall mean only sales, general office, computer research, engineering, development and testing, and administration, together with uses ancillary thereto (such as cafeteria and related kitchen facilities), and any other legally permitted use consistent with the character of the Building. 9. "RENTABLE AREA," "RENTABLE SQUARE FEET" and similar terms shall mean Rentable Area as determined in accordance with the American National Standard Method of measuring floor space in office buildings as published by the Building Owners and Managers Association International dated June 7, 1996 ("BOMA"). 10. "TENANT'S PRO RATA SHARE" shall mean twenty and four hundred forty five one thousandths percent (20.445%), which is the quotient (expressed as a percentage), derived by dividing the Rentable Area of the Premises (94,182) by the Rentable Area of Buildings 3,4 and 5 (460,663). At such time as the construction of all of the Buildings is completed, Landlord will cause the rentable square feet of the Buildings and the Premises to be determined in accordance with BOMA standards, will notify Tenant of such rentable square feet, and Tenant's Pro Rata Share shall be adjusted accordingly if the Rentable Area differs from that set forth above. 11. "USABLE AREA," "USABLE SQUARE FEET" and similar terms shall mean Usable Area as determined in accordance with BOMA. 2 4 12. "NOTICE ADDRESSES" shall mean the following addresses for Tenant and Landlord, respectively: Tenant: On and after the Commencement Date, notices shall be sent to Tenant at the Premises. Prior to tile Commencement Date, notices shall be sent to Tenant at the following address: BSQUARE Corporation 3633 136th Place NE, Suite 100 Bellevue, WA 98006 Attn: General Counsel Landlord: WRC Sunset North LLC c/o Wright Runstad & Company Suite 2000 1191 Second Avenue Seattle, WA 98101 Attention: Jon F. Nordby With a copy to: Equity Office Properties Trust Two North Riverside Plaza Suite 2200 Chicago, Illinois 60606 Attention: Regional Counsel - Western Region Payments of Rent only shall be made payable to the order of WRC Sunset North LLC at the address of the Landlord set forth above, or such other address as may be specified in the Commencement Letter delivered to Tenant pursuant to Section 3(C). B. The following are additional definitions of some of the defined terms used in the Lease. 1. "BASIC COSTS" are defined below in Section 7(B) hereof. 2. "BROKER" means The Broderick Group and Leibsohn & Company 3. "BUILDING STANDARD" shall mean the type, grade, brand, quality and/or quantity of materials Landlord designates from time to time to be the minimum quality and/or quantity to be used in the Building. 4. "BUSINESS DAY(S)" shall mean Mondays through Fridays exclusive of the normal business holidays ("Holidays") of New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Landlord, from time to time during the 3 5 Lease Term, shall have the right to designate additional Holidays, provided such additional Holidays are nationally recognized by other office buildings. 5. "COMMON AREAS" shall mean those areas provided for the common use or benefit of all tenants generally and/or the public, such as corridors, elevators, elevator foyers, common mail rooms, restrooms, vending areas, lobby areas (whether at ground level or otherwise), walkways, parking areas and landscaping and other similar facilities. 6. "LANDLORD WORK" shall mean the construction of the shell and core of the Building, including the Common Areas. The Landlord Work is described on Exhibit D attached hereto. 7. "NORMAL BUSINESS HOURS" for the Building shall mean 7:00 a.m. to 7:00 p.m. Mondays through Fridays, and 7:00 a.m. to 2:00 p.m. on Saturdays, exclusive of Holidays. 8. "PRIME RATE" shall mean the prime rate reported in the Money Rates column or section of the Wall Street Journal or any successor thereof from time to time. 9. "PROPERTY" shall mean the Buildings and the Parcel(s) of land on which they are located, all other property in the Campus and, at Landlord's discretion, the garages serving the Buildings, and all other improvements owned by Landlord and serving the Buildings and the tenants thereof and the parcel(s) of land on which they are located. The legal description for the Property is set forth on Exhibit A-1, attached hereto and incorporated herein by this reference. 10. "INITIAL TENANT IMPROVEMENTS" shall mean the tenant improvements to be constructed in the Initial Premises pursuant to Tenant's plans and specifications, as approved by Landlord pursuant to the terms of Exhibit D attached hereto, and "Tenant Improvements" shall include the Initial Tenant Improvements. ARTICLE 2: LEASE GRANT. Subject to and upon the terms herein set forth, Landlord leases to Tenant and Tenant leases from Landlord the Premises, together with the right, in common with others, to use the Common Areas. ARTICLE 3: ADJUSTMENT OF COMMENCEMENT DATE/POSSESSION. A. Commencement Date: Landlord and Tenant shall use their best efforts to complete the Building and the Initial Tenant Improvements in accordance with Exhibit D hereto on the Target Commencement Date or as soon thereafter as practicable. 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 the contractor engaged by Landlord to construct the shell and core of the Building (the "SHELL AND CORE CONTRACTOR"), Landlord shall use its commercially reasonable best efforts to cause the Commencement Date to occur by August 15, 1999. If the Initial Tenant Improvement work is bid, and if the Shell and Core Contractor's bid is the lowest received by Tenant for the 4 6 construction of the Tenant Improvements, or is within two percent (2%) of the lowest bid received, and Tenant chooses a contractor other than the Shell and Core Contractor, the Commencement Date shall be deemed to occur on the date that it otherwise would have occurred (as determined by the following paragraph) had the Shell and Core Contractor been chosen to construct the Initial Tenant Improvements (as reasonably determined based on the Shell and Core Contractor's proposed schedule included in its tenant work bid but taking into consideration Force Majeure events that are not the result of Tenant's selection of a contractor other than the Shell and Core Contractor (e.g. no adjustment shall be made for material shortages or labor disputes that would not have applied to the Shell and Core Contractor.) If the Shell and Core Contractor is not the lowest bidder or within two percent (2%) of the lowest bidder, and Tenant chooses such lowest bidder, the Commencement Date shall be deemed to occur on the earlier of (i) the date three (3) weeks after the date that it otherwise would have occurred had the Shell and Core Contractor been chosen to construct the Initial Tenant Improvements (as reasonably determined based on the Shell and Core Contractor's proposed schedule included in its tenant work bid but taking into consideration Force Majeure events that are not the result of Tenant's selection of a contractor other than the Shell and Core Contractor (e.g. no adjustment shall be made for material shortages or labor disputes that would not have applied to the Shell and Core Contractor), or (ii) the date the Commencement Date would otherwise occur pursuant to the following paragraph. All of the foregoing dates are subject to the delay provisions contained in Section 38(D) below. The contractor so selected to construct the Tenant Improvements shall be hereinafter referred to as the "TENANT IMPROVEMENTS 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, (i) if the Initial Premises have been delivered to Tenant with all of Landlord's Work and the Initial Tenant Improvements substantially completed, the Commencement Date shall be deemed to have occurred with respect to the Initial Premises on the date Tenant first occupies any portion of the Initial Premises for normal business operations, if such date is earlier than the dates described above; and (ii) if all of Landlord's Work and the Initial Tenant Improvements have not been completed in the Initial Premises, but Tenant occupies all or some portion of the Initial Premises for normal business operations, Rent and Additional Rent shall be payable only on the space so occupied by Tenant until the Commencement Date. Any such occupancy of the Premises prior to the Commencement Date shall be subject to all of the other terms and conditions of this Lease except that the Initial Lease Term shall not commence until the Commencement Date. As used herein, the term "TENANT DELAY" shall mean any delay experienced by Landlord in its work on the Building or the Tenant Improvements resulting from: (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 D; (c) any delay attributable to changes in or additions to Landlord's plans requested by Tenant or Tenant's selection of non-Building Standard Tenant Improvements; (d) any other delay in acts of Tenant required under 5 7 Exhibit D; or (e) any delay attributable to Tenant's selection as the Tenant Improvement Contractor of a party other than the Shell and Core Contractor, as described in this Section 3(A); provided that the foregoing clauses (a) through (c) shall apply only to the extent that such delay impedes or otherwise adversely affects Landlord's Work or the schedule for preparing the Premises for occupancy. Landlord shall notify Tenant as soon as reasonably possible when Landlord becomes aware of an event which constitutes or may constitute a Tenant 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 or in connection with Landlord's Work, or which have not been completed in accordance with the plans and specifications, or in a workman like manner, with respect to the Landlord's Work or Initial Tenant Improvements. 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 Landlord's Work, they shall be completed at Landlord's sole cost and expense. If such items relate to the Initial Tenant Improvements, they shall be paid in the same manner that the costs of the Initial Tenant Improvements are paid. With respect to such items that relate to the Initial Tenant Improvements, 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 on such items 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 items 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 written 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 Commencement Date or, with respect to latent defects or defects not discoverable as a result of a visual review of the Premises, within three (3) years after the Commencement Date. 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. B. Installation Period. Tenant shall have the right to enter the Premises at no cost for up to thirty (30) days prior to the Commencement Date for purposes of installing 6 8 furniture, fixtures, cabling, wiring and equipment (the "INSTALLATION PERIOD"), provided that the Installation Period shall not delay the Commencement Date. Tenant shall coordinate its work with the Shell and Core Contractor and the Tenant Improvements Contractor and shall not interfere with any such contractors or their subcontractors. Tenant's occupancy of the Premises during the Installation Period shall be subject to all of the terms and conditions of this Lease, except Tenant shall not be charged Rent during the Installation Period unless Tenant has occupied any portion of the Premises during such period for normal business operations, in which event, Rent shall commence as set forth in Section 3(A) above. C. Confirmation of Commencement Date: The Commencement Date shall be confirmed in writing using the form contained in Exhibit C. D. Failure of Commencement Date: If the Commencement Date has not occurred on or before December 1, 1999, as extended for Force Majeure and Tenant Delay (provided any such extension for Force Majeure shall not exceed sixty (60) days in the aggregate), Tenant shall have the option, to be exercised in Tenant's sole discretion, upon thirty (30) days' prior written notice to Landlord, to terminate this Lease and all obligations of Tenant hereunder (unless the Commencement Date occurs within such 30-day period), or to sue to specifically enforce this Lease, as Tenant's sole remedies as a result of such delay. ARTICLE 4: INTENTIONALLY DELETED ARTICLE 5: PREMISES A. Initial Premises. The Initial Premises are depicted on Exhibit A attached hereto and contain approximately ninety-four thousand one hundred eighty-two (94,182) rentable square feet of area. The precise square footage of the Initial Premises shall be determined based upon Tenant's Final Plans, and once so determined shall not be further adjusted except to reflect additions to or other modifications of the Premises. B. Expansion Option. Landlord hereby grants Tenant one (1) option to expand (the "Expansion Option") in accordance with the provisions of this Section 5(B), provided: 1. Tenant is not in default under this Lease beyond any applicable cure periods at the time Landlord receives the Expansion Notice; and 2. no part of the Premises aggregating to fifty percent (50%) or more of the Rentable Area of the Premises is sublet (other than pursuant to a Corporate Transfer, as defined in Section 16(E) below) at the time Landlord receives the Expansion Notice (for purposes of this Subsection 2, the Rentable Area of the Premises shall include any area that Tenant elects to lease pursuant to the Expansion Notice described below); and 3. this Lease has not been assigned (other than pursuant to a Corporate Transfer) prior to the time Landlord receives the Expansion Notice. Landlord agrees to take the second floor of the Building off the market until March 31, 1999 and Tenant has the option to lease such floor (the entire floor or portion thereof) until such date. To exercise the Expansion Option, Tenant shall provide to Landlord written notice on or before March 31, 1999 (the "Expansion Notice"), that Tenant is exercising the Expansion Option, at 7 9 which time Tenant shall designate the approximate number of rentable square feet Tenant desires to occupy on the second floor. In the event Tenant leases any portion of the second floor, the rental rate shall be the same Base Rental rate applicable to the Initial Premises, the lease term shall be co-terminus and the tenant improvement Allowance shall be the same as initially provided for the Initial Premises. In addition, the Security Deposit as defined in Section 9 will increase proportionately based on the amount of additional area leased. If Tenant leases less than the full floor pursuant to this provision, Landlord reserves the right to determine the location of the partial floor leased, subject to Tenant's reasonable approval. Upon exercise of the Expansion Option by Tenant, Landlord and Tenant shall enter into an amendment to this Lease which reflects the additional space to be leased by Tenant, and which shall set forth the respective dates, in accordance with Exhibit D, by which the various items to be completed by Landlord and Tenant are to be so completed (the number of days shall be the same approximate number of days as exist with respect to the Initial Premises). The additional Security Deposit payment shall be paid pro rata at the same time as payments are due in accordance with Article 9; provided that the "execution of this Lease" shall refer to execution of the amendment to the Lease with respect to the Expansion Option, and the "Commencement Date" shall refer to the Commencement Date of the Lease with respect to the expansion space. For purposes of the Lease, the Commencement Date with respect to the expansion space shall be determined solely with reference to the expansion space and shall occur on the earlier of Tenant's occupancy of any portion of such expansion space for normal business purposes or October 15, 1999, but in no event earlier than the Commencement Date for the Initial Premises. C. Option to Expand. Landlord hereby grants Tenant the option to extend the Lease Term for four (4) periods of five (5) years each, upon all of the terms and conditions contained in this Lease, except for Base Rental, provided: 1. Tenant is not in default under this Lease beyond any applicable cure periods at the time that Tenant delivers any Extension Notice or at the time Tenant delivers any Binding Notice; and 2. No part of the Premises aggregating to thirty-three percent (33%) or more of the Rentable Area of the Premises is sublet (other than pursuant to a Corporate Transfer) at the time that Tenant delivers any Extension Notice or at the time Tenant delivers any Binding Notice; and 3. The Lease has not been assigned (other than pursuant to a Corporate Transfer) prior to the date that Tenant delivers any Extension Notice or prior to the date Tenant delivers any Binding Notice. The Base Rental shall be one hundred percent (100%) of the projected net fair market rental rate on the effective date of such renewal for comparable term extensions for comparable space in comparable first class buildings in the Eastside area, excluding the Bellevue central business district (the "FAIR MARKET RENEWAL RATE"), provided that in no event shall the Fair Market Renewal Rate be less than the then current Base Rental being paid by Tenant. If Tenant wishes to exercise this extension option, Tenant shall provide written notice of its intent to extend (an "Extension Notice") at least twelve (12) months, but not more than fifteen (15) months, prior to the expiration of the then current Lease Term. Within thirty (30) days after receipt of the Extension Notice, Landlord shall inform Tenant of the proposed Fair Market Renewal Rate. If Landlord and Tenant cannot agree on a Base Rental within sixty (60) days after Tenant's receipt 8 10 of Landlord's notice, then Tenant may either (i) elect not to so extend the Lease Term; or (ii) irrevocably elect to extend the Lease Term with the market rent to be determined in accordance with the following binding arbitration provisions (a "Binding Notice"). The Fair Market Renewal Rate will include the following if offered in comparable buildings to a renewing tenant: rental concession, refurbishment allowance, tenant improvement allowance, any other incentives, and any brokerage commission. The Fair Market Renewal Rate will also reflect the refurbishment allowance granted by Landlord to Tenant pursuant to Section 6(E) below. (a) Within fifteen (15) business days after Tenant's irrevocable election to extend the Lease term, 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 having not less than ten (10) years' active experience as a real estate professional in the downtown and suburban office leasing market in Bellevue, Washington, but who may not be a real estate broker or sales person. If either party falls to appoint an expert within such fifteen (15) business day period, then the determination of the expert first appointed shall be final, conclusive and binding on both parties. (b) 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. (c) If the two experts fail to agree on Fair Market Renewal Rate and the difference between the two determinations exceeds ten percent (10%) of the lower of the two determinations, then the experts shall, within tell (10) business days after the expiration of the 30-day period described in subparagraph (2) above, 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 Base Rental for the extended term. (d) 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. D. Right of First Offer and Other Rights. (1) Landlord hereby grants Tenant a continuing right of first offer in accordance with the provisions of this Section 5(D)(1), provided Tenant shall have no rights under this Section 5(D)(1) and shall not be entitled to a Landlord's Notice if: (a) Tenant is in default under this Lease beyond any applicable cure periods at the time Landlord would otherwise deliver the Landlord's Notice; or (b) the Premises, or any portion thereof aggregating at the time Landlord would otherwise deliver Landlord's Notice, either to 9 11 (i) fifty percent (50%) or more of the Rentable Area of the Premises if Landlord's Notice would be delivered during the first five (5) years of the Initial Term, or to (ii) thirty-three percent (33%) or more of the Rentable Area of the Premises if Landlord's Notice would be delivered after the first five (5) years of the Initial Term, is sublet (other than pursuant to a Corporate Transfer). For purposes of this Subsection (b), the Rentable Area of the Premises shall include any rentable area which is the subject of the Landlord's Notice; or (c) the Lease has been assigned (other than pursuant to a Corporate Transfer) prior to the date Landlord would otherwise deliver the Landlord's Notice; or (d) the Tenant is not occupying any portion of the Premises on the date Landlord would otherwise deliver the Landlord's Notice. In addition to and subject to Tenant's rights pursuant to Section 5(B), Tenant shall have a right of first offer on the second (2nd) floor of the Building, which is currently available or which becomes available during the Lease Term. In the event Landlord is prepared to issue or issues a proposal to a third party for space on the second (2nd) floor of the Building, Landlord shall deliver a notice ("Landlord's Notice") to Tenant identifying such third party and the space subject to such proposal. Tenant shall have five (5) business days after receipt of Landlord's Notice to elect to lease such space upon the terms and conditions offered or to irrevocably commit to lease such space at the Fair Market Rental Rate. As used herein, the "FAIR MARKET RENTAL RATE" shall mean one hundred percent (100%) of the projected net fair market rental rate on the date such space will first be leased by Tenant for comparable space in comparable first class buildings in the Eastside area, excluding the Bellevue central business district, provided that in no event shall the Fair Market Rental Rate be less than the then current Base Rental being paid by Tenant on the remainder of the Premises. The Fair Market Rental Rate will include the following if offered in such comparable buildings: rental concessions, refurbishment allowances, tenant improvement allowances, any other incentives, and any brokerage commissions. If Landlord and Tenant are unable to agree on the Fair Market Rental Rate within fifteen (15) business days after Tenant's receipt of Landlord's Notice, the Fair Market Rental Rate shall be determined in the same manner that the Fair Market Renewal Rate is determined pursuant to Section 5(C) above. If Tenant elects not to lease such space, or if Tenant fails to respond within such five (5) business day period, Landlord shall be free to lease such space to the party specified in Landlord's Notice on such terms as Landlord may desire; provided that if negotiations with the third party identified in Landlord's Notice terminate, or if Landlord does not lease such space to such third party within six (6) months following the date of Landlord's notice to Tenant, the provisions of this Section 5(D)(1) shall again apply and Landlord shall not lease such space until Landlord has provided to Tenant the right of first offer as provided in this Section 5(D)(1). (2) In addition to the right of first offer granted to Tenant pursuant to Section 5D (1) above, Tenant shall have an additional a right of offer in accordance with the 10 12 provisions of this Section 5(D)(2), provided Tenant shall have no rights under this Section 5(D)(2) and shall not be entitled to a Landlord's Notice if: (a) Tenant is in default under this Lease beyond any applicable cure periods at the time Landlord would otherwise deliver the Landlord's Notice; or (b) the Premises, or any portion thereof aggregating at the time Landlord would otherwise deliver Landlord's Notice, either to (i) fifty percent (50%) or more of the Rentable Area of the Premises if Landlord's Notice would be delivered during the first five (5) years of the Initial Term, or to (ii) thirty-three percent (33%) or more of the Rentable Area of the Premises if Landlord's Notice would be delivered after the first five (5) years of the Initial Term, is sublet (other than pursuant to a Corporate Transfer). For purposes of this Subsection (b), the Rentable Area of the Premises shall include any rentable area which is the subject of the Landlord's Notice; or (c) the Lease has been assigned (other than pursuant to a Corporate Transfer) prior to the date Landlord would otherwise deliver the Landlord's Notice; or (d) the Tenant is not occupying any portion of the Premises on the date Landlord would otherwise send the Landlord's Notice. The rights contained in this Section 5(D)(2) shall apply to the remainder of the leasable space in the Building (the "Second Offer Space") and shall be subject and subordinate to all currently existing rights of expansion, first offer, first refusal and similar rights with respect to such space that are presently existing or that are subsequently granted to tenants in the Property. Tenant acknowledges that its rights hereunder may be subject and subordinate to the rights of more than one other tenant. In the event Landlord is prepared to issue or issues a proposal to a third party for all or any portion of the Second Offer Space, and all prior rights granted to other tenants with respect to such space have expired or otherwise terminated, Landlord shall deliver a notice ("Landlord's Notice") to Tenant identifying the space subject to such proposal. Tenant shall have five (5) business days after receipt of Landlord's Notice to elect to lease such space upon the terms and conditions offered, or upon other terms and conditions agreed upon. If Tenant elects not to lease such space, or if Tenant fails to respond within such five (5) business day period, Landlord shall be free to lease such space to any other party on such terms as Landlord may desire; provided that if negotiations with the third party identified in Landlord's Notice terminate, or if Landlord does not lease such space to such third party within six (6) months following the date of Landlord's notice to Tenant, the provisions of this Section 5(D)(2) shall again apply and Landlord shall not lease such space until Landlord has provided to Tenant the right of first offer as provided in this Section 5(D)(2). E. Termination Option. Tenant shall have the right to terminate all or a portion of this Lease in accordance with the provisions of this Section 5(E), provided: 11 13 1. Tenant is not in default under this Lease beyond any applicable cure periods at the time that Tenant delivers the termination Notice; and 2. The Lease has not been assigned (other than pursuant to a Corporate Transfer) prior to the date that Tenant delivers the Termination Notice. Tenant shall have the option to terminate the Lease or terminate a portion of the Lease on a floor by floor basis effective at the end of the seventh (7th) year of the Initial Lease Term by providing not less than twelve (12) months prior written notice to Landlord ("Termination Notice"). If Tenant exercises this option, Tenant shall pay a termination fee for that portion of the space terminated equal to six (6) months Base Rental (at the Year 8 scheduled Base Rental rate as defined in Article A.2. above) plus the unamortized principal balance of the tenant improvement allowance ($30.15 per useable square foot of the space terminated), and leasing commissions ($5.50 per rentable square foot of the area terminated) provided by Landlord assuming a 12% per annum interest rate. Such termination fee shall be payable fifty percent (50%) on the notice date and fifty percent (50%) upon the effective date of termination. For the purpose of computing the termination fee, the Tenant Improvement Allowance and the leasing commission shall be deemed to be amortized by Landlord in equal monthly installments over 120 months, commencing on the Commencement Date, with interest at twelve percent (12%). By way of example, if the rentable square footage is 94,000 square feet, and Landlord pays a broker's commission in connection therewith in an amount equal to $5.50 per rentable square foot, or $517,000, and if the useable square footage is 82,000 square feet and Landlord pays a Tenant Improvement Allowance of $30.15 per usable square foot, or $2,472,300, the total Tenant Improvement Allowance and real estate commissions to be amortized would be $2,989,300. If Tenant terminated one floor of the Lease (aggregating 31,333 rentable square feet and 27,333 useable square feet) effective the end of the seventh (7th) lease year, the unamortized principal balance of the Tenant Improvement Allowance and leasing commissions for three floors would be $1,291,244. One third of that amount, applicable to the one of three floors terminated, equals $430,415. In addition, six (6) months of Base Rental using year eight (8) rents ($24.00 per rentable square foot), multiplied by the number of rentable square feet on one floor (31,333) equals $375,996. The total termination fee for one (1) floor is thus $806,411 ($430,415 + $375,996). F. Parking. Landlord shall provide Tenant with no fewer than four (4) unassigned parking spaces in the parking garage serving the Building for each one thousand (1,000) usable square feet of leased space in the Premises, as set forth in Section 1(A)(7) above. The number of spaces provided to Tenant hereunder shall proportionally change as the area of the Premises changes. Tenant may change the number of spaces Tenant wishes to use from time to time, subject to the above maximum, provided Tenant gives Landlord at least thirty (30) days prior notice of such change and the changes are effective on the first day of a calendar month. The rate for monthly parking for each such space during the first thirty-six (36) months of the term shall be Forty-Five Dollars ($45.00) per month per space plus Washington State sales tax. The parking rate shall be adjusted every thirty-six (36) months to the comparable rates for office buildings on the I-90 corridor, but not less than $45.00 per stall plus applicable sales tax. A designated limited number of executive parking spaces will be located directly below the Building on the top garage level. The exact size of this area will depend upon how many parkers desire this service. The cost for stalls for these executive parking spaces will initially be Sixty-Five Dollars ($65.00) per month per stall plus Washington State sales tax. Landlord shall monitor the access to and parking in the parking garage to ensure that Tenant has reasonable 12 14 access to the number of parking spaces desired by Tenant from time to time. Landlord shall make available to Tenant not less than four (4) executive parking spaces within the above permitted number of spaces. No reserved stalls will be available. ARTICLE 6: TENANT IMPROVEMENTS A. Tenant Improvements for 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 D. Landlord shall enter into the contract with the Initial Tenant Improvements contractor, who shall be selected in accordance with the provisions of Exhibit D. Tenant is aware that its selection of an Initial Tenant Improvements contractor other than the Shell and Core Contractor may result in delays in completion of the Initial Tenant Improvements. B. Landlord shall provide Tenant with an allowance (the "ALLOWANCE") of Thirty and 15/100 Dollars ($30.15) per square foot of usable area in the Initial Premises (i.e. $30.00 per usable square foot for tenant improvements and $0.15 per usable square foot for the space planning allowance). The Allowance may be applied to costs of designing and constructing the tenant Improvements, Tenant's signage costs and the acquisition and installation of Tenant's furniture, fixtures and equipment. The Landlord shall contract with the contractor chosen by Tenant to construct the Tenant Improvement (the terms and conditions of which contract shall be subject to Tenant's prior written approval, acting reasonably) and shall pay all payments owed to such contractor when and as due; provided that at such time as Landlord has paid the total sum of the Allowance to such contractor, or to others at the direction of Tenant, Tenant shall thereafter be responsible to pay the balance owed to the contractor, which balance shall be paid by Tenant to Landlord, for payment to the contractor, on or before the same day that payments are owed by Landlord to such contractor in connection with the construction of the Tenant Improvements. Any unused portion of the Allowance may be taken as a credit against Rent or may be applied to additional build-out, wiring or cabling costs, as Tenant may elect. Any costs of constructing Tenant Improvements in excess of the Allowance shall be borne solely by Tenant. C. Landlord and Tenant mutually agree on the selection of JPC, Incorporated as Tenant's architect to plan, design, and complete construction documents for the Initial Tenant Improvements. The cost for such services as well as engineering costs attributable to the same shall be charged against the Allowance; provided that the contract with JPC, Incorporated, as well as with any engineer, the costs of which will be charged against the Allowance, shall be subject to the prior written approval of Tenant, acting reasonably. D. 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 6(D). All statutes of limitations which would otherwise be applicable and any limitations upon claims set forth in this Agreement shall apply to any arbitration proceeding under this Section 6(D). 1. Notice of Demand. Either party may demand arbitration by notifying the other party in writing in accordance with the notice provisions of Section 6(D). 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 3. 13 15 2. Response. The party that has not demanded arbitration shall respond to the notice of demand within five (5) business days of receipt of such notice by delivering a written response in accordance with the notice provisions of Section 34. The response shall list the name of a second arbitrator qualified in accordance with Subsection 3. The response shall also describe counterclaims, if any, the amount involved, and the particular remedy sought. If a party falls to respond timely to the notice of demand, the arbitrator selected by the party making such demand under Subsection 1 shall resolve the dispute, controversy or claim within seven (7) business days of the deadline for response. 3. Qualified Arbitrator. Any arbitrator selected in accordance with Subsections 1 and 2 shall be any natural person not currently or previously employed by, nor having or had, directly or indirectly, any contractual relationship with 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 or Bellevue or the outlying Bellevue real estate markets. 4. Appointment of Third Arbitrator. If a party responds timely to a notice of demand for expedited arbitration under Subsection 2 the two arbitrators shall appoint a third arbitrator who shall be qualified in accordance with subsection 3. Such third arbitrator shall be appointed within seven (7) business days of receipt by the party demanding arbitration of notice of response provided for under Subsection 3. 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) business 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. 5. Arbitration Hearing; Discovery; Venue. The arbitration hearing shall commence within five (5) business days of appointment of the third arbitrator as described in Subsection 4. The hearing shall in no event last longer than two (2) business 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. 6. Decision. The arbitrators' decision shall be made in no event later than seven (7) business days of the commencement of the arbitration hearing described in Subsection 5. If only two (2) arbitrators are appointed, the decision shall require unanimous approval of both arbitrators. If three (3) arbitrators are appointed, a majority decision shall 14 16 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. E. Refurbishment Allowance. At the end of the initial sixty (60) months of the Initial Lease Term, Landlord will repaint, using Building Standard quality paint the initial Premises and the expansion space, if any, acquired by Tenant pursuant to the Expansion Option. Further, on the commencement date of each five year renewal, Landlord will provide a market comparable refurbishment allowance for a renewing tenant, such allowance to be not less than the cost of replacing Building Standard quality carpet and repainting the Premises. ARTICLE 7: RENT. A. Tenant shall pay to Landlord, throughout the Lease Term, the Base Rental, in equal monthly installments on the first day of each calendar month, without demand, notice or offset. In addition, during each calendar year, or portion thereof, falling within the Lease Term, Tenant shall pay to Landlord as Additional Base Rental hereunder Tenant's Pro Rata Share of Basic Costs (as defined below) for the applicable calendar year. Prior to the Commencement Date and prior to January 1 of each calendar year during the Lease Term, or as soon thereafter as practical, Landlord shall make a good faith estimate of Basic Costs for the applicable calendar year and Tenant's Pro Rata Share thereof. On or before the first day of each month during such calendar year, Tenant shall pay to Landlord, as Additional Base Rental, a monthly installment equal to one-twelfth of Tenant's Pro Rata Share of Landlord's estimate of Basic Costs. Landlord shall have the right from time to time during any such calendar year, if it reasonably believes the costs will vary by more than five percent (5%), to revise the estimate of Basic Costs for such year and provide Tenant with a revised statement therefor, and thereafter the amount Tenant shall pay each month shall be based upon such revised estimate. If Landlord does not provide Tenant with an estimate of the Basic Costs by January 1 of any calendar year, Tenant shall continue to pay a monthly installment based on the previous year's estimate until such time as Landlord provides Tenant with an estimate of Basic Costs for the current year. Upon receipt of such current year's estimate, an adjustment shall be made for any month during the current year with respect to which Tenant paid monthly installments of Additional Base Rental based on the previous year's estimate. Tenant shall pay to Landlord for any underpayment within ten (10) days after demand. Any overpayment shall, at Landlord's option, be refunded to Tenant or credited against the next due installment or installments of Base Rental due for the months immediately following the furnishing of such estimate. Any amounts paid by Tenant based on any estimate shall be subject to adjustment pursuant to tile immediately following paragraph when actual Basic Costs are determined for such calendar year. As soon as is practical following the end of each calendar year during the Lease Term, Landlord shall furnish to Tenant a statement of Landlord's actual Basic Costs for the previous calendar year. If the amount of estimated Basic Costs actually paid by Tenant for the prior year is in excess of Tenant's actual Pro Rata Share of Basic Costs for such prior year, then Landlord shall apply such overpayment against Base Rental next due or to become due hereunder, provided if the Lease Term expires prior to the determination of such overpayment, Landlord shall within ten (10) days following such termination, refund such overpayment to Tenant after first deducting the amount of any Rent due hereunder. Likewise, Tenant shall pay to Landlord, within ten (10) days after demand, any underpayment with respect to the prior year, 15 17 whether or not the Lease has terminated prior to receipt by Tenant of a statement for such underpayment. This clause shall survive the expiration of the Lease. B. "BASIC COSTS" shall mean all reasonable and customary costs and expenses paid or incurred in each calendar year in connection with operating, maintaining, repairing and managing the Building and the Property, including but not limited to the following (but only to the extent such costs and expenses are commercially reasonable in amount and of a type customarily passed through to tenants in buildings comparable to the Building): 1. All labor costs for all persons at or below the grade of Building manager performing services required or utilized in connection with the operation, repair, replacement and maintenance of and control of access to the Building and the Property, including but not limited to amounts incurred for wages, salaries and other compensation for services, payroll, social security, unemployment and other similar taxes, workers' compensation insurance, uniforms, training, disability benefits, pensions, hospitalization, retirement plans, group insurance premiums or any other similar or like expenses or benefits. The building manager shall be an on-site, full time employee dedicated solely to the Property or, if such on-site manager has other building management responsibilities, then the Property shall be charged only a pro-rata share of the cost of such manager. 2. All management fees, the cost of equipping and maintaining a management office at the Building (but excluding rent), accounting services, legal fees (subject to the exclusions described below), and all other administrative costs relating to the Building and the Property. If management services are not provided by a third party, Landlord shall be entitled to a management fee comparable to that due and payable to third parties provided Landlord or management companies owned by, or management divisions of, Landlord perform actual management services of a comparable nature and type as normally would be performed by third parties. 3. All rental and/or purchase costs of materials, supplies, tools and equipment used in the operation, repair, replacement and maintenance and the control of access to the Building and the Property. 4. All amounts charged to Landlord by contractors and/or suppliers for services, replacement parts, components, materials, equipment and supplies furnished in connection with the operation, repair, maintenance, replacement of and control of access to any part of the Building, or the Property generally, including the heating, air conditioning, ventilating, plumbing, electrical, elevator and other systems and equipment. Major repair items that would be capitalized in accordance with generally accepted accounting principles shall be amortized over the useful life of such items. 5. All premiums and deductibles paid by Landlord for fire and extended coverage insurance, earthquake and extended coverage insurance, liability and extended coverage insurance, rental loss insurance, elevator insurance, boiler insurance and other insurance customarily carried from time to time by landlords of comparable office buildings or required to be carried by Landlord's Mortgagee. 6. Charges for water, gas, steam and sewer, but excluding those charges for which Landlord is otherwise reimbursed by tenants, and charges for Electrical Costs. For 16 18 purposes hereof, the term "ELECTRICAL COSTS" shall mean: (i) all charges paid by Landlord for electricity supplied to the Building, Property and Premises, regardless of whether such charges are characterized as distribution charges, transmission charges, generation charges, public good charges, disconnection charges, competitive transaction charges, stranded cost recoveries or otherwise; and (ii) except to the extent otherwise included in Basic Costs, any costs incurred in connection with the energy management program for the Building, Property and Premises, including any costs incurred for the replacement of lights and ballasts and the purchase and installation of sensors and other energy saving equipment. Notwithstanding the foregoing, Electrical Costs shall be adjusted as follows: (a) any amounts received by Landlord as reimbursement for above standard electrical consumption shall be deducted from Electrical Costs, (b) the cost of electricity incurred in providing overtime HVAC to specific tenants shall be deducted from Electrical Costs, and (c) if Tenant is billed directly for the cost of electricity to the Premises as a separate charge in addition to Base Rental and Basic Costs, the cost of electricity to individual tenant spaces in the Building shall be deducted from Electrical Costs. 7. "TAXES", which for purposes hereof, shall mean: (a) all real estate taxes and assessments on the Property, the Building or the Premises, and taxes and assessments levied in substitution or supplementation in whole or in part of such taxes, (b) all personal property taxes for the Building's personal property, including license expenses, (c) all taxes imposed on services of Landlord's agents and employees, (d) all other taxes, fees or assessments now or hereafter levied by any governmental authority on the Property, the Building or its contents or on the operation and use thereof (except as relate to specific tenants), and (e) all costs and fees incurred in connection with seeking reductions in or refunds in Taxes including, without limitation, any costs incurred by Landlord to challenge the tax valuation of the Building, but excluding gross or net income or franchise taxes. For the purpose of determining real estate taxes and assessments for any given calendar year, the amount to be included in Taxes for such year shall be as follows: (1) with respect to any special assessment that is payable in installments, Taxes for such year shall include the amount of the installment (and any interest) due and payable during such year; and (2) with respect to all other real estate taxes, Taxes for such year shall include the amount due and payable for such year. If a reduction in Taxes is obtained for any year of the Lease Term during which Tenant paid its Pro Rata Share of Basic Costs, then Basic Costs for such year will be retroactively adjusted and Landlord shall provide Tenant with a credit, if any, based on such adjustment. If requested by Tenant, Landlord shall, in good faith and acting reasonably, challenge the tax valuation of the Building and/or Property. 8. All landscape expenses and costs of maintaining, repairing, resurfacing, resealing and striping of the parking areas and garages of the Property 9. Cost of all maintenance service agreements, including those for equipment, alarm service, window cleaning, drapery or venetian blind cleaning, janitorial services, pest control, uniform supply, plant maintenance, landscaping, and any parking equipment. 10. Cost of all other repairs, replacements and general maintenance of the Property and Building neither specified above nor directly billed to tenants, and all similar common area costs of the Property allocable to the Building. 11. The amortized cost of capital improvements made to the Building or the Property after the Commencement Date which are: (a) primarily for the purpose of reducing 17 19 operating expense costs or otherwise improving the operating efficiency of the Property or Building; or (b) required to comply with any laws, rules or regulations of any governmental authority enacted after the Commencement Date (unless such law must be complied with due solely to another tenant's use of the Building or Property). The cost of such capital improvements shall be amortized over a period of the useful life of such improvement and shall, at Landlord's option, include interest at a rate that is reasonably equivalent to the interest rate that Landlord would be required to pay to finance the cost of the capital improvement in question as of the date such capital improvement is performed, provided if the savings generated from any capital improvement are sufficient to pay back the cost of such improvement over a period shorter than the useful life of such improvement, Landlord may amortize the cost of such capital improvement over the payback period. 12. Any other expense or charge of any nature whatsoever which, in accordance with general industry practice with respect to the operation of a comparable first-class office building, would be construed as an operating expense. Basic Costs shall not include (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) the cost of capital improvements (except as set forth above in subparagraph 11); (IV) executives' salaries above the grade of Building manager; (V) costs reimbursed to Landlord through proceeds of insurance to the extent the proceeds are compensation for expenses which were previously included in Basic 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 and deductible amounts paid by Landlord under any insurance policy; (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 Property or 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 Property or 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 (both principal and interest); (X) costs resulting from the correction of any patent or 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 Property; (XIV) damages incurred by Landlord for any default, negligent or wrongful act, breach, claim, judgment or settlement; and (XV) structural replacements (including replacements to the roof and foundations). If the Building is not at least ninety-five percent (95%) occupied during any calendar year of the Lease Term or if Landlord is not supplying services to at least ninety-five percent (95%) of the total Rentable Area of the Building at any time during any calendar year of the Lease Term, actual Basic Costs for purposes hereof shall, at Landlord's option, be determined as if the Building had been ninety-five percent (95%) occupied and Landlord had been supplying services to ninety-five percent (95%) of the Rentable Area of the Building during such year. Any necessary extrapolation of Basic Costs under this Article shall be performed by adjusting the cost of those components of Basic Costs that are impacted by changes in the occupancy of the Building (including, at Landlord's option, Taxes) to the cost that would have been incurred if the Building had been ninety-five percent (95%) occupied and 18 20 Landlord had been supplying services to ninety-five percent (95%) of the Rentable Area of the Building. In no event shall Landlord be entitled to collect more than the actual Basic Costs incurred. C. Tenant, within three (3) years after receiving Landlord's statement of actual Basic Costs for a particular calendar year (or up to five (5) years if Tenant can demonstrate a reasonable basis to believe prior statements might be incorrect), shall have the right to provide Landlord with written notice (the "Review Notice") of its intent to review Landlord's books and records relating to the Basic Costs for such calendar year. Within a reasonable time after receipt of a timely Review Notice, Landlord shall make such books and records available to Tenant or Tenant's agent for its review at either Landlord's home office or at the office of the Building, provided that if Tenant retains an agent to review Landlord's books and records for any calendar year, such agent must be CPA firm licensed to do business in the state. in which the Building is located. Tenant shall be solely responsible for any and all costs, expenses and fees incurred by Tenant or Tenant's agent in connection with such review, provided that if such review determines that Basic Costs were overstated by five percent (5%) or more, Landlord shall pay the cost of such review. If Tenant elects to review Landlord's books and records, within thirty (30) days after such books and records are made available to Tenant, Tenant shall have the right to give Landlord written notice stating in reasonable detail any objection to Landlord's statement of actual Basic Costs for such calendar year. If Tenant fails to give Landlord written notice of objection within such thirty (30) day period or fails to provide Landlord with a Review Notice within the period provided above, Tenant shall be deemed to have approved Landlord's statement of Basic Costs in all respects and shall thereafter be barred from raising any claims with respect thereto. Upon Landlord's receipt of a timely objection notice from Tenant, Landlord and Tenant shall work together in good faith to resolve the discrepancy between Landlord's statement and Tenant's review. If Landlord and Tenant determine that Basic Costs for the calendar year in question are less than reported, Landlord shall provide Tenant with a credit against future Base Rental in the amount of any overpayment by Tenant. Likewise, if Landlord and Tenant determine that Basic Costs for the calendar year in question are greater than reported, Tenant shall forthwith pay to Landlord the amount of underpayment by Tenant. Any information obtained by Tenant pursuant to the provisions of this Section shall be treated as confidential. Notwithstanding anything herein to the contrary, Tenant shall not be permitted to examine Landlord's books arid records or to dispute any statement of Basic Costs unless Tenant has paid to Landlord the amount due as shown on Landlord's statement of actual Basic Costs, said payment being a condition precedent to Tenant's right to examine Landlord's books and records. D. Tenant covenants and agrees to pay to Landlord during the Lease Term, without any setoff or deduction whatsoever except as otherwise set forth in this Lease, the full amount of all Base Rental and Additional Base Rental due hereunder. In addition, Tenant shall pay and be liable for, as additional rent, all rental, sales and use taxes or other similar taxes, (other than gross or net income taxes) if any, levied or imposed by any city, state, county or other governmental body having authority, such payments to be in addition to all other payments required to be paid to Landlord by Tenant under the terms and conditions of this Lease. Any such payments shall be paid concurrently with the payments of the Rent on which the tax is based. The Base Rental, Tenant's Pro Rata Share of Basic Costs and any recurring monthly charges due hereunder shall be due and payable in advance on the first day of each calendar month during the Lease Term without demand, provided that the installment of Base Rental for the first full calendar month of the Lease Term shall be payable two (2) days after Landlord 19 21 gives Tenant the 30-Day Notice described in Section 3(A) above. All other items of Rent shall be due and payable by Tenant on or before ten (10) days after billing by Landlord. If the Lease Term commences on a day other than the first day of a calendar month, then the monthly Base Rental and Tenant's Pro Rata Share of Basic Costs for such month shall be prorated for the number of days in such month occurring within the Lease Term based on a fraction, the numerator of which is the number of days of the Lease Term that fell within such calendar month and the denominator of which is the number of days in such month. All such payments shall be by a good and sufficient check in lawful money of the United States. No payment by Tenant or receipt or acceptance by Landlord of a lesser amount than the correct amount of Rent due under this Lease shall be deemed to be other than a payment on account of the earliest Rent due hereunder, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance or pursue any other available remedy. The acceptance by Landlord of any Rent on a date after the due date of such payment shall not be construed to be a waiver of Landlord's right to declare a default for any other late payment. Tenant's covenant to pay Rent shall be independent of every other covenant set forth in. this Lease. E. All Rent not paid within five (5) days of the date it is due and payable shall bear interest from the date due until paid at fourteen percent (14%) per annum. In addition, if Tenant fails to pay any installment of Rent within five (5) days after receipt of written notice that it is overdue and payable hereunder, a service fee equal to four percent (4%) of such unpaid amount will be due and payable immediately by Tenant to Landlord. F. In lieu of requiring Tenant to pay Rent by good and sufficient check in the manner described in Section 7(D) above, and subject to Tenant's approval (which may be withheld in Tenant's sole discretion), Tenant shall pay Rent by means of an automated debit system (the "Automatic Debit System") whereby any or all payments of Rent shall be debited from Tenant's account in a bank or financial institution designated by Tenant and credited to Landlord's account in a bank or financial institution designated by Landlord. In the event Landlord desires, and Tenant agrees, to have Tenant pay all or any portion of Rent by means of the Automatic Debit System, Tenant, within thirty (30) days after written request by Landlord, shall execute and deliver to Landlord any authorizations, certificates or other documentation as may be required to establish and give effect to the Automatic Debit System. If Landlord elects to have less than all items of Rent paid by the Automatic Debit System, Landlord shall advise Tenant in writing as to those items of Rent that will be paid by the Automatic Debit System (e.g. Base Rental only or Base Rental and Tenant's Pro Rata Share of Basic Costs only). Either party shall have the right to change its bank or financial institution from time to time, provided that Tenant, no less than thirty (30) days prior to the effective date of any such change, shall provide Landlord with written notice of such change and any and all authorizations, certificates or other documentation as may be required to establish and give effect to the Automatic Debit System at Tenant's new bank or financial institution. Tenant shall promptly pay all service fees and other charges imposed upon Landlord or Tenant in connection with the Automatic Debit System, including, without limitation, any charges resulting from insufficient funds in Tenant's bank account. In the event that any Rent is not paid on time as a result of insufficient funds in Tenant's account, Tenant shall be liable for any interest and/or service fee in accordance with Section 7(E) above. Tenant shall remain liable to Landlord for all payments of Rent due hereunder regardless of whether Tenant's account is incorrectly debited in any given month, it 20 22 being agreed that a debit of less than the full amount of Rent due shall not be construed as a waiver by Landlord of its right to receive any unpaid balance of Rent. ARTICLE 8: USE. The Premises shall be used for the Permitted Use and for no other purpose. Tenant agrees not to use or permit the use of the Premises for any purpose which is, in Landlord's reasonable opinion, illegal, dangerous to life, limb or property or which creates a nuisance or which would increase the cost of insurance coverage with respect to the Building. Tenant shall conduct its business and control its agents, servants, contractors, employees, customers, licensees, and invitees in such a manner as not to interfere with, annoy or disturb other tenants, or in any way interfere with Landlord in the management and operation of the Building. Tenant will maintain the Premises in a clean and healthful condition, and comply with all laws, ordinances, orders, rules and regulations of any governmental entity with reference to the operation of Tenant's business and to the use, condition, configuration or occupancy of the Premises, including without limitation, the Americans with Disabilities Act (collectively referred to as "Laws"). Landlord will maintain the Building, Property and the Common Areas in a clean and healthful condition, and to a condition consistent with a first class office building, and comply with all laws, ordinances, orders, rules and regulations of any governmental entity with reference to the use, condition, configuration or occupancy of the Building (excluding areas leased to tenants), including without limitation, the Laws. Tenant, within ten (10) days after receipt thereof, shall provide Landlord with copies of any notices it receives with respect to a violation or alleged violation of any Laws. Tenant will comply with the rules and regulations of the Building attached hereto as Exhibit B and such other rules and regulations relating to Building operations adopted and altered by Landlord from time to time and will cause all of its agents, servants, contractors, employees, customers, licensees and invitees to do so. All changes to such rules and regulations shall be reasonable, shall not be inconsistent with the terms of this Lease, and shall be sent by Landlord to Tenant in writing. ARTICLE 9: SECURITY DEPOSIT. A. Tenant shall deposit with Landlord the following amounts on the dates set forth below to serve as a security deposit under this Lease (collectively the "Security Deposit"): 1. One Hundred Thousand and no/100 Dollars ($100,000.00) upon execution of this Lease by Tenant and Landlord; 2. An additional Two Hundred Thousand and no/100 Dollars ($200,000.00) upon commencement of construction of Tenant's improvements in the Premises; 3. An additional Two Hundred Thousand and no/100 Dollars ($200,000.00) on the Commencement Date. 4. An additional Two Hundred Fifty Thousand and no/100 Dollars ($250,000.00) shall be required if Tenant's Working Capital (as defined below) is less than Two Million Five Hundred Thousand and no/100 Dollars ($2,500,000.00) as of the Commencement Date. 21 23 5. If the Initial Premises is increased in size pursuant to the Expansion Option defined in Section 5(B), then the amount of the Security Deposit shall be proportionately increased. B. As used herein, "Working Capital" means from time to time the amount determined by subtracting the aggregate of all current liabilities from the aggregate of all current assets of Tenant. For purposes of this definition, deferred revenue shall not be considered a current liability. C. All such deposits constituting the Security Deposit shall, at Tenant's option, be made in the form of cash or in the form of a letter of credit issued by a financial institution, and upon such terms, as may be reasonably approved by Landlord. Any letter of credit delivered by Tenant shall have a minimum term of one (1) year, and shall be renewed by Tenant on an annual basis for so long as Tenant elects to deposit a letter of credit instead of cash hereunder. If Landlord is not provided notice of such renewal at least fifteen (15) days prior to the expiration date of the then current letter of credit, Landlord may draw down the entire amount of the current letter of credit. Without limiting the foregoing, the issuing bank must have assets of at least $100,000,000, and such letter of credit must be irrevocable and subject to no conditions other than Landlord's presentation thereof to the issuing bank with a demand for payment that certifies that an Event of Default (as defined in this Lease) has occurred under this Lease and that Landlord is entitled to draw on the letter of credit in accordance with and pursuant to this Lease. D. Once established, the Security Deposit and Additional Security Deposit, if any, shall be reduced by twenty percent (20%) of its maximum amount on each of the first through fifth anniversaries of the Commencement Date, provided that on each such anniversary date Tenant has Working Capital of at least Two Million Five Hundred Thousand and no/100 Dollars ($2,500,000). Such reduction shall be cumulative, so that if a reduction is not made in one year but is made in the Subsequent year, the reduction in the second year shall be forty percent (40%) of the maximum amount of the Security Deposit. In no event shall a reduction in the Security Deposit or the Additional Security Deposit, if any, be made if Tenant is then in default hereunder or if there exists a state of circumstances which with the giving of notice or passage of time or both would constitute a default hereunder. Provided Tenant is not in default at the end of the seventh (7th) year of the Lease Term, Tenant shall have no further obligation to make the Security Deposit or Additional Security Deposit, if any, for the remainder of the Lease Term, and Landlord shall return the Security Deposit and the Additional Security Deposit, if any, to Tenant, regardless of the level of Tenant's Working Capital at such date. E. The Security Deposit shall not be considered an advance payment of Rent or a measure of Tenant's liability for damages. Landlord may, from time to time, without prejudice to any other remedy, use all or a portion of the Security Deposit to make good any arrearage of Rent, to repair damages to the Premises, to clean the Premises upon termination of this Lease or otherwise to satisfy any other covenant or obligation of Tenant hereunder, but only to the extent that Tenant is obligated to perform the act or make the payment for which the Security Deposit is to be used by Landlord. Following any such application of the Security Deposit, Tenant shall pay to Landlord on demand the amount so applied in order to restore the Security Deposit to its original amount. If Tenant is not in default at the termination of this Lease, after Tenant surrenders the Premises to Landlord in accordance with this Lease and all amounts due Landlord from Tenant are finally determined and paid by Tenant or through application of the Security Deposit, the balance of the Security Deposit remaining after any such application shall be 22 24 returned to Tenant. If Landlord transfers its interest in the Premises during the Lease Term, Landlord may assign the Security Deposit to the transferee and thereafter shall have no further liability for the return of such Security Deposit, so long as the transferee assumes this Lease, acknowledges receipt of the Security Deposit and agrees to return the same to Tenant in accordance with the provisions of this Lease. Tenant agrees to look solely to such transferee or assignee for the return of the Security Deposit. Landlord and its successors and assigns shall not be bound by any actual or attempted assignment or encumbrance of the Security Deposit by Tenant, provided, however, if Tenant's interest in this Lease has been assigned, Landlord shall, provided that Landlord has been furnished with a fully executed copy of the agreement assigning such Security Deposit, return the Security Deposit to such assignee in accordance with the terms and conditions hereof. If Landlord returns the Security Deposit to Tenant's assignee as aforesaid, Landlord will have no further obligation to any party with respect thereto. Landlord shall not be required to keep the Security Deposit separate from its other accounts. In no event shall the Security Deposit serve as a limitation on the damages payable by Tenant as a result of its default under this Lease. ARTICLE 10: SERVICES TO BE FURNISHED BY LANDLORD. A. Landlord, as part of Basic Costs (except as otherwise provided), agrees to furnish Tenant the following services: 1. Hot and cold water for use in the lavatories on the floor(s) on which the Premises is located. If Tenant desires water in the Premises for any approved reason, including a private lavatory or kitchen, cold water shall be supplied, at Tenant's sole cost and expense, from the Building water main through a line and fixtures installed at Tenant's sole cost and expense with the prior reasonable consent of Landlord. If Tenant desires hot water in the Premises, Tenant, at its sole cost and expense and subject to the prior reasonable consent of Landlord, may install a hot water heater in the Premises. Tenant shall be solely responsible for maintenance and repair of any such hot water heater. 2. Central heat, ventilating and air conditioning at such temperatures and in such amounts as are standard for first-class office buildings of similar class, size, age and location, or as required by governmental authority; provided that such heat, ventilation and air conditioning shall in any event be installed, maintained and operated to provide heating and cooling to the standard set forth on Exhibit D-2 hereto. In the event that Tenant requires central heat, ventilation or air conditioning at hours other than Normal Business Hours, such central heat, ventilation or air conditioning shall be furnished when and as desired by Tenant, unless fire services so required cannot be activated by Tenant using the Building's automated system, but must be activated by Landlord using the Building's central systems, in which event Tenant must deliver a request for such services (which may be by telephone or in person) to Landlord at the office of the Building prior to 3:00 p.m. of the same day. Tenant shall pay Landlord, as Additional Base Rental, the actual direct utility costs of additional service and a reasonable charge for the extra wear and tear on Building equipment, without a profit to or overhead charge by Landlord. 3. Maintenance and repair of all Common Areas in the manner and to the extent standard for first-class office buildings of similar class, size, age and location. 23 25 4. Janitorial services, consistent with those provided to other first class office buildings in Bellevue, Washington, Monday through Thursday and Sunday nights; provided, however, if Tenant's use, floor covering or other improvements require special services, Tenant shall pay the additional cost reasonably attributable thereto as Additional Base Rental. In the event the janitorial services provided to the Premises are not at or above a level comparable to those provided to comparable first class office buildings, Tenant shall so notify Landlord in writing, and if the level of services does not rise to a level at least comparable with those provided to other comparable first class office buildings within sixty (60) days after Landlord's receipt of such notice, Tenant may arrange for its own janitorial service for the Premises and Tenant's Basic Costs will not include a charge for such service. 5. Passenger elevator service during and after Normal Business Hours in common with other tenants of the Building. 6. Electricity to the Premises during and after Normal Business Hours for Tenant's office use, in accordance with and subject to the terms and conditions set forth in Article 14 of this Lease. Landlord warrants that the electricity and air-conditioning available in the Premises will be sufficient for the normal operation of the equipment described on Exhibit F attached hereto. 7. Landlord shall provide, at Landlord's expense, a multi-level card key security system that will control access to the Building and the garage and elevators therein. Tenant shall have access to and use of the Premises 24 hours a day, 7 days a week. Additional card readers may be installed in the stairwells to facilitate controlled access between Tenant's floors by way of the stairwells. Tenant shall bear the cost of any such additional card readers or other security measures. Tenant shall have the right at any time to install such other or additional security systems in or about the Premises to control access to and from the Premises, including, but not limited, camera surveillance systems, controlling and monitoring access to and from the Premises from corridors and stairwells, all of which may be independent of Landlord's access control system, and Tenant shall have the right to limit and restrict card access thereto; provided that Landlord shall be provided a card for access in emergencies, maintenance or as otherwise permitted pursuant to this Lease. The cost of such Tenant's security system shall be Tenant's sole cost and expense. 8. Such other reasonable services as are commonly provided to tenants in comparable first class office buildings in the area. B. The failure by Landlord to any extent to furnish, or the interruption or termination of, any services in whole or in part, resulting from adherence to laws, regulations and administrative orders, wear, use, repairs, improvements, alterations or any causes beyond the reasonable control of Landlord shall not render Landlord liable in any respect nor be construed as a constructive eviction of Tenant, nor give rise to an abatement of Rent, nor relieve Tenant from the obligation to fulfill any covenant or agreement hereof, provided that if any such interruption or termination continues for seventy-two (72) hours and was not caused by Tenant, Rent shall thereafter abate to the extent the Premises are rendered untenantable as a result thereof as Tenant's sole and exclusive remedy as a result of such interruption. Should any of the equipment or machinery used in the provision of such services for any cause cease to function properly, Landlord shall use reasonable diligence to repair such equipment or machinery. 24 26 C. Tenant expressly acknowledges that if Landlord, from time to time, elects to provide security services, Landlord shall not be deemed to have warranted the efficiency of any security personnel, service, procedures or equipment and Landlord shall not be liable in any manner for the failure of any such security personnel, services, procedures or equipment to prevent or control, or apprehend anyone suspected of personal injury, property damage or any criminal conduct in, on or around the Property. ARTICLE 11: LEASEHOLD IMPROVEMENTS. Any trade fixtures, unattached and movable equipment or furniture, or other personalty brought into the Premises by Tenant ("Tenant's Property") shall be owned and insured by Tenant. Tenant shall remove all such Tenant's Property from the Premises in accordance with the terms of Article 37 hereof. Any and all alterations, additions and improvements to the Premises, including any built-in furniture (but excluding any trade fixtures) (collectively, "Leasehold Improvements") shall be owned and insured by Landlord and shall remain upon the Premises, all without compensation, allowance or credit to Tenant. Upon expiration of this Lease, the Leasehold Improvements shall remain with and as part of the Building and are not required to be removed by Tenant. Upon vacation of the Premises by Tenant, Tenant shall leave the Premises in a broom clean condition, less ordinary wear and tear and damage caused by fire or casualty. Tenant, at its sole cost and expense, may install a standby generator in the Building garage in a location acceptable to Landlord and Tenant. Tenant shall be responsible for obtaining all permits and shall be responsible for operating such generator in conformity with all applicable codes and regulations and Building rules and regulations. ARTICLE 12: SIGNAGE. Subject to the conditions listed below, Tenant shall be provided signage on the Building monument located at the Building entrance and one (1) exterior sign on the Building, provided such signs comply with the Signage Criteria attached as Exhibit E hereto and with all applicable laws and codes. The cost of such exterior signs shall be borne by Tenant, which Tenant may pay from the Allowance. Landlord shall provide Tenant identification on the Building directory, at Landlord's expense. The cost of Tenant's interior signage, except for the Building's lobby directory, will be charged against the tenant improvement Allowance. The Building is currently known as Sunset North Building 4. Subject to the conditions listed below, Landlord shall not change (i) the name of the Building to include the name of an entity that, in the reasonable judgment of Tenant, directly competes with Tenant in the Windows CE tools, services or applications software development business as such entity's primary line of business, or (ii) change the name of the Building to include the name or identity of another tenant in the Campus without Tenant's prior written consent, which shall not be unreasonably withheld. Tenant's rights to place exterior signage on the Building or to enforce any rights granted above with respect to the name of the Building shall be contingent upon the following conditions being satisfied as of the date in question: 1. Tenant is not in default under this Lease beyond any applicable cure periods; 2. Tenant has not previously assigned its interest in this Lease (other than pursuant to a Corporate Transfer); and 25 27 3. Tenant leases and occupies at least two full floors of the Building. ARTICLE 13: REPAIRS AND ALTERATIONS. A. Except to the extent such obligations are imposed upon Landlord hereunder, Tenant, at its sole cost and expense, shall perform all maintenance and repairs to the Premises as are necessary to keep the same in good condition and repair throughout the entire Lease Term, reasonable wear and tear and damage by fire or casualty excepted. Tenant's repair and maintenance obligations with respect to the Premises shall include, without limitation, any necessary repairs with respect to: (1) any carpet or other floor covering, (2) any interior partitions, (3) any doors, (4) the interior side of any demising walls, (5) any telephone and computer cabling that serves Tenant's equipment exclusively, (6) any supplemental air conditioning units, private showers and kitchens, including any plumbing in connection therewith, and similar facilities serving Tenant exclusively, and (7) any alterations, additions or improvements performed by contractors retained by Tenant. All such work shall be performed in accordance with Section 13(B) below and the rules, policies and procedures reasonably enacted by Landlord from time to time for the performance of work in the Building. If Tenant fails to make any necessary repairs to the Premises which are required to be made by Tenant within a reasonable time after written notice from Landlord (except in case of emergency), Landlord may, at its option, make such repairs, and Tenant shall pay the cost thereof to the Landlord on demand as Additional Base Rental, together with an administrative charge in an amount equal to ten percent (10%) of the cost of such repairs. Landlord shall, at its expense (except as included in Basic Costs), keep and maintain in good repair and working order, in accordance with the standards of a first-class office building in the area, and make all repairs to and perform necessary maintenance upon: (a) all structural elements of the Building (including the roof and roof membrane, and foundations); and (b) all elevator, mechanical, electrical and plumbing systems that serve the Building in general; and (c) the Common Areas, Property and Building facilities common to all tenants including, but not limited to, the ceilings, walls and floors in the Common Areas. B. Tenant shall not make or allow to be made any alterations, additions or improvements to the Premises without first obtaining the written consent of Landlord in each such instance, which consent Landlord shall not unreasonably withhold. Landlord's consent shall be deemed granted if Landlord does not respond to Tenant's written request for approval within ten (10) business days (and in such event, Landlord shall be deemed to have elected not to require Tenant to remove such alterations or improvements at the expiration of the Lease). Prior to commencing any such work and as a condition to obtaining Landlord's consent, Tenant must furnish Landlord with plans and specifications reasonably acceptable to Landlord; names and addresses of contractors reasonably acceptable to Landlord; copies of contracts; necessary permits and approvals; evidence of contractor's and subcontractor's insurance in accordance with Section 19(B) hereof; and payment bond or other security, all in form and amount satisfactory to Landlord. All such improvements, alterations or additions shall be constructed in a good and workmanlike manner using Building Standard materials or other new materials of equal or greater quality. Landlord, to the extent reasonably necessary to avoid any disruption to the tenants and occupants of the Building, shall have the right to designate the time when any such alterations, additions and improvements may be performed and to otherwise designate reasonable rules, regulations and procedures for the performance of work in the Building. Upon 26 28 completion, Tenant shall furnish "as-built" plans, contractor's affidavits and full and final waivers of lien and receipted bills covering all labor and materials. All improvements, alterations and additions shall comply with all insurance requirements, codes, ordinances, laws and regulations, including without limitation, the Americans with Disabilities Act. Tenant shall reimburse Landlord upon demand as Additional Base Rental for all sums, if any, expanded by Landlord for third party examination of the architectural, mechanical, electric and plumbing plans for any alterations, additions or improvements. In addition, if Landlord so requests, Landlord shall be entitled to oversee the construction of any alterations, additions or improvements that may affect the structure of the Building or any of the mechanical, electrical, plumbing or life safety systems of the Building and Tenant shall pay Landlord the reasonable costs incurred by Landlord for any such reasonably necessary oversight. Landlord's approval of Tenant's plans and specifications for any work performed for or on behalf of Tenant shall not be deemed to be a representation by Landlord that such plans and specifications comply with applicable insurance requirements, building codes, ordinances, laws or regulations or that the alterations, additions and improvements constructed in accordance with such plans and specifications will be adequate for Tenant's use. Notwithstanding the foregoing, 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. ARTICLE 14: USE OF ELECTRICAL SERVICE BY TENANT. A. All electricity used by Tenant in the Premises shall be paid for by Tenant by a separate charge billed directly to Tenant by Landlord and payable by Tenant as Additional Base Rental within ten (10) days after billing. It is understood that electrical service to the Premises may be furnished by one or more companies providing electrical generation, transmission and/or distribution services and that the cost of electricity may be billed as a single charge or divided into and billed in a variety of categories such as distribution charges, transmission charges, generation charges, public good charges or other similar categories. Landlord shall have the exclusive right to select the company(ies) providing electrical service to the Building, Premises and Property, to aggregate the electrical service for the Building, Premises and Property with other buildings, to purchase electricity for the Building, Premises and Property through a broker and/or buyers group and to change the providers and/or manner of purchasing electricity from time to time so long as and to the extent that such does not interfere with Tenant's use of the Premises in accordance with this Lease. Landlord shall make available to Tenant upon Tenant's request, such information and documents and Tenant shall reasonably request to calculate and verify charges to Tenant for electricity usage by Tenant. B. Tenant's use of electrical service in the Premises shall not exceed, either in voltage, rated capacity, or overall load, the design specifications for the Building (the electrical design specifications for the Building are set forth on Exhibit D-2 hereto). In the event Tenant shall consume (or request that it be allowed to consume) electrical service in excess of the design 27 29 specifications for the Building, Landlord may refuse to consent to such excess usage or may condition its consent to such excess usage upon such conditions as Landlord reasonably elects (including the installation of utility service upgrades, submeters, air handlers or cooling units), and all such additional usage (to the extent permitted by law), installation and maintenance thereof shall be paid for by Tenant as Additional Base Rental. Landlord, at any time during the Lease Term, shall have the right to separately meter electrical usage for the Premises or to measure electrical usage by survey or any other method that Landlord, in its reasonable judgment, deems to be appropriate. C. Notwithstanding Section A above to the contrary, if Landlord permits Tenant to purchase electrical power for the Premises from a provider other than Landlord's designated company(ies), such provider shall be considered to be a contractor of Tenant and Tenant shall indemnify and hold Landlord harmless from such provider's acts and omissions while in, or in connection with their services to, the Building or Premises in accordance with the terms and conditions of Article 18. In addition, at the request of Landlord, Tenant shall allow Landlord to purchase electricity from Tenant's provider (at no additional cost or liability to Tenant and only if such provider is willing to sell such electricity to Landlord) at such rates as Landlord is able to negotiate with such provider. ARTICLE 15: ENTRY BY LANDLORD. Landlord and its agents or representatives shall have the right to enter the Premises to inspect the same, or to show the Premises to prospective purchasers, mortgagees, tenants (during the last twelve months of the Lease Term or earlier in connection with a potential relocation) or insurers, or to clean or make repairs, alterations or additions thereto, including any work that Landlord deems necessary for the safety, protection or preservation of the Building or any occupants thereof, or to facilitate repairs, alterations or additions to the Building or any other tenants' premises. Except for any entry by Landlord in an emergency situation or to provide normal cleaning and janitorial service, Landlord shall provide Tenant with reasonable prior notice of any entry into the Premises, which notice may be given verbally, and shall access the Premises only with a designated representative of Tenant being present. If reasonably necessary for the protection and safety of Tenant and its employees, Landlord shall have the right to temporarily close the Premises to perform repairs, alterations or additions in the Premises, provided that Landlord shall use reasonable efforts to perform all such work on weekends and after Normal Business Hours. Entry by Landlord hereunder shall not constitute a constructive eviction or entitle Tenant to any abatement or reduction of Rent by reason thereof. ARTICLE 16: ASSIGNMENT AND SUBLETTING. A. Tenant shall not assign, sublease, transfer or encumber this Lease or any interest therein or grant any license, concession or other right of occupancy of the Premises or any portion thereof or otherwise permit the use of the Premises or any portion thereof by any party other than Tenant (any of which events is hereinafter called a "Transfer") without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed with respect to any proposed Transfer. Landlord's consent shall not be considered unreasonably withheld if: (1) the proposed transferee's financial responsibility does not meet the same criteria Landlord uses to select Building tenants; (2) the proposed transferee's business is not suitable for the Building considering the business of the other tenants or would result in a violation of an exclusive right granted to another tenant in the Building; (3) the proposed use is different than 28 30 the Permitted Use; (4) the proposed transferee is a government agency or occupant of the Building; (5) Tenant is in Default; or (6) any portion of the Building or Premises would become subject to additional or different governmental laws or regulations as a consequence of the proposed Transfer and/or the proposed transferee's use and occupancy of the Premises in a way that would have a material adverse effect on the Premises or Building. Tenant acknowledges that the foregoing is not intended to be an exclusive list of the reasons for which Landlord may reasonably withhold its consent to a proposed Transfer. Any attempted Transfer in violation of the terms of this Article shall, at Landlord's option, be void. Consent by Landlord to one or more Transfers shall not operate as a waiver of Landlord's rights as to any subsequent Transfers. In addition, Tenant shall not, without Landlord's consent, publicly advertise the proposed rental rate for any Transfer. B. If Tenant requests Landlord's consent to a Transfer, Tenant, together with such request for consent, shall provide Landlord with the name of the proposed transferee and the nature of the business of the proposed transferee, the term, use, rental rate and all other material terms and conditions of the proposed Transfer, including, without limitation, a copy of the proposed assignment, sublease or other contractual documents and evidence satisfactory to Landlord that the proposed transferee is financially responsible. Notwithstanding Landlord's agreement to act reasonably under Section 16(A) above, with respect to Transfers other than those described in Subsection 16(E) below, if such Transfer is made for the full remaining balance of the Term, excluding extension options (whether with respect to all or only a portion or the Premises), Landlord may, within fifteen (15) business days after its receipt of all information and documentation required herein, either, (1) consent to or reasonably refuse to consent to such Transfer in writing; or (2) for any sublease or assignment of one floor or more, cancel and terminate this Lease, as to the portion of the Premises proposed to be transferred, upon thirty (30) days' notice and recapture the space proposed for such subletting or assignment. In the event Landlord consents to any such Transfer, the Transfer and consent thereto shall be in a form approved by Landlord, and, whether or not Landlord consents to such Transfer, Tenant shall bear all costs and expenses incurred by Landlord in connection with the review and approval of such documentation, which costs and expenses shall be deemed to be at least Two Hundred Fifty Dollars ($250.00), and not to exceed One Thousand Five Hundred Dollars ($1,500.00) and further provided that any net proceeds from assignment or subleasing the Premises shall be shared on an equal basis by Tenant and Landlord after deducting Tenant's reasonable subleasing/assignment costs. C. Landlord shall respond to any requested Transfer by Tenant, within fifteen (15) business days of Tenant's written request. D. If Tenant is a corporation, limited liability company or similar entity, the transfer, in a single transaction or a series of related transactions occurring within a twelve (12) month period, of 50% or more of the voting stock of Tenant shall constitute a Transfer. The preceding sentence shall not apply whenever Tenant is a corporation, the outstanding stock of which is listed on a recognized security exchange, or if at least eighty percent (80%) of its voting stock is owned by another corporation, the voting stock of which is so listed. E. Notwithstanding anything herein to the contrary, provided Tenant is not in default under this Lease, 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, a wholly owned subsidiary of Tenant or of such parent, or another affiliate which Tenant controls, is controlled by or is under common 29 31 control with Tenant, (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 and Tenant's affiliated entity. An initial public offering of Tenant's stock and any subsequent transfers shall not be considered a Transfer hereunder. A Transfer meeting all of the requirements of this Section 16(E) shall be deemed a "Corporate Transfer." F. Any Transfer consented to by Landlord in accordance with this Article 16 shall be only for the Permitted Use and for no other purpose. In no event shall any Transfer release or relieve Tenant from any obligations under this Lease. ARTICLE 17: LIENS. Tenant will not permit any mechanic's liens or other liens to be placed upon the Premises or Tenant's leasehold interest therein, the Building, or the Property. Landlord's title to the Building and Property is and always shall be paramount to the interest of Tenant, and nothing herein contained shall empower Tenant to do any act that can, shall or may encumber Landlord's title. In the event any such lien does attach, Tenant shall, within ten (10) days of notice of the filing of said lien, either discharge or bond over such lien to the satisfaction of Landlord and Landlord's Mortgagee (as hereinafter defined), and in such a manner as to remove the lien as an encumbrance against the Building and Property. If Tenant shall fail to so discharge or bond over such lien, then, in addition to any other right or remedy of Landlord, Landlord may, but shall not be obligated to bond over or discharge the same. Any amount paid by Landlord for any of the aforesaid purposes, including reasonable attorneys' fees (if and to the extent permitted by law) shall be paid by Tenant to Landlord on demand as Additional Base Rental. Landlord shall have the right to post and keep posted on the Premises any notices that may be provided by law or which Landlord may deem to be proper for the protection of Landlord, the Premises and the Building from such liens. ARTICLE 18: INDEMNITY AND WAIVER OF CLAIMS. A. Tenant shall indemnify, defend and hold Landlord, its members, principals, beneficiaries, partners, officers, directors, employees, Mortgagee(s) and agents, and the respective principals and members of any such agents (collectively the "Landlord Related Parties") harmless against and from all liabilities, obligations, damages, penalties, claims, costs, charges and expenses, including, without limitation, reasonable attorneys' fees and other professional fees (if and to the extent permitted by law), which may be imposed upon, incurred by, or asserted against Landlord or any of the Landlord Related Parties and arising, directly or indirectly, out of or in connection with the use, occupancy or maintenance of the Premises by, the rough or under Tenant including, without limitation, any of the following (to the extent they were done by, under or through the Tenant): (1) any work or thing done in, on or about the Premises or any part thereof by Tenant or any of its transferees, agents, servants, contractors, employees, customers, licensees or invitees; (2) any use, non-use, possession, occupation, condition, operation or maintenance of the Premises or any part thereof, (3) any act or omission of Tenant or any of its transferees, agents, servants, contractors, employees, customers, licensees 30 32 or invitees, regardless of whether such act or omission occurred within the Premises; (4) any injury or damage to any person or property occurring in, on or about the Premises or any part thereof, or (5) any failure on the part of Tenant to perform or comply with any of the covenants, agreements, terms or conditions contained in this Lease with which Tenant must comply or perform. B. Landlord and the Landlord Related Parties shall not be liable for, and Tenant hereby waives, all claims for loss or damage to Tenant's business or damage to person or property sustained by Tenant or any person claiming by, through or under Tenant [including Tenant's principals, agents and employees (collectively, the "Tenant Related Parties")] resulting from any accident or occurrence in, on or about the Premises, the Building or the Property, including, without limitation, claims for loss, theft or damage resulting from: (1) the Premises, Building, or Property, or any equipment or appurtenances becoming out of repair; (2) wind or weather; (3) any defect in or failure to operate, for whatever reason, any sprinkler, heating or air conditioning equipment, electric wiring, gas, water or steam pipes; (4) broken glass; (5) the backing up of any sewer pipe or downspout; (6) the bursting, leaking or running of any tank, water closet, drain or other pipe; (7) the escape of steam or water; (8) water, snow or ice being upon or coming through the roof, skylight, stairs, doorways, windows, walks or any other place upon or near the Building; (9) the falling of any fixture, plaster, tile or other material; (10) any act, omission or negligence of other tenants, licensees or any other persons or occupants of the Building or of adjoining or contiguous buildings, or owners of adjacent or contiguous property or the public, or by construction of any private, public or quasi-public work; or (11) any other cause of any nature except, as to items 1-9, where such loss or damage is due to Landlord's negligence or willful misconduct, or due to Landlord's willful failure to make repairs required to be made pursuant to other provisions of this Lease, after the expiration of a reasonable time after written notice to Landlord of the need for such repairs. To the maximum extent permitted by law, Tenant agrees to use and occupy the Premises, and to use such other portions of the Building as Tenant is herein given the right to use, at Tenant's own risk. C. 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 negligent act or willful misconduct 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. ARTICLE 19: TENANT'S INSURANCE. A. At all times commencing on and after the earlier of the Commencement Date and the date Tenant or its agents, employees or contractors enters the Premises for any purpose, Tenant shall carry and maintain, at its sole cost and expense: 31 33 1. Commercial General Liability Insurance applicable to the Premises and its appurtenances providing, on an occurrence basis, a minimum combined single limit of Two Million Dollars ($2,000,000.00), with a Contractual liability endorsement covering Tenant's indemnity obligations under this Lease. 2. All Risks of Physical Loss Insurance written at replacement cost value and with a replacement cost endorsement covering all of Tenant's Property in the Premises. 3. Workers' Compensation Insurance as required by the state of Washington and in amounts as may be required by applicable statute, and Employers' Liability Coverage of One Million Dollars ($1,000,000.00) per occurrence. 4. Whenever good business practice, in Landlord's reasonable judgment, indicates the need of additional insurance coverage or different types of insurance in connection with the Premises or Tenant's use and occupancy thereof, Tenant shall, upon request, obtain such insurance at Tenant's expense and provide Landlord with evidence thereof. B. Except for items for which Landlord is responsible under Exhibit D, the Work Letter Agreement, before any repairs, alterations, additions, improvements, or construction are undertaken by or on behalf of Tenant, Tenant shall carry and maintain, at its expense, or Tenant shall require any contractor performing work on the Premises to carry and maintain, at no expense to Landlord, in addition to Workers' Compensation Insurance as required by the jurisdiction in which the Building is located, All Risk Builder's Risk Insurance in the amount of the replacement cost of any alterations, additions or improvements (or such other amount reasonably required by Landlord) and Commercial General Liability Insurance (including, without limitation, Contractor's Liability coverage, Contractual Liability coverage and Completed Operations coverage,) written on an occurrence basis with a minimum combined single limit of Two Million Dollars ($2,000,000.00) and adding "the named Landlord hereunder (or any successor thereto) and its respective members, principals, beneficiaries, partners, officers, directors, employees, agents and any Mortgagee(s)", and other designees of Landlord as the interest of such designees shall appear, as additional insureds (collectively referred to as the "Additional Insureds"). C. Any company writing any insurance which Tenant is required to maintain or cause to be maintained pursuant to the terms of this Lease (all such insurance as well as any other insurance pertaining to the Premises or the operation of Tenant's business therein being referred to as "TENANT'S INSURANCE"), as well as the form of such insurance, shall at all times be subject to Landlord's reasonable approval, and each such insurance company shall have an A.M. Best rating of "A-" or better and shall be licensed and qualified to do business in the state in which the Premises is located. All policies evidencing Tenant's Insurance (except for Workers' Compensation Insurance) shall specify Tenant as named insured and the Additional Insureds as additional insureds. Provided that the coverage afforded Landlord and any designees of Landlord shall not be reduced or otherwise adversely affected, all of Tenant's Insurance may be carried under a blanket policy covering the Premises and any other of Tenant's locations. All policies of Tenant's Insurance shall contain endorsements that the insurer(s) will give to Landlord and its designees at least thirty (30) days' advance written notice of any cancellation, termination or lapse of said insurance. Tenant shall be solely responsible for payment of premiums for all of Tenant's Insurance. Tenant shall deliver to Landlord at least fifteen (15) days prior to the time Tenant's Insurance is first required to be carried by Tenant, and upon 32 34 happening of the casualty. Notwithstanding the foregoing, Landlord's obligation to restore the Building, and the Tenant Improvements, if any, shall not require Landlord to expend for such repair and restoration work more than the insurance proceeds actually received by the Landlord as a result of the casualty plus any deductible. Tenant shall have the right to terminate this Lease if (i) any such restoration of the Premises is not completed within 225 days after the date of such casualty and such delays prevent Tenant from occupying the Premises for Tenant's normal business operations; or (ii) the Premises are damaged within the last two (2) years of the Lease Term and such damage prevents Tenant from occupying the Premises for Tenant's normal business operations. When repairs to the Premises have been completed by Landlord, Tenant shall complete the restoration or replacement of all Tenant's Property necessary to permit Tenant's reoccupancy of the Premises, and Tenant shall present Landlord with evidence satisfactory to Landlord of Tenant's ability to pay such costs prior to Landlord's commencement of repair and restoration of the Premises. Landlord shall not be liable for any inconvenience or annoyance to Tenant or injury to the business of Tenant resulting in any way from such damage or the repair thereof, except that, subject to the provisions of the next sentence, Landlord shall allow Tenant a fair diminution of Rent on a per diem basis during the time and to the extent any damage to the Premises causes the Premises to be rendered untenantable and not used by Tenant. If the Premises or any other portion of the Building is damaged by fire or other casualty resulting from the negligence of Tenant or any Tenant Related Parties, the Rent hereunder shall not be diminished during any period during which the Premises, or any portion thereof, is untenantable (except to the extent Landlord is entitled to be reimbursed by the proceeds of any rental interruption insurance), and Tenant shall be liable to Landlord for the cost of the repair and restoration of the Building caused thereby to the extent such cost and expense is not covered by insurance proceeds. Landlord and Tenant hereby waive the provisions of any law from time to time in effect during the Lease Term relating to the effect upon leases of partial or total destruction of leased property. Landlord and Tenant agree that their respective rights in the event of any damage to or destruction of the Premises shall be those specifically set forth herein. Notwithstanding anything to the contrary contained in this Article 22 above, in the event Landlord (i) is obligated or elects to restore the Premises or the Building after any casualty; (ii) such casualty has not had a material adverse effect on the Premises or Tenant's ability to use the Premises; and (iii) Tenant's continued occupancy of the Premises will not materially adversely affect Landlord's construction activity in restoring the Premises and the Building, nor prohibit or restrict Landlord's ability to obtain any necessary permits for such restoration work, then Landlord shall not terminate Tenant's lease as a result of such casualty. ARTICLE 23: INTENTIONALLY DELETED ARTICLE 24: CONDEMNATION If (a) the whole or any substantial part of the Premises or (b) any portion of the Building or Property which would leave the remainder of the Building unsuitable for use as an office building comparable to its use on the Commencement Date, shall be taken or condemned for any public or quasi-public use under governmental law, ordinance or regulation, or by right of eminent domain, or by private purchase in lieu thereof, then Landlord may, at its option, terminate this Lease effective as of the date the physical taking of said Premises or said portion of the Building or Property shall occur. In the event this Lease is not terminated, the Rentable Area of the Building, the Rentable Area of the Premises and Tenant's Pro Rata Share shall be appropriately adjusted. In addition, Rent for any portion of the Premises so taken or condemned 35 35 shall be abated during the unexpired term of this Lease effective when the physical taking of said portion of the Premises shall occur. All compensation awarded for any such taking or condemnation, or sale proceeds in lieu thereof, shall be the property of Landlord, and Tenant shall have no claim thereto, the same being hereby expressly waived by Tenant, except for any portions of such award or proceeds which are specifically allocated by the condemning or purchasing party for the taking of or damage to trade fixtures of Tenant, which Tenant specifically reserves to itself. ARTICLE 25: EVENTS OF DEFAULT The following events shall be deemed to be events of default under this Lease: A. Tenant shall fail to pay when due any Base Rental, Additional Base Rental or other Rent under this Lease and such failure shall continue for five (5) business days after receipt of written notice from Landlord (hereinafter sometimes referred to as a "Monetary Default"). B. Any failure by Tenant (other than a Monetary Default) to comply with any term, provision or covenant of this Lease, including, without limitation, the rules and regulations, which failure is not cured within thirty (30) days after receipt of notice of the occurrence of such failure, provided that if any such failure creates a hazardous condition, such failure must be cured immediately, and further provided, however, that with respect to any such nonhazardous default capable of being cured by Tenant which cannot be cured within thirty (30) days, the default shall not be deemed to be uncured if Tenant commences to cure within thirty (30) days and for so long as Tenant is diligently pursuing the care thereof. C. Tenant shall become insolvent, or shall make a transfer in fraud of creditors, or shall commit an act of bankruptcy or shall make an assignment for the benefit of creditors, or Tenant shall admit in writing its inability to pay its debts as they become due. D. Tenant shall file a petition under any section or chapter of the United States Bankruptcy Code, as amended, pertaining to bankruptcy, or under any similar law or statute of the United States or any State thereof, or Tenant shall be adjudged bankrupt or insolvent in proceedings filed against Tenant thereunder; or a petition or answer proposing the adjudication of Tenant as a debtor or its reorganization under any present or future federal or state bankruptcy or similar law shall be filed in any court and such petition or answer shall not be discharged or denied within sixty (60) days after the filing thereof. E. A receiver or trustee shall be appointed for all or substantially all of the assets of Tenant or of the Premises or of any of Tenant's Property located thereon in any proceeding brought by Tenant, or any such receiver or trustee shall be appointed in any proceeding brought against Tenant and shall not be discharged within sixty (60) days after such appointment or Tenant shall consent to or acquiesce in such appointment. F. The leasehold estate hereunder shall be taken on execution or other process of law or equity in any action against Tenant. G. The liquidation, termination, dissolution, forfeiture of right to do business, or death of Tenant. 36 36 ARTICLE 26: REMEDIES A. Upon the occurrence of any event or events of default under this Lease, Landlord shall have the option to pursue any one or more of the following remedies without any notice (except as expressly prescribed in Article 25 above) or demand whatsoever (and without limiting the generality of the foregoing, Tenant hereby specifically waives notice and demand for payment of Rent or other obligations due [except as expressly prescribed in Article 25 above] and waives any and all other notices or demand requirements imposed by applicable law): 1. Terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord. If Tenant fails to surrender the Premises upon termination of the Lease hereunder, Landlord may without prejudice to any other remedy which it may have, enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying said Premises, or any part thereof, and Tenant hereby agrees to pay to Landlord on demand the amount of all loss and damage, including consequential damage, which Landlord may suffer by reason of such termination (but only to the extent proximately caused by such damage), whether through inability to relet the Premises on satisfactory terms or otherwise, specifically including but not limited to all Costs of Reletting (hereinafter defined) and any deficiency that may arise by reason of any reletting or failure to relet. 2. Enter upon and take possession of the Premises and expel or remove Tenant or any other person who may be occupying said Premises, or any part thereof, without having any civil or criminal liability therefor and without terminating this Lease. Landlord may (but shall be under no obligation to) relet the Premises or any part thereof for the account of Tenant, in the name of Tenant or Landlord or otherwise, without notice to Tenant for such term or terms which may be greater or less than the period which would otherwise have constituted the balance of the Lease Term and on such conditions (which may include concessions, free rent and alterations of the Premises) and for such uses as Landlord, acting reasonably, shall determine, and Landlord may collect and receive any rents payable by reason of such reletting. Tenant agrees to pay Landlord on demand all reasonable Costs of Reletting and any deficiency that may arise by reason of such reletting or failure to relet. Landlord shall not be responsible or liable for any failure to relet the Premises or any part thereof or for any failure to collect any Rent due upon any such reletting so long as Landlord acts in good faith and makes reasonable efforts to mitigate its damages. No such re-entry or taking of possession of the Premises by Landlord shall be construed as an election on Landlord's part to terminate this Lease unless a written notice of such termination is given to Tenant. 3. Enter upon the Premises without having any civil or criminal liability therefor, and do whatever Tenant's obligated to do under the terms of this Lease, and Tenant agrees to reimburse Landlord on demand for any reasonable expense which Landlord may incur in thus effecting compliance with Tenant's obligations under this Lease together with interest at the lesser of a per annum rate equal to: (a) the Maximum Rate, or (b) the Prime Rate plus five percent (5%). Maximum Rate means the maximum rate of interest which may be charged without violation of applicable usury laws. 4. In order to regain possession of the Premises and to deny Tenant access thereto in any instance in which Landlord has terminated this Lease or Tenant's right to possession, or to limit access to the Premises in accordance with local law in the event of a 37 37 default by Tenant, Landlord or its agent may, at the expense and liability of the Tenant, alter or change any or all locks or other security devices controlling access to the Premises without posting or giving notice of any kind to Tenant. Landlord shall have no obligation to provide Tenant a key or grant Tenant access to the Premises so long as Tenant is in default under this Lease which default has not been cured within any time limits granted pursuant to this Lease. Tenant shall not be entitled to recover possession of the Premises, terminate this Lease, or recover any actual, incidental, consequential, punitive, statutory or other damages or award of attorneys' fees, by reason of Landlord's alteration or change of any lock or other security device as a result of any uncured default of Tenant. Landlord may, without notice, remove and either dispose of or store, at Tenant's expense, any property belonging to Tenant that remains in the Premises after Landlord has regained possession thereof. 5. Terminate this Lease, in which event, Tenant shall immediately surrender the Premises to Landlord and pay to Landlord the sum of: (a) all Rent accrued hereunder through the date of termination, and, upon Landlord's determination thereof, (b) an amount equal to: the total Rent that Tenant would have been required to pay for the remainder of the Lease Term discounted to present value at the Prime Rate then in effect, minus the then present fair rental value of the Premises for the remainder of the Lease Term, similarly discounted, after deducting all anticipated Costs of Reletting (as defined below). B. For purposes of this Lease, the term "COSTS OF RELETTING" shall mean all reasonable costs and expenses incurred by Landlord in connection with the reletting of the Premises, including without limitation, the cost of cleaning, renovation, repairs, decoration and alteration of the Premises for a new tenant or tenants, advertisement, marketing, brokerage and legal fees (if and to the extent permitted by law), the cost of protecting or caring for the Premises while vacant, the cost of removing and storing any property located on the Premises, any increase in insurance premiums caused by the vacancy of the Premises and any other out-of-pocket expenses reasonably incurred by Landlord including tenant incentives, allowances and inducements. C. Except as otherwise herein provided, no repossession or reentering of the Premises or any part thereof pursuant to Article 26 hereof or otherwise shall relieve Tenant of its liabilities and obligations hereunder, all of which shall survive such repossession or re-entering. Notwithstanding any such repossession or re-entering by reason of the occurrence of an event of default, Tenant will pay to Landlord the Rent required to be paid by Tenant pursuant to this Lease. D. No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder or now or hereafter existing by agreement, applicable law or in equity. In addition to other remedies provided in this Lease, Landlord shall be entitled, to the extent permitted by applicable law, to injunctive relief, or to a decree compelling performance of any of the covenants, agreements, conditions or provisions of this Lease, or to any other remedy allowed to Landlord at law or in equity. Forbearance by Landlord to enforce one or more of the remedies herein provided upon an event of default shall not be deemed or construed to constitute a waiver of such default. 38 38 E. This Article 26 shall be enforceable to the maximum extent such enforcement is not prohibited by applicable law, and the unenforceability of any portion thereof shall not thereby render unenforceable any other portion. ARTICLE 27: LIMITATION OF LIABILITY A. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS LEASE, THE LIABILITY OF LANDLORD (AND OF ANY SUCCESSOR LANDLORD HEREUNDER) TO TENANT SHALL BE LIMITED TO THE INTEREST OF LANDLORD IN THE PROPERTY AND ANY PROCEEDS THEREOF, SUBJECT TO THE INTEREST OF ANY MORTGAGEES, AND TENANT AGREES TO LOOK SOLELY TO LANDLORD'S INTEREST IN THE PROPERTY AND THE PROCEEDS THEREOF, SUBJECT TO THE INTEREST OF ANY MORTGAGEES, FOR THE RECOVERY OF ANY JUDGMENT OR AWARD AGAINST THE LANDLORD, IT BEING INTENDED THAT NEITHER LANDLORD NOR ANY MEMBER, PRINCIPAL, PARTNER, SHAREHOLDER, OFFICER, DIRECTOR OR BENEFICIARY OF LANDLORD SHALL BE PERSONALLY LIABLE FOR ANY JUDGMENT OR DEFICIENCY. TENANT HEREBY COVENANTS THAT, PRIOR TO THE FILING OF ANY SUIT FOR AN ALLEGED DEFAULT BY LANDLORD HEREUNDER, IT SHALL GIVE LANDLORD AND ALL MORTGAGEES WHOM TENANT HAS BEEN NOTIFIED HOLD MORTGAGES OR DEED OF TRUST LIENS ON THE PROPERTY, BUILDING OR PREMISES NOTICE AND REASONABLE TIME TO CURE SUCH ALLEGED DEFAULT BY LANDLORD. IN ADDITION, TENANT ACKNOWLEDGES THAT ANY ENTITY MANAGING THE BUILDING ON BEHALF OF LANDLORD, OR WHICH EXECUTES THIS LEASE AS AGENT FOR LANDLORD, IS ACTING SOLELY IN ITS CAPACITY AS AGENT FOR LANDLORD AND SHALL NOT BE LIABLE FOR ANY OBLIGATIONS, LIABILITIES, LOSSES OR DAMAGES ARISING OUT OF OR IN CONNECTION WITH THIS LEASE, ALL OF WHICH ARE EXPRESSLY WAIVED BY TENANT. ARTICLE 23: NO WAIVER Failure of Landlord to declare any default immediately upon its occurrence, or delay in. taking any action in connection with an event of default shall not constitute a waiver of such default, nor shall it constitute an estoppel against Landlord, but Landlord shall have the right to declare the default at any time and take such action as is lawful or authorized under this Lease. Failure by Landlord to enforce its rights with respect to any one default shall not constitute a waiver of its rights with respect to any subsequent default. Receipt by Landlord of Tenant's keys to the Premises shall not constitute an acceptance or surrender of the Premises. ARTICLE 29: EVENT OF BANKRUPTCY In addition to, and in no way limiting the other remedies set forth herein, Landlord and Tenant agree that if Tenant ever becomes the subject of a voluntary or involuntary bankruptcy, reorganization, composition, or other similar type proceeding under the federal bankruptcy laws, as now enacted or hereinafter amended, then, to the extent permitted by law: A. "ADEQUATE PROTECTION" of Landlord's interest in the Premises pursuant to the provisions of Section 361 and 363 (or their successor sections) of the Bankruptcy Code, 11 U.S.C. Section 101 et. seq., (such Bankruptcy Code as amended from time to time being 39 39 herein referred to as the "Bankruptcy Code"), prior to assumption and/or assignment of the Lease by Tenant shall include, but not be limited to all (or any part) of the following: 1. the continued payment by Tenant of the Base Rental and all other Rent due and owing hereunder and the performance of all other covenants and obligations hereunder by Tenant; 2. the furnishing of an additional/new security deposit by Tenant in the amount of three (3) times the then current monthly Base Rental. B. "ADEQUATE ASSURANCE OF FUTURE PERFORMANCE" by Tenant and/or any assignee of Tenant pursuant to Bankruptcy Code Section 365 will include (but not be limited to) payment of an additional/new Security Deposit in the amount of three (3) times the then Current monthly Base Rental payable hereunder. C. Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code, shall be deemed without further act or deed to have assumed all of the obligations of Tenant arising under this Lease on and after the effective date of such assignment. Any such assignee shall, upon demand by Landlord, execute and deliver to Landlord an instrument confirming such assumption of liability as well as a subordination agreement in the form of Exhibit G attached hereto. D. Notwithstanding anything in this Lease to the contrary, all amounts payable by Tenant to or on behalf of the Landlord under this Lease, whether or not expressly denominated as "Rent," shall constitute "rent" for the purposes of Section 502(b)(6) of the Bankruptcy Code. E. If this Lease is assigned to any person or entity pursuant to the provisions of the Bankruptcy Code, any and all monies or other considerations payable or otherwise to be delivered to Landlord (including Base Rentals and other Rent hereunder), shall be and remain the exclusive property of Landlord and shall not constitute property of Tenant or of the bankruptcy estate of Tenant. Any and all monies or other considerations constituting Landlord's property under the preceding sentence not paid or delivered to Landlord shall be held in trust by Tenant or Tenant's bankruptcy estate for the benefit of Landlord and shall be promptly paid to or turned over to Landlord. F. If Tenant assumes this Lease and proposes to assign the same pursuant to the provisions of the Bankruptcy Code to any person or entity who shall have made a bona fide offer to accept an assignment of this Lease on terms acceptable to the Tenant, then notice of such proposed offer/assignment, setting forth: (1) the name and address of such person or entity, (2) all of the terms and conditions of such offer, and (3) the adequate assurance to be provided Landlord to assure such person's or entity's future performance under the Lease, shall be given to Landlord by Tenant no later than twenty (20) days after receipt by Tenant, but in any event no later than ten (10) days prior to the date that Tenant shall make application to a court of competent jurisdiction for authority and approval to enter into such assumption and assignment, and Landlord shall thereupon have the prior right and option, to be exercised by notice to Tenant given at any time prior to the effective date of such proposed assignment, to accept an assignment of this Lease upon the same terms and conditions and for the same consideration, if any, as the bona fide offer made by such persons or entity, less any brokerage commission which 40 40 may be payable out of the consideration to be paid by such person for the assignment of this Lease. G. To the extent permitted by law, Landlord and Tenant agree that this Lease is a contract under which applicable law excuses Landlord from accepting performance from (or rendering performance to) any person or entity other than Tenant within the meaning of Sections 365(c) and 365(e)(2) of the Bankruptcy Code. ARTICLE 30: WAIVER OF JURY TRIAL Landlord and Tenant hereby waive any right to a trial by jury in any action or proceeding based upon, or related to, the subject matter of this Lease. This waiver is knowingly, intentionally, and voluntarily made by Tenant, and Tenant acknowledges that neither Landlord nor any person acting on behalf of Landlord has made any representations of fact to induce this waiver of trial by jury or in any way to modify or nullify its effect. Tenant further acknowledges that it has been represented (or has had the opportunity to be represented) in the signing of this Lease and in the making of this waiver by independent legal counsel, selected of its own free will, and that it has had the opportunity to discuss this waiver with counsel. ARTICLE 31: HOLDING OVER In the event of holding over by Tenant after expiration or other termination of this Lease or in the event Tenant continues to occupy the Premises after the termination of Tenant's right of possession pursuant to Articles 25 and 26 hereof, occupancy of the Premises subsequent to such termination or expiration shall be that of a tenancy at sufferance and in no event for month-to-month or year-to-year. Tenant shall, throughout the entire holdover period, be subject to all the terms and provisions of this Lease and shall pay for its use and occupancy an amount (on a per month basis without reduction for any partial months during any such holdover) equal to 135% of the sum of the Base Rental and Additional Base Rental due for the period immediately preceding such holding over, provided that in no event shall Base Rental and Additional Base Rental during the holdover period be less than the fair market rental for the Premises. No holding over by Tenant or payments of money by Tenant to Landlord after the expiration of the term of this Lease shall be construed to extend the Lease Term or prevent Landlord from recovery of immediate possession of the Premises by summary proceedings or otherwise. In addition to the obligation to pay the amounts set forth above during any such holdover period, Tenant also shall be liable to Landlord for all damage which Landlord may suffer by reason of any holding over by Tenant, and Tenant shall indemnify Landlord against any and all claims made by any other tenant or prospective tenant against Landlord for delay by Landlord in delivering possession of the Premises to such other tenant or prospective tenant. ARTICLE 32: SUBORDINATION TO MORTGAGES; ESTOPPEL CERTIFICATE Tenant accepts this Lease subject and subordinate to any mortgage, deed of trust, ground lease or other lien presently existing or hereafter arising upon the Premises, or upon the Building and/or the Property and to any renewals, modifications, refinancings and extensions thereof (any such mortgage, deed of trust, lease or other lien being hereinafter referred to as a "Mortgage", and the person or entity having the benefit of same being referred to hereinafter as a "Mortgagee"), provided that with respect to the current first-lien Mortgage on the Property, Tenant hereby approves and agrees to execute, upon execution of this Lease, the form of 41 41 Subordination Agreement attached hereto as Exhibit G, but Tenant shall not be bound thereunder until the lender under such Subordination Agreement becomes bound by such Subordination Agreement. Tenant agrees that any such Mortgagee shall have the right at any time to subordinate such Mortgage to this Lease on such terms and subject to such conditions as such Mortgagee may deem appropriate in its discretion. Landlord is hereby irrevocably vested with full power and authority to subordinate this Lease to any Mortgage, and Tenant agrees upon demand to execute such further instruments subordinating this Lease, acknowledging the subordination of this Lease or attorning to the holder of any such Mortgage as Landlord may request. Notwithstanding the foregoing, any such subordination of this Lease shall be conditioned upon Tenant's receipt from the Mortgagee of a nondisturbance agreement on terms reasonably acceptable to Tenant. If any person shall succeed to all or part of Landlord's interests in the Premises whether by purchase, foreclosure, deed in lieu of foreclosure, power of sale, termination of lease or otherwise, and if and as so requested or required by such successor-in-interest, Tenant shall, without charge, attorn to such successor-in-interest. Tenant agrees that it will upon its initial occupancy of the Premises and from time to time upon request by Landlord, within five (5) business days of the date of such request, execute and deliver to such persons as Landlord shall request an estoppel certificate or other similar statement in recordable form certifying that (i) this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as so modified), (ii) this Lease as so modified constitutes the entire agreement between Landlord and Tenant with respect to the Premises, (iii) the obligations of Tenant hereunder are valid and binding, (iv) the dates to which Rent and other charges payable under this Lease have been paid, (v) that no deposits or prepayments have been made under this Lease except as specified herein, (vi) to the best of Tenant's knowledge, there exists no breach, default, or event or condition which, with the giving of notice or the passage of time or both, would constitute a breach or default under this Lease (or if Tenant alleges a default stating the nature of such alleged default), (vii) to the best of Tenant's knowledge, there are no existing claims, defenses or offset against rental due or to become due hereunder, and (viii) such other matters as Landlord shall reasonably require. ARTICLE 33: ATTORNEYS' FEES In the event that Landlord or Tenant should retain counsel and/or institute any suit against the other for violation of or to enforce any of the covenants or conditions of this Lease, or should either party institute any suit against the other for violation of any of the covenants or conditions of this Lease, or should either party intervene in any suit in which the other is a party to enforce or protect its interest or rights hereunder, the prevailing party in any such suit shall be entitled to all of its costs, expenses and reasonable fees of its attorney(s) (if and to the extent permitted by law) in connection therewith. ARTICLE 34: NOTICE Whenever any demand, request, approval, consent or notice ("Notice") shall or may be given to either of the parties by the other, each such Notice shall be in writing and shall be sent by registered or certified mail with return receipt requested, or sent by personal delivery or by overnight courier service (such as Federal Express) at the respective addresses of the parties for notices as set forth in Section 1(A)(12) of this Lease. Any Notice under this Lease delivered by registered or certified mail shall be deemed to have been given, delivered, received and effective on the earlier of (a) the third business day following the day on which the same shall have been mailed with sufficient postage prepaid or (b) the delivery date indicated on the return receipt. 42 42 Notice sent by overnight courier service shall be deemed given, delivered, received and effective upon the business day after such notice is delivered to or picked up by the overnight courier service, and notice by personal delivery shall be deemed given on the day received. Either party may, at any time, change its Notice Address by giving the other party Notice stating the change and setting forth the new address. ARTICLE 35: LANDLORD'S LIEN Landlord shall have all statutory lien rights for Rent. ARTICLE 36: EXCEPTED RIGHTS This Lease does not grant any rights to light or air over or about the Building. Except as provided in Section 38(S), Landlord specifically excepts and reserves to itself the use of any roofs, the exterior portions of the Premises, all rights to the land and improvements below the improved floor level of the Premises, the improvements and air rights above the Premises and the improvements and air rights located outside the demising walls of the Premises, and such areas within the Premises as are required for installation of utility lines and other installations required to serve any occupants of the Building and the right to maintain and repair the same, and no rights with respect thereto are conferred upon Tenant unless otherwise specifically provided herein. Landlord further reserves to itself the right from time to time to perform the following, the cost of which shall be borne in accordance with the provisions contained in Article 7 or elsewhere in this Lease: (a) to change the Building's name (subject to the provisions of Article 12 above) or street address; (b) to install, fix and maintain signs on the exterior and interior of the Building (subject to the restriction on Landlord of naming the Building); (c) to designate and approve window coverings; (d) to make any decorations, alterations, additions, improvements to the Building, or any part thereof (including the Premises) which Landlord shall desire, or deem necessary for the safety, protection, preservation or improvement of the Building, or as Landlord may be required to do by law, provided that Landlord shall use all reasonable efforts to minimize interference with Tenant's business operations when performing such functions; (e) to have access to the Premises to perform its duties and obligations and to exercise its rights under this Lease (subject to compliance with Tenant's security and limitation on access procedures as described in Section 10(A)(7) above); (f) to retain at all times and to use pass-keys to all locks within and into the Premises (subject to compliance with Tenant's security and limitation on access procedures as described in Section 10(A)(7) above); (g) to approve the weight, size, or location of heavy equipment, or articles in and about the Premises; (h) to close or restrict access to the Building at all times other than Normal Business Hours, subject to Tenant's right to admittance at all times under such regulations as Landlord may reasonably prescribe from time to time, or to close (temporarily or permanently) any of the entrances to the Building; (i) to change the arrangement and/or location of entrances of passageways, doors and doorways, corridors, elevators, stairs, toilets and public parts of the Building so long as it does not unreasonably interfere with Tenant's access, ingress or egress to or from the Premises; and (j) if Tenant has vacated the Premises during the last six (6) months of the Lease Term, to perform additions, alterations and improvements to the Premises in connection with a reletting or anticipated reletting thereof without being responsible or liable for the value or preservation of any then existing improvements to the Premises. Landlord, in accordance with Article 15 hereof, shall have the right to enter the Premises in connection with the exercise of any of the rights set forth herein and such entry into the Premises and the performance of any work therein shall not 43 43 constitute a constructive eviction or entitle Tenant to any abatement or reduction of Rent by reason thereof. ARTICLE 37: SURRENDER OF PREMISES At the expiration or earlier termination of this Lease or Tenant's right of possession hereunder, Tenant shall remove all Tenant's Property from the Premises, remove all Required Removables designated by Landlord at the time of initial consent to Tenant's alterations and quit and surrender the Premises to Landlord, broom clean, and in good order, condition and repair, ordinary wear and tear and damage by fire and casualty excepted. If Tenant fails to remove any of Tenant's Property within one (1) day after the termination of this Lease or Tenant's right to possession hereunder, Landlord, at Tenant's sole cost and expense, shall be entitled to remove and/or store such Tenant's Property and Landlord shall in no event be responsible for the value, preservation or safekeeping thereof. Tenant shall pay Landlord, upon demand, any and all expenses caused by such removal and all storage charges against such property so long as the same shall be in the possession of Landlord or under the control of Landlord. In addition, if Tenant falls to remove any Tenant's Property from the Premises or storage, as the case may be, within ten (10) days after written notice from Landlord, Landlord, at its option, may deem all or any part of such Tenant's Property to have been abandoned by Tenant and title thereof shall immediately pass to Landlord. ARTICLE 38: MISCELLANEOUS. A. If any term or provision of this Lease, or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, arid each term and provision of this Lease shall be valid and enforced to the fullest extent permitted by law. This Lease represents the result of negotiations between Landlord and Tenant, each of which has been (or has had opportunity to be) represented by counsel of its own selection, and neither of which has acted under duress or compulsion, whether legal, economic or otherwise. Consequently, Landlord and Tenant agree that the language in all parts of the Lease shall in all cases be construed as a whole according to its fair meaning and neither strictly for nor against Landlord or Tenant. B. Landlord agrees that Tenant may record a memorandum of this Lease, provided the form thereof shall be subject to Landlord's reasonable prior written approval. C. This Lease and the rights and obligations of the parties hereto shall be interpreted, construed, and enforced in accordance with the laws of the state of Washington. D. Events of "FORCE MAJEURE" shall include strikes, riots, acts of God, shortages of labor or materials, war, governmental law, regulations or restrictions and any other cause (other than financial ability) that is beyond the reasonable control of Landlord. Whenever a period of time is herein prescribed for the taking of any action by Landlord, Landlord shall not be liable or responsible for, and there shall be excluded from the computation of such period of time, any delays due to events of Force Majeure, except as otherwise set forth in this Lease. 44 44 E. Landlord shall have the right to transfer and assign, in whole or in part, all of its rights and obligations hereunder and in the Building and Property referred to herein, and in such event and upon such transfer, following assumption of this Lease by the transferee, Landlord shall be released from any further obligations hereunder, and Tenant agrees to look solely to such successor in interest of Landlord for the performance of such obligations. F. Tenant hereby represents to Landlord that it has dealt directly with and only with the Broker as a broker in connection with this Lease. Tenant agrees to indemnify and hold Landlord and the Landlord Related Parties harmless from all claims of any brokers other than the Broker claiming to have represented Tenant in connection with this Lease. Landlord agrees to indemnify and hold Tenant and the Tenant Related Parties harmless from all claims of the Broker and any brokers claiming to have represented Landlord in connection with this Lease. Landlord agrees to pay a brokerage commission to Broker in accordance with the terms of a written commission agreement between Landlord and Broker. G. Agency Disclosure. Leibsohn & Company, Inc. represents Tenant in connection with this Lease. Landlord shall pay Leibsohn & Company a commission of Four and no/100 Dollars ($4.00) per rentable square foot of the Initial Premises, which commission shall be earned and paid one-half (1/2) upon execution of this Lease and one-half (1/2) upon Tenant's occupancy of the Premises. No commission shall be paid on any option or expansion space except for expansion space with a Rent Commencement Date within the first six (6) months of the commencement of the Initial Term. H. Landlord and Tenant, by their execution of this Lease, each acknowledge and agree that they have timely received a pamphlet on the law of real estate agency as required under RCW 18.86.030(l)(f). I. If there is more than one Tenant, or if the Tenant is comprised of more than one person or entity, the obligations hereunder imposed upon Tenant shall be joint and several obligations of all such parties. All notices, payments, and agreements given or made by, with or to any one of such persons or entities shall be deemed to have been given or made by, with or to all of them. J. In the event Tenant is a corporation (including any form of professional association), partnership (general or limited), or other form of organization other than an individual (each such entity is individually referred to herein as an "ORGANIZATIONAL ENTITY"), then Tenant hereby covenants, warrants and represents: (1) that such individual is duly authorized to execute or attest and deliver this Lease on behalf of Tenant in accordance with the organizational documents of Tenant; (2) that this Lease is binding upon Tenant; (3) that Tenant is duly organized and legally existing in the state of its organization, and is qualified to do business in the state in which the Premises is located; and (4) that the execution and delivery of this Lease by Tenant will not result in any breach of, or constitute a default under any mortgage, deed of trust, lease, loan, credit agreement, partnership agreement or other contract or instrument to which Tenant is a party or by which Tenant may be bound. If Tenant is an Organizational Entity, upon request, Tenant will, prior to the Commencement Date, deliver to Landlord true and correct copies of an appropriate resolution or consent of Tenant's board of directors or other appropriate governing body of Tenant authorizing or ratifying the execution and delivery of this Lease, which resolution or consent will be duly certified by an appropriate individual with 45 45 authority to certify such documents, such as the secretary or assistant secretary or the managing general partner of Tenant. K. Tenant acknowledges that the financial capability of Tenant to perform its obligations hereunder is material to Landlord and that Landlord would not enter into this Lease but for its belief, based on its review of Tenant's financial statements, that Tenant is capable of performing such financial obligations. Tenant hereby represents, warrants and certifies to Landlord that its financial statements previously furnished to Landlord were at the time given true and correct in all material respects and that there have been no material subsequent changes thereto as of the date of this Lease. At any time during the Lease Term, Tenant shall provide Landlord, upon ten (10) days' prior written notice from Landlord, with a current financial statement and financial statements of the two (2) years prior to the current financial statement year and such other information as Landlord or its Mortgagee may reasonably request in order to create a "business profile" of Tenant and determine Tenant's ability to fulfill its obligations under this Lease. Such statement shall be prepared in accordance with the accounting principles consistently applied by Tenant in its financial reporting, and, if such is the normal practice of Tenant, shall be audited by an independent certified public accountant. All such financial information shall be treated as confidential by Landlord and shall be disclosed to third parties such as Mortgagees only as reasonably necessary and only with direction to such third party to maintain the confidentiality of such information. L. Except as expressly otherwise herein provided, with respect to all required acts of Tenant and Landlord, time is of the essence of this Lease. This Lease shall create the relationship of Landlord and Tenant between the parties hereto. M. This Lease and the covenants and conditions herein contained shall inure to the benefit of and be binding upon Landlord and Tenant and their respective permitted successors and assigns, N. Notwithstanding anything to the contrary contained in this Lease, the expiration of the Lease Term, whether by lapse of time or otherwise, shall not relieve Tenant from Tenant's obligations accruing prior to the expiration of the Lease Term, and such obligations shall survive any such expiration or other termination of the Lease Term. 0. The headings and titles to the paragraphs of this Lease are for convenience only and shall have no affect upon the construction or interpretation of any part hereof. P. Landlord has delivered a copy of this Lease to Tenant for Tenant's review only, and the delivery hereof does not constitute an offer to Tenant or option. This Lease shall not be effective until an original of this Lease is executed by both Landlord and Tenant. Q. Quiet Enjoyment. Tenant shall, and may peacefully have, hold, and enjoy the Premises, subject to the other terms of this Lease (and without interference from any Mortgagee to whom this Lease is subordinated), provided that Tenant pays the Rent herein recited to be paid by Tenant and performs all of Tenant's covenants and agreements herein contained. This covenant and any and all other covenants of Landlord shall be binding upon Landlord and its successors only during its or their respective periods of ownership of the Landlord's interest hereunder. 46 46 R. Americans With Disabilities Act. Landlord will insure that at the Commencement Date the Common Areas of the Building, and the shell and core, shall be in compliance with the Americans With Disabilities Act. Tenant shall be responsible for seeing that the Tenant Improvements are designed in accordance with the Americans With Disabilities Act. S. Roof Space Dish/Antenna. 1. Tenant shall have the right, without rental cost, to lease space on the roof of the Building for the purpose of installing (in accordance with Section 13(B) of the Lease), operating and maintaining one or more dish, antenna or other communication device approved by the Landlord (collectively the "Dish/Antenna"). The exact location of the space on the roof to be leased by Tenant shall be designated by Landlord and shall not exceed Tenant's proportionate share of the roof space suitable for the placement of such communication devices based on the portion of the Building leased by Tenant hereunder (the "Roof Space"). Landlord reserves the right to relocate the Roof Space as reasonably necessary during the Lease Term. Landlord's designation shall take into account Tenant's use of the Dish/Antenna. Notwithstanding the foregoing, Tenant's right to install the Dish/Antenna shall be subject to the approval rights of Landlord and Landlord's architect and/or engineer with respect to the plans and specifications of the Dish/Antenna, the manner in which the Dish/Antenna is attached to the roof of the Building and the manner in which any cables are run to and from the Dish/Antenna. The precise specifications and a general description of the Dish/Antenna along with all documents Landlord reasonably requires to review the installation of the Dish/Antenna (the "Plans and Specifications") shall be submitted to Landlord for Landlord's written approval no later than twenty (20) days before Tenant commences to install the Dish/Antenna. Tenant shall be solely responsible for obtaining all necessary governmental and regulatory approvals and for the cost of installing, operating, maintaining and removing the Dish/Antenna. Tenant shall notify Landlord upon completion of the installation of the Dish/Antenna. If Landlord determines that the Dish/Antenna equipment does not comply with the approved Plans and Specifications, that the Building has been damaged during installation of the Dish/Antenna or that the installation was defective, Landlord shall notify Tenant of any noncompliance or detected problems and Tenant immediately shall cure the defects. If the Tenant fails to immediately cure the defects, Tenant shall pay to Landlord upon demand the cost, as reasonably determined by Landlord, of correcting any defects and repairing any damage to the Building caused by such installation. If at any time Landlord, in its sole discretion, deems it necessary, Tenant shall provide and install, at Tenant's sole cost and expense, appropriate aesthetic screening, reasonably satisfactory to Landlord, for the Dish/Antenna (the "Aesthetic Screening"). 2. Landlord agrees that Tenant, upon reasonable prior written notice to Landlord, shall have access to the roof of the Building and the Roof Space for the purpose of installing, maintaining, repairing and removing the Dish/Antenna, the appurtenances and the Aesthetic Screening, if any, all of which shall be performed by Tenant or Tenant's authorized representative or contractors, which shall be approved by Landlord, at Tenant's sole cost and risk. It is agreed, however, that only authorized engineers, employees or properly authorized contractors of Tenant, FCC inspectors, or persons under their direct supervision will be permitted to have access to the roof of the Building and the Roof Space. Tenant further agrees to exercise firm control over the people requiring access to the roof of the Building and the Roof Space in 47 47 order to keep to a minimum the number of people having access to the roof of the Building and the Roof Space and the frequency of their visits. 3. It is further understood and agreed that the installation, maintenance, operation and removal of the Dish/Antenna, the appurtenances and the Aesthetic Screening, if any, will in no way damage the Building or the roof thereof, or interfere with the use of the Building and roof by Landlord. Tenant agrees to be responsible for any damage caused to the roof or any other part of the Building, which may be caused by Tenant or any of its agents or representatives. 4. Tenant agrees to install only equipment of types and frequencies which will not cause unreasonable interference to Landlord or existing tenants of the Building. In the event Tenant's equipment causes such interference, Tenant will change the frequency on which it transmits and/or receives and take any other steps necessary to eliminate the interference. If said interference cannot be eliminated within a reasonable period of time, in the judgment of Landlord, then Tenant agrees to remove the Dish/Antenna from the Roof Space. 5. Tenant shall, at its sole cost and expense, and at its sole risk, install, operate and maintain the Dish/Antenna in a good and workmanlike manner, and in compliance with all Building, electric, communication, and safety codes, ordinances, standards, regulations and requirements, now in effect or hereafter promulgated, of the Federal Government, including, without limitation, the Federal Communications Commission (the "FCC"), the Federal Aviation Administration ("FAA") or any successor agency of either the FCC or FAA having jurisdiction over radio or telecommunications, and of the state, city and county in which the Building is located. Under this Lease, the Landlord and its agents assume no responsibility for the licensing, operation and/or maintenance of Tenant's equipment. Tenant has the responsibility of carrying out the terms of its FCC license in all respects. The Dish/Antenna shall be connected to Landlord's power supply in strict compliance with all applicable Building, electrical, fire and safety codes. Neither Landlord nor its agents shall be liable to Tenant for any stoppages or shortages of electrical power furnished to the Dish/Antenna or the Roof Space because of any act, omission or requirement of the public utility serving the Building, or the act or omission of any other tenant, invitee or licensee or their respective agents, employees or contractors, or for any other cause beyond the reasonable control of Landlord, and Tenant shall not be entitled to any rental abatement for any such stoppage or shortage of electrical power. Neither Landlord nor its agents shall have any responsibility or liability for the conduct or safety of any of Tenant's representatives, repair, maintenance and engineering personnel while in or on any part of the Building or the Roof Space. 6. The Dish/Antenna, the appurtenances and the Aesthetic Screening, if any, shall remain the personal property of Tenant, and shall be removed by Tenant at its own expense at the expiration or earlier termination of this Lease or Tenant's right to possession hereunder. Tenant shall repair any damage caused by such removal, including the patching of any holes to match, as closely as possible, the color surrounding the area where the equipment and appurtenances were attached. Tenant agrees to maintain all of the Tenant's Dish/Antenna equipment placed on or about the roof or in any other part of the Building in proper operating condition and maintain same in satisfactory condition as to appearance, in Landlord's sole discretion, and satisfactory condition as to safety, in Landlord's reasonable discretion. Such maintenance and operation shall be performed in a manner to avoid any interference with any other tenants or Landlord. Tenant agrees that at all times during the Lease Term, it will keep the 48 48 roof of the Building and the Roof Space free of all trash or waste materials produced by Tenant or Tenant's agents, employees or contractors. 7. In light of the specialized nature of the Dish/Antenna, Tenant shall be permitted to utilize the services of its choice for installation, operation, removal and repair of the Dish/Antenna, the appurtenances and the Aesthetic Screening, if any, subject to the reasonable approval of Landlord. Notwithstanding the foregoing, Tenant must provide Landlord with prior written notice of any such installation, removal or repair and coordinate such work with Landlord in order to avoid voiding or otherwise adversely affecting any warranties granted to Landlord with respect to the roof. If necessary, Tenant, at its sole cost and expense, shall retain any contractor having a then existing warranty in effect on the roof to perform such work (to the extent that it involves the roof), or, at Tenant's option, to perform such work in conjunction with Tenant's contractor. In the event the Landlord contemplates roof repairs that could affect Tenant's Dish/Antenna, or which may result in an interruption of the Tenant's telecommunication service, Landlord shall formally notify Tenant at least thirty (30) days in advance (except in cases of an emergency) prior to the commencement of such contemplated work in order to allow Tenant to make other arrangements for such service. 8. Tenant shall not allow any provider of telecommunication, video, data or related services ("Communication Services") to locate any equipment on the roof of the Building or in the Roof Space for any purpose whatsoever, nor may Tenant use the Roof Space and/or Dish/Antenna to provide Communication Services to an unaffiliated tenant, occupant or licensee of another building, or to facilitate the provision of Communication Services on behalf of another Communication Services provider to an unaffiliated tenant, occupant or licensee of the Building or any other building. 9. Tenant acknowledges that Landlord may at some time establish a standard license agreement (the "License Agreement") with respect to the use of roof space by tenants of the Building. Tenant, upon request of Landlord, shall enter into such License Agreement with Landlord provided that such agreement is reasonably acceptable to Tenant and does not materially alter the rights of Tenant hereunder with respect to the Roof Space. 10. Tenant specifically acknowledges and agrees that the terms and conditions of Article 18 of the Lease (Indemnity and Waiver of Claims) shall apply with full force and effect to the Roof Space and any other portions of the roof accessed or utilized by Tenant, its representatives, agents, employees or contractors. 11. If Tenant defaults under any of the terms and conditions of this Section or the Lease, and Tenant fails to cure said default within the time allowed by Article 25 of the Lease, Landlord shall be permitted to exercise all remedies provided under the terms of the Lease, including removing the Dish/Antenna, the appurtenances and the Aesthetic Screening, if any, and restoring the Building and the Roof Space to the condition that existed prior to the installation of the Dish/Antenna, tile appurtenances and the Aesthetic Screening, if any. If Landlord removes the Dish/Antenna, the appurtenances and the Aesthetic Screening, if any, as a result of an uncured default, Tenant shall be liable for all costs and expenses Landlord incurs in removing the Dish/Antenna, the appurtenances and the Aesthetic Screening, if any, and repairing any damage to the Building, the roof of the Building and the Roof Space caused by the installation, operation or maintenance of the Dish/Antenna, the appurtenances, and the Aesthetic Screening, if any. 49 49 12. Tenant shall be allowed to install fiber optics and related equipment in the Building for Tenant's personal use, the design, location, and operating characteristics of which shall be subject to Landlord's reasonable approval. T. Environmental. (1) Hazardous Materials. Tenant shall not bring on to the Property any hazardous substances or materials except those used for normal office purposes, and Tenant shall not (either with or without negligence) cause or permit the escape, disposal or release of any biologically or chemically active or other hazardous substances, or materials in violation of any applicable environmental laws. Tenant shall not knowingly allow the storage or use of such substances or materials in any manner not sanctioned by law or by the highest standards prevailing in the industry for the storage and use of such substances of materials, nor allow to be brought into the Project any such materials or substances except to use for general office purposes and the other permitted uses in the ordinary course of Tenant's business. Without limitation, hazardous substances and materials shall include those described in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et seq., any applicable state or local laws and the regulations adopted under these acts. If any governmental agency or lender (in its reasonable judgment) shall ever require testing to ascertain whether or not there has been any release of hazardous materials and as a result of such testing it is determined that Tenant has violated any of the terms and conditions of this section, then, in addition to any other rights and remedies available hereunder or at law or in equity, the reasonable costs of such testing shall be reimbursed by Tenant to Landlord upon demand as additional charges. In addition, Tenant shall execute affidavits, representations and the like from time to time at Landlord's request concealing Tenant's best knowledge and belief regarding the presence of hazardous substances or materials on the Premises. In all events, Tenant shall indemnify Landlord in the manner elsewhere provided in this Lease from any release of hazardous materials on the Premises caused by Tenant or persons acting under Tenant. The within covenants shall survive the expiration or earlier termination of the Lease Term. (2) Landlord's Representation. To the actual knowledge of Landlord, neither the Building nor the Property contains any hazardous substances or materials in excess of levels permitted by applicable laws. U. Storage Space. A limited amount of storage space, on a first-come first-serve basis is available in the Building garage. If Available, Tenant may lease up to 2,000 square feet of storage space. The rate for storage space shall initially be $12.00 per usable square foot per year, increasing each year by the increase in the Index as defined in Section 1(A)6. V. Consent. Landlord and Tenant confirm that in all cases where consent or approval shall be required of either Tenant or Landlord pursuant to the Lease, the granting of such consent shall not be unreasonably withheld or delayed by the party from whom such consent is required, unless otherwise specified in the Lease. W. Year 2000 Compliant. Landlord agrees to use commercially reasonable efforts to: (i) investigate with its management and vendors the ability of the computer time clocks and software which operate and/or control the Building equipment and tenant billings to continue to 50 50 operate without unreasonable interruption or disruption after January 1, 2000 (the "Millennium Assessment"); and (ii) undertake commercially reasonable measures to address any potential problems identified by the Millennium Assessment so as to avoid, to the extent reasonably possible, unreasonable interruption and/or disruption to the operation of the Building equipment and tenant billings. The Millennium Assessment shall include an assessment of the Building elevators, mechanical equipment, life safety systems, invoice billing and any other devices or software which are necessary for the operation of the Building in accordance with the provisions of the Lease. Tenant and Landlord acknowledge that, notwithstanding Landlord's commercially reasonable efforts to prevent the same, problems may occur in connection with the operation of the Building's equipment and systems as a result of the Millennium and that such problems, if any, will not excuse Tenant from fulfilling its duties and obligations under the Lease, render Landlord liable for damages of any type or nature or be considered a Landlord default under the Lease. ARTICLE 39: ENTIRE AGREEMENT This Lease Agreement, including the following Exhibits: Exhibit A - Legal Description and Outline and Location of Premises Exhibit A-1 - Legal Description of Property Exhibit B - Rules and Regulations Exhibit C - Commencement Letter Exhibit D - Landlord's Work Exhibit D-1 - Shell and Core and Landlord Provided Tenant Improvements Exhibit D-2 - Plans and Specifications for Building Exhibit E - Signage Criteria Exhibit F - Tenant Equipment List and Electrical/HVAC Related Specifications Exhibit G - Subordination Agreement, Acknowledgement of Lease Assignment, Estoppel, Attornment and Non-Disturbance Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter of this Lease and supersedes all prior agreements and understandings between the parties related to the Premises, including all lease proposals, letters of intent and similar documents. TENANT EXPRESSLY ACKNOWLEDGES AND AGREES THAT LANDLORD HAS NOT MADE AND IS NOT MAKING, AND TENANT, IN EXECUTING AND DELIVERING THIS LEASE, IS NOT RELYING UPON, ANY WARRANTIES, REPRESENTATIONS, PROMISES OR STATEMENTS, EXCEPT TO THE EXTENT THAT THE SAME ARE EXPRESSLY SET FORTH IN THIS LEASE. ALL UNDERSTANDINGS AND AGREEMENTS HERETOFORE MADE BETWEEN THE PARTIES ARE MERGED IN THIS LEASE WHICH ALONE FULLY AND COMPLETELY EXPRESSES THE AGREEMENT OF THE PARTIES, NEITHER PARTY RELYING UPON ANY STATEMENT OR REPRESENTATION NOT EMBODIED IN THIS LEASE. THIS LEASE MAY BE MODIFIED ONLY BY A WRITTEN AGREEMENT SIGNED BY LANDLORD AND TENANT 51 51 IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the day and year first above written. LANDLORD: WRC SUNSET NORTH LLC, a Washington limited liability company By: EOP SUNSET NORTH, L.L.C., a Delaware limited liability company, its manager By: EOP OPERATING LIMITED PARTNERSHIP, a Delaware limited partnership, its sole member By: EQUITY OFFICE PROPERTIES TRUST, a Maryland real estate investment trust, its managing general partner By: [Signature Illegible] ---------------------------- Its: SVP --------------------------- By: WRIGHT RUNSTAD ASSOCIATED LIMITED PARTNERSHIP, a Washington limited partnership its manager By: WRIGHT RUNSTAD & COMPANY, a Washington corporation, its sole general partner By: [Signature Illegible] ---------------------------- Its: [Illegible] --------------------------- TENANT: BSQUARE Corporation, a Washington corporation By: [Signature Illegible] -------------------------------- Its: CEO -------------------------------- 52 52 LANDLORD ACKNOWLEDGMENT STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) I, the undersigned, a Notary Public, in and for the County and State aforesaid, do hereby certify that Jon F. Nordby, personally known to me to be the Executive V.P. of Wright Runstad & Company, the general partner of Wright Runstad Associates Limited Partnership, a Member of WRC SUNSET NORTH LLC, a Washington limited liability company, the Landlord in the foregoing instrument, and personally known to me to be the same person whose name is subscribed to the foregoing instrument, appeared before me this day in person and acknowledged that as such officer of said entity being authorized so to do, he executed the foregoing instrument on behalf of said entity, by subscribing the name of such entity by himself as such officer, as a free and voluntary act, and as the free and voluntary act and deed of said entity under the foregoing instrument for the uses and purposes therein set forth. GIVEN under my hand and official seal this 15th day of January, 1999. Notary Public: /s/ THOMAS E. DIXON ------------------------- Printed Name: THOMAS E. DIXON -------------------------- Residing at: Seattle --------------------------- My Commission expires: 2-28-01 ----------------- [SEAL] STATE OF WASHINGTON ) ) ss. SEE ATTACHED NOTARY PAGE COUNTY OF KING ) GIVEN under my hand and official seal this _____ day of January, 1999. Notary Public: ------------------------- Printed Name: -------------------------- Residing at: --------------------------- My Commission expires: ----------------- 53 53 Attachment to Page 53 of Lease Agreement between WRC Sunset North LLC and BSquare Corporation STATE OF COLORADO ) ) ss County of Arapahoe ) I, the undersigned, a Notary Public, in and for the County and State aforesaid, do hereby certify that Kim J. Koehn, personally known to me to be the Senior Vice President of Equity Office Properties Trust, the general partner of EOP Operating Limited Partnership, the sole member of EOP Sunset North, L.L.C., the manager of WRC Sunset North LLC, a Washington limited liability company, the Landlord in the foregoing instrument, and personally known to me to be the same person whose name is subscribed to the foregoing instrument, appeared before me this day in person and acknowledged that as such office of said entity being authorized so to do, he executed the foregoing instrument on behalf of said entity, by subscribing the name of such entity by himself as such officer, as a free and voluntary act, and as the free and voluntary act and deed of said entity under the foregoing instrument for the uses and purposes therein set forth. GIVEN under my hand and official seal this 26th day of January 1999. /s/ PATRICIA ANN REICHLE [SEAL] ---------------------------------------- Patricia Ann Reichle, Notary Public Residing at: Castle Rock, Colorado My Commission expires: January 14, 2001 54 TENANT ACKNOWLEDGMENT STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) On this the 15th day of January, 1999, before me a Notary Public duly authorized in and for the said County in the State aforesaid to take acknowledgments personally appeared William Baxter, known to me to be CEO of BSQUARE CORPORATION the Tenant in the foregoing instrument, and acknowledged that as such officer, being authorized so to do, (s)he executed the foregoing instrument on behalf of said corporation by subscribing the name of such corporation by himself/herself as such officer and caused the corporate seal of said corporation to be affixed thereto, as a free and voluntary act, and as the free and voluntary act of said corporation, for the uses and purposes therein set forth. IN WITNESS WHEREOF, I hereunto set my hand and official seal. Notary Public: /s/ CAMILLA J. ALSON ------------------------- Printed Name: CAMILLA J. ALSON -------------------------- Residing at: Bellevue, WA --------------------------- My Commission expires: 6-6-2002 ----------------- 54 55 EXHIBIT A PREMISES This Exhibit is attached to and made a part of the Lease dated as of January 15, 1999, by and between WRC SUNSET NORTH LLC, a Washington limited liability company ("Landlord") and BSQUARE CORPORATION, a Washington corporation ("Tenant") for space on the third (3rd), fourth (4th) and fifth (5th) floors in Building Four (4) located at the Northeast corner of 139th Avenue Southeast and Southeast 32nd Street, Bellevue, King County, Washington. The legal description for the property upon which the Premises is located is set forth on Exhibit A-1, attached hereto and incorporated herein by this reference. The Premises is outlined on Exhibit A-2 and A-3 attached hereto and incorporated herein by this reference. Exhibit A 56 EXHIBIT A-1 LEGAL DESCRIPTION OF PROPERTY This Exhibit is attached to and made a part of the Lease dated as of January 15, 1999, by and between WRC SUNSET NORTH LLC, a Washington limited liability company ("Landlord") and BSQUARE CORPORATION, a Washington corporation ("Tenant") for space on the third (3rd), fourth (4th) and fifth (5th) floors in Building Four (4) located at the Northeast corner of 139th Avenue Southeast and Southeast 32nd Street, Bellevue, King County, Washington. LOTS 6 THROUGH 10 OF SUNSET RIDGE I-90 CORPORATE CAMPUS, A BINDING SITE PLAN, AS PER PLAT RECORDED IN VOLUME 154 OF PLATS, PAGES 77 THROUGH 80, RECORDS OF KING COUNTY; EXCEPT ANY PORTION CONVEYED FOR 139TH AVE. S.E., BY DEED RECORDED UNDER RECORDING NO. 9101280422; TOGETHER WITH AN UNDIVIDED 60% INTEREST IN LOT 11 AND TRACT C OF SAID PLAT; AND TOGETHER WITH THOSE CERTAIN EASEMENT RIGHTS AS DELINEATED IN INSTRUMENT RECORDED UNDER RECORDING NO. 9601091040; AND TOGETHER WITH THOSE CERTAIN EASEMENT RIGHTS AS DELINEATED IN INSTRUMENT RECORDED UNDER RECORDING NO. 9107260572; AND TOGETHER WITH THOSE CERTAIN EASEMENT RIGHTS AS DELINEATED IN INSTRUMENT RECORDED UNDER RECORDING NO. 9309292404; SITUATE IN THE CITY OF BELLEVUE, COUNTY OF KING, STATE OF WASHINGTON. Exhibit A1-1 57 EXHIBIT A-2 Floors 3 and 4 [FLOOR PLAN] 58 EXHIBIT A-3 Floor 5 [FLOOR PLAN] 59 EXHIBIT B BUILDING RULES AND REGULATIONS The following rules and regulations shall apply, where applicable, to the Premises, the Building, the parking garage associated therewith (if any), the Property and the appurtenances thereto: 1. Sidewalks, doorways, vestibules, halls, stairways and other similar areas shall not be obstructed by Tenant or used by Tenant for any purpose other than ingress and egress to and from the Premises. No rubbish, litter, trash, or material of any nature shall be placed, emptied, or thrown in those areas. 2. Plumbing fixtures and appliances shall be used only for the purposes for which designed, and no sweepings, rubbish, rags or other unsuitable material shall be thrown or placed therein. Damage resulting to any such fixtures or appliances from misuse by Tenant or its agents, employees or invitees, shall be paid for by Tenant, and Landlord shall not in any case be responsible therefor. 3. No signs, advertisements or notices shall be painted or affixed on or to any windows, doors or other parts of the Building, except those of such color, size, style and in such places as shall be first approved in writing by Landlord. No nails, hooks or screws shall be driven or inserted into any part of the Premises or Building except for normal decoration, nor shall any part of the Building be defaced by Tenant. 4. Landlord shall provide and maintain in the first floor (main lobby) of the Building an alphabetical directory board listing all Tenants, and no other directory shall be permitted unless previously consented to by Landlord in writing. 5. Tenant will install proprietary locks on the doors to the perimeter of the Premises and provide a reasonable number of keys to those doors to the Landlord. Tenant shall have the right to place any additional locks on any interior doors of Premises without notice to or approval of Landlord, and without providing Landlord keys thereto; provided that Landlord shall be provided a reasonable number of keys to those interior doors in the Premises controlling access to Building mechanical, electrical and fire protection systems and shall be provided access at all times for emergency and maintenance purposes. All keys shall be returned to Landlord at the expiration or earlier termination of this Lease. 6. All contractors, contractor's representatives, and installation technicians performing work in the Building shall be subject to Landlord's prior approval, which shall not be unreasonably withheld or delayed, and shall be required to comply with Landlord's standard rules, regulations, policies and procedures, as the same may be revised from time to time. Tenant shall be solely responsible for complying with all applicable laws, codes and ordinances pursuant to which said work shall be performed. 7. Movement in or out of the Building of furniture or office equipment, or dispatch or receipt by Tenant of any merchandise or materials which require the use of elevators, stairways, lobby areas, or loading dock areas, shall be restricted to hours reasonably designated by Landlord. If approved by Landlord, such activity shall be under the supervision of Landlord and performed in the manner stated by Landlord. Landlord may reasonably prohibit any article, Exhibit B-1 60 equipment or any other item from being brought into the Building. Tenant is to assume all risk for damage to articles moved and injury to any persons resulting from such activity. If any equipment, property, and/or personnel of Landlord or of any other tenant is damaged or injured as a result of or in connection with such activity, Tenant shall be solely liable for any and all damage or loss resulting therefrom. 8. Landlord shall have the power to prescribe the weight and position of safes and other heavy equipment or items, which in all cases shall not in the opinion of Landlord exceed acceptable floor loading and weight distribution requirements. All damage done to the Building by the installation, maintenance, operation, existence or removal of any property of Tenant shall be repaired at the expense of Tenant. 9. Corridor doors, when not in use, shall be kept closed. 10. Tenant shall not: (1) make or permit any improper, objectionable or unpleasant noises or odors in the Building, or otherwise interfere in any way with other tenants or persons having business with them; (2) solicit business or distribute, or cause to be distributed, in any portion of the Building any handbills, promotional materials or other advertising; or (3) conduct or permit any other activities in the Building that might constitute a nuisance. 11. No animals, except seeing eye dogs, shall be brought into or kept in, on or about the Premises. 12. No inflammable, explosive or dangerous fluid or substance (other than normal office supplies and cleaning compounds) shall be used or kept by Tenant in the Premises or Building. Tenant shall not, without Landlord's prior written consent and except for normal office supplies and cleaning compounds, use, store, install, spill, remove, release or dispose of within or about the Premises or any other portion of the Property, any asbestos-containing materials or any solid, liquid or gaseous material now or hereafter considered toxic or hazardous under the provisions of 42 U.S.C. Section 9601 et seq. or any other applicable environmental law which may now or hereafter be in effect. If Landlord does give written consent to Tenant pursuant to the foregoing sentence, Tenant shall comply with all applicable laws, rules and regulations pertaining to and governing such use by Tenant, and shall remain liable for all costs of cleanup or removal in connection therewith. 13. Tenant shall not use or occupy the Premises in any manner or for any purpose which would injure the reputation or impair the present or future value of the Premises or the Building; without limiting the foregoing, Tenant shall not use or permit the Premises or any portion thereof to be used for lodging, sleeping or for any illegal purpose. 14. Tenant shall not take any action which would knowingly violate Landlord's labor contracts affecting the Building or which would cause any work stoppage, picketing, labor disruption or dispute, or any interference with the business of Landlord or any other tenant or occupant of the Building or with the rights and privileges of any person lawfully in the Building. Tenant shall take any actions necessary to resolve any such work stoppage, picketing, labor disruption, dispute or interference and shall have pickets removed and, at the request of Landlord, immediately terminate at any time any construction work being performed in the Premises giving rise to such labor problems, until such time as Landlord shall have given its written consent for such work to resume. Tenant shall have no claim for damages of any nature Exhibit B-2 61 against Landlord or any of the Landlord Related Parties in connection therewith, nor shall the date of the commencement of the Term be extended as a result thereof. 15. Tenant shall utilize the termite and pest extermination service designated by Landlord to control termites and pests in the Premises. Except as included in Basic Costs, Tenant shall bear the cost and expense of such extermination services. 16. Tenant shall not install, operate or maintain in the Premises or in any other area of the Building, any electrical equipment which does not bear the U/L (Underwriters Laboratories) seal of approval, or which would overload the electrical system or any part thereof beyond its capacity for proper, efficient and safe operation as determined by Landlord, taking into consideration the overall electrical system and the present and future requirements therefor in the Building. Tenant shall not furnish any cooling or heating to the Premises, including, without limitation, the use of any electronic or gas heating devices, without Landlord's prior written consent. Tenant shall not use more than its proportionate share of telephone lines available to service the Building. 17. Tenant shall not operate or permit to be operated on the Premises any coin or token operated vending machine or similar device (including, without limitation, telephones, lockers, toilets, scales, amusement devices and machines for sale of beverages, foods, candy, cigarettes or other goods), except for those vending machines or similar devices which are for the sole and exclusive use of Tenant's employees. 18. Bicycles and other vehicles are not permitted inside or on the walkways outside the Building, except in those areas specifically designated by Landlord for such purposes. Landlord shall provide in the common areas of the Building a bicycle rack. 19. Landlord may from time to time adopt appropriate systems and procedures for the security or safety of the Building, its occupants, entry and use, or its contents. Tenant, Tenant's agents, employees, contractors, guests and invitees shall comply with Landlord's reasonable requirements relative thereto. 20. Landlord shall have the right to prohibit publicity by Tenant that in Landlord's opinion may tend to impair the reputation of the Building or its desirability for Landlord or other tenants. Upon written notice from Landlord, Tenant will refrain from and/or discontinue such publicity immediately. 21. Tenant shall carry out Tenant's permitted repair, maintenance, alterations, and improvements in the Premises only during times reasonably agreed to in advance by Landlord and in a manner which will not interfere with the rights of other tenants in the Building. 22. Canvassing, soliciting, and peddling in or about the Building is prohibited. Tenant shall cooperate and use its best efforts to prevent the same. 23. At no time shall Tenant permit or shall Tenant's agents, employees, contractors, guests, or invitees smoke in any common area of the Building, unless such common area has been declared a designated smoking area by Landlord (and Landlord agrees to designate one or more dry smoking area(s) in the common areas of the Building or the garage), or to allow any Exhibit B-3 62 smoke from the Premises to emanate into the common areas or any other tenant's premises (other than from Landlord's designated smoking areas). 24. Tenant shall observe Landlord's rules with respect to maintaining standard window coverings at all windows in the Premises so that the Building presents a uniform exterior appearance. Tenant shall ensure that to the extent reasonably practicable, window coverings are closed on all windows in the Premises while they are exposed to the direct rays of the sun. 25. Tenant shall not permit the process of deliveries to or from the Premises to occur in a manner which will unreasonably interfere with the use by any other tenant of its premises or of any common areas, any pedestrian use of such area, or any use which is inconsistent with good business practice. Landlord will make available reasonable areas and accesses for deliveries to and from the Premises and Building. 26. The work of cleaning personnel shall not be hindered by Tenant after 6:00 p.m. windows, doors and fixtures may be cleaned at any time with reasonable prior notice to Tenant. Tenant shall provide adequate waste and rubbish receptacles necessary to prevent unreasonable hardship to Landlord regarding cleaning service. Exhibit B-4 63 EXHIBIT C COMMENCEMENT LETTER Date Tenant Address Re: Commencement Letter with respect to that certain Lease dated _____________________ by and between WRC SUNSET NORTH LLC as Landlord, and BSQUARE CORPORATION, a Washington corporation as Tenant, for approximately ninety-four thousand one hundred eighty-two (94,182) square feet of Rentable Area on the third (3rd), fourth (4th) and fifth (5th) floors of the Building located at the Northeast corner of 139th Avenue Southeast and Southeast 32nd Street, Bellevue, King County, Washington. Dear : In accordance with the terms and conditions of the above referenced Lease, Tenant hereby accepts possession of the Premises and agrees as follows: 1. The Commencement Date of the Lease is _________________________________; 2. The Termination Date of the Lease is _________________________________. Please acknowledge your acceptance of possession and agreement to the terms set forth above by signing all three (3) copies of this Commencement Letter in the space provided and returning two (2) fully executed copies of the same to my attention. Sincerely, Property Manager Agreed and Accepted: Tenant: By: Name: Title: Date: Exhibit C 64 EXHIBIT D WORK LETTER AGREEMENT The parties to this Work Letter Agreement ("AGREEMENT") are WRC SUNSET NORTH LLC, a Washington limited liability company ("LANDLORD") and BSQUARE CORPORATION, a Washington corporation ("TENANT"). Landlord and Tenant are parties to that certain Lease Agreement dated as of January 15, 1999 (the " LEASE") for space on the third (3rd), fourth (4th) and fifth (5th) floors in Building Four (4) of the Sunset North Corporate Campus located at the Northeast corner of 139th Avenue Southeast and Southeast 32nd Street, Bellevue, King County, Washington. The Premises are more particularly described in the Lease. Defined terms used in this Agreement shall have the same meanings given them in the Lease. I. IMPROVEMENTS PROVIDED BY LANDLORD: Landlord agrees to provide improvements to the Building and the Premises pursuant to the attached Exhibit 1, Base Building Condition, and plans and specifications listed on Exhibit 2. II. IMPROVEMENTS BY TENANT/REIMBURSEMENT BY LANDLORD: Design and construction of all improvements in the Initial Premises beyond those listed in Exhibit 1 shall be provided at Tenant's expense, provided Landlord shall pay the Allowance defined below. Landlord shall provide Tenant with an allowance of Thirty and no/100 Dollars ($30.00) (tenant improvements allowance) plus Zero and 15/100 Dollars ($0.15) (space plan allowance) per square foot of usable area in the Initial Premises (the "ALLOWANCE"). The Allowance may be applied to costs of designing and constructing the Tenant Improvements, Tenant's signage costs and the acquisition and installation of Tenant's furniture, fixture and equipment. The Allowance shall be paid as provided in Paragraph 6B of the Lease. Any unused portion of the Allowance may be taken as a credit against Rent or may be applied to additional build-out, wiring or cabling costs, as Tenant may elect. Any costs of constructing Tenant Improvements in excess of the Allowance shall be borne solely by Tenant. Landlord shall obtain all permits and government approvals and assume specific responsibility for delivery of the Premises as defined in the Lease and this Agreement, provided Tenant shall have met the drawing delivery dates herein. If Shell and Core Contractor is not initially selected to construct the Initial Tenant Improvements, then Landlord shall manage the bidding of tenant improvements to at least three (3) firms acceptable to. Landlord, one of which shall be the Shell and Core Contractor. The contractor selected by Tenant to construct the Tenant Improvements shall be hereinafter known as the "TENANT IMPROVEMENT CONTRACTOR." III. BUILDING STANDARD IMPROVEMENTS: Tenant shall use Building Standard lighting, window coverings, doors, relites, hardware, ceiling treatment and heating, ventilating and air conditioning distribution equipment and controls. IV. DESIGN OF TENANT IMPROVEMENTS: Tenant, at Tenant's cost and with the approval of Landlord, has retained JPC, Incorporated ("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 Agreement for construction of the tenant improvements in Tenant's area. All Tenant's Plans shall be subject to Exhibit D - Page 1 65 approval of Landlord (not to be unreasonably withheld or delayed) in accordance with Section IV(C) of this Agreement, and Landlord agrees to respond in writing with approval or comments within five (5) business days after receipt of each component of Tenant's Plans. Tenant's Office Planner shall ensure that the work shown on Tenant's Plans is compatible with the basic Building Plans and that necessary basic Building modifications are included in Tenant's Plans. Such modifications shall be subject to Landlord approval. If such approved basic Building modifications 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 as well as any increased shell and core construction costs shall be paid by Tenant. On or before the indicated dates, Tenant shall supply Landlord with one (1) reproducible copy and five (5) black line prints of the following Tenant Plans with respect to the Tenant Improvements in the Initial Premises and in any other portion of the Premises constructed at the same time as those in the Initial Premises: A. BASIC PLANS DELIVERY DATE: JANUARY 22, 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: FEBRUARY 22, 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 sufficient to obtain all necessary permits, shall be signed by the Tenant and shall 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. Exhibit D - Page 2 66 The Allowance shall be applied to the cost of the engineers retained by Tenant's Office Planner. The Allowance shall also be applied to any necessary review of the Engineering Drawings by Landlord's shell and core engineers: electrical (Holmes Electric), mechanical (McDonald Miller) and structural plans (KPFF) (Engineering Drawings) for Tenant's improvements based on the signed Working Drawings. C. FINAL PLANS REVIEW DATE: MARCH 26, 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 shall be sufficient for purposes of obtaining construction bids and shall 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 March 26, 1999. (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: APRIL 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 Shell and Core 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 Shell and Core Contractor and, if not initially selected, then to at least two (2) other contractors acceptable to Landlord and Tenant for pricing. Those contractors shall Exhibit D - Page 3 67 have at least two (2) weeks to provide their bid proposal with respect to completion of the Initial Tenant Improvement Work pursuant to the Final Plans. The final construction contract to be entered into between Landlord and the Tenant Improvement Contractor (including, but not limited to, the guaranteed maximum price to be contained therein) shall also be subject to Tenant's review and approval, such approval not to be unreasonably withheld. Landlord and Tenant shall review all pricing documentation received from the bidding tenant improvement contractors, including sub bids, quantities, and unit prices. Within ten (10) days of receipt of such prices and prior to execution of the Initial Tenant Improvements construction contract, Tenant shall give Landlord written authorization to complete the Premises in accordance with such Final Plans and naming the Tenant Improvement Contractor. Tenant may in such authorization delete any or all items of extra cost; however if the Shell and Core Contractor is selected, then if Landlord deems these changes to be extensive, at its option, Landlord may within three (3) business days of Tenant's written authorization refuse to accept the authorization to proceed until all changes have been incorporated in the Final Plans signed by Tenant and written acceptance of the revised price has been received by Landlord from Tenant. In the absence of such written authorization to proceed and if Landlord's contractor is selected, then Landlord shall not be obligated to commence work on the Premises and Tenant shall be responsible for any costs due to any resulting delay in completion of the Premises and as provided in Section 3(A) of the Lease. B. PAYMENTS. Refer to Section 6(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. Landlord shall not charge for its services in relation to any such modifications unless such modifications constitute material change to Tenants' Final Plans. Apart from any fee due with respect to such material changes, Landlord shall not charge Tenant a construction management fee for Landlord's work on the Tenant Improvements. If Tenant wishes to proceed with such changes, Tenant shall within five (5) business days to 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(A) of the Lease, Tenant shall be responsible for any resulting delay in completion of the Premises due to modification of Final Plans. Tenant shall also be responsible for any demolition work required as a result of the change. D. IMPROVEMENTS CONSTRUCTED BY TENANT. If any work is to be performed in connection with the Initial Tenant Improvements on the Premises by Tenant or Tenant's contractor: (1) Such work shall proceed upon Landlord's written approval (not to be unreasonably withheld) of (i) Tenant's contractor, (ii) general liability and property damage insurance satisfactory to Landlord carried by Tenant's contractor, which insurance shall not be required to exceed levels carried by Shell and Core Contractor, (iii) detailed plans and Exhibit D - Page 4 68 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 Shell and Core 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 Shell and Core 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 Shell and Core Contractor or the Tenant Improvement Contractor and shall pay such reasonable charges for such services as may be charged by the Shell and Core Contractor or the Tenant Improvement Contractor. This will be included in the general conditions of Subsection (1)(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 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, any Mortgagees, and the Shell and Core 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, Tenant's Office Planner, licensees, agents, servants, employees, guests, invitees, or visitors. Landlord will make reasonable efforts to accommodate Tenant's Exhibit D - Page 5 69 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 item V(D)(4) of this Agreement. IN WITNESS WHEREOF, Landlord and Tenant have executed this exhibit as of the 15th day of January, 1999. LANDLORD: WRC SUNSET NORTH LLC, a Washington limited liability company By: EOP SUNSET NORTH, L.L.C., a Delaware limited liability company, its manager By: EOP OPERATING LIMITED PARTNERSHIP, a Delaware limited partnership, its sole member By: EQUITY OFFICE PROPERTIES TRUST, a Maryland real estate investment trust, its managing general partner By: ----------------------------- Its: ----------------------------- By: WRIGHT RUNSTAD ASSOCIATED LIMITED PARTNERSHIP, a Washington limited partnership its manager By: WRIGHT RUNSTAD & COMPANY, a Washington corporation, its sole general partner By: --------------------------------- Its: --------------------------------- TENANT: BSQUARE CORPORATION, a Washington corporation By: --------------------------------- Its: -------------------------------- Exhibit D - Page 6 70 EXHIBIT D-1 SUNSET NORTH Shell and Core and Landlord Provided Tenant Improvements Landlord shall provide bare shell and core floor ready for tenant improvements as follows: Building Standard restrooms completed. Building Standard drinking fountains installed. DRYWALL. Drywall installed around the core areas only and firetaped (excludes drywall at the perimeter of the building and columns). MAIN LOBBY. The main lobby serving the building is completed. ELEVATOR LOBBY. All finishes are part of tenant improvements (except Building Standard elevator doors, frames, and buttons). LIFE SAFETY. Life safety includes fire sprinkler riser, code minimum tenant distribution, central life safety system with Conduit, and wire to floor. Dropping of heads, detectors, strobe lights, and speakers are part of tenant improvements. MECHANICAL. Mechanical includes the main system with medium pressure duct (the main loop) serving the floor and return air systems. VAV boxes and low pressure ductwork from main loop is a part of tenant improvements. The base building will include a central automated system pursuant to which Tenant may activate after hours HVAC from within the Premises, but Tenant's in Premises link to that system will be part of tenant improvements. ELECTRICAL. Electrical includes panels in the electrical closets based on a design load as set forth on Exhibit F attached to the Lease. The main system includes expansion capabilities for additional panels installed during tenant improvements. PERIMETER FINISHES. Perimeter finishes include the exterior of the building, support structure, and insulation. CEILING GRID. Ceiling grid and panels are excluded and considered tenant improvements. ELEVATORS AND STAIRWELLS. Elevators and stairwells (with Building Standard finishes) serving the floor are completed. Exhibit D-1 - Page 1 71 EXHIBIT D-2 LIST OF BUILDING PLANS AND SPECIFICATIONS Architectural Plans prepared by Zimmer Gunsal Frasca Partnership dated 8/10/98; Civil Plans prepared by KPFF dated 8/10/98; Landscape Plans prepared by The Berger Partnership dated 8/10/98; Structural Plans prepared by KPFF dated 8/10/98; HVAC Plans prepared by MacDonald-Miller dated 8/10/98; Plumbing Plans prepared by MacDonald-Miller dated 8/10/98; Electrical Plans prepared by Holmes Electric dated 8/10/98; Fire Protection Plans prepared by Cosco dated 8/10/98. Exhibit D-2 - Page 1 72 EXHIBIT E SIGNAGE CRITERIA This Exhibit is attached to and made a part of the Lease dated as of January 15, 1999, by and between WRC SUNSET NORTH LLC, a Washington limited liability company ("Landlord") and BSQUARE CORPORATION, a Washington corporation ("Tenant") for space on the third (3rd), fourth (4th) and fifth (5th) floors in Building Four (4) located at the Northeast corner of 139th Avenue Southeast and Southeast 32nd Street, Bellevue, King County, Washington. GENERAL Tenant will have the right to place one sign on the west face of the Building. Tenant will have the first choice of a location. The components of all signs including size, design, and color and materials shall be approved by Landlord and shall conform to the specific requirements identified below. Tenant shall submit to the Landlord a preliminary drawing showing the sign located on the Building's entire elevation and a dimensioned drawing of the entire sign describing the size and character of the proposed letters together with samples of all colors and materials prior to entering into a final contract with a sign company. In no case shall a sign be fabricated or installed without Tenant receiving the Landlord's approval and obtaining Landlord's signature on a shop drawing(s) prior to fabrication. BUILDING SIGNAGE CRITERIA Shop drawings shall be fully dimensioned and indicate location, type of lettering, illumination (if applicable), all colors and materials, and specifications for the entire assembly, including details describing how the sign will be mounted to the Building. The sign shall consist of the Tenant's trade name and/or logo if the logo is a part of Tenant's common trademark. The wording shall not include the product or service sold except as part of the trade name. The letter style and color may be proposed by the individual tenants. Signs shall be internally illuminated and constructed of individual letters/numerals with a translucent face and opaque back. Maximum height shall be 24" for letters and logos. Signage is limited to a maximum length of 16 lineal feet of signage, including letter characters and symbols. Exhibit E-1 73 EXHIBIT E (CONT'D.) SIGNAGE CRITERIA All portions of any sign must be within 2'0" x 16'0" area centered horizontally between specified columns. The lower edge of the letters shall all align 3" above the lower edge of the panel. See Exhibit A attached. No moving, flashing, or audible signs will be permitted. The sign, including its raceway and letters, shall not project more than 13" from the face of the panel to which it is mounted (8" for the raceway and 5" for the letter). There shall be no overhanging signs or signage perpendicular to the Building. No signs shall be attached to the Building in other than the designated area. There will be no exposed labels bearing the name of the sign contractor, fabricator, or underwriter's approval. All costs associated with the design, fabrication, installation, and maintenance shall be paid by the Tenant. Signs shall comply with all governing building and electrical codes and regulations, and shall bear the UL label. Cost of obtaining all permits, approvals, etc. required for installation shall be the responsibility of the Tenant. Electrical service to approved illuminated sign shall originate from the Tenant's electrical panel. Tenant shall pay the additional electrical cost. Exhibit E-2 74 EXHIBIT F TENANT'S ELECTRICAL EQUIPMENT LIST The electricity and the heating, ventilation and air-conditioning ("HVAC") available to the Premises will be sufficient to support an average of two (2) standard personal computer central processing units and two (2) monitors per office, based on offices with an average size of 200 rentable square feet evenly distributed throughout the Premises. Central computer rooms and laboratories are NOT included in these calculations. Supporting calculations are as follows: 1. Based on the foregoing, Tenant's electrical loads have been calculated as follows: -1.2 Watts per square foot for the lighting load for electrical (code requirement). -5.0 Watts per square foot electrical load for tenant equipment (as defined above). 6.2 Watts total electrical capacity needed. 2. Based on the foregoing, Tenant's HVAC loads have been calculated as follows: -1.2 Watts per square foot for the lighting load for HVAC (code requirement). -2.1 Watts per square foot for the HVAC load for tenant equipment (as defined above). 3.3 Watts total HVAC capacity needed 3. The base building utilities design shall provide the following electrical capacities: -1.2 Watts per square foot is provided to meet maximum allowed by Washington State Energy Code. -6.0 Watts per square foot for tenant equipment loads. 7.2 Watts* total electrical capacity to be provided *NOTE: An additional 4.0 Watts per square foot will be provided to power the building HVAC System. 4. The base building utilities design shall provide the following HVAC capacities: -1.2 Watts per square foot is provided to meet maximum allowed by Washington State Energy Code. -2.8 Watts Per square foot for tenant equipment loads. 4.0 Watts total HVAC capacity to be provided. Exhibit F-1 75 In summary, based on the above-described level of electrical usage, the base building will provide a surplus electrical load of 1.0 watts per square foot (7.2-6.2) and a Surplus HVAC load of 0.7 watts per square foot (4.0-3.3). Exhibit F-2 76 EXHIBIT G FORM OF SUBORDINATION AGREEMENT RETURN NAME AND ADDRESS: WELLS FARGO BANK, NATIONAL ASSOCIATION Real Estate Group, MAC 6101-121 1300 S.W. 5th Avenue, l2th Floor Portland, OR 97201 Attn: M. K. Long SUBORDINATION AGREEMENT; ACKNOWLEDGMENT OF LEASE ASSIGNMENT, ESTOPPEL, ATTORNMENT AND NON-DISTURBANCE AGREEMENT GRANTORS: (1) WRC SUNSET NORTH LLC; (2) BSQUARE CORPORATION GRANTEE: WELLS FARGO BANK, NATIONAL ASSOCIATION LEGAL LOTS 6 THROUGH 10 AND AN UNDIVIDED INTEREST IN LOT 11 AND DESCRIPTION: TRACT C OF SUNSET RIDGE I-90 CORPORATE CAMPUS, VOLUME 154 OF PLATS, PAGES 77-80, KING COUNTY, WASHINGTON Additional legal description is on Exhibit A of this document. ASSESSOR'S 813530-0060-02 PROPERTY TAX 813530-0070-00 PARCEL 813530-0080-08 ACCOUNT 813530-0090-06 NUMBER(S): 813530-0100-04 813530-0110-02 502880-0050-09 Exhibit G-1 77 SUBORDINATION AGREEMENT; ACKNOWLEDGMENT OF LEASE ASSIGNMENT, ESTOPPEL, ATTORNMENT AND NON-DISTURBANCE AGREEMENT (Lease To Deed of Trust) NOTICE: THIS SUBORDINATION AGREEMENT RESULTS IN YOUR LEASE BECOMING SUBJECT TO AND OF LOWER PRIORITY THAN THE LIEN OF THE DEED OF TRUST (DEFINED BELOW). THIS SUBORDINATION AGREEMENT; ACKNOWLEDGMENT OF LEASE ASSIGNMENT, ESTOPPEL, ATTORNMENT AND NON-DISTURBANCE AGREEMENT ("Agreement") is made as of January 15, 1999, by and between WRC SUNSET NORTH LLC, a Washington limited liability company ("Owner"), BSQUARE CORPORATION, a Washington corporation ("Lessee") and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Lender"). R E C I T A L S 1. Pursuant to the terms and provisions of a lease dated as of January 15, 1999 ("Lease") Owner, as "Lessor", granted to Lessee a leasehold estate in and to a portion of the property described on Exhibit A attached hereto and incorporated herein by this reference (which property, together with all improvements now or hereafter located on the property, is defined as the "Property"). 2. Owner has executed, or proposes to execute, a deed of trust with absolute assignment of leases and rents, security agreement and fixture filing ("Deed of Trust") securing, among other things, a promissory note ("Note") in the principal sum of SIXTY EIGHT MILLION DOLLARS ($68,000,000), dated September 1, 1998, in favor of Lender, which Note is payable with interest and upon the terms and conditions described therein ("Loan"). The Deed of Trust is to be recorded concurrently herewith. 3. As a condition to making the Loan secured by the Deed of Trust, Lender requires that the Deed of Trust be, and at all times remain, a lien on the Property, prior and superior to all the rights of Lessee under the Lease on the terms set forth in this document. 4. Owner, Lessee and Lender desire to enter into the agreements set forth in this document. Exhibit G-2 78 NOW THEREFORE, for valuable consideration, Owner, Lessee and Lender hereby agree as follows: 6 SUBORDINATION. Owner and Lessee hereby agree that: 6.1 Prior Lien. The Deed of Trust securing the Note in favor of Lender, and any modifications, renewals or extensions thereof, shall be and at all times remain a lien on the Property prior and superior to the Lease; 6.2 Subordination. Lender has advised Owner that Lender would not make the Loan without this agreement to subordinate; and 6.3 Whole Agreement. This Agreement shall be the whole agreement and only agreement with regard to the subordination of the Lease to the lien of the Deed of Trust and shall supersede and cancel, but only insofar as would affect the priority between the Deed of Trust and the Lease, any prior agreements as to such subordination, including, without limitation, those provisions, if any, contained in the Lease which provide for the subordination of the Lease to a deed or deeds of trust or to a mortgage or mortgages. AND FURTHER, Lessee declares, agrees and acknowledges for the benefit of Lender, that: 6.4 Use of Proceeds. Lender, in making disbursements pursuant to the Note, the Deed of Trust or any loan agreements with respect to the Property, is under no obligation or duty to, nor has Lender represented that it will, see to the application of such proceeds by the person or persons to whom Lender disburses such proceeds, and any application or use of such proceeds for purposes other than those provided for in such agreement or agreements shall not defeat this agreement to subordinate in whole or in part; 6.5 Subordination. Lessee intentionally and unconditionally subordinates all of Lessee's right, title and interest in and to the Property to the lien of the Deed of Trust and understands that in reliance upon, and in consideration of, this subordination, specific loans and advances are being and will be made by Lender and, as part and parcel thereof, specific monetary and other obligations are being and will be entered into which would not be made or entered into but for said reliance upon this subordination. 7. ASSIGNMENT. Lessee acknowledges and consents to the assignment of the Lease by Owner in favor of Lender. 8. ESTOPPEL. Lessee acknowledges and represents that: 8.1 Lease Effective. The Lease has been duly executed and delivered by Lessee and, subject to the terms and conditions thereof, the Lease is in full force and effect, the obligations of Lessee thereunder are valid and binding and there have been no modifications or additions to the Lease, written or oral; 8.2 No Default. To the best of Lessee's knowledge, as of the date hereof: (i) there exists no breach, default, or event or condition which, with the giving of notice or the passage of Exhibit G-3 79 time or both, would constitute a breach or default under the Lease; and (ii) there are no existing claims, defense's or offsets against rental due or to become due under the Lease; 8.3. Entire Agreement. The Lease constitutes the entire agreement between Lessor and Lessee with respect to the Property and Lessee claims no rights with respect to the Property other than as set forth in the Lease; and 8.4 No Prepaid Rent. No deposits or prepayments of rent have been made in connection with the Lease, except as follows: (if none, state "None") NONE. 9. ADDITIONAL AGREEMENTS. Lessee covenants and agrees that, during all such times as Lender is the Beneficiary under the Deed of Trust: 9.1 Modification, Termination and Cancellation. Lessee will not consent to any modification, amendment, termination or cancellation of the Lease (in whole or in part) except to the extent expressly permitted by the terms of the Lease or as a result of default of Owner pursuant to the Lease without Lender's prior written consent and will not make any payment to Owner in consideration of any modification, termination or cancellation of the Lease (in whole or in part) except to the extent expressly permitted by the terms of the Lease without Lender's prior written consent; 9.2 Notice of Default. Lessee will notify Lender in writing concurrently with any notice given to Owner of any default by Owner under the Lease, and Lessee agrees that Lender has the right (but not the obligation) to cure any breach or default specified in such notice within the time periods set forth in the Lease; 9.3 No Advance Rents. Lessee will make no payments or prepayments of rent more than one (1) month in advance of the time when the same become due under the Lease; and 9.4 Assignment of Rents. Upon receipt by Lessee of written notice from Lender that Lender has elected to terminate the license granted to Owner to collect rents, as provided in the Deed of Trust, and directing the payment of rents by Lessee to Lender, Lessee shall comply with such direction to pay and shall not be required to determine whether Owner is in default under the Loan and/or the Deed of Trust, and Owner hereby so directs and authorizes Lessee to make such payments upon receipt of such notice from Lender. Notwithstanding the foregoing, if Lessee after notice from Lender, is uncertain in Lessee's sole discretion, as to whether payments are to be made to Owner or to Lender, Lessee may deposit the payments in an interpleader action with the Superior Court for King County, State of Washington and interplead Owner and Lender therein, provided Lessee shall not so deposit such funds in an interpleader action if (i) Lender has had a receiver appointed for the Property by a court with appropriate jurisdiction and Lessee has received written notice of such appointment with direction by the court to pay rent to such receiver; (ii) a court with appropriate jurisdiction has issued an order directing such payments to be made to Lender, and Lessee has received a copy of such order; or (iii) Lessee receives written evidence of Owner's concurrence with the payments of such amounts to Lender. Exhibit G-4 80 10. ATTORNMENT. Lessee agrees for the benefit of Lender (including for this purpose any transferee of Lender or any transferee of Owner's title in and to the Property by Lender's exercise of the remedy of sale by foreclosure under the Deed of Trust), and Lender agrees, that following transfer of title to the Property to Lender by exercise of Lender's remedy of sale by foreclosure under the Deed of Trust and assumption of the Lease by Lender (subject to the same limitations on personal liability contained in Section 27 of the Lease) with respect to obligations of the Lessor to be performed under the Lease after the date of transfer of title of the Property to Lender: 10.1 Payment of Rent. Lessee shall pay to Lender all rental payments required to be made by Lessee pursuant to the terms of the Lease for the duration of the team of the Lease; 10.2 Continuation of Performance. Lessee shall be bound to Lender in accordance with all of the provisions of the Lease for the balance of the term thereof, and Lessee hereby attorns to Lender as its landlord, such attornment to be effective and self-operative without the execution of any further instrument immediately upon Lender succeeding to Owner's interest in the Lease and giving written notice thereof to Lessee; 10.3 No Offset. Lender shall not be liable for, nor subject to, any offsets or defenses which Lessee may have by reason of any act or omission of Owner under the Lease prior to the date of transfer of title to the Property to Lender, nor for the return of any sums which Lessee may have paid to Owner under the Lease as and for security deposits, advance rentals or otherwise, except to the extent that such sums are actually delivered by Owner to Lender or Lender otherwise has received credit therefor. Notwithstanding the foregoing provisions of this Section 10.3, (i) nothing in this Section 10.3 shall create a right of offset under the Lease that does not otherwise exist; and (ii) Tenant may enforce the offset rights granted to Tenant in Section 3(A) of the Lease against Lender provided (A) Tenant drivers to Lender a copy of Tenant's notice to Landlord stating that certain punchlist items have not been timely completed, and a copy of Tenant's written demand for payment of the cost of Tenant's completion of such items, both of which notices are required under Section 3(A) of the Lease and shall be given in accordance with Section 9.2 of this Agreement; and (B) Tenant promptly exercises such offset rights once those offset rights have accrued; and 10.4 Subsequent Transfer. Lender, by succeeding to the interest of Owner under the Lease, shall become obligated to perform the agreements and covenants of Owner thereunder with respect to those agreements and covenants first becoming due after Lender succeeds to the interest of Owner, and, upon any further transfer of Owner's interest by Lender, all of such obligations shall terminate as to Lender with respect to obligations first becoming due after the date of transfer by Lender. 11. NON-DISTURBANCE. In the event of a foreclosure under the Deed of Trust, so long as there shall then exist no breach, default, or event of default on the part of Lessee under the Lease beyond any applicable cure periods stated in the Lease, Lender agrees for itself and its successors and assigns that the leasehold interest of Lessee under the Lease shall not be extinguished or terminated by reason of such foreclosure, but rather the Lease shall continue in full force and effect and Lender shall recognize and accept Lessee as tenant under the Lease subject to the terms and provisions of the Lease. Exhibit G-5 81 12. MISCELLANEOUS. 12.1 Heirs, Successors, Assigns and Transferees. The covenants herein shall be binding upon, and inure to the benefit of, the heirs, successors and assigns of the parties hereto; and 12.2 Notices. All notices or other communications required or permitted to be given pursuant to the provisions hereof shall be deemed served upon delivery or, if mailed, upon the first to occur of receipt or the expiration of three (3) days after deposit in United States Postal Service, certified mail, postage prepaid and addressed to the address of Owner, Lessee or Lender appearing below: "OWNER" "LENDER" WRC SUNSET NORTH LLC WELLS FARGO BANK, NATIONAL c/o Wright Runstad & Company ASSOCIATION 1191 Second Avenue, Suite 2000 Real Estate Group, MAC 6101-121 Seattle, Washington 98101 1300 S.W. 5th Avenue, 12th Floor Portland, OR 97201 Attn: Jon F. Nordby Attn: M. K. Long Loan No. "LESSEE" BSQUARE CORPORATION 3633 136th Place NE, Suite 100 Bellevue, WA 98006 Attn: General Counsel provided, however, any party shall have the right to change its address for notice hereunder by the giving of written notice thereof to the other party in the manner set forth in this Agreement; and 12.3 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute and be construed as one and the same instrument; and 12.4 Paragraph Headings. Paragraph headings in this Agreement are for convenience only and are not to be construed as part of this Agreement or in any way limiting the provisions hereof. 12.5 INCORPORATION. Exhibit A is attached hereto and incorporated herein by this reference. Exhibit G-6 82 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. NOTICE: THIS SUBORDINATION AGREEMENT CONTAINS A PROVISION WHICH ALLOWS THE OWNER TO OBTAIN A LOAN, THE PROCEEDS OF WHICH MAY BE EXPENDED FOR PURPOSES OTHER THAN THE IMPROVEMENT OF THE PROPERTY. IT IS RECOMMENDED THAT, PRIOR TO THE EXECUTION OF THIS AGREEMENT, THE PARTIES CONSULT WITH THEIR ATTORNEYS WITH RESPECT HERETO. "OWNER" WRC SUNSET NORTH LLC, a Washington limited liability company By: EOP SUNSET NORTH, L.L.C., a Delaware limited liability company, its manager By: EOP OPERATING LIMITED PARTNERSHIP, a Delaware limited partnership, its sole member By: EQUITY OFFICE PROPERTIES TRUST, a Maryland real estate investment trust, its managing general partner By: ------------------------------ Its: -------------------------- By: WRIGHT RUNSTAD ASSOCIATED LIMITED PARTNERSHIP, a Washington limited partnership its manager By: WRIGHT RUNSTAD & COMPANY, a Washington corporation, its sole general partner By: ------------------------------ Its: -------------------------- Exhibit G-7 83 "LENDER" WELLS FARGO BANK, NATIONAL ASSOCIATION By: --------------------------------- Its: ----------------------------- "LESSEE" BSQUARE, CORPORATION, a Washington corporation By: --------------------------------- Its: ----------------------------- STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) I, the undersigned, a Notary Public, in and for the County and State aforesaid, do hereby certify that ____________________________, personally known to me to be the _______________ of Wright Runstad & Company, the general partner of Wright Runstad Associates Limited Partnership, a Member of WRC SUNSET NORTH LLC, a Washington limited liability company, the Owner in the foregoing instrument, and personally known to me to be the same person whose name is subscribed to the foregoing instrument, appeared before me this day in person and acknowledged that as such officer of said entity being authorized so to do, he executed the foregoing instrument on behalf of said entity, by subscribing the name of such entity by himself as such officer, as a free and voluntary act, and as the free and voluntary act and deed of said entity under the foregoing instrument for the uses and purposes therein set forth. GIVEN under my hand and official seat this ______ day of January, 1999. Notary Public: ------------------------- Printed Name: -------------------------- Residing at: --------------------------- My Commission expires: ----------------- Exhibit G-8 84 STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) I, the undersigned, a Notary Public, in and for the County and State aforesaid, do hereby certify that ____________________________, personally known to me to be the _______________ of Equity Office Properties Trust, the general partner of EOP Operating Limited Partnership, the sole member of EOP Sunset North, L.L.C., a Member of WRC SUNSET NORTH LLC, a Washington limited liability company, the Owner in the foregoing instrument, and personally known to me to be the same person whose name is subscribed to the foregoing instrument, appeared before me this day in person and acknowledged that as such officer of said entity being authorized so to do, he executed the foregoing instrument on behalf of said entity, by subscribing the name of such entity by himself as such officer, as a free and voluntary act, and as the free and voluntary act and deed of said entity under the foregoing instrument for the uses and purposes therein set forth. GIVEN under my hand and official seal this ______ day of January, 1999. Notary Public: ------------------------- Printed Name: -------------------------- Residing at: --------------------------- My Commission expires: ----------------- STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) On this the _____ day of January, 1999, before me a Notary Public duly authorized in and for the said County in the State aforesaid to take acknowledgments personally appeared ________________ known to me to be ________________ of WELLS FARGO BANK, NATIONAL ASSOCIATION the Lender in the foregoing instrument, and acknowledged that as such officer, being authorized so to do, (s)he executed the foregoing instrument on behalf of said corporation by subscribing the name of such corporation by himself/herself as such, as a free and voluntary act, and as the free and voluntary act of said corporation, for the uses and purposes therein set forth. IN WITNESS WHEREOF, I hereunto set my hand and official seal. Notary Public: ------------------------- Printed Name: -------------------------- Residing at: --------------------------- My Commission expires: ----------------- Exhibit G-9 85 STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) On this _____ the day of January, 1999, before me a Notary Public duly authorized in and for the said County in the State aforesaid to take acknowledgments personally appeared ________________ known to me to be ________________ of BSQUARE CORPORATION the Lessee in the foregoing instrument, and acknowledged that as such officer, being authorized so to do, (s)he executed the foregoing instrument on behalf of said corporation by subscribing the name of such corporation by himself/herself as such, as a free and voluntary act, and as the free and voluntary act of said corporation, for the uses and purposes therein set forth. IN WITNESS WHEREOF, I hereunto set my hand and official seal. Notary Public: ------------------------- Printed Name: -------------------------- Residing at: --------------------------- My Commission expires: ----------------- Exhibit G-10 86 EXHIBIT A Loan No. _____________ DESCRIPTION OF PROPERTY EXHIBIT A to Subordination Agreement; Acknowledgment of Lease Assignment, Estoppel, Attornment and Non-Disturbance Agreement dated as of January 15, 1999, executed by WRC SUNSET NORTH LLC, a Washington limited liability company as "Owner", BSQUARE CORPORATION, a Washington corporation, as "Lessee", and WELLS FARGO BANK, NATIONAL ASSOCIATION, as "Lender". All that certain real property located in the County of King, State of Washington, described as follows: LOTS 6 THROUGH 10 OF SUNSET RIDGE I-90 CORPORATE CAMPUS, A BINDING SITE PLAN, AS PER PLAT RECORDED IN VOLUME 154 OF PLATS, PAGES 77 THROUGH 80, RECORDS OF KING COUNTY; EXCEPT ANY PORTION CONVEYED FOR 139TH AVE. S.E., BY DEED RECORDED UNDER RECORDING NO. 9101280422; TOGETHER WITH AN UNDIVIDED 60% INTEREST IN LOT 11 AND TRACT C OF SAID PLAT; AND TOGETHER WITH THOSE CERTAIN EASEMENT RIGHTS AS DELINEATED IN INSTRUMENT RECORDED UNDER RECORDING NO. 9601091040; AND TOGETHER WITH THOSE CERTAIN EASEMENT RIGHTS AS DELINEATED IN INSTRUMENT RECORDED UNDER RECORDING NO. 9107260572; AND TOGETHER WITH THOSE CERTAIN EASEMENT RIGHTS AS DELINEATED IN INSTRUMENT RECORDED UNDER RECORDING NO. 9309292404; SITUATE IN THE CITY OF BELLEVUE, COUNTY OF KING, STATE OF WASHINGTON. Exhibit G-11 EX-10.12 16 MICROSOFT SOFTWARE FOR DEDICATED SYSTEMS 1 EXHIBIT 10.12 MICROSOFT(R) SOFTWARE FOR DEDICATED SYSTEMS DISTRIBUTOR AGREEMENT #_____________ dated November 1ST, 1997 with Bsquare Corporation, a corporation of Washington. This Distributor Agreement ("Agreement") is made and entered into as of the date first set forth above ("Effective Date"), by and between MICROSOFT CORPORATION, a Washington, U.S.A. corporation, ("MS"), and the company specified above ("COMPANY"). MS anticipates that it will transfer its OEM licensing operations to its wholly owned subsidiary, Microsoft Licensing, Inc., a Nevada, U.S.A. corporation, on or about December 31, 1997. From and after such transfer, all references to "MS" contained in this Agreement shall refer to Microsoft Licensing, Inc. Microsoft Corporation will notify COMPANY of the assignment of the Agreement to Microsoft Licensing, Inc. For shipments of Product(s) after the date of assignment, COMPANY will report to and make royalty payments to Microsoft Licensing, Inc. at the address provided by Microsoft Corporation or Microsoft Licensing, Inc. 1. DEFINITIONS. (a) "Associated Product Materials" or "APM" shall mean a serialized sticker and/or other materials designated by MS from time to time which COMPANY shall acquire from MS or an MS-designated supplier for distribution with each copy of Product. (b) "Dedicated Application" shall mean a dedicated purpose software program which provides the primary functionality of the Dedicated System (as defined below) and which when used with the Dedicated System offers significant functionality in addition to the Product software. A Dedicated Application excludes any software program which addresses more than one function of the office automation and consumer computing markets. Office automation and consumer computing functions include, without limitation, email, word processing, spreadsheets, network browsing, scheduling, and personal finance. (c) "Dedicated Product Deliverables" shall mean Product software in object code form, installation and configuration utilities, and any other software or materials provided by MS and identified as part of the Dedicated Product Deliverables. (d) "Dedicated System" shall mean an OEM Customer's computer system or computing device which utilizes a single microprocessor, is distributed with Product software in accordance with the Sublicense Agreement (as defined in Section 1(e)), and is designed for exclusive use with a Dedicated Application that provides the primary functionality of the system or device. A Dedicated System excludes any personal, laptop, desktop, handheld, notebook, server computers, or other such computing devices which address more than one function of the office automation or consumer computing markets and shall not be useable as a commercially acceptable substitute for such computers or devices. (e) "MSCORP" shall mean Microsoft Corporation, a Washington, U.S.A. corporation. (e) "OEM Customer" shall mean an original equipment manufacturer of Dedicated Systems which licenses Product from COMPANY under the terms of an OEM Customer Sublicense Agreement for Dedicated Systems ("Sublicense Agreement") in the form attached hereto as Exhibit U. (f) "Product" shall mean the copyrighted and/or patented MS product(s) (including, where applicable, Product software in object code form, Dedicated Product Deliverables, and APM) identified in the attached Exhibit(s) C as being licensed to COMPANY. (g) "Product Release" shall mean a release of Product which MS designates as a change in the digit(s) to the left of the decimal point in the Product version number [(x).xx] or a change in the annual identifier (e.g., 96 or 1996). (h) "Product Upgrade" shall mean a Version Release, Update Release or other release of the Product to be distributed by an OEM Customer pursuant to the Sublicense Agreement as a replacement for a prior version of the Product software. (i) "Recovery Media" shall mean a backup image of the Product as originally installed on the Dedicated System. (j) "Sales Target" shall mean the sales targets in US Dollars specified in Exhibit Q. (k) "Suppliers" shall mean any and all entities (e.g. MSCORP) which license or otherwise supply MS with Products or portions thereof for redistribution and sublicense by MS. (k) "Update Release" shall mean a release of Product which MS designates as a change in the digit(s) to the right of the tenths digit in the Product version number [x.x(x)]. (l) "Version Release" shall mean a release of Product which MS designates as a change in the tenths digit in the Product version number [x.(x)x]. 2. LIMITED LICENSE GRANT. (a) Subject to the restrictions set forth in this Agreement, and COMPANY's compliance with all terms and conditions of this Agreement, MS grants to COMPANY the non-exclusive limited license to: (i) acquire Dedicated Product Deliverables for Products from MS or an MS-designated supplier; (ii) directly distribute to its OEM Customers the Dedicated Product Deliverables and APM supplied by MS or an MS-designated supplier; (iii) grant to COMPANY's OEM Customers who have executed a Sublicense Agreement with COMPANY, the rights to: (A) configure the Product in accordance with the instructions, if any, contained in the Dedicated Product Deliverables solely to enable Product to execute on OEM Customer's Dedicated System; (B) install one (1) copy of the Product software in nonvolatile, solid-state memory, on the hard disk drive, or in other nonvolatile form, in accordance with instructions, if any, contained in the Dedicated Product Deliverables, only as part of a Dedicated System; (C) reproduce the Product software for distribution as Product Upgrades and Recovery Media as set forth in the Sublicense Agreement; (D) distribute the Product Software as part of the Dedicated Systems, Product Upgrades and Recovery Media as set forth in the Sublicense Agreement. (b) COMPANY's license shall extend to Update Releases and Version Releases. COMPANY's license shall not extend to Product Releases. 2 (c) (i) Before providing any Product or Dedicated Product Deliverables to an OEM Customer, COMPANY will execute a Sublicense Agreement with such OEM Customer. (ii) COMPANY shall authorize the OEM Customer to reproduce and distribute only the number of units and language version(s) of Product as are described in the applicable Attachment 2 of the Sublicense Agreement. (iii) COMPANY may license additional units of Product(s) to OEM Customers that are licensed under a current Sublicense Agreement for such Product(s) and language version(s) by adding dated "Additional Units Attachment(s)" to the Sublicense Agreement using the Amendment form set forth in Exhibit V attached hereto ("Sublicense Amendment"). All terms and conditions of the Sublicense Agreement shall apply to the units of Product(s) licensed in the Sublicense Amendments. (iv) COMPANY shall not make any changes to the form of the Sublicense Agreement or Sublicense Amendment without the prior written consent of MS, except that the Sublicense Agreement and Sublicense Amendment shall be adapted as required by the laws of any non-USA jurisdiction in which COMPANY distributes the Product. (v) COMPANY shall cause the OEM Customer to comply with the terms and conditions of the Sublicense Agreement. COMPANY shall take such actions on behalf of MS, at COMPANY's expense, as MS may reasonably request to enforce the terms of the Sublicense Agreement. (vi) Upon MS request, COMPANY shall provide a copy of the Sublicense Agreement to MS. (d) For each unit of Product licensed by COMPANY to an OEM Customer, COMPANY shall supply one (1) APM for such Product to the OEM Customer. (e) COMPANY and COMPANY's OEM Customers may not reproduce, publish, or sell Product documentation. (f) (i) COMPANY agrees to provide commercially reasonable support for the Product to COMPANY's OEM Customers. (ii) COMPANY agrees to maintain a separate online service contract with MS Product Support Services in order that COMPANY can provide timely support to COMPANY's OEM Customers. COMPANY acknowledges that MS's standard support fees will apply for the support services. (iii) COMPANY agrees to provide MS with ninety (90) days prior written notice of any substantive change in COMPANY's support policy for the Product. (g) (i) COMPANY shall distribute Product(s) and the Dedicated Product Deliverables, and grant the rights set forth in Section 2(a)(iii) only to COMPANY's OEM Customers. (ii) COMPANY shall comply with the additional provisions, if any, provided in Exhibit(s) C with respect to Product. (h) COMPANY shall make no use of the Dedicated Product Deliverables except as described in Section 2(a) of this Agreement. (i) COMPANY shall not reverse engineer, decompile or disassemble any Product except as permitted by applicable law without the possibility of contractual waiver. COMPANY acknowledges that information on interoperability of the Product with other products is readily available. (j) All distribution and use of the Product is by license only. MS does not authorize the Product to be "issued to the public", "put into circulation", or subject to a "first sale" as the copyright laws may use those (or similar) terms. COMPANY's license to distribute the Product is limited to distribution of the Product by COMPANY to its OEM Customers pursuant to a Sublicense Agreement. (k) This Agreement does not include technical support by MS to COMPANY, COMPANY's OEM Customers, or end users. (l) MS reserves all rights not expressly granted including, without limitation, modification rights, translation rights, rental rights, and rights to source code. MS expressly reserves its exclusive right under applicable copyright, patent, and trademark laws to distribute copies of Product by any means. COMPANY acknowledges that MS (and/or its suppliers, if applicable) shall retain all copyright, patent, moral, trademark, title and other proprietary and intellectual property in the Product software, Dedicated Product Deliverables and components thereof, in whole or in part, in any form. 3. PAYMENT AND REPORTING. (a) COMPANY agrees to pay MS the royalties in Exhibit(s) C. Royalties exclude any fees charged by MS or any MS-designated supplier for production of the APM or Dedicated Product Deliverables. Royalties also exclude any taxes, duties, fees, excises or tariffs imposed on any of COMPANY's activities in connection with this Agreement. Such taxes, duties, fees, excises or tariffs, if any, shall be paid by COMPANY. (b) COMPANY agrees to pay MS the royalty rates set forth in Exhibit(s) C for each unit of Product licensed or distributed by COMPANY. (c) In addition, COMPANY agrees to pay MS the Localization Additional Royalty specified in Exhibit(s) C for each unit of non-US English version of Product licensed or distributed by COMPANY. (d) In the event income taxes are required to be withheld by any non-U.S.A. government on payments to MS required hereunder, provided that COMPANY promptly delivers to MS an official receipt for any such taxes withheld or other documents necessary to enable MS to claim a U.S.A. Foreign Tax Credit, COMPANY may deduct such taxes from the amount owed MS and shall pay them to the appropriate tax authority. COMPANY will make certain that any taxes withheld are minimized to the extent permitted by the applicable law. (e) COMPANY agrees that it will maintain a tracking system allowing complete tracking of shipments by (i) Product - including quantity, sticker serial number, and shipment date; and (ii) OEM Customer - including contact name, address, and telephone number. (f) (i) COMPANY agrees to make quarterly royalty reports and payments to MS as specified in Exhibit N within thirty (30) days after the end of each calendar quarter, and thirty (30) days after termination or expiration of this Agreement for the final full or partial quarter. COMPANY's report shall be signed by a duly authorized officer or director of COMPANY. (ii) A copy of COMPANY's report shall be sent to MS electronically or via facsimile in addition to the original 2 CONFIDENTIAL Microsoft Software for Dedicated Systems Distributor Agreement dated November 1st, 1997, between Microsoft Corporation and Bsquare corporation. 3 copy sent in accordance with Exhibit N. COMPANY's royalty reports shall be in the royalty report format attached as Exhibit R or other format as MS may provide from time to time and shall specify royalties for each Product and language version described in Exhibit(s) C. COMPANY shall make such reports even if no royalties are due for such quarter. (iii) A ten percent (10%) late charge and a one percent (1%) monthly finance charge will be assessed on all amounts that are past due, including receipts for foreign taxes withheld. (g) COMPANY shall provide MS with a copy of its U.S.A. state resale exempt certificate, if applicable, with this Agreement when it is returned to MS for signature by MS. 4. SALES TARGETS. (a) COMPANY acknowledges that it has been appointed as a Product distributor for Dedicated Systems based upon its representation that it shall meet the Sales Targets as set forth in Exhibit Q and that this representation forms a fundamental basis of this Agreement. (b) If COMPANY's Sales Targets are not met, this Agreement may be terminated at the sole discretion of MS as set forth in Section 10(c). 5. DELIVERY. (a) For each Product licensed hereunder, MS will deliver or cause to be delivered to COMPANY the Dedicated Product Deliverables if and as available. (b) Neither MS nor its Suppliers shall have any liability for failure to deliver Product by any particular date, or if the Product is not yet a released product, during the term of this Agreement. COMPANY shall not deliver Product to an OEM Customer until MS delivers final Dedicated Product Deliverables for such Product to COMPANY. 6. DEFENSE AND INDEMNIFICATION. (a) MS agrees to defend COMPANY against, and pay the amount of any adverse final judgment (or settlement to which MS consents) resulting from third party claim(s) (hereinafter "Indemnified Claims") that: (i) the Product(s) infringe any copyright enforceable in any Included Jurisdictions (defined in Section 6(d), below); or (ii) the Product name(s) or trademark(s) ("Mark(s)") infringe any trademark rights enforceable in the Included Jurisdictions; provided MS is notified promptly in writing of the Indemnified Claim and has sole control over its defense or settlement, and COMPANY provides reasonable assistance in the defense of the same. (b) In the event MS receives information concerning an intellectual property infringement claim (including an Indemnified Claim) related to the Product(s) or Mark(s), MS may, at its expense, and without obligation to do so, either (i) procure for COMPANY the right to continue to distribute the alleged infringing Product or Mark, or (ii) replace or modify the Product or Mark to make it non-infringing, and in which case COMPANY shall thereupon cease distribution of the alleged infringing Product or Mark. (c) MS and its Suppliers shall have no liability for any intellectual property infringement claim (including an Indemnified Claim) based on COMPANY's (i) manufacture, distribution, or use of any Product or Mark after MS' notice that COMPANY should cease manufacture, distribution, or use of such a Product or Mark due to such a claim; or (ii) combination of a Product with any other product, program or data; or (iii) adaptation or modification of any Product. For all claims described in this Section 6(c), COMPANY agrees to indemnify and defend MS and its Suppliers from and against all damages, costs and expenses, including reasonable attorneys' fees. (d) MS and its Suppliers shall have no obligation to COMPANY for any Indemnified Claims which arise outside the geographical boundaries of the United States, Canada, Australia, Japan, the European Union and Norway ("Included Jurisdictions"). (e) COMPANY hereby agrees to indemnify, and hold MS and its Suppliers harmless and, at MS' or its Suppliers' option, defend MS and its Suppliers, from any and all actions, causes of action, claims, demands, losses, liabilities, expenses and damages (including reasonable attorney fees) arising out of or in connection with any activity, action, inaction and/or failure of COMPANY or COMPANY's OEM Customer(s) to comply with the applicable terms of this Agreement or the Sublicense Agreement. COMPANY shall promptly reimburse MS and its Suppliers for any payment made or amount incurred by MS or its Suppliers for any liability, expense, damage or claim to which the foregoing indemnity relates. 7. INTELLECTUAL PROPERTY NOTICES. (a) COMPANY will not remove any copyright, trademark, patent or mask work notices that appear on the Product as delivered to COMPANY. COMPANY recognizes that MS or its Suppliers may seek patent registration for the Product. (b) COMPANY shall market the product only under the Product name(s) and version number for such Product provided to COMPANY. COMPANY agrees to use the appropriate trademark, product descriptor and trademark symbol (either "(TM)" or "(R)"), and clearly indicate MS', its Suppliers' or applicable third parties' ownership of its trademark(s) whenever the Product name is first mentioned in any advertisement, brochure or in any other manner in connection with the Product. COMPANY shall not, at any time, use any name or trademark confusingly similar to an M, its Suppliers, or licensed third party trademark, trade name and/or product name. COMPANY shall undertake no action that will interfere with or diminish MS' or its Suppliers' right, title and/or interest in MS', its Suppliers, or licensed third party's trademark(s), trade name(s) or Product name(s). COMPANY shall, upon request, provide MS samples of all COMPANY marketing literature which uses Product name(s). (c) COMPANY shall not use or display any MS or Supplier logo (i.e., including without limitation any stylized representation of the MS name used by MS or MSCORP) in its materials or packaging, except as provided by separate written agreement with MS or its Supplier. 8. PROHIBITION AGAINST ASSIGNMENT AND SUBLICENSE. This Agreement, and any rights or obligations hereunder, shall not be assigned or sublicensed by COMPANY (by contract, merger, sale or acquisition of assets, operation of law, or otherwise). 9. TERM OF AGREEMENT. The term of this Agreement shall run from the Effective Date until one (1) year from the end of the calendar quarter in which the Effective Date occurs. 3 CONFIDENTIAL Microsoft Software for Dedicated Systems Distributor Agreement dated November 1st, 1997, between Microsoft Corporation and Bsquare Corporation. 4 10. DEFAULT AND TERMINATION. (a) This Agreement may terminate if any of the following events of default occur: (i) if either party materially fails to perform or comply with any provision of this Agreement; (ii) COMPANY manufactures or distributes any MS or MSCORP product which is not properly licensed under this Agreement or another valid agreement with MS, MSCORP or an MS or MSCORP licensee; (iii) if COMPANY becomes insolvent, enters bankruptcy, reorganization, composition or other similar proceedings under applicable laws, whether voluntary or involuntary, or admits in writing its inability to pay its debts, or makes or attempts to make an assignment for the benefit of creditors; (iv) upon termination of any other agreement between COMPANY and MS or MSCORP due to default by COMPANY; or (v) a material breach of the Sublicense Agreement if such breach has not been cured within the time period set forth in the Sublicense Agreement. (b) Termination due to breach of Sections 2(g), 2(h), 2(i), 8, 13, 14(a), or 14(c) shall be effective upon notice to the defaulting party. Termination due to Section 10(a)(iii) shall be effective upon notice or as soon thereafter as is permitted by applicable law. In all other cases, termination shall be effective thirty (30) days after notice of termination to the defaulting party if the defaults have not been cured within such thirty (30) day period. At the option of the non-defaulting party, termination due to a breach of any provision of this Agreement may be effective upon notice to the defaulting party if such party has received two (2) or more previous notices of default during the term of this Agreement (whether or not such previous defaults have been cured). (c) (i) MS may terminate this Agreement upon written notice to COMPANY, if at the end of any two (2) consecutive calendar quarters following the First Target Period (as defined in Exhibit Q), COMPANY's cumulative reported royalties for each of the two (2) calendar quarters are twenty percent (20%) or more below the Cumulative Target Amount (as specified in Exhibit Q). (ii) For a period of thirty (30) days after such termination, COMPANY may continue license and distribution of Product in accordance with all the terms and conditions of this Agreement in order to fulfill COMPANY'S contractual obligations which existed as of the date of such termination. Nothing herein shall relieve COMPANY of its obligations to pay royalties to MS for Product licensed or distributed by COMPANY. (d) In the event of COMPANY'S default, MS may terminate this Agreement in its entirety or as to any individual Product(s). Termination of this Agreement as to any particular Product(s) will not affect the terms and conditions of this Agreement as they apply to the other Product(s) licensed under this Agreement. 11. OBLIGATION UPON TERMINATION. (a) Within thirty (30) days after termination or expiration of this Agreement, COMPANY shall return to MS all units of Product and all Dedicated Product Deliverables in COMPANY'S possession. COMPANY may, however, retain one unit of Dedicated Product Deliverables for each Product for support purposes only. There shall be no refund or adjustment for amounts paid for Product(s) returned to MS in accordance with this Section 11(a). (b) Except as set forth in Section 10(c)(ii), upon termination or expiration of this Agreement, COMPANY shall cease license and distribution of Product and Dedicated Product Deliverables and all of COMPANY'S license rights herein shall cease. Sections 6, 12, 13, 14, 15 and 16 of this Agreement shall survive termination or expiration of this Agreement. 12. LIMITATION OF LIABILITY AND REMEDY. (a) Total liability of MS and its Suppliers to COMPANY under this Agreement, including Section 6, shall be limited to one hundred percent (100%) of the amount having actually been paid by COMPANY to MS under Section 3. COMPANY releases MS and its Suppliers from all obligations, liability, claims or demands in excess of the limitation. (b) The rights and remedies granted to COMPANY under Section 6 constitute COMPANY'S sole and exclusive remedy against MS, its Suppliers, and their officers, agents and employees for any and all claims arising in connection with the Products or the Dedicated Product Deliverables including but not limited to claims regarding MS' delivery of Product or Dedicated Product Deliverables, or indemnification or contribution from MS with respect to any infringement of the rights of a third party, whether arising under statutory or common law or otherwise. (c) MS AND ITS SUPPLIERS HEREBY DISCLAIM ANY AND ALL WARRANTIES OF ANY KIND WHATSOEVER, INCLUDING THOSE FOR NON-INFRINGEMENT OF INTELLECTUAL PROPERTY, MERCHANTABILITY AND/OR FITNESS OR A PARTICULAR PURPOSE WHICH ARE EXPRESSLY EXCLUDED. NEITHER MS NOT ITS SUPPLIERS MAKE ANY WARRANTY THAT THE PRODUCT WILL OPERATE PROPERLY ON ANY CUSTOMER SYSTEM(S). COMPANY AGREES NEITHER MS NOR ITS SUPPLIERS SHALL BE LIABLE FOR ANY CONSEQUENTIAL, INCIDENTAL, INDIRECT, ECONOMIC OR PUNITIVE DAMAGES EVEN IF MS OR ITS SUPPLIERS HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. (d) (i) As partial consideration for the rights granted to COMPANY hereunder, COMPANY agrees not to (A) sue or (B) bring, prosecute, assist or participate in any judicial, administrative or other proceedings of any kind against MS, its Suppliers, their subsidiaries or their licensees (including without limitation MS OEM customers, OEM Customers, and end users) for infringement of COMPANY Patents (as defined below) which occurs during the Immunity Period (as defined below) on account of the manufacture, use, sale, or distribution of: 1) Any releases of Product(s) licensed to COMPANY hereunder, except as otherwise provided in (iii), below; or 2) Future releases of Product(s), or replacement or successor products to the Product, to the extent such future releases or replacement or successor product(s) use or embody inventions used or embodied in a version of such Product(s) licensed to COMPANY hereunder. (ii) "COMPANY Patents" as used in this subsection 12(d) means all patents throughout the world, other than design patents or the equivalent, owned or acquired by COMPANY for inventions made prior to termination or expiration of this Agreement, or for which COMPANY has or acquires rights prior to the termination or expiration of this Agreement. The "Immunity Period" shall commence upon the first to issue 4 CONFIDENTIAL Microsoft Software for Dedicated Systems Distributor Agreement dated November 1st, 1997, between Microsoft Corporation and Bsquare Corporation. 5 and shall terminate upon the last to expire, of any of the COMPANY Patents (in any jurisdiction). (iii) In the event that MS provides COMPANY a new release of a Product under this Agreement, and COMPANY determines that such new release uses or embodies inventions not used or embodied in a prior release of the Product licensed to COMPANY hereunder, COMPANY may elect to not license such new release by so notifying MS in writing within sixty (60) days after its receipt and prior to shipment of such new release. COMPANY's election under this paragraph shall not affect COMPANY's obligations above with respect to any prior release(s) of the Product licensed hereunder. (iv) In the event COMPANY assigns COMPANY Patents or rights to enforce COMPANY Patents, COMPANY shall require as a condition of any such assignment that the assignee agree to be bound by the provisions of this Section 12(d). 13. NONDISCLOSURE OBLIGATION. COMPANY shall keep confidential, and shall require COMPANY's OEM Customers to keep confidential, the Dedicated Product Deliverables, the terms and conditions of this Agreement, and other non-public information (including, without limitation, any and all MS and MSCORP product pricing information, the terms and conditions of any proposed (or actual) license agreement or other agreement concerning MS and MSCORP products, license negotiations, as well as any information or correspondence relating to released or unreleased MS and MSCORP software or hardware products, the marketing or promotion of any MS or MSCORP product, and MS' and MSCORP's business policies or practices) and know-how disclosed to COMPANY by MS or MSCORP or any of their subsidiaries. COMPANY shall treat the Dedicated Product Deliverables as confidential information and shall not disclose, disseminate or distribute such material to any third party (except to OEM Customers in compliance with the terms of this Agreement) without MS' prior written permission. COMPANY may disclose the terms and conditions of this Agreement in confidence to its immediate legal and financial consultants as required in the ordinary course of COMPANY's business. 14. AUDITS AND INSPECTIONS. (a) During the term of this Agreement and for a period of three (3) years thereafter, COMPANY shall keep all usual and proper records and books of account and all usual and proper entries relating to each Product licensed sufficient to substantiate the number of copies of Product acquired, distributed, or otherwise disposed of by or for COMPANY. COMPANY shall maintain such records on COMPANY premises. (b) In order to verify statements issued by COMPANY and COMPANY's compliance with the terms of this Agreement, MS may cause (i) an audit to be made of COMPANY's books and records and/or (ii) an inspection to be made of COMPANY's facilities and procedures. Any audit and/or inspection shall be conducted during regular business hours at COMPANY's facilities, with or without notice. Any audit shall be conducted by an independent certified public accountant selected by MS (other than on a contingent fee basis). (c) COMPANY agrees to provide MS' designated audit or inspection team access to the relevant COMPANY records and facilities. (d) Prompt adjustment shall be made to compensate for any errors or omissions disclosed by such audit. Any such audit shall be paid for by MS unless material discrepancies are disclosed. "Material" shall mean the lesser of Ten Thousand Dollars (US$10,000.00) or five percent (5%) of the amount that was reported. If material discrepancies are disclosed, COMPANY agrees to pay MS for the costs associated with the audit. Further, COMPANY shall pay MS an additional royalty of twenty-five percent (25%) of the applicable royalty on Exhibit(s) C for each unit COMPANY failed to report that is in excess of five percent (5%) of the number of units actually reported by COMPANY. In no event shall audits be made more frequently than semi-annually unless the immediately preceding audit disclosed a material discrepancy. 15. CONTROLLING LAW; ATTORNEYS' FEES. (a) This Agreement and all matters relating to this Agreement shall be construed and controlled by the laws of the State of Washington, and COMPANY consents to jurisdiction and venue in the state and federal courts sitting in the State of Washington. Process may be served on either party in the manner set forth in Section 16 for the delivery of notices or by such other method as is authorized by applicable law or court rule. (b) If either MS or COMPANY employs attorneys to enforce any rights arising out of or relating to this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees, costs and other expenses. 16. NOTICES. All notices, authorizations, and requests in connection with this Agreement shall be deemed given on the day they are (i) deposited in the U.S.A. mails, postage prepaid, certified or registered, return receipt requested; or (ii) sent by air express courier, charges prepaid; and addressed as stated in Exhibit N (or to such other address as the party to receive the notice or request so designates by written notice to the other). 17. GENERAL. (a) COMPANY agrees that it will not export or re-export Product to any country, person, entity or end user subject to U.S. export restrictions. COMPANY specifically agrees not to export or re-export Product (i) to any country to which the U.S. has embargoed or restricted the export of goods or services, which as of December 31, 1996 include, but are not necessarily limited to, Cuba, Iran, Iraq, Libya, North Korea, Sudan and Syria, or to any national of any such country who COMPANY knows intends to transmit or transport the products back to such country; (ii) to any end-user who COMPANY knows will utilize Product in the design, development or production of nuclear, chemical or biological weapons; or (iii) to any end-user who has been prohibited from participating in U.S. export transactions by any federal agency of the U.S. government. (b) This Agreement does not constitute an offer by MS and it shall not be effective until signed by both parties. Upon execution by both parties, this Agreement shall constitute the entire agreement between the parties with respect to the subject matter hereof and merges all prior and contemporaneous communications. It shall not be modified except by a written agreement signed on behalf of COMPANY and MS by their 5 CONFIDENTIAL Microsoft Software for Dedicated Systems Distributor Agreement dated November 1st, 1997, between Microsoft Corporation and Bsquare Corporation. 6 respective duly authorized representatives. Any statement appearing as a restrictive endorsement on a check or other document which purports to modify a right, obligation or liability of either party shall be of no force and effect. (c) Neither this Agreement, nor any terms and conditions contained herein, shall be construed as creating a partnership, joint venture or agency relationship or as granting a franchise. (d) If any provision of this Agreement or license of any particular Product shall be held by a court of competent jurisdiction to be illegal, invalid or unenforceable, the remaining provisions and license for remaining Products, as applicable, shall remain in full force and effect. (e) No waiver of any breach of any provision of this Agreement shall constitute a waiver of any prior, concurrent or subsequent breach of the same or any other provisions hereof, and no waiver shall be effective unless made in writing and signed by an authorized representative of the waiving party. (f) COMPANY shall, at its own expense, promptly obtain and arrange for the maintenance of all non-U.S.A. government approvals, if any, and comply with all applicable local laws and regulations as may be necessary for COMPANY's performance under this Agreement. (g) Product may be imported, distributed, or sold in or to a country or territory only if allowed by, and in compliance with, all applicable laws and regulations of such country or territory as well as all terms and conditions of the License Agreement. COMPANY acknowledges that versions of certain Products not localized for a specific market may be prohibited or subject to import and distribution procedures or restrictions under such laws and regulations. By way of example only, as of July 1, 1997, the U.S.A. English version of Microsoft Excel 97 cannot be distributed to or for use in India, and games, entertainment products and products with substantial amounts of video, graphics or similar content may be prohibited or subject to specific import procedures under laws of the People's Republic of China. COMPANY agrees to indemnify MS from and against all damages, costs and expenses (including reasonable attorneys' fees) incurred by MS in connection with any and all claims, demands or actions arising from COMPANY's importation or distribution of a Product in or to a country or territory not in compliance with the laws and regulations of such country or territory. (h) Any Product which COMPANY distributes or licenses to or on behalf of the United States of America, its agencies and/or instrumentalities (the "Government"), shall be provided with RESTRICTED RIGHTS in accordance with DFARS 252.227-7013(c)1(ii), or as set forth in the particular department or agency regulations or rules, or particular contract which provide MS equivalent or greater protection. 18. EXHIBITS. The following Exhibits are part of this Agreement: Exhibit(s) C Products for Dedicated Systems Exhibit N Addresses Exhibit Q Sales Targets Exhibit R Royalty Report Exhibit U OEM Customer Sublicense Agreement for Dedicated Systems Exhibit V License of Additional Product Software Units Exhibit Z (if executed) Additional Country/Region Provisions 6 CONFIDENTIAL Microsoft Software for Dedicated Systems Distributor Agreement dated November 1st, 1997, between Microsoft Corporation and Bsquare Corporation. 7 IN WITNESS WHEREOF, the parties have executed this Agreement by their duly authorized representatives as of the date set forth above. All signed copies of this Agreement shall be deemed originals. Each individual signing on behalf of COMPANY below hereby represents and warrants that he or she has full authority to sign this Agreement and bind COMPANY to perform all duties and obligations contemplated by this Agreement. If COMPANY is located in a jurisdiction in which a corporate seal or "chop" is commonly used as an instrument of agreement execution, in addition to the individual signature provided below, COMPANY's seal or "chop" should be entered below COMPANY's signature block. MICROSOFT CORPORATION BSQUARE CORPORATION /s/ RONALD HOSOGI /s/ WILLIAM BAXTER - ------------------------------ ------------------------------------- By (Signature) By (Signature) RONALD HOSOGI WILLIAM BAXTER - ------------------------------ ------------------------------------- Name (Print) Name (Print) DIRECTOR, OEM CEO - ------------------------------ ------------------------------------- Title Title NOV 20, 1997 10-24-97 - ------------------------------ ------------------------------------- Date Date ------------------------------------- COMPANY's seal or "chop" ------------------------------------- REVIEWED BY BSQUARE LEGAL 7 CONFIDENTIAL Microsoft Software for Dedicated Systems Distributor Agreement dated November 1st, 1997, between Microsoft Corporation and Bsquare Corporation. 8 EXHIBIT C PRODUCTS FOR DEDICATED SYSTEMS
Language Licensed Files Applicable Localization Versions(2) (for Kernel Additional Per copy Additional Product Name and Version ** Versions Only) Provisions Royalty* Royalty - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- Windows(R) CE Operating System version 2.0 EN (a),(b),(c),(d) US* US* Full Version - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- Windows(R) CE Operating System version 1.01 EN (a),(b),(c),(g) US* US* Full Version - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- Windows(R) CE Operating System version 2.0 EN (a),(b),(c),(e) US* US* Limited Version - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- Windows(R) CE Operating System version 1.01 EN (a),(b),(c),(h) US* US* Limited Version - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- Windows(R) CE Operating System version 2.0 EN (a),(b),(c),(f) US* US* Kernel Version - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- Windows(R) CE Operating System version 1.01 EN (a),(b),(c),(i) US* US* Kernel Version - -------------------------------- ------------------ ----------------------- ------------------ ---------------- -------------------
* A Product is not licensed hereunder unless royalty rate(s) are indicated in the Product table. **Language Key: DE = German, ES = Spanish, EN = English, FR = French, IT = Italian, JA = Japanese. Localized versions are licensed on an if and as available basis. ADDITIONAL PROVISIONS (a) COMPANY shall advise its OEM Customers that the Dedicated Product Deliverables for this Product consist of (i) the "untethered" Kernal Version of the Product, and (ii) a license to distribute certain components of the software in accordance with the Sublicense Agreement provided that such software was developed by COMPANY utilizing the Windows CE Embedded Toolkit for Visual C++ in accordance with the instructions therein. (b) In order to support its OEM Customers, COMPANY agrees to enter into and maintain, at COMPANY's expense, a valid Priority Support Agreement with MS at all times during the period COMPANY is licensed for this Product. (c) COMPANY shall not sign a Sublicense Agreement for the Product without MS' prior written approval. To assist MS in its review of COMPANY's proposed OEM Customer, COMPANY shall provide MS with: (1) the name, address, and business profile in the English language (including years in business, ownership profile, tradenames used, and nature of principle business activities) of the proposed OEM Customer; and (2) model name, description and specific industry application of proposed OEM Customer's Dedicated Systems. (d) COMPANY's right to sublicense this Product shall apply only to those files which are components of the Product's Full Version configuration as indicated in the Dedicated product Deliverables documentation. 8 CONFIDENTIAL Microsoft Software for Dedicated Systems Distributor Agreement dated November 1st, 1997, between Microsoft Corporation and Bsquare Corporation. - ------------ * Confidential Treatment Requested 9 EXHIBIT C ADDITIONAL PROVISIONS (Continued) (e) COMPANY's right to sublicense this Product shall apply to those files which are components of the Product's Limited Version configuration as indicated in the Dedicated Product Deliverables documentation. (f) COMPANY's right to sublicense this Product shall apply only to those files which are components of the Product's Kernel Version configuration as indicated in the Dedicated Product Deliverables documentation. (g) COMPANY's right to sublicense this Product shall apply only to those files which are components of Demos #4 and #5 as indicated in the Dedicated Product Deliverables documentation. (h) COMPANY's right to sublicense this Product shall apply only to those files which are components of Demos #3 as indicated in the Dedicated Product Deliverables documentation. (g) COMPANY's right to sublicense this Product shall apply only to those files which are components of Demos #1 and #2 as indicated in the Dedicated Product Deliverables documentation. 9 CONFIDENTIAL Microsoft Software for Dedicated Systems Distributor Agreement dated November 1st, 1997, between Microsoft Corporation and Bsquare Corporation. 10 EXHIBIT N ADDRESS COMPANY - ------- NOTICES: Bsquare Corporation 3633 136th Place SE, Suite 200 Bellevue, WA 98006 Attn: Mr. William Baxter Telephone: 425-519-5963 Fax: 425-519-5998 BILL TO: Bsquare Corporation 3633 136th Place SE Suite 200 Bellevue, WA 98006 Attn: Mr. William Baxter SHIP TO: Bsquare Corporation 3633 136th Place SE Suite 200 Bellevue, WA 98006 Attn: Mr. Don Baughman COMPANY SUPPORT TELEPHONE NO.: 425-519-5900 MS: - --- NOTICES: MICROSOFT CORPORATION One Microsoft Way Redmond, WA 98052-6399 U.S.A. Attn: Vice President, OEM Group WITH COPY TO: MICROSOFT CORPORATION One Microsoft Way Redmond, WA 98052-6399 U.S.A. Attn: Law & Corporate Affairs Fax: +1-425-936-7329 OTHER CORRESPONDENCE: OEM Sales MICROSOFT CORPORATION One Microsoft Way Redmond, WA 98052-6399 U.S.A. REPORTS AND PAYMENTS: - --------------------- REPORTS TO: MICROSOFT CORPORATION One Microsoft Way Redmond, WA 98052-6399 U.S.A. Attention: OEM Finance Fax: +1-425-936-5298 IF COMPANY IS A U.S.A., OR CANADA BASED COMPANY, PAYMENT SHALL BE MADE BY WIRE TRANSFER TO: MICROSOFT CORPORATION c/o NationsBank of Texas, N.A. 1401 Elm Street Dallas, TX U.S.A. ABA #11100001-2 SWIFT Code: NBKUS44DAL Account #3750771783 Regarding: Microsoft OEM #844500 Collections IF COMPANY IS BASED OUTSIDE THE U.S.A. AND CANADA, PAYMENTS SHALL BE MADE BY WIRE TRANSFER TO: MICROSOFT CORPORATION c/o Citybank, N.A. 399 Park Avenue New York, NY 10043 U.S.A. ABA 021000089 SWIFT Code: CITIUS33 Account #38468231 Regarding: Microsoft International OEM Collections or to such other address or account as MS may specify from time to time. COMPANY agrees to ensure that the regarding line stated above, the MS license agreement number for the Agreement, and the MS invoice number (if any) are specified on each wire transfer payment made pursuant to the Agreement." 10 CONFIDENTIAL Microsoft Software for Dedicated Systems Distributor Agreement dated November 1st, 1997, between Microsoft Corporation and Bsquare Corporation. 11 EXHIBIT Q SALES TARGETS Sales Targets for Windows CE Products
Period Sales Target Amount Cumulative Sales Target Amount - ------ ------------------- ------------------------------ (US$) (US$) The first calendar quarter following the calendar quarter in which the Effective Date occurs ("First Target Period") $ * $ * The calendar quarter following the First Target Period $ * $ * The 2nd calendar quarter following the First Target Period $ * $ * The 3rd calendar quarter following the First Target Period $ * $ * Total Sales Target: $ * $ *
11 CONFIDENTIAL Microsoft Software for Dedicated Systems Distributor Agreement dated November 1st, 1997, between Microsoft Corporation and Bsquare Corporation. - ------------ * Confidential treatment requested 12 EXHIBIT R ROYALTY REPORT COMPANY NAME: _______________________________ LICENSE #: _______________________________ REPORTING PERIOD: _______________________________ REPORT DUE: _______________________________
Prod. 1 Prod. 2 Prod. 3 Prod. 4 Prod. 5 Prod. 6 Prod. 7 - ----------------------------------------------------------------------------------------------------------- CUSTOMER SYSTEM MODEL NAME OR PRODUCT UNITS/ MODEL NUMBER ROYALTY TYPE - ----------------------------------------------------------------------------------------------------------- 1 "Per System" units --------------------------------------------------------------------------------------- "Per Copy" units - ----------------------------------------------------------------------------------------------------------- 2 "Per System" units --------------------------------------------------------------------------------------- "Per Copy" units - ----------------------------------------------------------------------------------------------------------- 3 "Per System" units --------------------------------------------------------------------------------------- "Per Copy" units - ----------------------------------------------------------------------------------------------------------- 4 "Per System" units --------------------------------------------------------------------------------------- "Per Copy" units - ----------------------------------------------------------------------------------------------------------- 5 "Per System" units --------------------------------------------------------------------------------------- "Per Copy" units - ----------------------------------------------------------------------------------------------------------- 6 "Per System" units --------------------------------------------------------------------------------------- "Per Copy" units - ----------------------------------------------------------------------------------------------------------- 7 "Per System" units --------------------------------------------------------------------------------------- "Per Copy" units - ----------------------------------------------------------------------------------------------------------- 8 "Per System" units --------------------------------------------------------------------------------------- "Per Copy" units - ----------------------------------------------------------------------------------------------------------- 9 "Per System" units --------------------------------------------------------------------------------------- "Per Copy" units - ------------------------------------------------------------------------------------------------------------ 10 "Per System" units --------------------------------------------------------------------------------------- "Per Copy" units - ----------------------------------------------------------------------------------------------------------- SUMMARY - ----------------------------------------------------------------------------------------------------------- TOTAL UNITS "Per System" units 0 0 0 0 0 0 0 --------------------------------------------------------------------------------------- "Per Copy" units 0 0 0 0 0 0 0 - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- ENTER THE NUMBER OF NON-ENGLISH VERSION UNITS SHIPPED FOR EACH MICROSOFT PRODUCT - -----------------------------------------------------------------------------------------------------------
12 CONFIDENTIAL Microsoft Software for Dedicated Systems Distributor Agreement dated November 1st, 1997, between Microsoft Corporation and Bsquare Corporation. 13 EXHIBIT R (Continued) Dollar Recap
=============================================================================================== Product 1 - ----------------------------------------------------------------------------------------------- "Per System" Activity "Per Copy" Activity Amount Amount Units Royalty Quantity Due Units Royalty Quantity Due ----- ------- -------- ------ ----- ------- -------- ------ 1 to 0 $0.00 0 $0.00 1 to 0 $0.00 0 $0.00 $0.00 $0.00 + $0.00 + $0.00 -------- -------- 0 0 - ----------------------------------------------------------------------------------------------- Non-English Version Activity Amount Royalty Quantity Due ------- -------- ------ $0.00 0 $0.00 PRODUCT TOTAL $0.00 --------------------------------------- =============================================================================================== Product 2 - ----------------------------------------------------------------------------------------------- "Per System" Activity "Per Copy" Activity Amount Amount Units Royalty Quantity Due Units Royalty Quantity Due ----- ------- -------- ------ ----- ------- -------- ------ 1 to 0 $0.00 0 $0.00 1 to 0 $0.00 0 $0.00 $0.00 $0.00 + $0.00 + $0.00 -------- -------- 0 0 - ----------------------------------------------------------------------------------------------- Non-English Version Activity Amount Royalty Quantity Due ------- -------- ------ $0.00 0 $0.00 PRODUCT TOTAL $0.00 --------------------------------------- =============================================================================================== PLEASE SEND REPORT TO: Microsoft Corporation ---------------------------- OEM Accounting Services TOTAL REPORTED $0.00 FAX:(1) 206-936-5298 ---------------------------- ===============================================================================================
================================================================================ The undersigned hereby certifies that he/she is duly authorized by COMPANY to complete this report, that the title listed below is his/her true and correct title, and that this report is complete and correct. REPORT COMPLETED BY: ------------------------ --------------------------- Signature Date ------------------------ --------------------------- Print name and title Telephone Number ================================================================================ 13 CONFIDENTIAL Microsoft Software for Dedicated Systems Distributor Agreement dated November 1st, 1997, between Microsoft Corporation and Bsquare Corporation. 14 EXHIBIT U OEM CUSTOMER SUBLICENSE AGREEMENT FOR DEDICATED SYSTEMS This agreement ("Agreement") is made and entered into by and between you ("Customer"), and [enter name of COMPANY] ("Company"), and shall be effective as of the date on which it is signed by COMPANY ("Effective Date"). Microsoft Corporation ("Microsoft") shall be a third party beneficiary of this Agreement and shall be entitled to enforce the terms of this Agreement as provided herein and such other rights and obligations herein as necessary to protect Microsoft's interests in the Microsoft software program(s) and other licensed product(s) identified in Attachment 2 to this Agreement (the "SOFTWARE"). Microsoft anticipates that it will transfer its OEM licensing operations to its wholly owned subsidiary, Microsoft Licensing, Inc., a Nevada, U.S.A. corporation, on or about December 31, 1997. From and after such transfer, all references to "Microsoft" contained in this Agreement shall refer to "Microsoft Licensing, Inc. Customer hereby acknowledges and agrees that, at Microsoft's request, COMPANY shall provide a copy of this Agreement to Microsoft. 1. DEFINITIONS. (a) "Dedicated Application" shall mean a dedicated purpose software program which provides the primary functionality of the Dedicated System (as defined below) and which, when used with the Dedicated System, offers significant functionality in addition to the SOFTWARE. A Dedicated Application excludes any software program which addresses more than one function of the office automation and consumer computing markets. Office automation and consumer computing functions include, without limitation, email, word processing, spreadsheets, network browsing, scheduling, and personal finance. (b) "Dedicated System" is a Customer's computer system or computing device which utilizes a single microprocessor, is distributed with the SOFTWARE in accordance with this Agreement, and is designed for exclusive use with a Dedicated Application that provides the primary functionality of the system or device. A Dedicated System excludes any general or multi-purpose personal, laptop, desktop, handheld, notebook, server computers, or other such computing devices which address more than one function of the office automation or consumer computing markets and shall not be useable as a commercially acceptable substitute for such computers or devices. (c) "Dedicated Product Deliverables" shall mean SOFTWARE in object code form, installation utilities, adaptation code in source code form, if provided by COMPANY, and other information or instructions regarding the SOFTWARE that COMPANY or Microsoft may provide. (d) "EULA" shall mean an end user license agreement for the SOFTWARE. (e) "Recovery Media" shall mean a backup image of the SOFTWARE as originally installed on the Dedicated System. (f) "SOFTWARE Upgrade" shall mean a copy of the SOFTWARE to be distributed by Customer directly to end users to replace an earlier version of the SOFTWARE licensed to Customer under this Agreement. 2. LIMITED LICENSE GRANT. Subject to the restrictions set forth in this Agreement, and Customer's compliance with all terms and conditions of this Agreement, COMPANY grants to Customer the following limited license rights: (a) (i) to install one (1) copy of the SOFTWARE in nonvolatile, solid-state memory, on the hard disk drive, or in other nonvolatile form, in accordance with instructions, if any, contained in the Dedicated Product Deliverables only as part of a Dedicated System; and (ii) to distribute the SOFTWARE only as part of such Dedicated Systems solely under Customer's brand names and trademarks. (b) to configure the SOFTWARE in accordance with the instructions, if any, contained in the Dedicated Product Deliverables solely to enable SOFTWARE to execute on a Dedicated System. (c) to reproduce and distribute with each Dedicated System distributed in accordance with 2(a), not more than one (1) unit of Recovery Media provided that: (i) The images of the SOFTWARE on the Recovery Media shall be identical to the object code that was originally installed on the Dedicated System. Recovery Media may include non-Microsoft products that Customer distributes installed on the Dedicated System; (ii) Recovery Media shall be maintained by the end user as an archival copy and may only be licensed for use: (A) to restore the same version and language release of the SOFTWARE as originally installed on a Dedicated System, or (B) to reinstall the same version and language release of the SOFTWARE as originally installed on the Dedicated System after the installation of an upgrade to the Dedicated Application on a Dedicated System; (iii) Recovery or reinstallation of the SOFTWARE shall be performed by an authorized service representative of Customer or by the licensed end user; (iv) Recovery Media may include a single copy of each of the following files in order that the Recovery Media shall be "bootable": command.com, io.sys, msdos.sys, and for Dedicated Systems with Windows 95, drvspace.bin; (v) A single unit of Recovery Media may be used by the licensed end user or the Customer's authorized service representative to restore or reinstall the SOFTWARE on such end user's additional units of the same Dedicated System which contain the same version and language release of the SOFTWARE 14 CONFIDENTIAL Microsoft Software for Dedicated Systems Distributor Agreement dated November 1st, 1997, between Microsoft Corporation and Bsquare Corporation. 15 properly licensed to the end user pursuant to this Agreement; (vi) Recovery Media shall be clearly labeled "Recovery Media" -for Backup or Archival purposes only with >Name and Model of the Dedicated System (d) to reproduce and distribute SOFTWARE Upgrades to an end user provided that (i) such end user is an existing, authorized end user of a Dedicated System; (i) Customer shall acquire a serialized sticker from COMPANY, and Customer shall pay the applicable SOFTWARE royalty fee as set forth in Attachment 2 for each copy of SOFTWARE Upgrade installed by its end users or service representatives pursuant to this Section 2(d); (iii) SOFTWARE Upgrades shall be distributed directly by Customer, separate from a Dedicated System, to an end-user for use solely as a replacement copy for the SOFTWARE originally installed on the Dedicated System pursuant to this Agreement; (iv) the SOFTWARE Upgrade is configured to ensure that it executes solely on the applicable Dedicated System and will not execute on general or multi-purpose personal, laptop, desktop, handheld, notebook, or server computers which address the office automation market; (v) the SOFTWARE Upgrade is distributed as an integrated part of the Dedicated Application; (vi) Installation of the SOFTWARE Upgrade shall be performed by an authorized service representative of Customer or by the licensed end user; (vii) A single unit of SOFTWARE Upgrade may be used by the licensed end user or the Customer's authorized service representative to install the SOFTWARE Upgrade on such end user's additional units of the same Dedicated System which contain the same version and language release of the SOFTWARE; (viii) Customer shall establish a reasonable procedure to assure the return or destruction of any replaced SOFTWARE (for example, a SOFTWARE Upgrade that erases or permanently disables the replaced SOFTWARE would satisfy this requirement); (ix) the SOFTWARE Upgrade shall be clearly labeled "For Upgrade purposes only - not for use on a new Dedicated System. For Use Only with ". (e) Customer shall cause to appear in a conspicuous place in the Dedicated System documentation, the EULA attached to this Agreement as Attachment 1, or such other EULA as COMPANY may provide from time to time, with each Dedicated System and each copy of SOFTWARE Upgrade: Customer shall adapt the EULA as necessary to comply with the laws of any jurisdiction in which the SOFTWARE is distributed. 3. LICENSE RESTRICTIONS. (a) The total number of units of the SOFTWARE (including any SOFTWARE Upgrades) distributed by Customer shall not exceed the number of "Units of SOFTWARE licensed" for such SOFTWARE as set forth in Attachment 2 hereto. (b) Except as provided in Section 2(c)-(d), SOFTWARE may not be distributed in whole or in part other than installed on the Dedicated System. (c) Customer may not distribute any SOFTWARE documentation. (d) Customer shall not use, copy, modify, or transfer the SOFTWARE or any copy in whole or in part, except as expressly provided in this Agreement. Customer's reproduction of the SOFTWARE in accordance with Section 2 shall be performed only on Customer premises by Customer's regular employees except as otherwise specifically approved in writing by Microsoft. (e) Customer shall not reverse engineer, decompile or disassemble any SOFTWARE except as permitted by applicable law without the possibility of contractual waiver. Customer acknowledges that information on interoperability of the SOFTWARE with other products is readily available. (f) All distribution and use of the SOFTWARE is by license only. Neither COMPANY nor Microsoft authorize the SOFTWARE to be "issued to the public", "put into circulation", or subject to a "first sale" as the copyright laws may use those (or similar) terms. Customer's license to distribute the SOFTWARE is limited to distribution of the SOFTWARE by Customer to end users for use pursuant to a EULA. (g) Customer may distribute only one copy of SOFTWARE in addition to one copy of preinstalled SOFTWARE in one language version and release version (i.e. MS-DOS 5.0 or MS-DOS 6.22; MS-DOS or MS-DOS ROM version) for use on each such Dedicated System. (h) Microsoft reserves all rights not expressly granted including, without limitation, modification rights, translation rights, rental rights, and rights to source code. Microsoft expressly reserves its exclusive right under applicable copyright, patent, and trademark laws to distribute copies of SOFTWARE by any means. Except as set forth in Section 2(c)-(d) above, without limitation, neither COMPANY nor Microsoft authorizes Customer to distribute the SOFTWARE separately from Dedicated Systems; any such unauthorized distribution by Customer shall constitute a violation of this Agreement and Microsoft's distribution right under applicable law. Customer acknowledges that Microsoft (and/or its suppliers, if applicable) shall retain all copyright, patent, moral, trademark, title and other proprietary and intellectual property in the SOFTWARE, Dedicated Product Deliverables and components thereof, in whole or in part in any form. (i) Customer will not remove, modify, or obscure any copyright, trademark, patent or other intellectual property notices included on the SOFTWARE or the SOFTWARE Upgrade. (j) Customer shall not advertise, publish or otherwise mark. 15 CONFIDENTIAL Microsoft Software for Dedicated Systems Distributor Agreement dated November 1st, 1997, between Microsoft Corporation and Bsquare Corporation. 16 a separate price for the SOFTWARE. (k) Customer agrees to provide commercially reasonable end user support for the SOFTWARE which, in any event, shall be under terms and conditions at least as favorable to the end user as the terms under which Customer provides support for Dedicated System(s) to end users generally. Customer agrees to provide COMPANY and Microsoft with ninety (90) days prior written notice of any substantive change in Customer's support policy for the SOFTWARE. 4. LICENSE STICKER. (a) Customer shall place a serialized sticker supplied by COMPANY for each unit of SOFTWARE: (i) on the hard drive containing the SOFTWARE, or (ii) if the SOFTWARE is installed in ROM, on the ROM or in a conspicuous place on the component board to which the ROM is attached. If placement as described in both (i) and (ii) are impractical, the label may be affixed to the inside or outside of the rear panel of the Dedicated System casing. (b) (i) Customer shall also place a serialized sticker supplied by COMPANY on the media for each unit of SOFTWARE Upgrade distributed by Customer. (ii) If one unit of the COMPANY Upgrade is used to install the SOFTWARE Upgrade on additional units of the Dedicated System as set forth in Section 2(d)(vii), prior to distribution of the SOFTWARE Upgrade, Customer shall (A) determine the number of units of SOFTWARE Upgrade to be installed, (B) provide end user or Customer's authorized service representative with a serialized sticker supplied by COMPANY for each such unit, and (C) ensure that a serialized sticker is placed on each Dedicated System on which SOFTWARE Upgrade is installed as described in Section 4(a). 5. DELIVERY. For each SOFTWARE product licensed hereunder, COMPANY (or Microsoft, on behalf of COMPANY) shall deliver to Customer one (1) unit of Dedicated Product Deliverables. Customer acknowledges and agrees that neither COMPANY nor Microsoft shall have any liability for failure to deliver Dedicated Product Deliverables by any particular date, or if the SOFTWARE is not yet a released product, during the term of this Agreement. 6. LIMITED WARRANTY AND CUSTOMER REMEDIES. (a) COMPANY warrants that the SOFTWARE will perform substantially in accordance with the accompanying written materials for a period of ninety (90) days from the date of receipt. (b) COMPANY's, Microsoft's, and their suppliers' entire liability and Customer's exclusive remedy for a breach of the warranty set forth above shall be, at COMPANY's option, either (i) return of the price paid or (ii) repair or replacement of the SOFTWARE that does not meet the above Limited Warranty and which is returned to COMPANY. This Limited Warranty is void if failure of the SOFTWARE has resulted from accident, abuse, or misapplication. Any replacement SOFTWARE will be warranted for the remainder of the original warranty period or thirty (30) days, whichever is longer. (c) COMPANY, MICROSOFT, AND THEIR SUPPLIERS DISCLAIM ALL OTHER WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF NON-INFRINGEMENT, MERCHANTABILITY, AND/OR FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE SOFTWARE AND ANY ACCOMPANYING WRITTEN MATERIALS. (d) The rights and remedies granted to Customer under this Section 6 constitute Customer's sole and exclusive remedy against the COMPANY and Microsoft, their officers, agents and employees for any and all claims arising in connection with the SOFTWARE or the Dedicated Product Deliverables including but not limited to claims regarding COMPANY's or Microsoft's delivery of SOFTWARE or Dedicated Product Deliverables, or indemnification or contribution from COMPANY or Microsoft with respect to any infringement of the rights of a third party, whether arising under statutory or common law or otherwise. 7. TERM AND TERMINATION. (a) The term of this license shall run from the Effective Date until the earlier of: (i) one (1) year after Effective Date, or (ii) the date on which Customer has distributed the number of units of SOFTWARE licensed under this Agreement as set forth in Attachment 2 for each SOFTWARE. (b) Termination due to breach of Sections 3(d), 3(e), 3(f), 10, or 11 shall be effective upon notice to Customer. In all other cases, termination shall be effective fifteen (15) days after notice of termination to the defaulting party if the defaults have not been cured within such fifteen (15) day period. At the option of the non-defaulting party, termination due to a breach of any provision of this Agreement may be effective upon notice to the defaulting party if such party has received two (2) or more previous notices of default during the term of this Agreement (whether or not such previous defaults have been cured). (c) Upon termination or expiration of the Agreement, Customer will immediately cease all use and distribution of the SOFTWARE, the SOFTWARE product name, and all associated trademark(s). Within ten (10) days of the termination or expiration of the Agreement, Customer shall return to COMPANY all Dedicated Product Deliverables and serialized stickers for the SOFTWARE in Customer's possession or under Customer's control. There shall be no refund or adjustment for amounts paid for the Dedicated Product Deliverables or stickers returned to COMPANY in accordance with this Section 7(c). 8. DISCLAIMER OF LIABILITY. IN NO EVENT SHALL COMPANY, MICROSOFT, OR THEIR SUPPLIERS BE LIABLE FOR ANY DAMAGES WHATSOEVER (INCLUDING, WITHOUT LIMITATION, DAMAGES FOR LOSS OF BUSINESS PROFITS, CONSEQUENTIAL, INCIDENTAL, INDIRECT, ECONOMIC OR 16 CONFIDENTIAL Microsoft Software for Dedicated Systems Distributor Agreement dated November 1st, 1997, between Microsoft Corporation and Bsquare Corporation. 17 PUNITIVE DAMAGES, BUSINESS INTERRUPTION, LOSS OF BUSINESS INFORMATION, OR OTHER PECUNIARY LOSS) ARISING OUT OF THE MANUFACTURE, SALE, USE OF OR INABILITY TO MANUFACTURE, SELL OR USE THE SOFTWARE, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 9. TECHNICAL SUPPORT. This Agreement does not include technical support from Microsoft. Technical support for the SOFTWARE will be provided by COMPANY. 10. AUDITS AND INSPECTIONS. (a) During the term of this Agreement and for three (3) years thereafter, Customer agrees to keep all usual and proper entries relating to each unit of SOFTWARE licensed sufficient to substantiate the number of units of SOFTWARE and the number of Dedicated Systems distributed by Customer. (b) In order to verify statements issued by Customer and Agreement, COMPANY and/or Microsoft may cause (i) an audit to be made of Customer's books and records and/or (ii) an inspection to be made of Customer's facilities and procedures. Any audit and/or inspection shall be conducted during regular business hours at Customer's facilities, with or without notice. Any audit shall be conducted by an independent certified public accountant selected by Microsoft or COMPANY (other than on a contingent fee basis). (c) Customer agrees to provide Microsoft's and/or COMPANY's designated audit or inspection team(s) access to the relevant Customer records and facilities. Prompt adjustment shall be made to compensate for any errors or omissions disclosed by such audit. If material discrepancies are disclosed in such audit, Customer agrees to pay Microsoft or COMPANY, as applicable, for the costs associated with the audit. 11. NONDISCLOSURE OBLIGATION. Customer shall keep confidential the Dedicated Product Deliverables, any SOFTWARE source code provided by COMPANY or Microsoft on behalf of COMPANY, the terms and conditions of this Agreement, and other non-public information and know-how disclosed to Customer by COMPANY or Microsoft. Customer may disclose the terms and conditions of this Agreement in confidence to its immediate legal and financial consultants as required in the ordinary course of Customer's business. Customer's obligation under this Section shall survive termination or expiration of this Agreement and shall extend until such time as the information protected hereby is in the public domain. 12. GENERAL. (a) This Agreement shall be construed and controlled by the laws of the State of Washington, and Customer further consents to jurisdiction by the state and federal courts sitting in the State of Washington. Process may be served on either party by air express courier, (e.g. DHL, Airborne) charges prepaid, return receipt requested. If COMPANY, Microsoft or Customer employs attorneys to enforce any rights arising out of or relating to this Agreement, the prevailing party shall be entitled to recover reasonable attorney's fees. (b) Customer agrees that it will not export or re-export SOFTWARE to any country, person, entity or end user subject to U.S. export restrictions. Customer specifically agrees not to export or re-export SOFTWARE (i) to any country to which the U.S. has embargoed or restricted the export of goods or services, which as of December 31, 1996 include, but are not necessarily limited to, Cuba, Iran, Iraq, Libya, North Korea, Sudan, and Syria, or to any national of any such country who Customer knows intends to transmit or transport the products back to such country; (ii) to any end-user who Customer knows will utilize SOFTWARE in the design, development or production of nuclear, chemical or biological weapons; or (iii) to any end-user who has been prohibited from participating in U.S. export transactions by any federal agency of the U.S. government. (c) If any provision or portion of this Agreement shall be held by a court of competent jurisdiction to be illegal, invalid or unenforceable, the remaining provisions or portions shall remain in full force and effect. (d) No waiver of any breach of any provision of this Agreement shall constitute a waiver of any prior, concurrent, or subsequent breach of the same or any other provisions hereof, and no waiver shall be effective unless made in writing and signed by an authorized representative of the waiving party. (e) Any assignment of this Agreement without prior written consent of the non-assigning party shall be void. (f) SOFTWARE may be imported, distributed, or sold in or to a country or territory only if allowed by, and in compliance with, all applicable laws and regulations of such country or territory as well as all terms and conditions of this Agreement. Customer acknowledges that versions of certain SOFTWARE not localized for a specific market may be prohibited or subject to import and distribution procedures or restrictions under such laws and regulations. By way of example only, as of July 1, 1997, the U.S.A. English version of Microsoft Excel 97 cannot be distributed to or for use in India, and games, entertainment products and products with substantial amounts of video, graphics or similar content may be prohibited or subject to specific import procedures under laws of the People's Republic of China. Customer agrees to indemnify COMPANY and Microsoft from and against all damages, costs and expenses (including reasonable attorneys' fees) incurred by COMPANY or Microsoft in connection with any and all claims, demands or actions arising from Customer's importation or distribution of SOFTWARE in or to a country or territory not in compliance with the laws and regulations of such country or territory. (f) Any SOFTWARE which Customer distributes or licenses to or on behalf of the United States of America, its agencies and/or instrumentalities (the "Government"), shall be provided with RESTRICTED RIGHTS in accordance with DFARS 252.227-7013(c)1(ii), or as set forth in the 17 CONFIDENTIAL Microsoft Software for Dedicated Systems Distributor Agreement dated November 1st, 1997, between Microsoft Corporation and Bsquare Corporation. 18 particular department or agency regulations or rules, or particular contract which provide Microsoft equivalent or greater protection. Should Customer have any questions concerning this Agreement, please write: _________________________________________________________________________ Name of COMPANY _________________________________________________________________________ Address _________________________________________________________________________ _________________________________________________________________________ IN WITNESS WHEREOF, the parties have executed this Agreement by their duly authorized representatives as of the date set forth above. All signed copies of this Agreement shall be deemed originals. Each individual signing on behalf of Customer below hereby represents and warrants that he or she has full authority to sign this Agreement and bind Customer to perform all duties and obligations contemplated by this Agreement. If Customer is located in a jurisdiction in which a corporate seal or "chop" is commonly used as an instrument of agreement execution, in addition to the individual signature provided below, Customer's seal or "chop" should be entered below Customer's signature block. COMPANY _______________________________________________________________________________ By (Signature) _______________________________________________________________________________ Name (Print) _______________________________________________________________________________ Title _______________________________________________________________________________ Date CUSTOMER _______________________________________________________________________________ By (Signature) _______________________________________________________________________________ Name (Print) _______________________________________________________________________________ Title _______________________________________________________________________________ Date 18 CONFIDENTIAL Microsoft Software for Dedicated Systems Distributor Agreement dated November 1st, 1997, between Microsoft Corporation and Bsquare Corporation. 19 ATTACHMENT 1 TO OEM CUSTOMER SUBLICENSE AGREEMENT FOR DEDICATED SYSTEMS END-USER LICENSE AGREEMENT FOR MICROSOFT SOFTWARE IMPORTANT--READ CAREFULLY: THIS END-USER LICENSE AGREEMENT ("EULA") IS A LEGAL AGREEMENT BETWEEN YOU (EITHER AN INDIVIDUAL OR A SINGLE ENTITY) AND THE MANUFACTURER ("MANUFACTURER") OF THE SPECIAL PURPOSE COMPUTING DEVICE ("SYSTEM") YOU ACQUIRED WHICH INCLUDES CERTAIN MICROSOFT SOFTWARE PRODUCT(S) INSTALLED ON THE SYSTEM ("SOFTWARE PRODUCT" OR "SOFTWARE"). THE SOFTWARE INCLUDES COMPUTER SOFTWARE, THE ASSOCIATED MEDIA, ANY PRINTED MATERIALS, AND ANY "ONLINE" OR ELECTRONIC DOCUMENTATION. BY INSTALLING, COPYING OR OTHERWISE USING THE SOFTWARE, YOU AGREE TO BE BOUND BY THE TERMS OF THIS EULA. IF YOU DO NOT AGREE TO THE TERMS OF THIS EULA, MANUFACTURER AND MICROSOFT CORPORATION ("MICROSOFT") ARE UNWILLING TO LICENSE THE SOFTWARE TO YOU. IN SUCH EVENT, YOU MAY NOT USE OR COPY THE SOFTWARE, AND YOU SHOULD PROMPTLY CONTACT MANUFACTURER FOR INSTRUCTIONS ON RETURN OF THE UNUSED PRODUCT(S) FOR A REFUND. - ------------------------------------------------------------------------------ SOFTWARE LICENSE The SOFTWARE is protected by copyright laws and international copyright treaties, as well as other intellectual property laws and treaties. The SOFTWARE is licensed, not sold. 1. GRANT OF LICENSE. This EULA grants you the following rights: - SOFTWARE. You may use the SOFTWARE as installed on the SYSTEM. - APPLICATION SHARING. The SOFTWARE may contain technology that enables applications to be shared between two or more SYSTEMS, even if an application is installed on only one of the SYSTEMS. You should consult your application license agreement or contact the application licensor to determine whether sharing the application is permitted by its licensor. - STORAGE/NETWORK USE. If the SOFTWARE PRODUCT is installed on the SYSTEM over an internal network from a server, you must acquire and dedicate a license for the SOFTWARE PRODUCT for each SYSTEM on which the SOFTWARE PRODUCT is used or to which it is distributed. A license for the SOFTWARE PRODUCT may not be shared or used concurrently on different SYSTEMS. - BACK-UP COPY. If MANUFACTURER has not included a copy of the SOFTWARE on separate media with the SYSTEM, you may make a single copy of the SOFTWARE for use solely for archival purposes with the SYSTEM. 2. DESCRIPTION OF OTHER RIGHTS AND LIMITATIONS. - LIMITATIONS ON REVERSE ENGINEERING, DECOMPILATION AND DISASSEMBLY. You may not reverse engineer, decompile, or disassemble the SOFTWARE, except and only to the extent that such activity is expressly permitted by applicable law notwithstanding this limitation. - SINGLE SYSTEM. The SOFTWARE is licensed with the SYSTEM as a single integrated product. The SOFTWARE may only be used with the SYSTEM. - RENTAL. You may not rent or lease the SOFTWARE. - SOFTWARE TRANSFER. You may permanently transfer all of your rights under this EULA only as part of a sale or transfer of the SYSTEM, provided you retain no copies, you transfer all of the SOFTWARE (including all component parts, the media, any upgrades or backup copies, and this EULA, and if applicable, the Certificate(s) of Authenticity), AND the recipient agrees to the terms of this EULA. If the SOFTWARE is an upgrade, any transfer must include all prior versions of the SOFTWARE. - TERMINATION. Without prejudice to any other rights, Manufacturer or Microsoft may terminate this EULA if you fail to comply with the terms and conditions of this EULA. In such event, you must destroy all copies of the SOFTWARE and all of its component parts. - SINGLE EULA. The package for the SOFTWARE may contain multiple versions of this EULA, such as multiple translations and/or multiple media versions (e.g., in the user documentation and in the software). In this case, you are only licensed to use one (1) copy of the SOFTWARE PRODUCT. - EXPORT RESTRICTIONS. You agree that you will not export or re-export the SOFTWARE to any country, person, entity or end user subject to U.S. export restrictions. You specifically agree not to export or re-export the SOFTWARE (i) to any country to which the U.S. has embargoed or restricted the export of goods or services, which currently include, but are not necessarily limited to Cuba, Iran, Iraq, Libya, North Korea, Sudan and Syria, or to any national of any such country, wherever located, who intends to transmit or transport the products back to such country; (ii) to an end user you know or have reason to know will utilize the SOFTWARE in the design, development or production or nuclear, chemical or biological weapons; or (iii) to any end-user who has been prohibited from participating in U.S. export transactions by any federal agency of the U.S. government. 3. UPGRADES AND RECOVERY MEDIA. - If the SOFTWARE is provided by Manufacturer on media separate from the SYSTEM and is labeled "For Upgrade Purposes Only" (Upgrade SOFTWARE), you may install one copy of the Upgrade SOFTWARE onto the SYSTEM as a replacement copy for the SOFTWARE originally installed on the SYSTEM and use it in accordance with Section 1 of this EULA. You may also install additional copies of the Upgrade SOFTWARE as replacement copies onto additional SYSTEMS which are the same brand and model as the 19 CONFIDENTIAL Microsoft Software for Dedicated Systems Distributor Agreement dated November 1st, 1997, between Microsoft Corporation and Bsquare Corporation. 20 SYSTEM and contain a duly licensed copy of the same version and language release of the SOFTWARE ("ADDITIONAL SYSTEMS"), provided that (1) Manufacturer has supplied a corresponding serialized sticker for each additional copy of the Upgrade SOFTWARE, and (2) you affix a serialized sticker per Manufacturer's instructions for each unit of Upgrade SOFTWARE you install. o If the SOFTWARE is provided by Manufacturer on separate media and labeled as "Recovery Media", you may not make a copy of the SOFTWARE as described in Section 1 for archival purposes. Instead, you may use the Recovery Media solely to restore or reinstall the same version and language release of the SOFTWARE as originally installed on the SYSTEM and thereafter use the SOFTWARE as restored or reinstalled in accordance with Section 1 of this EULA. A single unit of Recovery Media may be used by you to restore or reinstall the SOFTWARE on ADDITIONAL SYSTEMS. 4. COPYRIGHT. All title and copyrights in and to the SOFTWARE (including but not limited to any images, photographs, animations, video, audio, music, text and "applets," incorporated into the SOFTWARE), the accompanying printed materials, and any copies of the SOFTWARE, are owned by Microsoft or its suppliers. You may not copy the printed materials accompanying the SOFTWARE. All rights not specifically granted under this EULA are reserved by Microsoft. 5. PRODUCT SUPPORT. PRODUCT SUPPORT FOR THE SOFTWARE IS NOT PROVIDED BY MICROSOFT OR ITS SUBSIDIARIES. FOR PRODUCT SUPPORT, PLEASE REFER TO MANUFACTURER'S SUPPORT NUMBER PROVIDED IN THE DOCUMENTATION FOR THE SYSTEM. SHOULD YOU HAVE ANY QUESTIONS CONCERNING THIS EULA, OR IF YOU DESIRE TO CONTACT MANUFACTURER FOR ANY OTHER REASON, PLEASE REFER TO THE ADDRESS PROVIDED IN THE DOCUMENTATION FOR THE SYSTEM. 6. LIMITED WARRANTY. o LIMITED WARRANTY. Manufacturer warrants that the SOFTWARE will perform substantially in accordance with the accompanying written materials for a period of ninety (90) days from the date of receipt. Any implied warranties on the SOFTWARE are limited to ninety (90) days. Some states/jurisdictions do not allow limitations on duration of an implied warranty, so the above limitation may not apply to you. o CUSTOMER REMEDIES. Manufacturer's and its suppliers' entire liability and your exclusive remedy shall be, at Manufacturer's option, either (a) return of the price paid, or (b) repair or replacement of the SOFTWARE that does not meet the above Limited Warranty and which is returned to Manufacturer with a copy of your receipt. This Limited Warranty is void if failure of the SOFTWARE has resulted from accident, abuse, or misapplication. Any replacement SOFTWARE will be warranted for the remainder of the original warranty period or thirty (30) days, whichever is longer. o NO OTHER WARRANTIES. EXCEPT AS EXPRESSLY PROVIDED IN THE LIMITED WARRANTY SECTION ABOVE, THE SOFTWARE IS PROVIDED TO THE END USER "AS IS" WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF NON-INFRINGEMENT, MERCHANTABILITY, AND/OR FITNESS FOR A PARTICULAR PURPOSE. THE ENTIRE RISK OF THE QUALITY AND PERFORMANCE OF THE SOFTWARE IS WITH YOU. o NO LIABILITY FOR CONSEQUENTIAL DAMAGES. MANUFACTURER OR MANUFACTURER'S SUPPLIERS SHALL NOT BE HELD TO ANY LIABILITY FOR ANY DAMAGES SUFFERED OR INCURRED BY THE END USER (INCLUDING, BUT NOT LIMITED TO, GENERAL, SPECIAL, CONSEQUENTIAL OR INCIDENTAL DAMAGES INCLUDING DAMAGES FOR LOSS OF BUSINESS PROFITS, BUSINESS INTERRUPTION, LOSS OF BUSINESS INFORMATION AND THE LIKE), ARISING FROM OR IN CONNECTION WITH THE DELIVERY, USE OR PERFORMANCE OF THE SOFTWARE. 20 CONFIDENTIAL Microsoft Software for Dedicated Systems Distributor Agreement dated November 1st, 1997, between Microsoft Corporation and Bsquare Corporation. 21 7. NOTE ON JAVA SUPPORT. THE SOFTWARE PRODUCT MAY CONTAIN SUPPORT FOR PROGRAMS WRITTEN IN JAVA. JAVA TECHNOLOGY IS NOT FAULT TOLERANT AND IS NOT DESIGNED, MANUFACTURED, OR INTENDED FOR USE OR RESALE AS ON-LINE CONTROL EQUIPMENT IN HAZARDOUS ENVIRONMENTS REQUIRING FAIL-SAFE PERFORMANCE, SUCH AS IN THE OPERATION OF NUCLEAR FACILITIES, AIRCRAFT NAVIGATION OR COMMUNICATION SYSTEMS, AIR TRAFFIC CONTROL, DIRECT LIFE SUPPORT MACHINES, OR WEAPONS SYSTEMS, IN WHICH THE FAILURE OF JAVA TECHNOLOGY COULD LEAD DIRECTLY TO DEATH, PERSONAL INJURY, OR SEVERE PHYSICAL OR ENVIRONMENTAL DAMAGE. _______________________________________________________________________________ U.S. GOVERNMENT RESTRICTED RIGHTS The SOFTWARE and documentation are provided with RESTRICTED RIGHTS. Use, duplication, or disclosure by the Government is subject to restrictions as set forth in subparagraph (c)(I)(ii) of the Rights in Technical Data and Computer Software clause at DFARS 252.227-7013 or subparagraphs (c)(1) and (2) of the Commercial Computer Software -- Restricted Rights at 48 CFR 52.227-19, as applicable. Manufacturer is Microsoft Corporation/One Microsoft Way/Redmond, WA 98052-6399. If you acquired this EULA in the United States, this EULA is governed by the laws of the State of Washington. If you acquired this EULA in Canada, this EULA is governed by the laws of the Province of Ontario, Canada. Each of the parties hereto irrevocably attorns to the jurisdiction of the courts of the Province of Ontario and further agrees to commence any litigation which may arise hereunder in the courts located in the Judicial District of York, Province of Ontario. If this EULA was acquired outside the United States, then local law may apply. Should you have any questions concerning this EULA, please contact the Manufacturer. 21 CONFIDENTIAL Microsoft Software for Dedicated Systems Distributor Agreement dated November 1st, 1997, between Microsoft Corporation and Bsquare Corporation. 22 ATTACHMENT 2 TO OEM CUSTOMERS SUBLICENSE AGREEMENT FOR DEDICATED SYSTEMS SOFTWARE PRODUCTS FOR DEDICATED SYSTEMS
UNITS OF LANGUAGE LICENSED FILES APPLICABLE LOCALIZATION SOFTWARE VERSION(S) (FOR KERNEL ADDITIONAL PER COPY ADDITIONAL PRODUCT NAME AND VERSION LICENSED ** VERSIONS ONLY) PROVISIONS ROYALTY* ROYALTY - --------------------------------- -------------- -------------- ------------------- ------------------ ------------ --------------- 1. WINDOWS(R) CE OPERATING SYSTEM VERSION 2.0 ---- EN (a),(b),(c),(d) US$_____ US$_____ FULL VERSION (E),(f),(g) - --------------------------------- -------------- -------------- ------------------- ------------------ ------------ --------------- - --------------------------------- -------------- -------------- ------------------- ------------------ ------------ --------------- 2. WINDOWS(R) CE OPERATING SYSTEM VERSION 1.01 ---- EN (a),(b),(c),(d) US$_____ US$_____ FULL VERSION (e),(f),(J) - --------------------------------- -------------- -------------- ------------------- ------------------ ------------ --------------- - --------------------------------- -------------- -------------- ------------------- ------------------ ------------ --------------- 3. WINDOWS(R) CE OPERATING SYSTEM VERSION 2.0 ---- EN (a),(b),(c),(d) US$_____ US$_____ LIMITED VERSION (e),(f),(h) - --------------------------------- -------------- -------------- ------------------- ------------------ ------------ --------------- - --------------------------------- -------------- -------------- ------------------- ------------------ ------------ --------------- 4. WINDOWS(R) CE OPERATING SYSTEM VERSION 1.01 ---- EN (a),(b),(c),(d) US$_____ US$_____ LIMITED VERSION (e),(f),(k) - --------------------------------- -------------- -------------- ------------------- ------------------ ------------ --------------- - --------------------------------- -------------- -------------- ------------------- ------------------ ------------ --------------- 5. WINDOWS(R) CE OPERATING SYSTEM VERSION 2.0 ---- EN (a),(b),(c),(d) US$_____ US$_____ KERNEL VERSION (e),(f),(i) - --------------------------------- -------------- -------------- ------------------- ------------------ ------------ --------------- - --------------------------------- -------------- -------------- ------------------- ------------------ ------------ --------------- 6. WINDOWS(R) CE OPERATING SYSTEM VERSION 1.01 ---- EN (a),(b),(c),(d) US$_____ US$_____ KERNEL VERSION (e),(f),(l) - --------------------------------- -------------- -------------- ------------------- ------------------ ------------ ---------------
* IF ROYALTY RATE AND UNITS OF SOFTWARE ARE NOT SPECIFIED FOR A PARTICULAR PRODUCT, THEN SUCH PRODUCT IS NOT LICENSED UNDER THIS AGREEMENT. **LANGUAGE KEY: DE = GERMAN, ES = SPANISH, EN = ENGLISH, FR = FRENCH, IT = ITALIAN, JA = JAPANESE. LOCALIZED VERSIONS ARE LICENSED ON AN IF AND AS AVAILABLE BASIS. 22 CONFIDENTIAL Microsoft Software for Dedicated Systems Distributor Agreement dated November 1st, 1997, between Microsoft Corporation and Bsquare Corporation. 23 ADDITIONAL PROVISIONS (a) The Dedicated Product Deliverables for this SOFTWARE consist of (i) the "untethered" Kernel Version of the SOFTWARE, and (ii) a license to distribute certain components of the SOFTWARE with Customer's hardware reference platform and/or software applications developed by COMPANY utilizing the Windows CE Embedded Toolkit for Visual C++ in accordance with the instructions therein, provided that such SOFTWARE and Customer components are distributed in accordance with this Agreement and are distributed solely as part of Customer's Dedicated System. (b) Notwithstanding anything to the contrary contained in the Agreement, Customer may not reproduce the SOFTWARE or Dedicated Product Deliverables in any manner except as necessary to install the SOFTWARE on Customer's Dedicated Systems in accordance with Section 2(a); and (ii) configure the SOFTWARE to execute on Customer's Dedicated Systems, in accordance with the instructions contained in the Dedicated Product Deliverables. (c) Dedicated Systems shall be distributed only through such channels as may be customary for similar devices for the referenced industry and the specific industry application. (d) If an end user of the Dedicated System shall have access to the command line (for example, the C:\prompt) of the SOFTWARE, then Customer shall cause to appear on the display screen as part of the sign-on message for each SOFTWARE the copyright notices specified in the Dedicated Product Deliverables. (e) If Customer installs the SOFTWARE in ROM and the SOFTWARE is not the only software contained in ROM, Customer will ensure that Microsoft's copyright notice for SOFTWARE shall at all times be included in the first four percent (4%) and the last four percent (4%) of the software contained in ROM. The copyright notice(s) for SOFTWARE shall be as specified in the Dedicated Product Deliverables. In any event, Customer will not remove any copyright, trademark or patent notices that appear on the SOFTWARE as delivered to Customer. (f) Notwithstanding anything to the contrary contained within the Agreement, Customer may distribute SOFTWARE only with Dedicated Systems which are marketed an distributed exclusively under Customer's brand names, trade names and trademarks. The SOFTWARE may not be distributed with Dedicated Systems which are marketed or distributed under any name which includes any third party brand names, trade names or trademarks. (g) Customer's license rights with respect to the SOFTWARE shall apply only to those files which are components of the SOFTWARE Full Version configuration as indicated in the Dedicated Product Deliverables documentation. (h) Customer's license rights with respect to the SOFTWARE shall apply only to those files which are components of the SOFTWARE Limited Version configuration as indicated in the Dedicated Product Deliverables documentation. (i) Customer's license rights with respect to the SOFTWARE shall apply only to those files which are components of the SOFTWARE Kernel Version configuration as indicated in the Dedicated Product Deliverables documentation. (j) Customer's license rights with respect to the SOFTWARE shall apply only to those files which are components of Demos #4 and #5 as indicated in the Dedicated Product Deliverables documentation. (k) Customer's license rights with respect to the SOFTWARE shall apply only to those files which are components of Demo #3 as indicated in the Dedicated Product Deliverables documentation. (l) Customer's license rights with respect to the SOFTWARE shall apply only to those files which are components of Demos #1 and #2 as indicated in the Dedicated Product Deliverables documentation. DEDICATED SYSTEMS Customer's Dedicated Systems for SOFTWARE described in this Attachment 2 shall be limited to Customer's current and future Dedicated Systems described below. Each listed Dedicated System must have a unique model line name, model name, or model number which Customer uses both internally (in Customer's books and records) and externally (on the Dedicated System case and packaging). New models may be added by agreement of the parties. At Customer's option, for purposes of administrative convenience, Customer may designate models by model line or series. e.g., "Jaguar model line", "Jaguar Pro series", "Jaguar Pro 750 model line", "Jaguar Pro 950 series", etc.)." Dedicated Systems defined by model line or series shall include all present models which include the designated model line or series name, (e.g., "Jaguar Pro model line" includes Jaguar Pro, Jaguar Pro 950, Jaguar Pro S, etc.; "Jaguar series" includes Jaguar, Jaguar Pro, Jaguar Pro 950, Jaguar S400, etc.; "Jaguar Pro 950 series" includes Jaguar Pro 950, Jaguar Pro 955, etc.). PRODUCT NUMBER KEY: 1 = Windows CE 2.0 Full Version; 2 = Windows CE 1.01 Full Version; 3 = Windows CE 2.0 Limited Version; 4 = Windows CE 1.01 Limited Version; 5 = Windows CE 2.0 Kernel Version; 6 = Windows CE 1.01 Kernel Version. ROYALTY BASIS KEY: C = per copy; if Product box is blank, such Product is not licensed for distribution with the listed Dedicated System. 23 CONFIDENTIAL Microsoft Software for Dedicated Systems Distributor Agreement dated November 1st, 1997, between Microsoft Corporation and Bsquare Corporation. 24
- ---------------------------------------------------------------------------------------------------------------------------------- SPECIFIC INDUSTRY MODEL NAME OR MODEL NUMBER APPLICATION 1 2 3 4 5 - ------------------------------ -------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------------------ -------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------------------ -------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------------------ -------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------------------ -------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------------------ -------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------------------ -------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------------------ -------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------------------ -------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------------------ -------------- ---------------- ---------------- ---------------- ---------------- ----------------
- ---------------------------------------------------------------------------------------------------------------------------------- SPECIFIC INDUSTRY MODEL NAME OR MODEL NUMBER APPLICATION 6 7 8 9 10 - ------------------------------ -------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------------------ -------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------------------ -------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------------------ -------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------------------ -------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------------------ -------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------------------ -------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------------------ -------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------------------ -------------- ---------------- ---------------- ---------------- ---------------- ---------------- - ------------------------------ -------------- ---------------- ---------------- ---------------- ---------------- ----------------
24 CONFIDENTIAL Microsoft Software for Dedicated Systems Distributor Agreement dated November 1st, 1997, between Microsoft Corporation and Bsquare Corporation. 25 EXHIBIT V LICENSE OF ADDITIONAL PRODUCT SOFTWARE UNITS AMENDMENT NUMBER ___ Amendment Date: _____________________ to OEM CUSTOMER SUBLICENSE AGREEMENT FOR DEDICATED SYSTEMS between _________________________, a Corporation of _________________________ and _________________________, a Corporation of _________________________ Agreement Effective Date: _______________________ WHEREAS, Customer has licensed a certain number of units of Product Software (the "SOFTWARE") from COMPANY under the terms of the above referenced license agreement (the "Agreement"); WHEREAS, Customer now desires to license additional units of SOFTWARE from COMPANY as described in the Additional Units Attachment dated ____________, 199__, which is attached to this Amendment; NOW, THEREFORE, Customer and COMPANY hereby agree: 1. Effective as of the date indicated on the Additional Units Attachment, such Additional Units Attachment is hereby added to the Agreement and sets forth the number of additional units of the SOFTWARE and the language version(s) licensed to Customer under the terms and conditions of the Agreement. 2. Customer may license additional SOFTWARE on the Additional Units Attachment only for the SOFTWARE and the language version(s) that are currently licensed by Customer under the Agreement between Customer and COMPANY. In order to license SOFTWARE or language version(s) not currently licensed under the Agreement with COMPANY, Customer shall execute a new OEM Customer Sublicense Agreement for Dedicated Systems which includes such SOFTWARE and/or language version(s). 3. All capitalized terms used but not defined herein shall have the meanings ascribed to them in the Agreement. The terms of this Amendment shall supersede any inconsistent terms contained in the Agreement. IN WITNESS WHEREOF, the parties have executed this Amendment by their duly authorized representatives as of the date set forth above. All signed copies of this Amendment shall be deemed originals. Each individual signing on behalf of Customer below hereby represents and warrants that he or she has full authority to sign this Agreement and bind Customer to perform all duties and obligations contemplated by this Amendment. If Customer is located in a jurisdiction in which a corporate seal or "chop" is commonly used as an instrument of agreement execution, in addition to the individual signature provided below, Customer's seal or "chop" should be entered below Customer's signature block. This Amendment is executed only in the English language. ___________________________________ ___________________________________ (Name of COMPANY) (Name of Customer) ___________________________________ ___________________________________ By (Signature) By (Signature) ___________________________________ ___________________________________ Name (Print) Name (Print) ___________________________________ ___________________________________ Title Title ___________________________________ ___________________________________ Date Date Customer's seal or "chop" 25 CONFIDENTIAL Microsoft Software for Dedicated Systems Distributor Agreement dated November 1st, 1997, between Microsoft Corporation and Bsquare Corporation. 26 ADDITIONAL UNITS ATTACHMENT Dated: ___________________
PRODUCT NAME AND VERSION ADDITIONAL UNITS OF SOFTWARE LICENSED LANGUAGE VERSION - ------------------------------------------------------------------------------------------------------- WINDOWS(R) CE OPERATING SYSTEM VERSION 2.0 ___________ FULL VERSION - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- WINDOWS(R) CE OPERATING SYSTEM VERSION 1.01 ___________ FULL VERSION - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- WINDOWS(R) CE OPERATING SYSTEM VERSION 2.0 ___________ LIMITED VERSION - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- WINDOWS(R) CE OPERATING SYSTEM VERSION 1.01 ___________ LIMITED VERSION - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- WINDOWS(R) CE OPERATING SYSTEM VERSION 2.0 ___________ KERNEL VERSION - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- WINDOWS(R) CE OPERATING SYSTEM VERSION 1.01 ___________ KERNEL VERSION - -------------------------------------------------------------------------------------------------------
26 CONFIDENTIAL Microsoft Software for Dedicated Systems Distributor Agreement dated November 1st, 1997, between Microsoft Corporation and Bsquare Corporation. 27 AMENDMENT NUMBER 1 Amendment Date: November 1st, 1997 to MICROSOFT(R) SOFTWARE DEDICATED SYSTEMS DISTRIBUTION AGREEMENT between MICROSOFT CORPORATION, a Washington U.S.A. Corporation, as assigned to MICROSOFT LICENSING, INC., a Nevada, U.S.A. Corporation and Bsquare Corporation, a corporation of Washington Agreement Effective Date: November 1st, 1997 MICROSOFT LICENSE #7772-7310 (SAP: 5000020519) Effective as of the Amendment Date indicated above, the below signed parties agree that the indicated portions of the above referenced license agreement between COMPANY and Microsoft Corporation, (hereinafter the "License Agreement") are hereby amended by this instrument (hereinafter the "Amendment"), as follows: 1. Exhibit C of the License Agreement is hereby deleted and replaced with the attached Exhibit C. 2. Exhibit N of the License Agreement is hereby deleted and replaced with the attached Exhibit N. 3. COMPANY acknowledges that Microsoft Corporation transferred its OEM licensing operations to its wholly owned subsidiary, Microsoft Licensing, Inc., a Nevada, U.S.A. corporation ("MS Licensing, Inc."), on or about December 31, 1997. From and after such transfer, all references to "MS" contained in the Agreement (as amended) shall refer to MS Licensing, Inc., provided, however that the disclaimers and limitations in Section 4(c), 5, 7, 10(a), 12(a), 12(b), 12(c) 13, and Exhibit S, if applicable, shall inure to the benefit of each of MS Licensing, Inc. and Microsoft Corporation. Notwithstanding anything to the contrary in the foregoing, all references to "MS" contained in Section 12(d) shall refer to MS Licensing, Inc. and to Microsoft Corporation. For shipments of Product(s) after the date of assignment, COMPANY will report to and make royalty payments to Microsoft Licensing, Inc., at the address provided by Microsoft Corporation or Microsoft Licensing, Inc. COMPANY agrees that all obligations of Microsoft Corporation under the License Agreement will be the obligations of MS Licensing, Inc. as of the date of such transfer. All capitalized terms used but not defined herein shall have the meanings ascribed to them in the License Agreement. The terms of this Amendment shall supersede any inconsistent terms contained in the License Agreement. NOTICE: FOR PRODUCT(S) SPECIFIED IN EXHIBIT C AS LICENSED UNDER THE "PER SYSTEM" ROYALTY CALCULATION PROVISIONS, PLEASE NOTE THE FOLLOWING: THIS IS AN MS PER SYSTEM LICENSE. AS A CUSTOMER, YOU MAY CREATE A "NEW SYSTEM" AT ANY TIME THAT DOES NOT REQUIRE THE PAYMENT OF A ROYALTY TO MS UNLESS THE CUSTOMER AND MS AGREE TO ADD IT TO THE LICENSE AGREEMENT. ANY NEW SYSTEM CREATED MAY BE IDENTICAL IN EVERY RESPECT TO A SYSTEM AS TO WHICH THE CUSTOMER PAYS A PER SYSTEM ROYALTY TO MS PROVIDED THAT THE NEW SYSTEM HAS A UNIQUE MODEL NUMBER OR MODEL NAME FOR INTERNAL AND EXTERNAL IDENTIFICATION PURPOSES WHICH DISTINGUISHES IT FROM ANY SYSTEM THE CUSTOMER SELLS THAT IS INCLUDED IN A PER SYSTEM LICENSE. THE REQUIREMENT OF EXTERNAL IDENTIFICATION MAY BE SATISFIED BY PLACEMENT OF THE UNIQUE MODEL NAME OR MODEL NUMBER ON THE MACHINE AND ITS CONTAINER (IF ANY), WITHOUT MORE. IF THE CUSTOMER DOES NOT INTEND TO INCLUDE A MICROSOFT OPERATING SYSTEM PRODUCT WITH A NEW SYSTEM, THE CUSTOMER DOES NOT NEED TO NOTIFY MS AT ANY TIME OF THE CREATION, USE OR SALE OF ANY SUCH NEW SYSTEM, NOR DOES IT NEED TO TAKE ANY PARTICULAR STEPS TO MARKET OR ADVERTISE THE NEW SYSTEM. UNDER MS'S LICENSE AGREEMENT, THERE IS NO CHARGE OR PENALTY IF A CUSTOMER CHOOSES AT ANY TIME TO CREATE A NEW SYSTEM INCORPORATING A NON-MICROSOFT OPERATING SYSTEM. IF THE CUSTOMER INTENDS TO INCLUDE A MICROSOFT OPERATING SYSTEM PRODUCT WITH THE NEW SYSTEM, THE CUSTOMER MUST SO NOTIFY MS, AFTER WHICH THE PARTIES MAY ENTER INTO ARM'S LENGTH NEGOTIATION WITH RESPECT TO A LICENSE TO APPLY TO THE NEW SYSTEM. 28 IN WITNESS WHEREOF, the parties have executed this Amendment in duplicate as of the date first written above. All signed copies of this Amendment shall be deemed originals. This Amendment is executed only in the English language. MICROSOFT LICENSING, INC. BSQUARE CORPORATION /s/ WILLIAM BAXTER - ------------------------- ------------------------- By (Signature) By (Signature) William Baxter - ------------------------- ------------------------- Name (Printed) Name (Printed) President/CEO - ------------------------- ------------------------- Title Title 1-28-98 - ------------------------- ------------------------- Date Date 29 AMENDMENT NUMBER 1 Amendment Date: November 1st, 1997 to MICROSOFT(R) SOFTWARE DEDICATED SYSTEMS DISTRIBUTION AGREEMENT between MICROSOFT CORPORATION, a Washington U.S.A. Corporation, as assigned to MICROSOFT LICENSING, INC., a Nevada, U.S.A. Corporation and Bsquare Corporation, a corporation of Washington Agreement Effective Date: November 1st, 1997 MICROSOFT LICENSE #7772-7310 (SAP: 5000020519) Effective as of the Amendment Date indicated above, the below signed parties agree that the indicated portions of the above referenced license agreement between COMPANY and Microsoft Corporation, (hereinafter the "License Agreement") are hereby amended by this instrument (hereinafter the "Amendment"), as follows: 1. Exhibit C of the License Agreement is hereby deleted and replaced with the attached Exhibit C. 2. Microsoft Corporation anticipates that it will transfer its OEM licensing operations to its wholly owned subsidiary, Microsoft Licensing, Inc., a Nevada, U.S.A. corporation, on or about December 31, 1997. Microsoft Corporation will notify COMPANY of the assignment of the License Agreement to Microsoft Licensing, Inc. For shipments of Product(s) after the date of assignment, COMPANY will report to and make royalty payments to Microsoft Licensing Inc., at the address provided by Microsoft Corporation or Microsoft Licensing, Inc. From and after such transfer, all references to "MS" contained in this Agreement shall refer to Microsoft Licensing, Inc. All capitalized terms used but not defined herein shall have the meanings ascribed to them in the License Agreement. The terms of this Amendment shall supersede any inconsistent terms contained in the License Agreement. IN WITNESS WHEREOF, the parties have executed this Amendment in duplicate as of the date first written above. All signed copies of this Amendment shall be deemed originals. This Amendment is executed only in the English language. MICROSOFT CORPORATION BSQUARE CORPORATION /s/ WILLIAM T. BAXTER - ---------------------------------- ---------------------------------- By (Signature) By (Signature) WILLIAM T. BAXTER - ---------------------------------- ---------------------------------- Name (Printed) Name (Printed) PRESIDENT & CEO - ---------------------------------- ---------------------------------- Title Title 23 FEB. 1998 - ---------------------------------- ---------------------------------- Date Date 30 EXHIBIT C PRODUCTS FOR DEDICATED SYSTEMS
Language Licensed Files Applicable Localization Versions(2) (for Kernel Additional Per copy Additional Product Name and Version ** Versions Only) Provisions Royalty* Royalty - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- Windows(R) CE Operating System version 2.0 EN (a),(b),(c),(d) US$* US$* Full Version - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- Windows(R) CE Operating System version 1.01 EN (a),(b),(c),(g) US$* US$* Full Version - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- Windows(R) CE Operating System version 2.0 EN (a),(b),(c),(e) US$* US$* Limited Version - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- Windows(R) CE Operating System version 1.01 EN (a),(b),(c),(h) US$* US$* Limited Version - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- Windows(R) CE Operating System version 2.0 EN (a),(b),(c),(f) US$* US$* Kernel Version - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- Windows(R) CE Operating System version 1.01 EN (a),(b),(c),(i) US$* US$* Kernel Version - -------------------------------- ------------------ ----------------------- ------------------ ---------------- -------------------
* A Product is not licensed hereunder unless royalty rate(s) are indicated in the Product table. **Language Key: DE = German, ES = Spanish, EN = English, FR = French, IT = Italian, JA = Japanese. Localized versions are licensed on an if and as available basis. ADDITIONAL PROVISIONS (a) COMPANY shall advise its OEM Customers that the Dedicated Product Deliverables for this Product consist of (i) the "untethered" Kernel Version of the Product, and (ii) a license to distribute certain components of the software in accordance with the Sublicense Agreement provided that such software was developed by COMPANY utilizing the Windows CE Embedded Toolkit for Visual C++ in accordance with the instructions therein. (b) In order to support its OEM Customers, COMPANY agrees to enter into and maintain, at COMPANY's expense, a valid Priority Support Agreement with MS at all times during the period COMPANY is licensed for this Product. (c) COMPANY shall not sign a Sublicense Agreement for the Product without MS' prior written approval. To assist MS in its review of COMPANY's proposed OEM Customer, COMPANY shall provide MS with: (1) the name, address, and business profile in the English language (including years in business, ownership profile, tradenames used, and nature of principle business activities) of the proposed OEM Customer; and (2) model name, description and specific industry application of proposed OEM Customer's Dedicated Systems. (d) COMPANY's right to sublicense this Product shall apply only to those files which are components of the Product's Full Version configuration as indicated in the Dedicated Product Deliverables documentation. - ------------ * Confidential treatment requested 31 EXHIBIT C ADDITIONAL PROVISIONS (Continued) (e) COMPANY's right to sublicense this Product shall apply only to those files which are components of the Product's Limited Version configuration as indicated in the Dedicated Product Deliverables documentation. (f) COMPANY's right to sublicense this Product shall apply only to those files which are components of the Product's Kernel Version configuration as indicated in the Dedicated Product Deliverables documentation. (g) COMPANY's right to sublicense this Product shall apply only to those files which are components of Demos #4 and #5 as indicated in the Dedicated Product Deliverables documentation. (h) COMPANY's right to sublicense this Product shall apply only to those files which are components of Demos #3 as indicated in the Dedicated Product Deliverables documentation. (i) COMPANY's right to sublicense this Product shall apply only to those files which are components of Demos #1 and #2 as indicated in the Dedicated Product Deliverables documentation. 32 EXHIBIT N ADDRESSES COMPANY: - ------- NOTICES: Bsquare Corporation 3633 136th Place SE, Suite 100 Bellevue, WA 98006 Attn: Mr. William Baxter Telephone: 425-519-5963 Fax: 425-519-5998 BILL TO: Bsquare Corporation 3633 136th Place SE, Suite 100 Bellevue, WA 98006 Attn: Mr. William Baxter SHIP TO: Bsquare Corporation 3633 136th Place SE, Suite 100 Bellevue, WA 98006 Attn: Mr. Don Baughman COMPANY SUPPORT telephone no.: 425-519-5900 MS: - --- NOTICES: MICROSOFT LICENSING, INC. Non-US Postal Service Delivery Address: 6100 Neil Road Reno, NV 89511-1132 U.S.A. Attn: General Manager Fax: 1-702-826-0506 WITH COPY TO: MICROSOFT CORPORATION One Microsoft Way Redmond, WA 98052-6399 U.S.A. Attn: Law & Corporate Affairs Fax: +1-425-936-7329 OTHER CORRESPONDENCE: MICROSOFT LICENSING, INC. 6100 Neil Road Reno, NV 89511-1132 U.S.A. Attn.: General Manager Reports and Payments: - --------------------- WITH COPIES TO: OEM Sales MICROSOFT CORPORATION One Microsoft Way Redmond, WA 98052-6399 U.S.A. 33 REPORTS AND PAYMENTS: REPORTS TO: ROYALTY REPORTS SHALL BE MADE TO: MICROSOFT LICENSING, INC. 6100 Neil Road Reno, NV 89511-1132 U.S.A. Attention: OEM Finance Fax: + 1-702-826-0506 or to such other address as MS may specify from time to time. PAYMENTS SHALL BE MADE BY WIRE TRANSFER TO: MICROSOFT LICENSING INC. #100430 c/o NationsBank of Texas, N.A. 1401 Elm Street Dallas, TX U.S.A. ABA # 11100001-2 SWIFT Code: NBKUS44DAL Account#3750891058 Regarding: REF+LB+100430 or to such other address or account as MS may specify from time to time. COMPANY agrees to ensure that the regarding line stated above, the MS license agreement number for the agreement, and the MS invoice number (if any) are specified on each wire transfer payment made pursuant to the Agreement." CONFIDENTIAL 34 EXHIBIT C PRODUCTS FOR DEDICATED SYSTEMS
Language Licensed Files Applicable Localization Version(s) (for Kernel Additional Per copy Additional Product Name and Version ** Versions Only) Provisions Royalty* Royalty - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- Windows(R) CE Operating System version 2.0 EN (a),(b),(c),(d) US$* US$* Full Version - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- Windows(R) CE Operating System version 1.01 EN (a),(b),(c),(g) US$* US$* Full Version - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- Windows(R) CE Operating System version 2.0 EN (a),(b),(c),(e) US$* US$* Limited Version - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- Windows(R) CE Operating System version 1.01 EN (a),(b),(c),(h) US$* US$* Limited Version - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- Windows(R) CE Operating System version 2.0 EN (a),(b),(c),(f) US$* US$* Kernel Version - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- Windows(R) CE Operating System version 1.01 EN (a),(b),(c),(i) US$* US$* Kernel Version - -------------------------------- ------------------ ----------------------- ------------------ ---------------- -------------------
* A Product is not licensed hereunder unless royalty rate(s) are indicated in the Product table. **Language Key: DE = German, ES = Spanish, EN = English, FR = French, IT = Italian, JA = Japanese. Localized versions are licensed on an if and as available basis. ADDITIONAL PROVISIONS (a) COMPANY shall advise its OEM Customers that the Dedicated Product Deliverables for this Product consist of (i) the "untethered" Kernel Version of the Product, and (ii) a license to distribute certain components of the software in accordance with the Sublicense Agreement provided that such software was developed by COMPANY utilizing the Windows CE Embedded Toolkit for Visual C++ in accordance with the instructions therein. (b) In order to support its OEM Customers, COMPANY agrees to enter into and maintain, at COMPANY's expense, a valid Priority Support Agreement with MS at all times during the period COMPANY is licensed for this Product. (c) COMPANY shall not sign a Sublicense Agreement for the Product without MS' prior written approval. To assist MS in its review of COMPANY's proposed OEM Customer, COMPANY shall provide MS with: (1) the name, address, and business profile in the English language (including years in business, ownership profile, tradenames used, and nature of principle business activities) of the proposed OEM Customer; and (2) model name, description and specific industry application of proposed OEM Customer's Dedicated Systems. (d) COMPANY's right to sublicense this Product shall apply only to those files which are components of the Product's Full Version configuration as indicated in the Dedicated Product Deliverables documentation. - ------------ * Confidential treatment requested 35 EXHIBIT C ADDITIONAL PROVISIONS (Continued) (e) COMPANY's right to sublicense this Product shall apply only to those files which are components of the Product's Limited Version configuration as indicated in the Dedicated Product Deliverables documentation. (f) COMPANY's right to sublicense this Product shall apply only to those files which are components of the Product's Kernel Version configuration as indicated in the Dedicated Product Deliverables documentation. (g) COMPANY's right to sublicense this Product shall apply only to those files which are components of Demos #4 and #5 as indicated in the Dedicated Product Deliverables documentation. (h) COMPANY's right to sublicense this Product shall apply only to those files which are components of Demos #3 as indicated in the Dedicated Product Deliverables documentation. (i) COMPANY's right to sublicense this Product shall apply only to those files which are components of Demos #1 and #2 as indicated in the Dedicated Product Deliverables documentation. 36 [SIGNED ORIGINAL] AMENDMENT NUMBER 2 Amendment Date: November 1st, 1998 To MICROSOFT SOFTWARE FOR DEDICATED SYSTEMS DISTRIBUTOR AGREEMENT Between MICROSOFT LICENSING, INC., a Nevada, U.S.A. Corporation And BSQUARE CORPORATION, A Corporation of Washington Agreement Effective Date: November 1st, 1997 MS LICENSE#: 7772-7310 (SAP: 5000020519) Microsoft Corporation transferred its OEM licensing operations to its wholly owned subsidiary, Microsoft Licensing, Inc., a Nevada, U.S.A. Corporation, on December 31, 1997. Accordingly, the above referenced license agreement was assigned by separate instrument to Microsoft Licensing, Inc. on that date. Effective as of the Amendment Date indicated above, the below signed parties agree that the indicated portions of the above referenced license agreement (hereinafter the "License Agreement") are hereby amended by this instrument (hereinafter the "Amendment"), as follows 1. The attached Exhibit C2, "WINDOWS CE PRODUCTS FOR DEDICATED SYSTEMS" is hereby added to the License Agreement. 2. The attached Exhibit C3, "WINDOWS CE PRODUCTS FOR WINDOWS-BASED TERMINAL DEVICES" is hereby added to the License Agreement. 3. The attached Exhibit U, Attachment 2A, "TO OEM CUSTOMER SUBLICENSE AGREEMENT FOR DEDICATED SYSTEMS, WINDOWS CE PRODUCTS FOR WINDOWS-BASED TERMINAL DEVICES" is hereby added to the License Agreement. 4. The attached Exhibit V3, "LICENSE OF ADDITIONAL PRODUCT SOFTWARE UNITS" is hereby added to the License Agreement. All capitalized terms used but not defined herein shall have the meanings ascribed to them in the License Agreement. The terms of this Amendment shall supersede any inconsistent terms contained in the License Agreement. IN WITNESS WHEREOF, the parties have executed this Amendment in duplicate as of the date first written above. All signed copies of this Amendment shall be deemed originals. This Amendment is executed in the English language. MICROSOFT LICENSING, INC. BSQUARE CORPORATION /s/ DAVID KAYE /s/ AL DOSSER - ------------------------------------- ------------------------------------ By (Signature) By (Signature) David Kaye Al Dosser - ------------------------------------- ------------------------------------ Name (Printed) Name (Printed) OEM Accounting Manager Sr. Vice President - ------------------------------------- ------------------------------------ Title Title December 16, 1998 Nov. 13, 1998 - ------------------------------------- ------------------------------------ Date Date 37 EXHIBIT C2 WINDOWS CE PRODUCTS FOR DEDICATED SYSTEMS
- -------------------------------------------------------------------------------------------------------- PRODUCT NAME AND LANGUAGE APPLICABLE PER COPY LOCALIZATION VERSION VERSION(S) ADDITIONAL ROYALTY* ADDITIONAL ** PROVISIONS ROYALTY - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- Microsoft(R) Windows(R) CE EN (a), (b), (c), (d), (e) US$* US$_____ Platform Builder Version 2.11 - -------------------------------------------------------------------------------------------------------- Microsoft(R) Windows(R) CE EN (a), (b), (c), (d), (e) US$* US$_____ Platform Builder Version 2.11, Upgrade Edition - --------------------------------------------------------------------------------------------------------
* A PRODUCT IS NOT LICENSED HEREUNDER UNLESS ROYALTY RATE(S) ARE INDICATED IN THE PRODUCT TABLE. ** LANGUAGE KEY: D=GERMAN, EN=ENGLISH, J=JAPANESE. LOCALIZED VERSIONS ARE LICENSED ON AN IF AND AS AVAILABLE BASIS. ADDITIONAL PROVISIONS (a) Notwithstanding anything to the contrary in Sections (a) and 2(d) of the Agreement, there is no APM available with this Product. (b) Notwithstanding anything to the contrary in Sections 1(f) and 2(c) of the Agreement, COMPANY may license the Product to an end user that has not executed a Sublicense Agreement. (c) Notwithstanding anything to the contrary in 2(a)(iii), COMPANY is not authorized to grant any rights to the Product in addition to those contained in the Product documentation. COMPANY shall inform end user(s) that they may use the Product only in accordance with the Product documentation. (d) (1) Notwithstanding anything to the contrary in section 2(f) of the Agreement, COMPANY is not required to provide support for the Product. (2) Notwithstanding anything to the contrary in section 2(k) of the Agreement, technical support by MS is provided to end user(s) in accordance with the terms and conditions contained in the Product documentation. (e) The Product is available from selected MS designated supplier(s) only. COMPANY should contact its Account Manager for further information. ------------ * Confidential treatment requested 38 EXHIBIT C3 WINDOWS CE PRODUCTS FOR WINDOWS-BASED TERMINAL DEVICES
- -------------------------------------------------------------------------------------------------------- PRODUCT NAME AND LANGUAGE APPLICABLE PER COPY LOCALIZATION VERSION VERSION(S) ADDITIONAL ROYALTY ADDITIONAL ** PROVISIONS * ROYALTY - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- 1. Microsoft(R) Windows(R) CE EN (a), (b), (c), US$ * US$_____ Operating System (d), (e), (f), (g) for Windows(R)- (h), (i) Based Terminal devices Version 1.0 - --------------------------------------------------------------------------------------------------------
* A PRODUCT IS NOT LICENSED HEREUNDER UNLESS ROYALTY RATE(S) ARE INDICATED IN THE PRODUCT TABLE. ** LANGUAGE KEY: EN=ENGLISH ADDITIONAL PROVISIONS KEY (a) In addition to the Dedicated Product Deliverables for this Product, COMPANY shall require OEM Customer to obtain in a separate transaction the Microsoft Windows CE Embedded Toolkit for Visual C++ version 5.0, which includes the Windows CE 2.1 Enhancement Pack for the Embedded Tool Kit ("ETK") and use the ETK in accordance with the accompanying instructions to implement the Product on OEM Customer's Dedicated Systems. (b) With respect to the ETK components, COMPANY's rights granted hereunder to sublicense the ETK to OEM Customer shall apply only to the Full Operating System configuration which is described in the ETK documentation. (c) COMPANY shall not sign a Sublicense Agreement for the Product without MS' prior written approval. To assist MS in its review of COMPANY's proposed OEM Customer, COMPANY shall provide MS with: (1) the name, address, and business profile in the English language (including years in business, ownership profile, tradenames used, and nature of principal business activities) of the proposed OEM Customer; and (2) model name, description and specific industry application of proposed OEM Customer's Dedicated Systems. (d) Except as set forth in Exhibit W of the OEM Customer Sublicense Agreement, OEM Customer may distribute Product(s) only with Dedicated Systems which are marketed and distributed exclusively under OEM Customer's or OEM Customer's subsidiaries' brand names, trade names and trademarks. The Product(s) may not be distributed with Dedicated Systems which are marketed or distributed under any name which includes any third party brand names, trade names or trademarks. If, at any time, MS becomes aware of any violation of the foregoing, then without limiting its remedies, MS may charge COMPANY for each such Dedicated System an additional royalty equal to thirty percent (30%) of the highest royalty for the Product(s). COMPANY shall pay such additional royalty within thirty (30) days of receipt of MS' invoice. (e) COMPANY shall ensure that OEM Customer has executed the applicable logo license with MSCORP prior to any marketing or distribution of a Dedicated System. COMPANY hereby agrees to indemnify and defend MS and its Suppliers from and against all damages, costs and expenses, including reasonable attorneys' fees, which MS or its Suppliers may incur if the OEM Customer markets or distributes Dedicated Systems without executing, or in breach of, the applicable logo license. (f) "MSCORP Compatibility Test" shall mean MSCORP's then-standard suite of tests conducted by or for MSCORP to determine whether OEM Customer's Dedicated System is compliant with the MSCORP testing and compatibility requirements for the Product. COMPANY shall require of OEM Customer that the Dedicated Systems pass the MSCORP Compatibility Test and display the Product logo(s), as designated by MS from time to time, on Dedicated Systems distributed with the Product. Such logo use shall be in accordance with the applicable logo license which is available through a separate written agreement with MSCORP. To obtain additional information regarding the MSCORP Compatibility Test and the MSCORP logo agreement, COMPANY should contact the Account Manager assigned to COMPANY. (g) Notwithstanding anything to the contrary in section 1(d) of the Agreement, "Dedicated System" shall mean OEM Customer's computer systems that (1) comply with the MSCORP system specifications for Windows-Based Terminal devices; and (2) provide the end user with the ability to utilize the Microsoft Remote Desktop Protocol software to connect to the server. - ----------------- Confidential treatment requested 39 ADDITIONAL PROVISIONS KEY (CONTINUED) (h) COMPANY shall ensure that for each unit of Product distributed to France, OEM Customer shall set the Product "end user locale" to "France", thereby disabling that portion of the Product's encryption functionality which, pursuant to French law (Decree 92-1358 of December 1992), is not currently authorized for sale, use, or distribution within France. COMPANY may inform OEM Customer pursuant to a binding non-disclosure agreement between COMPANY and OEM Customer, but shall not disclose to third parties, that if "end user locale" is set to any locale other than "France" this Product will provide a higher level of encryption technology that may legally be used outside of France. COMPANY shall not disclose to third parties the contents of this Additional Provision (h). COMPANY shall defend and indemnify MS and its Suppliers against any claim related to breach of this Additional Provision(h). (i) Subject to limitations in the Agreement, MS grants to COMPANY the additional right to grant to COMPANY's OEM Customer the non-exclusive, limited right to use the Dedicated Product Deliverables on OEM Customer premises for the purposes and pursuant to the terms of the Exhibit S of "Attachment 2A to the OEM Customer Sublicense Agreement For Dedicated Systems - Windows CE Products for Windows-based Terminal Devices". 40 \ EXHIBIT U ATTACHMENT 2A TO OEM CUSTOMER SUBLICENSE AGREEMENT FOR DEDICATED SYSTEMS WINDOWS CE PRODUCTS FOR WINDOWS-BASED TERMINAL DEVICED
Units of Language Applicable Localization Product Name SOFTWARE Version(s) Additional Per Royalty Additional and Version licensed ** Provisions Copy * Royalty - ----------------------------------------------------------------------------------------------------------- 1. Microsoft(R) EN (a), (b), (c), US$____ US$____ Windows(R) CE (d), (e), (f), Operating System (g), (h), (i) for Windows(R) Based Terminal devices version 1.0
* IF ROYALTY RATE AND UNITS OF SOFTWARE ARE NOT SPECIFIED FOR A PARTICULAR PRODUCT, THEN SUCH PRODUCT IS NOT LICENSED UNDER THIS AGREEMENT. ** LANGUAGE KEY: EN = ENGLISH ADDITIONAL PROVISIONS KEY (a)(1) In addition to the Dedicated Product Deliverables for this SOFTWARE which are provided by COMPANY under this Agreement, Customer shall obtain in a separate transaction the Microsoft Windows CE Embedded Toolkit for Visual C++ version 5.0, which includes the Windows CE 2.1 Enhancement Pack for the Embedded Tool Kit ("ETK"). Customer shall use the ETK in accordance with its instructions to implement the SOFTWARE on Customer's Dedicated Systems. (2) Notwithstanding anything to the contrary contained in Section 6 of the Agreement, no warranties for the ETK are provided in the Agreement. The warranties, if any, contained in the ETK are the only warranties provided for the ETK. (b) With respect to the ETK componets, Customer's distribution license granted hereunder shall apply only to the Full Operating System configuration which is described in the ETK documentation. (c)(1) Notwithstanding anything to the contrary contained in Exhibit S to this Attachment 2A, Section (b) of Exhibit S does not apply to the Dedicated Product Deliverables. (2) Notwithstanding anything to the contrary contained in this Agreement, including the Exhibits attached hereto, Exhibit S does not apply to the ETK. (d)(1) Customer is not licensed to, and agrees that it will not, modify, in any way, or delete any aspect of the SOFTWARE (including, without limitation, any features, shortcuts, icons, "wizards", folders (including sub-folders) or programs of SOFTWARE) as delivered by COMPANY in the Dedicated Product Deliverables, except if and as specifically permitted below or in the OEM Adaptation Kit ("OAK") provided in the Dedicated Product Deliverables. In particular, and without limitation, this means that Customer is not licensed to and agrees that it will not: (A) Modify or obscure, in any way, the sequence or appearance of any screens displayed by the SOFTWARE as delivered by COMPANY. (B) Display any visual or audio content from power on through and including the time that the Dedicated System has displayed the SOFTWARE initial user interface screen ("UI Screen"), except: (i) as provided in section (d)(1)(C) below, (ii) for the presentation of Customer's brand logo(s) and the required SOFTWARE LOGO(s) in accordance with the Microsoft Corporation system specifications for Windows-Based Terminal devices and the applicable logo license, or (iii) for diagnostic notices or interactive prompts required for hardware or device driver initialization. 41 ADDITIONAL PROVISIONS KEY (Continued) (C) Modify or obscure, in any way, the appearance of the initial UI Screen displayed when the Dedicated System is initially powered on, (including without limitation, the addition or modification of background wallpaper bitmaps); provided, however, that Customer may add icons or folders to the UI Screen provided that any such icons are the same size as, and substantially similar in shape to, icons included on the UI Screen as delivered by COMPANY and that any such folders are the same size, shape and appearance as folders included on the UI Screen as delivered by COMPANY. (D) Pre-configure any programs (including without limitation any "shells", "screen savers" or "welcome" scripts), "wizards" or other content except for device drivers necessary to support preinstalled or pre-configured hardware devices (e.g., network interfaces, LCD panels, or keyboards), terminal emulation clients, or system administration support (as allowed in the OAK documentation) to be enabled, run or initialized automatically (i.e. without requiring a deliberate act of the end user) from an icon or folder on the UI Screen or otherwise without a deliberate act by the end user. By way of example only, and without limiting the generality of the foregoing, Customer agrees that it shall not populate with any programs or other content the SOFTWARE "Start-up" directory, initialization or other files in any manner which will cause any program or content (except specifically noted above in this (d)(1)(D)) to run or load automatically unless the end user has taken a prior deliberate action. (E) Modify or add content to any directories installed by the SOFTWARE, except as permitted in the OAK for pre-installation of applications by Customer. (F) Enable end user applications (i.e., programs that process data for the end user and are not required for the Dedicated System to operate or function) to run locally on the Dedicated System with the exception of device drivers, terminal emulation software, and system administration support software as set forth in (d)(1)(D) above, or an onscreen keyboard. All end user applications utilized on the Dedicated System must reside upon and operate only on the server to which the Dedicated system is connected. (2) Any EULA for the SOFTWARE distributed by Customer must be identical to the on screen EULA presented to the end user during SOFTWARE setup. (e) If Customer installs the SOFTWARE in ROM and the SOFTWARE is not the only software contained in ROM, Customer will ensure that Microsoft Corporation's copyright notice for SOFTWARE shall at all times be included in the first four percent (4%) and the last four percent (4%) of the software contained in ROM. The copyright notice(s) for SOFTWARE shall be as specified in the Dedicated Product Deliverables. In any event, Customer will not remove any copyright, trademark or patent notices that appear on the SOFTWARE as delivered to Customer. (f)(1) Except as set forth in Exhibit W, if attached, Customer may distribute SOFTWARE only with Dedicated Systems which are marketed and distributed exclusively under Customer's or Customer subsidiaries' brand names, trade names and trademarks. The SOFTWARE may not be distributed with Dedicated Systems which are marketed or distributed under any name which includes any third party brand names, trade names, or trademarks. If, at any time, COMPANY becomes aware of any violation of the foregoing, then without limiting its remedies, COMPANY may charge. Customer for each such Dedicated System an additional royalty equal to thirty percent (30%) of the highest royalty for the SOFTWARE. Customer shall pay such additional royalty within thirty (30) days of receipt of COMPANY's invoice. (2) In the event Dedicated Systems are marketed or distributed under a name which includes any third party brand names, trade names or trademarks, Customer shall ensure that such third party has executed the applicable logo license with Microsoft Corporation prior to any marketing or distribution of such Dedicated Systems. Customer hereby agrees to indemnify and defend COMPANY, MS and their Suppliers from and against all damages, costs and expenses, including reasonable attorneys' fees which COMPANY, MS or their Suppliers may incur if the third party markets or distributes Dedicated Systems without executing, or in breach of, the applicable logo license. (g) "MSCORP Compatibility Test" shall mean Microsoft Corporation's then-standard suite of tests conducted by or for Microsoft Corporation to determine whether Customer's Dedicated System is compliant with the Microsoft Corporation testing and compatibility requirements for the SOFTWARE. Dedicated Systems must pass the MSCORP Compatibility Test and display the SOFTWARE logo(s), as designated by MS from time to time, on Dedicated Systems distributed with the SOFTWARE. Such logo use shall be in accordance with the applicable logo license which is available through a separate written agreement with Microsoft Corporation. To obtain additional information regarding the MSCORP Compatibility Test and the Microsoft Corporation logo agreement, Customer should contact COMPANY. (h) Customer's EULA for this SOFTWARE shall be the EULA set forth in Exhibit 1 attached hereto, except that it shall be modified as indicated in Section 2(e) of the Agreement. 42 ADDITIONAL PROVISIONS KEY (Continued) (i) This SOFTWARE includes encryption technology which is not authorized for sale, use, or distribution within France. French law (Decree 92-1358 of December 1992) generally prohibits the use in France of such technology, unless special approvals are granted. Accordingly, to comply with French law, Customer shall ensure that for each unit of SOFTWARE distributed in France, the SOFTWARE setting for "end user locale" shall be set to "France", thereby disabling the encryption functionality prohibited by French law. Customer shall not disclose to third parties (including any end users) the contents of the preceding sentence; Customer, may, however, in its discretion, segregate and distinctively mark Dedicated Systems with end user locale set to France (noting, for example, but without limitation, that such Dedicated Systems are "Authorized for distribution in France," or "Not Intended for Use Outside France"). Customer shall defend and indemnify COMPANY, and MS and their Suppliers, against any claim related to breach of this Additional Provision(i). DEDICATED SYSTEMS Notwithstanding anything to the contrary in Section 1(b) of the Agreement, each Dedicated System shall (1) comply with the Microsoft Corporation system specifications for Windows-Based Terminal devices, and (2) provide the end user with the ability to utilize the Microsoft Remote Desktop Protocol software to connect to the server. Dedicated Systems for SOFTWARE described in this Attachment 2A shall be limited to Customer's current and future computing devices described below. At Customer's option, for purposes of administrative convenience, Customer may designate models by "all models" or by "model line" or "series", (e.g., "Jaguar model line", "Jaguar Pro series", "Jaguar Pro 750 model line", "Jagual Pro 950 series", etc.). Dedicated Systems defined by "all models" shall include all current and future models that meet the description specified in the table (e.g., "All models which include a CD-ROM drive, 500 Mb or larger hard disk drive, and sound card.") and utilize the listed microprocessor(s). Dedicated Systems defined by model line or series shall include all current and future models which include the designated model line or series name, (e.g., "Jaguar Pro model line" includes Jaguar Pro, Jaguar Pro 950, Jaguar Pro S, etc.; "Jaguar series" includes Jaguar, Jaguar Pro, Jaguar Pro 950, Jaguar S400, etc.; "Jaguar Pro 950 series" includes Jaguar Pro 950, Jaguar Pro 955, etc.). PRODUCT NUMBER KEY: 1 = Windows(R) CE Operating System for Windows-Based Terminal devices version 1.0; ROYALTY BASIS KEY: C = per copy; if Product box is blank, such Product is not licensed for distribution with the listed Dedicated System.
- --------------------------------------------------------------------------------------------------------- PRODUCT NUMBER MODEL NAME, MODEL NUMBER, MODEL LINE, PROCESSOR MANUFACTURER OR MODEL DESCRIPTION TYPE 1 2 3 4 5 - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------
43 EXHIBIT U ATTACHMENT 2A EXHIBIT 1 MICROSOFT(R) WINDOWS(R) CE OPERATING SYSTEM FOR WINDOWS-BASED TERMINAL DEVICES VERSION 1.0 - -------------------------------------------------------------------------------- IMPORTANT--READ CAREFULLY: THIS END USER LICENSE AGREEMENT ("EULA") IS A LEGAL AGREEMENT BETWEEN YOU (EITHER AN INDIVIDUAL OR A SINGLE ENTITY) AND THE MANUFACTURER ("MANUFACTURER") OF THE SPECIAL PURPOSE COMPUTING DEVICE ("SYSTEM") YOU ACQUIRED WHICH INCLUDES CERTAIN MICROSOFT SOFTWARE PRODUCT(S) INSTALLED ON THE SYSTEM AND/OR INCLUDED IN THE SYSTEM PACKAGE ("SOFTWARE"). THE SOFTWARE INCLUDES COMPUTER SOFTWARE, THE ASSOCIATED MEDIA, ANY PRINTED MATERIALS, AND ANY "ONLINE" OR ELECTRONIC DOCUMENTATION. BY INSTALLING, COPYING, DOWNLOADING, OR OTHERWISE USING THE SOFTWARE, YOU AGREE TO BE BOUND BY THE TERMS OF THIS EULA. IF YOU DO NOT AGREE TO THE TERMS OF THIS EULA, MANUFACTURER AND MICROSOFT LICENSING, INC. ("MS") ARE UNWILLING TO LICENSE THE SOFTWARE TO YOU. IN SUCH EVENT, YOU MAY NOT USE OR COPY THE SOFTWARE, AND YOU SHOULD PROMPTLY CONTACT MANUFACTURER FOR INSTRUCTIONS ON RETURN OF THE UNUSED PRODUCT(S) FOR A REFUND. - ------------------------------------------------------------------------------ SOFTWARE LICENSE The SOFTWARE is protected by copyright laws and international copyright treaties, as well as other intellectual property laws and treaties. The SOFTWARE is licensed, not sold. 1. GRANT OF LICENSE. SOFTWARE includes software already installed on the SYSTEM ("SYSTEM Software") and, if included in the SYSTEM package, software contained on the CD-ROM disk and/or floppy disk(s) labeled "Desktop Software for Microsoft Windows CE" ("Desktop Software"). This EULA grants you the following rights to the SOFTWARE: - SYSTEM SOFTWARE. You may use the SYSTEM Software only as installed in the SYSTEM. - DESKTOP SOFTWARE. Desktop Software might not be included with your SYSTEM. If Desktop Software is included with your SYSTEM, you may install and use the component(s) of the Desktop Software in accordance with the terms of the end user license agreement provided with such component(s). In the absence of a separate end user license agreement for particular component(s) of the Desktop Software, you may install and use only one (1) copy of such component(s) on a single computer with which you use the SYSTEM. - USE OF WINDOWS CE OPERATING SYSTEM FOR WINDOWS-BASED TERMINAL DEVICES WITH MICROSOFT WINDOWS NT SERVER, TERMINAL SERVER EDITION. If the SOFTWARE is Windows CE operating system for Windows-Based Terminal devices, the following special provisions apply. In order to use the SYSTEM in connection with Windows NT Server, Terminal Server Edition, you must possess (1) a Client Access License for Windows NT Server, Terminal Server Edition and (2) an end user license for Windows NT Workstation or an end user license agreement for Windows NT Workstation for Windows-Based Terminal Devices (please refer to the end user license agreement for Windows NT Server, Terminal Server Edition for additional information). Manufacturer may have included a Certificate of Authenticity for Windows NT Workstation for Windows-Based Terminal Devices with the SYSTEM. In that case, this EULA constitutes an end user license for the version of Windows NT Workstation for Windows-Based Terminal Devices indicated on such Certificate of Authenticity. - BACK-UP COPY. If Manufacturer has not included a back-up copy of the SYSTEM Software with the SYSTEM, you may make a single back-up copy of the SYSTEM Software. You may use the back-up copy solely for archival purposes. 2. DESCRIPTION OF OTHER RIGHTS AND LIMITATIONS. - SPEECH/HANDWRITING RECOGNITION. If the SYSTEM Software includes speech and/or handwriting recognition component(s), you should understand that speech and handwriting recognition are inherently statistical processes; that recognition errors are inherent in the processes; that it is your responsibility to provide for handling such errors and to monitor the recognition processes and correct any errors. NEITHER MANUFACTURER NOR ITS SUPPLIERS SHALL BE LIABLE TO ANY DAMAGES ARISING OUT OF ERRORS IN THE SPEECH AND HANDWRITING RECOGNITION PROCESSES. - LIMITATIONS ON REVERSE ENGINEERING, DECOMPILATION AND DISASSEMBLY. You may not reverse engineer, decompile, or disassemble the SYSTEM Software, except and only to the extent that such activity is expressly permitted by applicable law notwithstanding this limitation. 44 o SINGLE SYSTEM. The SYSTEM Software is licensed with the SYSTEM as a single integrated product. The SYSTEM Software installed in Read Only Memory ("ROM") of the SYSTEM may only be used as part of the SYSTEM. o SINGLE EULA. The package for the SYSTEM Software may contain multiple versions of this EULA, such as multiple translations and/or multiple media versions (e.g., in the user documentation and in the software). Even if you receive multiple versions of the EULA, you are licensed to use only one (1) copy of the SYSTEM Software. o RENTAL. You may not rent or lease the SOFTWARE. o SOFTWARE TRANSFER. You may permanently transfer all of your rights under this EULA only as part of a sale or transfer of the SYSTEM, provided you retain no copies, you transfer all of the SOFTWARE (including all component parts, the media, any upgrades or backup copies, this EULA and, if applicable, the Certificate(s) of Authenticity), AND the recipient agrees to the terms of this EULA. If the SOFTWARE is an upgrade, any transfer must include all prior versions of the SOFTWARE. o TERMINATION. Without prejudice to any other rights, Manufacturer or MS may terminate this EULA if you fail to comply with the terms and conditions of this EULA. In such event, you must destroy all copies of the SOFTWARE and all of its component parts. 3. UPGRADES. If the SYSTEM Software and this EULA are provided separate from the SYSTEM by Manufacturer and the SYSTEM Software is on a ROM chip, CD ROM disk(s) or floppy disk(s), and labeled "For ROM Upgrade Purposes Only" ("ROM Upgrade"), you may install one copy of the ROM Upgrade onto the SYSTEM as a replacement copy for the SYSTEM Software originally installed on the SYSTEM and use it in accordance with Section 1 of this EULA. 4. COPYRIGHT. All title and copyrights in and to the SOFTWARE (including but not limited to any images, photographs, animations, video, audio, music, text and "applets," incorporated into the SOFTWARE), the accompanying printed materials, and any copies of the SOFTWARE, are owned by MS or its suppliers (including Microsoft Corporation). You may not copy the printed materials accompanying the SOFTWARE. All rights not specifically granted under this EULA are reserved by MS and its suppliers (including Microsoft Corporation). 5. PRODUCT SUPPORT. PRODUCT SUPPORT FOR THE SOFTWARE IS NOT PROVIDED BY MS, ITS PARENT CORPORATION, MICROSOFT CORPORATION,OR THEIR AFFILIATES OR SUBSIDIARIES. FOR PRODUCT SUPPORT, PLEASE REFER TO MANUFACTURER'S SUPPORT NUMBER PROVIDED IN THE DOCUMENTATION FOR THE SYSTEM. SHOULD YOU HAVE ANY QUESTIONS CONCERNING THIS EULA, OR IF YOU DESIRE TO CONTACT MANUFACTURER FOR ANY OTHER REASON, PLEASE REFER TO THE ADDRESS PROVIDED IN THE DOCUMENTATION FOR THE SYSTEM. 6. EXPORT RESTRICTIONS. You agree that you will not export or re-export the SOFTWARE to any country, person, or entity subject to U.S. export restrictions. You specifically agree not to export or re-export the SOFTWARE: (i) to any country to which the U.S. has embargoed or restricted the export of goods or services, which as of March 1998 include, but are not necessarily limited to Cuba, Iran, Iraq, Libya, North Korea, Sudan and Syria, or to any national of any such country, wherever located, who intends to transmit or transport the products back to such country; (ii) to any person or entity who you know or have reason to know will utilize the SOFTWARE or portion thereof in the design, development or production of nuclear, chemical or biological weapons; or (iii) to any person or entity who has been prohibited from participating in U.S. export transactions by any federal agency of the U.S. government. If the SOFTWARE is labeled "North America Only Version" above, on the Product Identification Card, or on the SOFTWARE packaging or other written materials, then the following applies: The SOFTWARE Is intended for distribution only in the United States, its territories and possessions (including Puerto Rico, Guam, and U.S. Virgin Islands) and Canada. Export of the SOFTWARE from the United States is regulated under "El controls" of the Export Administration Regulations (EAR, 15 CFR 730-744) of the U.S. Commerce Department, Bureau of Export Administration (BXA). A license is required to export the SOFTWARE outside the United States or Canada. You agree that you will not directly or indirectly, export or re-export the SOFTWARE (or portions thereof) to any country, other than Canada, or to any person or entity subject to U.S. export restrictions without first obtaining a Commerce Department export license. You warrant and represent that neither the BXA nor any other U.S. federal agency has suspended, revoked or denied your export privileges. 7. NOTE ON JAVA SUPPORT. The SYSTEM Software may contain support for programs written in Java. Java technology is not fault tolerant and is not designed, manufactured, or intended for use or resale as on-line control equipment in hazardous environments requiring fail-safe performance, such as in the operation of nuclear facilities, aircraft navigation or communication systems, air traffic control, direct life support machines, or weapons systems, in which the failure of Java technology could lead directly to death, personal injury, or severe physical or environmental damage. 45 8. LIMITED WARRANTY. o LIMITED WARRANTY. Manufacturer warrants that the SOFTWARE will perform substantially in accordance with the accompanying written materials for a period of ninety (90) days from the date of receipt. Any implied warranties on the SOFTWARE are limited to ninety (90) days. Some states/jurisdictions do not allow limitations on duration of an implied warranty, so the above limitation may not apply to you. o CUSTOMER REMEDIES. Manufacturer's and its suppliers' entire liability and your exclusive remedy shall be, at Manufacturer's option, either (a) return of the price paid, or (b) repair or replacement of the SOFTWARE that does not meet the above Limited Warranty and which is returned to Manufacturer with a copy of your receipt. This Limited Warranty is void if failure of the SOFTWARE has resulted from accident, abuse, or misapplication. Any replacement SOFTWARE will be warranted for the remainder of the original warranty period or thirty (30) days, whichever is longer. o NO OTHER WARRANTIES. EXCEPT AS EXPRESSLY PROVIDED IN THE LIMITED WARRANTY SECTION ABOVE, THE SOFTWARE IS PROVIDED TO THE END USER "AS IS" WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF NON-INFRINGEMENT, MERCHANTABILITY, AND/OR FITNESS FOR A PARTICULAR PURPOSE. THE ENTIRE RISK OF THE QUALITY AND PERFORMANCE OF THE SOFTWARE IS WITH YOU. o NO LIABILITY FOR CONSEQUENTIAL DAMAGES. MANUFACTURER OR MANUFACTURER'S SUPPLIERS, INCLUDING MS AND ITS SUPPLIERS, SHALL NOT BE HELD TO ANY LIABILITY FOR ANY DAMAGES SUFFERED OR INCURRED BY THE END USER (INCLUDING, BUT NOT LIMITED TO, GENERAL, SPECIAL, CONSEQUENTIAL OR INCIDENTAL DAMAGES INCLUDING DAMAGES FOR LOSS OF BUSINESS PROFITS, BUSINESS INTERRUPTION, LOSS OF BUSINESS INFORMATION AND THE LIKE), ARISING FROM OR IN CONNECTION WITH THE DELIVERY, USE OR PERFORMANCE OF THE SOFTWARE. If you acquired this EULA in the United States, this EULA is governed by the laws of the State of Washington. If you acquired this EULA in Canada, this EULA is governed by the laws of the Province of Ontario, Canada. Each of the parties hereto irrevocably attorns to the jurisdiction of the courts of the Province of Ontario and further agrees to commence any litigation which may arise hereunder in the courts located in the Judicial District of York, Province of Ontario. If this EULA was acquired outside the United States, then local law may apply. Should you have any questions concerning this EULA, please contact the Manufacturer of your SYSTEM. - -------------------------------------------------------------------------------- U.S. GOVERNMENT RESTRICTED RIGHTS The SOFTWARE and documentation are provided with RESTRICTED RIGHTS. Use, duplication, or disclosure by the Government is subject to restrictions as set forth in subparagraph (c)(1)(ii) of the Rights in Technical Data and Computer Software clause at DFARS 252.227-7013 or subparagraphs (c)(1) and (2) of the Commercial Computer Software--Restricted Rights at 48 CFR 52.227-19, as applicable. Manufacturer is Microsoft Corporation/One Microsoft Way/Redmond, WA 98052-6399. 46 EXHIBIT U ATTACHMENT 2A EXHIBIT S USE OF DEDICATED PRODUCT DELIVERABLES FOR WINDOWS CE SOFTWARE (a) COMPANY grants to Customer a non-exclusive, personal, nontransferable, non-assignable license during the term of the Agreement to: (i) use on Customer premises the Dedicated Product Deliverables (other than the Software Development Kit, if provided) in accordance with the instructions contained in the Dedicated Product Deliverables for the following limited purposes: (A) creating an OEM Abstraction Layer for the SOFTWARE on Customer's Dedicated Systems; (B) testing Customer's Dedicated Systems; (C) creating device drivers for Customer's Dedicated Systems; and (ii) use on Customer premises the Software Development Kit in accordance with the instructions contained therein to design software applications for the SOFTWARE; and (iii) distribute the Object Code files in the Software Development Kit designated as "Redistributable Components" only in conjunction with Customer's software application product, provided that: (A) Customer's software application product is designed to operate with the SOFTWARE and is fully compatible with the applicable SOFTWARE APIs and protocols; (B) Customer does not use MS' or Microsoft Corporation's name, logo (except by separate written agreement with MS or Microsoft Corporation), or trademarks to market the software application product; (C) Customer includes MS' or Microsoft Corporation's copyright notices for the SOFTWARE on the disk label and/or on the title page of the documentation for the software application product; and (D) Customer hereby indemnifies, holds harmless, and defends COMPANY, MS and their Suppliers from and against any claims or lawsuits, including attorney's fees, that arise or result from the use or distribution of the software application product. The limited license granted hereunder is solely for Customer's internal use. MS reserves all rights not expressly licensed hereunder. (b) MS and Customer shall jointly own any and all intellectual property in and to any modifications or additions made by or for Customer to the OEM Abstraction Layer and device drivers. To the extent required to realize such joint ownership, Customer hereby assigns to MS an undivided one-half interest in any and all such intellectual property. The parties agree that each shall be free to use and commercially exploit their interests in such intellectual property and there shall be no obligation of payment or accounting to the other therefore, provided that Customer's use or exploitation of such intellectual property shall at all times be subject to the terms of this Agreement and shall be exercised solely in connection with the SOFTWARE. (c) Customer shall comply with the confidentiality obligations under Section 11 of the Agreement. In addition, Customer shall use best efforts to safeguard the Dedicated Product Deliverables from disclosure, which care shall not be less than the standard of care Customer uses to protect its own most confidential information. Customer shall not reproduce, duplicate, copy or otherwise disclose, distribute or disseminate any part of the Dedicated Product Deliverables or additional information or materials provided pursuant to this Exhibit S in any media except for Customer's own internal use by Customer's full-time employees on a need-to-know basis on Customer premises. Customer hereby indemnifies COMPANY, MS and their Suppliers for any damages COMPANY, MS or their Suppliers may suffer as a result of the failure of Customer to abide by the terms of Section 11 of the Agreement or this Exhibit S. Notwithstanding anything to the contrary in Section 11, Customer's confidentiality obligations with respect to Source Code provided in connection with the Dedicated Product Deliverables shall continue until such time as MS or Microsoft Corporation places such Source Code in the public domain. (d) Notwithstanding Section (c) above, Customer may disclose the Dedicated Product Deliverables to a third party contractor which MS has confirmed in writing to be an MS authorized Windows CE Integrator and employ such Windows CE Integrator as a third party contractor of Customer to use the Dedicated Product Deliverables in accordance with the Agreement and this Exhibit S, provided that: (i) Customer and its contractor enter into a written agreement (hereinafter "Contractor Agreement") that expressly provides that MS is a third party intended beneficiary of the Contractor Agreement with rights to enforce such agreement, and that requires contractor: (A) to comply with obligations identical to those imposed on Customer by the Agreement, including, without limitation, those obligations set forth in Sections (b) and (c) of this Exhibit S; (B) to cease all reference to, and to return all full or partial copies of, the Dedicated Product Deliverables upon notice from Customer, COMPANY, or MS of the termination or expiration of the Agreement; and 47 EXHIBIT U ATTACHMENT 2A EXHIBIT S (Continued) (C) to pay COMPANY's MS' or their Suppliers or Customer's attorneys' fees and costs if COMPANY, Customer or MS or their Suppliers employ(s) attorneys to enforce any rights arising out of the Contractor Agreement; (ii) Customer guarantees its contractors' fulfillment of the applicable obligations imposed on Customer by this Agreement; (iii) Customer hereby indemnifies COMPANY, MS and their Suppliers with respect to any and all damages of any kind, without limitation, caused by unauthorized reproduction and/or distribution of any portion of the Dedicated Product Deliverables by any such contractor or by any other breach of the Contractor Agreement by any such contractor; and (iv) Customer notifies MS of the name and address of any contractor with which Customer intends to enter into a Contractor Agreement at least sixty (60) days before execution of such agreement, and MS approves in writing such contractor. Customer's notice to MS shall also include a written summary of the terms of any such Contractor Agreement(s), including: the specific activity to be performed by the contractor; the SOFTWARE involved; the term of the agreement with the contractor; and such samples as MS may reasonably request of the work product of the contractor. Customer shall promptly notify MS of the termination, expiration or significant modification of the terms of such Contractor Agreement(s). (e) In the event of an assignment or attempted assignment in violation of Section 12 of the Agreement, the license described in this Exhibit S shall immediately terminate and the Dedicated Product Deliverables shall be returned to COMPANY within ten (10) days. Customer shall provide a declaration signed by an officer of Customer, and a declaration signed by an officer of the authorized Windows CE Integrator, attesting that all copies of the Dedicated Product Deliverables have been returned to COMPANY. - ------------------------------------- ------------------------------------- (Name of COMPANY) (Named of Customer) - ------------------------------------- ------------------------------------- By By - ------------------------------------- ------------------------------------- Name (Print) Name (Print) - ------------------------------------- ------------------------------------- Title Title - ------------------------------------- ------------------------------------- Date Date 48 EXHIBIT V3 LICENSE OF ADDITIONAL PRODUCT SOFTWARE UNITS [THIS EXHIBIT V3 IS FOR USE ONLY WITH AGREEMENTS THAT INCLUDE "WINDOWS CE PRODUCTS FOR WINDOWS-BASED TERMINAL DEVICES" AS EXHIBIT C3] AMENDMENT NUMBER ____ Amendment Date:________ to OEM CUSTOMER SUBLICENSE AGREEMENT FOR DEDICATED SYSTEMS between ______________________, a Corporation of __________________ and _________________, a Corporation of ____________________ Agreement Effective Date:_________________ WHEREAS, Customer has licensed a certain number of units of Product Software (the "SOFTWARE") from COMPANY under the terms of the above referenced license agreement (the "Agreement"); WHEREAS, Customer now desires to license additional units of SOFTWARE from COMPANY as described in the Additional Units Attachment dated ________, 199__, which is attached to this Amendment; NOW, THEREFORE, Customer and COMPANY hereby agree: 1. Effective as of the date indicated on the Additional Units Attachment, such Additional Units Attachment is hereby added to the Agreement and sets forth this number of additional units of the SOFTWARE and the language version(s) licensed to Customer under the terms and conditions of the Agreement. 2. Customer may license additional SOFTWARE on the Additional Units Attachment only for the SOFTWARE and the language version(s) that are currently licensed by Customer under the Agreement between Customer and COMPANY. In order to license SOFTWARE or language version(s) not currently licensed under the Agreement with COMPANY, Customer shall execute a new OEM Customer Sublicense Agreement for Dedicated Systems which includes such SOFTWARE and/or language version(s). 3. All capitalized terms used but not defined herein shall have the meanings ascribed to them in the Agreement. The terms of this Amendment shall supersede any inconsistent terms contained in the Agreement. IN WITNESS WHEREOF, the parties have executed this Amendment by their duly authorized representatives as of the date set forth above. All signed copies of this Amendment shall be deemed originals. Each individual signing on behalf of Customer hereby represents and warrants that he or she has full authority to sign this Agreement and bind Customer to perform all duties and obligations contemplated by this Amendment. If Customer is located in a jurisdiction in which a corporate seal or "chop" is commonly used as an instrument of agreement execution, in addition to the individual signature provided below, Customer's seal or "chop" should be entered below Customer's signature block. This Amendment is executed only in the English language. - ----------------------------------- --------------------------------- (Name of COMPANY) (Name of Customer) - ----------------------------------- --------------------------------- By (Signature) By (Signature) - ----------------------------------- --------------------------------- Name (Print) Name (Print) - ----------------------------------- --------------------------------- Title Title - ----------------------------------- --------------------------------- Date Date ----------------------------- Customer's seal or "chop" ----------------------------- 49 EXHIBIT V3 ADDITIONAL UNITS ATTACHMENT (CONT.) Dated: ____________________
- ------------------------------------------------------------------------------------------------------------ PRODUCT NAME AND VERSION ADDITIONAL UNITS OF SOFTWARE LICENSED LANGUAGE VERSION - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ Microsoft(R) Windows(R) CE Operating System for _______________________ Windows(R)-Based Terminal devices version 1.0 - ------------------------------------------------------------------------------------------------------------
50 SIGNED ORIGINAL AMENDMENT NUMBER 3 Amendment Date: December 1st, 1998 to MICROSOFT SOFTWARE FOR DEDICATED SYSTEMS DISTRIBUTOR AGREEMENT between MICROSOFT LICENSING, INC., a Nevada, U.S.A. Corporation and BSQUARE CORPORATION, a Corporation of Washington, U.S.A. Agreement Effective Date: November 1st, 1997 MICROSOFT LICENSE #7772-7310 (SAP: 5000020519) Microsoft Corporation transferred its OEM licensing operations to its wholly owned subsidiary, Microsoft Licensing, Inc., a Nevada, U.S.A. Corporation, on December 31, 1997. Accordingly, the above referenced license agreement (hereinafter the "Agreement") was assigned by separate instrument to Microsoft Licensing, Inc. on that date. BSQUARE CORPORATION, ("COMPANY") has licensed from Microsoft Licensing, Inc. ("MS") the right to distribute certain Product Software (the "SOFTWARE") under the terms of the above referenced distributor agreement (the "Agreement"); Now, therefore, MS and COMPANY hereby agree that effective as of the Amendment Date set forth above: 1. COMPANY may license OEM Customers approved by MS in writing in each instance to employ third party installer(s) to install one (1) copy of the SOFTWARE on OEM Customer's Dedicated Systems in accordance with the terms of the Sublicense Agreement, provided: a. COMPANY and its OEM Customer shall execute an amendment in the form attached hereto as Attachment 1 in order to add Exhibit I to the OEM Customer Sublicense Agreement for Dedicated Systems between COMPANY and OEM Customer; b. COMPANY and its OEM Customer shall comply with all terms and conditions contained in Exhibit I; c. COMPANY shall ensure that its OEM Customer and the third party installer(s) execute an Installation Agreement which complies with Exhibit I of the Sublicense Agreement; d. COMPANY shall submit to MS the following information in the English language: (i) the name, address, and business profile of the OEM Customer's proposed third party installer(s), which installer(s) COMPANY shall not approve until such time as MS approves the third party installer(s); and (ii) a copy of each executed Installation Agreement. e. COMPANY shall, upon MS request: (i) commence an audit of the third party installer(s) in accordance with Exhibit I of the Sublicense Agreement, and (ii) provide information concerning the SOFTWARE installed, the corresponding Dedicated Systems and shipment destination(s). f. COMPANY shall cooperate fully with MS in protecting and enforcing MS rights set forth in the Agreement. 2. The parties agree that Section 9 of the Agreement is hereby amended and shall read as follows: "9. TERM OF AGREEMENT. The term of this Agreement shall run from the Effective Date until two (2) years from the end of the calendar quarter in which the Effective Date occurs." 3. All capitalized terms used but not defined herein shall have the meanings ascribed to them in the Agreement. The terms of this Amendment shall supersede any inconsistent terms contained in the Agreement. IN WITNESS WHEREOF, the parties have executed this Amendment by their duly authorized representatives as of the date set forth above. All signed copies of this Amendment shall be deemed originals. Each individual signing on behalf of COMPANY below hereby represents and warrants that he or she has full authority to sign this Agreement and bind COMPANY to perform all duties and obligations contemplated by this Amendment. If COMPANY is located in a jurisdiction in which a corporate seal or "chop" is commonly used as an instrument of agreement execution, in addition to the individual signature provided below, COMPANY's seal or "chop" should be entered below COMPANY's signature block. This Amendment is executed only in the English language. 51 IN WITNESS WHEREOF, the parties have executed this Amendment by their duly authorized representatives as of the date set forth above. All signed copies of this Amendment shall be deemed originals. Each individual signing on behalf of COMPANY below hereby represents and warrants that he or she has full authority to sign this Agreement and bind COMPANY to perform all duties and obligations contemplated by this Amendment. If COMPANY is located in a jurisdiction in which a corporate seal or "chop" is commonly used as an instrument of agreement execution, in addition to the individual signature provided below, COMPANY's seal or "chop" should be entered below COMPANY's signature block. This Amendment is executed only in the English language. MICROSOFT LICENSING, INC. BSQUARE CORPORATION /s/ DAVID KAYE /s/ WILLIAM T. BAXTER - ---------------------------- ---------------------------- By (Signature) By (Signature) DAVID KAYE WILLIAM T. BAXTER - ---------------------------- ---------------------------- Name (Print) Name (Print) OEM Accounting Manager President/CEO - ---------------------------- ---------------------------- Title Title January 6, 1999 December 17, 1998 - ---------------------------- ---------------------------- Date Date COMPANY's seal or "chop" 52 ATTACHMENT 1 AMENDMENT NUMBER ___ Amendment Date: _____ to OEM CUSTOMER SUBLICENSE AGREEMENT FOR DEDICATED SYSTEMS between ____________________, a Corporation of ______________("COMPANY") and ________________, a Corporation of __________________ ("CUSTOMER") Agreement Effective Date: __________ WHEREAS, Customer has licensed certain Product Software (the "SOFTWARE") from COMPANY under the terms of the above referenced license agreement (the "Agreement"); WHEREAS, Customer now desires to contract with a third party to install such SOFTWARE onto Customer's Dedicated Systems; NOW, THEREFORE, Customer and COMPANY hereby agree: 1. Effective as of the Amendment Date above, the attached Exhibit I is hereby added to the Agreement and Customer hereby agrees to comply with all terms and conditions set forth in Exhibit I. 2. All capitalized terms used but not defined herein shall have the meanings ascribed to them in the Agreement. The terms of this Amendment shall supersede any inconsistent terms contained in the Agreement. IN WITNESS WHEREOF, the parties have executed this Amendment by their duly authorized representatives as of the date set forth above. All signed copies of this Amendment shall be deemed originals. Each individual signing on behalf of COMPANY below hereby represents and warrants that he or she has full authority to sign this Agreement and bind COMPANY to perform all duties and obligations contemplated by this Amendment. If COMPANY is located in a jurisdiction in which a corporate seal or "chop" is commonly used as an instrument of agreement execution, in addition to the individual signature provided below, COMPANY's seal or "chop" should be entered below COMPANY's signature block. This Amendment is executed only in the English language. - ---------------------------- ---------------------------- (CUSTOMER NAME) (CUSTOMER NAME) - ---------------------------- ---------------------------- By (Signature) By (Signature) - ---------------------------- ---------------------------- Name (Print) Name (Print) - ---------------------------- ---------------------------- Title Title - ---------------------------- ---------------------------- Date Date COMPANY's seal or "chop" 53 EXHIBIT I CUSTOMER USE OF THIRD PARTY INSTALLERS Except as expressly provided in this Exhibit I, CUSTOMER shall not reproduce, duplicate, copy or otherwise permit the installation of SOFTWARE except on CUSTOMER premises by CUSTOMER employees. CUSTOMER may engage a third party installer specifically approved in writing by COMPANY ("Third Party Installer") to install the SOFTWARE for CUSTOMER on the Dedicated System hard disk or ROM pursuant to Section 2(a)(i) of the OEM Customer Sublicense Agreement for Dedicated Systems between COMPANY and CUSTOMER (the "Agreement") provided that all of the conditions listed below are and remain satisfied. (a) CUSTOMER shall provide COMPANY with the name, address, and business profile in the English language (including years in business, ownership profile, tradenames used, nature of principle business activities, and summary of any prior experience with installation or replication of MS software products) of any Third Party Installer CUSTOMER intends to engage for installation of the SOFTWARE at least sixty (60) days before CUSTOMER intends to have the Third Party Installer begin work for CUSTOMER. The Third Party Installer must be approved in writing by COMPANY prior to beginning work. (b) CUSTOMER shall enter into a written agreement with the Third Party Installer (hereinafter "Installation Agreement") that expressly provides that MS and COMPANY are third party intended beneficiaries of the Installation Agreement with rights to enforce such agreement, and that requires the Third Party Installer: (1) to comply with obligations identical to those imposed on CUSTOMER by Section 2(a), 3(d), 3(e), 3(f), 3(h), 3(i), 4(a), 10, 11, 12 of the Agreement; (2) to consent to venue and jurisdiction in the State of Washington with respect to any action brought by MS to enforce its rights under the Installation Agreement; (3) to provide access to Third Party Installer premises to audit or inspection team(s) sent on behalf of MS, CUSTOMER or COMPANY, with or without notice, in order that such team may perform an audit of the Third Party Installer's books and records and/or an inspection of the Third Party Installer's procedures to determine compliance with the terms of the Installation Agreement and the Agreement; (4) to halt reproduction of the SOFTWARE upon notice from MS, CUSTOMER or COMPANY; (5) to distribute the Dedicated Systems with preinstalled SOFTWARE only to CUSTOMER; (6) to pay MS, CUSTOMER'S or COMPANY'S attorneys' fees if MS, CUSTOMER or COMPANY employs attorneys to enforce any rights arising out of the Installation Agreement; (7) to report to CUSTOMER information concerning SOFTWARE installed including, without limitation, the number of units of SOFTWARE installed, corresponding Dedicated System model name(s), and shipment destination, and (8) A sample Installation Agreement which CUSTOMER may wish to use as a framework for the Installation Agreement is attached hereto as Attachment A to this Exhibit I. (c) CUSTOMER shall report to COMPANY within fifteen (15) days of the end of each calendar month, the number of units of each SOFTWARE which the Third Party Installer shipped to CUSTOMER during such month. (d) CUSTOMER hereby agrees to cease use of any Third Party Installer upon receipt of written notice from MS or COMPANY. (e) CUSTOMER hereby unconditionally and irrevocably guarantees the Third Party Installer's fulfillment of the applicable obligations imposed by this Agreement and/or the Installation Agreement. (f) CUSTOMER hereby indemnifies COMPANY for all damages (including attorney's fees) of any kind in connection with the Third Party Installer's activities for CUSTOMER, including, without limitation, damages resulting from: (1) a breach of the terms of this Agreement and/or the Installation Agreement, or (2) any and all unauthorized reproduction and/or distribution of any portion of the SOFTWARE by the Third Party Installer. (g) Within thirty (30) days of CUSTOMER's execution of the Installation Agreement with each Third Party Installer, CUSTOMER shall provide a copy of such agreement to COMPANY. CUSTOMER acknowledges that COMPANY will provide a copy of such agreement to MS. If the Installation Agreement is not completed in the English language, CUSTOMER shall also provide an accurate and complete English translation thereof. (h) CUSTOMER shall promptly notify COMPANY of the termination, expiration or significant modification of the terms of the Installation Agreement. (i) Sections (e) and (f) of this Exhibit I shall survive any termination of expiration of this Exhibit I. 54 ATTACHMENT A TO EXHIBIT I SAMPLE INSTALLATION AGREEMENT THIS INSTALLATION AGREEMENT ("Agreement") is made and entered into this ____ day of ______________, 19__ ("Effective Date") by and between ____________, a ___________________ corporation ("CUSTOMER") and ______________________, a ____________________ corporation ("INSTALLER"). RECITALS WHEREAS, CUSTOMER has licensed certain software Product(s) as defined below from an MS Distributor; and WHEREAS, CUSTOMER desires to have INSTALLER install the Product(s) on the hard disk or ROM of CUSTOMER's Dedicated Systems; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: AGREEMENT 1. DEFINITIONS. a. "Dedicated System" shall mean CUSTOMER's dedicated system product(s) described in the attached Exhibit B which INSTALLER manufactures for CUSTOMER or which CUSTOMER provides to INSTALLER for purposes of this Agreement. Each such Dedicated System is a CUSTOMER computer system or computing device which utilizes a single microprocessor and is designed for exclusive use with a dedicated application that provides the primary functionality of the system or device. A Dedicated System excludes any general or multi-purpose personal, laptop, desktop, handheld, notebook, or server computers which address the office automation or consumer computing markets and shall not be useable as a commercially acceptable substitute for such computers or devices. b. "MS" shall mean Microsoft Licensing, Inc. c. "MS Distributor" shall mean an MS authorized distributor which licenses certain Product(s) (as defined below) from MS under the terms of a Microsoft Software for Dedicated Systems Distributor Agreement. d. "OEM License" shall mean the OEM Customer Sublicense Agreement for Dedicated Systems between CUSTOMER and MS Distributor which is identified in the attached Exhibit A. e. "Product(s)" shall mean the copyrighted and patented Microsoft Corporation software product(s) described in the attached Exhibit B licensed to CUSTOMER by MS Distributor under the OEM License. 2. INSTALLATION SERVICES. a. Subject to the terms and conditions of this Agreement, INSTALLER shall, if directed by CUSTOMER: (i) install the Product(s) in object code form in the nonvolatile, solid-state memory, on the hard disk drive, or in other nonvolatile form of CUSTOMER's Dedicated Systems using the installation utilities and master copy of Product software provided by CUSTOMER. b. Installation of Product(s) shall be performed by INSTALLER employees only at the specific INSTALLER premises indicated in Section 11 of this Agreement. c. INSTALLER shall deliver the Dedicated Systems with installed Product only to CUSTOMER. d. INSTALLER shall halt reproduction of the Product upon notice from MS, CUSTOMER or MS Distributor. e. INSTALLER shall not reverse engineer, decompile or disassemble any Product(s). f. INSTALLER shall place a notice over either the Dedicated System power switch in the "off" position or the power inlet connector which informs the end user that turning on the Dedicated System indicates acceptance of the terms of the end user license agreement ("EULA"), or such other procedure as is authorized by CUSTOMER. 3. REPORTS TO MS DISTRIBUTOR. INSTALLER shall report promptly to MS Distributor information concerning INSTALLER's installation of the Product(s) for CUSTOMER including, without limitation, the number of units of each Product installed, corresponding Dedicated System model name(s), and shipment destination. 4. COPYRIGHT AND PATENT NOTICES. INSTALLER will not remove, modify, or obscure any copyright, trademark or patent notices that appear in or on the Product(s) as delivered by CUSTOMER. CONFIDENTIAL 55 5. TERM. This Agreement shall commence on the Effective Date and continue until the earlier of (i) termination by MS Distributor or CUSTOMER pursuant to Section 6; or (ii) termination or expiration of the OEM License. 6. DEFAULT AND TERMINATION. a. This Agreement shall terminate if any of the following events of default occur: (i) if INSTALLER materially fails to perform or comply with any provision of this Agreement; (ii) if INSTALLER makes Product(s) available separately from CUSTOMER's Dedicated Systems; (iii) if INSTALLER manufactures, installs or distributes any Microsoft Corporation software product(s) or Product(s) which are not properly authorized under a valid agreement with CUSTOMER; (iv) if INSTALLER becomes insolvent, enters bankruptcy, reorganization, composition or other similar proceedings under applicable laws, whether voluntary or involuntary, or admits in writing its inability to pay its debts, or makes or attempts to make an assignment for the benefit of creditors; or (v) upon notice from MS Distributor or MS to CUSTOMER that CUSTOMER shall cease use of INSTALLER. b. Termination resulting from default as outlined in this Section shall be effective upon notice to INSTALLER, except that in the case of Section 6(a)(iv), termination shall be effective upon notice or as soon thereafter as is permitted by applicable law. 7. OBLIGATIONS UPON TERMINATION. Within ten (10) days after the earlier of: (i) termination or expiration of this Agreement; or (ii) notice to INSTALLER from CUSTOMER or MS Distributor of termination or expiration of the OEM License, INSTALLER shall return the installation "master" and any Product(s) in its possession or under its control to CUSTOMER. From and after termination or expiration, INSTALLER shall not use nor employ any Product(s) as part or portion of any product that INSTALLER may use, sell, assign, lease, license or transfer to third parties. INSTALLER shall cease and desist from all use of any Product(s) name(s) and associated trademarks and, upon request, deliver to CUSTOMER or its authorized representatives or destroy all material upon which the Product(s) name(s) and the associated trademark(s) appear. 8. CONFIDENTIALITY. INSTALLER shall keep confidential the Product installation tools and materials contained in the Product installation kit, the terms and conditions of this Agreement, and other non-public information and know-how disclosed to INSTALLER by CUSTOMER, and INSTALLER will make no use of such materials, information and know-how except for INSTALLER's internal use in accordance with the terms of this Agreement. INSTALLER may disclose the terms and conditions of this Agreement in confidence to its immediate legal and financial consultants as required in the ordinary course of INSTALLER's business. 9. AUDITS. a. During the term of this Agreement, INSTALLER agrees to keep all usual and proper records and books of account and all usual and proper entries relating to each Product installed. b. CUSTOMER, MS Distributor or MS may audit the applicable INSTALLER records and/or make an inspection of INSTALLER's facilities in order to verify INSTALLER's compliance with the terms of this Agreement and to verify statements issued by INSTALLER. Prompt adjustment shall be made to compensate for any errors or omissions disclosed by such audit or inspection. Any such audit shall be conducted by an independent certified public accountant selected by CUSTOMER, MS Distributor or MS (other than on a contingent fee basis) and shall be conducted during regular business hours at INSTALLER's offices and in such a manner as not to interfere with INSTALLER's normal business activities. Any such audit shall be paid for by the auditing party unless discrepancies are disclosed. c. Neither the right to examine and audit nor the right to receive adjustment shall be affected by any statement to the contrary, appearing on checks or otherwise, unless expressly agreed to in writing by the party having such a right. 10. MS DISTRIBUTOR AS THIRD PARTY BENEFICIARY. a. The parties agree that their respective promised performances under this Agreement are intended for the benefit of MS and MS Distributor. For this reason, the parties further agree that MS and/or MS Distributor has the right to enforce the parties' performance of their respective obligations and duties under this Agreement, and pursuant to such right, may sue to enforce any claim for breach of this Agreement. b. MS and/or MS Distributor's right to enforce the obligations of a party to this Agreement shall not be subject to any defenses that such party may have against the party to whom performance is promised. [CONFIDENTIAL] 56 11. NOTICES. (a) All notices, authorizations, and requests in connection with this Agreement shall be deemed given on the day they are (i) deposited in the U.S.A. mails, postage prepaid, certified or registered, return receipt requested; or (ii) sent by air express courier, charges prepaid; and addressed as stated below (or to such other address as the party to receive the notice or request so designates by written notice to the other). INSTALLER: CUSTOMER: - ------------------------------ ------------------------------ - ------------------------------ ------------------------------ - ------------------------------ ------------------------------ Telephone: Telephone: ------------------- ------------------- Fax: Fax: ------------------------- ------------------------- (b) The work to be performed under this Agreement will take place at INSTALLER'S premises located at: --------------------------------------------- --------------------------------------------- --------------------------------------------- Telephone: ---------------------------------- Fax: ---------------------------------------- 12. CONTROLLING LAW; ATTORNEYS' FEES. a. This Agreement shall be construed and controlled by the laws of the State of Washington, and with respect to any action brought by MS to enforce its rights hereunder, CUSTOMER and INSTALLER further consent to venue and jurisdiction in the state and federal courts sitting in the State of Washington. With respect to any action brought by CUSTOMER or INSTALLER to enforce the terms of this Agreement, CUSTOMER and INSTALLER further consent to venue and jurisdiction in _______________ [state/country]. b. Process may be served on either party by U.S.A. mails, postage prepaid, certified or registered, return receipt requested or sent by air express courier, charges prepaid, as well as any other method or procedure authorized by applicable law or court rule. c. In the event that CUSTOMER or MS Distributor employs attorneys to enforce any rights arising out of or relating to this Agreement, INSTALLER agrees to pay such attorneys' fees. 13. EXPORT RESTRICTIONS. INSTALLER agrees that it will not export or re-export SOFTWARE to any country, person, entity or end user subject to U.S. export restrictions. INSTALLER specifically agrees not to export or re-export SOFTWARE (i) to any country to which the U.S. has embargoed or restricted the export of goods or services, which as of December 31, 1996 include, but are not necessarily limited to, Cuba, Iran, Iraq, Libya, North Korea, Sudan, and Syria, or to any national of any such country who INSTALLER knows intends to transmit or transport the products back to such country; (ii) to any end-user who INSTALLER knows will utilize SOFTWARE in the design, development or production of nuclear, chemical or biological weapons; or (iii) to any end-user who has been prohibited from participating in U.S. export transactions by any federal agency of the U.S. government. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth above on their own behalf and for the benefit of MS Distributor. All signed copies of this Agreement shall be deemed originals. CUSTOMER: ___________________ INSTALLER: ___________________ _____________________________ ______________________________ By (Signature) By (Signature) _____________________________ ______________________________ Name (Print) Name (Print) _____________________________ ______________________________ Title Title _____________________________ ______________________________ Date Date CONFIDENTIAL 57 EXHIBIT A OEM Customer Sublicense Agreement for Dedicated Systems MS Distributor (COMPANY): ________________ CUSTOMER:____________________ Effective Date: _____________ 58 EXHIBIT B List of Products and Dedicated Systems Product Name and Version Language Version(s) Dedicated Systems _________________________ ____________________ __________________ _________________________ ____________________ __________________ _________________________ ____________________ __________________ _________________________ ____________________ __________________ _________________________ ____________________ __________________ _________________________ ____________________ __________________ 59 AMENDMENT NUMBER 4 Amendment Date: July 15, 1999 To MICROSOFT SOFTWARE FOR DEDICATED SYSTEMS DISTRIBUTOR AGREEMENT Between MICROSOFT LICENSING, INC., a Nevada, U.S.A. Corporation And BSQUARE CORPORATION, A Corporation of Washington, U.S.A. Agreement Effective Date: November 1st, 1997 MS LICENSE #7772-7310 (SAP: 5000020519) Effective as of the Amendment Date indicated above, the below signed parties agree that the indicated portions of the above referenced license agreement (hereinafter the "License Agreement") are hereby amended by this instrument (hereinafter the "Amendment"), as follows: 1. Exhibit C of the License Agreement is hereby amended and replaced with the attached Exhibit C. 2. Exhibit U of the License Agreement is hereby amended and replaced with the attached Exhibit U. 3. Exhibit V of the License Agreement is hereby amended and replaced with the attached Exhibit V. All capitalized terms used but not defined herein shall have the meanings ascribed to them in the License Agreement. The terms of this Amendment shall supersede any inconsistent terms contained in the License Agreement. 60 IN WITNESS WHEREOF, the parties have executed this Amendment in duplicate as of the date first written above. All signed copies of this Amendment shall be deemed originals. This Amendment is executed only in the English language. MICROSOFT LICENSING, INC. BSQUARE CORPORATION /s/ [ILLEGIBLE] - ----------------------- ------------------------ By (Signature) By (Signature) /s/ BRIAN V. TURNER - ----------------------- ------------------------ Name (Printed) Name (Printed) CFO - ----------------------- ------------------------ Title Title June 30, 1999 - ----------------------- ------------------------ Date Date 61 EXHIBIT C WINDOWS CE PRODUCTS FOR DEDICATED SYSTEMS
LANGUAGE LICENSED FILES APPLICABLE LOCALIZATION VERSION(S) (FOR KERNEL ADDITIONAL PER COPY ADDITIONAL PRODUCT NAME AND VERSION ** VERSIONS ONLY) PROVISIONS ROYALTY* ROYALTY - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- Windows(R) CE Operating System for Dedicated EN (a),(b),(c),(d) US$ * US$ * Systems version 2.11 Data Exchange Version - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- Windows(R) CE Operating System for Dedicated EN (a),(b),(c),(d) US$ * US$ * Systems version 2.0 or 2.11 Full Version - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- Windows(R) CE Operating System for Dedicated EN (a),(b),(c),(d) US$ * US$ * Systems version 2.0 or 2.11 Limited Version - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- Windows(R) CE Operating See Additional System for Dedicated EN Provision (b) (a),(b),(c),(d) US$ * US$ * Systems version 2.0 or 2.11 below Kernel Version - -------------------------------- ------------------ ----------------------- ------------------ ---------------- -------------------
* A PRODUCT IS NOT LICENSED HEREUNDER UNLESS ROYALTY RATE(S) ARE INDICATED IN THE PRODUCT TABLE. ** LANGUAGE KEY: EN-ENGLISH, LOCALIZED VERSIONS ARE LICENSED ON AN IF AND AS AVAILABLE BASIS. ADDITIONAL PROVISIONS (a) Notwithstanding anything to the contrary contained in the Agreement, there are no Dedicated Product Deliverables for the product. COMPANY's OEM Customer has obtained the Product as part of a Microsoft Windows CE Embedded Toolkit for Visual C++ version 5.0 or as part of the Microsoft Windows CE Platform Builder version 2.11 (hereinafter referred to collectively or separately as "Windows CE Kit") in a separate transaction. (b) COMPANY's license to grant rights as set forth in Section 2(iii) of the Agreement to COMPANY's OEM Customers shall apply only to the licensed Product Version (i.e., Data Exchange, Full, Limited, Kernel) indicated above; each Product Version configuration is fully described in the Windows CE Kit documentation. The Data Exchange Version license includes all components of the Full Version and, in addition, the Desktop Software CD Rom disk (which includes Windows CE Services) which COMPANY shall obtain from the Authorized Replicator. (c) In order to support its OEM Customers, COMPANY agrees to enter into and maintain, at COMPANY's expense, a valid Priority Support Agreement with MSCORP at all times during the period COMPANY is licensed for this Product. (d) Use of the Dedicated Systems logo(s) is optional; however, if OEM Customer chooses to use the Dedicated Systems logo(s) with its Dedicated Systems, COMPANY shall ensure that OEM Customer has executed the applicable logo license with MSCORP prior to any marketing or distribution of a Dedicated System. COMPANY hereby agrees to indemnify and defend MS and its Suppliers from and against all damages, costs and expenses, including reasonable attorneys' fees, which MS or its Suppliers may incur if the OEM Customer markets or distributes Dedicated Systems in absence or breach of the applicable logo license. - ------------ * Confidential treatment requested 62 EXHIBIT U OEM CUSTOMER SUBLICENSE AGREEMENT FOR DEDICATED SYSTEMS This agreement ("Agreement") is made and entered into by and between you ("Customer"), and [ENTER NAME OF COMPANY] ("COMPANY"), and shall be effective as of the date on which it is signed by COMPANY ("Effective Date"). Microsoft Licensing, Inc., a Nevada, U.S.A. corporation ("MS") shall be a third party beneficiary of this Agreement and shall be entitled to enforce the terms of this Agreement as provided herein and such other rights and obligations herein as necessary to protect MS' interests in the software program(s) and other licensed product(s) identified in Attachment 2 to this Agreement ("SOFTWARE"). 1. DEFINITIONS. (a) "Dedicated Systems" means Customer's computer systems or computing devices which: (a) are based on the Window CE operating system, (b) utilize a single central processor unit, (c) are designed for use with a Dedicated Application (defined below), (d) are marketed to one or more specific industries (and not to general consumer or mass markets), and (e) shall not be useable as a commercially viable substitute for computers or devices which perform general purpose consumer computing functions. (b) "Dedicated Application" means industry- or task-specific software programs and/or functionality, not generally available to consumers, that (a) provide the primary functionality of the Dedicated System, (b) are designed to meet the functionality requirements of the specific industry into which the Dedicated System is being marketed, and (c) offer significant functionality in addition to the Product software. (c) "Dedicated Product Deliverables" shall mean SOFTWARE in object code form, installation utilities, adaptation code in source code form, if provided by COMPANY, and other information or instructions regarding the SOFTWARE that COMPANY or MS may provide. (d) "EULA" shall mean an end user license agreement for the SOFTWARE. (e) "Recovery Media" shall mean a backup image of the SOFTWARE as originally installed on the Dedicated System. (f) "SOFTWARE Upgrade" shall mean a copy of the SOFTWARE to be distributed by Customer directly to end users to replace an earlier version of the SOFTWARE licensed to Customer under this Agreement. (g) "Suppliers" shall mean any and all entities (including, without limitation, Microsoft Corporation, a Washington, U.S.A. corporation) which license or otherwise supply MS with Products or portions thereof for redistribution or sublicense by MS. 2. LIMITED LICENSE GRANT. Subject to the restrictions set forth in this Agreement, and Customer's compliance with all terms and conditions of this Agreement, COMPANY grants to Customer the following limited license rights: (a)(i) to install as part of a Dedicated System, one (1) copy of the SOFTWARE in nonvolatile, solid-state memory, on the hard disk drive, or in other nonvolatile form, in accordance with the instructions, if any, contained in the Dedicated Product Deliverables; and (ii) to distribute the SOFTWARE only as part of a Dedicated System solely under Customer's brand names and trademarks. (b) to configure the SOFTWARE in accordance with the instructions, if any, contained in the Dedicated Product Deliverables solely to enable SOFTWARE to execute on a Dedicated System. (c) to reproduce and distribute with each Dedicated System distributed in accordance with 2(a), not more than one (1) unit of Recovery Media provided that: (i) The images of the SOFTWARE on the Recovery Media shall be identical to the object code that was originally installed on the Dedicated System. Recovery Media may include non-MS products that Customer distributes installed on the Dedicated System; (ii) Recovery Media shall be maintained by the end user as an archival copy and may only be licensed for use: (A) to restore the same version and language release of the SOFTWARE as originally installed on a Dedicated System or (B) to reinstall the same version and language release of the SOFTWARE as originally installed on the Dedicated System after the installation of an upgrade to the Dedicated Application on a Dedicated System; (iii) Recovery or reinstallation of the SOFTWARE shall be performed by an authorized service representative of Customer or by the licensed end user; (iv) Recovery Media may include a single copy of each of the following files in order that the Recovery Media shall be "bootable": command.com, io.sys, msdos.sys, and for Dedicated Systems with Windows 95, drvspace.bin; (v) A single unit of Recovery Media may be used by the licensed end user or the Customer's authorized service representative to restore or reinstall the SOFTWARE on such end user's additional units of the same name and model Dedicated System which contain the same version and language release of the SOFTWARE properly licensed to the end user pursuant to this Agreement; (vi) Recovery Media shall be clearly labeled "Recovery Media-for Backup or Archival purposes only with [Name and Model of the Dedicated System]". (d) to reproduce and distribute SOFTWARE Upgrades to an end user provided that: (i) such end user is an existing, authorized end user of a Dedicated System; (ii) Customer shall acquire a serialized sticker from COMPANY, and Customer shall pay the applicable SOFTWARE royalty fee as set forth in Attachment 2 for each copy of SOFTWARE Upgrade installed by its end users or service representatives pursuant to this Section 2(d); (iii) SOFTWARE Upgrades shall be distributed directly by Customer, separate from a Dedicated System, to an end-user for use solely as a replacement copy for the SOFTWARE originally installed on the Dedicated System pursuant to this Agreement; (iv) the SOFTWARE Upgrade is configured to ensure that it executes solely on the applicable Dedicated System and will not execute on general or multi-purpose personal, laptop, desktop, handheld, notebook, server computers or other such computing devices which address more than one function of the office automation or consumer computing market; (v) the SOFTWARE Upgrade is distributed as an integrated part of the Dedicated Application; (vi) Installation of the SOFTWARE Upgrade shall be performed by an authorized service representative of 63 Customer or by the licensed end user; (vii) A single unit of SOFTWARE Upgrade may be used by the licensed end user or the Customer's authorized service representative to install the SOFTWARE Upgrade on such end user's additional units of the same name and model Dedicated System which contain the same version and language release of the SOFTWARE; (viii) Customer shall establish a reasonable procedure to assure the return or destruction of any replaced SOFTWARE (for example, a SOFTWARE Upgrade that erases or permanently disables the replaced SOFTWARE would satisfy this requirement); (ix) the SOFTWARE Upgrade shall be clearly labeled "For Upgrade purposes only - not for use on a new Dedicated System. For Use Only with [Name and Model of the Dedicated System]". (e) Customer shall cause to appear in a conspicuous place in the Dedicated System documentation to accompany each Dedicated System and each copy of SOFTWARE Upgrade, the EULA attached to this Agreement as Attachment 1, or such other EULA as COMPANY may provide from time to time. Customer shall adapt the EULA as necessary to comply with the laws of any jurisdiction in which the SOFTWARE is distributed. 3. LICENSE RESTRICTIONS. (a) The total number of units of the SOFTWARE (including any SOFTWARE Upgrades) distributed by Customer shall not exceed the number of "Units of SOFTWARE licensed" for such SOFTWARE as set forth in Attachment 2 hereto. (b) Except as provided in Section 2(c)-(d), SOFTWARE may not be distributed in whole or in part other than installed on the Dedicated System. (c) Customer may not distribute any SOFTWARE documentation. (d) Customer shall not use, copy, modify, or transfer the SOFTWARE or any copy in whole or in part, except as expressly provided in this Agreement. Customer's reproduction of the SOFTWARE in accordance with Section 2 shall be performed only on Customer premises by Customer's regular employees except as otherwise specifically approved in writing by MS. (e) Customer shall not reverse engineer, decompile or disassemble any SOFTWARE except as permitted by applicable law without the possibility of contractual waiver. Customer acknowledges that information on interoperability of the SOFTWARE with other products is readily available. (f) All distribution and use of the SOFTWARE is by license only. Neither COMPANY nor MS authorize the SOFTWARE to be "issued to the public", "put into circulation", or subject to a "first sale" as the copyright laws may use those (or similar) terms. Customer's license to distribute the SOFTWARE is limited to distribution of the SOFTWARE by Customer to end users for use pursuant to a EULA. (g) MS reserves all rights not expressly granted including, without limitation, modification rights, translation rights, rental rights, and rights to source code. MS expressly reserves its exclusive right under applicable copyright, patent, and trademark laws to distribute copies of SOFTWARE by any means. Except as set forth in Section 2(c)-(d) above, without limitation, neither COMPANY nor MS authorizes Customer to distribute the SOFTWARE separately from Dedicated Systems; any such unauthorized distribution by Customer shall constitute a violation of this Agreement and MS' distribution right under applicable law. Customer acknowledges that MS (and/or its Suppliers, if applicable) shall retain all copyright, patent, moral, trademark, title and other proprietary and intellectual property in the SOFTWARE, Dedicated Product Deliverables and components thereof, in whole or in part in any form. (h) Customer will not remove, modify, or obscure any copyright, trademark, patent or other intellectual property notices included on the SOFTWARE or the SOFTWARE Upgrade. (i) Customer shall not advertise, publish or otherwise mark a separate price for the SOFTWARE. (j) Customer agrees to provide commercially reasonable end user support for the SOFTWARE which, in any event, shall be under terms and conditions at least as favorable to the end user as the terms under which Customer provides support for Dedicated System(s) to end users generally. Customer agrees to provide COMPANY and MS with ninety (90) days prior written notice of any substantive change in Customer's support policy for the SOFTWARE. 4. LICENSE STICKER. (a) For each unit of SOFTWARE distributed, Customer shall place a serialized sticker supplied by COMPANY (i) on the hard drive containing the SOFTWARE, or if the SOFTWARE is installed in nonvolatile, solid-state memory, (ii) on the nonvolatile, solid-state memory or in a conspicuous place on the component board to which the nonvolatile, solid-state memory is attached. If placement as described in both (i) and (ii) are impractical, the label may be affixed to the inside or outside of the rear panel of the Dedicated System casing. (b) (i) Customer shall also place a serialized sticker supplied by COMPANY on the media for each unit of SOFTWARE Upgrade distributed by Customer. (ii) If one unit of the SOFTWARE Upgrade is used to install the SOFTWARE Upgrade on additional units of the Dedicated System as set forth in Section 2(d)(vii), then, prior to distribution of the SOFTWARE Upgrade, Customer shall (A) determine the number of units of SOFTWARE Upgrade to be installed, (B) provide end user or Customer's authorized service representative with a serialized sticker supplied by COMPANY for each such unit, and (C) ensure that a serialized sticker is placed on each Dedicated System on which SOFTWARE Upgrade is installed as described in Section 4(a). 5. DELIVERY. For each SOFTWARE product licensed hereunder, COMPANY (or MS, on behalf of COMPANY) shall deliver to Customer one (1) unit of Dedicated Product Deliverables. Customer' acknowledges and agrees that neither COMPANY, nor MS and its Suppliers, shall have any liability for failure to deliver Dedicated Product Deliverables by any particular date, or if the SOFTWARE is not yet a released product, during the term of this Agreement. 6. LIMITED WARRANTY AND CUSTOMER REMEDIES. (a) COMPANY warrants that the SOFTWARE will perform substantially in accordance with the accompanying written materials for a period of ninety (90) days from the date of receipt. (b) COMPANY's, MS', and their Suppliers' entire liability and Customer's exclusive remedy for a breach of the warranty set forth above shall be, at COMPANY's option, either (i) return of the price paid or (ii) repair or replacement of the SOFTWARE that does not meet the above limited warranty and which is returned to COMPANY. This limited warranty is void if failure of the SOFTWARE has resulted from accident, abuse, or misapplication. Any replacement SOFTWARE will be warranted for the remainder of the original warranty period or thirty (30) days, whichever is longer. (c) COMPANY, MS, AND THEIR SUPPLIERS DISCLAIM AND EXPRESSLY EXCLUDE ALL OTHER WARRANTIES, EITHER EXPRESS OR IMPLIED, 64 INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF NON-INFRINGEMENT, MERCHANTABILITY, AND/OR FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE SOFTWARE AND ANY ACCOMPANYING WRITTEN MATERIALS. (d) The rights and remedies granted to Customer under this Section 6 constitute Customer's sole and exclusive remedy against the COMPANY, MS, their Suppliers, and their officers, agents and employees for any and all claims arising in connection with the SOFTWARE or the Dedicated Product Deliverables including, but not limited to, claims regarding COMPANY's or MS' delivery of SOFTWARE or Dedicated Product Deliverables, or indemnification or contribution from COMPANY, MS or their Suppliers with respect to any infringement of the rights of a third party, whether arising under statutory or common law or otherwise. 7. TERM AND TERMINATION. (a) The term of this license shall run from the Effective Date until the earlier of (i) one (1) year after Effective Date, or (ii) the date on which Customer has distributed the number of units of SOFTWARE licensed under this Agreement as set forth in Attachment 2 for each SOFTWARE. (b) Termination due to breach of Sections 3(d), 3(e), 3(f), 10, or 11 shall be effective upon notice to Customer. In all other cases, termination shall be effective fifteen (15) days after notice of termination to the defaulting party if the defaults have not been cured within such fifteen (15) day period. At the option of the non-defaulting party, termination due to a breach of any provision of this Agreement may be effective upon notice to the defaulting party if such party has received two (2) or more previous notices of default during the term of this Agreement (whether or not such previous defaults have been cured). (c) Upon termination or expiration of the Agreement, Customer will immediately cease all use and distribution of the SOFTWARE, the SOFTWARE product name, and all associated trademarks). Within ten (10) days of the termination or expiration of the Agreement, Customer shall return to COMPANY all Dedicated Product Deliverables and serialized stickers for the SOFTWARE in Customer's possession or under Customer's control. There shall be no refund or adjustment for amounts paid for the Dedicated Product Deliverables or stickers returned to COMPANY in accordance with this Section 7(c). 8. DISCLAIMER OF LIABILITY. IN NO EVENT SHALL COMPANY, MS, OR THEIR SUPPLIERS BE LIABLE FOR ANY DAMAGES WHATSOEVER (INCLUDING, WITHOUT LIMITATION, DAMAGES FOR LOSS OF BUSINESS PROFITS, CONSEQUENTIAL, INCIDENTAL, INDIRECT, ECONOMIC OR PUNITIVE DAMAGES, BUSINESS INTERRUPTION, LOSS OF BUSINESS INFORMATION, OR OTHER PECUNIARY LOSS) ARISING OUT OF THE MANUFACTURE, SALE, USE OF OR INABILITY TO MANUFACTURE, SELL OR USE THE SOFTWARE, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 9. TECHNICAL SUPPORT. This Agreement does not include technical support from MS or its Suppliers. Technical support, if any, for the SOFTWARE will be provided by COMPANY. 10. AUDITS AND INSPECTIONS. (a) During the term of this Agreement and for three (3) years thereafter, Customer agrees to keep all usual and proper records and books of account and all usual and proper entries relating to each unit of SOFTWARE licensed sufficient to substantiate the number of units of SOFTWARE and the number of Dedicated Systems distributed by Customer. (b) In order to verify statements issued by Customer and Customer's compliance with the terms of this Agreement, COMPANY and/or MS may cause (i) an audit to be made of Customer's books and records and/or (ii) an inspection to be made of Customer's facilities and procedures. Any audit and/or inspection shall be conducted during regular business hours at Customer's facilities, with or without notice. Any audit shall be conducted by an independent certified public accountant selected by MS or COMPANY (other than on a contingent fee basis). (c) Customer agrees to provide any audit or inspection team(s) designated by MS and/or COMPANY access to all relevant Customer records and facilities. Prompt adjustment shall be made to compensate for any errors or omissions disclosed by such audit. If material discrepancies are disclosed in such audit, Customer agrees to pay MS or COMPANY, as applicable, for the costs associated with the audit. 11. NONDISCLOSURE OBLIGATION. Customer shall keep confidential the Dedicated Product Deliverables, any SOFTWARE source code provided by COMPANY, MS or their Suppliers on behalf of COMPANY, the terms and conditions of this Agreement, and other non-public information and know-how disclosed to Customer by COMPANY, MS or their Suppliers. Customer may disclose the terms and conditions of this Agreement in confidence to its immediate legal and financial consultants as required in the ordinary course of Customer's business. Customer's obligation under this Section shall survive termination or expiration of this Agreement and shall extend until such time as the information protected hereby is in the public domain. 12. GENERAL. (a) This Agreement shall be construed and controlled by the laws of the State of Washington, and Customer and COMPANY further consents to jurisdiction by the state and federal courts sitting in the State of Washington. Process may be served on either party by air express courier, (e.g. DHL, Airborne) charges prepaid, return receipt requested. If COMPANY, MS or Customer employs attorneys to enforce any rights arising out of or relating to this Agreement, the prevailing party shall be entitled to recover reasonable attorney's fees. (b) Customer agrees that it will not export or re-export SOFTWARE to any country, person, entity or end user subject to U.S. export restrictions. Customer specifically agrees not to export or re-export SOFTWARE (i) to any country to which the U.S. has embargoed or restricted the export of goods or services, which as of December 31, 1996 include, but are not necessarily limited to, Cuba, Iran, Iraq, Libya, North Korea, Sudan, and Syria, or to any national of any such country who Customer knows intends to transmit or transport the products back to such country; (ii) to any end-user who Customer knows will utilize SOFTWARE in the design, development or production of nuclear, chemical or biological weapons; or (iii) to any end-user who has been prohibited from participating in U.S. export transactions by any federal agency of the U.S. government. (c) If any provision or portion of this Agreement shall be held by a court of competent jurisdiction to be illegal, invalid or unenforceable, the remaining provisions or portions shall remain in full force and effect. (d) No waiver of any breach of any provision of this Agreement shall constitute a waiver of any prior, concurrent, or subsequent breach of the same or any other provisions hereof, and no waiver shall be effective unless made in writing and signed by an authorized representative of the waiving party. (e) Any assignment of this Agreement without prior written 65 consent of the non-assigning party shall be void. (f) SOFTWARE may be imported, distributed, or sold in or to a country or territory only if allowed by, and in compliance with, all applicable laws and regulations of such country or territory as well as all terms and conditions of this Agreement. Customer acknowledges that versions of certain SOFTWARE not localized for a specific market may be prohibited or subject to import and distribution procedures or restrictions under such laws and regulations. By way of example only, as of July 1, 1997, the U.S.A. English version of Microsoft Excel 97 cannot be distributed to or for use in India, and games, entertainment products and products with substantial amounts of video, graphics or similar content may be prohibited or subject to specific import procedures under laws of the People's Republic of China. Customer agrees to indemnify COMPANY, MS and their Suppliers from and against all damages, costs and expenses (including reasonable attorneys' fees) incurred by COMPANY, or MS or their Suppliers in connection with any and all claims, demands or actions arising from Customer's importation or distribution of SOFTWARE in or to a country or territory not in compliance with the laws and regulations of such country or territory. (g) Any SOFTWARE which Customer distributes or licenses to or on behalf of the United States of America, its agencies and/or instrumentalities (the "Government"), shall be provided with RESTRICTED RIGHTS in accordance with DFARS 252.2277013(c)1(ii), or as set forth in the particular department or agency regulations or rules, or particular contract which provide MS and its Suppliers equivalent or greater protection. Should Customer have any questions concerning this Agreement, please write: - -------------------------------------- Name of COMPANY - -------------------------------------- Address - -------------------------------------- - -------------------------------------- 66 IN WITNESS WHEREOF, the parties have executed this Agreement by their duly authorized representatives as of the date set forth above. All signed copies of this Agreement shall be deemed originals. Each individual signing on behalf of Customer below hereby represents and warrants that he or she has full authority to sign this Agreement and bind Customer to perform all duties and obligations contemplated by this Agreement. If COMPANY or Customer is located in a jurisdiction in which a corporate seal or "chop" is commonly used as an instrument of agreement execution, in addition to the individual signature provided below, COMPANY's and/or Customer's seal or "chop" should be entered below the appropriate signature block. COMPANY CUSTOMER _________________________ ___________________________ By (Signature) By (Signature) _________________________ ___________________________ Name (Print) Name (Print) _________________________ ___________________________ Title Title _________________________ ___________________________ Date Date _________________________ COMPANY's seal or "chop" _________________________ _________________________ CUSTOMER's seal or "chop" _________________________ 67 ATTACHMENT 1 TO OEM CUSTOMER SUBLICENSE AGREEMENT FOR DEDICATED SYSTEMS END-USER LICENSE AGREEMENT FOR MICROSOFT SOFTWARE IMPORTANT--READ CAREFULLY: THIS END-USER LICENSE AGREEMENT ("EULA") IS A LEGAL AGREEMENT BETWEEN YOU (EITHER AN INDIVIDUAL OR A SINGLE ENTITY) AND THE MANUFACTURER ("MANUFACTURER") OF THE SPECIAL PURPOSE COMPUTING DEVICE ("SYSTEM") YOU ACQUIRED WHICH INCLUDES CERTAIN MICROSOFT SOFTWARE PRODUCT(S) INSTALLED ON THE SYSTEM ("SOFTWARE PRODUCT" OR "SOFTWARE"). THE SOFTWARE INCLUDES COMPUTER SOFTWARE, THE ASSOCIATED MEDIA (INCLUDING RECOVERY MEDIA), ANY PRINTED MATERIALS, AND ANY "ONLINE" OR ELECTRONIC DOCUMENTATION. ANY SOFTWARE PROVIDED ALONG WITH THE SOFTWARE THAT IS ASSOCIATED WITH A SEPARATE END-USER LICENSE AGREEMENT IS LICENSED TO YOU UNDER THE TERMS OF THAT LICENSE AGREEMENT. BY INSTALLING, COPYING, DOWNLOADING, ACCESSING OR OTHERWISE USING THE SOFTWARE, YOU AGREE TO BE BOUND BY THE TERMS OF THIS EULA. IF YOU DO NOT AGREE TO THE TERMS OF THIS EULA, MANUFACTURER AND MICROSOFT LICENSING, INC. ("MS") ARE UNWILLING TO LICENSE THE SOFTWARE TO YOU. IN SUCH EVENT, YOU MAY NOT USE OR COPY THE SOFTWARE, AND YOU SHOULD PROMPTLY CONTACT MANUFACTURER FOR INSTRUCTIONS ON RETURN OF THE UNUSED PRODUCT(S) FOR A REFUND. - ------------------------------------------------------------------------------ SOFTWARE LICENSE The SOFTWARE is protected by copyright laws and international treaties, as well as other intellectual property laws and treaties. The SOFTWARE is licensed, not sold. 1. GRANT OF LICENSE. This EULA grants you the following rights: - SOFTWARE. SOFTWARE includes software already installed on the SYSTEM ("SYSTEM Software") and, if included in the SYSTEM package, software contained on the CD-ROM disk labeled "Desktop Software for Microsoft Windows CE" ("Desktop Software"). - SYSTEM SOFTWARE. You may use SYSTEM Software only as installed in the SYSTEM. - DESKTOP SOFTWARE. If Desktop Software is included with your SYSTEM, you may install and use the component(s) of the Desktop Software in accordance with the terms of the end user license agreement provided with such component(s). If no separate end user license agreement is provided, you may install and use only one (1) copy of such component(s) on a single computer with which you use the SYSTEM. - BACK-UP COPY. If MANUFACTURER has not included a copy of the SOFTWARE on separate media with the SYSTEM, you may make a single copy of the SOFTWARE for use solely for archival purposes with the SYSTEM. 2. DESCRIPTION OF OTHER RIGHTS AND LIMITATIONS. - LIMITATIONS ON REVERSE ENGINEERING, DECOMPILATION AND DISASSEMBLY. You may not reverse engineer, decompile, or dissemble the SOFTWARE, except and only to the extent that such activity is expressly permitted by applicable law notwithstanding this limitation. - SINGLE SYSTEM. The SOFTWARE is licensed with the SYSTEM as a single integrated product. The SOFTWARE may only be used with the SYSTEM. - RENTAL. You may not rent or lease the SOFTWARE. - SOFTWARE TRANSFER. You may permanently transfer all of your rights under this EULA only as part of a sale or transfer of the SYSTEM, provided you retain no copies, you transfer all of the SOFTWARE (including all component parts, the media, any upgrades or backup copies, and this EULA, and if applicable, the Certificate(s) of Authenticity), AND the recipient agrees to the terms of this EULA. If the SOFTWARE is an upgrade, any transfer must include all prior versions of the SOFTWARE. - TERMINATION. Without prejudice to any other rights, Manufacturer or MS may terminate this EULA if you fail to comply with the terms and conditions of this EULA. In such event, you must destroy all copies of the SOFTWARE and all of its component parts. - SINGLE EULA. The package for the SOFTWARE may contain multiple versions of this EULA, such as multiple translations and/or multiple media versions (e.g., in the user documentation and in the software). In this case, you are only licensed to use one (1) copy of the SOFTWARE PRODUCT. - EXPORT RESTRICTIONS. You agree that you will not export or re-export the SOFTWARE to any country, person, entity or end user subject to U.S. export restrictions. You specifically agree not to export or re-export the SOFTWARE (i) to any country to which the U.S. has embargoed or restricted the export of goods or services, which currently include, but are not necessarily limited to Cuba, Iran, Iraq, Libya, North Korea, Sudan and Syria, or to any national of any such country, wherever located, who intends to transmit or transport the products back to such country; (ii) to an end user you know or have reason to know will utilize the SOFTWARE in the design, development or production or nuclear, chemical or biological weapons; or (iii) to any end-user who has been prohibited from participating in U.S. export transactions by any federal agency of the U.S. government. 68 ATTACHMENT 1 (continued) 3. UPGRADES AND RECOVERY MEDIA. - If the SOFTWARE is provided by Manufacturer on media separate from the SYSTEM and is labeled "For Upgrade Purposes Only" (Upgrade SOFTWARE), you may install one copy of the Upgrade SOFTWARE onto the SYSTEM as a replacement copy for the SOFTWARE originally installed on the SYSTEM and use it in accordance with Section 1 of this EULA. You may also install additional copies of the Upgrade SOFTWARE as replacement copies onto additional SYSTEMS which are the same brand and model as the SYSTEM and contain a duly licensed copy of the same version and language release of the SOFTWARE ("ADDITIONAL SYSTEMS"), provided that (1) Manufacturer has supplied a corresponding serialized sticker for each additional copy of the Upgrade SOFTWARE, and (2) you affix a serialized sticker per Manufacturer's instructions for each unit of Upgrade SOFTWARE you install. - If the SOFTWARE is provided by Manufacturer on separate media and labeled as "Recovery Media" ("Recovery Media"), you may not make a copy of the SOFTWARE as described in Section 1 for archival purposes. Instead, you may use the Recovery Media solely to restor or reinstall the same version and language release of the SOFTWARE as originally installed on the SYSTEM and thereafter use the SOFTWARE as restored or reinstalled in accordance with Section 1 of this EULA. A single unit of Recovery Media may be used by you to restore or reinstall the SOFTWARE on ADDITIONAL SYSTEMS. 4. NOTE ON COMPATIBILITY OF DESKTOP SOFTWARE. THIS EULA IS FOR A SPECIAL PURPOSE COMPUTING DEVICE. THE ONLY WARRANTIES ARE THOSE PROVIDED BY MANUFACTURER IN THE LIMITED WARRANTY SECTION SET FORTH BELOW. NOTWITHSTANDING ANY ONLINE "HELP" FILES OR OTHER ONLINE INFORMATION DISPLAYED BY THE DESKTOP SOFTWARE, NEITHER MS NOR ITS SUPPLIERS (INCLUDING MICROSOFT CORPORATION) REPRESENTS OR MAKES ANY WARRANTY THAT THE DESKTOP SOFTWARE WILL OPERATE IN A SPECIFIC MANNER OR OPERATE WITH ANY COMPUTER OR COMPUTING DEVICE, WHETHER OR NOT SUCH COMPUTER(S) OR COMPUTING DEVICE(S) CONTAIN MICROSOFT WINDOWS OPERATING SYSTEM SOFTWARE OR MICROSOFT WINDOWS CE OPERATING SYSTEM SOFTWARE MANUFACTURER'S WARRANTIES ARE EXPRESSLY LIMITED TO THOSE SET FORTH IN THE LIMITED WARRANTY SECTION BELOW. 5. COPYRIGHT. All title and copyrights in and to the SOFTWARE (including but not limited to any images, photographs, animations, video, audio, music, text and "applets," incorporated into the SOFTWARE), the accompanying printed materials, and any copies of the SOFTWARE, are owned by MS or its suppliers (including Microsoft Corporation). You may not copy the printed materials accompanying the SOFTWARE. All rights not specifically granted under this EULA are reserved by MS and its suppliers (including Microsoft Corporation). 6. PRODUCT SUPPORT. Product support for the SOFTWARE is not provided by MS, its parent corporation, Microsoft Corporation, or their affiliates or subsidiaries. For product support, please refer to Manufacturer's support number provided in the documentation for the SYSTEM. Should you have any questions concerning this EULA, or if you desire to contact Manufacturer for any other reason, please refer to the address provided in the documentation for the SYSTEM. 7. LIMITED WARRANTY. - LIMITED WARRANTY. Manufacturer warrants that the SOFTWARE will perform substantially in accordance with the accompanying written materials for a period of ninety (90) days from the date of receipt. Any implied warranties on the SOFTWARE are limited to ninety (90) days. Some states/jurisdictions do not allow limitations on duration of an implied warranty, so the above limitation may not apply to you. - CUSTOMER REMEDIES. Manufacturer's and its suppliers' entire liability and your exclusive remedy shall be, at Manufacturer's option, either (a) return of the price paid, or (b) repair or replacement of the SOFTWARE that does not meet the above Limited Warranty and which is returned to Manufacturer with a copy of your receipt. This Limited Warranty is void if failure of the SOFTWARE has resulted from accident, abuse, or misapplication. Any replacement SOFTWARE will be warranted for the remainder of the original warranty period or thirty (30) days, whichever is longer. - NO OTHER WARRANTIES. EXCEPT AS EXPRESSLY PROVIDED IN THE LIMITED WARRANTY SECTION ABOVE, THE SOFTWARE IS PROVIDED TO THE END USER "AS IS" WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF NON-INFRINGEMENT, MERCHANTABILITY, AND/OR FITNESS FOR A PARTICULAR PURPOSE. THE ENTIRE RISK OF THE QUALITY AND PERFORMANCE OF THE SOFTWARE IS WITH YOU. - NO LIABILITY FOR CONSEQUENTIAL DAMAGES. MANUFACTURER OR MANUFACTURER'S SUPPLIERS, INCLUDING MS AND ITS SUPPLIERS, SHALL NOT BE HELD TO ANY LIABILITY FOR ANY DAMAGES SUFFERED OR INCURRED BY THE END USER (INCLUDING, BUT NOT LIMITED TO, GENERAL, SPECIAL, CONSEQUENTIAL OR INCIDENTAL DAMAGES INCLUDING DAMAGES FOR LOSS OF BUSINESS PROFITS, BUSINESS INTERRUPTION, LOSS OF BUSINESS INFORMATION AND THE LIKE), ARISING FROM OR IN CONNECTION WITH THE DELIVERY, USE OR PERFORMANCE OF THE SOFTWARE. 8. NOTE ON JAVA SUPPORT. THE SOFTWARE PRODUCT MAY CONTAIN SUPPORT FOR PROGRAMS WRITTEN IN JAVA. JAVA TECHNOLOGY IS NOT FAULT TOLERANT AND IS NOT DESIGNED, MANUFACTURED, OR INTENDED FOR USE OR RESALE AS ON-LINE CONTROL EQUIPMENT IN HAZARDOUS ENVIRONMENTS REQUIRING FAIL-SAFE PERFORMANCE, SUCH AS IN THE OPERATION OF NUCLEAR FACILITIES, AIRCRAFT NAVIGATION OR COMMUNICATION SYSTEMS, AIR TRAFFIC CONTROL, DIRECT LIFE SUPPORT MACHINES, OR WEAPONS SYSTEMS, IN WHICH THE FAILURE OF JAVA TECHNOLOGY COULD LEAD DIRECTLY TO DEATH, PERSONAL INJURY, OR SEVERE PHYSICAL OR ENVIRONMENTAL DAMAGE. SUN MICROSYSTEMS, INC. HAS CONTRACTUALLY OBLIGATED MICROSOFT CORPORATION TO MAKE THIS DISCLAIMER. 69 ATTACHMENT 1 (continued) _______________________________________________________________________________ If you acquired this EULA in the United States, this EULA is governed by the laws of the State of Washington. If you acquired this EULA in the Canada, this EULA is governed by the laws of the Province of Ontario, Canada. Each of the parties hereto irrevocably attorns to the jurisdiction of the courts of the Province of Ontario and further agrees to commence any litigation which may arise hereunder in the courts located in the Judicial District of York, Province of Ontario. If this EULA was acquired outside the United States, then local law may apply. Should you have any questions concerning this EULA, please contact the Manufacturer. _______________________________________________________________________________ U.S. GOVERNMENT RESTRICTED RIGHTS The SOFTWARE and documentation are provided with RESTRICTED RIGHTS. Use, duplication, or disclosure by the Government is subject to restrictions as set forth in subparagraph (c)(1)(ii) of the Rights in Technical Data and Computer Software clause at DFARS 252.227-7013 or subparagraphs (c)(1) and (2) of the Commercial Computer Software -- Restricted Rights at 48 CFR 52.227-19, as possible. Manufacturer is Microsoft Corporation/One Microsoft Way/Redmond, WA 98052-6399. 70 ATTACHMENT 2 TO OEM CUSTOMER SUBLICENSE AGREEMENT FOR DEDICATED SYSTEMS WINDOWS CE SOFTWARE PRODUCTS FOR DEDICATED SYSTEMS
Units of Language Licensed Files Applicable Localization SOFTWARE Versions(2) (for Kernel Additional Per copy Additional Product Name and Version licensed ** Versions Only) Provisions Royalty* Royalty - -------------------------- -------- ------------ ------------------- ---------------- -------------- ------------------- 2. Windows(R) CE Operating (a), (b), (c) System version 2.11 -- EN (d), (e), (f) US$___ US$___ Data Exchange Version - -------------------------- ---------- ------------ ------------------- ---------------- --------------- ------------------- - -------------------------- ---------- ------------ ------------------- ---------------- --------------- ------------------- 2. Windows(R) CE Operating System for Dedicated -- EN (a), (b), (c) US$___ US$___ Systems version 2.0 or (d), (e) 2.11 Full Version - -------------------------- ---------- ------------ ------------------- ---------------- --------------- ------------------- - -------------------------- ---------- ------------ ------------------- ---------------- --------------- ------------------- 3. Windows(R) CE Operating System for Dedicated -- EN (a), (b), (c) US$___ US$___ Systems version 2.0 or (d), (e) 2.11 Limited Version - -------------------------- ---------- ------------ ------------------- ---------------- --------------- ------------------- - -------------------------- ---------- ------------ ------------------- ---------------- --------------- ------------------- 4. Windows(R) CE Operating System for Dedicated -- EN See Additional (a), (b), (c) US$___ US$___ Systems version 2.0 or Provision (b) (d), (e) 2.11 Kernel Version below - -------------------------- ---------- ------------ ------------------- ---------------- --------------- -------------------
* IF ROYALTY RATE AND UNITS OF SOFTWARE ARE NOT SPECIFIED FOR A PARTICULAR PRODUCT, THEN SUCH PRODUCT IS NOT LICENSED UNDER THIS AGREEMENT. ** LANGUAGE KEY: EN = ENGLISH, LOCALIZED VERSIONS ARE LICENSED ON AN IF AND AS AVAILABLE BASIS. ADDITIONAL PROVISIONS (a) (i) Notwithstanding anything to the contrary contained in the Agreement, there are no Dedicated Product Deliverables for the SOFTWARE Customer has obtained the SOFTWARE as part of a Microsoft Windows CE Embedded Toolkit for Visual C++ version 5.0 or Microsoft Windows CE Platform Builder version 2.11, (hereinafter referred to collectively or separately as "Windows CE Kit"), in a separate transaction. (ii) Notwithstanding anything to the contrary contained in Section 6 of the Agreement, no warranties for the SOFTWARE are provided in the Agreement. The warranties, if any, contained in the Windows CE Kit are the only warranties provided for the SOFTWARE. (b) Customer's license rights to reproduce, install, and distribute the SOFTWARE granted in Section 2 of the Agreement shall apply only to the licensed Product Version (i.e., Data Exchange, Full, Limited, Kernel) indicated above; each Product Version configuration is fully described in the Windows CE Kit documentation. The Data Exchange Version configuration includes all components of the Full Version and, in addition, the Desktop Software CD ROM disk (which includes Windows CE Services) which Customer shall obtain from COMPANY. (c) Dedicated Systems shall be distributed only through such channels as may be customary for similar devices for the specific referenced industry and the specific industry application. (d) (i) Customer will not remove or obscure any copyright, trademark or patent notices that appear in the SOFTWARE as delivered to Customer. (ii) If an end user of the Dedicated System shall have access to the command line (for example, the C:\prompt) of the SOFTWARE, then COMPANY shall cause to appear on the display screen as part of the sign-on message for each unit of SOFTWARE in copyright notices specified in the Windows CE Kit. 71 ATTACHMENT 2 (Continued) (e) Use of the Dedicated System logo(s), as designated by MS from time to time, is optional. If Customer chooses to use the Dedicated Systems logo(s) on its Dedicated Systems distributed with the SOFTWARE, COMPANY shall use the Dedicated Systems logo(s) in accordance with the applicable logo license(s), which are available through separate agreement(s) with Microsoft Corporation. To obtain additional information regarding the Microsoft Corporation logo license(s), Customer should contact COMPANY. (f) If Customer licenses the Data Exchange Version of the SOFTWARE, Customer: (A) shall obtain the Desktop Software from COMPANY for distribution to the end user; (B) shall distribute one (1) unit of the Desktop Software in the form and packaging as available from COMPANY; (C) shall distribute the Desktop Software only in the Dedicated System packaging; (D) shall display a prominent notice to end users regarding the Desktop Software components that Customer has enabled to function with the Dedicated System; if Customer has not enabled all components of the Desktop Software to function with the Dedicated System, Customer shall advise its end users accordingly; and (E) shall conduct its own testing of the Desktop Software with its Dedicated Systems to Customer's own satisfaction; Customer hereby confirms its understanding that neither COMPANY nor MS has conducted tests or quality reviews to ensure that the Desktop Software will function as set forth in the Desktop Software display information, online HELP files, or otherwise, when utilized in conjunction with the Dedicated System. DEDICATED SYSTEMS Customer's Dedicated Systems for Product described in this Attachment 2 shall be limited to Customer's current and future Dedicated Systems described below. Each listed Dedicated System must have a unique model line name, model name, or model number which Customer uses both internally (in Customer's books and records) and externally (on the Dedicated System case and packaging). New models may be added by agreement of the parties. At Customer's option, for purposes of administrative convenience, Customer may designate models by model line or series, e.g., "Jaguar model line", "Jaguar Pro series", "Jaguar Pro 750 model line", "Jaguar Pro 950 series ", etc.)." Dedicated Systems defined by model line or series shall include all present models which include the designated model line or series name, (e.g., "Jaguar Pro model line" includes Jaguar Pro, Jaguar Pro 950, Jaguar Pro S, etc.; "Jaguar series" includes Jaguar, Jaguar Pro, Jaguar Pro 950, Jaguar S400, etc.; "Jaguar Pro 950 series" includes Jaguar Pro 950, Jaguar Pro 955, etc.). PRODUCT NUMBER KEY:: 1 = Windows(R) CE Operating System for Dedicated System version 2.11, Data Exchange Version; 2 = Windows(R) CE Operating System for Dedicated Systems version 2.0 or 2.11, Full Version; 3 = Windows(R) CE Operating System for Dedicated Systems version 2.0 or 2.11, Limited Version 4 = Windows(R) CE Operating System for Dedicated Systems version 2.0 or 2.11, Kernel Version. ROYALTY BASIS KEY: C = per copy; if Product box is blank, such Product is not licensed for distribution with the listed Dedicated System.
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72 EXHIBIT V LICENSE OF ADDITIONAL PRODUCT SOFTWARE UNITS AMENDMENT NUMBER ____ Amendment Date:________ to OEM CUSTOMER SUBLICENSE AGREEMENT FOR DEDICATED SYSTEMS between ______________________, a Corporation of __________________ and _________________, a Corporation of ____________________ Agreement Effective Date:_________________ WHEREAS, Customer has licensed a certain number of units of Product Software (the "SOFTWARE") from COMPANY under the terms of the above referenced license agreement (the "Agreement"); WHEREAS, Customer now desires to license additional units of SOFTWARE from COMPANY as described in the Additional Units Attachment dated ________, 199__, which is attached to this Amendment; NOW, THEREFORE, Customer and COMPANY hereby agree: 1. Effective as of the date indicated on the Additional Units Attachment, such Additional Units Attachment is hereby added to the Agreement and sets forth the number of additional units of the SOFTWARE and the language version(s) licensed to Customer under the terms and conditions of the Agreement. 2. Customer may license additional SOFTWARE on the Additional Units Attachment only for the SOFTWARE and the language version(s) that are currently licensed by Customer and COMPANY. In order to license SOFTWARE or language version(s) not currently licensed under the Agreement with COMPANY, Customer shall execute a new OEM Customer Sublicense Agreement for Dedicated Systems which includes such SOFTWARE and/or language version(s). 3. All capitalized terms used but not defined herein shall have the meaning ascribed to them in the Agreement. The terms of this Amendment shall supersede any inconsistent terms contained in the Agreement. IN WITNESS WHEREOF, the parties have executed this Amendment by their duly authorized representatives as of the date set forth above. All signed copies of this Amendment shall be deemed originals. Each individual signing on behalf of Customer below hereby represents and warrants that he or she has full authority to sign this Agreement and bind Customer to perform all duties and obligations contemplated by this Amendment. If Customer is located in a jurisdiction in which a corporate seal or "chop" is commonly used as an instrument of agreement execution, in addition to the individual signature provided below, Customer's seal or "chop" should be entered below Customer's signature block. This Amendment is executed only in the English language. - ----------------------------------- --------------------------------- (Name of COMPANY) (Name of Customer) - ----------------------------------- --------------------------------- By (Signature) By (Signature) - ----------------------------------- --------------------------------- Name (Print) Name (Print) - ----------------------------------- --------------------------------- Title Title - ----------------------------------- --------------------------------- Date Date ----------------------------- Customer's seal or "chop" ----------------------------- 73 ADDITIONAL UNITS ATTACHMENT Dated: __________________
PRODUCT NAME AND VERSION ADDITIONAL UNITS OF SOFTWARE LICENSED LANGUAGE VERSION - -------------------------------------------------------------------------------------------------------------------------------- Windows(R) CE Operating System Version 2.11 __________ Date Exchange Version - -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- Windows(R) CE Operating System Version 2.0 or 2.11 __________ Full Version - -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- Windows(R) CE Operating System Version 2.0 or 2.11 __________ Limited Version - -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- Windows(R) CE Operating System Version 2.0 or 2.11 __________ Kernel Version - --------------------------------------------------------------------------------------------------------------------------------
74 AMENDMENT NUMBER 5 Amendment Date: July 15th, 1999 To MICROSOFT SOFTWARE FOR DEDICATED SYSTEMS DISTRIBUTOR AGREEMENT Between MICROSOFT LICENSING, INC., a Nevada, U.S.A. Corporation And BSQUARE CORPORATION, A Corporation of Washington, U.S.A. Agreement Effective Date: November 1st, 1997 MS LICENSE #5000020519 Effective as of the Amendment Date indicated above, the below signed parties agree that the indicated portions of the above referenced license agreement (hereinafter the "License Agreement") are hereby amended by this instrument (hereinafter the "Amendment"), as follows 1. The attached Exhibit C3 is hereby amended and replaced with the attached Exhibit C3. 2. The attached Exhibit U, Attachment 2A is hereby amended and replaced with the attached Exhibit U, Attachment 2A. 3. The attached Exhibit V3 is hereby amended and replaced with the attached Exhibit V3. All capitalized terms used but not defined herein shall have the meanings ascribed to them in the License Agreement. The terms of this Amendment shall supersede any inconsistent terms contained in the License Agreement. IN WITNESS WHEREOF, the parties have executed this Amendment in duplicate as of the date first written above. All signed copies of this Amendment shall be deemed originals. This Amendment is executed only in the English language. MICROSOFT LICENSING, INC. BSQUARE CORPORATION /s/ BRIAN V. TURNER - ----------------------------- -------------------------------- By (Signature) By (Signature) Brian V. Turner - ----------------------------- -------------------------------- Name (Printed) Name (Printed) CFC - ----------------------------- -------------------------------- Title Title 7/16/99 - ----------------------------- -------------------------------- Date Date 75 EXHIBIT C3 WINDOWS CE PRODUCTS FOR WINDOWS-BASED TERMINAL DEVICES
PRODUCT NAME AND LANGUAGE APPLICABLE PER COPY LOCALIZATION VERSION VERSION(S) ADDITIONAL ROYALTY ADDITIONAL ** PROVISIONS * ROYALTY 1. Microsoft(R) Windows(R) CE EN (a),(b),(c), US$ * US$ * Operating System (d),(e),(f),(g), for Windows(R) - (h) Based Terminal devices version 1.0
* A PRODUCT IS NOT LICENSED HEREUNDER UNLESS ROYALTY RATE(S) ARE INDICATED IN THE PRODUCT TABLE. ** LANGUAGE KEY: EN = ENGLISH ADDITIONAL PROVISIONS KEY (a) In addition to the Dedicated Product Deliverables for this Product, COMPANY shall require OEM Customer to: (i) obtain in a separate transaction the Microsoft Windows CE Embedded Toolkit for Visual C++ version 5.0, which includes the Windows CE 2.1 Enhancement Pack for the Embedded Tool Kit ("ETK") or the Microsoft Windows CE Platform Builder version 2.11 ("Platform Builder") hereinafter referred to collectively or separately as "Windows CE Kit"; and (ii) use the Windows CE Kit in accordance with the accompanying instructions to implement the Product on OEM Customer's Dedicated Systems. (b) COMPANY's rights granted hereunder to sublicense the Product to OEM Customer shall apply only to the Full Operating System configuration which is described in the Windows CE Kit documentation. (c) Except as set forth in Exhibit W of the OEM Customer Sublicense Agreement, OEM Customer may distribute Product(s) only with Dedicated Systems which are marketed and distributed exclusively under OEM Customer's or OEM Customer's subsidiaries' brand names, trade names and trademarks. The Product(s) may not be distributed with Dedicated Systems which are marketed or distributed under any name which includes any third party brand names, trade names or trademarks. If, at any time, MS becomes aware of any violation of the foregoing, then without limiting its remedies, MS may charge COMPANY for each such Dedicated System an additional royalty equal to thirty percent (30%) of the highest royalty for the Product(s). COMPANY shall pay such additional royalty within thirty (30) days of receipt of MS' invoice. (d) COMPANY shall ensure that OEM Customer has executed the applicable logo license with MSCORP prior to any marketing or distribution of a Dedicated System. COMPANY hereby agrees to indemnify and defend MS and its Suppliers from and against all damages, costs and expenses, including reasonable attorneys' fees, which MS or its Suppliers may incur if the OEM Customer markets or distributes Dedicated Systems without executing, or in breach of, the applicable logo license. (e) "MSCORP Compatibility Test" shall mean MSCORP's then-standard suite of tests conducted by or for MSCORP to determine whether OEM Customer's Dedicated System is compliant with the MSCORP testing and compatibility requirements for the Product. COMPANY shall require of OEM Customer that the Dedicated Systems pass the MSCORP Compatibility Test and display the Product logo(s), as designated by MS from time to time, on Dedicated Systems distributed with the Product. Such logo use shall be in accordance with the applicable logo license which is available through a separate written agreement with MSCORP. To obtain additional information regarding the MSCORP Compatibility Test and the MSCORP logo agreement, COMPANY should contact the Account Manager assigned to COMPANY. (f) Notwithstanding anything to the contrary in section 1(d) of the Agreement, "Dedicated System" shall mean OEM Customer's computer systems that (1) comply with the MSCORP system specifications for Windows-Based Terminal devices; and (2) provide the end user with the ability to utilize the Microsoft Remote Desktop Protocol software to connect to the server. - ------------ * Confidential treatment requested 76 EXHIBIT U ATTACHMENT 2A TO OEM CUSTOMER SUBLICENSE AGREEMENT FOR DEDICATED SYSTEMS WINDOWS CE PRODUCTS FOR WINDOWS-BASED TERMINAL DEVICES
Units of Language Applicable Localization SOFTWARE Version(s) Additional Per copy Additional Product Name and Version licensed ** Provisions Royalty* Royalty - -------------------------------- ------------------ ----------------------- ------------------ ---------------- ------------------- 1. Microsoft(R) Windows(R) CE Operating (a),(b),(c),(d) System for Windows(R)- EN (e),(f),(g), US$________ US$________ Based Terminal devices (h),(i) version 1.0 - -------------------------------- ------------------ ----------------------- ------------------ ---------------- -------------------
* IF ROYALTY RATE AND UNITS OF SOFTWARE ARE NOT SPECIFIED FOR A PARTICULAR PRODUCT, THEN SUCH PRODUCT IS NOT LICENSED UNDER THIS AGREEMENT. ** LANGUAGE KEY: EN=ENGLISH ADDITIONAL PROVISIONS KEY (a)(1) In addition to the Dedicated Product Deliverables for this SOFTWARE which are provided by COMPANY under this Agreement, Customer shall obtain in a separate transaction the Microsoft Windows CE Embedded Toolkit for Visual C++ version 5.0, which includes the Windows CE 2.1 Enhancement Pack for the Embedded Tool Kit ("Embedded Toolkit") or the Microsoft Windows CE Platform Builder version 2.11 ("Platform Builder"), hereinafter referred to collectively or separately as "Windows CE Kit". (2) Customer shall use the Embedded Toolkit in accordance with its instructions to implement version 1.0 of the SOFTWARE on Dedicated Systems. (3) Customer shall use the Platform Builder in accordance with its instructions to implement version 1.1 of the SOFTWARE on Dedicated Systems. (4) Notwithstanding anything to the contrary contained in Section 6 of the Agreement, no warranties for the Windows CE Kit are provided in the Agreement. The warranties, if any, contained in the Windows CE Kit are the only warranties provided for the Windows CE Kit. (b) With respect to the SOFTWARE, Customer's distribution license granted hereunder shall apply only to the Full Operating System configuration which is described in the Windows CE Kit documentation. (c)(1) Notwithstanding anything to the contrary contained in Exhibit S to this Attachment 2A, Section (b) of Exhibit S does not apply to the Dedicated Product Deliverables. (2) Notwithstanding anything to the contrary contained in this Agreement, including the Exhibits attached hereto, Exhibit S does not apply to the Windows CE Kit. (d)(1) Customer is not licensed to, and agrees that it will not, modify, in any way, or delete any aspect of the SOFTWARE (including, without limitation, any features, shortcuts, icons, "wizards", folders (including sub-folders) or programs of SOFTWARE) as delivered by COMPANY in the Dedicated Product Deliverables, except if and as specifically permitted below or in the OEM Adaptation Kit ("OAK") provided in the Dedicated Product Deliverables. In particular, and without limitation, this means that Customer is not licensed to and agrees that it will not: (A) Modify or obscure, in any way, the sequence or appearance of any screens displayed by the SOFTWARE as delivered by COMPANY. (B) Display any visual or audio content from power on through and including the time that the Dedicated System has displayed the SOFTWARE initial user interface screen ("UI Screen"), except: (i) as provided in section (d)(1)(C) below, (ii) for the presentation of Customer's brand logo(s) and the required SOFTWARE logo(s) in accordance with the Microsoft Corporation system specifications for Windows-Based Terminal devices and the applicable logo license, or (iii) for diagnostic notices or interactive prompts required for hardware or device driver initialization. (C) Modify or obscure, in any way, the appearance of the initial UI Screen displayed when the Dedicated System is initially powered on, (including without limitation, the addition or modification of background wallpaper bitmaps); provided, however, that Customer may add icons or folders to the UI Screen provided that any such icons are the same size as, and substantially similar in shape to, icons included on the UI Screen as delivered by COMPANY and that any such folders are the same size, shape and appearance as folders included on the UI Screen as delivered by COMPANY. 77 (D) Pre-configure any programs (including without limitation any "shells", "screen savers" or "welcome" scripts), "wizards" or other content except for device drivers necessary to support preinstalled or pre-configured hardware devices (e.g., network interfaces, LCD panels, or keyboards), terminal emulation clients, or system administration support (as allowed in the OAK documentation) to be enabled, run or initialized automatically (i.e. without requiring a deliberate act of the end user) from an icon or folder on the UI Screen or otherwise without a deliberate act by the end user. By way of example only, and without limiting the generality of the foregoing, Customer agrees that it shall not populate with any programs or other content the SOFTWARE "Start-up" directory, initialization or other files in any manner which will cause any program or content (except specifically noted above in this (d)(1)(D)) to run or load automatically unless the end user has taken a prior deliberate action. (E) Modify or add content to any directories installed by the SOFTWARE, except as permitted in the OAK for pre-installation of applications by Customer. (F) Enable end user applications (i.e., programs that process data for the end user and are not required for the Dedicated System to operate or function) to run locally on the Dedicated System with the exception of device drivers, terminal emulation software, and system administration support software as set forth in (d)(1)(D) above, or an onscreen keyboard. All end user applications utilized on the Dedicated System must reside upon and operate only on the server to which the Dedicated System is connected. (e) If Customer installs the SOFTWARE in ROM and the SOFTWARE is not the only software contained in ROM, Customer will ensure that Microsoft Corporation's copyright notice for SOFTWARE shall at all times be included in the first four percent (4%) and the last four percent (4%) of the software contained in ROM. The copyright notice(s) for SOFTWARE shall be as specified in the Dedicated Product Deliverables. In any event, Customer will not remove any copyright, trademark or patent notices that appear on the SOFTWARE as delivered to Customer. (f) (1) Except as set forth in Exhibit W, if attached, Customer may distribute SOFTWARE only with Dedicated Systems which are marketed and distributed exclusively under Customer's or Customer subsidiaries' brand names, trade names and trademarks. The SOFTWARE may not be distributed with Dedicated Systems which are marketed or distributed under any name which includes any third party brand names, trade names or trademarks. If, at any time, COMPANY becomes aware of any violation of the foregoing, then without limiting its remedies, COMPANY may charge Customer for each such Dedicated System an additional royalty equal to thirty percent (30%) of the highest royalty for the SOFTWARE. Customer shall pay such additional royalty within thirty (30) days of receipt of COMPANY's invoice. (2) In the event Dedicated Systems are marketed or distributed under a name which includes any third party brand names, trade names or trademarks, Customer shall ensure that such third party has executed the applicable logo license with Microsoft Corporation prior to any marketing or distribution of such Dedicated Systems. Customer hereby agrees to indemnify and defend COMPANY, MS and their Suppliers from and against all damages, costs and expenses, including reasonable attorneys' fees which COMPANY, MS or their Suppliers may incur if the third party markets or distributes Dedicated Systems without executing, or in breach of, the applicable logo license. (g) "MSCORP Compatibility Test" shall mean Microsoft Corporation's then-standard suite of tests conducted by or for Microsoft Corporation to determine whether Customer's Dedicated System is compliant with the Microsoft Corporation testing and compatibility requirements for the SOFTWARE. Dedicated Systems must pass the MSCORP Compatibility Test and display the SOFTWARE logo(s), as designated by MS from time to time, on Dedicated Systems distributed with the SOFTWARE. Such logo use shall be in accordance with the applicable logo license which is available through a separate written agreement with Microsoft Corporation. To obtain additional information regarding the MSCORP Compatibility Test and the Microsoft Corporation logo agreement, Customer should contact COMPANY. (h) Customer's EULA for this SOFTWARE shall be the EULA set forth in Exhibit 1 attached hereto, except that it shall be adapted as indicated in Section 2(e) of the Agreement. Customer may elect to present the EULA to the end user online during SOFTWARE setup. (i) This SOFTWARE includes encryption technology which is not authorized for sale, use, or distribution within France. French law (Decree 92-1358 of December 1992) generally prohibits the use in France of such technology, unless special approvals are granted. Accordingly, to comply with French law, Customer shall ensure that for each unit of SOFTWARE distributed in France, the SOFTWARE setting for "end user locale" shall be set to "France", thereby disabling the encryption functionality prohibited by French law. Customer shall not disclose to third parties (including any end users) the contents of the preceding sentence; Customer, may, however, in its discretion, segregate and distinctively mark Dedicated Systems with end user locale set to France (noting, for example, but without limitation, that such Dedicated Systems are "Authorized for distribution in France," or "Not Intended for Use Outside France"). Customer shall defend and indemnify COMPANY, and MS and their Suppliers, against any claim related to breach of this Additional Provision (i). DEDICATED SYSTEMS Notwithstanding anything to the contrary in Section 1(b) of the Agreement, each Dedicated System shall (1) comply with the Microsoft Corporation system specifications for Windows-Based Terminal devices, and (2) provide the end user with the ability to utilize the Microsoft Remote Desktop Protocol software to connect to the server. Dedicated Systems for SOFTWARE described in this Attachment 2A shall be limited to Customer's current and future computing devices described below. At Customer's option, for purposes of administrative convenience, Customer may designate models by "all models" or by "model line" or "series", (e.g., "Jaguar model line", "Jaguar Pro series", "Jaguar Pro 750 model line", "Jaguar Pro 950 series", etc.). Dedicated Systems defined by "all models" shall include all current and future models that meet the description specified in the table (e.g., "All models which include a CD-ROM drive, 500 Mb or larger hard disk drive, and sound card.") and utilize the listed microprocessor(s). Dedicated Systems defined by model line or series shall include all current and future models which include the designated model line or series name, (e.g., "Jaguar Pro model line" 78 includes Jaguar Pro, Jaguar Pro 950, Jaguar Pro S, etc.; "Jaguar series" includes Jaguar, Jaguar Pro, Jaguar Pro 950, Jaguar S400, etc.; "Jaguar Pro 950 series" includes Jaguar Pro 950, Jaguar Pro 955, etc.). PRODUCT NUMBER KEY: 1=Windows(R) CE Operating System for Windows-Based Terminal devices version 1.0; ROYALTY BASIS KEY: C=per copy; if Product box is blank, such Product is not licensed for distribution with the listed Dedicated System.
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79 EXHIBIT U ATTACHMENT 2A EXHIBIT 1 MICROSOFT(R) WINDOWS(R) CE OPERATING SYSTEM FOR WINDOWS-BASED TERMINAL DEVICES VERSION 1.0 - -------------------------------------------------------------------------------- IMPORTANT--READ CAREFULLY: THIS END USER LICENSE AGREEMENT ("EULA") IS A LEGAL AGREEMENT BETWEEN YOU (EITHER AN INDIVIDUAL OR A SINGLE ENTITY) AND THE MANUFACTURER ("MANUFACTURER") OF THE SPECIAL PURPOSE COMPUTING DEVICE ("SYSTEM") YOU ACQUIRED WHICH INCLUDES CERTAIN MICROSOFT SOFTWARE PRODUCT(S) INSTALLED ON THE SYSTEM AND/OR INCLUDED IN THE SYSTEM PACKAGE ("SOFTWARE"). THE SOFTWARE INCLUDES COMPUTER SOFTWARE, THE ASSOCIATED MEDIA, ANY PRINTED MATERIALS, ANY "ONLINE" OR ELECTRONIC DOCUMENTATION. BY INSTALLING, COPYING, DOWNLOADING, ACCESSING, OR OTHERWISE USING THE SOFTWARE, YOU AGREE TO BE BOUND BY THE TERMS OF THIS EULA. IF YOU DO NOT AGREE TO THE TERMS OF THIS EULA, MANUFACTURER AND MICROSOFT LICENSING, INC. ("MS") ARE UNWILLING TO LICENSE THE SOFTWARE TO YOU. IN SUCH EVENT, YOU MAY NOT USE OR COPY THE SOFTWARE, AND YOU SHOULD PROMPTLY CONTACT MANUFACTURER FOR INSTRUCTIONS ON RETURN OF THE UNUSED PRODUCT(S) FOR A REFUND. - -------------------------------------------------------------------------------- SOFTWARE LICENSE The SOFTWARE is protected by copyright laws and international copyright treaties, as well as other intellectual property laws and treaties. The SOFTWARE is licensed, not sold. 1. GRANT OF LICENSE. SOFTWARE includes software already installed on the SYSTEM ("SYSTEM Software") and, if included in the SYSTEM package, software contained on the CD-ROM disk and/or floppy disk(s) labeled "Desktop Software for Microsoft Windows CE" ("Desktop Software"). This EULA grants you the following rights to the SOFTWARE: - SYSTEM SOFTWARE. You may use the SYSTEM Software only as installed in the SYSTEM. - DESKTOP SOFTWARE. Desktop Software might not be included with your SYSTEM. If Desktop Software is included with your SYSTEM, you may install and use the component(s) of the Desktop Software in accordance with the terms of the end user license agreement provided with such component(s). In the absence of a separate end user license agreement for particular component(s) of the Desktop Software, you may install and use only one (1) copy of such component(s) on a single computer with which you use the SYSTEM. - USE OF WINDOWS CE OPERATING SYSTEM FOR WINDOWS-BASED TERMINAL DEVICES WITH MICROSOFT WINDOWS NT SERVER, TERMINAL SERVER EDITION. If the SOFTWARE is Windows CE operating system for Windows-Based Terminal devices, the following special provisions apply. In order to use the SYSTEM in connection with Windows NT Server, Terminal Server Edition, you must possess (1) a Client Access License for Windows NT Server, Terminal Server Edition and (2) either an end user license for Windows NT Workstation or a Terminal Services Client Access License (please refer to the end user license agreement for Windows NT Server, Terminal Server Edition for additional information). - BACK-UP COPY. If Manufacturer has not included a back-up copy of the SYSTEM Software with the SYSTEM, you may make a single back-up copy of the SYSTEM Software. You may use the back-up copy solely for archival purposes. 2. DESCRIPTION OF OTHER RIGHTS AND LIMITATIONS. - SPEECH/HANDWRITING RECOGNITION. If the SYSTEM Software includes speech and/or handwriting recognition component(s), you should understand that speech and handwriting recognition are inherently statistical processes; that recognition errors are inherent in the processes; that it is your responsibility to provide for handling such errors and to monitor the recognition processes and correct any errors. NEITHER MANUFACTURER NOR ITS SUPPLIERS SHALL BE LIABLE FOR ANY DAMAGES ARISING OUT OF ERRORS IN THE SPEECH AND HANDWRITING RECOGNITION PROCESSES. - LIMITATIONS ON REVERSE ENGINEERING, DECOMPILATION AND DISASSEMBLY. You may not reverse engineer, decompile, or disassemble the SYSTEM Software, except and only to the extent that such activity is expressly permitted by applicable law notwithstanding this limitation. - SINGLE SYSTEM. The SYSTEM Software is licensed with the SYSTEM as a single integrated product. The SYSTEM Software installed in Read Only Memory ("ROM") of the SYSTEM may only be used as part of the SYSTEM. - SINGLE EULA. The package for the SYSTEM Software may contain multiple versions of this EULA, such as multiple translations and/or multiple media versions (e.g., in the user documentation and in the software). Even if you receive multiple versions of the EULA, you are licensed to use only one (1) copy of the SYSTEM Software. - RENTAL. You may not rent or lease the SOFTWARE. - SOFTWARE TRANSFER. You may permanently transfer all of your rights under this EULA only as part of a sale or transfer of the SYSTEM, provided you retain no copies, you transfer all of the SOFTWARE (including all component parts, the media, any upgrades or backup copies, this EULA and, if applicable, the Certificate(s) of Authenticity), AND the recipient agrees to the terms of this EULA. If the SOFTWARE is an upgrade, any transfer must include all prior versions of the SOFTWARE. - TERMINATION. Without prejudice to any other rights, Manufacturer or MS may terminate this EULA if you fail to comply with the terms and conditions of this EULA. In such event, you must destroy all copies of the SOFTWARE and all of its component parts. 80 3. UPGRADES AND RECOVERY MEDIA. - If the SYSTEM Software and this EULA are provided separate from the SYSTEM by Manufacturer and the SYSTEM Software is on a ROM chip, CD ROM disk(s) or floppy disk(s), and labeled "For ROM Upgrade Purposes Only" ("ROM Upgrade"), you may install one copy of the ROM Upgrade onto the SYSTEM as a replacement copy for the SYSTEM Software originally installed on the SYSTEM and use it in accordance with Section 1 of this EULA. You may also install additional copies of the ROM Upgrade as replacement copies onto additional SYSTEMS which are the same brand and model as the SYSTEM and contain a duly licensed copy of the same version and language release of the SOFTWARE ("ADDITIONAL SYSTEMS"), provided that (1) Manufacturer has supplied a corresponding serialized sticker for each additional copy of the ROM Upgrade and (2) you affix a serialized sticker per Manufacturer's instructions for each unit of ROM Upgrade you install. - If the SYSTEM SOFTWARE is provided by Manufacturer on separate media and labeled as "Recovery Media", you may not make a copy of the SOFTWARE as described in Section 1 for archival purposes. Instead, you may use the Recovery Media solely to restore or reinstall the same version and language release of the SOFTWARE as originally installed on the SYSTEM and thereafter use the SOFTWARE as restored or reinstalled in accordance with Section 1 of this EULA. A single unit of Recovery Media may be used by you to restore or reinstall the SOFTWARE on ADDITIONAL SYSTEMS. 4. COPYRIGHT. All title and copyrights in and to the SOFTWARE (including but not limited to any images, photographs, animations, video, audio, music, text and "applets," incorporated into the SOFTWARE), the accompanying printed materials, and any copies of the SOFTWARE, are owned by MS or its suppliers (including Microsoft Corporation). You may not copy the printed materials accompanying the SOFTWARE. All rights not specifically granted under this EULA are reserved by MS and its suppliers (including Microsoft Corporation). 5. PRODUCT SUPPORT. PRODUCT SUPPORT FOR THE SOFTWARE IS NOT PROVIDED BY MS, ITS PARENT CORPORATION, MICROSOFT CORPORATION, OR THEIR AFFILIATES OR SUBSIDIARIES. FOR PRODUCT SUPPORT, PLEASE REFER TO MANUFACTURER'S SUPPORT NUMBER PROVIDED IN THE DOCUMENTATION FOR THE SYSTEM. SHOULD YOU HAVE ANY QUESTIONS CONCERNING THIS EULA, OR IF YOU DESIRE TO CONTACT MANUFACTURER FOR ANY OTHER REASON, PLEASE REFER TO THE ADDRESS PROVIDED IN THE DOCUMENTATION FOR THE SYSTEM. 6. EXPORT RESTRICTIONS. You agree that you will not export or re-export the SOFTWARE to any country, person, or entity subject to U.S. export restrictions. You specifically agree not to export or re-export the SOFTWARE: (i) to any country to which the U.S. has embargoed or restricted the export of goods or services,which as of March 1998 include, but are not necessarily limited to Cuba, Iran, Iraq, Libya, North Korea, Sudan and Syria, or to any national of any such country, wherever located, who intends to transmit or transport the products back to such country; (ii) to any person or entity who you know or have reason to know will utilize the SOFTWARE or portion thereof in the design, development or production of nuclear, chemical or biological weapons; or (iii) to any person or entity who has been prohibited from participating in U.S. export transactions by any federal agency of the U.S. government. If the SOFTWARE is labeled "North America Only Version" above, on the Product Identification Card, or on the SOFTWARE packaging or other written materials, then the following applies: The SOFTWARE is intended for distribution only in the United States, its territories and possessions (including Puerto Rico, Guam, and U.S. Virgin Islands) and Canada. Export of the SOFTWARE from the United States is regulated under "EI controls" of the Export Administration Regulations (EAR, 15 CFR 730-744) of the U.S. Commerce Department, Bureau of Export Administration (BXA). A license is required to export the SOFTWARE outside the United States or Canada. You agree that you will not directly or indirectly, export or re-export the SOFTWARE (or portions thereof) to any country, other than Canada, or to any person or entity subject to U.S. export restrictions without first obtaining a Commerce Department export license. You warrant and represent that neither the BXA nor any other U.S. federal agency has suspended, revoked or denied your export privileges. 7. NOTE ON JAVA SUPPORT. The SYSTEM Software may contain support for programs written in Java. Java technology is not fault tolerant and is not designed, manufactured, or intended for use or resale as on-line control equipment in hazardous environments requiring fail-safe performance, such as in the operation of nuclear facilities, aircraft navigation or communication systems, air traffic control, direct life support machines, or weapons systems, in which the failure of Java technology could lead directly to death, personal injury, or severe physical or environmental damage. Sun Microsystems, Inc. has contractually obligated Microsoft Corporation to make this disclaimer. 8. LIMITED WARRANTY. - LIMITED WARRANTY. Manufacturer warrants that the SOFTWARE will perform substantially in accordance with the accompanying written materials for a period of ninety (90) days from the date of receipt. Any implied warranties on the SOFTWARE are limited to ninety (90) days. Some states/jurisdictions do not allow limitations on duration of an implied warranty, so the above limitation may not apply to you. - CUSTOMER REMEDIES. Manufacturer's and its suppliers' entire liability and your exclusive remedy shall be, at Manufacturer's option, either (a) return of the price paid, or (b) repair or replacement of the SOFTWARE that does not meet the above Limited Warranty and which is returned to Manufacturer with a copy of your receipt. This Limited Warranty is void if failure of the SOFTWARE has resulted from accident, abuse, or misapplication. Any replacement SOFTWARE will be warranted for the remainder of the original warranty period or thirty (30) days, whichever is longer. - NO OTHER WARRANTIES. EXCEPT AS EXPRESSLY PROVIDED IN THE LIMITED WARRANTY SECTION ABOVE, THE SOFTWARE IS PROVIDED TO THE END USER "AS IS" WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF NON-INFRINGEMENT, MERCHANTABILITY, AND/OR FITNESS FOR A PARTICULAR PURPOSE. THE ENTIRE RISK OF THE QUALITY AND PERFORMANCE OF THE SOFTWARE IS WITH YOU. 81 - NO LIABILITY FOR CONSEQUENTIAL DAMAGES. MANUFACTURER OR MANUFACTURER'S SUPPLIERS, INCLUDING MS AND ITS SUPPLIERS, SHALL NOT BE HELD TO ANY LIABILITY FOR ANY DAMAGES SUFFERED OR INCURRED BY THE END USER (INCLUDING, BUT NOT LIMITED TO, GENERAL, SPECIAL, CONSEQUENTIAL OR INCIDENTAL DAMAGES INCLUDING DAMAGES FOR LOSS OF BUSINESS PROFITS, BUSINESS INTERRUPTION, LOSS OF BUSINESS INFORMATION AND THE LIKE), ARISING FROM OR IN CONNECTION WITH THE DELIVERY, USE OR PERFORMANCE OF THE SOFTWARE. If you acquired this EULA in the United States, this EULA is governed by the laws of the State of Washington. If you acquired this EULA in the Canada, this EULA is governed by the laws of the Province of Ontario, Canada. Each of the parties hereto irrevocably attorns to the jurisdiction of the courts of the Province of Ontario and further agrees to commence any litigation which may arise hereunder in the courts located in the Judicial District of York, Province of Ontario. 82 If this EULA was acquired outside the United States, then local law may apply. Should you have any questions concerning this EULA, please contact the Manufacturer of your SYSTEM. _______________________________________________________________________________ U.S. GOVERNMENT RESTRICTED RIGHTS The SOFTWARE and documentation are provided with RESTRICTED RIGHTS. Use, duplication, or disclosure by the Government is subject to restrictions as set forth in subparagraph (c)(1)(ii) of the Rights in Technical Data and Computer Software clause at DFARS 252.227-7013 or subparagraphs (c)(1) and (2) of the Commercial Computer Software -- Restricted Rights at 48 CFR 52.227-19, as applicable. Manufacturer is Microsoft Corporation/One Microsoft Way/Redmond, WA 98052-6399. 83 EXHIBIT U ATTACHMENT 2A EXHIBIT S USE OF DEDICATED PRODUCT DELIVERABLES FOR WINDOWS CE SOFTWARE (a) COMPANY grants to Customer a non-exclusive, personal, nontransferable, non-assignable license during the term of the Agreement to: (i) use on Customer premises the Dedicated Product Deliverables (other than the Software Development Kit, if provided) in accordance with the instructions contained in the Dedicated Product Deliverables for the following limited purposes: (A) creating an OEM Abstraction Layer for the SOFTWARE on Customer's Dedicated Systems; (B) testing Customer's Dedicated Systems; (C) creating device drivers for Customer's Dedicated Systems; and (ii) use on Customer premises the Software Development Kit in accordance with the instructions contained therein to design software applications for the SOFTWARE; and (iii) distribute the Object Code files in the Software Development Kit designated as "Redistributable Components" only in conjunction with Customer's software application product, provided that: (A) Customer's software application product is designed to operate with the SOFTWARE and is fully compatible with the applicable SOFTWARE APIs and protocols; (B) Customer does not use MS' or Microsoft Corporation's name, logo (except by separate written agreement with MS or Microsoft Corporation), or trademarks to market the software application product; (C) Customer includes MS' or Microsoft Corporation's copyright notices for the SOFTWARE on the disk label and/or on the title page of the documentation for the software application product; and (D) Customer hereby indemnifies, holds harmless, and defends COMPANY, MS and their Suppliers from and against any claims or lawsuits, including attorney's fees, that arise or result from the use or distribution of the software application product. The limited license granted hereunder is solely for Customer's internal use. MS reserves all rights not expressly licensed hereunder. (b) MS and Customer shall jointly own any and all intellectual property in and to any modifications or additions made by or for Customer to the OEM Abstraction Layer and device drivers. To the extent required to realize such joint ownership, Customer hereby assigns to MS an undivided one-half interest in any and all such intellectual property. The parties agree that each shall be free to use and commercially exploit their interests in such intellectual property and there shall be no obligation of payment or accounting to the other therefore, provided that Customer's use or exploitation of such intellectual property shall at all times be subject to the terms of this Agreement and shall be exercised solely in connection with the SOFTWARE. (c) Customer shall comply with the confidentiality obligations under Section 11 of the Agreement. In addition, Customer shall use best efforts to safeguard the Dedicated Product Deliverables from disclosure, which care shall not be less than the standard of care Customer uses to protect its own most confidential information. Customer shall not reproduce, duplicate, copy or otherwise disclose, distribute or disseminate any part of the Dedicated Product Deliverables or additional information or materials provided pursuant to this Exhibit S in any media except for Customer's own internal use by Customer's full-time employees on a need-to-know basis on Customer premises. Customer hereby indemnifies COMPANY, MS and their Suppliers for any damages COMPANY, MS or their Suppliers may suffer as a result of the failure of Customer to abide by the terms of Section 11 of the Agreement or this Exhibit S. Notwithstanding anything to the contrary in Section 11, Customer's confidentiality obligations with respect to Source Code provided in connection with the Dedicated Product Deliverables shall continue until such time as MS or Microsoft Corporation places such Source Code in the public domain. (d) Notwithstanding Section (c) above, Customer may disclose the Dedicated Product Deliverables to a third party contractor which MS has confirmed in writing to be an MS authorized Windows CE Integrator and employ such Windows CE Integrator as a third party contractor of Customer to use the Dedicated Product Deliverables in accordance with the Agreement and this Exhibit S, provided that: (i) Customer and its contractor enter into a written agreement (hereinafter "Contractor Agreement") that expressly provides that MS is a third party intended beneficiary of the Contractor Agreement with rights to enforce such agreement, and that requires contractor: (A) to comply with obligations identical to those imposed on Customer by the Agreement, including, without limitation, those obligations set forth in Sections (b) and (c) of this Exhibit S; (B) to cease all reference to, and to return all full or partial copies of, the Dedicated Product Deliverables upon notice from Customer, COMPANY, or MS of the termination or expiration of the Agreement; and 84 EXHIBIT U ATTACHMENT 2A EXHIBIT S (Continued) (C) to pay COMPANY's, MS' or their Suppliers or Customer's attorneys' fees and costs if COMPANY, Customer or MS or their Suppliers employ(s) attorneys to enforce any rights arising out of the Contractor Agreement; (ii) Customer guarantees its contractors' fulfillment on the applicable obligations imposed on Customer by this Agreement; (iii) Customer hereby indemnifies COMPANY, MS and their Suppliers with respect to any and all damages of any kind, without limitation caused by unauthorized reproduction and/or distribution of any portion of the Dedicated Product Deliverables by any such contractor or by any other breach of the Contractor Agreement by any such contractor; and (iv) Customer notifies MS of the name and address of any contractor with which Customer intends to enter into a Contractor Agreement at least sixty (60) days before execution of such agreement, and MS approves in writing such contractor. Customer's notice to MS shall also include a written summary of the terms of any such Contractor Agreement(s), including: the specific activity to be performed by the contractor; the SOFTWARE involved; the term of the agreement with the contractor; and such samples as MS may reasonably request of the work product of the contractor. Customer shall promptly notify MS of the termination, expiration or significant modification of the terms of such Contractor Agreement(s). (e) In the event of an assignment or attempted assignment in violation of Section 12 of the Agreement, the license described in this Exhibit S shall immediately terminate and the Dedicated Product Deliverables shall be returned to COMPANY within ten (10) days. Customer shall provide a declaration signed by an officer of Customer, and a declaration signed by an officer of the authorized Windows CE Integrator, attesting that all copies of the Dedicated Product Deliverables have been returned to COMPANY. - ----------------------------------- ------------------------------------ (Name of COMPANY) (Name of Customer) - ----------------------------------- ------------------------------------ By By - ----------------------------------- ------------------------------------ Name (Print) Name (Print) - ----------------------------------- ------------------------------------ Title Title - ----------------------------------- ------------------------------------ Date Date 85 EXHIBIT V3 LICENSE OF ADDITIONAL PRODUCT SOFTWARE UNITS [THIS EXHIBIT V3 IS FOR USE ONLY WITH AGREEMENTS THAT INCLUDE "WINDOWS CE PRODUCTS FOR WINDOWS-BASED TERMINAL DEVICES:" AS EXHIBIT C3] AMENDMENT NUMBER ____ Amendment Date:________ to OEM CUSTOMER SUBLICENSE AGREEMENT FOR DEDICATED SYSTEMS between _____________________, a Corporation of ____________ and ________________, a Corporation of ________________ Agreement Effective Date: _________________ WHEREAS, Customer has licensed a certain number of units of Product Software (the "SOFTWARE") from COMPANY under the terms of the above referenced license agreement (the "Agreement"); WHEREAS, Customer now desires to license additional units of SOFTWARE from COMPANY as described in the Additional Units Attachment dated __________, 199__, which is attached to this Amendment; NOW, THEREFORE, Customer and COMPANY hereby agree: 1. Effective as of the date indicated on the Additional Units Attachment, such Additional Units Attachment is hereby added to the Agreement and sets forth the number of additional units of the SOFTWARE and the language version(s) licensed to Customer under the terms and conditions of the Agreement. 2. Customer may license additional SOFTWARE on the Additional Units Attachment only for the SOFTWARE and the language version(s) that are currently licensed by Customer under the Agreement between Customer and COMPANY. In order to license SOFTWARE or language version(s) not currently licensed under the Agreement with COMPANY, Customer shall execute a new OEM Customer Sublicense Agreement for Dedicated Systems which includes such SOFTWARE and/or language version(s). 3. All capitalized terms used but not defined herein shall have the meanings ascribed to them in the Agreement. The terms of this Amendment shall supersede any inconsistent terms contained in the Agreement. IN WITNESS WHEREOF, the parties have executed this Amendment by their duly authorized representatives as of the date set forth above. All signed copies of this Amendment shall be deemed originals. Each individual signing on behalf of Customer below hereby represents and warrants that he or she has full authority to sign this Agreement and bind Customer to perform all duties and obligations contemplated by this Amendment. If Customer is located in a jurisdiction in which a corporate seal or "chop" is commonly used as an instrument of agreement execution, in addition to the individual signature provided below, Customer's seal or "chop" is commonly used as an instrument of agreement execution, in addition to the individual signature provided below, Customer's seal or "chop" should be entered below Customer's signature block. This Amendment is executed only in the English language. - ----------------------------------- ------------------------------------ (Name of COMPANY) (Name of Customer) - ----------------------------------- ------------------------------------ By (Signature) By (Signature) - ----------------------------------- ------------------------------------ Name (Print) Name (Print) - ----------------------------------- ------------------------------------ Title Title - ----------------------------------- ------------------------------------ Date Date Customer's seal or "chop" 86 EXHIBIT V3 ADDITIONAL UNITS ATTACHMENT (CONT.) Dated:_____________________
PRODUCT NAME AND VERSION ADDITIONAL UNITS OF SOFTWARE LICENSED LANGUAGE VERSION - ---------------------------------------------------------------------------------------------------------------- Microsoft(R) Windows(R) CE Operating System for ________________________ Windows(R)-Based Terminal devices version 1.0 - ----------------------------------------------------------------------------------------------------------------
EX-10.13 17 MASTER DEVELOPMENT & LICENSE AGREEMENT 1 EXHIBIT 10.13 Master Development & License Agreement Between BSQUARE CORPORATION and MICROSOFT CORPORATION This Master Development & License Agreement (this "Agreement") is made and entered into by and between MICROSOFT CORPORATION, a Washington corporation located at One Microsoft Way, Redmond, Washington 98052 ("MICROSOFT") and BSQUARE CORPORATION, a Washington corporation located at 3633 136th Place SE, Suite 100, Bellevue, Washington 98006 ("BSQUARE"), to be effective as of the 1st day of October, 1998. RECITALS MICROSOFT has developed a computer software platform known as Microsoft[R] Windows[R] CE; MICROSOFT desires to have BSQUARE provide certain development and testing services in connection with Windows CE, and BSQUARE desires to provide such services to Microsoft; and MICROSOFT and BSQUARE intend that this Agreement serve as a master agreement establishing the basic terms and conditions under which BSQUARE will undertake particular development and testing projects for MICROSOFT. The parties agrees as follows: 1. DEFINITIONS For the purposes of this Agreement, the following terms shall have the following meanings: 1.1 "APPROVED EXPENSE(S)" shall mean those reasonable and necessary costs and expenses incurred by BSQUARE in performing work under this Agreement that are identified as subject to reimbursement by MICROSOFT in a Work Plan or an amendment thereto, or are subsequently approved by MICROSOFT in writing, which approval shall not be unreasonably denied. 1.2 "CONFIDENTIAL INFORMATION" shall mean: (i) any trade secrets relating to either party's product plans, designs, costs, prices and names, finances, marketing plans, business opportunities, personnel, research development or know-how; (ii) any information designated by the disclosing party as confidential in writing or, if disclosed orally, identified at the time of disclosure as being confidential, or which, under the circumstances surrounding disclosure, ought to be treated as confidential; and (iii) the terms and conditions of this Agreement. "Confidential Information" shall not include information that: (i) is or becomes generally known or available by publication or otherwise through no fault of the receiving party; (ii) is known and has been reduced to tangible form by the receiving party at the time of disclosure and is not subject to restriction; (iii) is independently developed by the receiving party; or (iv) is made generally available by the disclosing party without restriction on disclosure. 1.3 "DELIVERABLES" shall mean the various alpha, beta, and final versions of a Work Product, in source and object code forms (with regard to software Deliverables), to be delivered by BSQUARE to MICROSOFT, as more fully described in the applicable Work Plan. 1.4 "DERIVATIVE TECHNOLOGY" shall mean: (i) for copyrightable or copyrighted material, any translation (including translation into other computer languages), portation, modification, correction, addition, extension, upgrade, improvement, compilation, abridgment or other form in which an existing work may be recast, transformed or adapted; (ii) for patentable or patented material, any improvement thereon; and (iii) for material which is protected by trade secret, any new material derived from such 1 2 existing trade secret material, including new material which may be protected by copyright, patent and/or trade secret. 1.5 "ERROR(S)" shall mean defect(s) in a Deliverable which prevent it from performing in accordance with the specifications in the applicable Work Plan (including, without limitation, bugs identified in Microsoft's bug tracking RAID database and bugs identified in bug reports prepared following shipment of product). 1.6 "MICROSOFT INTERNAL REFERENCE NUMBER" shall mean the unique number assigned by Microsoft to each project undertaken by BSQUARE hereunder pursuant to the applicable Work Plan, which number shall be used to track and record the hours worked by each BSQUARE employee assigned to such Work Plan. 1.7 "SCHEDULE" shall mean the schedule for completion of the Services and delivery of the Deliverables contained in a Work Plan. 1.8 "SERVICES" shall mean the design and development of a Work Product, delivery of the applicable Deliverables, performance of the services described in and pursuant to a Work Plan and related Work Plan management services. 1.9 "SOURCE CODE" shall mean the source code for MICROSOFT'S Windows CE and Windows NT operating systems, Visual Tools, and for the Windows CE Tools and any other source code that may be identified in a Work Plan, as provided by MICROSOFT to BSQUARE for the limited purpose of providing the Services pursuant to this Agreement. 1.10 "STANDARD RATE SCHEDULE" shall mean that document attached to and made a part of this Agreement as Exhibit A, setting forth the hourly rates at which MICROSOFT shall pay BSQUARE for Services under this Agreement. 1.11 "TEST HARDWARE" shall mean all of the hardware provided to BSQUARE by MICROSOFT for the limited purpose of testing and developing the Work Product pursuant to this Agreement. 1.12 "WINDOWS CE" shall mean the MICROSOFT operating system for general embedded devices and specific targeted platforms and form factors, including all bug fixes, error corrections, modifications, enhancements, updates, upgrades, new versions and successor products thereto. 1.13 "WINDOWS CE TOOLS" shall mean MICROSOFT'S platform development kit for Windows CE currently known as Windows CE Platform Builder, as well as the Windows CE Toolkits for Visual Basic, Visual C++ and Visual J++, including the corresponding runtimes (e.g., MFC, ATL, ADOCE, Java VM, ActiveX Control Pack, etc.), and including all bug fixes, error corrections, modifications, enhancements, updates, upgrades, new versions and successor products thereto. 1.14 "WORK PLAN(S)" shall mean the specifications for Services and related information, attached to and made a part of this Agreement from time to time as sequential Exhibits B (e.g., B-1, B-2, B-3 ....). The Work Plans shall be in the form attached hereto, and shall be signed by both parties. The Work Plans may be amended from time to time by mutual agreement of duly authorized personnel of the parties. 1.15 "WORK PRODUCT" shall mean the results of the performance of the work tasks described in each Work Plan, including without limitation all Deliverables. 2 3 2. DEVELOPMENT 2.1 Services. BSQUARE shall perform the Services in accordance with and pursuant to the applicable Work Plan. The parties agree to discuss in good faith issues that may arise in performance of the work tasks associated with each Work Plan, including any issues regarding compliance with the Schedule set forth in the Work Plan, although the Work Plan may be amended only by mutual agreement of the parties. 2.2 Status Reports. For each individual project set forth in a Work Plan, BSQUARE shall provide to MICROSOFT, at MICROSOFT's expense, a current and accurate monthly status report, in a form reasonably acceptable to MICROSOFT, detailing the status of each project, including current budget tracking and assessment of ability to meet project milestones. BSQUARE shall also provide such additional status reports regarding work in progress as the MICROSOFT project manager may reasonably request from time to time, at MICROSOFT's expense. 2.3 Personnel/Rate Schedule Adjustments. 2.3.1 BSQUARE shall have on its staff, at the levels and at the rates specified in Exhibit A, trained and experienced personnel that primarily are dedicated to and available for the MICROSOFT projects set forth in the Work Plans. BSQUARE shall use commercially reasonable efforts to ensure that (i) BSQUARE personnel providing Services under this Agreement are available for assignment by BSQUARE to work on additional Work Plans which are similar to those for which they have provided Services previously, and (ii) BSQUARE personnel providing Services under this Agreement are not unnecessarily and inefficiently moved between Work Plans in progress. BSQUARE shall consult with MICROSOFT when establishing and changing the project teams assigned to each Work Plan. The parties will meet from time to time to discuss upcoming Work Plans and the anticipated personnel needs for such projects. 2.3.2 During the term of this Agreement, the parties agree to meet on an annual basis to establish the Standard Rate Schedule for the upcoming year, provided that no changes shall be made to the initial Standard Rate Schedule prior to October 1, 1999. Subsequent Standard Rate Schedule adjustments shall be effective as of October 1st of the relevant year (e.g., by Oct. 1, 1999 for the one year period commencing Oct. 1, 1999 and ending Sept. 30, 1999). In the event that the parties are unable to agree on a Standard Rate Schedule adjustment by Oct. 1st of the relevant year, then either party may terminate this Agreement on ninety (90) days prior written notice, with the existing Standard Rate Schedule remaining in effect through the date of termination. Any mutually agreed upon Standard Rate Schedule, if agreed upon after October 1st of the relevant year, shall be retroactive to October 1st of such year. 2.4 Evaluation of Services. 2.4.1 BSQUARE understands and agrees that it is obligated under this Agreement to provide MICROSOFT with high quality Work Product and Services at all times during the term of this Agreement. In addition, and as further detailed in Section 2.4.3 below, BSQUARE shall be responsible for initiating prompt and detailed communications with the appropriate MICROSOFT project leaders regarding any Errors discovered during the course of development of software code Deliverables. In the event that any such Errors are caused by a failure of BSQUARE to provide a high quality Work Product, then Microsoft shall be entitled (in addition to any other remedies it may have under this Agreement, at law or in equity) to an appropriate credit for Service time associated with such Error. 2.4.2 For documentation or report Deliverables, MICROSOFT shall evaluate each version of such Deliverable. In the event that it requires corrections, MICROSOFT shall specify the corrections needed and BSQUARE shall deliver an amended version of such documentation within five (5) working days. 3 4 2.4.3 BSQUARE shall use all reasonable commercial efforts to complete and deliver the Deliverables set forth in a Work Plan to MICROSOFT, according to the applicable Schedule. Additional information, reports, documentation and the like regarding the Services shall be provided by BSQUARE to MICROSOFT upon the reasonable request of MICROSOFT. BSQUARE shall promptly raise with MICROSOFT any issues that arise (or which BSQUARE reasonably foresees arising) regarding the quality or performance of the Deliverables set forth in the Work Plan, as well as any deviation from the applicable Schedule for such Deliverables. The parties shall use all reasonable efforts to promptly address any such issues that may arise, including the establishment of an appropriate recovery plan to the extent required. 2.5 Design Review and Plan Changes. BSQUARE understands that there may be additions, deletions or other changes which may affect a Work Plan at any time during the performance of such Work Plan. Upon notice of any such changes by MICROSOFT, BSQUARE and MICROSOFT shall work together to make any necessary changes to the Services, including, if necessary, the compensation owed to BSQUARE, and BSQUARE shall alter the Work Plan in order to accommodate any such changes as mutually agreed to by BSQUARE and MICROSOFT. 2.6 Services Performed on MICROSOFT Property. In the event it is necessary for BSQUARE to perform the Services, or portion thereof, at MICROSOFT'S Redmond, Washington, campus, BSQUARE shall abide by all MICROSOFT rules, regulations, and security measures, including any restrictions on access to Confidential Information. 2.7 Cancellation of Work Plans. Microsoft shall have the right to cancel any Work Plan for any reason. In the event that Microsoft cancels a work Plan without cause prior to completion of Services under that Work Plan, Microsoft shall retain any and all Work Product existing in whatever form at the time of the cancellation of the applicable Work Plan (including any applicable documentation) with rights as set forth in Section 4, and pay BSQUARE for all outstanding invoices applicable to the retained Work Product, with no additional fee to be paid to BSQUARE thereafter. 2.8 Preferred Vendor. BSQUARE shall be a preferred Microsoft vendor for Microsoft Visual Tools for Windows CE projects. 2.9 Non-Competition. During the term of this Agreement, neither BSQUARE nor any entity that owns or controls, is owned or controlled by, or is under common ownership and control with BSQUARE ("BSQUARE Affiliate") shall, without Microsoft's prior written consent, design or develop or participate in the design or development of products (or provide services in connection with products) which compete with Windows CE, the Windows CE Tools products, the Microsoft Windows card operating system (including all bug fixes, error corrections, modifications, enhancements, updates, new versions and successor products thereto), and/or the Microsoft Windows card tools (including all bug fixes, error corrections, modifications, enhancements, updates, upgrades, new versions and successor products thereto) (i) in existence as of the Effective Date of this Agreement or (ii) which BSQUARE knows or has reason to know Microsoft intends to develop, is developing, or has developed (itself or in conjunction with third parties), or intends to acquire. 2.9.1 If BSQUARE requests MS' consent pursuant to the foregoing, such request shall be in writing. Microsoft will make reasonable efforts to review the request in Microsoft's discretion and advise BSQUARE of its decision within 5 business days following Microsoft's receipt of such request. Microsoft's failure to provide a written response within 10 business days of Microsoft's receipt of such request from BSQUARE shall be deemed consent. 2.9.2 For the purposes of this Section 2.9, a product will be deemed to "compete" with Windows CE or the Windows CE Tools products if, on a product by product basis, such product could be deemed a replacement or alternative for Windows CE or the relevant Windows CE Tools product, respectively. Likewise, a product will be deemed to "compete" with the Microsfot Windows card operating system and/or the Microsoft Windows card tools if, on a product by 4 5 product basis, such product could be deemed a replacement or alternative for the Windows card operating system or the relevant Windows card tools product, respectively. Thus, for example, applications for Windows CE, such as BFax and Buseful, do not compete with Windows CE and/or the Windows CE Tools. 2.9.3 The restriction in this Section 2.9 shall not apply to (a) any BSQUARE products currently on the market as of the Effective Date of this Agreement; (b) the BSQUARE product under development as of the Effective Date that is internally referred to by BSQUARE as "CE Validator"; or (c) a tool product for any other operating system in the Microsoft Windows family of operating systems, provided that such tool product does not compete, on a product by product basis, with a Microsoft tool product for such other Microsoft operating system. 2.9.4 Nothing in this Section 2.9 shall be construed to authorize BSQUARE or any BSQUARE Affiliate to make use of Microsoft's intellectual property rights. 3. PAYMENT FOR SERVICES 3.1 Payment. MICROSOFT agrees to pay BSQUARE for work performed in accordance with the Work Plan, based upon the Standard Rate Schedule (which schedule may be modified on an annual basis pursuant to Section 2.3 above), and for any Approved Expenses identified in the Work Plan, provided that BSQUARE shall not exceed the maximum payable amount specified in any Work Plan without obtaining MICROSOFT's prior written approval. 3.2 Invoices. BSQUARE shall invoice MICROSOFT by the seventh day of each month (or the following Monday if the seventh day falls on a weekend) for the amounts due for work performed under any Work Plan in the prior month. Billing will be recorded in hourly increments by project, and MICROSOFT Internal Reference Number, sufficient for MICROSOFT to determine the number of hours each engineer worked on any given MICROSOFT project on each day. In the event that MICROSOFT provides a form to detail BSQUARE billings, BSQUARE agrees to utilize such forms as MICROSOFT may supply. MICROSOFT shall pay each undisputed invoice within thirty (30) days of receiving each invoice. Invoices shall include reasonable supporting materials (not including any source code-type information, which is to be delivered as part of the Deliverables set forth in the Work Plan) documenting the Services performed by BSQUARE. 3.3 One-time Declining Revenue Adjustment. In the event the average monthly invoice billed to MICROSOFT for any consecutive three (3) month period during the term of this Agreement falls below the total invoice amount for the one month immediately preceding such three (3) month period (the "Baseline Month"), MICROSOFT agrees to pay to BSQUARE an amount equal to three times the difference between seventy-five percent (75%) of the invoice for the Baseline Month and the average monthly invoice for the three consecutive months; provided that such an adjustment shall only be made once, for the first such consecutive three month period during the term. Thus, for example, if in January the monthly invoice is $100,000, and the average monthly invoice for February through April of the same year is $70,000, then MICROSOFT would pay BSQUARE $15,000 ([75,000-70,000] X 3). Notwithstanding the foregoing, MICROSOFT shall not be required to pay such an adjustment where MICROSOFT has provided BSQUARE with at least ninety days prior written notice that BSQUARE may experience a decline in revenue as described in this Section 3.3. 4. RIGHTS 4.1 Work Made For Hire. The Work Product has been specially ordered and commissioned by MICROSOFT. BSQUARE agrees that the Work Product is a "work made for hire" for copyright purposes, with all copyrights in the Work Product owned by MICROSOFT. 4.2 Assignment. To the extent that the Work Product does not qualify as a work made for hire under applicable law, and to the extent that the Work Product includes material subject to copyright, patent, trade 5 6 secret, or other proprietary right protection, BSQUARE hereby assigns to MICROSOFT, its successors and assigns, all right, title and interest in and to the Work Product, including, but not limited to the following: 4.2.1 Any copyrights that BSQUARE may possess or acquire in the Work Product and all copyrights and equivalent rights in the Work Product throughout the world, including all renewals and extensions of such rights that may be secured under the laws now or hereafter in force and effect in the United States of America or in any other country or countries; 4.2.2 All rights in and to any inventions, ideas, designs, concepts, techniques, discoveries, or improvements, whether or not patentable, embodied in the Work Product or developed in the course of BSQUARE's creation of the Work Product, including but not limited to all trade secrets, utility and design patent rights and equivalent rights in and to such inventions and designs throughout the world regardless of whether or not legal protection for the Work Product is sought; 4.2.3 The right to prepare Derivative Technology with exclusive rights to authorize others to do the same; 4.2.4 Copies of any documents, magnetically or optically encoded media, or other materials created by BSQUARE under this Agreement; and 4.2.5 The right to sue for infringements of the Work Product which may occur before the date of this Agreement, and to collect and retain damages from any such infringements. 4.3 Assistance. At MICROSOFT's expense, BSQUARE shall execute and deliver such instruments and take such other action as may be requested by MICROSOFT to perfect or protect MICROSOFT's rights in the Work Product and to carry out the assignments set forth in this Section 4. 4.4 Assignment/Waiver of Moral Rights. BSQUARE hereby irrevocably transfers and assigns to MICROSOFT any and all "moral rights" that BSQUARE may have in the Work Product and any Derivative Technology thereof. BSQUARE also hereby forever waives and agrees never to assert any and all "moral rights" it may have in the Work Product and Derivative Technology, even after termination of the Services. 4.5 Source Code License Grant. MICROSOFT hereby grants to BSQUARE a personal, non-exclusive, non-transferable, non-assignable license during the term of this Agreement to use and modify the Source Code for the sole purpose of providing the Services pursuant to this Agreement. BSQUARE shall only exercise the foregoing license rights on BSQUARE's premises, MICROSOFT's premises or other locations expressly designated by MICROSOFT in the applicable Work Plan, provided that such Source Code shall at all times reside only on the Microsoft network or shall reside locally on the individual machines or workstations of the BSQUARE personnel working with the Source Code (e.g., versus on servers in BSQUARE's local area network). The Source Code provided hereunder shall be considered Confidential Information and, therefore, shall be subject to the terms and conditions of Section 6 of this Agreement. BSQUARE may disclose the Source Code only to BSQUARE's employees and independent contractors that MICROSOFT has approved in writing in advance, and only on a need-to-know basis. BSQUARE shall execute appropriate written agreements with its employees and independent contractors sufficient to enable it to comply with all the provisions of this Agreement, including non-disclosure and assignment of rights. 4.6 Test Hardware License Grant. MICROSOFT hereby grants to BSQUARE a personal, non-exclusive, non-transferable, non-assignable license during the term of this Agreement to use the Test Hardware for the sole purpose of providing the Services pursuant to this Agreement. BSQUARE shall not use the Test Hardware for any purpose other than for the testing and development of the Work Product pursuant to the terms of this Agreement. The Test Hardware provided hereunder shall be considered Confidential Information and, therefore, shall be subject to the terms and conditions of Section 6 of this Agreement. BSQUARE may disclose the Test Hardware only to BSQUARE's employees and independent contractors that MICROSOFT has approved in writing in advance, and only on a need-to-know basis. 6 7 BSQUARE may not disclose, distribute, or disseminate the Test Hardware to third parties without the written permission of MICROSOFT in each instance. 4.7 Return of Materials. Upon the termination of this Agreement as provided in Section 9, BSQUARE shall return all copies of the Source Code, Test Hardware and Microsoft Confidential Information, to the extent provided only for performance of the Services under this Agreement (versus being provided by MICROSOFT for use under more than one agreement between MICROSOFT and BSQUARE), in BSQUARE's possession or under its control within ten (10) days following the termination date. BSQUARE shall take all necessary steps to ensure that electronic copies of such Source Code, Test Hardware and Confidential Information are not retained by BSQUARE, its employees, or any authorized independent contractors. BSQUARE shall provide a declaration signed by an officer of BSQUARE attesting that all copies of the Source Code, Test Hardware, Confidential Information and related materials have been returned to MICROSOFT and/or destroyed. 4.8 No Other Rights. BSQUARE agrees that this Agreement does not grant to it any rights other than what is granted in this Section 4 and for the limited purposes set forth therein. Under no circumstances will the license grants set forth in this Section 4 be construed as granting, by implication, estoppel or otherwise, a license to any MICROSOFT technology other than the Source Code and Test Hardware, solely for the purposes designated herein. All rights not expressly granted herein are expressly reserved by MICROSOFT. 5. NO OBLIGATION/INDEPENDENT DEVELOPMENT Notwithstanding any other provision of this Agreement, MICROSOFT shall have no obligation to market, sell or otherwise distribute the Work Product, either alone or in any MICROSOFT product. Except as provided in Sections 2.8 and 6, nothing in this Agreement will be construed as restricting MICROSOFT'S ability to acquire, license, develop, manufacture or distribute for itself, or have others acquire, license, develop, manufacture or distribute for MICROSOFT, similar technology performing the same or similar functions as the technology contemplated by this Agreement, or to market and distribute such similar technology in addition to, or in lieu of, the technology contemplated by this Agreement. 6. CONFIDENTIALITY 6.1 Each party shall protect the other's Confidential Information from unauthorized dissemination and use with the same degree of care that such party uses to protect its own like information. Neither party will use the other's Confidential Information for purposes other than those necessary to directly further the purposes of this Agreement. Neither party will disclose to third parties the other's Confidential Information without the prior written consent of the other party. Except as expressly provided in this Agreement, no ownership or license rights are granted in any Confidential Information. 6.2 Each party acknowledges that monetary damages may not be a sufficient remedy for unauthorized disclosure of Confidential Information and that, in the event of such unauthorized disclosure, the non-breaching party shall be entitled, without waiving any other rights or remedies, to such injunctive or equitable relief as may be deemed proper by a court of competent jurisdiction. 6.3 The parties' obligations of confidentiality under this Agreement shall not be construed to limit either party's right to independently develop or acquire products without use of the other party's Confidential Information. 7 8 7. WARRANTIES 7.1 BSQUARE. BSQUARE warrants and represents that: 7.1.1 It has the full power to enter into this Agreement and make the assignments and grant the license rights set forth herein; 7.1.2 It has not previously and will not grant any rights in the Work Product (including without limitation all Deliverables) to any third party that are inconsistent with the rights granted to MICROSOFT herein; 7.1.3 The Work Product (including without limitation all Deliverables) is original to BSQUARE and does not infringe any copyright, patent trade secret, or other proprietary right held by any third party provided, however, that this warranty does not apply with regard to any patent infringement necessitated by compliance with any Work Plan hereunder unless BSQUARE had knowledge of such infringement; 7.1.4 The Work Product (including without limitation all Deliverables) will be created by employees of BSQUARE within the scope of their employment and under obligation to assign inventions to BSQUARE, or by independent contractors under written obligations to assign all rights in the Work Product to BSQUARE; and 7.1.5 The Services shall be performed in a professional manner and shall be of a high grade, nature, and quality. 7.2 MICROSOFT. MICROSOFT warrants and represents that it has the full power to enter into this Agreement and make the assignments and grant the license rights set forth herein. 8. INDEMNITY 8.1 Indemnity. 8.1.1 Except as covered in Section 8.1.4, BSQUARE shall, at its expense, defend, indemnify and hold harmless MICROSOFT and MICROSOFT'S subsidiaries, affiliates, directors, officers, employees, agents and independent contractors from any and all costs, damages, liabilities and fees reasonably incurred by MICROSOFT, including but not limited to fees of attorneys and other professionals, with respect to any claim or action arising out of or in any way related to a breach by BSQUARE of this Agreement, including without limitation of the warranties and representations set forth in Section 7 above; provided that: (i) MICROSOFT provides BSQUARE reasonably prompt notice in writing of any such claim or action and permits BSQUARE, through counsel mutually acceptable to MICROSOFT and BSQUARE, to answer and defend such claim or action; (ii) MICROSOFT provides BSQUARE information, assistance and authority, at BSQUARE's expense and reasonable request, to help BSQUARE defend such claim or action; and (iii) BSQUARE will not be responsible for any settlement made by MICROSOFT without BSQUARE's written permission, which permission will not be unreasonably withheld. 8.1.2 MICROSOFT shall have the right to employ separate counsel and participate in the defense of any claim or action. BSQUARE shall reimburse MICROSOFT upon demand for any payments made or losses suffered by it at any time after the date hereof, based upon the judgment of any court of competent jurisdiction or pursuant to a bona fide compromise or settlement of claims, demands, or actions, in respect to any damages related to any claim or action under this Section 8. 8 9 8.1.3 BSQUARE may not settle any claim or action under this Section 8 on MICROSOFT'S behalf without first obtaining MICROSOFT'S written permission, which permission will not be unreasonably withheld. In the event MICROSOFT and BSQUARE agree to settle a claim or action, BSQUARE agrees not to publicize the settlement without first obtaining MICROSOFT'S written permission, which permission will not be unreasonably withheld. 8.1.4 MICROSOFT shall, at its expense, defend BSQUARE, BSQUARE subsidiaries, affiliates, directors, officers and employees and pay the amount of any final judgment, or settlement approved by MICROSOFT, in connection with any claim or action brought against any of the indemnified parties to the extent it is based upon a claim that BSQUARE's use of the Source Code as authorized under this Agreement infringes or violates any third party copyright, patent, trade secret or other third party proprietary right; provided that: (i) BSQUARE provides MICROSOFT reasonably prompt notice in writing of any such claim or action and permits MICROSOFT through counsel of its choosing to answer and defend such claim or action and (ii) BSQUARE provides MICROSOFT with information, assistance and authority, at MICROSOFT's expense with respect to actual and out of pocket expenses and otherwise at BSQUARE's expense, to help MICROSOFT to defend such claim or action. In consideration of MICROSOFT's indemnity pursuant to this Section, BSQUARE agrees that it shall not settle any claim or action subject to this subsection without first obtaining MICROSOFT's consent, which consent may be withheld in the sole discretion of MICROSOFT. 8.2 Duty to Correct. Notwithstanding Section 8.1, should the Work Product or any portion thereof be held to constitute an infringement covered by Section 8.1.1 and use of the Work Product or any portion thereof as contemplated by this Agreement be enjoined or be threatened to be enjoined, BSQUARE shall notify MICROSOFT and immediately, at BSQUARE's expense: (i) procure for MICROSOFT the right to continue use, sale, and marketing of the Work Product, or portion thereof, as applicable; or (ii) replace or modify the Work Product, or portion thereof, with a version that is non-infringing, provided that the replacement or modified version meets the specifications in the applicable Work Plan to MICROSOFT'S satisfaction. If (i) or (ii) are not available to BSQUARE, in addition to any damages or expenses reimbursed under Section 8.1, BSQUARE shall refund to MICROSOFT all amounts paid to BSQUARE by MICROSOFT under such applicable Work Plan. 9. TERM AND TERMINATION 9.1 Term. The term of this Agreement shall run from the Effective Date through July 1, 2000 and may be renewed for an additional year (through July 1, 2001) by mutual agreement of the parties. 9.2 Termination By Either Party For Cause. Either party may suspend performance and/or terminate this Agreement immediately upon written notice at any time if: 9.2.1 The other is in material breach of any material warranty, term, condition or covenant of this Agreement, other than those contained in Section 6, and fails to cure that breach within thirty (30) days after written notice thereof; or 9.2.2 The other party is in material breach of Section 6. 9.3 Effect of Termination. In the event of termination or expiration of this Agreement for any reason, Sections 3 (with respect to payment for Services completed prior to expiration or termination), 4.1 - 4.4, 4.7 - 4.8, 5, 6, 7, 8, 9.3, 10 and 11.4 shall survive termination or expiration. Neither party shall be liable nor owe any compensation to the other solely by reason of exercising the right to terminate granted by this provision. Microsoft shall retain any and all Work Product (including without limitation all Deliverables) existing in whatever form at the termination or expiration of this Agreement (including any applicable documentation) with rights as set forth in Section 4. 9 10 10. LIMITATION OF LIABILITIES WITH THE EXCEPTION OF ANY BREACH OF SECTIONS 4.5, 6 AND 8, NEITHER PARTY SHALL BE LIABLE FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, PUNITIVE OR SPECIAL DAMAGES, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. EXCEPT AS SET FORTH IN SECTION 7, BSQUARE SPECIFICALLY DISCLAIMS ANY AND ALL WARRANTIES WITH REGARD TO THE WORK PRODUCT PROVIDED HEREUNDER, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTY OF FITNESS, FUNCTIONALITY OR MERCHANTABLITY, WHETHER EXPRESS OR IMPLIED. 11. GENERAL 11.1 Notices. All notices and requests in connection with this Agreement shall be deemed given as of the day they are received either by messenger, delivery service, or in the United States of America mails, postage prepaid, certified or registered, return receipt requested, and addressed as follows: To BSQUARE: To MICROSOFT: BSQUARE Corporation Microsoft Corporation 3633 136th Place SE, Suite 100 One Microsoft Way Bellevue, WA 98006 Redmond, WA 98052-6399 Attention: William Baxter Attention: Gen. Mgr., Consumer Phone: 425-519-5963 Appliance Div. Fax: 425-519-5998 Phone: 425-882-8040 Fax: 425-936-7329 Copy to: Vice President of Copy to: Law & Corporate Affairs Legal Affairs Fax: 425-936-7409 Phone: 425-519-5910 or to such other addresses as a party may designate pursuant to this notice provision. 11.2 Independent Contractors. BSQUARE is an independent contractor for MICROSOFT, and nothing in this Agreement shall be construed as creating an employer-employee relationship, a partnership, or a joint venture between the parties. 11.3 Taxes. In the event taxes are required to be withheld on payments made under this Agreement by any U.S. (state or federal) of foreign government, MICROSOFT may deduct such taxes from the amount owed BSQUARE and pay them to the appropriate taxing authority. Microsoft shall in turn promptly secure and deliver to BSQUARE an official receipt for any taxes withheld. MICROSOFT will use reasonable efforts to minimize such taxes to the extent permissible under applicable law. 11.4 Governing Law. This Agreement shall be governed by the laws of the State of Washington as though entered into between Washington residents and to be performed entirely within the State of Washington, and BSQUARE consents to jurisdiction and venue in the state and federal courts sitting in the State of Washington. In any action or suit to enforce any right or remedy under this Agreement or to interpret any provision of this Agreement, the prevailing party shall be entitled to recover its costs, including reasonable attorneys' fees. 11.5 Assignment. This Agreement shall be binding upon and inure to the benefit of each party's respective successors and lawful assigns; provided, however, that BSQUARE may not assign this Agreement, in whole or in part, without the prior written approval of MICROSOFT. 10 11 11.6 Construction. Except to Sections 3.1, 6, 9 and 10 herein above, should a court of competent jurisdiction find any provision of this Agreement, or portion hereof, to be unenforceable, that provision of the Agreement will be enforced to the maximum extent permissible so as to effect the intent of the parties, and the remainder of this Agreement will continue in full force and effect. Should Sections 3, 6, 9 or 10 herein, or any portion thereof, be held unenforceable, then in that event either party shall have a right to immediately terminate this Agreement by written notice to the other party. Failure by either party to enforce any provision of this Agreement will not be deemed a waiver of future enforcement of that or any other provision. This Agreement has been negotiated by the parties and their respective counsel and will be interpreted fairly in accordance with its terms and without any strict construction in favor or against either party. 11.7 Force Majeure. This Agreement and the parties' performances hereunder are subject to all contingencies beyond the reasonable control of the parties (whether or not now in the contemplation of either of the parties), including, but not limited to, force majeure; strikes; labor disputes; floods; civil commotion; war; riot; acts of God; rules, laws, orders, restrictions, embargoes, quotas or actions of any government, foreign or domestic, or any agency or subdivision thereof; casualties; fires; earthquakes; accidents; shortages of transportation facilities; detention of goods and merchandise by customs authorities; loss of goods and merchandise in public or private warehouses; or other casualty or contingency beyond the reasonable control of the parties or otherwise unavoidable. 11.8 Entire Agreement. This Agreement does not constitute an offer by MICROSOFT and it shall not be effective until signed by both parties. Subject to Section 1.14, this Agreement constitutes the entire agreement between the parties with respect to the Services and all other subject matter hereof and merges all prior and contemporaneous communications, and supersedes all prior agreements between the parties regarding the subject matter of this Agreement, including, without limitation, the Development & License Agreement effective June 12, 1997, as amended by Amendment No. 1 effective December 17, 1997, and as amended by Amendment No. 2 effective March 15, 1998. This Agreement shall not be modified except by a written agreement dated subsequent to the date of this Agreement and signed on behalf of BSQUARE and MICROSOFT by their respective duly authorized representatives. 11.9 Joint Press Release. Upon execution of this Agreement by both parties, the parties agree to work together to prepare and issue a mutually acceptable joint press release to announce their relationship under this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth above. All signed copies of this Agreement shall be deemed originals. This Agreement shall be effective upon execution on behalf of BSQUARE and MICROSOFT by their duly authorized representatives. MICROSOFT CORPORATION BSQUARE CORPORATION /s/ HAREL KODESH /s/ WILLIAM T. BAXTER ---------------------------- ---------------------------- By By Harel Kodesh William T. Baxter ---------------------------- ---------------------------- Name (Print) Name (Print) VP President/CEO ---------------------------- ---------------------------- Title Title 2/1/99 January 28, 1999 ---------------------------- ---------------------------- Date Date 11 12 EXHIBIT A STANDARD RATE SCHEDULE BSQUARE will charge MICROSOFT at the applicable rate specified below for each hour of services rendered under a Work Plan (unless otherwise expressly provided in the applicable Work Plan) by the associated Job Title Category on a project by project basis using MICROSOFT Internal Reference Numbers. TOTAL STAFFING LEVELS
- -------------------------------------------------------------------------------- JOB TITLES (DUTIES) CATEGORY HOURLY RATE - -------------------------------------------------------------------------------- SDE Level 1 SDE1 * (Architect - compiler or kernel/OS) - -------------------------------------------------------------------------------- SDE Level 2 SDE2 * (System Engineer - compiler, debugger and OS) - -------------------------------------------------------------------------------- SDE Level 3 SDE3 * (Application Engineer - visual tools, IDE, MFC, etc.) - -------------------------------------------------------------------------------- STE Level 1 STE1 * (Test lead) - -------------------------------------------------------------------------------- STE Level 2 STE2 * (System Test Engineer) - -------------------------------------------------------------------------------- STE Level 3 STE3 * (Application Test Engineer) - -------------------------------------------------------------------------------- Group Manager PM1 * (Top Level Project Mgr) - -------------------------------------------------------------------------------- Project Manager PM2 * (Multi-project PM for Compiler) - -------------------------------------------------------------------------------- User Education Level 1 UE1 * (Editor) - -------------------------------------------------------------------------------- User Education Level 2 (Writer) UE2 * - --------------------------------------------------------------------------------
- ----------- * Confidential treatment requested 13 EXHIBIT B WORK PLANS This Exhibit is made pursuant to that certain Master Services Agreement and Intellectual Property Assignment (the "Agreement"), dated October 1, 1998 by and between BSQUARE CORPORATION ("BSQUARE") and MICROSOFT CORPORATION ("MICROSOFT"). A. Project: B. Project Description: C. Maximum payable amount for Project: D. Additional IP Accessed: E. MICROSOFT internal reference number: F. Expected staffing level requirements:
Job Category Quantity Rate Start End Days Hours Total Payment - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Total $____________
G. Special Terms: These Special Terms are intended by the parties to amend, modify and supersede to the extent of any inconsistencies, the provisions of the main Agreement solely with regard to this Work Plan (including the Services performed and the Work Product developed with respect to this Work Plan). [insert special terms if any] This Exhibit shall be attached to and incorporated into the Agreement, and, except as provided above, is subject to all the terms and conditions of the Agreement. MICROSOFT CORPORATION BSQUARE CORPORATION - ------------------------------ ------------------------------ By (Sign) By (Sign) - ------------------------------ ------------------------------ Name (Print) Name (Print) - ------------------------------ ------------------------------ Title Title - ------------------------------ ------------------------------ Date Date 13 EX-10.14 18 STOCK PURCHASE & SHAREHOLDER AGREEMENT 1 EXHIBIT 10.14 BSQUARE CORPORATION STOCK PURCHASE AND SHAREHOLDERS AGREEMENT As of January 30, 1998 2 BSQUARE CORPORATION Stock Purchase and Shareholders Agreement As of January 30, 1998
Page ---- SECTION 1. PURCHASE AND SALE OF SHARES; REDEMPTION ......................... 1 1.1 Description of Securities ....................................... 1 1.2 Sale and Purchase; Redemption ................................... 2 1.3 Closing ......................................................... 2 SECTION 2. REPRESENTATIONS AND WARRANTIES .................................. 2 2.1 Organization and Corporate Power ................................ 2 2.2 Authorization and Non-Contravention. ............................ 3 2.3 Capitalization .................................................. 4 2.4 Subsidiaries; Investments ....................................... 5 2.5 Financial Statements and Matters ................................ 5 2.6 Absence of Undisclosed Liabilities .............................. 6 2.7 Absence of Certain Developments ................................. 6 2.8 Ordinary Course ................................................. 6 2.9 Accounts Receivable ............................................. 6 2.10 Title to Properties ............................................. 7 2.11 Tax Matters ..................................................... 7 2.12 Certain Contracts and Arrangements .............................. 8 2.13 Intellectual Property Rights; Employee Restrictions ............. 9 2.14 Litigation ......................................................10 2.15 Employee Benefit Plans ..........................................10 2.16 Labor Laws ......................................................11 2.17 Employees and Suppliers .........................................11 2.18 Hazardous Waste, Etc ............................................11 2.19 Business; Compliance with Laws ..................................12 2.20 Investment Banking; Brokerage ...................................12 2.21 Insurance .......................................................12 2.22 Transactions with Affiliates ....................................12 2.23 Customers .......................................................12 2.24 Relationship with Microsoft .....................................13 2.25 Certain Events ..................................................13 2.26 Disclosure ......................................................13 SECTION 2A. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS .................14 SECTION 3. CONDITIONS OF PURCHASE ..........................................15 3.1 Satisfaction of Conditions ......................................15
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Page ---- 3.2 Director Election................................................15 3.3 Compensation and Audit Committees................................15 3.4 Opinion of Counsel...............................................15 3.5 Consent of Spouse................................................15 3.6 Authorization....................................................15 3.7 All Proceedings Satisfactory.....................................16 3.8 Investors' Fees..................................................16 3.9 No Violation or Injunction.......................................16 3.10 Consents and Waivers.............................................16 3.11 Compensation of Shareholders.....................................16 3.12 Payment of Broker Fee............................................16 3.13 Termination of Existing Redemption Agreement.....................16 3.14 Key Person Insurance.............................................17 3.15 Director Indemnification Agreements..............................17 3.16 Certificate of Designation.......................................17 SECTION 4. COVENANTS........................................................17 4.1 Financial Statements and Budgetary Information; Inspection.......17 4.2 Indemnification; Insurance.......................................17 4.3 Board of Directors...............................................18 4.4 Composition of Board Committees..................................18 4.5 Restrictive Covenants............................................18 4.6 Redemption.......................................................19 4.7 Cancellation of Shareholder Notes................................19 4.8 Reissuance of Stock Certificates.................................19 4.9 Key Person Insurance.............................................20 4.10 Compensation of Shareholders.....................................20 4.11 Stock Awards.....................................................20 4.12 Assignment of Rights.............................................20 4.13 Compliance with Laws.............................................20 4.14 Use of Proceeds..................................................20 4.15 Audited Financial Statements.....................................20 SECTION 5. TRANSFER RESTRICTIONS............................................21 5.1 General Restriction..............................................21 5.2 Right of First Refusal...........................................21 5.3 Right of Co-Sale.................................................23 5.4 Assignment of Rights.............................................24 5.5 Sales to Strategic Purchasers....................................25 SECTION 6. RIGHTS TO PURCHASE...............................................25 6.1 Right to Participate in Certain Sales of Additional Securities.. 25 6.2 Assignment of Rights............................................ 26
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Page ---- SECTION 7. REGISTRATION RIGHTS..............................................26 7.1 Optional Registrations...........................................26 7.2 Required Registrations...........................................27 7.3 Registrable Securities...........................................29 7.4 Further Obligations of the Company...............................29 7.5 Indemnification; Contribution....................................31 7.6 Rule 144 and Rule 144A Requirements..............................33 7.7 Assignment of Rights.............................................33 7.8 "Market Stand-off" Agreement.....................................33 SECTION 8. ELECTION OF DIRECTORS............................................34 8.1 Election of Directors............................................34 8.2 Committees.......................................................34 8.3 Vacancies and Removal............................................34 SECTION 9. GENERAL..........................................................35 9.1 Amendments, Waivers and Consents.................................35 9.2 Indemnification from the Company.................................35 9.3 Survival of Representations, Warranties and Covenants; Assignability of Rights..........................................37 9.4 Legend on Securities.............................................37 9.5 Governing Law....................................................38 9.6 Section Headings and Gender......................................38 9.7 Counterparts.....................................................39 9.8 Notices and Demands..............................................39 9.9 Dispute Resolution...............................................39 9.10 Remedies; Severability...........................................40 9.11 Integration......................................................40
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Page ---- EXHIBITS A. Schedule of Investors B. Preferred Stock Terms C. Schedule of Common Stock Redemptions D. Form of Redemption Agreement E. Disclosure Schedule F. Form of Opinion of Counsel G. Form of Consent of Spouse H. Form of Director Indemnification Agreement
(v) 7 STOCK PURCHASE AND SHAREHOLDERS AGREEMENT STOCK PURCHASE AND SHAREHOLDERS AGREEMENT made as of this 30th day of January, 1998, by and among BSQUARE Corporation, a Washington corporation (together with any predecessors or successors thereto, the "Company"), William T. Baxter, Albert T. Dosser, Peter R. Gregory, and Joseph Notarangelo (collectively the "Shareholders" and individually a "Shareholder"), and the investors named in Exhibit A hereto (together with their successors and assigns, collectively the "Investors," and each individually an "Investor"). WHEREAS, all of the outstanding shares of the Company's capital stock prior to the date hereof are owned by the Shareholders; and WHEREAS, the Company has authorized the issuance and sale to the Investors of a total of 8,333,333 shares of Series A Convertible Preferred Stock, no par value, having the rights and preferences set forth in Exhibit B hereto ("Convertible Preferred Stock"), for an aggregate purchase price of $14,999,999.40; WHEREAS, the Company has agreed to redeem and William T. Baxter, Albert T. Dosser, and Peter R. Gregory (the "Redeeming Shareholders") have agreed to sell to the Company an aggregate of 3,333,333 shares of the Company's Common Stock, no par value ("Common Stock"), for an aggregate purchase price of $5,999,999.40; and WHEREAS, the parties hereto desire to set forth the terms of their ongoing relationship in connection with the Company. NOW THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows: SECTION 1. PURCHASE AND SALE OF SHARES, REDEMPTION 1.1 Description of Securities. The Company's authorized capital stock consists of 50,000,000 shares of Common Stock and 10,000,000 shares of preferred stock, no par value ("Preferred Stock"), of which 8,333,333 shares have been designated Convertible Preferred Stock. The Company has authorized and has reserved, and covenants to continue to reserve, a sufficient number of shares of its Common Stock to satisfy the rights of conversion of the holders of the Convertible Preferred Stock. For purposes of this Agreement, (a) the shares of Convertible Preferred Stock to be acquired by the Investors from the Company hereunder are referred to as the "Convertible Preferred Shares," (b) the shares of Common Stock issuable upon conversion of the Convertible Preferred Shares are referred to as the "Conversion Shares," (c) the Convertible Preferred Shares and the Conversion Shares are sometimes referred to as the "Securities", and (d) the shares of Common Stock to be redeemed by the Company from the Redeeming Shareholders are referred to as the "Redemption Shares." 8 1.2 Sale and Purchase: Redemption. Upon the terms and subject to the conditions herein, and in reliance on the representations and warranties set forth in Section 2, (a) each Investor hereby purchases from the Company, and the Company hereby issues and sells to each of the Investors, at the Closing (as defined in Section 1.3), the number of Convertible Preferred Shares set forth opposite the name of such Investor in Exhibit A hereto for the purchase price of $1.80 per Convertible Preferred Share (or 8,333,333 Convertible Preferred Shares for an aggregate purchase price of $14,999,999.40), and the Company hereby grants the Investors the rights set forth herein. Immediately following the Closing, the Company shall acquire from the Redeeming Shareholders, and each such Redeeming Shareholder shall sell to the Company, the respective number of Redemption Shares set forth on Exhibit C hereto for a price of $1.80 per Redemption Share (or 3,333,333 Redemption Shares for an aggregate redemption price of $5,999,999.40), pursuant to a redemption agreements (each, a "Redemption Agreement" and, collectively, the "Redemption Agreements") in the form attached hereto as Exhibit D. All purchase and redemption payments hereunder shall be made by wire transfer of next day available funds. 1.3 Closing. The closing of the purchases and sales of the Convertible Preferred Shares and the redemption of the Redemption Shares contemplated by Section 1.2 (the "Closing") shall take place at 10:00 a.m. on the date hereof (the "Closing Date"). SECTION 2. REPRESENTATIONS AND WARRANTIES In order to induce the Investors to enter into this Agreement, the Company and the Shareholders jointly and severally represent and warrant to each of the Investors the following, except as set forth in the schedule of exceptions attached hereto as Exhibit E (the "Disclosure Schedule"). 2.1 Organization and Corporate Power. The Company is a corporation duly organized and validly existing under the laws of the State of Washington, and is qualified to do business as a foreign corporation in each jurisdiction in which the failure to be so qualified would have a material adverse effect on its assets, liabilities, condition (financial or other), business, results of operations or prospects (a "Material Adverse Effect"). The Company has all required corporate power and corporate authority to carry on its business as presently conducted, to enter into and perform this Agreement and the agreements contemplated hereby to which it is a party and to carry out the transactions contemplated hereby and thereby, including the issuance of the Securities and the redemption of the Redemption Shares. The copies of the Articles of Incorporation and the By-laws of the Company, as amended to date (the "Articles of Incorporation" and the "Bylaws," respectively), and of the minute book of the Company, which have been furnished to the Investors by the Company, are complete at the date hereof. The Company is not in material violation of any term of its Articles of Incorporation or By-laws. 9 2.2 Authorization and Non-Contravention. (a) The execution, delivery and performance by the Company of this Agreement and each other agreement, document and instrument to be executed and delivered by the Company pursuant to or as contemplated by this Agreement (including, without limitation, the Redemption Agreements) and the issuance and delivery of (i) the Convertible Preferred Shares, and (ii) upon the conversion of the Convertible Preferred Shares, the Conversion Shares, have been duly authorized by all necessary corporate action of the Company. This Agreement and each such other agreement, document, and instrument (including, without limitation, the Redemption Agreements) constitute valid and binding obligations of the Company, enforceable in accordance with their respective terms, except as rights to indemnity and contribution may be limited by applicable law and public policy and subject to (i) applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally and (ii) general principles of equity, whether such enforceability is considered in a proceeding in equity or at law. The execution and delivery by the Company of this Agreement and each other agreement, document and instrument to be executed and delivered by the Company pursuant hereto or as contemplated hereby (including, without limitation, the Redemption Agreements) and the performance by the Company of the transactions contemplated hereby and thereby, including, without limitation, the issuance and delivery of (i) the Convertible Preferred Shares and (ii) upon the conversion of the Convertible Preferred Shares, the Conversion Shares, do not and will not: (A) except as set forth in Section 2.2 of the Disclosure Schedule, violate, conflict with or result in a default (whether after the giving of notice, lapse of time or both) under any material contract or obligation to which the Company is a party or by which it or its assets are bound, or any provision of the Articles of Incorporation or By-laws of the Company, or cause the creation of any material encumbrance upon any of the assets of the Company; (13) to the Company's knowledge, violate or result in a violation of, or constitute a default under, any provision of any material law, regulation or rule, or any order of, or any restriction imposed by, any court or governmental agency applicable to the Company; (C) except as set forth in Section 2.2 of the Disclosure Schedule, require from the Company any notice to, declaration or filing with, or consent or approval of any governmental authority or third party other than as may be required to secure an exemption from qualification of the offer and sale of the Securities under the Securities Act of 1933, as amended (the "Securities Act"), and applicable state securities and blue sky laws; or D) accelerate any obligation under, or give rise to a right of termination of, any material agreement, permit, license or authorization to which the Company is a party or by which the Company is bound. (b) Each Shareholder has full right, authority, power and (if applicable) capacity to enter into this Agreement and each other agreement, document and instrument to be executed and delivered by or on behalf of such Shareholder pursuant to or as contemplated by this Agreement (including, if applicable, a Redemption Agreement) and to carry out the transactions contemplated hereby and thereby. This Agreement and each other agreement, document and instrument executed and delivered by each Shareholder pursuant to or as contemplated by this Agreement (including, if applicable, a Redemption Agreement) constitute, or when executed and delivered will constitute, valid and binding obligations of such Shareholder enforceable in 10 accordance with their respective terms, except as rights to indemnity and contribution may be limited by applicable law and public policy and subject to (i) applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally and (ii) general principles of equity, whether such enforceability is considered in a proceeding in equity or at law. The execution and delivery by each Shareholder of this Agreement and each other agreement, document and instrument to be executed and delivered by each Shareholder pursuant hereto or as contemplated hereby (including, if applicable, a Redemption Agreement), and the performance by such Shareholder of the transactions contemplated hereby and thereby do not and will not: (A) violate, conflict with or result in a default (whether after the giving of notice, lapse of time or both) under any material contract or obligation to which such Shareholder is a party or by which such Shareholder's assets are bound, or any provision of the Articles of Incorporation or By-laws of the Company, or cause the creation of any material encumbrance upon any of the assets of such Shareholder or the Company; (B) to the Shareholder's knowledge, violate or result in a violation of, or constitute a default under, any provision of any material law, regulation or rule, or any order of, or any restriction imposed by, any court or other governmental agency applicable to the Company or such Shareholder; (C) require from such Shareholder or the Company any notice to, declaration or filing with, or consent or approval of any governmental authority or other material third party other than as may be required to secure an exemption from qualification of the offer and sale of the Securities under the Securities Act and applicable state securities and blue sky laws; or (D) accelerate any obligation under, or give rise to a right of termination of, any material agreement, permit, license or authorization to which such Shareholder or the Company is a party or by which such Shareholder or the Company is bound. 2.3 Capitalization. Immediately prior to the Closing, each of the Shareholders owns beneficially and of record the shares of Common Stock set forth opposite such Shareholder's name on Section 2.3 of the Disclosure Schedule free and clear of any liens, restrictions or encumbrances, and, except as set forth in Section 2.3 of the Disclosure Schedule, such shares of capital stock represent all of the outstanding shares of the Company's capital stock prior to the date hereof. As of the Closing and after giving effect to the transactions contemplated hereby, the authorized capital stock of the Company will consist of 50,000,000 shares of Common Stock, of which 18,041,667 shares will be issued and outstanding, and 8,333,333 shares of Convertible Preferred Stock, of which 8,333,333 shares will be issued and outstanding. In addition, the Company has authorized and reserved for issuance upon conversion of the Convertible Preferred Shares up to 8,333,333 Conversion Shares (subject to adjustment for stock splits, stock dividends and the like) and has reserved for issuance upon exercise of options under the BSQUARE Corporation Amended and Restated Stock Option Plan (the "Plan") 3,625,000 shares of Common Stock (subject in each case to adjustments for stock splits, stock dividends and the like). A copy of the Plan, as amended to date, is included in Section 2.3 of the Disclosure Schedule. Except for the 3,625,000 shares of Common Stock issuable upon the exercise of options granted under the Plan and the Conversion Shares, the Company has not issued or agreed to issue and is not obligated to issue any warrants, options or other rights to purchase or acquire any shares of its capital stock, or any securities convertible into or exercisable or exchangeable for such shares or any warrants. options or other rights to acquire any such convertible securities. As of the Closing, 11 and after giving effect to the transactions contemplated hereby, all of the outstanding shares of capital stock of the Company (including, without limitation, the Convertible Preferred Shares) will have been duly and validly authorized and issued, fully paid and nonassessable and, except as set forth herein, not subject to any preemptive rights and will have been offered, issued, sold and delivered in compliance with applicable federal and state securities laws. The Conversion Shares will, upon issuance, be duly and validly authorized and issued, fully paid and nonassessable and not subject to any preemptive rights and will he issued in compliance with applicable federal and state securities laws. The relative rights, preferences and other provisions relating to the Convertible Preferred Shares are as set forth in Exhibit B attached hereto. There are no preemptive rights, rights of first refusal, put or call rights or obligations or anti-dilution rights with respect to the issuance, sale or redemption of the Company's capital stock, other than as described in Section 2.3 of the Disclosure Schedule and rights to which the Investors and Shareholders are entitled as set forth in this Agreement or the Certificate of Designation (as defined herein), and except as described in the Redemption Agreements. Except as set forth herein, there are no rights to have the Company's capital stock registered for sale to the public under the laws of any jurisdiction, no agreements relating to the voting of the Company's voting securities, and no restrictions on the transfer of the Company's capital stock, except as set forth in Section 2.3 of the Disclosure Schedule. After giving effect to the transactions contemplated hereby, the outstanding shares of the Company's capital stock are held beneficially and of record by the persons identified in Section 2.3 of the Disclosure Schedule in the amounts indicated thereon. 2.4 Subsidiaries; Investments. The Company has no subsidiaries or interests in any corporation, joint venture, partnership or other entity. 2.5 Financial Statements and Matters. (a) The Company has previously furnished to the Investors copies of its unaudited financial statements for the fiscal years ended December 31, 1996 and December 31, 1997. Such financial statements referred to in this Section 2.5(a) were prepared in conformity with generally accepted accounting principles applied on a consistent basis, are complete, correct and consistent in all material respects with the books and records of the Company and fairly and accurately present the financial position of the Company as of the dates thereof and the results of operations and cash flows of the Company for the periods shown therein. (b) The Company has at least $2,000,000 of working capital at the date hereof. (c) The projections given to the Investors represent good faith estimates of the Company's performance for 1998 and future years and are based upon assumptions which are set forth therein and which were in good faith believed to be reasonable when made and continue to be reasonable as of the date hereof; provided, however, that projections as to future events are not to be viewed as fact and that actual results likely will differ from the projected results and that the differences may be material; provided, further, that the Investors acknowledge that such projections contain certain forward-looking statements which involve known and unknown risks, 12 uncertainties and other factors which may cause actual results, performance or achievements of the Company to differ materially from those expressed or implied by such forward-looking statements. 2.6 Absence of Undisclosed Liabilities. Except as and to the extent reflected or reserved against in the balance sheet of the Company at December 31, 1997 contained in the financial statements referred to in Section 2.5(a) (the "Base Balance Sheet") or as set forth in Section 2.6 of the Disclosure Schedule, the Company does not have and is not subject to any material liability or obligation of any nature, whether accrued, absolute, contingent or otherwise. 2.7 Absence of Certain Developments. Since the date of the Base Balance Sheet, except as set forth in Section 2.7 of the Disclosure Schedule, there has not been any: (i) material adverse change in the financial condition of the Company or in the assets, liabilities, condition (financial or other), business or results of operations of the Company, (ii) declaration, setting aside or payment of any dividend or other distribution with respect to, or any direct or indirect redemption or acquisition of, any of the capital stock of the Company, (iii) waiver of any valuable right of the Company or cancellation of any debt or claim held by the Company, (iv) loss, destruction or damage to any property which is material to the assets, liabilities, condition (financial or other), properties, business, results of operations or prospects of the Company, whether or not insured, (v) acquisition or disposition of any material assets or other transaction by the Company other than in the ordinary course of business, (vi) transaction or agreement involving the Company and any officer, director, employee or shareholder of the Company, (vii) increase, direct or indirect, in the compensation paid or payable to any officer, director, employee or agent of the Company or any establishment or creation of any employment or severance agreement or employee benefit plan, (viii) material loss of personnel of the Company, material change in the terms and conditions of the employment of the Company's key personnel or any labor trouble involving the Company, (ix) arrangements relating to any royalty, dividend or similar payment to employees, customers, or independent contractors based on the sales volume of the Company. whether as part of the terms of the Company's capital stock or by any separate agreement, (x) customer contract or other arrangement pursuant to which the Company has agreed to provide products or services at a below-market rate, (xi) loss or any development that could result in a loss of any significant customer, account or employee of the Company, (xii) incurrence of indebtedness or any lien, (xiii) transaction not occurring in the ordinary course of business, or (xiv) any agreement with respect to any of the foregoing actions. 2.8 Ordinary Course. Since the date of the Base Balance Sheet, the Company has conducted its business only in the ordinary course and consistent with its prior practices. 2.9 Accounts Receivable. All of the accounts receivable of the Company, whether shown or reflected on the Base Balance Sheet or otherwise, represent bona fide completed sales of products or services made in the ordinary course of business, are valid and enforceable claims, are subject to no known set-offs or counterclaims, and are, in the best judgment of the Company, fully collectible in the normal course of business after deducting the reserve set forth in the Base 13 Balance Sheet and adjusted since that date, which reserve is a reasonable estimate of the Company's uncollectible accounts. 2.10 Title to Properties. Section 2.10 of the Disclosure Schedule sets forth the addresses and uses of all real property that the Company owns, leases or subleases. The Company has good, valid and (if applicable) marketable title to all of its owned assets, including, without limitation, those assets reflected on the Base Balance Sheet or acquired by it after the date thereof (except for properties disposed of since that date in the ordinary course of business), free and clear of all liens, claims or encumbrances of any nature, other than (i) the lien of current taxes not yet due and payable, and (ii) possible liens and encumbrances which do not in any case materially detract from the value of the property subject thereto or materially impair the operations of the Company, and which have not arisen otherwise than in the ordinary course of business. All equipment included in such properties which is necessary to the business of the Company is in good condition and repair (ordinary wear and tear excepted) and all leases of real or personal property to which the Company is a party are fully effective and afford the Company peaceful and undisturbed possession of the subject matter of the lease. The property and assets of the Company are sufficient for the conduct of its business as presently conducted. To its knowledge, the Company is not in violation of any zoning, building or safety ordinance, regulation or requirement or other law or regulation applicable to the operation of its owned or leased properties, the violation of which would have a Material Adverse Effect, nor has it received any notice of any such violation. There are no defaults by the Company or, to the knowledge of the Company, by any other party, which might curtail in any material respect the present use of the Company's property. The performance by the Company of this Agreement or any other agreement, document, or instrument contemplated hereby will not result in the termination of, or in any increase of any amounts payable under, any of its leases. 2.11 Tax Matters. The Company has filed all federal, state, local and foreign income, excise and franchise tax returns, real estate and personal property tax returns, sales and use tax returns and other tax returns required to be filed by it where the failure to file such returns would have a Material Adverse Effect and has paid all taxes owing by it, except taxes which have not yet accrued or otherwise become due, for which adequate provision has been made in the pertinent financial statements referred to in Section 2.5(a) above or which will not have a Material Adverse Effect. The provision for taxes on the Base Balance Sheet is sufficient as of its date for the payment of all accrued and unpaid federal, state, county and local taxes of any nature of the Company, and any applicable taxes owing to any foreign jurisdiction, whether or not assessed or disputed. All taxes and other assessments and levies which the Company is required to withhold or collect have been withheld and collected and have been paid over to the proper governmental authorities except where the failure to withhold or collect and pay over would not have a Material Adverse Effect. With regard to the federal income tax returns of the Company, the Company has never received notice of any audit or of any proposed deficiencies from the Internal Revenue Service. There are in effect no waivers of applicable statutes of limitations with respect to any taxes owed by the Company for any year. Neither the Internal Revenue Service nor any other taxing authority is now asserting or, to the knowledge of the Company, threatening to assert against the Company any deficiency or claim for additional taxes or interest thereon or penalties 14 in connection therewith. The Company (and any predecessor of the Company) was a validly electing "S-corporation" within the meaning of Section 1361 and Section 1362 of the Internal Revenue Code of 1986, as amended, at all times through the end of the Company's taxable year ending October 15, 1997. 2.12 Certain Contracts and Arrangements. Except as set forth in Section 2.12 of the Disclosure Schedule (with true and correct copies delivered to the Investors), the Company is not a party or subject to or bound by: (a) any plan or contract providing for collective bargaining or the like, or any contract or agreement with any labor union; (b) any contract, lease or agreement creating any obligation of the Company to pay to any third party $50,000 or more with respect to any single such contract or agreement; (c) any contract or agreement for the sale, license, lease or disposition of products or services in excess of $200,000; (d) any contract containing covenants directly or explicitly limiting the freedom of the Company to compete in any line of business or with any person or entity; (e) any license agreement (as licensor or licensee), other than such licenses or agreements arising solely from the purchase of "off the shelf" or standard products, involving payments by or to the Company in excess of $200,000; (f) any contract or agreement for the purchase of any leasehold improvements, equipment or fixed assets for a price in excess of $50,000; (g) any indenture, mortgage, promissory note, loan agreement, guaranty or other agreement or commitment for borrowing in excess of $50,000 or any pledge or security arrangement; (h) any material joint venture, partnership, manufacturing, development or supply agreement; (i) any endorsement or any other advertising, promotional or marketing agreement; (j) any employment contracts, or agreements with officers, directors, employees or shareholders of the Company or persons or organizations related to or affiliated with any such persons; (k) any stock redemption or purchase agreements or other agreements affecting or relating to the capital stock of the Company, including, without limitation, any agreement with 15 any shareholder of the Company which includes, without limitation, anti-dilution rights, registration rights, voting arrangements, operating covenants or similar provisions; (l) any pension, profit sharing, retirement, stock option, phantom stock or other equity incentive, bonus or commission plans; (m) any arrangement relating to any royalty, dividend or similar payments to employees, customers or independent contractors based on the sales volume of the Company; (n) any acquisition, merger or similar agreement; (o) any contract with a governmental body under which the Company may have an obligation for renegotiation; (p) any agreement with any shareholder of the Company or any affiliate of any shareholder; or (q) any other material contract not executed in the ordinary course of business. All of the Company's contracts, agreements, understandings and commitments are in full force and effect and neither the Company nor, to the knowledge of the Company, any other party is in default thereunder (nor, to the knowledge of the Company, has any event occurred which with notice, lapse of time or both would constitute a default thereunder), except to the extent that any such default would not have a Material Adverse Effect, and the Company has not received notice of any alleged default under any such contract, agreement, understanding or commitment. 2.13 Intellectual Property Rights; Employee Restrictions. Except as set forth in Section 2.13 of the Disclosure Schedule: (a) The Company has exclusive ownership of, or sufficient right to use, sell, license, dispose of, and bring actions for infringement of, all Intellectual Property Rights (as hereinafter defined) material to the conduct of its business as presently conducted, including, without limitation, the Company's name and the trademarks and product names listed in Section 2.13 of the Disclosure Schedule (the "Company Rights"). (b) The business of the Company as presently conducted and the provision of the services provided by the Company do not violate any agreements that the Company has with any third party or, to the knowledge of the Company, infringe any patent, trademark, service mark, copyright, trade secret or any other Intellectual Property Rights of any third party. (c) No claim is pending or, to the knowledge of the Company, threatened against the Company nor has the Company received any notice of any claim from any third party asserting that any of the Company's present or contemplated activities infringe or may infringe any 16 Intellectual Property Rights of such third party, and the Company is not aware of any infringement by any other third party of any Intellectual Property Rights of the Company. (d) The Company has taken all commercially reasonable steps required to establish and preserve its ownership of all of the Company Rights; each current and former employee of the Company, and each of the Company's consultants and independent contractors involved in development of any of the Company Rights, has executed an agreement regarding confidentiality, proprietary information and assignment of inventions and copyrights to the Company, and, to the best knowledge of the Company, none of such employees, consultants or independent contractors is in violation of any agreement or in breach of any agreement or arrangement with former or present employers relating to proprietary information or assignment of inventions. As used herein, the term "Intellectual Property Rights" shall mean all intellectual property rights, including, without limitation, all of the registered rights set forth in Section 2.13 of the Disclosure Schedule and all patents, patent applications, patent rights, trademarks, trademark applications, trade names, service marks, service mark applications, copyrights, copyright applications, computer programs and other computer software, inventions, designs, samples, specifications, schematics, know-how, trade secrets, proprietary processes and formulae, including production technology and processes, all source and object code, algorithms, promotional materials, customer lists, supplier and dealer lists and marketing research, and all documentation and media constituting, describing or relating to the foregoing, including without limitation, manuals, memoranda and records. Section 2.13 of the Disclosure Schedule contains a list and brief description of all Intellectual Property Rights owned by or registered in the name of the Company or of which the Company is the licensor or a licensee of a material right or in which the Company has any material right and, in each case, a brief description of the nature of the right. 2.14 Litigation. There is no litigation or governmental proceeding or investigation pending or, to the knowledge of the Company, threatened against the Company or affecting any of its properties or assets or against any officer, director or key employee of the Company in his or her capacity as an officer, director or employee of the Company, which litigation, proceeding or investigation is reasonably likely to have a Material Adverse Effect, or which may call into question the validity or hinder the enforceability of this Agreement or any other agreements or transactions contemplated hereby; nor, to the knowledge of the Company, has there occurred any event, nor does there exist any condition, on the basis of which any such litigation, proceeding or investigation might be properly instituted or commenced. 2.15 Employee Benefit Plans. The Company does not maintain or contribute to any employee benefit, stock option, bonus or incentive plan, severance pay policy or agreement, deferred compensation agreement, or any similar plan or agreement (an "Employee Benefit Plan") other than the Employee Benefit Plans identified and described in Section 2.15 of the Disclosure Schedule. The terms and operation of each Employee Benefit Plan comply in all material respects with all applicable laws and regulations relating to such Employee Benefit Plans. There are no unfunded obligations of the Company under any retirement, pension, profit-sharing, or deferred 17 compensation plan or similar program. The Company is not required to make any payments or contributions to any Employee Benefit Plan pursuant to any collective bargaining agreement or, to the knowledge of the Company, any applicable labor relations law, and all Employee Benefit Plans are terminable at the discretion of the Company without liability to the Company upon or following such termination. The Company has never maintained or contributed to any Employee Benefit Plan providing or promising any health or other non-pension benefits to terminated employees. 2.16 Labor Laws. The Company generally enjoys good employer-employee relationships. The Company is not delinquent in payments to any of its employees for any wages, salaries, commissions, bonuses or other direct compensation for any services performed for it as of the date hereof or amounts required to be reimbursed to such employees. The Company is in compliance in all material respects with all applicable laws and regulations respecting labor, employment, fair employment practices, terms and conditions of employment, and wages and hours. There are no charges of employment discrimination or unfair labor practices or strikes, slowdowns, stoppages of work or any other concerted interference with normal operations existing, pending or, to the knowledge of the Company, threatened against or involving the Company. 2.17 Employees and Suppliers. (a) Section 2.17 of the Disclosure Schedule contains a list of all managers, employees and consultants of the Company who, individually, have received compensation from the Company for the fiscal year of the Company ended December 31, 1997 in excess of $100,000. In each case, Section 2.17 of the Disclosure Schedule includes the current job title, years of service with the Company and aggregate annual compensation and benefits of each such individual. To the knowledge of the Company and the Shareholders, no key employee of the Company has any plan or intention to terminate his or her employment with the Company. The Company has complied in all material respects with the immigration laws of the United States with respect to the hiring, employment and engagement of all of its employees and consultants who are not United States citizens, and, to the knowledge of the Company, the immigration or residency status. of each of such employees and consultants is sufficient to allow such employees and consultants to remain lawfully employed or engaged by the Company. (b) Section 2.17 of the Disclosure Schedule sets forth a list of all suppliers of the Company to whom during the twelve months ended December 31, 1997 the Company made payments aggregating $100,000 or more (the "Suppliers"), showing, with respect to each, the name, address and dollar volume involved. To the knowledge of the Company, no Supplier has any plan or intention to terminate or reduce its business with the Company or to materially and adversely modify its relationship with the Company. 2.18 Hazardous Waste, Etc. No hazardous wastes, substances or materials or oil or petroleum products have been generated, transported, used, disposed of, stored or treated by the Company and no hazardous wastes. substances or materials, or oil or petroleum products have 18 been released, discharged, disposed of, transported, placed or otherwise caused to enter the soil or water in, under or upon any real property owned, leased or operated by the Company while the Company occupied such property. 2.19 Business; Compliance with Laws. The Company has all necessary franchises, permits, licenses and other rights and privileges necessary to permit it to own its property and to conduct its business as it is presently, or is contemplated to be, conducted, except where the failure to have such franchise, permit, license or other right would not have a Material Adverse Effect. The Company is currently, and has heretofore been, in compliance in all material respects with all federal, state, local and foreign laws and regulations. 2.20 Investment Banking; Brokerage. Except as set forth in Section 2.20 of the Disclosure Schedule, there are no claims for investment banking fees, brokerage commissions, finder's fees or similar compensation (exclusive of professional fees to lawyers and accountants) in connection with the transactions contemplated by this Agreement payable by the Company or based on any arrangement or agreement made by or on behalf of the Company or any of the Shareholders. 2.21 Insurance. The Company has fire, casualty, product liability and business interruption and other insurance policies, with extended coverage, sufficient in amount to allow it to replace any of its material properties which might be damaged or destroyed or to cover liabilities to which the Company may reasonably become subject, and such types and amounts of other insurance with respect to its business and properties, on both a per occurrence and an aggregate basis, as are customarily carried by entities engaged in the same or similar business as the Company. There is no default or event which could give rise to a default under any such policy. Section 2.21 of the Disclosure Schedule constitutes a full and complete list of all insurance policies and any underlying risk financing and claims adjustment agreements maintained by the Company. 2.22 Transactions with Affiliates. There are no loans, leases, contracts or other transactions in existence between the Company and any officer, director or five percent (5%) shareholder of the Company or any family member or affiliate of the foregoing persons and there have been no such transactions within the past five (5) years except as set forth in Section 2.22 of the Disclosure Schedule. 2.23 Customers. Section 2.23 of the Disclosure Schedule sets forth each customer of the Company who accounted for more than 5% of the sales of the Company for the twelve months ended December 31, 1997 (collectively, the "Customers"). The relationships of the Company with its Customers are generally good commercial working relationships. No Customer of the Company has canceled or otherwise terminated its relationship with the Company, or has during the last twelve months decreased materially its services, supplies or materials to the Company or its usage or purchases of the services or products of the Company. No Customer has, to the knowledge of the Company, any plan or intention to terminate, cancel or otherwise materially and adversely modify its relationship with the Company or to decrease materially or limit its services, 19 supplies or materials to the Company or its usage, purchase or distribution of the services or products of the Company. 2.24 Relationship with Microsoft. The Company expects to sign a contract with Microsoft Corporation for a term of at least two years on terms and conditions no less favorable to the Company than the Development and License Agreement, dated June 12, 1997, by and between Microsoft Corporation and the Company, as amended by Amendment No. 1 to Development and License Agreement, dated December 17, 1997 (the "Microsoft Agreement"); provided, however, that there can be no assurance that such a contract will be entered into by the parties for such duration, on such terms and conditions, or at all. The Microsoft Agreement is attached as Section 2.24 of the Disclosure Schedule. 2.25 Certain Events. (a) During the past ten years, neither the Company nor any of the Shareholders, officers or directors of the Company has had a petition under the Bankruptcy Reform Act of 1978, as amended, or any state insolvency law, filed by or against any of them, or has had a receiver, fiscal agent or similar officer appointed by a court for any of their business or property or any partnership in which any of them was a general partner at or within two years before the time of such filing, or any corporation or business association of which any of them was an officer, director or stockholder at or within two years before the time of such filing. (b) During the past ten years, neither the Company nor any of the Shareholders, officers and directors of the Company has been convicted in a criminal proceeding or is a named subject of a criminal proceeding which is presently pending (excluding traffic violations and other minor offenses). (c) During the past ten years, neither the Company nor any of the Shareholders, officers and directors of the Company has been, or is, the subject of any order, judgment or decree, whether or not subsequently reversed, suspended or vacated, of any court or any administrative agency, requiring the payment of money damages in excess of $50,000 or permanently or temporarily enjoining any of them from, or otherwise limiting any of their abilities to engage in, any type of business practice. 2.26 Disclosure. The representations and warranties made or contained in this Agreement, the Disclosure Schedule, the Exhibits hereto and the certificates and statements executed or delivered in connection herewith, and written information concerning the business of the Company delivered by officers of the Company to the Investors in connection with or pursuant to this Agreement, when taken together, do not and shall not contain any untrue statement of a material fact and do not and shall not omit to state a material fact required to be stated therein or necessary in order to make such representations, warranties or other material not misleading in light of the circumstances in which they were made or delivered. There have been no events or transactions, or information which has come to the attention of the management of the Company, having a direct impact on the Company or its assets, liabilities, financial condition, business, 20 results of operations or prospects which, in the reasonable judgment of such management, could reasonably be expected to have a Material Adverse Effect. SECTION 2A. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS (a) Each Investor represents to the Company that (i) it has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment contemplated by this Agreement and making an informed investment decision with respect thereto, (ii) it is able to bear the economic risk of an investment in the Securities and can afford to sustain a substantial loss on such investment, (iii) it has had, during the course of this transaction, the opportunity to ask questions and receive answers from the Company concerning the Company and this Agreement, (iv) it is an "accredited investor" as such term is defined in Rule 501 under the Securities Act, and (v) it is purchasing the Convertible Preferred Shares for its own account, for investment only and not with a view to, or any present intention of, effecting a distribution of such securities or any part thereof except pursuant to a registration or an available exemption under applicable law. Such Investor acknowledges that its respective Convertible Preferred Shares have not been registered under the Securities Act or the securities laws of any state or other jurisdiction and cannot be disposed of unless they are subsequently registered under the Securities Act and any applicable state laws or an exemption from such registration is available. (b) Each Investor understands that the Securities have not been registered under the Securities Act, that there is no public market for the Securities and that it must bear the economic risk of investment in the Company for an indefinite period of time. (c) Each Investor has full right, authority and power under its governing partnership agreement to enter into this Agreement and each agreement, document and instrument to be executed and delivered by or on behalf of such Investor pursuant to or as contemplated by this Agreement and to carry out the transactions contemplated hereby and thereby, and the execution, delivery and performance by such Investor of this Agreement and each such other agreement, document and instrument have been duly authorized by all necessary action under such Investor's governing partnership agreement. This Agreement and each agreement, document and instrument executed and delivered by each Investor pursuant to or as contemplated by this Agreement constitute, or when executed and delivered will constitute, valid and binding obligations of each such Investor enforceable in accordance with their respective terms. The execution, delivery and performance by each Investor of this Agreement and each such other agreement, document and instrument, and the performance of the transactions contemplated hereby and thereby do not and will not: (A) violate, conflict with or result in a default (whether after the giving of notice, lapse of time or both) under any contract or obligation to which any such Investor is a party or by which it or its assets are bound, or cause the creation of any encumbrance upon any of the assets of such Investor; (B) violate or result in a violation of, or constitute a default under. any provision of any law, regulation or rule, or any order of, or any restriction imposed by, any court or other governmental agency applicable to such Investor; (C) require from such Investor any notice to, declaration or filing with, or consent or approval of any governmental 21 authority or other third party; or (D) accelerate any obligation under, or give rise to a right of termination of, any agreement, permit, license or authorization to which any such Investor is a party or by which such Investor is bound. (c) Each Investor represents that there are no claims for investment banking fees, brokerage commissions, finder's fees or similar compensation (exclusive of professional fees to lawyers and accountants) in connection with the transactions contemplated by this Agreement based on any arrangement or agreement made by or on behalf of such Investor. SECTION 3. CONDITIONS OF PURCHASE Each Investor's obligation to purchase and pay for the Convertible Preferred Shares to be purchased by it shall be subject to the compliance by the Company with its agreements herein contained and to the fulfillment to the Investors' satisfaction, or the waiver by the Investors, on or before and at the Closing Date of the following conditions: 3.1 Satisfaction of Conditions. The representations and warranties of the Company and the Shareholders contained in this Agreement shall be true and correct on and as of the Closing Date; each of the conditions specified in this Section 3 shall have been fulfilled to the Investors' satisfaction or waived in writing by the Investors; and, on the Closing Date, certificates to such effect executed by the President and Chief Operating Officer of the Company shall have been delivered to the Investors. 3.2 Director Election. Each of Jeffrey T. Chambers and Scot E. Land, as the nominees of the Investors (together with any subsequent nominees of the Investors, the "Investors' Nominees"), shall have been elected as a director of the Company. 3.3 Compensation and Audit Committees. The Company shall have established a Compensation Committee (the "Compensation Committee") and an Audit Committee (the "Audit Committee") of its Board of Directors, each of which shall be comprised of three members in accordance with Section 4.4 hereof. 3.4 Opinion of Counsel. The Investors shall have received from the Summit Law Group an opinion, dated as of the Closing Date, substantially in the form attached hereto as Exhibit F. 3.5 Consent of Spouse. The spouse of each Shareholder shall have executed a Consent of Spouse in the form attached hereto as Exhibit G. 3.6 Authorization. The Board of Directors of the Company shall have duly adopted resolutions in a form reasonably satisfactory to the Investors and shall have taken all action necessary for the purpose of authorizing the Company to execute and deliver this Agreement, and the other agreements, documents, and instruments contemplated hereby and to consummate the transactions contemplated hereby and thereby in accordance with the terms hereof or thereof and 22 to cause the Certificate of Designation establishing the Convertible Preferred Shares in accordance with the terms set forth in Exhibit B hereto (the "Certificate of Designation") to become effective; and the Investors shall have received a certificate of the Secretary of the Company setting forth a copy of the resolution and the Articles of Incorporation, the Bylaws, and the Certificate of Designation of the Company and such other matters as may be reasonably requested by the Investors. 3.7 All Proceedings Satisfactory. All corporate and other proceedings taken prior to or at the Closing in connection with the transactions contemplated by this Agreement, and all documents and evidences incident thereto, shall be reasonably satisfactory in form and substance to the Investors. 3.8 Investors' Fees. The Company shall have paid on behalf of the Investors all legal fees and related expenses incurred by Goodwin, Procter & Hoar LLP on behalf of the Investors in connection with the transactions contemplated by this Agreement. 3.9 No Violation or Injunction. The consummation of the transactions contemplated by this Agreement shall not be in violation of any law or regulation, and shall not be subject to any injunction, stay or restraining order. 3.10 Consents and Waivers. The Company and the Shareholders shall have obtained all consents or waivers necessary to execute this Agreement and the other agreements, documents, and instruments contemplated herein, to issue and sell the Securities to be sold to the Investors hereunder, to redeem the Redemption Shares as contemplated herein pursuant to the Redemption Agreements and to carry out the transactions contemplated hereby and thereby and shall have delivered evidence thereof to the Investors. All corporate and other action and governmental filings necessary to effectuate the terms of this Agreement and the other agreements, documents and instruments executed and delivered by the Company in connection herewith shall have been made or taken. 3.11 Compensation of Shareholders. The terms of the compensation payable to each of William T. Baxter, Albert T. Dosser, and Peter R. Gregory, in his capacity as an employee of the Company, shall be as set forth in Section 3.11 of the Disclosure Schedule. 3.12 Payment of Broker Fee. The broker fee set forth in Section 2.20 of the Disclosure Schedule shall be paid by the Company. 3.13 Termination of Existing Redemption Agreement. The Company and the Shareholders shall have terminated that certain Redemption Agreement, dated as of January 1, 1996, and any other existing shareholder or redemption agreement. The Company's standard form of agreement, as approved by the Board of Directors, to be executed by officers, employees and consultants of the Company upon the grant to such officers, employees and consultants of options under the Plan or upon the exercise of such options (the "Non-Founder Shareholder Agreement") is attached as Section 3.13 of the Disclosure Schedule. 23 3.14 Key Person Insurance. The Company shall have in place "key person" term life insurance policies of at least $1.5 million each on the lives of William T. Baxter, Albert T. Dosser and Peter R. Gregory, each of which shall name the Company as beneficiary. 3.15 Director Indemnification Agreements. The Company shall have entered into indemnification agreements with each director, including the Investors' Nominees, in the form attached hereto as Exhibit H. 3.16 Certificate of Designation. The Certificate of Designation, attached as Section 3.16 of the Disclosure Schedule, shall have been filed with the Secretary of State of the State of Washington and shall be in full force and effect. SECTION 4. COVENANTS The Company agrees for the benefit of the Investors that it shall comply with the following covenants, provided that the covenants set forth in Section 4.1 shall not be in effect during any period in which the Company is subject to the periodic reporting obligations set forth in Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and that all of the covenants set forth in this Section 4 shall terminate as of the closing of the Company's first Qualified Public Offering. A "Qualified Public Offering" shall have the meaning provided in the Certificate of Designation. 4.1 Financial Statements and Budgetary Information; Inspection. So long as the Investors hold at least 833,333.3 Convertible Preferred Shares or shares of Common Stock (subject to adjustments for stock splits, stock dividends and the like), the Investors shall have the rights, and the Company shall have the obligations, set forth in this Section 4. 1. The Company will deliver to the Investors internally prepared unaudited monthly and quarterly financial statements and audited annual financial statements, as well as annual budgets and operating plans. The monthly and quarterly financial information will be provided within 30 days after the end of each month and quarter. The annual budget and operating plan will be presented at a Board of Directors' meeting by January 31 of the fiscal year of the Company covered. An annual audit by an accounting firm of national recognition selected by the Board of Directors will be provided within 90 days after each fiscal year-end of the Company. The Company will, upon reasonable prior notice to the Company, permit authorized representatives of the Investors to visit and inspect any of the properties of the Company, including its books of account (and to make copies thereof and take extracts therefrom), and to discuss its affairs, finances and accounts with its officers, administrative employees and independent accountants, all at such reasonable times and as often as may be reasonably requested. 4.2 Indemnification, Insurance. For so long as any of the Securities remain outstanding, the Articles of Incorporation or By-laws of the Company will at all times during which any nominee of any of the Investors serves as director of the Company provide for 24 indemnification of the Company's directors and limitations on the liability of the Company's directors to the fullest extent permitted under applicable state law. Prior to any initial public offering, the Company will purchase a directors and officers insurance policy in the amount of at least $3 million and on other terms reasonably acceptable to two-thirds in interest of the Investors (with the Investors' Nominees to be third party beneficiaries of this Agreement) covering, among other things, violations of federal or state securities laws. 4.3 Board of Directors. The Board of Directors of the Company shall consist of up to seven (7) members including the two (2) Investors' Nominees and at least one (1) independent director mutually acceptable to the Shareholders and the Investors (an "Independent Director"), which Independent Director shall be nominated and elected to the Board of Directors as soon as reasonably practicable on or following the Closing Date. The Company shall cause meetings of its Board of Directors to be held at least four (4) times each year at intervals of not more than four (4) months and shall pay all reasonable out-of-pocket expenses incurred by the Investors' Nominees in connection with attending meetings or other functions of the Company's Board of Directors or any committees thereof and shall pay each of the Investors' Nominees and Independent Directors fees in an amount equal to any fees that are paid to the other non-management directors of the Company, if any. 4.4 Composition of Board Committees. Each of the Compensation Committee and the Audit Committee shall be comprised of one member of management who is also a director, one of the Investors' Nominees, and one Independent Director. 4.5 Restrictive Covenants. The Company will not, without the consent of two thirds-in-interest of the Investors: (a) sell, lease or otherwise dispose of (whether in one transaction or a series of related transactions) all or substantially all of its assets or business, (b) merge with or into or consolidate with another entity or enter into or engage in any other transaction or series of related transactions, in any such case in connection with or as a result of which the Company is not the surviving entity or the owners of the Company's outstanding equity securities immediately prior to the transaction or series of related transactions do not own at least a majority of the outstanding equity securities of the surviving, resulting or consolidated entity, (c) dissolve, liquidate or wind up its operations, (d) directly or indirectly redeem, purchase, or otherwise acquire for consideration any shares of its Common Stock or any other class of its capital stock except (i) for the redemption of Convertible Preferred Shares pursuant to and as provided in the Certificate of Designation, (ii) as contemplated by Sections 1.2, 4.6, and 5.2 hereof, or (iii) as contemplated by the Non-Founder Shareholder Agreement, 25 (e) adopt any amendment to the Certificate of Designation, or any amendment to its Articles of Incorporation or By-Laws, that eliminates, amends, restricts or otherwise adversely affects the rights and preferences of the Convertible Preferred Stock, or that increases the authorized shares of Convertible Preferred Stock, (f) declare or make dividend payments on any shares of its Common Stock or any other class of its capital stock, (g) create, or obligate itself to create, any class or series of shares that has a preference over, or is on a parity with, the Convertible Preferred Stock, (h) increase the size of the Board of Directors to more than seven (7) members, (i) enter into any agreement or arrangement or take any other action that eliminates, amends, restricts or otherwise adversely affects the rights of the Investors hereunder or as holders of Securities of the relevant class or its ability to perform its obligations hereunder, or (j) enter into or be a party to any transaction or agreement, including, without limitation, any lease or other rental or purchase agreement providing for loans or extensions of credit by or to the Company, with or for the benefit of any person or entity which is a shareholder, officer or director of the Company, or which is a relative by blood or marriage of, a trust or estate for the benefit of, or a person or entity which directly or indirectly controls, is controlled by, or is under common control with, any such person or entity, except (i) for normal compensation paid to employees of the Company in the ordinary course of business and (ii) transactions expressly disclosed in or contemplated by this Agreement and the Exhibits hereto. 4.6 Redemption. Immediately upon the sale of the Convertible Preferred Shares, the Company shall complete the redemption of 1,111,111 Redemption Shares from each of the Shareholders for a cash payment of $2,000,000 (or an aggregate of 3,333,333 Redemption Shares for an aggregate cash payment of $6 million) pursuant to a Redemption Agreement, in each case on terms reasonably satisfactory to the Investors. 4.7 Cancellation of Shareholder Notes. The promissory notes of the Company evidencing the loans to the Shareholders to be paid off with the proceeds from the issuance of the Convertible Preferred Shares, as set forth in Section 4.12 of the Disclosure Schedule, shall have been delivered to the Company by the Shareholders and marked as "CANCELED," and the Company and each of the Shareholders shall have executed an acknowledgment as to payment in full thereof. 4.8 Reissuance of Stock Certificates. In connection with the redemption described in Section 4.6, all certificates representing shares of Common Stock issued to the Shareholders on or prior to the date hereof shall be reissued with the legends set forth in Section 9.4 of this Agreement typed on each of such reissued certificates. 26 4.9 Key Person Insurance. The Company will maintain "key person" term life insurance policies of at least $1.5 million each on the lives of William T. Baxter, Albert T. Dosser and Peter R. Gregory, each of which shall name the Company as beneficiary. The Company hereby agrees that such policies shall not be assigned, borrowed against or pledged. 4.10 Compensation of Shareholders. The annual compensation paid by the Company to William T. Baxter, Albert T. Dosser and Peter R. Gregory shall be as set forth in Section 3.11 of the Disclosure Schedule and shall be adjusted from time to time only by the Compensation Committee. 4.11 Stock Awards. Except for stock option awards with respect to up to 3,625,000 shares of Common Stock pursuant to the Plan as in effect on the date hereof, the Company will not grant or award options, or stock or other equity-based or quasi-equity rights, to officers, employees, advisers, consultants or directors without the consent of two-thirds in interest of the Investors. The Plan and any awards granted thereunder may not be amended, revised or waived after the date hereof without the consent of two-thirds in interest of the Investors. 4.12 Assignment of Rights. Each Investor may assign its rights under this Section 4 in connection with any transaction or series of related transactions involving the Transfer (as defined in Section 5.1) to one or more transferees of at least 833,333.3 shares of capital stock of the Company (subject to adjustments for stock splits, stock dividends and the like and aggregating all contemporaneous Transfers by two or more Investors), or to any fund managed by or associated with TA Associates, Inc. ("TA Funds") or Encompass Ventures ("Encompass Funds"). Upon any such Transfer, such transferee or TA Fund or Encompass Fund thereupon shall be deemed an "Investor" for purposes of this Section 4 with the rights set forth in this Section. 4.13 Compliance with Laws. The Company will comply in all respects with all applicable statutes, rules and regulations of the United States and of all other jurisdictions applicable to it, and of the states thereof and their counties, municipalities and other subdivisions and of any other jurisdiction applicable to it, except where compliance therewith shall at the time be contested in good faith by appropriate proceedings or where noncompliance therewith could not have a Material Adverse Effect. 4.14 Use of Proceeds. Unless otherwise approved by two-thirds in interest of the Investors, the Company shall use the proceeds of the issuance of the Convertible Preferred Shares only in the manner described in Section 4.14 of the Disclosure Schedule. 4.15 Audited Financial Statements. The Company shall deliver to the Investors audited financial statements for the fiscal years ending December 31, 1996 and December 31, 1997, as soon as reasonably practicable after the Closing. 27 SECTION 5. TRANSFER RESTRICTIONS The following provisions of this Section 5 shall terminate immediately prior to the closing of a Qualified Public Offering and shall not apply with respect to any Qualified Public Offering. 5.1 General Restriction. (a) Each Shareholder agrees that neither such Shareholder nor any of such Shareholder's permitted transferees as contemplated below will directly or indirectly offer, transfer, donate, sell, assign, pledge, hypothecate or otherwise dispose of (any such action a "Transfer") all or any portion of the shares of capital stock of the Company now owned or hereafter acquired by such Shareholder or any of them, except (i) to permitted transferees as permitted by Section 5.1(b) and (ii) in bona fide sales to third parties for value following compliance with Section 5. (b) Permitted Transfers by a Shareholder shall include (i) any pledge made pursuant to a bona fide loan transaction that creates a mere security interest but shall not include any Transfer upon the exercise of any rights in respect of any such security interest, (ii) Transfers to the Shareholder's grandparents, parents, spouse, children (including adopted children), or grandchildren, to a trust of which such Shareholder is the settlor or a trustee for the benefit of such Shareholder's grandparents, parents, spouse, children (including adopted children) or grandchildren or to charitable institutions, (iii) Transfers in connection with any bona fide gift, and (iv) Transfers upon a Shareholder's death to such Shareholder's heirs, executors or administrators or to a trust under such Shareholder's will or to his or her guardian or conservator; provided that in any such case the transferee shall have entered into an enforceable written agreement providing that all shares so Transferred shall continue to be subject to all provisions of this Agreement as if such shares were still held by the Shareholder, and provided further that such permitted transferee shall not be permitted to make any further Transfers without complying with the provisions of this Section 5. Anything to the contrary in this Agreement notwithstanding, Transfers under this Section 5.1(b) shall not be subject to Section 5.2 or Section 5.3 and transferees permitted by this Section 5.1(b) shall take any shares so Transferred subject to all obligations under this Agreement as if such shares were still held by the Shareholder whether or not they so expressly agree. 5.2 Right of First Refusal. If at any time on or after the date hereof a Shareholder (such term to include for all purposes of this Section 5.2 any permitted transferees of such Shareholder's shares pursuant to Section 5.1(b)) receives a bona fide offer to purchase any or all of such Shareholder's shares (an "Offer") from an unaffiliated third party (an "Offeror") which such Shareholder wishes to accept, such Shareholder may Transfer such shares pursuant to and in accordance with this Section 5.2 and Section 5.4 below: (a) Such Shareholder (for purposes of this Section 5.2, a "Selling Shareholder") shall cause the Offer to be reduced to writing and shall notify the Company, the Investors, and the other Shareholders (the "Other Shareholders") in writing of the Offer and of such Selling 28 Shareholder's desire to accept the Offer and shall otherwise comply with the provisions of this Section 5. The Selling Shareholder's notice shall constitute an irrevocable offer to sell such shares to the Company, the Investors, and the Other Shareholders at a purchase price equal to the price contained in, and on the same terms and conditions of, the Offer. The notice shall be accompanied by a true copy of the Offer (which shall identify the Offeror). (b) The Company shall have the right to purchase all or a portion of the shares covered by the Offer. To exercise such right, the Company shall, within 10 days of receipt of such written notice, communicate in writing such election (which writing shall specify the number of shares to which such election relates) to the Selling Shareholder (with copies to the Investors and the Other Shareholders). Subject to Section 5.2(d) below, the Company's written election to purchase shares covered by the Offer shall constitute a valid, legally binding and enforceable agreement between the Selling Shareholder and the Company for the sale and purchase of the number of shares so elected to be purchased. (c) In the event that the Company does not exercise its rights pursuant to Section 5.2(b) to purchase all of the shares covered by the Offer, the Selling Shareholder shall notify the Investors and the Other Shareholders in writing of such fact (the "Purchase Notice"). At any time within 10 days after receipt by the Investors and the Other Shareholders of the Purchase Notice (the "Purchase Notice Period"), one or more of the Investors and Other Shareholders may, subject to the terms hereof, choose to accept the Offer with respect to all, but not less than all, of the remaining shares covered thereby by giving written notice to the Selling Shareholder to such effect; provided, that if two or more of the Investors and Other Shareholders choose, in the aggregate, to accept such Offer with respect to an aggregate number of shares which exceeds the number of shares subject to such Offer and available for purchase, the number of shares for which the Offer may be accepted by each such Investor and Other Shareholders shall, in each case, be reduced by the smallest number of shares as shall be necessary to reduce the aggregate number of shares for which the Offer may be accepted by the electing Investors and Other Shareholders as contemplated herein to the number of shares for which the Offer was made and which are available for purchase by them; provided further, that the number of shares for which any Investor or Other Shareholder may accept such Offer as contemplated herein shall in no event be reduced to less than the number of shares which bears the same proportion to the total number of shares which are available for purchase as the number of shares of Common Stock held on the date of the Purchase Notice by such Investor (on an as converted basis as contemplated by the Certificate of Designation) or such Other Shareholder, as the case may be, bears to the total number of shares of Common Stock held on the date of the Purchase Notice by all Investors (on an as converted basis as contemplated by the Certificate of Designation) and all Other Shareholders accepting such Offer. (d) All of the shares covered by the Offer must be purchased pursuant to the terms of Section 5.2(b) and Section 5.2(c) or none of such shares may be purchased. If all shares covered by any Offer are purchased pursuant to Section 5.2(b) and Section 5.2(c), such purchase shall be (i) at the same price and on the same terms and conditions as the Offer if the Offer is for cash and/or notes or (ii) if the Offer includes any consideration other than cash and notes, then at 29 the equivalent all cash price for such other consideration. The closing of the purchase of the shares subject to an Offer pursuant to this Section 5.2 shall take place within 15 days after the expiration of the Purchase Notice Period, or upon satisfaction of any governmental approval requirements, if later, by delivery by the respective purchasers of the purchase price for shares being purchased as provided above to the Selling Shareholder against delivery of the certificates representing the shares so purchased, appropriately endorsed for Transfer by such Selling Shareholder. 5.3 Right of Co-Sale. (a) If at any time on or after the date hereof a Shareholder (such term to include for all purposes of this Section 5.3 any permitted transferees of such Shareholder's shares pursuant to Section 5.1(b)) proposes to sell any shares or receives an Offer and such shares are not purchased pursuant to Section 5.2, such Shareholder may Transfer such shares pursuant to and in accordance with this Section 5.3 and Section 5.4 below: (i) In such event, immediately following the last day of the Purchase Notice Period, such Shareholder (for purposes of this Section 5.3, a "Selling Shareholder") shall give an additional notice of the proposed sale to the Investors and the Other Shareholders, once again enclosing a copy of the Offer, if applicable, which shall identify the Offeror and the number of shares proposed to be sold (the "Co-Sale Notice"). (ii) Upon the election of one or more Investors holding at least twenty percent (20%) of the Securities, each of the Investors and Other Shareholders shall have the right, exercisable upon written notice to such Selling Shareholder within 10 days after delivery to it of the Co-Sale Notice (the "Co-Sale Notice Period"), to participate in the sale on the terms and conditions stated in the Co-Sale Notice, except that any Investor who holds Convertible Preferred Shares shall be permitted to sell to the relevant purchaser the Conversion Shares or, if the acquiror does not object, the Convertible Preferred Shares. Each of the Investors and the Other Shareholders shall have the right to sell all or any portion of its shares on the terms and conditions in the Co-Sale Notice (subject to the foregoing), with the maximum number of shares which may be sold by each Investor and each Other Shareholder to be equal to the product obtained by multiplying the number of shares proposed to be sold by the Selling Shareholder as described in the Co-Sale Notice by a fraction, the numerator of which is the number of shares of Common Stock held on the date of the Co-Sale Notice by such Investor (on an as converted basis) or such Other Shareholder, as the case may be, and the denominator of which is the sum of the number of shares of Common Stock held on the date of the Co-Sale Notice by all of the Investors and any assignees thereof (on an as converted basis) and all of the Other Shareholders and their permitted transferees. (iii) Within five days after the expiration of the Co-Sale Notice Period, the Selling Shareholder shall notify each participating Investor and Other Shareholder of the number of shares held by such Investor or Other Shareholder that will be included in 30 the sale and the date on which the sale will be consummated, which shall be no later than the later of (A) 30 days after the delivery of the Co-Sale Notice and (B) the satisfaction of all governmental approval requirements, if any. (iv) Each of the Investors and the Other Shareholders may effect its participation in any sale hereunder by delivery to the purchaser, or to the Selling Shareholder for transfer to the purchaser, of one or more instruments or certificates, properly endorsed for transfer, representing the shares it elects to sell therein, provided that no Investor or Other Shareholder shall be required to make any representations or warranties or to provide any indemnities in connection therewith other than with respect to title to the stock being conveyed. At the time of consummation of the sale, the purchaser shall remit directly to each Investor or Other Shareholder that portion of the sale proceeds to which each Investor or Other Shareholder is entitled by reason of its participation therein. No shares may be purchased by a purchaser from the Selling Shareholder unless the purchaser simultaneously purchases from the Investors and the Other Shareholders all of the shares that they have elected to sell pursuant to this Section 5.3(a). (b) Any shares held by a Selling Shareholder that such Selling Shareholder desires to sell following compliance with Section 5.3(a) may be sold to the purchaser only during the 90-day period after the expiration of the Co-Sale Notice Period and only on terms no more favorable to such Selling Shareholder than those contained in the Co-Sale Notice. Promptly after such sale, such Selling Shareholder shall notify the Investors and the Other Shareholders of the consummation thereof and shall furnish such evidence of the completion and time of completion of such sale and of the terms thereof as may reasonably be requested by the Investors and the Other Shareholders. So long as the purchaser is neither a party, nor an affiliate or relative of a party, to this Agreement, such purchaser shall take the shares so Transferred free and clear of any further restrictions of this Section 5. If, at the end of such 90-day period, such Selling Shareholder has not completed the sale of such shares as aforesaid, all the restrictions on Transfer contained in this Section 5 shall again be in effect with respect to such shares. 5.4 Assignment of Rights. If two or more Shareholders (and their permitted transferees, if any) propose concurrent Transfers which are subject to Section 5.2 or Section 5.3, then the provisions of Sections 5.2 and Section 5.3 shall apply to each such proposed Transfer independently. Each Investor or Shareholder may assign its rights under this Section 5 in connection with any transaction or series of related transactions involving the Transfer to one or more transferees of at least 833,333.3 shares of capital stock of the Company (subject to adjustments for stock splits, stock dividends and the like and aggregating all contemporaneous Transfers by two or more Investors), or to any TA Fund or Encompass Fund, or permitted transferees of a Shareholder pursuant to Section 5.1(b). Upon any such Transfer, such transferee or TA Fund or Encompass Fund thereupon shall be deemed an "Investor" or a "Shareholder," as the case may be, for purposes of this Section 5 with the rights set forth in this Section. 31 5.5 Sales to Strategic Purchasers. Notwithstanding anything contained in this Agreement to the contrary, no Investor may Transfer Securities held by such Investor to a Strategic Purchaser (as hereinafter defined) without the prior written consent of the Company, which consent shall not be unreasonably withheld. For purposes of this Agreement, the term "Strategic Purchaser" shall mean an entity actively engaged in the sale of products or services within the imbedded systems or software industries, which entity proposes to purchase for value Securities held by an Investor. SECTION 6. RIGHTS TO PURCHASE Notwithstanding anything herein to the contrary, the following provisions of this Section 6 shall terminate immediately prior to the closing of a Qualified Public Offering and shall not apply with respect to any Qualified Public Offering. 6.1 Right to Participate in Certain Sales of Additional Securities. The Company agrees that it will not sell or issue any shares of capital stock of the Company, or other securities convertible into or exercisable or exchangeable for capital stock of the Company, or options, warrants or rights carrying any rights to purchase capital stock of the Company unless the Company first submits a written offer to the Investors and the Shareholders (including for all purposes of this Section 6 each permitted transferee of a Shareholder pursuant to Section 5.1(b)) identifying the terms of the proposed sale (including price, number or aggregate principal amount of securities and all other material terms), and offers to each Investor and Shareholder the opportunity to purchase its Pro Rata Share (as hereinafter defined) of the securities (subject to increase for over-allotment if some Investors or Shareholders do not fully exercise their rights) on terms and conditions, including price, not less favorable to the Investors and Shareholders than those on which the Company proposes to sell such securities to a third party or parties. Each Investor's or Shareholder's "Pro Rata Share" of such securities shall be based on the ratio which the shares of Common Stock held by he, she or it bears to all the issued and outstanding shares of Common Stock calculated on a fully-diluted basis giving effect to the conversion of convertible securities as of the date of such written offer. The Company's offer to the Investors and Shareholders shall remain open and irrevocable for a period of 20 days, and Investors and Shareholders who elect to purchase shall have the first right to take up and purchase any shares or other securities which other Investors or Shareholders do not elect to purchase, based on the relative holdings of the electing purchasers. Any securities so offered which are not purchased pursuant to such offer may be sold by the Company but only on the terms and conditions set forth in the initial offer to the Investors and Shareholders, at any time within 90 days following the termination of the above-referenced 20-day period but may not be sold to any other person or on terms and conditions, including price, that are more favorable to the purchaser than those set forth in such offer or after such 90-day period without renewed compliance with this Section 6.1. Notwithstanding the foregoing, the Company may (i) issue options to its officers and employees with respect to up to 3,625,000 shares of its Common Stock pursuant to the Plan (subject to adjustments for stock splits, stock dividends and the like) and issue shares of its Common Stock upon the exercise of any such stock options, (ii) issue the Conversion Shares, 32 (iii) issue shares of capital stock in connection with the merger or consolidation of the Company or a subsidiary of the Company with any other operating company, or the exchange of the capital stock of the Company for the capital stock of another operating company, (iv) issue shares in connection with the acquisition of any assets, stock or other interest in any partnership, corporation or other entity, and (v) issue shares in connection with the formation of any research and development partnerships, licensing or collaborative agreements or other similar ventures, and this Section 6 shall not apply with respect to such issuances. 6.2 Assignment of Rights. Each Investor or Shareholder may assign its rights under this Section 6 in connection with any transaction or series of related transactions involving the Transfer to one or more transferees of at least 833,333.3 shares of capital stock of the Company (subject to adjustments for stock splits, stock dividends and the like and aggregating all contemporaneous transfers by Investors), or to any TA Fund, Encompass Fund or permitted transferee of a Shareholder. Upon any such Transfer, such transferee or TA Fund or Encompass Fund shall be deemed an "Investor" or "Shareholder," as the case may be, for purposes of this Section 6 with the rights set forth in this Section. SECTION 7. REGISTRATION RIGHTS 33 7.1 Optional Registrations. If at any time or times after the date hereof, the Company shall seek to register any shares of its capital stock or securities convertible into or exercisable or exchangeable for capital stock under the Securities Act (whether in connection with a public offering of securities by the Company (a "primary offering"), a public offering of securities by shareholders of the Company (a "secondary offering"), or both), the Company will promptly give written notice thereof to each Investor (the "Holders," subject to Section 7.7 below) holding Registrable Securities as hereinafter defined in Section 7.3 below. If within 30 days after their receipt of such notice one or more Holders request in a writing delivered to the Company the inclusion of some or all of the Registrable Securities owned by them in such registration, the Company will use its best efforts to effect the registration under the Securities Act of all Registrable Securities requested to be so included. In the case of the registration of shares of capital stock by the Company in connection with any underwritten public offering, if the underwriter(s) determines that marketing factors require a limitation on the number of Registrable Securities to be offered, the Company shall not be required to register Registrable Securities of the Holders in excess of the amount, if any, of shares of the capital stock which the principal underwriter of such underwritten offering shall reasonably and in good faith agree to include in such offering in excess of any amount to be registered for the Company; provided, however, that the number of shares of Registrable Securities of the Holders included in any such offering subsequent to the Company's first Qualified Public Offering shall in no event be less than twenty percent (20%) of the aggregate number of shares of capital stock to be registered, unless the aggregate number of shares of Registrable Securities the Holders requested in writing to be included in such offering is less than twenty percent (20%) of the aggregate number of shares of capital stock to be registered. If any limitation of the number of shares of Registrable Securities to be registered by the Holders is required pursuant to this Section 7.1, the number of Registrable Securities that may be included in the registration on behalf of the Holders shall be allocated among the Holders or the holders of any other registration rights in proportion, as nearly as practicable, to the respective holdings of Registrable Securities of all Holders requesting registration. The provisions of this Section 7.1 will not apply to a registration effected solely to implement (i) an Employee Benefit Plan, or (ii) a transaction to which Rule 145 or any other similar rule of the Securities and Exchange Commission (the "SEC" or the "Commission") under the Securities Act is applicable. 34 7.2 Required Registrations. (a) Demand Registration. On one or more occasions at any time after the earlier of the fifth anniversary of the Closing Date or the first anniversary of the effective date of the Company's first registration statement under the Securities Act, an Investor or Investors holding at least 50% of the Registrable Securities held by the Investors may request that the Company register under the Securities Act all or a portion of the Registrable Securities held by such requesting Investors; provided, however, that if a registration under this Section 7.2(a) is the Company's first public offering of securities registered under the Securities Act, then the minimum price to the public of the shares being registered must be no less than $4.50 per share, the gross proceeds with respect to the shares being registered must exceed $7,500,000, and the shares included in such registration must be underwritten by an underwriter selected by the Company and reasonably acceptable to the Investors. (b) Form S-3. After the first public offering of its securities registered under the Securities Act, the Company shall use its best efforts to qualify and remain qualified to register securities on Form S-3 (or any successor form) under the Securities Act. Any Investor or Investors shall have the right to request any number of registrations on Form S-3 (or any successor form) for the Registrable Securities held by such Investor, including registrations for the sale of such Registrable Securities on a delayed or continuous basis pursuant to Rule 415 under the Securities Act. Such requests shall be in writing and shall state the number of shares of Registrable Securities to be disposed of and the intended method of disposition of such shares by such Investor or Investors. The Company shall not be required to effect a registration under this Section 7.2(b) if (i) the aggregate price to the public with respect to the shares being registered is less than $ 1,000,000, or (ii) the Company has completed a registration under this Section 7.2(b) within the past 12 months. (c) Registration Requirements. Following a request pursuant to Section 7.2(a) or Section 7.2(b) above, the Company will notify all of the Holders who would be entitled to notice of a proposed registration under Section 7.1 above and any other holder of piggyback registration rights of its receipt of such notification from such Investor or Investors. Upon the written request of any such Holder or other holder of the Company's securities delivered to the Company within 20 days after receipt from the Company of such notification, the Company will either (i) elect to make a primary offering, in which case the rights of such Holders shall be as set forth in Section 7.1 above (in which case the registration shall not count as one of the Investors' permitted demand registrations under this Section 7.2), or (ii) use its best efforts to cause such of the Registrable Securities as may be requested by any Holders and any other holders of piggyback registration rights to be registered under the Securities Act in accordance with the terms of this Section 7.2; provided, however, that the number of shares of Registrable Securities of the Holders included in any such offering shall in no event be less than twenty percent (20%) of the aggregate number of shares of capital stock to be registered, unless the aggregate number of shares of Registrable Securities the Holders requested in writing to be in such offering is less than twenty percent (20%) of the aggregate number of shares of capital stock to be registered. 35 (d) Number of Required Registrations. The Company will not be obligated pursuant to this Section 7.2 to effect more than two registration statements on Form S-1 or S-2, but shall be obligated to file an unlimited number of registration statements on Form S-3. (e) Postponement. The Company may postpone the filing of any registration statement required hereunder for a reasonable period of time, not to exceed 120 days in the aggregate during any twelve-month period, if the Company has been advised by legal counsel that such filing would require a special audit or the disclosure of a material impending transaction or other matter and the Company's Board of Directors determines reasonably and in good faith that such disclosure would have a Material Adverse Effect. The Company shall not be required to cause a registration statement requested pursuant to this Section 7.2 to become effective prior to 90 days following the effective date of a registration statement initiated by the Company, if the request for registration has been received by the Company subsequent to the giving of written notice by the Company, made in good faith, to the Investors that the Company is commencing to prepare a Company-initiated registration statement (other than a registration effected solely to implement an Employee Benefit Plan or a transaction to which Rule 145 or any other similar rule of the SEC under the Securities Act is applicable); provided, however, that the Company shall use its best efforts to achieve such effectiveness promptly. (f) Suspension. In the case of a registration for the sale of Registrable Securities, upon receipt of any notice (a "Suspension Notice") from the Company of the happening of any event which makes any statement made in the registration statement or related prospectus untrue or which requires the making of any changes in such registration statement or prospectus so that they will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made not misleading, each Holder of Registrable Securities registered under such registration statement shall forthwith discontinue disposition of such Registrable Securities pursuant to such registration statement until such Holder's receipt of the copies of the supplemented or amended prospectus or until it is advised in writing (the "Advice") by the Company that the use of the prospectus may be resumed, and has received copies of any additional or supplemental filings which are incorporated by reference in the prospectus; provided, however, that the Company shall not give a Suspension Notice until after the registration statement has been declared effective and shall not give more than one Suspension Notice to the Holders in respect to all Registrable Securities and pursuant to this Section 7 during any period of twelve consecutive months and in no event shall the period from the date on which any Holder receives a Suspension Notice to the date on which any Holder receives either the Advice or copies of the supplemented or amended prospectus (the "Suspension Period") exceed 90 days. In the event that the Company shall give any Suspension Notice, the Company shall use its best efforts and take such actions as are reasonably necessary to render the Advice and end the Suspension Period as promptly as practicable. 7.3 Registrable Securities. For the purposes of this Section 7, the term "Registrable Securities" shall mean any shares of Common Stock held by a Holder or subject to acquisition by a Holder upon conversion of Convertible Preferred Shares, as applicable, including any shares 36 issued by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization; provided, however, that if an Investor owns Convertible Preferred Shares, the Investor may exercise its registration rights hereunder by converting the shares to be sold publicly into Common Stock as of the closing of the relevant offering and shall not be required to cause such Convertible Preferred Shares to be converted to Common Stock until and unless such Closing occurs, and provided, further, that any Common Stock that is sold in a registered sale pursuant to an effective registration statement under the Securities Act or pursuant to Rule 144 thereunder, or that may be sold without restriction as to volume or otherwise pursuant to Rule 144 under the Securities Act (as confirmed by an unqualified opinion of counsel to the Company), shall not be deemed Registrable Securities. 7.4 Further Obligations of the Company. Whenever the Company is required hereunder to register any Registrable Securities, it agrees that it shall also do the following: (a) Pay all expenses of such registrations and offerings (exclusive of underwriting discounts and commissions) and the reasonable fees and expenses of not more than one independent counsel for the Holders satisfactory to two-thirds in interest of the Investors in connection with any registrations pursuant to Section 7.1, up to one registration on Form S-1 or S-2 designated by two-thirds in interest of the Investors and up to three registrations on Form S-3 designated by two-thirds in interest of the Investors, provided that the Investors shall pay all such expenses in connection with any other demand registrations; (b) Use its best efforts (with due regard to management of the ongoing business of the Company and the allocation of managerial resources) diligently to prepare and file with the SEC a registration statement and such amendments to said registration statement and supplements to the prospectus used in connection therewith as may be necessary to keep said registration statement effective for at least 180 days or until the Holder or Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs, and to comply with the provisions of the Securities Act with respect to the sale of securities covered by said registration statement for the period necessary to complete the proposed public offering; (c) Furnish to each selling Holder such copies of each preliminary and final prospectus and such other documents as such Holder may reasonably request to facilitate the public offering of its Registrable Securities; (d) Enter into any reasonable underwriting agreement required by the proposed underwriter (which underwriter, in connection with any registration requested pursuant to Section 7.2, shall be selected by the Company and shall be reasonably acceptable to the Investors), if any, in such form and containing such terms as are customary; provided, however, that no Holder shall be required to make any representations or warranties other than with respect to its title to the Registrable Securities and any written information provided by the Holder to the Company, and if the underwriter requires that representations or warranties be made and that indemnification be provided, the Company shall make all such representations and warranties and provide all such indemnities, including, without limitation, in respect of the Company's business, operations and 37 financial information and the disclosures relating thereto in the prospectus; provided further that the right of any Holder to include such Holder's Registrable Securities in an underwritten public offering pursuant to Section 7.1 shall be conditioned on such Holder's agreement to be included in such underwriting arrangements; (e) Use its best efforts (with due regard to management of the ongoing business of the Company and the allocation of managerial resources) to register or qualify the securities covered by said registration statement under the securities or "blue sky" laws of such jurisdictions as any selling Holder may reasonably request, provided that the Company shall not be required to register or qualify the securities in any jurisdictions which require it to qualify to do business therein; (f) Immediately notify each selling Holder, at any time when a prospectus relating to such Holder's Registrable Securities is required to be delivered under the Securities Act, of the happening of any event as a result of which such registration statement or such prospectus contains an untrue statement of a material fact or omits any material fact necessary to make the statements therein not misleading, and, at the request of any such selling Holder, prepare an amendment to such registration statement or supplement to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading; (g) Cause all such Registrable Securities to be listed on each securities exchange or quotation system on which similar securities issued by the Company are then listed or quoted; (h) Otherwise use its best efforts to comply with the securities laws of the United States and other applicable jurisdictions and all applicable rules and regulations of the SEC and comparable governmental agencies in other applicable jurisdictions and make generally available to its holders, in each case as soon as practicable, but not later than 45 days after the close of the period covered thereby, an earnings statement of the Company which will satisfy the provisions of Section 11(a) of the Securities Act; (i) Obtain and furnish to each selling Holder, immediately prior to the effectiveness of the registration statement (and, in the case of an underwritten offering, at the time of delivery of any Registrable Securities sold pursuant thereto), a cold comfort letter from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by cold comfort letters as the Holders of a majority of the Registrable Securities being sold may reasonably request; and (j) Otherwise cooperate with the underwriter or underwriters, the Commission and other regulatory agencies and take all actions and execute and deliver or cause to be executed and delivered all documents necessary to effect the registration of any Registrable Securities under this Section 7. 38 7.5 Indemnification; Contribution. (a) Incident to any registration statement referred to in this Section 7, the Company will indemnify and hold harmless each underwriter, each Holder who offers or sells any such Registrable Securities in connection with such registration statement (including its partners (including partners of partners and shareholders of any such partners), and directors, officers, employees and agents of any of them (a "Selling Holder"), and each person who controls any of them within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (a "Controlling Person")), from and against any and all losses, claims, damages, expenses and liabilities, joint or several (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted, as the same are incurred), to which they, or any of them, may become subject under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities arise out of or are based on (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement (including any related preliminary or definitive prospectus, or any amendment or supplement to such registration statement or prospectus), (ii) any omission or alleged omission to state in such document a material fact required to be stated in it or necessary to make the statements in it not misleading, or (iii) any violation by the Company of the Securities Act, any state securities or "blue sky" laws or any rule or regulation thereunder in connection with such registration: provided, however, that the Company will not be liable to the extent that such loss, claim, damage, expense or liability arises from and is based on an untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with information furnished in writing to the Company by such underwriter, Selling Holder or Controlling Person expressly for use in such registration statement. With respect to such untrue statement or omission or alleged untrue statement or omission in the information furnished in writing to the Company by such Selling Holder expressly for use in such registration statement, such Selling Holder will indemnify and hold harmless each underwriter, the Company (including its directors, officers, employees and agents), each other Holder (including its partners (including partners of partners and shareholders of such partners) and directors, officers, employees and agents of any of them, and each person who controls any of them within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act), from and against any and all losses, claims, damages, expenses and liabilities, joint or several, to which they, or any of them, may become subject under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise to the same extent provided in the immediately preceding sentence. In no event, however, shall a Selling Holder be liable for indemnification under this Section 7.5(a) for an amount in excess of the lesser of (i) the proceeds (net of the applicable underwriting discount) received by such Selling Holder from its sale of Registrable Securities under such registration statement, or (ii) such Selling Holder's pro rata share of the total of such losses, claims, damages or liabilities indemnified against, based upon the number of Registrable Securities sold by such Selling Holder under such registration statement as a percentage of the total number of securities sold under such registration statement. 39 (b) If the indemnification provided for in Section 7.5(a) above for any reason is held by a court of competent jurisdiction to be unavailable to an indemnified party in respect of any losses, claims, damages, expenses or liabilities referred to therein, then each indemnifying party under this Section 7.5, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, expenses or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, the other Selling Holders and the underwriters from the offering of the Registrable Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, the other Selling Holders and the underwriters in connection with the statements or omissions which resulted in such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company, the Selling Holders and the underwriters shall be deemed to be in the same respective proportions that the net proceeds from the offering (before deducting expenses) received by the Company and the Selling Holders and the underwriting discount received by the underwriters, in each case as set forth in the table on the cover page of the applicable prospectus, bear to the aggregate public offering price of the Registrable Securities. The relative fault of the Company, the Selling Holders and the underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, the Selling Holders or the underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Holders, and the underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7.5(b) were determined by pro rata or per capita allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. In no event, however, shall a Selling Holder be required to contribute any amount under this Section 7.5(b) in excess of the lesser of (i) the proceeds (net of the applicable underwriting discount) received by such Selling Holder from its sale of Registrable Securities under such registration statement, or (ii) such Selling Holder's pro rata share of the total of such losses, claims, damages or liabilities indemnified against, based upon the number of Registrable Securities sold by such Selling Holder under such registration statement as a percentage of the total number of securities sold under such registration statement. No person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not found guilty of such fraudulent misrepresentation. (c) The amount paid by an indemnifying party or payable to an indemnified party as a result of the losses, claims, damages and liabilities referred to in this Section 7.5 shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim, payable as the same are incurred. The indemnification and contribution provided for in this Section 7.5 will remain in full force and effect regardless of any investigation 40 made by or on behalf of the indemnified parties or any officer, director, employee, agent or controlling person of the indemnified parties. (d) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with an underwritten public offering are in conflict with the foregoing provisions, the provisions of such underwriting agreement shall control. 7.6 Rule 144 and Rule 144A Requirements. In the event that the Company becomes subject to Section 13 or Section 15(d) of the Exchange Act, the Company shall use its best efforts to take all action as may be required as a condition to the availability of Rule 144 or Rule 144A under the Securities Act (or any successor or similar exemptive rules hereafter in effect). The Company shall furnish to any Holder, within 15 days of a written request, a written statement executed by the Company as to the steps it has taken to comply with the current public information requirements of Rule 144 or Rule 144A or such successor rules. 7.7 Assignment of Rights. The registration rights and related obligations under this Section 7 of the Holders with respect to their Registrable Securities may be assigned in connection with any transaction or series of related transactions involving the Transfer to one or more transferees of at least 833,333.3 shares of capital stock of the Company, other than pursuant to an effective registration statement under the Securities Act or pursuant to Rule 144 thereunder (subject to adjustments for stock splits, stock dividends and the like and aggregating all contemporaneous transfers by Holders), or to any TA Funds or Encompass Funds. Upon any such transfer, such transferee or TA Fund or Encompass Fund shall be deemed to be included within the definition of a "Holder" for purposes of this Section 7 with the rights set forth in this Section. 7.8 "Market Stand-off" Agreement. In connection with any underwritten public offering by the Company, the Holders, if requested in good faith by the Company and the managing underwriter of the Company's securities, shall agree not to sell or otherwise transfer or dispose of any securities of the Company held by them (except for any securities sold pursuant to such registration statement) for a period following the effective date of the applicable registration statement that in no event shall exceed 180 days. Notwithstanding the foregoing, unless otherwise consented to by two-thirds in interest of the Investors, such an agreement shall not be required unless all officers and directors and three percent (3%) or greater shareholders of the Company and all other persons with registration rights enter into similar agreements. In order to enforce the foregoing, the Company may impose stop-transfer instructions with respect to the Registrable Securities of each Holder (and the securities of every other person subject to the foregoing restriction) until the end of such period. 41 SECTION 8. ELECTION OF DIRECTORS The following provisions of this Section 8 shall terminate on the earliest to occur of (i) the closing of a Qualified Public Offering, or (ii) the date which is 10 years after the date hereof. 8.1 Election of Directors. At any time at which shareholders of the Company will have the right to or will vote shares of capital stock of the Company in an election of directors, the Investors and the Shareholders shall vote all shares of capital stock of the Company presently owned or hereafter acquired by them in favor of the following action: (a) to cause and maintain the election to the Board of Directors of one Investor Nominee designated by a majority in interest of the Convertible Preferred Shares held by the TA Funds (the "TA Nominee"), who shall initially be Jeffrey T. Chambers, and one Investor Nominee designated by a majority in interest of the Convertible Preferred Shares held by Encompass Ventures (the "Encompass Nominee"), who shall initially be Scot E. Land; (b) to cause and maintain the election to the Board of Directors of three members of the Company's management, designated by a majority in interest of the Common Stock held by the Shareholders (the "Shareholders' Nominees"), who shall initially be William T. Baxter, Albert T. Dosser, and Peter R. Gregory; and (c) to cause and maintain the election to the Board of Directors of at least one Independent Director, designated by agreement between the Investors' Nominees and the Shareholders' Nominees, which Independent Director shall be nominated and elected to the Board of Directors as soon as reasonably practicable on or following the Closing Date. The Investors and the Shareholders shall cause the nomination for election to the Board of Directors of the individuals set forth above. 8.2 Committees. The Company and the Shareholders shall cause the Board of Directors to nominate and appoint at least one Investor Nominee, one Shareholder Nominee and one Independent Director to each of the Compensation Committee and the Audit Committee. 8.3 Vacancies and Removal. (a) The TA Nominee may be removed during his term of office, without cause, by and only by the affirmative vote or written consent of a majority in interest of the Convertible Preferred Shares held by the TA Funds. The Encompass Nominee may be removed during his term of office, without cause, by and only by the affirmative vote or written consent of a majority in interest of the Convertible Preferred Shares held by the Encompass Funds. A Shareholder Nominee may be removed during his term of office, without cause, by and only by the affirmative vote or written consent of the holders of a majority of the outstanding shares of Common Stock (other than Conversion Shares). 42 (b) Any vacancy in the office of (i) a TA Nominee may be filled only by the vote or written consent of a majority in interest of the Convertible Preferred Shares held by the TA Funds, (ii) an Encompass Nominee may be filled only by the vote or written consent of a majority in interest of the Convertible Preferred Shares held by the Encompass Funds, or (iii) a Shareholder Nominee may filled only by the vote or written consent of a majority of the outstanding shares of Common Stock of the Company (other than Conversion Shares), all in accordance with the Articles of Incorporation and Bylaws and the corporate law of the State of Washington. SECTION 9. GENERAL 9.1 Amendments, Waivers and Consents. For the purposes of this Agreement and all agreements executed pursuant hereto, no course of dealing between or among any of the parties hereto and no delay on the part of any party hereto in exercising any rights hereunder or thereunder shall operate as a waiver of the rights hereof and thereof. No covenant or other provision hereof may he waived otherwise than by a written instrument signed by the party or parties so waiving such covenant or other provision. No amendment to this Agreement may be made without the written consent of the Company and the Investors; provided that the written consent of the Shareholders shall be required for any amendment of Sections 5, 6, 7, 8 or 9 hereof. Any actions required to be taken or consents, approvals, votes or waivers required or contemplated to be given by the Investors or the Shareholders shall require a vote of a two-thirds in interest of the Investors or two-thirds in interest of the Shareholders, as applicable, based on the relative holdings of capital stock of the Company of the Investors as a group or of the Shareholders as a group, as applicable, at the relevant time, and any such action by such Investors or Shareholders, as applicable, shall bind all of the Investors, or Shareholders, as applicable. 9.2 Indemnification from the Company. 43 (a) Without limitation of any other provision of this Agreement, the Company agrees to defend, indemnify and hold the Investors and their affiliates and their respective direct and indirect partners, members, shareholders, directors, officers, employees and agents and each person who controls any of them within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (parties receiving the benefit of the indemnification agreement herein shall be referred to collectively as "Indemnified Parties" and individually as an "Indemnified Party") harmless from and against any and all losses, claims, damages, obligations, liens, assessments, judgments, fines, liabilities, and other costs and expenses (including without limitation interest, penalties and any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted, as the same are incurred, and including any diminution in the value of the Investors' shares) of any kind or nature whatsoever which may be sustained or suffered by any such Indemnified Party, without regard to any investigation by any of the Indemnified Parties, based upon, arising out of, by reason of or otherwise in respect of or in connection with any third party or governmental action relating to any action taken or omitted to be taken or alleged to have been taken or omitted to have been taken by any Indemnified Party as shareholder, director, agent, representative or controlling person of the Company, including, without limitation, any and all losses, claims, damages, expenses and liabilities, joint or several (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted, as the same may be incurred) arising or alleged to arise under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, including without limitation any such claim alleging so-called control person liability or securities law liability; provided, however, that the Company will not be liable to the extent that such loss, claim, damage, expense or liability arises from and is based on (i) an untrue statement or omission or alleged untrue statement or omission in a registration statement or prospectus which is made in reliance on and in conformity with written information furnished to the Company in an instrument duly executed by or on behalf of such Indemnified Party specifically stating that it is for use in the preparation thereof or (ii) a knowing and willful violation of the federal securities laws by an Indemnified Party, as finally determined by a court of competent jurisdiction; provided further, however, that no such indemnity shall indemnify any Indemnified Party from or on account of (x) acts or omissions of the Indemnified Party finally adjudged to be intentional misconduct or a knowing violation of law; (y) conduct of an Indemnified Party finally adjudged to be in violation of RCW.23B 08.310; or (z) any transaction with respect to which it was finally adjudged that such Indemnified Party personally received a benefit in money, property, or services to which the Indemnified Party was not legally entitled. (b) If the indemnification provided for in Section 9.2(a) above for any reason is held by a court of competent jurisdiction to be unavailable to a Indemnified Party in respect of any losses, claims, damages, expenses or liabilities referred to therein, then the Company, in lieu of indemnifying such Indemnified Party thereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages, expenses or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Investors, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in 44 clause (i) above but also the relative fault of the Company and the Investors in connection with the action or inaction which resulted in such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable considerations. In connection with any registration of the Company's securities, the relative benefits received by the Company and the Investors shall be deemed to be in the same respective proportions that the net proceeds from the offering (before deducting expenses) received by the Company and the Investors, in each case as set forth in the table on the cover page of the applicable prospectus, bear to the aggregate public offering price of the securities so offered. The relative fault of the Company and the Investors shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Investors and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Investors agree that it would not be just and equitable if contribution pursuant to this Section 9.2(b) were determined by pro rata or per capita allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. In connection with the registration of the Company's securities, in no event shall an Investor be required to contribute any amount under this Section 9.2(b) in excess of the lesser of (i) that proportion of the total of such losses, claims, damages or liabilities indemnified against equal to the proportion of the total securities sold under such registration statement which is being sold by such Investor or (ii) the proceeds received by such Investor from its sale of securities under such registration statement. No person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not found guilty of such fraudulent misrepresentation. (c) The indemnification and contribution provided for in this Section 9.2 will remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Parties or any officer, director, partner, employee, agent or controlling person of the Indemnified Parties. (d) The provisions of this Section 9.2 are in addition to and shall supplement those set forth in Section 7.5 which shall apply in the case of the registration and sale of Registrable Securities held by any of the Investors pursuant to Section 7 hereof. (e) From and after the Closing, the Company agrees to pay and hold the Investors harmless against liability for payment of all reasonable out-of-pocket costs and expenses incurred by them in connection with their ongoing investment in the Company, including the fees and disbursements of counsel and other professionals. In addition, the Company agrees to pay any and all stamp, transfer and other similar taxes, if any, payable or determined to be payable in connection with the execution and delivery of this Agreement and the issuance of securities hereunder. 45 9.3 Survival of Representations, Warranties and Covenants; Assignability of Rights. All covenants, agreements, representations and warranties of the Company, the Shareholders and the Investors made herein, in the Disclosure Schedule and in the certificates, lists, exhibits, schedules or other written information delivered or furnished to any Investor in connection herewith (a) are material, shall be deemed to have been relied upon by the party or parties to whom they are made and shall survive the Closing regardless of any investigation or knowledge on the part of such party or its representatives and (b) shall bind the parties' successors and assigns (including without limitation any successor to the Company by way of acquisition, merger or otherwise), whether so expressed or not, and, except as otherwise provided in this Agreement, all such covenants, agreements, representations and warranties shall inure to the benefit of the Investors' successors and assigns and to their transferees of Securities, whether so expressed or not, subject to the provisions of Sections 4.12, 5.4, 6.2 and 7.7, and any such transferee shall be deemed an "Investor" for purposes hereof. 9.4 Legend on Securities. The Company, the Investors and the Shareholders acknowledge and agree that the following legend shall be typed on each certificate evidencing any of the securities issued hereunder held at any time by an Investor or Shareholder (except that the legend set forth in Section 9.4(c) below shall only be typed on certificates evidencing Convertible Preferred Shares): (a) THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES OR BLUE SKY LAWS AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT (1) PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE UNDER THE ACT OR (2) PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE ACT AND UNDER APPLICABLE STATE SECURITIES AND BLUE SKY LAWS RELATING TO THE DISPOSITION OF SECURITIES, PROVIDED THAT AN OPINION OF COUNSEL TO SUCH EFFECT IS PROVIDED TO THE COMPANY IN CONNECTION THEREWITH. (b) THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO THE PROVISIONS OF A STOCK PURCHASE AND SHAREHOLDERS AGREEMENT DATED AS OF JANUARY 30, 1998, INCLUDING THEREIN CERTAIN RESTRICTIONS ON TRANSFER. A COMPLETE AND CORRECT COPY OF THE AGREEMENT IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE COMPANY AND WILL BE FURNISHED UPON WRITTEN REQUEST AND WITHOUT CHARGE. (c) THE COMPANY HAS COMMON STOCK AND PREFERRED STOCK AUTHORIZED. THE FULL STATEMENT OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS THEREOF (THE "STATEMENT OF RIGHTS AND PREFERENCES") OF THE SHARES OF EACH SUCH SERIES OR CLASS OF STOCK IS SET FORTH IN THE ARTICLES OF 46 INCORPORATION, AS AMENDED, AND CERTIFICATE OF DESIGNATION OF THE COMPANY, AND ANY EFFECTIVE STATEMENT OF RELATIVE RIGHTS AND PREFERENCES OF PREFERRED STOCK, ON FILE IN THE OFFICE OF THE SECRETARY OF STATE OF THE STATE OF WASHINGTON. THE COMPANY WILL FURNISH COPIES OF THE STATEMENT OF RIGHTS AND PREFERENCES TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE. 9.5 Governing Law. This Agreement shall be deemed to be a contract made under, and shall be construed in accordance with, the laws of the State of Washington, without giving effect to conflict of laws principles thereof. 9.6 Section Headings and Gender. The descriptive headings in this Agreement have been inserted for convenience only and shall not be deemed to limit or otherwise affect the construction of any provision thereof or hereof. The use in this Agreement of the masculine pronoun in reference to a party hereto shall be deemed to include the feminine or neuter, and vice versa, as the context may require. 9.7 Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which when so executed and delivered shall be taken to be an original; but such counterparts shall together constitute but one and the same document. 9.8 Notices and Demands. Any notice or demand which is required or provided to he given under this Agreement or the Certificate of Designation shall be deemed to have been sufficiently given and received for all purposes when delivered by hand, telecopy, telex or other method of facsimile, or five days after being sent by certified or registered mail, postage and charges prepaid, return receipt requested, or two days after being sent by overnight delivery providing receipt of delivery, to the following addresses: if to the Company: BSQUARE Corporation 3633 136th Place SE, Suite 100 Bellevue, Washington 98006 Attn: President Fax: (206) 519-5994 copy to: Summit Law Group, P.L.L.C. 1505 Westlake Avenue North, Suite 300 Seattle, Washington 98109 Attn: Michael J. Erickson, Esq. Fax: (206) 281-9882 if to the Shareholders: c/o BSQUARE Corporation 3633 136th Place SE, Suite 100 Bellevue, Washington 98006 Fax: (206) 519-5994 47 if to an Investor, c/o TA Associates, Inc. or Encompass Ventures, at their respective mailing addresses shown on Exhibit A hereto, or at any other address designated by the Investors to the Company and the Shareholders in writing. 9.9 Dispute Resolution. Except with respect to matters as to which injunctive relief is being sought, any dispute arising out of or relating to this Agreement that has not been settled within thirty (30) days by good faith negotiation between the parties to this Agreement shall be submitted to Endispute for final and binding arbitration pursuant to Endispute's Arbitration Rules. Any such arbitration shall be conducted in Seattle, Washington. Such proceedings shall be guided by the following agreed upon procedures: (a) mandatory exchange of all documents discoverable pursuant to the Rules of Civil Procedure to be accomplished within forty-five (45) days of the submission of the claim to Endispute; (b) no other discovery; (c) hearings before the neutral advisor which shall consist of a summary presentation by each side of not more than three hours; such hearings to take place on one or two days at a maximum; and (d) parties agree to request that a decision be rendered not more than ten (10) days following such hearings. 9.10 Remedies, Severability. Notwithstanding Section 9.9, it is specifically understood and agreed that any breach of the provisions of this Agreement by any person subject hereto will result in irreparable injury to the other parties hereto, that the remedy at law alone will be an inadequate remedy for such breach, and that, in addition to any other remedies which they may have, such other parties may enforce their respective rights by actions for specific performance (to the extent permitted by law). The Company may refuse to recognize any unauthorized transferee as one of its shareholders for any purpose, including, without limitation, for purposes of dividend and voting rights, until the relevant party or parties have complied with all applicable provisions of this Agreement. Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be deemed prohibited or invalid under such applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, and such prohibition or invalidity shall not invalidate the remainder of such provision or the other provisions of this Agreement. 9.11 Integration. This Agreement, including the exhibits, documents and instruments referred to herein or therein, constitutes the entire agreement, and supersedes all other prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, including, without limitation, the letter of intent between the parties hereto 48 in respect of the transactions contemplated herein, which letter of intent shall be completely superseded by the representations, warranties and covenants of the Company contained herein. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 49 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. COMPANY: BSQUARE CORPORATION By: /s/ WILLIAM T. BAXTER ------------------------ Name: William T. Baxter Title: Pres. & CEO SHAREHOLDERS: /s/ WILLIAM T. BAXTER --------------------------- William T. Baxter /s/ ALBERT T. DOSSER --------------------------- Albert T. Dosser /s/ PETER R. GREGORY --------------------------- Peter R. Gregory /s/ JOSEPH NOTARANGELO --------------------------- Joseph Notarangelo 50 INVESTORS: TA/ADVENT VIII L.P. By: TA Associates VIII LLC Its: General Partner By: TA Associates, Inc. Its: General Manager By: /s/ KENNETH T. SCHICIANO -------------------------- Name: Kenneth T. Schiciano Title: Principal ADVENT ATLANTIC AND PACIFIC III L.P. By: TA Associates AAP III Partners L.P. Its: General Partner By: TA Associates, Inc. Its: General Partner By: /s/ KENNETH T. SCHICIANO -------------------------- Name: Kenneth T. Schiciano Title: Principal TA INVESTORS LLC By: TA Associates, Inc. Its: Manager By: /s/ KENNETH T. SCHICIANO ------------------------------- Name: Kenneth T. Schiciano Title: Principal TA EXECUTIVES FUND LLC By: TA Associates, Inc. Its: Manager By: /s/ KENNETH T. SCHICIANO ------------------------------- Name: Kenneth T. Schiciano Title: Principal 42 51 ENCOMPASS GROUP INFORMATION TECHNOLOGY PARTNERS 1 LP By: ------------------------------- Name: Scot E. Land Title: Managing Director /s/ HOWARD A. CUBELL ---------------------------------- Howard A. Cubell /s/ JEFFREY C. HADDEN ---------------------------------- Jeffrey C. Hadden /s/ JOHN J. EGAN, III ---------------------------------- John J. Egan, III /s/ STEVEN M. ELLIS ---------------------------------- Steven M. Ellis /s/ STEPHEN D. POSS ---------------------------------- Stephen D. Poss /s/ JOHN R. LeCLAIRE ---------------------------------- John R. LeClaire 43 52 ENCOMPASS GROUP INFORMATION TECHNOLOGY PARTNERS 1 LP By: EGI Fund Management Company, LLC Its: General Partner By: /s/ CRAIG McCALLUM -------------------------- Name: Craig McCallum Its: Managing Director 44 53 EXHIBIT A 54 EXHIBIT A SCHEDULE OF INVESTORS
Number of Shares Aggregate Name and Address Purchased Payment ---------------- ---------------- ------------- TA/Advent VIII L.P. 5,414,733 $9,746,519.40 Advent Atlantic and Pacific III L.P. 1,016,278 $1,829,300.40 TA Investors LLC 108,294 $ 194,929.20 TA Executives Fund LLC 99,583 $ 179,249.40 EnCompass Group US Information Technology Partners 1 LP 1,666,666 $2,999,998.80 Howard A. Cubell 8,333 $14,999.40 Jeffrey C. Hadden 5,556 $10,000.80 John J. Egan, M 5,556 $10,000.80 Steven M. Ellis 2,778 $5,000.40 Stephen D. Poss 2,778 $5,000.40 John R. LeClaire 2,778 $5,000.40 --------- -------------- Total 8,333,333 $14,999,999.40 ========= ==============
Address of and Notices to all TA Investors and Individual Investors: TA Associates, Inc. 125 High Street, Suite 2500 Boston, MA 02110 Attention: Kenneth T. Schiciano TA Associates, Inc. 435 Tasso Street Palo Alto, CA 94301 Attention: Jeffrey T. Chambers Address of and Notices to Encompass Ventures: Encompass Ventures 4040 Lake Washington Blvd., N.E., Suite 205 Kirkland, Washington 98033 Attention: Scot E. Land Copy to: Goodwin, Procter & Hoar LLP Exchange Place Boston, MA 02109 Attention: Jeffrey C. Hadden, Esq. 55 EXHIBIT B 56 EXHIBIT B PREFERRED STOCK TERMS The designations and the powers, preferences and rights of the Series A Convertible Preferred Stock are as follows: Section 1. Designation and Dividends. The Corporation hereby designates 8,333,333 shares of the Preferred Stock as Series A Convertible Preferred Stock (the "Series A Preferred Stock"), which shall have the rights, preferences and terms set forth herein. The holders of the Series A Preferred Stock shall be entitled to receive dividends at the same rate as dividends (other than dividends paid in additional shares of Common Stock) are paid with respect to the Common Stock (treating each share of Series A Preferred Stock as being equal to the number of shares of Common Stock into which each such share of Series A Preferred Stock could be converted pursuant to the provisions of Section 4 hereof with such number determined as of the record date for the determination of holders of Common Stock entitled to receive such dividend) (the "Participating Dividends"). Section 2. Liquidation, Dissolution or Winding Up. (a) In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, each holder of outstanding shares of Series A Preferred Stock shall be entitled to be paid, out of the assets of the Corporation available for distribution to stockholders, whether such assets are capital, surplus, or earnings and before any amount shall be paid or distributed to the holders of any class of Common Stock or of any other stock ranking on liquidation junior to the Series A Preferred Stock, the greater of: (i) an amount in cash equal to $1.80 per share (adjusted appropriately for stock splits, stock dividends and the like) together with declared but unpaid dividends to which the holders of outstanding shares of Series A Preferred Stock are entitled pursuant to Section 1 hereof (the "Minimum Liquidation Amount"); provided, however, that if, upon any liquidation, dissolution or winding up of the Corporation, the amounts payable with respect to the Series A Preferred Stock and any other stock ranking as to any such distribution on a parity with the Series A Preferred Stock are not paid in full, the holders of the Series A Preferred Stock and such other stock shall share ratably in any distribution of assets in proportion to the full respective preferential amounts to which they are entitled; or (ii) cash in an amount equal to the portion of the assets of the Corporation remaining for distribution to shareholders which such holder would have received if each share of Series A Preferred Stock held by such holder had been converted into the number of shares of Common Stock issuable upon the conversion of a share of Series A Preferred Stock immediately prior to any such liquidation, dissolution or winding up of the Corporation after taking into account the rights of holders of any other class or series of capital stock of the Corporation (including the Common Stock) entitled to share in such distribution in either case, plus any declared but unpaid 57 dividends to which the holders of outstanding shares of Series A Preferred Stock are entitled pursuant to Section I hereof (the "Aggregate Liquidation Amount"). (b) A consolidation, merger or capital reorganization of the Corporation (except (i) into or with a wholly-owned subsidiary of the Corporation with requisite shareholder approval or (ii) a merger in which the beneficial owners of the Corporation's outstanding capital stock immediately prior to such transaction hold no less than fifty-one percent (51%) of the voting power in the resulting entity) or a sale of all or substantially all of the assets of the Corporation shall be regarded as a liquidation, dissolution or winding up of the affairs of the Corporation within the meaning of this Section 2; provided, however, that each holder of the Series A Preferred Stock shall have the right to elect the benefits of the provisions of Section 4(i) hereof in lieu of receiving payment in liquidation, dissolution or winding up of the Corporation pursuant to this Section 2. Section 3. Voting, Power. Except as otherwise expressly provided herein or as required by law, the holder of each share of Series A Preferred Stock shall be entitled to vote on all matters. Each share of Series A Preferred Stock shall entitle the holder thereof to such number of votes per share as shall equal the number of shares of Common Stock into which each share of Series A Preferred Stock is then convertible. Except as otherwise expressly provided herein (including without limitation the provisions of Section 6 hereof) or as required by law, the holders of shares of the Series A Preferred Stock and the Common Stock shall vote together as a single class on all matters. Section 4. Conversion. The holders of the Series A Preferred Stock shall have the following conversion rights: (a) Voluntary Conversion. Holders of a majority of the outstanding shares of Series A Preferred Stock shall be entitled, at any time and from time to time after the date hereof, to cause any or all of such shares to be converted into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing $1.80 by the conversion price applicable to such shares, determined as hereafter provided in effect on the date the certificate is surrendered for conversion. Initially the conversion price shall be $1.80 per share of Common Stock, which price shall be adjusted as hereinafter provided (and, as so adjusted, is hereinafter sometimes referred to as the "Conversion Price"). If a holder of Series A Preferred Stock elects to convert his or her Series A Preferred Stock at a time when there are any accrued and unpaid dividends or other amounts due on such shares (including any Participating Dividends), such dividends and other amounts shall, to the extent permitted by applicable law, be paid in full by the Corporation in connection with such conversion. (b) Automatic Conversion. Each share of Series A Preferred Stock outstanding shall automatically, and without the requirement of any consent of any holder, be converted into the number of shares of Common Stock into which such shares 58 are convertible at the then effective Conversion Price upon the closing of a Qualified Public Offering. For purposes hereof, the term "Qualified Public Offering" shall mean an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), covering the offer and sale of Common Stock of the Corporation to the public at a minimum price of $4.50 per share and pursuant to which (i) the gross proceeds received by the Corporation equal or exceed $30,000,000 and (ii) the shares of Common Stock sold under such registration statement are approved for listing on the New York Stock Exchange or approved for quotation on The Nasdaq Stock Market, Inc.'s National Market. (c) Conversion Procedures. Any holder of Series A Preferred Stock converting such shares into shares of Common Stock pursuant to Section 4(a), or whose shares are automatically converted pursuant to Section 4(b), shall surrender the certificate or certificates representing the Series A Preferred Stock being converted, duly assigned or endorsed for transfer to the Corporation (or accompanied by duly executed stock powers relating thereto), at the principal executive office of the Corporation or the offices of the transfer agent for the Series A Preferred Stock or such office or offices in the continental United States of an agent for conversion as may from time to time be designated by notice to the holders of the Series A Preferred Stock by the Corporation, accompanied by written notice of conversion. Such notice of conversion shall (i) specify the number of shares of Series A Preferred Stock to be converted, (ii) specify the name or names in which such holder wishes the certificate or certificates for Common Stock and for any Series A Preferred Stock not to be so converted to be issued, (iii) include payment of any applicable transfer tax and (iv) specify the address to which such holder wishes delivery to be made of such new certificates to be issued upon such conversion. Upon surrender of a certificate representing Series A Preferred Stock for conversion, the Corporation shall issue and send by hand delivery, by courier or by first class mail (postage prepaid) to the holder thereof or to such holder's designee, at the address designated by such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled upon conversion. In the event that there shall have been surrendered a certificate or certificates representing Series A Preferred Stock, only part of which are to be converted, the Corporation shall issue and send to such holder or such holder's designee, in the manner set forth in the preceding sentence, a new certificate or certificates representing the number of shares of Series A Preferred Stock which shall not have been converted. (d) Effective Date of Conversion. The issuance by the Corporation of shares of Common Stock upon a conversion of Series A Preferred Stock into shares of Common Stock made at the option of the holder thereof pursuant to Section 4(a) hereof shall be effective as of the surrender of the certificate or certificates for the Series A Preferred Stock to be converted, duly assigned or endorsed for transfer to the Corporation (or accompanied by duly executed stock powers relating thereto). The issuance by the Corporation of shares of Common Stock upon a conversion of Series A Preferred Stock into Common Stock pursuant to Section 4(b) hereof shall be deemed to be effective immediately prior to the closing of the Qualified Public Offering. On and after the effective date of conversion, the person or persons entitled to receive the Common Stock 59 issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock. (e) Fractional Shares. The Corporation shall not be obligated to deliver to holders of Series A Preferred Stock any fractional share of Common Stock issuable upon any conversion of such Series A Preferred Stock, but in lieu thereof may make a cash payment in respect thereof in any manner permitted by law. (f) Reservation of Common Stock. The Corporation shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for issuance upon the conversion of Series A Preferred Stock as herein provided, free from any preemptive rights or other obligations, such number of shares of the Common Stock as shall from time to time be issuable upon the conversion of all the Series A Preferred Stock then outstanding provided that the shares of Common Stock so reserved shall not be reduced or affected in any manner whatsoever so long as any Series A Preferred Stock is outstanding, except in the case of a reverse stock split or stock combination. The Corporation shall prepare and shall use its reasonable business efforts to obtain and keep in force such governmental or regulatory permits or other authorizations as may be required by law, and shall comply with all requirements as to registration, qualification or listing of the Common Stock, in order to enable the Corporation lawfully to issue and deliver to each holder of record of Series A Preferred Stock such number of shares of its Common Stock as shall from time to time be sufficient to effect the conversion of all shares of Series A Preferred Stock then outstanding and convertible into shares of Common Stock. (g) Adjustments to Conversion Price. The Conversion Price in effect from time to time shall be subject to adjustment as follows: (i) Stock Dividends, Subdivisions and Combinations. Upon the issuance of additional shares of Common Stock as a dividend or other distribution on outstanding Common Stock, the subdivision of outstanding shares of Common Stock into a greater number of shares of Common Stock, or the combination of outstanding shares of Common Stock into a smaller number of shares of Common Stock, the Conversion Price shall, simultaneously with the happening of such dividend, subdivision or combination be adjusted by multiplying the then effective Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event. An adjustment made pursuant to this Section 4(g)(i) shall be given effect, upon payment of such a dividend or distribution, as of the record date for the determination of shareholders entitled to receive such dividend or distribution (on a retroactive basis) and, in the case of a subdivision or combination, immediately as of the effective date thereof. (ii) Sale of Common Stock. In the event the Corporation shall at any time or from time to time while the Series A Preferred Stock is outstanding, issue, 60 sell or exchange any shares of Common Stock (including shares held in the Corporation's treasury, but excluding: (i) any Common Stock which may be issued upon conversion of the Series A Preferred Stock; and (ii) up to 3,625,000 shares of Common Stock issued to officers, directors, employees, consultants or agents of the Corporation pursuant to the Corporation's Stock Option Plan (the "Plan") or upon the exercise of options issued pursuant to such Plan, or such greater number of shares as may be issuable pursuant to the adjustment provisions of such Plan as in effect on the date hereof (collectively, the "Excluded Shares")), for a consideration per share less than the Conversion Price in effect immediately prior to the issuance, sale or exchange of such shares (any such issuance, sale or exchange hereinafter referred to as a "Dilutive Transaction"), then, and thereafter successively upon the consummation of any Dilutive Transaction, the Conversion Price in effect immediately prior to the Dilutive Transaction shall forthwith be reduced to an amount (calculated to the nearest cent) determined by multiplying such Conversion Price by a fraction: (A) the numerator of which shall be (1) the number of shares of Common Stock of all classes outstanding immediately prior to the Dilutive Transaction (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Series A Preferred Stock, options, warrants, rights or convertible securities), plus (2) the number of shares of Common Stock which the net aggregate consideration received by the Corporation for the total number of such additional shares of Common Stock so issued in the Dilutive Transaction would purchase at the Conversion Price (prior to adjustment), and (B) the denominator of which shall be (1) the number of shares of Common Stock of all classes outstanding immediately prior to the Dilutive Transaction (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Series A Preferred Stock, options, warrants, rights or convertible securities), plus (2) the number of such additional shares of Common Stock so issued in the Dilutive Transaction. (iii) Sale of Options, Fights or Convertible Securities. In the event the Corporation shall at any time or from time to time while the Series A Preferred Stock is outstanding, issue options, warrants or rights to subscribe for shares of Common Stock (other than any options for Excluded Shares), or issue any securities convertible into or exercisable or exchangeable for shares of Common Stock, for a consideration per share (determined by dividing the Net Aggregate Consideration (as determined below) by the aggregate number of shares of Common Stock that would be issued if all such options, warrants, rights or convertible securities were exercised or converted to the fullest extent permitted by their terms) less than the Conversion Price in effect immediately prior to the issuance of such options or rights or convertible or exchangeable securities, the 61 Conversion Price in effect immediately prior to the issuance of such options, warrants or rights or securities shall be reduced to an amount determined by multiplying such Conversion Price by a fraction: (A) the numerator of which shall be (1) the number of shares of Common Stock of all classes outstanding immediately prior to the issuance of such options, rights or convertible securities (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Series A Preferred Stock, options, warrants, rights or convertible securities), plus (2) the number of shares of Common Stock which the total amount of consideration received by the Corporation for the issuance of such options, warrants, rights or convertible securities plus the minimum amount set forth in the terms of such security as payable to the Corporation upon the exercise or conversion thereof (the "Net Aggregate Consideration") would purchase at the Conversion Price prior to adjustment, and (B) the denominator of which shall be (1) the number of shares of Common Stock of all classes outstanding immediately prior to the issuance of such options, warrants, rights or convertible securities (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Series A Preferred Stock, options, warrants, rights or convertible securities), plus (2) the aggregate number of shares of Common Stock that would be issued if all such options, warrants, rights or convertible securities were exercised or converted. (iv) Expiration or Change in Price. If the consideration per share provided for in any options or rights to subscribe for shares of Common Stock or any securities exercisable or exchangeable for or convertible into shares of Common Stock, changes at any time, the Conversion Price in effect at the time of such change shall be readjusted to the Conversion Price which would have been in effect at such time had such options or convertible securities provided for such changed consideration per share (determined as provided in Section 4(g)(iii) hereof) at the time initially granted, issued or sold; provided, that such adjustment of the Conversion Price will be made only as and to the extent that the Conversion Price effective upon such adjustment remains less than or equal to the Conversion Price that would be in effect if such options, rights or securities had not been issued. No adjustment of the Conversion Price shall be made under this Section 4 upon the issuance of any additional shares of Common Stock which are issued pursuant to the exercise of any warrants, options or other subscription or purchase rights or pursuant to the exercise of any conversion or exchange rights in any convertible securities if an adjustment shall previously have been made upon the issuance of such warrants, options or other rights. Any adjustment of the Conversion Price shall be disregarded if, as, and when the rights to acquire shares of Common Stock upon exercise or conversion of the warrants, options, rights or 62 convertible securities which gave rise to such adjustment expire or are canceled without having been exercised, so that the Conversion Price effective immediately upon such cancellation or expiration shall be equal to the Conversion Price in effect at the time of the issuance of the expired or canceled warrants, options, rights or convertible securities, with such additional adjustments as would have been made to that Conversion Price had the expired or canceled warrants, options, rights or convertible securities not been issued. (h) Other Adjustments. In the event the Corporation shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, then and in each such event lawful and adequate provision shall be made so that the holders of Series A Preferred Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the number of securities of the Corporation which they would have received had their Series A Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the conversion date (calculated in accordance with Section 4(d) hereof), retained such securities receivable by them as aforesaid during such period, giving application to all adjustments called for during such period under this Section 4 as applied to such distributed securities. If the Common Stock issuable upon the conversion of the Series A Preferred Stock shall be changed into the same or different number of shares of any class or classes of stock, whether by reclassification or otherwise (other than a subdivision or combination of shares or stock dividend provided for above, or a reorganization, merger, consolidation or sale of assets provided for elsewhere in this Section 4), then and in each such event the holder of each share of Series A Preferred Stock shall have the right thereafter to convert each such share into the kind and amount of shares of stock and other securities and property receivable upon such reorganization, reclassification or other change, by holders of the number of shares of Common Stock into which such shares of Series A Preferred Stock might have been converted immediately prior to such reorganization, reclassification or change, all subject to further adjustment as provided herein. (i) Mergers and Other Reorganizations. If at any time or from time to time there shall be a capital reorganization of the Common Stock (other than a subdivision, combination, reclassification or exchange of shares provided for elsewhere in this Section 4) or a merger or consolidation of the Corporation with or into another Corporation or the sale of all or substantially all of the Corporation's properties and assets to any other person, then, as a part of and as a condition to the effectiveness of such reorganization, merger, consolidation or sale, lawful and adequate provision shall be made so that the holders of the Series A Preferred Stock shall thereafter be entitled to receive upon conversion of the Series A Preferred Stock the number of shares of stock or other securities or property of the Corporation or of the successor corporation resulting from such merger or consolidation or sale, to which a holder of Common Stock 63 deliverable upon conversion would have been entitled on such capital reorganization, merger, consolidation, or sale. In any such case, appropriate provisions shall be made with respect to the rights of the holders of the Series A Preferred Stock after the reorganization, merger, consolidation or sale to the end that the provisions of this Section 4 (including, without limitation, provisions for adjustment of the Conversion Price and the number of shares purchasable upon conversion of the Series A Preferred Stock) shall thereafter be applicable, as nearly as may be, with respect to any shares of stock, securities or assets to be deliverable thereafter upon the conversion of the Series A Preferred Stock. Each holder of Series A Preferred Stock upon the occurrence of a capital reorganization, merger or consolidation of the Corporation or the sale of all or substantially all its assets and properties as such events are more fully set forth in the first paragraph of this Section 4(i), shall have the option of electing treatment of his or her shares of Series A Preferred Stock under either this Section 4(i) or Section 2(b) hereof, notice of which election shall be submitted in writing to the Corporation at its principal offices no later than ten (10) days before the effective date of such event, provided that any such notice shall be effective if given not later than fifteen (15) days after the date of the Corporation's notice, pursuant to Section 8, with respect to such event. (j) Notices. In each case of an adjustment or readjustment of the Conversion Price, the Corporation will furnish each holder of Series A Preferred Stock with a certificate, prepared by the chief financial officer of the Corporation, showing such adjustment or readjustment, and stating in detail the facts upon which such adjustment or readjustment is based. Section 5. Redemption. (a) Any holder of shares of Series A Preferred Stock may request that up to 50% of the Series A Preferred Stock then held by such holder be redeemed by the Corporation at any time on or after January 30, 2003 (the "First Redemption Date"), or that up to 100% of the Series A Preferred Stock then held by such holder be redeemed by the Corporation at any time on or after January 30, 2004 (the "Second Redemption Date," and, collectively with the First Redemption Date, the "Redemption Date"), by giving 90 days written notice to the Corporation, stating in such notice the number of shares to be redeemed and delivering the certificates for the shares of Series A Preferred Stock to be so redeemed to the Corporation by the Redemption Date. The Corporation shall redeem all shares as to which it has received requests for redemption from the holders thereof in accordance with the foregoing. Any redemption hereunder shall be at a per share redemption price equal to $1.80 per share (adjusted appropriately for stock splits, stock dividends and the like), plus any accrued but unpaid dividends (including any Participating Dividends) to which the holders of outstanding shares of Series A Preferred Stock are entitled pursuant to Section 1 hereof (the "Redemption Price"). (b) If the Corporation does not have sufficient funds legally available to redeem all shares for which redemption is requested hereunder, then it shall redeem 64 such shares on a pro-rata basis among the holders of the Series A Preferred Stock in proportion to the shares of Series A Preferred Stock then held by them to the extent possible and shall redeem the remaining shares to be redeemed as soon as sufficient funds are legally available. In the event that the Corporation fails to timely redeem shares for which redemption is requested pursuant to Section 5(a) for any reason whatsoever, then during the period from the Redemption Date through the date on which such shares are redeemed, the Redemption Price of such shares shall bear interest at a per annum rate equal to the Prime Rate (as reported in The Wall Street Journal from time to time) plus two percent, which interest rate shall increase by an additional 1% at the end of each three (3) month period thereafter until the Redemption Price (and any interest thereon) is paid in full, subject to a maximum interest rate of the greater of 15% or such Prime Rate plus ten percent, but in no event greater than 18%. Section 6. Restrictions and Limitations. (a) So long as any shares of the Series A Preferred Stock remain outstanding, the Corporation shall not without the affirmative vote or written consent of the holders of two-thirds in interest of the Series A Preferred Stock: (i) sell, lease or otherwise dispose of (whether in one transaction or a series of related transactions) all or substantially all of its assets or business, (ii) merge with or into or consolidate with another entity or enter into or engage in any other transaction or series of related transactions, in any such case in connection with or as a result of which the Company is not the surviving entity or the owners of the Company's outstanding equity securities immediately prior to the transaction or series of related transactions do not own at least a majority of the outstanding equity securities of the surviving, resulting or consolidated entity, (iii) dissolve, liquidate or wind up its operations, (iv) directly or indirectly redeem, purchase, or otherwise acquire for consideration any shares of its Common Stock or any other class of its capital stock except (A) for the redemption of Convertible Preferred Shares pursuant to and as provided in Sections 2, 4 and 5 hereof, (B) as contemplated by Sections 1.2, 4.6, and 5.2 of that certain Stock Purchase and Shareholders Agreement, dated as of January 30, 1998 or (C) as contemplated by the Corporation's standard form of agreement, as approved by the Board of Directors, to be executed by employees, officers, and consultants of the Corporation upon the grant to such employees, officers, and consultants of options under the Plan. or upon exercise of such options, (v) adopt any amendment to this Certificate of Designation, or any amendment to its Articles of Incorporation or By-Laws, that eliminates, 65 amends, restricts or otherwise adversely affects the rights and preferences of the Convertible Preferred Stock, or that increases the authorized shares of Convertible Preferred Stock, (vi) declare or make dividend payments on any shares of its Common Stock or any other class of its capital stock, (vii) create, or obligate itself to create, any class or series of shares that has a preference over, or is on a parity with, the Convertible Preferred Stock, (viii) increase the size of the Board of Directors to more than seven (7) members, (ix) enter into any agreement or arrangement or take any other action that eliminates,amends, restricts or otherwise adversely affects the rights of the holders of Convertible Preferred Stock or its ability to perform its obligations hereunder; or (x) enter into or be a party to any transaction or agreement, including, without limitation, any lease or other rental or purchase agreement providing for loans or extensions of credit by or to the Company, with or for the benefit of any person or entity which is a shareholder, officer or director of the Company, or which is a relative by blood or marriage of, a trust or estate for the benefit of, or a person or entity which directly or indirectly controls, is controlled by, or is under common control with, any such person or entity, except for normal compensation paid to employees of the Company in the ordinary course of business. Section 7. No Reissuance of Series A Preferred Stock. No share or shares of the Series A Preferred Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be reissued, and all such shares shall be canceled, retired, and eliminated from the shares which the Corporation shall be authorized to issue. The Corporation may from time to time take such appropriate corporate action as may be necessary to reduce the authorized number of shares of the Series A Preferred Stock accordingly. Section 8. Other Rights. Except as otherwise provided in this Certificate of Designation, each share of Series A Preferred Stock and each share of Common Stock shall be identical in all respects, shall have the same powers, preferences and rights, without preference of any such class or share over any other such class or share. 66 EXHIBIT C 67
EXHIBIT C SCHEDULE OF COMMON STOCK REDEMPTIONS Name of Shareholder Number of Shares of Common Stock to be Redeemed William T. Baxter 1,111,111 Albert T. Dosser 1,111,111 Peter R. Gregory 1,111,111
68 EXHIBIT D 69 EXHIBIT D FORM OF REDEMPTION AGREEMENT This STOCK REDEMPTION AGREEMENT (the "Agreement") is made as of January 30, 1998, by and between BSQUARE CORPORATION, a Washington corporation (the "Corporation"), and ("Transferor"). RECITALS WHEREAS, Transferor owns beneficially and of record 7,000,000 common shares, no par value, of the Corporation's capital stock ("Common Stock"); WHEREAS, the Board of Directors of the Corporation has approved an investment in the Corporation by a group of funds affiliated with TA Associates, Inc. or Encompass Ventures (collectively, the "Investors") whereby the Investors propose to invest an aggregate of $15,000,000 in the Corporation in exchange for issuance by the Corporation to the Investors of shares of the Corporation's Series A Convertible Preferred Stock, par value (the "Investment Transaction"); WHEREAS, as a condition to the closing of the Investment Transaction, the Board of Directors has agreed to repurchase an aggregate of $6,000,000 of the Common Stock from certain existing shareholders of the Corporation; and WHEREAS, the Corporation desires to purchase 1,111,111 shares (the "Transferred Stock") of such Common Stock from Transferor for an aggregate purchase price of $2,000,000. NOW, THEREFORE, IT IS AGREED THAT: 1. Transfer. Transferor hereby transfers the Transferred Stock to the Corporation, and the Corporation hereby accepts the Transferred Stock, in exchange for payment by the Corporation to the Transferor in the amount of $2,000,000 (the "Stock Payment"). Payment shall be made by check, wire transfer or such other form as shall be mutually agreed upon by the parties. 2. Delivery and Payment. Upon the signing of this Agreement, (a) the Corporation shall deliver to transferor (i) a signed copy of this Agreement; (ii) the Stock Payment; (iii) a new stock certificate representing the balance of the Corporation's Common Stock owned by Transferor and not subject to transfer to the Corporation hereunder; and (b) Transferor shall deliver to the Corporation (i) a copy of this Agreement signed by the Transferor, and (ii) a stock certificate representing the Transferred Stock, duly endorsed for transfer in accordance with the terms hereof, together with all such other documents as may be required to effect a valid transfer of the Transferred Stock, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest. 3. Consent of Spouse. If the Transferor is married on the date of this Agreement, the Transferor's spouse shall execute a Consent of Spouse in the form of Exhibit A hereto, effective on 1 70 the date hereof Such consent shall not be deemed to confer or convey to the spouse any rights in the Transferred Stock that do not otherwise exist by operation of law or the agreement of the parties. If the Transferor should marry or remarry subsequent to the date of this Agreement, the Transferor shall within thirty (30) days thereafter obtain his new spouse's acknowledgment of and consent to the existence and binding effect of all restrictions contained in this Agreement by signing an additional Consent of Spouse in the form of Exhibit A. 4. Transferor's Representations and Warranties. Transferor represents and warrants to the Corporation as follows: (a) Valid Title. Transferor now has and will have on the date hereof valid record and beneficial ownership of and title to the Transferred Stock, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest. Transferor has full right, power and authority to sell, assign, transfer and deliver such Transferred Stock. (b) Requisite Power and Authority. Transferor has all necessary power, competence and authority under all applicable provisions of law to execute and deliver this Agreement and to carry out its provisions. All action required on Transferor's part for the lawful execution and delivery of this Agreement has been or will be effectively taken prior to the date hereof. Upon its execution and delivery, this Agreement will be a valid and binding obligation of Transferor, enforceable in accordance with its terms. (c) No Conflicts. The execution and delivery of this Agreement do not, and the performance of this Agreement and the consummation of the transactions herein contemplated will not, conflict with, result in a breach of or default under, or give rise to a right to terminate, amend, modify, abandon or accelerate any bond, debenture, note or other evidence of indebtedness, or any contract, indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which Transferor is a party or by which Transferor or any Transferred Stock hereunder may be bound or, to Transferor's best knowledge, result in any violation of any law, order, rule, regulation, writ, injunction or decree of any court or governmental agency or body. 5. Further Instruments. The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. 6. Successors and Assigns. This Agreement shall inure to the benefit of the successors and assigns of the Corporation and be binding upon the Transferor, his heirs, executors, administrators, successors and assigns. 7. Entire Agreement; Amendments. This Agreement, together with Exhibit A hereto, constitutes the full and entire understanding and agreement of the parties with regard to the specific subject matter hereof and supersedes all prior and contemporaneous written or oral agreements, and no amendment or addition hereto shall be deemed effective unless agreed to in writing by the parties hereto. 2 71 8. Governing Law. This Agreement shall be governed by Washington State laws without giving effect to conflicts of law principles. Any action arising out of this Agreement must be brought in either the Superior Court of the State of Washington or the United States District Court for the District of Washington, as permitted by law, which together shall have exclusive jurisdiction over disputes arising out of this Agreement. 9. Dispute Resolution. Except with respect to matters as to which injunctive relief is being sought, any dispute arising out of or relating to this Agreement that has not been settled within thirty (30) days by good faith negotiation between the parties to this Agreement shall be submitted to Endispute for final and binding arbitration pursuant to Endispute's Arbitration Rules. Any such arbitration shall be conducted in Bellevue, Washington. Such proceedings shall be guided by the following agreed upon procedures: i. mandatory exchange of all documents, discoverable pursuant to the Rules of Civil Procedure to be accomplished within forty-five (45) days of the submission of the claim to Endispute; ii. no other discovery; iii. hearings before the neutral advisor which shall consist of a summary presentation by each side of not more than three hours; such hearings to take place on one or two days at a maximum; and iv. parties agree to request that decision be rendered not more than ten (10) days following such hearings. 10. Separability. If any provisions of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions shall nevertheless continue in full force and effect without being impaired or invalidated in any way and shall be construed in accordance with the purposes and tenor and effect of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. Corporation: Transferor: BSQUARE CORPORATION - ---------------------------- ---------------------------- William T. Baxter, President ---------------------------- 3 72 EXHIBIT 3 73 EXHIBIT E DISCLOSURE SCHEDULES Section 2.2 Pursuant to Section 8.5 of the Windows NT Source Code License Agreement dated February 27, 1997 between the Company and Microsoft Corporation, the Company is required to obtain the consent of Microsoft in the event there is a change in the ownership of beneficial interest of greater than 20% of the Company's shares. The Company has not received written consent from Microsoft, but is currently negotiating an agreement with Microsoft regarding this source code. 74 Section 2.3
1. LIST OF SHAREHOLDERS PRIOR TO CLOSING. - William T. Baxter 7,000,000 shares - Albert T. Dosser 7,000,000 shares - Peter R. Gregory 7,000,000 shares - Joseph Notarangelo 375,000 shares
2. LIST OF SHAREHOLDERS FOLLOWING CLOSING.
- William T. Baxter 5,888,889 shares of Common Stock - Albert T. Dosser 5,888,889 shares of Common Stock - Peter R. Gregory 5,888,889 shares of Common Stock - Joseph Notarangelo 375,000 shares of Common Stock - TA/Advent VIII L.P. 5,414,733 shares of Convertible Preferred Stock - Advent Atlantic and 1,016,278 shares of Convertible Preferred Stock Pacific III L.P. - TA Investors LLC 108,294 shares of Convertible Preferred Stock - TA Executives Fund LLC 99,583 shares of Convertible Preferred Stock - EnCompass Group US 1,666,666 shares of Convertible Preferred Stock Information Technology Partners 1 LP - Howard A. Cubell 8,333 shares of Convertible Preferred Stock - Jeffrey C. Hadden 5,556 shares of Convertible Preferred Stock - John. F. Egan, III 5,556 shares of Convertible Preferred Stock - Steven M. Ellis 2,778 shares of Convertible Preferred Stock - Stephen D. Poss 2,778 shares of Convertible Preferred Stock - John R. LeClaire 2,778 shares of Convertible Preferred Stock
3. STOCK OPTION PLAN. A copy of the Company's Amended and Restated Stock Option Plan has been attached to this Section 2.3 of the Disclosure Schedule. 4. REDEMPTION AGREEMENT. All of the Company's current shareholders are subject to a Redemption Agreement dated January 1, 1996, whereby in the event that any shareholder wishes to sell his stock, such shareholder must first offer his or her shares to the Company and to the non-selling shareholders. In addition, there are certain provisions regarding what happens to a shareholder's stock upon termination of employment with the Company and upon death. The Company and Shareholders have terminated this Redemption Agreement contingent upon the closing of the transactions contemplated by this Agreement. 75 SECTION 2.3 TO DISCLOSURE SCHEDULE BSQUARE CORPORATION AMENDED AND RESTATED STOCK OPTION PLAN 76
1. DEFINITIONS ............................................................. 1 2. PURPOSES ................................................................ 4 3. ADMINISTRATION .......................................................... 4 (A) COMMITTEE ......................................................... 4 (B) APPOINTMENT OF COMMITTEE .......................................... 4 (C) POWERS; REGULATIONS ............................................... 4 (D) DELEGATION To EXECUTIVE OFFICER ................................... 5 4. ELIGIBILITY ............................................................. 5 5. STOCK .................................................................... 5 6. TERMS AND CONDITIONS OF OPTIONS ......................................... 5 (A) NUMBER OF SHARES AND TYPE OF OPTION ............................... 5 (B) DATE OF GRANT ..................................................... 6 (C) OPTION PRICE ...................................................... 6 (D) DURATION OF OPTIONS ............................................... 6 (E) VESTING SCHEDULE AND EXERCISABILITY OF OPTIONS .................... 7 (F) ACCELERATION OF VESTING AND EXERCISABILITY ........................ 7 (G) TERM OF OPTION .................................................... 8 (H) EXERCISE OF OPTIONS ............................................... 8 (I) PAYMENT UPON EXERCISE OF OPTION ................................... 9 (J) RIGHTS AS A SHAREHOLDER ........................................... 10 (K) TRANSFER OF OPTION ................................................ 10 (L) SECURITIES REGULATION AND TAX WITHHOLDING ......................... 11 (M) STOCK DIVIDEND, REORGANIZATION OR LIQUIDATION ..................... 12 (N) APPROVED TRANSACTIONS; CONTROL PURCHASE............................ 13 7. EFFECTIVE DATE; TERM..................................................... 14 8. NO OBLIGATIONS TO EXERCISE OPTION........................................ 14 9. NO RIGHT TO OPTIONS OR TO EMPLOYMENT..................................... 14 10. APPLICATION OF FUNDS..................................................... 14 11. INDEMNIFICATION OF COMMITTEE............................................. 14 12. SHAREHOLDERS AGREEMENT................................................... 15 13. SEPARABILITY............................................................. 15 14. NON-EXCLUSIVITY OF THE PLAN.............................................. 15 15. EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION.................... 15 16. AMENDMENT OF PLAN........................................................ 15
77 BSQUARE CORPORATION AMENDED AND RESTATED STOCK OPTION PLAN 1. DEFINITIONS. Capitalized terms not defined elsewhere in the Plan shall have the following meanings (whether used in the singular or plural). (a) "AGREEMENT" means a written agreement approved by the Committee evidencing Options granted under the Plan. (b) "APPROVED TRANSACTION" means (i) a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act covering the offer and sale of Common Stock for the account of the Company to the public with aggregate proceeds paid to the Company of not less than $1 0,000,000 (after the deduction of underwriting commissions and offering expenses); (ii) the acquisition of the Company by another entity by means of merger, consolidation or other transaction or series of related transactions resulting in the exchange of the outstanding shares of the Company for securities of, or consideration issued, or caused to be issued by, the acquiring entity or any of its affiliates, Provided, that after such event the shareholders of the Company immediately prior to the event own less than a majority of the outstanding voting equity securities of the surviving entity immediately following the event; (iii) any liquidation or dissolution of the Company; and (iv) any sale, lease, exchange or other transfer not in the ordinary course of business (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company. (c) "BOARD" means the Board of Directors of the Company. (d) "CODE" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute or statutes thereto. Reference to any specific section of the Code shall include any successor section. (e) "COMMITTEE" shall mean the Board, or the committee appointed by the Board pursuant to Section 3(b) of the Plan, if it is administering the Plan. (f) "COMMON STOCK" means the Common Stock, no par value, of the Company. (g) "COMPANY" means BSQUARE CORPORATION, a Washington corporation. 1 78 (h) "CONTROL PURCHASE" means any transaction (or series of related transactions) in which any person, corporation or other entity (including any "person" as defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act, but excluding the Company and any employee benefit plan sponsored by the Company): (i) purchases any Common Stock (or securities convertible into Common Stock) for cash, securities or any other consideration pursuant to a tender offer or exchange offer unless by the terms of such offer the offeror, upon consummation thereof, would be the "beneficial owner" (as that term is defined in Rule l3d-3 under the Exchange Act) of less than 30% of the shares of Common Stock then outstanding; or (ii) becomes the "beneficial owner", directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in Rule 13d-3(d) under the Exchange Act in the case of rights to acquire the Company's securities); provided, however, that the foregoing shall not constitute a Control Purchase if the transactions or related transactions received the prior approval of a majority of all of the directors of the Company, excluding for such purpose the votes of directors who are directors or officers of, or have a material financial interest in any Person (other than the Company) who is a party to the event specified in either clauses (i) or (ii). (i) "COVERED EMPLOYEE" has the meaning given to it by Section 162(m)(3) of the Code. (j) "DATE OF GRANT" means that date the Committee has deemed to be the effective date of the Option for purposes of the Plan. (k) "DISABILITY" means any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months that renders the Optionee unable to engage in any substantial gainful activity. (l) "EFFECTIVE DATE" means at the time specified in the resolutions of the Board adopting the Plan. (m) "EMPLOYEES" means individuals employed by the Company or a Related Corporation. (n) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute or statutes thereto. Reference to any specific section of the Exchange Act shall include any successor section. (o) "EXECUTIVE OFFICER" shall be defined in Section 3(d). (p) "FAIR MARKET VALUE" means, if the Common Stock is publicly traded, the last sales price (or, if no last sales price is reported, the average of the high bid and low asked prices) for a share of Common Stock on that day (or, if that day is not a trading day, on the next preceding trading day), as reported by the principal exchange on which the Common Stock 2 79 is listed, or, if the Common Stock is publicly traded but not listed on an exchange, as reported by The Nasdaq Stock Market, or if such prices or quotations are not reported by The Nasdaq Stock Market, as reported by any other available source of prices or quotations selected by the Committee. If the Common Stock is not publicly traded or if the Fair Market Value is not determinable by any of the foregoing means, the Fair Market Value on any day shall be determined in good faith by the Committee on the basis of such considerations as the Committee deems important. (q) "IMMEDIATE FAMILY MEMBER" means a spouse, children or grandchildren of the Optionee. (r) "INCENTIVE STOCK OPTION" means an Option that is an incentive stock option within the meaning of Section 422 of the Code. (s) "NON-EMPLOYEE DIRECTOR" has the meaning given to it by Rule 16b-3 promulgated under the Exchange Act of 1934. (t) "NON-INSIDERS" has the meaning given to by Section 162(m)(3) of the Code. (u) "NON-QUALIFIED STOCK OPTION" means an Option that is not an Incentive Stock Option. (v) "OPTION" means an option with respect to shares of Common Stock awarded pursuant to Section 6. (w) "OPTIONEE" means any person to whom an Option is granted under the Plan (as well as any permitted transferee of an Option). (x) "OUTSIDE DIRECTOR" has the meaning given to it by the regulations promulgated under Section 162(m) of the Code. (y) "PLAN" means the BSQUARE CORPORATION stock option plan. (z) "QUALIFIED PERFORMANCE-BASED COMPENSATION" has the meaning given to it by the regulations promulgated under Section 162(m) of the Code. (aa) "RELATED Corporation" means any corporation (other than the Company) that is a "parent corporation" of the Company or "subsidiary corporation" of the Company, as defined in Sections 424(e) and 424(f), respectively, of the Code. (bb) "SECTION 16 INSIDERS" means individuals who are subject to Section 16(b) of the Exchange Act with respect to the Common Stock. (cc) "SECURITIES ACT" means the Securities Act of 1933, as amended from time to time, or any successor statute or statutes thereto. References to any specific section of the Securities Act shall include any successor section. (dd) "TEN PERCENT SHAREHOLDER" means a person who owns more than ten percent of the total combined voting power of the Company or any related corporation as determined with reference to Section 424(d) of the Code. 3 80 2. PURPOSES. The purposes of the Plan are to retain the services of directors, valued key employees and consultants of the Company and such other persons as the Committee shall select in accordance with Section 4, to encourage such persons to acquire a greater proprietary interest in the Company, thereby strengthening their incentive to achieve the objectives of the shareholders of the Company, and to serve as an aid and inducement in hiring new employees and to provide an equity incentive to directors, consultants and other persons selected by the Committee. 3. ADMINISTRATION. (a) COMMITTEE. The Plan shall be administered by the Board unless the Board appoints a separate committee of the board to administer the Plan pursuant to Section 3(b) below. A majority of the members of the Committee shall constitute a quorum, and all actions of the Committee shall be taken by a majority of the members present. Any action may be taken by a written instrument signed by all of the members of the Committee and any action so taken shall be fully effective as if it had been taken at a meeting. (b) APPOINTMENT OF COMMITTEE. The Board may appoint a committee consisting of two or more of its members to administer the Plan. The Board shall consider whether a director is (i) an Outside Director and (ii) a Non-Employee Director when appointing any such Committee and shall appoint solely two or more individuals who qualify as Outside Directors if the Board intends for compensation attributable to Options to be Qualified Performance-Based Compensation. The Committee shall have the powers and authority vested in the Board hereunder (including the power and authority to interpret any provision of the Plan or of any Option). The members of any such Committee shall serve at the pleasure of the Board. (c) POWERS; REGULATIONS. Subject to the provisions of the Plan, and with a view to effecting its purpose, the Committee shall have sole authority, in its absolute discretion, to: (i) construe and interpret the Plan; (ii) define the terms used in the Plan; (iii) prescribe, amend and rescind rules and regulations relating to the Plan; (iv) correct any defect, supply any omission or reconcile any inconsistency in the Plan; (v) grant Options under the Plan; (vi) determine the individuals to whom Options shall be granted under the Plan and whether the Option is an Incentive Stock Option or a Non-Qualified Stock Option; (vii) determine the time or times at which Options shall be granted under the Plan; (viii) determine the number of shares of Common Stock subject to each Option, the exercise price of each Option, the duration of each Option and the times at which each Option shall become exercisable; (ix) determine all other terms and conditions of Options; and (x) make all other determinations necessary or advisable for the administration of the Plan. 4 81 All decisions, determinations and interpretations made by the Committee shall be binding and conclusive on all participants in the Plan and on their legal representatives, heirs and beneficiaries. (d) DELEGATION TO EXECUTIVE OFFICER. The Committee may by resolution delegate to one or more executive officers (the "Executive Officer") of the Company the authority to grant Options under the Plan to employees of the Company who, at the time of grant, are not Section 16 Insiders nor Covered Employees; provided, however, that the authority delegated to the Executive Officer under this Section 3 shall not exceed that of the Committee under the provisions of the Plan and shall be subject to such limitations, in addition to those specified in this Section 3, as may be specified by the Committee at the time of delegation. 4. ELIGIBILITY. Incentive Stock Options may be granted to any individual who, at the time such Options are granted, is an Employee, including Employees who are also directors of the Company. Non-Qualified Stock Options may be granted to Employees and to such other persons as the Committee shall select. Options may be granted in substitution for outstanding options of another corporation in connection with the merger, consolidation, acquisition of property or stock or other reorganization between such other corporation and the Company or any subsidiary of the Company. At such point as the Company first becomes subject to the periodic reporting requirements of Section 12 of the Exchange Act no person shall be eligible to receive in any fiscal year Options to purchase more than 500,000 shares of Common Stock (subject to adjustment as set forth in Section 6(m) hereof). 5. STOCK. The Company is authorized to grant Options to acquire up to a total of 3,625,000 shares of the Company's authorized but unissued, or reacquired, Common Stock. The number of shares with respect to which Options may be granted hereunder is subject to adjustment as set forth in Section 6(m). In the event that any outstanding Option expires or is terminated for any reason, the shares of Common Stock allocable to the unexercised portion of such Option may again be subject to an Option granted to the same Optionee or to a different person eligible under Section 4; provided, however, that any expired or terminated Options will be counted against the maximum number of shares with respect to which Options may be granted to any particular person as set forth in Section 4. 6. TERMS AND CONDITIONS OF OPTIONS. Each Option granted under the Plan shall be evidenced by an Agreement. Agreements may contain such provisions, not inconsistent with the Plan, as the Committee or Executive Officer, in its discretion, may deem advisable. All Options also shall comply with the following requirements: (a) Number of Shares and Type of Option. Each Agreement shall state the number of shares of Common Stock to which it pertains and whether the Option is intended to be an Incentive Stock Option or a Non-Qualified Stock Option. In the absence of action to the contrary by the Committee or Executive Officer in connection with the grant of an Option, all Options shall be Non-Qualified Stock Options. The aggregate Fair Market Value (determined at the Date of Grant) of the Common Stock with respect to which the Incentive Stock Options granted to the Optionee and any incentive stock options granted to the Optionee under any other stock option plan of the 5 82 Optionee during any calendar year shall not exceed $100,000, or such other limit as may be prescribed by the Code. If (i) an Optionee holds one or more Incentive Stock Options under the Plan (and/or any incentive stock options under any other stock option plan of the Company, any Related Corporation or any predecessor corporation), and (ii) the aggregate Fair Market Value of the shares of Common Stock with respect to which, during any calendar year, such Options become exercisable for the first time exceeds $100,000 (said value to be determined as provided above), then such Option or Options are intended to qualify under Section 422 of the Code with respect to the maximum number of such shares as can, in light of the foregoing limitation, be so qualified, with the shares so qualified to be the shares subject to the Option or Options earliest granted to the Optionee. If an Option that would otherwise qualify as an Incentive Stock Option becomes exercisable for the first time in any calendar year for shares of Common Stock that would cause such aggregate Fair Market Value to exceed $100,000, then the portion of the Option in respect of such shares shall be deemed to be a Non-Qualified Stock Option. (b) DATE OF GRANT. Each Agreement shall state the Date of Grant. (c) OPTION PRICE. Each Agreement shall state the price per share of Common Stock at which it is exercisable. The exercise price shall be fixed by the Committee or Executive Officer at whatever price the Committee or Executive Officer may determine in the exercise of its sole discretion; provided, however, that the per share exercise price for an Incentive Stock Option shall not be less than the Fair Market Value at the Date of Grant; provided further, that with respect to Incentive Stock Options granted to Ten Percent Shareholders of the Company, the per share exercise price shall not be less than 110 percent (11O%) of the Fair Market Value at the Date of Grant; and, provided further, that Options granted in substitution for outstanding options of another corporation in connection with the merger, consolidation, acquisition of property or stock or other reorganization involving such other corporation and the Company or any subsidiary of the Company may be granted with an exercise price equal to the exercise price for the substituted option of the other corporation, subject to any adjustment consistent with the terms of the transaction pursuant to which the substitution is to occur. (d) DURATION OF OPTIONS. On the Date of Grant, the Committee or Executive Officer shall designate, subject to Section 6(g), the expiration date of the Option, which date shall not be later than ten (10) years from the Date of Grant in the case of Incentive Stock Options; provided, however, that the expiration date of any Incentive Stock Option granted to a Ten Percent Shareholder shall not be later than five (5) years from the Date of Grant. In the absence of action to the contrary by the Committee in connection with the grant of an Option, and except in the case of Incentive Stock Options granted to Ten Percent Shareholders, all Options granted under this Section 6 shall expire ten (10) years from the Date of Grant. 6 83 (e) VESTING SCHEDULE AND EXERCISABILITY OF OPTIONS. No Option shall be exercisable until it has vested. The vesting schedule for each Option shall be specified by the Committee or Executive Officer at the time of grant of the Option; provided, however, that if no vesting schedule is specified at the time of grant, the Option shall be vested according to the following schedule:
Number of Years of Continuous Employment Portion of Total With the Company Following Option Which Will Become Grant Date Vested -------------------------- ------------------------ 1 25% 2 50% 3 75% 4 100%
The Committee or Executive Officer may specify a vesting schedule for all or any portion of an Option based on the achievement of performance objectives established in advance of the commencement by the Optionee of services related to the achievement of the performance objectives. Performance objectives shall be expressed in terms of one or more of the following: return on equity, return on assets, share price, market share, sales, earnings per share, costs, net earnings, net worth, inventories, cash and cash equivalents, gross margin or the Company's performance relative to its internal business plan. Performance objectives may be in respect of the performance of the Company as a whole (whether on a consolidated or unconsolidated basis), a Related Corporation, or a subdivision, operating unit product or product line of the foregoing. Performance objectives may be absolute or relative and may be expressed in terms of a progression or a range. An Option which is exercisable (in whole or in part) upon the achievement of one or more performance objectives may be exercised only upon completion of the following process: (a) the Optionee must deliver written notice to the Company that the performance objective has been achieved and demonstrating, if necessary, how the objective has been satisfied, (b) within 45 days after receipt of such notice, the Committee will make a good faith determination whether such performance objective has been achieved and deliver written notice to the Optionee detailing the results of such determination; if the Company fails to respond with such 45-day period, then the performance objective shall be presumed to have been achieved and (c) upon receipt of written notice from the Company that the performance objective has been achieved (or upon expiration of such 45-day period without a determination by the Company), the Optionee may exercise the Option; upon receipt of written notice from the Company that the performance objective has not been achieved, the Optionee shall have 15 days to appeal the Company's determination and the Company shall have 15 days after the receipt of such appeal to consider the issues presented by the Optionee and make a determination on the appeal, which determination shall be conclusive and binding on the Optionee. (f) ACCELERATION OF VESTING. Except to the extent that such acceleration would render unavailable "pooling of interests" accounting treatment for any reorganization, merger or consolidation of the Company, the vesting of one or more outstanding Options may be accelerated by the Board at such times and in such amounts as it shall determine in its sole discretion. 7 84 (g) TERM OF OPTION. Any vested Option granted to an Optionee shall terminate, to the extent not previously exercised, upon the occurrence of the first of the following events: (i) as designated by (x) the Board in accordance with Section 6(n) hereof or (y) the Committee or the Executive Officer in accordance with Section 6(d) hereof, (ii) the date of the Optionee's termination of employment or contractual relationship with the Company or any Related Corporation for cause (as determined in the sole discretion of the Committee); (iii) the expiration of ninety (90) days from the date of the Optionee's termination of employment or contractual relationship with the Company or any Related Corporation for any reason whatsoever other than cause, death or Disability unless the exercise period is extended by the Committee a date not later than the expiration date of the Option; (iv) the expiration of one year from (A) the date of death of the Optionee or (B) cessation of the Optionee's employment or contractual relationship by reason of Disability unless the exercise period is extended by the Committee until a date not later than the expiration date of the Option; or (v) any other event specified by the Committee at the time of grant of the Option. If an Optionee's employment or contractual relationship is terminated by death, any Option granted to the Optionee shall be exercisable only by the person or persons to whom such Optionee's rights under such Option shall pass by the Optionee's will or by the laws of descent and distribution of the state or county of the Optionee's domicile at the time of death. The Committee shall determine whether an Optionee has incurred a Disability on the basis of medical evidence reasonably acceptable to the Committee. Upon making a determination of Disability, the Committee shall, for purposes of the Plan, determine the date of an Optionee's termination of employment or contractual relationship. Unless accelerated in accordance with Section 6(f), any unvested Option granted to an Optionee shall terminate immediately upon termination of employment of the Optionee by the Company for any reason whatsoever, including death or Disability. For purposes of the Plan, transfer of employment between or among the Company and/or any Related Corporation shall not be deemed to constitute a termination of employment with the Company or any Related Corporation. For purposes of this subsection with respect to Incentive Stock Options, employment shall be deemed to continue while the Optionee is on military leave, sick leave or other bona fide leave of absence (as determined by the Committee). The foregoing notwithstanding, employment shall not be deemed to continue beyond the first ninety (90) days of such leave, unless the Optionee's re-employment rights are guaranteed by statute or by contract. (h) EXERCISE OF OPTIONS. If less than all of the shares included in an Option are purchased, the remainder may be purchased at any subsequent time prior to the expiration date with respect to, or the termination of, the Option. No portion of any Option may be exercised for less than one hundred (100) shares (as adjusted pursuant to Section 6(m)); provided, however, that if the Option is less than one hundred (100) shares, it may be 8 85 exercised with respect to all shares for which it is vested. Only whole shares may be issued upon exercise of an Option, and to the extent that an Option covers less than one (1) share, it is unexercisable. An Option or any portion thereof may be exercised by giving written notice to the Company upon such terms and conditions as the Agreement evidencing the Option may provide and in accordance with such other procedures for the exercise of an Option as the Committee may establish from time to time. Such notice shall be accompanied by payment in the amount of the aggregate exercise price for such shares, which payment shall be in the form specified in Section 6(i). The Company shall not be obligated to issue, transfer or deliver a certificate of Common Stock to the holder of any Option until provision has been made by the holder, to the satisfaction of the Company, for the payment of the aggregate exercise price for all shares for which the Option shall have been exercised and for satisfaction of any tax withholding obligations associated with such exercise. Options granted to an Optionee are, during the Optionee's lifetime, exercisable only by the Optionee or a transferee who takes title to the Option in the manner permitted by Section 6(k). (i) PAYMENT UPON EXERCISE OF OPTION. Upon the exercise of an Option, the Optionee shall pay to the Company the aggregate exercise price therefor in cash, by certified or cashier's check. In addition, such Optionee may pay for all or any portion of the aggregate exercise price by complying with one or more of the following alternatives: (1) by delivering to the Company whole shares of Common Stock then owned by such Optionee, or, subject to the prior approval of the Committee, by the Company withholding whole shares of Common Stock otherwise issuable to the Optionee upon exercise of the Option, which shares of Common Stock received or withheld shall be valued for such purpose at their Fair Market Value on the date of exercise. (2) by delivering a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale or loan proceeds required to pay the exercise price; (3) by any combination of the foregoing methods of payment; or (4) by complying with any other payment mechanism, including through the execution of a promissory note, as may be permitted for the issuance of equity securities under applicable securities and other laws and approved by the Committee at the time of exercise. 9 86 (j) RIGHTS AS A SHAREHOLDER. An Optionee shall have no rights as A shareholder with respect to any shares of Common Stock issuable upon exercise of the Option until such holder becomes a record holder of such shares. Subject to the provisions of Sections 6(m), no rights shall accrue to an Optionee and no adjustments shall be made on account of dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights declared on, or created in, the Common Stock for which the record date is prior to the date such Optionee becomes a record holder of the shares of Common Stock issuable upon exercise of such Option. (k) TRANSFER OF OPTION. Options granted under the Plan and the rights and privileges conferred by the Plan may not be transferred, assigned, pledged or hypothecated in any manner (whether by operation of law or otherwise) other than by will, by applicable laws of descent and distribution or pursuant to A domestic relations order (as defined in the Code or Title I of the Employment Retirement Income Security Act of 1974 or the rules or regulations thereunder), and shall not be subject to execution, attachment or similar process; provided, however, that solely with respect to Non-Qualified Stock Options, the Committee may, in its discretion, authorize all or a portion of the Options to be granted to an Optionee to be on terms which permit transfer by such Optionee to: (i) Immediate Family Members, (ii) a trust or trusts for the exclusive benefit of such Immediate Family Members, or (iii) a partnership in which such Immediate Family Members are the only partners, provided that: (x) there may be no consideration for any such transfer, (y) the Agreement evidencing such Options must be approved by Committee, and must expressly provide for transferability in a manner consistent with this Section, and (z) subsequent transfers of transferred Options shall be prohibited other than by will, by applicable laws of descent and distribution or pursuant to a domestic relations order (as defined in the Code or Title I of the Employment Retirement Income Security Act of 1974 or the rules or regulations thereunder). Following transfer, any such Options shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, provided that for purposes of Section 6(l)(2), the term "Optionee" shall be deemed to refer to the initial transferor. The events of termination of employment of Section 6(g) shall continue to be applied with respect to the original Optionee, following which the options shall be exercisable by the transferee only to the extent, and for the periods, specified in Section 6(g). Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of any Option or of any right or privilege conferred by the Plan contrary to the provisions hereof, or upon the sale, levy or any attachment or similar process upon the rights and privileges conferred by the Plan, such Option shall thereupon terminate and become null and void. 10 87 (l) SECURITIES REGULATION AND TAX WITHHOLDING. (1) No shares of Common Stock shall be issued upon exercise of an Option unless the exercise of such Option and the issuance and delivery of such shares shall comply with all relevant provisions of law, including, without limitation, any applicable state securities laws, the Securities Act, the Exchange Act, the rules and regulations thereunder and the requirements of any stock exchange upon which such shares may then be listed, and such issuance shall be further subject to the approval of counsel for the Company with respect to such compliance, including the availability of an exemption from registration for the issuance and sale of such shares. The inability of the Company to obtain from any regulatory body the authority deemed by the Company to be necessary for the lawful issuance and sale of any shares under the Plan, or the unavailability of an exemption from registration for the issuance and sale of any shares under the Plan, shall relieve the Company of any liability with respect to the non-issuance or sale of such shares. As long as the Common Stock is not registered under the Exchange Act, the Company intends that all offers and sales of Options and shares of Common Stock issuable upon exercise of Options shall be exempt from registration under the provisions of Section 5 of the Securities Act, and the Plan shall be administered in a manner so as to preserve such exemption. The Company also intends that the Plan shall constitute a written compensatory benefit plan, within the meaning of Rule 701(b) promulgated under the Securities Act, and that each Option granted pursuant to the Plan at a time when the Common Stock is not registered under the Exchange Act shall, unless otherwise specified by the Committee at the time the Option is granted or at any time thereafter, be granted in reliance on the exemption from the registration requirements of Section 5 of the Securities Act provided by Rule 701. As a condition to the exercise of an Option, the Committee may require the Optionee to represent and warrant in writing at the time of such exercise that the shares of Common Stock issuable upon exercise of the Option are being purchased only for investment and without any then-present intention to sell or distribute such shares. At the option of the Committee, a stop-transfer order against such shares may be placed on the stock books and records of the Company, and a legend indicating that such shares may not be pledged, sold or otherwise transferred unless an opinion of counsel is provided stating that such transfer is not in violation of any applicable law or regulation, may be stamped on the certificates representing such shares in order to assure an exemption from registration. The Committee also may require such other documentation as it shall, in its discretion, deem necessary from time to time to comply with federal and state securities laws. THE COMPANY HAS NO OBLIGATION TO UNDERTAKE REGISTRATION OF ANY OPTION OR ANY SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF ANY OPTION. (2) The Optionee shall pay to the Company by certified or cashier's check, promptly upon exercise of the Option or, if later, the date that the amount of such obligations becomes determinable, all applicable federal, state, local and foreign withholding taxes that the Committee, in accordance with the applicable rules and regulations, determines to result from the exercise of the Option or from a transfer or other disposition of shares of Common Stock acquired upon exercise of the Option or otherwise related to the Option or shares of Common Stock acquired upon exercise of the Option, which determination by the Committee of the amount due shall be binding upon the Optionee. Upon approval of the Committee, such Optionee may satisfy such obligation by complying with one or more of the following alternatives selected by the Committee: (A) by delivering to the Company whole shares of Common Stock then owned by such Optionee, or by the Company withholding whole shares of Common Stock otherwise issuable to the Optionee upon exercise of the Option, which shares of Common 11 88 Stock received or withheld shall have a Fair Market Value on the date of exercise (as determined by the Committee in good faith) equal to the tax obligation to be paid by such Optionee upon such exercise; (B) by executing appropriate loan documents approved by the Committee by which such Optionee borrows funds from the Company to pay the withholding taxes due under this Section 6(l)(2), with such repayment terms as the Committee shall select; (C) by any combination of the foregoing methods of payment; or (D) by complying with any other payment mechanism as may be permitted for the issuance of equity securities under applicable securities and other laws and approved by the Committee from time to time. (3) The issuance, transfer or delivery of certificates of Common Stock pursuant to the exercise of an Option may be delayed, at the discretion of the Committee, until the Committee is satisfied that the applicable requirements of the federal and state securities laws and the withholding provisions of the Code have been met. (m) STOCK SPLIT, REORGANIZATION OR LIQUIDATION. (1) Upon the occurrence of any of the following events, the Committee shall, with respect to each outstanding Option, proportionately adjust the number of shares of Common Stock issuable upon exercise of such Option, the per share exercise price or both so as to preserve the rights of the Optionee substantially proportionate to the rights of such Optionee prior to such event, and to the extent that such action shall include an increase or decrease in the number of shares of Common Stock issuable upon exercise of outstanding Options, the number of shares available under Section 5 shall automatically be increased or decreased, as the case may be, proportionately, without further action on the part of the Committee, the Company, the Company's shareholders, or any Optionee: (i) the Company shall at any time be involved in a transaction described in Section 424(a) of the Code (or any successor provision) or any "corporate transaction" described in the regulations promulgated thereunder; (ii) the Company subdivides its outstanding shares of Common Stock into a greater number of shares of Common Stock (by stock dividend, stock split, reclassification or otherwise) or combines its outstanding shares of Common Stock into a smaller number of shares of Common Stock (by reverse stock split, reclassification or otherwise); or (iii) any other event with substantially the same effect shall occur. (2) If the Company shall at any time declare an extraordinary dividend with respect to the Common Stock, whether payable in cash or other property, or is involved in any recapitalization, spinoff, combination, exchange of shares, warrants or rights offering to purchase Common Stock, or other similar event (including a merger or consolidation other than one that constitutes an Approved Transaction), the Committee may, in the exercise of its sole discretion and with respect to each outstanding Option, proportionately adjust the number of shares of Common Stock issuable upon exercise of such Option, the per share exercise price or both so as to preserve the rights of the Optionee substantially proportionate to the 12 89 rights of such Optionee prior to such event, and to the extent that such action shall include an increase or decrease in the number of shares of Common Stock issuable upon exercise of outstanding Options, the number of shares available under Section 5 of the Plan shall automatically be increased or decreased, as the case may be, proportionately, without further action on the part of the Committee, the Company, the Company's shareholders, or any Optionee. (3) The foregoing adjustments shall be made by the Committee or by the applicable terms of any assumption or substitution document. (4) With respect to the foregoing adjustments, the number of shares subject to an Option shall always be a whole number. The Committee may, if deemed appropriate, provide for a cash payment to any Optionee in connection with any adjustment made pursuant to this Section 6(m). (5) The grant of an Option shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge, consolidate or dissolve, to liquidate or to sell or transfer all or any part of its business or assets. (n) APPROVED TRANSACTIONS; CONTROL PURCHASE. In the event of any Approved Transaction or Control Purchase, if so provided for in the Agreement representing such Option, an Option may become exercisable in full in respect of the aggregate number of shares thereunder effective upon the Control Purchase or immediately prior to consummation of the Approved Transaction. In the case of an Approved Transaction, the Company shall provide notice of the pendency of the Approved Transaction at least fifteen (15) days prior to the expected date of consummation thereof to each Optionee entitled to acceleration. Each such Optionee shall thereupon be entitled to exercise the vested portion of the Option at any time prior to consummation of the Approved Transaction or immediately following the Control Purchase. Any such exercise shall be contingent on such consummation. Following consummation of the Approved Transaction or Control Purchase, and until such Option is terminated pursuant to Section 6(g) hereof, any vested portion of Options that are not exercised shall remain exercisable, and any unvested portions of any Options shall remain in effect and continue to vest in accordance with the vesting schedule specified at the time of grant, and upon such vesting shall become exercisable. Notwithstanding the foregoing, in its reasonable discretion, the Board may determine that any or all outstanding Options that are unvested at the time of, or are not exercised upon consummation of, the Approved Transaction or Control Purchase shall thereafter terminate, provided that, in making such determination, the Board shall consider the best interests of the Optionees, the Company and its shareholders, and will make such determination only if the action to be taken, in the opinion of the Board, is appropriate in light of the circumstances under which such determination is made. Moreover, except to the extent that such determination would render unavailable "pooling of interests" accounting treatment for any reorganization, merger or consolidation of the Company, the Board may take, or make effective provision for the taking of, such action as in the opinion of the Board is equitable and appropriate in order to substitute new stock options for any or all outstanding Options that do not become exercisable on an accelerated basis, or to assume such Options (which assumption may be effected by any means determined by the Board, in its discretion, including, but not limited to, by a cash payment to each Optionee, in cancellation of the Options held by him or her, of such amount as the Board determines, in its sole discretion, represents the then value of the Options) and in order to make such new stock options or assumed Options, as nearly as practicable, equivalent to the old Options, taking into 13 90 account to the extent applicable, the kind and amount of securities, cash or other assets into or for which the Common Stock may be changed, converted or exchanged in connection with the Approved Transaction. 7. EFFECTIVE DATE; TERM. The Plan shall be effective at the time specified in the resolutions of the Board adopting the Plan (the "Effective Date"). Options may be granted by the Committee or Executive Officer from time to time thereafter until the tenth anniversary of the Effective Date. Termination of the Plan shall not terminate any Option granted prior to such termination. Issuance of Non-Qualified Stock Options under the Plan shall be subject to the requirement of RCW 21.20.310(10) that the Administrator of Securities of the Department of Financial Institutions of the State of Washington be provided with notification of the adoption of the Plan. No Non-Qualified Stock Option shall be granted hereunder until this notification requirement has been satisfied. Issuance of Incentive Stock Options under the Plan within twelve (12) months after the Effective Date shall be subject to the approval of the Plan by the shareholders of the Company at a duly held meeting of shareholders at which a majority of all outstanding voting stock of the Company is represented in person or by proxy. The approval required shall be a majority of the votes cast on the proposal to approve the Plan. Such approval may also be provided pursuant to a written consent in lieu of such meeting. No Incentive Stock Option granted hereunder shall be exercisable until this approval requirement has been satisfied. If this requirement is not satisfied within twelve (12) months after the Effective Date, then, notwithstanding any contrary provision in the Plan (a) no Incentive Stock Options may thereafter be granted under the Plan, and (b) each Incentive Stock Option granted under the Plan prior thereto shall automatically be deemed to be a Non-Qualified Stock Option (except to the extent the Agreement evidencing the Option expressly provides otherwise). 8. NO OBLIGATIONS TO EXERCISE OPTION. The grant of an Option shall impose no obligation upon the Optionee to exercise such Option. 9. NO RIGHT TO OPTIONS OR TO EMPLOYMENT. Whether or not any Options are to be granted under the Plan shall be exclusively within the discretion of the Committee, and nothing contained in the Plan shall be construed as giving any person any right to participate under the Plan. The grant of an Option to any Optionee shall in no way constitute any form of agreement or understanding binding on the Company or any Related Corporation, express or implied, that the Company or such Related Corporation will employ or contract with such Optionee for any length of time, nor shall it interfere in any way with the Company's or, where applicable, a Related Corporation's right to terminate such Optionee's employment at any time, which right is hereby reserved. 10. APPLICATION OF FUNDS. The proceeds received by the Company from the sale of Common Stock issued upon the exercise of Options shall be used for general corporate purposes, unless otherwise directed by the Board. 11. INDEMNIFICATION OF COMMITTEE. In addition to all other rights of indemnification they may have by virtue of being a member of the Board or an executive officer of the Company, members of the Committee and the Executive Officer shall be indemnified by the Company for all reasonable expenses and liabilities of any type or nature, including attorneys' fees, incurred in connection with any action, suit or proceeding to which they or any of them are a 14 91 party by reason of, or in connection with, the Plan or any Option granted under the Plan, and against all amounts paid by them in settlement thereof (provided that such settlement is approved by independent legal counsel selected by the Company), except to the extent that such expenses relate to matters for which it is adjudged that such Committee member or Executive Officer is liable for willful misconduct; provided, however, that within fifteen (15) days after the institution of any such action, suit or proceeding, the Committee member or Executive Officer involved therein shall, in writing, notify the Company of such action, suit or proceeding, so that the Company may have the opportunity to make appropriate arrangements to prosecute or defend the same. 12. SHAREHOLDERS AGREEMENT. Unless the Agreement evidencing an Option expressly provides otherwise, each Optionee may be required, as a condition to the issuance of any shares of Common Stock that such Optionee acquires upon the exercise of the Option, to execute and deliver to the Company a shareholders agreement in such form as may be required by the Company at the time of such exercise, or a counterpart thereof, together with, unless the Optionee is unmarried, a spousal consent in the form required thereby, unless the Optionee has previously executed and delivered such documents and they are in effect at the time of exercise and apply by their terms to the shares to be issued. 13. SEPARABILITY. With respect to Incentive Stock Options, if the Plan does not contain any provision required to be included herein under Section 422 of the Code, such provision shall be deemed to be incorporated herein with the same force and effect as if such provision had been set out in full herein; provided, however, that to the extent any Option that is intended to qualify as an Incentive Stock Option cannot so qualify, the Option, to that extent, shall be deemed to be a Non-Qualified Stock Option for all purposes of the Plan. 14. NON-EXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the Board nor the submission of the Plan to the shareholders of the Company for approval shall be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options and the awarding of stock and cash otherwise than pursuant to the Plan, and such arrangements may be either generally applicable or applicable only in specific cases. 15. EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION. By acceptance of an Option, unless otherwise provided in the Agreement evidencing the Option, the Optionee with respect to such Option shall be deemed to have agreed that the Option is special incentive compensation that will not be taken into account, in any manner, as salary, compensation or bonus in determining the amount of any payment or other benefit under any pension, retirement or other employee benefit plan, program or policy of the Company or any of its affiliates. 16. AMENDMENT OF PLAN. The Board may, at any time, modify, amend or terminate the Plan or modify or amend any Option granted pursuant to the Plan, including, without limitation, such modifications or amendments as are necessary to maintain compliance with applicable statutes, rules or regulations; provided, however, that no amendment with respect to an outstanding Option which has the effect of reducing the benefits afforded to 15 92 amendment with respect to an outstanding Option which has the effect of reducing the benefits afforded to the Optionee shall be made over the objection of such Optionee; further provided, that the events triggering acceleration of vesting of an outstanding Option may be modified, expanded or eliminated without the consent of the Optionee. The Board may condition the effectiveness of any such amendment on the receipt of shareholder approval at such time and in such manner as the Committee may consider necessary for the Company to comply with or to avail the Company, the Optionees or both of the benefits of any securities, tax, market listing or other administrative or regulatory requirement which the Board determines to be desirable. Without limiting the generality of the foregoing, the Board may modify grants to persons who are eligible to receive Options under the Plan who are foreign nationals or employed outside the United States to recognize differences in local law, tax policy or custom. Date Amended and Restated Plan was Approved by Board of Directors of Company: January 29, 1998 Date Amended and Restated Plan was Approved by Shareholders of Company: January 29, 1998 16 93 SECTION 2.6 None. 94 SECTION 2.7 1. TERMINATION OF REDEMPTION AGREEMENT. See Item 4 to Section 2.3 of the Disclosure Schedule for a description of the termination of the Redemption Agreement between the Company and the current shareholders. 2. IMPERIAL BANK. The Company is in the process of negotiating a line of credit and term loan with Imperial Bank. The material terms of the facility are as follows: A. A $2,000,000 Revolving Line of Credit to support working capital and for issuance of trade related commercial and standby letters of credit. B. A $500,000 Term Loan to finance the purchase of equipment, software, furniture and acquisitions. The interest rate is the bank's prime rate for the line of credit and the bank's prime rate plus 0.25% for the term loan. The facility fee is 0.50% per annum, or $10,000, for the line of credit and the bank's prime rate plus 0.25% per annum, or $2,500 for the term loan. Covenants include, but are not limited to 1) maintaining a minimum quick ratio of 1.0,2) maintaining minimum tangible net worth of $2,500,000 and 3) maintaining a minimum debt service ratio of 1.5. 95 Section 2.10 Address of Leased Property Use of Property - -------------------------------------------------------------------------------- 13228 N.E. 20th Street, Suite C, Bellevue, Washington 98005 Office Space 3633--136th Place S.E., Suite 100, Bellevue, Washington 98006 Office Space 3633--136th Place S.E., Suite 200, Bellevue, Washington 98006 Office Space 3635--136th Place S.E., Suite 110, Bellevue, Washington 98006 Office Space (after February 28, 1998) 3633--136th Place S.E., Suite 310, Bellevue, Washington 98006 Office Space The Company is currently negotiating a lease for approximately 7,600 of additional office space in Bellevue, Washington. The lease provides for monthly payments of $30,210 in years one through three, and for $32,098 in years four through five. The Company will provide a security deposit of $60,420 in the form of a standby letter of credit. 96 SECTION 2.12(a) None. SECTION 2.12(b) The following is a list of arrangements where the Company is obligated to pay $50,000 or more per year:
Name of Creditor Approximate Obligation - ---------------- ---------------------- Seattle Office Associates LLC -- Suite 100 $225,792 Seattle Office Associates LLC -- Suite 200 $114,497 Seattle Office Associates LLC -- Suite 310 $204,307 Seattle Office Associates LLC -- Suite 110 $119,989 CB Commercial $ 62,662
Section 2.12(c) The following is a list of arrangements pursuant to which the Company will receive $200,000 or more: o Development and License Agreement Between BSQUARE Corporation and Microsoft Corporation, dated June 12, 1997, as amended by Amendment No. 1 dated December 17, 1997 o Development Agreement Between BSQUARE Corporation and Microsoft Corporation, dated September 12, 1997, as amended by Amendment No. 1 dated January 19, 1998 o Development and License Agreement by and between Advanced RISC Machines, Ltd. and BSQUARE Corporation, dated August 26, 1997 o Development and License Agreement by and between NEC Electronics Inc. and BSQUARE Consulting Inc., dated June 11, 1997 o License Agreement by and between BSQUARE Inc. and Hitachi, Ltd., dated April 7, 1997 o Porting Agreement between BSQUARE Corporation and IBM, dated August 7, 1997 Section 2.12(d) A number of the license and development agreements to which the Company is a party contain confidentiality provisions. These confidentiality provisions often include a limitation on the use of the information gained from such relationship, and in that way place a restriction on the type of work to be performed by the Company. In addition, the following is a list of specific restrictions contained in certain of the Company's contracts: 97 SECTION 2.12(a) None. SECTION 2.12(b) The following is a list of arrangements where the Company is obligated to pay $50,000 or more per year: Name of Creditor Approximate Obligation - ---------------- ---------------------- Seattle Office Associates LLC -- Suite 100 $225,792 Seattle Office Associates LLC -- Suite 200 $114,497 Seattle Office Associates LLC -- Suite 310 $204,307 Seattle Office Associates LLC -- Suite 110 $119,989 CB Commercial $ 62,662 SECTION 2.12(c) The following is a list of arrangements pursuant to which the Company will receive $200,000 or more: o Development and License Agreement Between BSQUARE Corporation and Microsoft Corporation, dated June 12, 1997, as amended by Amendment No. 1 dated December 17, 1997 o Development Agreement Between BSQUARE Corporation and Microsoft Corporation, dated September 12, 1997, as amended by Amendment No. 1 dated January 19, 1998 o Development and License Agreement by and between Advanced RISC Machines, Ltd. and BSQUARE Corporation, dated August 26, 1997 o Development and License Agreement by and between NEC Electronics Inc. and BSQUARE Consulting Inc., dated June 11, 1997 o License Agreement by and between BSQUARE Inc. and Hitachi, Ltd., dated April 7, 1997 o Porting Agreement between BSQUARE Corporation and IBM, dated August 7, 1997 SECTION 2.12(d) A number of the license and development agreements to which the Company is a party contain confidentiality provisions. These confidentiality provisions often include a limitation on the use of the information gained from such relationship, and in that way place a restriction on the type of work to be performed by the Company. In addition, the following is a list of specific restrictions contained in certain of the Company's contracts: 98 o Total Control/Stellcom agreement restricts the Company from licensing the Anybus driver to a list of competitors. o The Microsoft Development and Test Agreement (DTA) for the Windows CE OAK restricts the Company from working on a competing operating system with the same resources at the same time. SECTION 2.12(e) o Development and License Agreement Between BSQUARE Corporation and Microsoft Corporation, dated June 12, 1997, as amended by Amendment No. 1 dated December 17, 1997 o Development Agreement Between BSQUARE Corporation and Microsoft Corporation, dated September 12, 1997, as amended by Amendment No. 1 dated January 19, 1998 o Development and License Agreement by and between Advanced RISC Machines, Ltd. And BSQUARE Corporation, dated August 26, 1997 o Development & License Agreement by and between NEC Electronics Inc. and BSQUARE Consulting Inc., dated June 11, 1997 o License Agreement by and between BSQUARE Inc. and Hitachi, Ltd., dated April 7, 1997 o Software Licensing and Bundle Agreement between BSQUARE CORPORATION and Philips Mobile Computing Group dated June 25, 1997 o Philips Semiconductors Terms and Conditions for Contracted Services dated March 13, 1997 o Porting Agreement between International Business Machines Corporation and BSQUARE CORPORATION dated August 7, 1997 o Software Development Agreement by and between BSQUARE CORPORATION and Motorola, Inc. dated December 31, 1996, as amended by Amendment to Software Development Agreement dated October 3, 1997 SECTION 2.12(f) None. SECTION 2.12(e) See Item 2 to Section 2.7 of the Disclosure Schedule for a description of the Company's relationship with Imperial Bank. SECTION 2.12(h) See Sections 2.12(c) and 2.12(e) of the Disclosure Schedule for a list of the Company's material license agreements. The Company enters into development agreements with the 99 majority of its customers. Other than these development agreements, the Company has no joint venture, partnerships or supply agreements. SECTION 2.12(i) The Company utilizes the marketing and design services of Team Design. During fiscal 1997, the Company spent over $150,000 with Team Design. SECTION 2.12(j) Each of the Company's employees is given a standard employment offer letter and is required to sign a Proprietary Rights Agreement upon commencement of employment. SECTION 2.12(k) See Item 4 to Section 2.3 of the Disclosure Schedule for a description of the Redemption Agreement between the Company and the current shareholders. SECTION 2.12(l) o BSQUARE Corporation 401(k) Plan o BSQUARE Corporation Amended and Restated Stock Option Plan o Profit-sharing plan. Pursuant to an e-mail from Bill Baxter to all of the Company's employees, the Company implemented a Profit-sharing plan for 1997 and 1998. Specifically, the e-mail stated: "It is our intention to set aside 5% of our pre-tax earnings for the 1997 plan and at least 5% for the 1998 plan. After the year end numbers are final (December 31st), we will announce the final earnings. We will move as expeditiously as possible to disperse these profits to employees as taxable income (thank you Uncle Sam). The profits of the Corporation and your share of the profits will depend on many factors. Because of your contributions, BSQUARE is a profitable Corporation and we really appreciate all you have done to make this possible. In the future, your contributions to BSQUARE will continue to contribute to the overall success of our Corporation. If, for business reasons, the Board deems this plan is not advisable, we reserve to right to withdraw this plan. The Board will have final approval over such transactions and you should judge the Board's performance on how well it achieves the above stated intentions. In order to be eligible for the plan, you most have started work before December 15th of the respective year." SECTION 2.12(m) None. 100 SECTION 2.12(n) None. SECTION 2.12(o) None. SECTION 2.12(p) None. SECTION 2.12(q) None. 101 SECTION 2.13 The Company is divided into three general divisions: BSQUARE Consulting, BSQUARE Integration and BSQUARE Development. BSQUARE Consulting generally enters into time and material agreements with the Company's semi-conductor partners or with Microsoft. All intellectual property developed by this division is work-for-hire and is owned by Microsoft (or in some instances, by the Company's semi-conductor partners). BSQUARE Integration ports Windows CE to various OEM products. In most cases, the Company retains ownership or joint ownership of intellectual property developed by the BSQUARE Integration division and then the Company licenses this intellectual property back to the OEM customer. In one case (see Section 2.12(d) of the Disclosure Schedule), the customer acquired ownership of the intellectual property developed by the BSQUARE Integration division. BSQUARE Development develops shrink-wrap and off-the-shelf popular applications for OEM devices (generally, the "bProduct line"). The Company retains ownership of the intellectual products developed by the BSQUARE Development division and licenses the products for royalty-based distribution. In the course of its relationships with its customers, the Company is often granted a license to use and modify the customer's intellectual property to the extent necessary to perform the Company's development services. In addition, the Company has entered into a number of license agreements with a variety of software providers to acquire use of software necessary for the Company to perform its development services. The Company is also subject to those licenses or agreements arising from the purchase of "off-the-shelf" or standard products. The Company received a notice from one of its customers regarding a patent (U.S. Patent No. 4,918,723) covering a "keyboard to facsimile transmission device" held by a third party. The Company does not believe that the Company's Intellectual Property Rights conflict with this patent, but there can be no assurance that an action would not be brought in the future regarding this patent. TRADEMARKS: o BSQUARE: Registered in US Class 422,105,093 Class 9 application 75/57,07, application in Canada #827,659 o BSQUARE VIEW: application in US #75/157,019, application in Canada #826,625 o bVIEW: Registered in Canada #TMA485,548, application in US #75/157,018 o bFAX: application in US #75/157,020, application in Canada #826,626 o bFIND, bMOBILE, bTRACK, bREADY, bPRINT: applications pending in US o CE Xpress: application pending in US BSQUARE DEVELOPMENT COPYRIGHTS: o BSQUARE Fax Express (a.k.a., bFAX Express), 1996, 1997 and 1998: Send/only fax application for Windows CE. Support faxing and previewing bitmaps, text and Microsoft Pocket Word documents. This application has been adapted to the H/PC and the P/PC. This application is sold through reseller channels. The P/PC version is due for release in the first quarter of 1998. o BSQUARE Fax Pro (a.k.a., bFAX Pro): Send and receive fax application for Windows CE. Supports faxing and previewing of faxes containing multiple documents to multiple 102 recipients. This product is bundled with certain H/PCs. This application is sold through reseller channels. o BSQUARE Fax Lite (a.k.a., bFAX Lite), 1996, 1997 and 1998: A version of bFAX Pro that has certain features disabled. This product was developed to provide a free evaluation of bFAX to customers. This product is distributed free of charge on the Web and by certain H/PC OEMs. o BSQUARE Fax Enhanced (a.k.a., bFAX Enhanced): A version of bFAX Pro that has certain features disabled. This product was developed to bundle with the Casio Casseopiea A-1O and A-11. This product is no longer in production. o BSQUARE Mobile (a.k.a., bMOBILE, bMOBILE Wireless Internet): This is a driver and control panel application that allows Windows CE to communicate with a Motorola Personal Messenger 100C CDPD (cellular digital packet data) modem. The control panel interface allows for modem control and monitoring. o BSQUARE Net (a.k.a., bNET): This is a driver and control panel application which is very similar to bMOBILE, but extends this capability to the 3COM Etherlink III (3C589) and the NE2000 ethernet adapters. o BSQUARE Print (a.k.a., bPRINT): This product enables Windows CE Version 1 to print the same file formats bFAX supports while faxing. o BSQUARE Print Pro (a.k.a., bPRINT Pro): This product enables printing as does bPRINT, but extends print spooling to any application which supports printing. It supports printing to lRdA-compliant devices, and supports printing to various printers not already supported by Windows CE. It also provides for a print-to-fax capability so that any application can print to bFAX Pro. It is due for release in the first quarter of 1998. o BSQUARE Find (a.k.a., bFIND): This is a global search utility for Windows CE that allow search of all data sources and controls the execution of application to continue the search. This application is sold through reseller channels and is also bundled with all Hewlett-Packard H/PCs. o BSQUARE Track (a.k.a., bTRACK): This is a time, expense and car mileage tracking application for Windows CE. It provides a set of desktop APIs that enable third parties to integrate the expense information into customer applications and corporate information systems. It has been adapted to both the H/PC and the P/PC. It is due for release in the second quarter of 1998. o BSQUARE Ready (a.k.a., bREADY): This is an information management, online book authoring and reader application. It has two components. The desktop component sits on the desktop which allows for the authoring of electronic books. The authoring application contains Wizards that assist the user to acquire content from the Internet and produce an electronic book. The client-side application allows users to read electronic books produced with the desktop application. The reader has an Auto-scrolling feature which is used for reading books and speeches. The reader application supports bookmarks, annotations, searching, and indexing. It is due for release in the second quarter of 1998. o BSQUARE Mobile News (a.k.a., bMOBILE News, bNEWS): This is a USENET Newsreader application for Windows CE. It was acquired from AdageUS. All rights, title and interest are owned by BSQUARE. This application is sold through reseller channels. o BSQUARE Mobile Chat (a.k.a., bMOBILE Chat, bCHAT). This is an Internet Relay Chat program for Windows CE. It was acquired from AdageUS. All rights, title and interest are owned by BSQUARE. This application is sold through reseller channels. o BSQUARE Fax APIs (a.k.a., bFAX APIs): These are a set of low-level application programming interfaces that provide the capability of integrating faxing capabilities into other software applications. The purpose of these APIs is to allow third party independent 103 software vendors to integrate faxing capabilities into their applications. They require that the end-user license a copy of bFAX Pro to utilize the functionality. These APIs are currently being used by Odyssey Computing and Communications Intelligence Corporation. o BSQUARE IMAGING APIS: These are a set of low-level application programming interfaces that provide the capability of extending the imaging capabilities of bFAX, bVIEW and bPRINT. Only BSQUARE uses these capabilities. o MIMIC: This a graphical user interface testing framework used by BSQUARE Development to test applications. o PACKET DRIVER TECHNOLOGY: This is the basis for bMOBILE and bNET which enable those drivers to translate PPP (point to point protocol) into serial-line internet protocol (SLIP) and ethernet, respectively. This technology could, conceivably, be adapted to various other protocols. BSQUARE INTEGRATION COPYRIGHTS: o CE XPRESS KITS FOR SC400 (a.k.a., BSQUARE OAK for SC400, BSQUARE Value Added OAK for SC400): An adaptation of Windows CE to the AMD Elan SC400 Microcontroller. It has been adapted to various board-level devices using the SC400. o CE XPRESS KITS FOR VR4300 (a.k.a., BSQUARE OAK for VR4300, BSQUARE Value Added OAK for VR4300): An adaptation of Windows CE to the NEC VR4300 MIPS Processor. It has been adapted to NEC Nile 3 Chipset. o CE XPRESS KITS FOR MEDIAGX (a.k.a., BSQUARE OAK for MediaGX, BSQUARE Value Added OAK for MediaGX): An adaptation of Windows CE to the Cyrix MediaGX Processor. It has been adapted to various reference devices using the MediaGX. o BSQUARE FIRMWARE: A set of firmware utilities and tools which facilitate the adaptation of Windows CE to various microprocessors. This includes a client-side firmware stub called the "brainstem" and a Windows NT-hosted-application capable of interacting with the brainstem. This firmware provides mechanisms for flashing Windows CE images into a device, debugging the device, and application programming interfaces which enable the development of testing software which is source-code compatible across all devices running the brainstem. o Decompressing Boot LOADER: An OS loader capable of loading a compressed Windows CE image (using BSQUARE proprietary FILE format) into volatile storage which maps the image so that it can execute in place in the volatile storage. BSQUARE COPYRIGHTS: o BSQUARE INTRANET (a.k.a., bWEB): This is BSQUARE Corporation's Intranet Web Site which contains content necessary for disseminating information to BSQUARE Employees. This information includes, but is not limited to, Newsletters, organization structure, procedures, policies and forms, as well as help desk software. o BSQUARE HELP (a.k.a., bHELP): A component of bWEB which provides employees a network administration help desk which allows them to interact with BSQUARE Network Administrators. o BSQUARE OPS (a.k.a., bOPS): A component of bWEB, similar to bHELP, which provides a facilities/operations help desk to operations and facilities management. o BSQUARE WORLD Wide Web Site (a.k.a., www.bsquare.com): BSQUARE's Corporate Homepage. o BSQUARE Marketing Collateral: This includes all brochures and the like for marketing BSQUARE Corporation's business divisions. 104 SECTION 2.15 1. EMPLOYEE BENEFIT PLANS. See Section 2.12(l) of the Disclosure Schedule for a description of the Company's employee benefit plans. 2. ROBIN ARNOLD. On July 17, 1997, the Company entered into a Separation Agreement with Robin Arnold, who was a former employee, officer and shareholder of the Company. In connection with this Separation Agreement, the Company made A payment to Mr. Arnold in the amount of $7,083.33 in severance benefits. 3. COBRA BENEFITS. The Company offers standard post-employment COBRA benefits to its employees. 4. MICHAEL LAFAVRE On October 16, 1997, the Company entered into a Separation Agreement with Michael LaFavre, who was a former employee of the Company. In connection with this Separation Agreement, the Company made a payment to Mr. LaFavre in the amount of $2,856.55 in severance benefits. 105 SECTION 2.17(a)
YEARS OF NAME TITLE SALARY SERVICE - ---- ----- ------ ------- William Baxter President and Chief $250,000 plus $460 per 3.5 Executive Officer month car payment Albert Dosser Senior Vice President $150,000 3.5 Peter Gregory Senior Vice President $150,000 3.5 Joseph Notarangelo Vice President, $100,000 1.25 Engineering Christopher MacGregor Sr. Software Engineer $104,100 3 Fred Kunz Consulting Engineer $109,200 2.25
SECTION 2.17(b)
Team Design $150,548.68 1809 - 7th Avenue, Suite 500 Seattle, WA 98101 Ducky's Office Furniture $209,742.61 1111 Mercer Street Seattle, WA 98109 Nationwide Insurance $283,222.85 James E Hunnex & Assoc. Inc. 5870 Columbia Center Seattle, WA 98104 Seattle Office Associates $657,349.02 3633 -- 136th Place SE, Suite 205 Bellevue, WA 98006 Hard Drives Northwest $952,393.00 14404 NE 20th Street Bellevue, WA 98007
106 SECTION 2.20 The Company entered into a letter agreement with Dain Rauscher Incorporated ("Dain") dated December 3, 1997 pursuant to which Dain has been engaged as the Company's exclusive agent on a "best efforts" basis in connection with the offering by private placement of A series of preferred stock of the Company. In connection with this engagement, Dain is to be paid a selling commission of four percent (4%) on all sales of stock made by the Company. In addition, the Company is required to reimburse Dain for all of its accountable legal fees, travel and other reasonable out-of-pocket expenses not to exceed $25,000.00 without the prior approval of the Company. 107 SECTION 2.21 The following is a list of all insurance policies maintained by the Company: o PROPERTY INSURANCE $650,000 Blanket tenant Improvements & Betterments and Business Personal Property and $1,000,000 Extra Expense (as defined in the policy) o DATA PROCESSING INSURANCE $750,000 Equipment, $150,000 Media/Software, $25,000 Transit and $100,000 Extra Expense (as defined in the policy) o CRIME INSURANCE $500,000 Employee Dishonesty, $500,000 Forgery or Alteration, $500,000 Computer Fraud and $500,000 Fiduciary Responsibility o GENERAL LIABILITY INSURANCE PROPOSAL $2,000,000 Products/Completed Operations Aggregate, $2,000,000 General Aggregate, $1,000,000 Per Occurrence, $1,000,000 personal & Advertising Injury, $500,000 Fire Legal Damage per fire, $1,000,000 Employers Liability (Stop Gap), $1,000,000 Employee Benefits Liability Per Occurrence, $3,000,000 Employee Benefits Liability Aggregate o ERRORS & OMISSIONS $ 1,000,000 Per Occurrence, $ 1,000,000 Aggregate o AUTOMOBILE INSURANCE $1,000,000 Bodily Injury and Property Damage Liability, $5,000,000 Medial, $100 Comprehensive Deductible, $500 Collision Deductible, $1,000,000 Hired and Non-Owned Auto Liability, $40,000 Hired Auto Physical Damage, $100 Hired Auto Comprehensive Deductible, $500 Hired Auto Collision Deductible o UMBRELLA LIABILITY INSURANCE $3,000,000 Per Occurrence, $3,000,000 Aggregate The Company has no outstanding claims under the above policies that exceed $5,000. 108 SECTION 2.22 1. PROMISSORY NOTES TO SHAREHOLDERS. In connection with the revocation of its S-Corporation status, the Company executed promissory notes in the amount of $654,970.76 to each of William T. Baxter, Albert T. Dosser and Peter R. Gregory and a note in the amount of $35,087 to Joseph Notarangelo, which amounts represented the Company's accumulated adjustments account as of October 14, 1997 and included an amount sufficient to cover any federal taxes owing on the Company's income for fiscal year 1997 prior to revocation of the S-Corporation status. Such notes are due and payable on or prior to April 1, 1998. 2. REDEMPTION AGREEMENT. See Item 4 to Section 2.3 of the Disclosure Schedule for a description of the Redemption Agreement between the Company and the current shareholders. 3. AUTOMOBILE LEASE. The Company currently pays approximately $460 per month to cover an automobile lease for an automobile used by William T. Baxter. 109 SECTION 2.23 During the year ended December 31, 1997, the Company earned approximately $14.4 million. The following is a list of the customers who accounted for more than 5% of the sales: o Hitachi 18% o NEC 17% o Microsoft 39% o Motorola 8% o ARM 11% Although none of the Company's customers has completely terminated its relationship with the Company, a number of contracts have terminated as a result of the Company's completion of a project or service provision. In addition, a number of the Company's customers and suppliers operate on a purchase order to purchase order basis. Therefore, the Company cannot guarantee that it will be able to maintain a relationship with any of these current customers or suppliers. 110 SECTION 2.24 A copy of the Development and License Agreement, dated June 12, 1997, by and between Microsoft Corporation and the Company, as amended by Amendment No. 1 to Development and License Agreement, dated December 17, 1997 is attached as Section 2.24 of the Disclosure Schedule. 111 SECTION 2.24 OF DISCLOSURE SCHEDULE DEVELOPMENT & LICENSE AGREEMENT This Development Agreement (the "Agreement") is entered into and effective as of June 12, 1997 (the "Effective Date") by and between Microsoft Corporation, a Washington corporation located at One Microsoft Way, Redmond, WA 98052 ("Microsoft") and bsquare consulting, inc., a Washington corporation located at 3633 - 136th Place SE, Suite 100, Bellevue, WA 98006 ("bsquare"). RECITALS Microsoft has developed a computer software platform known as Microsoft(R) Windows(R) CE ("Windows CE"). Microsoft desires to have bsquare assist with the development, testing and program management of certain "Visual" development tools for Windows CE, and, bsquare desires to provide such software development and consulting services to Microsoft. The parties agree as follows: AGREEMENT 1. DEFINITIONS 1.1 "Work Product" shall mean the result of performance of the work tasks contained in the Work Plan. 1.2 "Services" shall mean the design and development of the Work Product, delivery of the Deliverables and performance of the program management services described in the Work Plan. 1.3 "Work Plan" shall mean the specifications for the Services, attached to this Agreement as Exhibit B. 1.4 "Schedule" shall mean the schedule for completion of the Services and delivery of the Deliverables, attached to this agreement as Exhibit C. 1.5 "Deliverables" shall mean the various alpha, beta and final versions of the Work Product, in source and object code forms, to be delivered by bsquare to Microsoft, as more fully described in the Work Plan. 1.6 "Source Code" shall mean Microsoft's Windows CE operating system product source code provided to bsquare for the limited purpose of designing, testing and development of the Work Product pursuant to this Agreement. 1.7 "Test Hardware" shall mean all of the hardware provided to bsquare by Microsoft for the limited purpose of testing and development of the Work Product pursuant to this Agreement. 1.8 "Derivative Technology" shall mean: (i) for copyrightable or copyrighted material, any translation (including translation into other computer languages), portation, modification, correction, addition, extension, upgrade, improvement, compilation, abridgment or other form in which an existing work may be recast, transformed or adapted; (ii) for patentable or patented material, any improvement thereon; and (iii) for material which is protected by trade secret, any new material derived from such existing trade secret material, including new material which may be protected by copyright, patent and/or trade secret. 112 1.9 "Confidential Information" shall mean: (i) any trade secrets relating to either party's product plans, designs, costs, prices and names, finances, marketing plans, business opportunities, personnel, research development or know-how; (ii) any information designated by the disclosing party as confidential in writing or, if disclosed orally, identified at the time of disclosure as being confidential; and (iii) the terms, conditions and existence of this Agreement. "Confidential Information" shall not include information that: (i) is or becomes generally known or available by publication, commercial use or otherwise through no fault of the receiving party; (ii) is known and has been reduced to tangible form by the receiving party at the time of disclosure and is not subject to restriction; (iii) is independently developed or learned by the receiving party; (iv) is lawfully obtained from a third party that has the right to make such disclosure; or (v) is made generally available by the disclosing party without restriction on disclosure. 2. DEVELOPMENT 2.1 Services. bsquare shall perform the Services in accordance with the Schedule and pursuant to the Work Plan. The parties agree to discuss in good faith, issues that may arise in performance of the work tasks, including any issues regarding compliance with the schedule set forth in the Work Plan, although the Work Plan may be amended only by mutual agreement of the parties. 2.2 Acceptance. 2.2.1 For software code Deliverables, Microsoft shall evaluate the alpha, beta and final version of each Deliverable and shall submit a written acceptance or rejection to bsquare within ten (10) business days after Microsoft's receipt of the alpha and beta versions and thirty (30) days after receipt of the final version of the Deliverable. Acceptance shall be in writing, and Microsoft shall not unreasonably withhold its acceptance. If Microsoft identifies Errors in each Deliverable prior to acceptance, then bsquare shall correct such Errors within fourteen (14) days following receipt of notice thereof during acceptance testing for the alpha and beta versions of each Deliverable and within the time specified in the Work Plan with respect to Errors discovered during acceptance testing for the final version of each Deliverable. If Microsoft fails to provide written acceptance or rejection within the time periods specified above, the Deliverables shall be deemed accepted on the last day of each such acceptance period. 2.2.2 For documentation or report Deliverables, Microsoft shall evaluate each version of such Deliverable. In the event that it requires corrections, Microsoft shall specify the corrections needed and bsquare shall deliver an amended version of such documentation within five (5) working days. 2.2.3 bsquare shall use all reasonable commercial efforts to complete and deliver the Deliverables set forth in the Work Plan to Microsoft, according to the schedule set forth in the Work Plan. Additional information, reports, documentation and the like regarding the Services according to the Work Plan, shall be provided by bsquare to Microsoft upon the reasonable request of Microsoft. bsquare shall promptly raise with Microsoft any issues that arise (or which bsquare reasonably foresees arising) regarding the quality or performance of the Deliverables set forth in the Work Plan, as well as any deviation from the Schedule set forth in Work Plan for such deliverables. The parties shall use all reasonable efforts to promptly address any such issues that may arise, including the establishment of an appropriate recovery plan to the extent required. 2.2.4 If bsquare fails to deliver any Deliverable within the dates specified in the Schedule and if any Errors discovered before acceptance cannot be eliminated in the correction period specified in the Work Plan then Microsoft may, at its option: (i) retain the Deliverable (including any applicable documentation) with rights as set forth in Section 4, and pay bsquare for all Page 2 of 15 113 outstanding payment milestones for which Microsoft has accepted corresponding Deliverables, with no further development and license fee to be paid to bsquare thereafter; (ii) extend the correction period; or (iii) suspend its performance and/or terminate this Agreement for cause pursuant to Section 9.3, provided, however, that Microsoft need not provide bsquare the cure period specified in Section 9.3. 2.3 Design Review & Specifications Changes. bsquare understands that there may be additions, deletions or other changes which may affect the Work Plan at any time during the term of this Agreement. Upon notice of any such changes by Microsoft, bsquare and Microsoft shall work together to make any necessary changes to the Services, including, if necessary, the compensation owed to bsquare and bsquare shall alter the Work Plan in order to accommodate any such changes as mutually agreed to by bsquare and Microsoft. 2.4 Services Performed on Microsoft Property. In the event it is necessary for bsquare to perform the Services, or portion thereof, at Microsoft's Redmond, Washington campus, bsquare shall abide by all Microsoft rules, regulations, and security measures, including any restrictions on access to Confidential Information. 3. PAYMENT FOR SERVICES 3.1 Payment. Microsoft agrees to pay bsquare for work performed in accordance with the Work Plan based upon the hourly rates and incurred expenses set forth in Exhibit A provided that bsquare has completed and delivered any corresponding Deliverables; and (ii) Microsoft has accepted such Deliverables. 3.2 Invoices. bsquare shall submit monthly invoices with respect to Services performed by bsquare pursuant to the Work Plan. The procedure for invoicing is set forth in Exhibit A. Invoices shall include reasonable supporting materials (not including any source code-type information, which is to be delivered as part of the Deliverables set forth in the Work Plan) documenting the Services performed by bsquare. 4. RIGHTS 4.1 Work Made For Hire. The Work Product has been specially ordered and commissioned by Microsoft. bsquare agrees that the Work Product is a "work made for hire" for copyright purposes, with all copyrights in the Work Product owned by Microsoft. 4.2 Assignment. To the extent that the Work Product does not qualify as a work made for hire under applicable law, and to the extent that the Work Product includes material subject to copyright, patent, trade secret, or other proprietary right protection, bsquare hereby assigns to Microsoft, its successors and assigns, all right, title and interest in and to the Work Product, including, but not limited to the following: 4.2.1 Any copyrights that bsquare may possess or acquire in the Work Product and all copyrights and equivalent rights in the Work Product throughout the world, including all renewals and extensions of such rights that may be secured under the laws now or hereafter in force and effect in the United States of America or in any other country or countries; 4.2.2 All rights in and to any inventions, ideas, designs, concepts, techniques, discoveries, or improvements, whether or not patentable, embodied in the Work Product or developed in the course of bsquare's creation of the Work Product, including but not limited to all trade secrets, utility and design patent rights and equivalent rights in and to such inventions and designs Page 3 of 15 114 throughout the world regardless of whether or not legal protection for the Work Product is sought; 4.2.3 The right to prepare Derivative Technology with exclusive rights to authorize others to do the same; 4.2.4 Copies of any documents, magnetically or optically encoded media, or other materials created by bsquare under this Agreement; and 4.2.5 The right to sue for infringements of the Work Product which may occur before the date of this Agreement, and to collect and retain damages from any such infringements. 4.3 Assistance. At Microsoft's expense, bsquare shall execute and deliver such instruments and take such other action as may be requested by Microsoft to perfect or protect Microsoft's rights in the Work Product and to carry out the assignments set forth in this Section 4. 4.4 Assignment/Waiver of Moral Rights. bsquare hereby irrevocably transfers and assigns to Microsoft any and all "moral rights" that bsquare may have in the Work Product and any Derivative Technology thereof. bsquare also hereby forever waivers and agrees never to assert any and all "moral rights" it may have in the Work Product and Derivative Technology, even after termination of the Services. 4.5 Source Code License Grant. Microsoft hereby grants to bsquare a non-exclusive, personal, non-transferable, non-assignable license to use and modify the Source Code solely for bsquare's internal use on bsquare's premises in designing, testing and development of the Work Product on behalf of Microsoft. The Source Code provided hereunder shall be considered Confidential Information and, therefore, shall be subject to the terms and conditions of Section 6 of this Agreement. bsquare may disclose the Source Code only to bsquare's employees on a need-to-know basis. bsquare shall execute appropriate written agreements with its employees sufficient to enable it to comply with all the provisions of this Agreement, including non-disclosure and assignment of rights. 4.6 Test Hardware License Grant. Microsoft hereby grants to bsquare a non-exclusive, personal, non-transferable, non-assignable license to use the Test Hardware solely for bsquare's internal use in testing and development of the Work Product. bsquare shall not reproduce, duplicate, copy or otherwise disclose, distribute, or disseminate the Test Hardware in any media, except as reasonably necessary for the Work Product. The Test Hardware provided hereunder shall be considered Confidential Information and, therefore, shall be subject to the terms and conditions of Section 6 of this Agreement. 4.7 Return of Materials. Upon the earlier of either completion of the Services or termination of this Agreement as provided in Section 9, bsquare shall return all copies of the Source Code, Test Hardware and confidential information in bsquare's possession or under its control within ten (10) days following the termination date or acceptance date of the Deliverable by Microsoft. bsquare shall provide a declaration signed by an officer of bsquare attesting that all copies of the Source Code, Test Hardware and related materials have been returned to Microsoft. 4.8 No Other Rights. bsquare agrees that this Agreement does not grant to it any rights other than what is granted in this Section 4 and for the limited purposes set forth therein. Under no circumstances will the license grants set forth in Section 4 be construed as granting, by implication, estoppel or otherwise, a license to any Microsoft technology other than the Source Code and Test Hardware, Page 4 of 15 115 solely for the purposes designated herein. All rights not expressly granted herein are expressly reserved by Microsoft. 5. NO OBLIGATION/INDEPENDENT DEVELOPMENT Notwithstanding any other provision of this Agreement, Microsoft shall have no obligation to market, sell or otherwise distribute the Work Product, either alone or in any Microsoft product. Except as provided in Section 6, nothing in this Agreement will be construed as restricting Microsoft's ability to acquire, license, develop, manufacture or distribute for itself, or have others acquire, license, develop, manufacture or distribute for Microsoft, similar technology performing the same or similar functions as the technology contemplated by this Agreement, or to market and distribute such similar technology in addition to, or in lieu of, the technology contemplated by this Agreement. 6. CONFIDENTIALITY 6.1 Each party shall protect the other's Confidential Information from unauthorized dissemination and use with the same degree of care that such party uses to protect its own like information. Neither party will use the other's Confidential Information for purposes other than those necessary to directly further the purposes of this Agreement. Neither party will disclose to third parties the other's Confidential Information without the prior written consent of the other party. Except as expressly provided in this Agreement, no ownership or license rights is granted in any Confidential Information. 6.2 The parties' obligations of confidentiality under this Agreement shall not be construed to limit either party's right to independently develop or acquire products without use of the other party's Confidential Information. 7. WARRANTIES 7.1 bsquare. bsquare warrants and represents that: 7.1.1 It has the full power to enter into this Agreement and make the assignments and license rights set forth herein; 7.1.2 It has not previously and will not grant any rights in the Deliverables to any third party that are inconsistent with the rights granted to Microsoft herein; 7.1.3 The Deliverables and Work Product are original to bsquare and do not infringe any copyright, patent, trade secret, or other proprietary right held by any third party; 7.1.4 The Deliverables and Work Product will be created by employees of bsquare within the scope of their employment and under obligation to assign inventions to bsquare, or by independent contractors under written obligations to assign all rights in the Deliverables and Work Product to bsquare; and 7.1.5 The Services shall be performed in a professional manner and shall be of a high grade, nature, and quality. 7.2 Microsoft. Microsoft warrants and represents that it has the full power to enter into this Agreement and make the assignments and license rights set forth herein; Page 5 of 15 116 8. INDEMNITY 8.1 Indemnity. 8.1.1 bsquare shall, at its expense and Microsoft's request, defend any claim or action brought against Microsoft, and Microsoft's subsidiaries, affiliates, directors, officers, employees, agents and independent contractors, to the extent it is based upon a claim that the Work Product and/or the Deliverables infringes or violates any patent, copyright, trademark, trade secret or other proprietary right of a third party, and bsquare will indemnify and hold Microsoft harmless from and against any costs, damages and fees reasonably incurred by Microsoft, including but not limited to fees of attorneys and other professionals, that are attributable to such claim; provided, that: (i) Microsoft provides bsquare reasonably prompt notice in writing of any such claim or action and permits bsquare, through counsel mutually acceptable to Microsoft and bsquare, to answer and defend such claim or action; (ii) Microsoft provides bsquare information, assistance and authority, at bsquare's expense, to help bsquare to defend such claim or action; and (iii) bsquare will not be responsible for any settlement made by Microsoft without bsquare's written permission, which permission will not be unreasonably withheld. 8.1.2 Microsoft shall have the right to employ separate counsel and participate in the defense of any claim or action. bsquare shall reimburse Microsoft upon demand for any payments made or loss suffered by it at any time after the date hereof, based upon the judgment of any court of competent jurisdiction or pursuant to a bona fide compromise or settlement of claims, demands, or actions, in respect to any damages related to any claim or action under this Section 8. 8.1.3 bsquare may not settle any claim or action under this Section 8 on Microsoft's behalf without first obtaining Microsoft's written permission, which permission will not be unreasonably withheld. In the event Microsoft and bsquare agree to settle a claim or action, bsquare agrees not to publicize the settlement without first obtaining Microsoft's written permission, which permission will not be unreasonably withheld. 8.2 Duty to Correct. Notwithstanding Section 8.1, should the Work Product, Deliverables or portion thereof be held to constitute an infringement and use as contemplated by this Agreement be enjoined or be threatened to be enjoined, bsquare shall notify Microsoft and immediately, at bsquare's expense: (i) procure for Microsoft the right to continue use, sale, and marketing of the Work Product, Deliverables or portion thereof, as applicable; or (ii) replace or modify the Work Product, Deliverables or portion thereof with a version that is non-infringing, provided that the replacement or modified version meets the Specifications to Microsoft's satisfaction. If (i) or (ii) are not available to bsquare, in addition to any damages or expenses reimbursed under Section 8.1, bsquare shall refund to Microsoft all amounts paid to bsquare by Microsoft under this Agreement. 9. TERMINATION 9.1 Term. The term of this Agreement shall commence as of the Effective Date and shall continue until terminated as provided in this Section 9. 9.2 Termination by Microsoft. Microsoft may terminate this Agreement with or without cause by providing bsquare thirty (30) days prior written notice of such cancellation. Upon receipt of such notice, bsquare will discontinue all work thereunder. Except in cases of termination for cause as specified in Section 2.2 of this Agreement, Microsoft will pay for all work performed by bsquare up until the date of receipt of the cancellation notice. In the event of cancellation, upon request by Microsoft, bsquare agrees to turn over to Microsoft all work in progress within ten (10) days. Page 6 of 15 117 9.3 Termination By Either Party For Cause. Either party may suspend performance and/or terminate this Agreement immediately upon written notice at any time if: 9.3.1 The other party is in material breach of any material warranty, term, condition or covenant of this Agreement, other than those contained in Section 6, and fails to cure that breach within thirty (30) days after written notice thereof; or 9.3.2 The other party is in material breach of Section 6. 9.4 Effect of Termination. In the event of termination or expiration of this Agreement for any reason, Sections 4.1 - 4.4, 4.7 - 4.8, 5, 6, 7, 8, and 10 shall survive termination. Any licenses or sublicenses already granted by Microsoft under this Agreement shall not be affected by any termination of this Agreement and shall remain in full force and effect. 10. LIMITATION OF LIABILITIES WITH THE EXCEPTION OF ANY BREACH OF SECTIONS 4.5, 6 AND 8, NEITHER PARTY SHALL BE LIABLE FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, PUNITIVE OR SPECIAL DAMAGES, EVENT IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. EXCEPT AS SET FORTH IN SECTION 7, BSQUARE SPECIFICALLY DISCLAIMS ANY WARRANTY OF FITNESS, FUNCTIONALITY OR MERCHANTABILITY, WHETHER EXPRESS OR IMPLIED. 11. GENERAL 11.1 Notices. All notices and requests in connection with this Agreement shall be deemed given as of the day they are received either by messenger, delivery service, or in the United States of America mails, postage prepaid, certified or registered, return receipt requested, and addressed as follows:
To bsquare: To Microsoft: bsquare consulting, inc. Microsoft Corporation 3633 136th Pl. SE, Suite 100 One Microsoft Way Bellevue, WA 98006 Redmond, WA 98052-6399 Attention: William Baxter Attention:_____________________ Phone: 425-519-5963 Phone: _____________________ Fax: 425-519-5999 Fax: _____________________ Copy to: Law & Corporate Affairs Fax: (425) 936-7409
or to such other address as a party may designate pursuant to this notice provision. 11.2 Independent Contractors. bsquare is an independent contractor for Microsoft, and nothing in this Agreement shall be construed as creating an employer-employee relationship, a partnership, or a joint venture between the parties. Page 7 of 15 118 11.3 Taxes. In the event taxes are required to be withheld on payments made under this Agreement by any U.S. (state or federal) or foreign government, Microsoft may deduct such taxes from the amount owed bsquare and pay them to the appropriate taxing authority. Microsoft shall in turn promptly secure and deliver to bsquare an official receipt for any taxes withheld. Microsoft will use reasonable efforts to minimize such taxes to the extent permissible under applicable law. 11.4 Governing Law. This Agreement shall be governed by the laws of the State of Washington as though entered into between Washington residents and to be performed entirely within the State of Washington, and bsquare consents to jurisdiction and venue in the state and federal courts sitting in the State of Washington. In any action or suit to enforce any right or remedy under this Agreement or to interpret any provision of this Agreement, the prevailing party shall be entitled to recover its costs, including reasonable attorneys' fees. 11.5 Assignment. This Agreement shall be binding upon and inure to the benefit of each party's respective successors and lawful assigns; provided, however, that bsquare may not assign this Agreement, in whole or in part, without the prior written approval of Microsoft. 11.6 Construction. Except for Sections 3, 6, 9, and 10 herein above, should a court of competent jurisdiction find any provision of this Agreement, or portion hereof, to be unenforceable, that provision of the Agreement will be enforced to the maximum extent permissible so as to effect the intent of the parties, and the remainder of this Agreement will continue in full force and effect. Should Sections 3, 6, 9 or 10 herein, or any portion thereof, be held unenforceable, then in that event either party shall have a right to immediately terminate this Agreement by written notice to the other party. Failure by either party to enforce any provision of this Agreement will not be deemed a waiver of future enforcement of that or any other provision. This Agreement has been negotiated by the parties and their respective counsel and will be interpreted fairly in accordance with its terms and without any strict construction if favor or against either party. 11.7 Force Majeure. This Agreement and the parties' performances hereunder are subject to all contingencies beyond the reasonable control of the parties (whether or not now in the contemplation of either of the parties), including, but not limited to, force majeure; strikes; labor disputes; floods; civil commotion; war; riot; acts of God; rules, laws, orders, restrictions, embargoes, quotas or actions of any government, foreign or domestic, or any agency or subdivision thereof; casualties; fires; earthquakes; accidents; shortages of transportation facilities; detention of goods and merchandise by customs authorities; loss of goods and merchandise in public or private warehouses; or other casualty or contingency beyond the reasonable control of the parties or otherwise unavoidable. 11.8 Entire Agreement. This Agreement does not constitute an offer by Microsoft and it shall not be effective until signed by both parties. This Agreement constitutes the entire agreement between the parties with respect to the Services and all other subject matter hereof and merges all prior and contemporaneous communications. It shall not be modified except by a written agreement dated subsequent to the date of this Agreement and signed on behalf of bsquare and Microsoft by their respective duly authorized representatives. Page 8 of 15 119 IN WITNESS WHEREOF, the parties have entered into this Agreement as of the Effective Date written above. MICROSOFT CORPORATION BSQUARE CONSULTING, INC. /s/ CRAIG MUNDIE /s/ WILLIAM BAXTER - ------------------------------ ------------------------------ By (Sign) By (Sign) Craig Mundie William Baxter - ------------------------------ ------------------------------ Name (Print) Name (Print) Sr. V.P. CPO President - ------------------------------ ------------------------------ Title Title June 12, 1997 6/17/97 - ------------------------------ ------------------------------ Date Date 91-1650880 ------------------------------ bsquare's Federal Employee ID Number Page 9 of 15 120 EXHIBIT A Payment and Invoicing: bsquare will charge Microsoft a flat rate of Seventy-nine Dollars (US$79.00) per hour for services rendered under this Agreement. Notwithstanding the provisions of Section 2.3, the total amount payable to bsquare for services performed under this Agreement shall not exceed Three Million Three Hundred Sixty-eight Thousand Five Hundred Sixty Dollars (US$3,368,560.00). bsquare will invoice Microsoft for Four Hundred Twenty-one Thousand Seventy Dollars (US$421,070.00) ("Advance Payment") upon execution of this Agreement. Subsequently, bsquare will invoice Microsoft at the end of each month for the services rendered during that month. Each invoice will be discounted by one sixth of the Advance Payment, or Seventy Thousand One Hundred Seventy-eight 33/100 Dollars (US$70,178.33), until the entire Advance Payment has been accounted for. As set forth in Section 3.2 of this agreement, invoices will be accompanied with reasonable supporting materials and Microsoft will make payment to bsquare within thirty (30) days of receiving the invoice(s). Page 10 of 15 121 EXHIBIT B Work Plan OVERVIEW bsquare consulting will develop certain components of the Visual development tools for Windows CE (WCE), the program management of the Japanese versions of the Visual development tools for WCE, the testing of the majority of the Visual tools for WCE and the testing of the WCE Java Virtual Machine (VM). Specific work includes the following areas:
DESCRIPTION HEADCOUNT - ----------- --------- testing of several components of the WCE development tools 22 Japanese WCE Visual Tools Program Manager 1 Development of MFC 2.0 for WCE 2 x86 tools development for WCE 1 Development of Active X Template Library 1 Development of the Visual Java product for WCE 2 testing of the WCE Java Virtual Machine 2 Development of the DDK for WCE 4 Development of the CKD for WCE 1 Development of V2 Emulation 5 ---- TOTAL 41 ====
RESPONSIBILITIES BUILDING OF WCE VISUAL DEVELOPMENT TOOLS bsquare will assume the primary role as the "builder" of the WCE Visual development tools and will cooperate with Microsoft to establish mutually acceptable terms and conditions for these procedures. bsquare will conduct daily builds of all the WCE Visual Development Tools. The build results will be published on a common share. bsquare will fix build problems by contacting the developers and working with them to check in the fixes. The build will drop all components to a common share. VCCE and VJCE will be dropped as fully functional kits. The build teams will manage all release versions. The build team will work with developer in adding new sources and products to the build. The build team will work with the localization team in running espresso to produce the Japanese versions. BUILD COMPONENTS - - Windbg - - DevStudio - - CRT - - Emulation - - Remote Tools - - MFC - - Japanese build and kits TESTING OF WCE VISUAL DEVELOPMENT TOOLS bsquare will assume primary role for all testing of the WCE Visual development tools. Testings will occur on a regular schedule. The test team will run the tests against the daily builds. Test suites will be maintained for each product. The test harness will be modified to run the appropriate tests against the Page 11 of 15 122 component and it will log all results. These results will be analyzed and published. All failures will be logged in a Raid database. Automated tests will be developed for each component. Manual testing will be used until the automated tests are up and running. Tests cases will be collected from users and developers and will be added to the test suites as regression tests. PRODUCTS TO BE TESTED o Debugger o Resource Editor o Setup o Remote Tools o Shell o MFC o Emulation o Compiler o Linker o Samples JAPANESE PM bsquare will assume primary responsibility for Program Management of the Japanese versions of the WCE Visual tools products. The responsibilities will include development of the Product Specifications, establishing the schedule, coordination of the different development groups. It will also include owning the licensing, marketing, and support issues. The PM will be responsible for all releases the Japanese versions of the WCE Visual Tools. PRODUCTS o VCCE o VJCE o SDK o OAK MFC bsquare will continue to assume primary responsibility for the WCE version of MFC. bsquare will adapt MFC to the different versions of the Alder OS. Each MFC version will match the functionality of the target platform. The MFC library work will involve building MFC in the WCE environment, removing unsupported classes or changing them to match the WCE V2 API set, and add new classes to capture WCE V2 specific features. The DevStudio work will involve adapting the WCE AppWizard to will generate applications for the different target platforms. The DevStudio work will also involve modifications to the Class Wizard to match the WCE V2 message set. TARGET PLATFORMS o Mercury o Gryphon o APC DELIVERABLES o MFCWCE.DLL, MFCWCE.LIB, UAFXWCE.LIB, MFCS42.LIB o WCE MFC Headers o WCE MFC Sources o MSVCRT.DLL, MSVCRT.LIB o App Wizard o Class Wizard o Documentation o Samples Page 12 of 15 123 NEW FEATURES FOR V2 o OLE o Win Sockets o HTML INTEGRATION OF X86 INTO WCE VISUAL DEVELOPMENT TOOLS (CEPC) bsquare will assume primary responsibility for the integration of x86 support into the WCE Visual development tools. bsquare will develop a WCE x86 platform package for DevStudio. This package will target enable users to target WCE x86 devices. bsquare will adapt the DevStudio remote debugger to the WCE x86 platform. All current WCE DevStudio features will be modified to work with a WCE x86 target. bsquare will also produce a WCE x86 runtime library. ATL (ACTIVEX TEMPLATE LIBRARY) DEVELOPMENT FOR WCE bsquare will assume primary responsibility for the ATL development for WCE. bsquare will adapt ATL to the WCE V2 API set. bsquare will test all ATL function against the Alder OS and work with Microsoft in resolving all issues involving ActiveX support in WCE. bsquare will develop a verification test suite for ATL on WCE. The WCE ATL will be integrated into the VCCE product. WCE VISUAL JAVA bsquare will assume primary responsibility for the WCE Visual Java product. bsquare will work with the Microsoft Program Managers to further refine the specifications for VJCE. bsquare will produce a WCE Java package for the DevStudio. The package will define the WCE Java platform features. These features will include WCE Java projects, build settings, automatic downloads, and remote Java debug support. bsquare will modify the DevStudio shell to meet the requirements of developing for WCE Java. Modification will include new menu options, dialogs and any other features that ease WCE Java development. The Java debugger will be adapted to work with the WCE pJVM on target device. The WCE Java projects will also be able to target the Emulation environment. bsquare will produce a WCE Visual Java product that will be independent of the VCCE product. bsquare will generate automated tests to test the new WCE Java features. These test will exercise all UI features and all debugger features. WCE JAVA VM TESTING bsquare will assume primary responsibility for the WCE Java VM testing, with Microsoft assuming primary responsibility for Java VM testing tools development. bsquare will adapt the automatic distributed complier test harmless to run tests against the pJVM. bsquare will develop a series of test suites to exercise all of the pJVM features. bsquare will add samples, existing tests, and real world code to the test suites. The tests will be run on a schedule basis with all results being published to a common location. The test results will be analyzed and all the failures will be logged to a Raid database. The failures will also be used to generate a regression test suite that will be added to the main tests. bsquare will work with the Microsoft developers in refining the pJVM test tools and in developing new tools. DEVELOPMENT OF CDK (COMPONENT DEVELOPMENT KIT) FOR WCE bsquare will work with Microsoft PMs to define and deliver a CDK for Windows CE. DEVELOPMENT OF DDK (DEVICE DRIVER KIT) FOR WCE bsquare will work with Microsoft PMs to define and deliver a DDK for Windows CE 2.0. Page 13 of 15 124 EMULATION FOR WCE bsquare will assume the primary development responsibility for the WCE Emulation Environment. bsquare will develop Emulation for the three main Alder platforms, Mercury, Gryphon, and APC. Emulation will be expanded to pickup the new Alder APIs and features such as OLE. bsquare will also integrate the DDK and the CDK into Emulation. The Emulation work will involve adapting the current emulated object store to each of the three platforms. The object store will be converted to be a true NT device which greatly improve all emulated file transactions. The Alder shell functionality will also be complete emulated. The DevStudio shell will be modified to match the features of the V2 Emulation. An option dialog will be added to allow a developer to select a particular Emulation platform. This dialog will configure the WCE shell and object store model used by Emulation so that it can the target the different platform. All the new Emulation components will be added to the VCCE product. Page 14 of 15 125 EXHIBIT C Schedule Project begins 4/15/97 All projects build 5/23/97 All projects, weekly product test reports 5/30/97 May status report 5/30/97 M1 - ALPHA EMULATION RTM 6/6/97 M1 - letter of acceptance 6/20/97 All project BVTs operational 6/13/97 All project detailed test suites begin 6/20/97 June status report 6/30/97 M2 - BETA I ALL PROJECTS 7/15/97 M2 - letter of acceptance 7/29/97 Feature complete all projects 7/25/97 July status report 7/31/97 M3 - BETA II DESKTOP PROJECTS 8/29/97 M3 - RTM ROM COMPONENTS 8/29/97 M3 - letter of acceptance 9/12/97 August status report 8/29/97 M4 - RTM OEM SKUs 9/12/97 M4 - letter of acceptance 9/26/97 September status report 9/30/97 M5 - RTM DESKTOP PROJECTS 10/15/97 M5 - letter of acceptance 10/19/97 Final project status 10/15/97 Project postmortem 10/16/97
Page 15 of 15 126 [MICROSOFT LETTERHEAD] AMENDMENT NO. 1 TO THE DEVELOPMENT & LICENSE AGREEMENT BETWEEN BSQUARE CORPORATION AND MICROSOFT CORPORATION [MICROSOFT LOGO] This Amendment is made and entered into by and between MICROSOFT CORPORATION ("Microsoft") and "BSQUARE CORPORATION ("BSQUARE") to be effective as of the 17th day of December, 1997. Capitalized terms used in this Amendment No. 1 that are not otherwise described herein shall have the meaning ascribed to such terms in the Agreement. RECITALS The parties have entered into that certain Development & License Agreement, dated June 12, 1997 (the "Agreement"); and Microsoft desires to have BSQUARE assist with the development, testing and program management of certain projects in connection with Windows CE operating system support for certain microprocessors in addition to other Services being provided by BSQUARE under the Agreement, and, The parties are currently negotiating a new master agreement to govern the provision of development services by BSQUARE to Microsoft (the "Master Agreement") over the next several years; and Until such time as the Master Agreement is executed and in effect, the parties desire to amend the Agreement on the terms and conditions provided herein to describe additional Services to be provided by BSQUARE; The parties hereby agree as follows: AMENDMENT 1. Definitions. Section 1.3, Definitions, is amended to restated to provide as follows: 1.3 "Work Plan" shall mean the specifications for the Services, attached to this Agreement in sequential Exhibits B. 2. Amended Exhibit A-1. Exhibit A-1 is hereby added to the Agreement and the prices and payments terms specified in Exhibit A-1 shall apply to all Services and Work Plans other than the original Work Plan in existence upon the execution of the Agreement. 3. Master Agreement. Although a variety of terms remain to be negotiated and no final agreement has been reached, the parties currently intend to include the following terms in the Master Agreement: a. Microsoft will agree to fund an agreed upon number of engineering personnel dedicated to Microsoft projects and Services during the term of the Master Agreement; 127 [MICROSOFT LOGO] [MICROSOFT LETTERHEAD] b. BSQUARE will agree to provide an agreed upon number of engineering personnel dedicated to Microsoft projects at the levels and rates specified in Exhibit A-1 to this Agreement; c. BSQUARE will agree not to provide products and services which compete with Windows CE and Windows CE tools. d. BSQUARE will bill Microsoft on monthly intervals by project. Billing will be recorded in hourly increments by project sufficient for Microsoft to determine the number of hours each engineer worked on a Microsoft project on each day. e. Work shall be performed on a work for hire basis with all intellectual property rights, including copyrights, trade secrets and patents assigned to Microsoft. f. All work performed by BSQUARE will be fully warranted against intellectual property infringement. g. BSQUARE will be a preferred Microsoft vendor for Microsoft Visual Tools for Windows CE projects. h. Upon execution of the Master Agreement, Microsoft and BSQUARE will work together on a joint press release to announce their relationship under the Master Agreement as agreed upon by the parties. i. The parties will work in good faith to complete the Master Agreement by March 1, 1998. 4. Additional Work Plans and Services. An additional Work Plan summary is hereby added to the Agreement by Exhibit B-2 and incorporated herein by this reference. The Work Plan will be supplemented upon execution of the Master Agreement as described in Section 5 below. Until execution of the Master Agreement, MS and BSQUARE will agree on the number of people assigned to the projects summarized in the Work Plan and the appropriate job level category for such personnel. Further it is agreed that additional details for each project will be developed and attached as exhibits in the Master Agreement prior to completion of each project specified in the Work Plan. 5. Term Section 9.1 (Term) of the Agreement is amended and restated to provided as follows: 9.1 Term. The term of this Agreement shall commence as of the Effective Date and shall continue until the earlier of March 1, 1998 or the date the Agreement is terminated as provided in this Section 9. 6. This Amendment shall amend, modify and supersede to the extent of any inconsistencies, the provisions of the Agreement. Except as expressly amended by this Amendment, the Agreement shall remain in full force and effect. Capitalized terms used in this Amendment No. 1 that are not otherwise described herein shall have the meaning ascribed to such terms in the Agreement. Page 2 128 [MICROSOFT LETTERHEAD] IN WITNESS WHEREOF, the parties have executed this Amendment to the Agreement as of the date set forth above. All signed copies of this Amendment to the Agreement shall be deemed originals. This Amendment does not constitute an offer by MS. This Amendment shall be effective upon execution on behalf of BSQUARE and MS by their duly authorized representatives. [MICROSOFT LOGO] MICROSOFT CORPORATION BSQUARE CORPORATION /s/ CRAIG MUNDIE /s/ WILLIAM BAXTER - --------------------------------- ---------------------------------- By By Craig Mundie William Baxter - --------------------------------- ---------------------------------- Name (Print) Name (Print) Sr. V.P. CPO CEO - --------------------------------- ---------------------------------- Title Title Jan. 19, 1998 12-17-97 - --------------------------------- ---------------------------------- Date Date Page 3 129 [MICROSOFT LOGO] [MICROSOFT LETTERHEAD] EXHIBIT A-1 PAYMENT AND INVOICING BSQUARE will charge Microsoft at the applicable rate specified below for each hour of services rendered under the Work Plan on a project by project basis using the Microsoft Internal Reference Numbers described below. The total maximum amount payable to BSQUARE for services performed under each project in a Work Plan shall be specified as well as a total of all projects summarized in the Work Plan. BSQUARE shall invoice MS by the tenth day of each month for the amounts due for work performed under the Work Plan in the prior month. Billing will be recorded in hourly increments by project and Microsoft Internal Reference Number sufficient for Microsoft to determine the number of hours each engineer worked on any given Microsoft project on each day. In the event that MS provides a form to detail BSQUARE billings, BSQUARE agrees to utilize such forms as MS may supply. MS shall pay each invoice within thirty (30) days of receiving each invoice, provided that MS has accepted the work described in the invoice. MS shall be entitled to conditionally accept Services billed each month, subject to final approval of the Services upon completion of the Project. If MS rejects any Services pursuant to the Agreement, then MS shall be entitled, in addition to any other remedies available, to deduct an amount from any subsequent invoice equal to the amount MS previously paid for the rejected Services or portion thereof. As set forth in Section 3.2 of this agreement, invoices will be accompanied with reasonable supporting materials and Microsoft will make payment to BSQUARE within 30 days of receiving the invoice(s).
Job Title Category Rate Basis - ---------------------------------------------------------------- -------- ------ -------- SDE Level 1 (Architect - compiler or kernel/OS) SDE1 125.00 per hour SDE Level 2 (System Engineer - compiler, debugger and OS) SDE2 105.00 per hour SDE Level 3 (Application Engineer - visual tools, IDE, MFC, etc.) SDE3 95.00 per hour STE Level 1 (Test lead) STE1 95.00 per hour STE Level 2 (System Test Engineer) STE2 85.00 per hour STE Level 3 (Application Test Engineer) STE3 70.00 per hour Group Manager (Top Level Project Mgr) PM1 100.00 per hour Project Manager (Multi-project PM for Compiler) PM2 75.00 per hour User Education Level 1 (Editor) UE1 75.00 per hour User Education Level 2 (Writer) UE2 65.00 per hour
Page 4 130 [MICROSOFT LETTERHEAD] EXHIBIT B-2 WORK PLAN SUMMARY [MICROSOFT LOGO] The table below identifies all known projects by name and associates a unique MS Internal Reference Number which shall be used to record hours worked by each employee assigned to a project. Work plans will be developed for each project and attached as exhibits to the Master Agreement. In the interim, this Work Plan summary identifies the projects, number of personnel expected to be assigned to the projects, the pay rate for each engineer assigned, a maximum amount payable for each project under the Work Plan and a maximum amount for all projects under the Work Plan. Total Maximum Payable Amount for All Projects $6,637,100
PROJECT MS INTERNAL REFERENCE # - ------- ----------------------- ARM 720T 1036724 ARM Thumb compiler/kernel support 1036726 NIPS NEC 4300 floating point 1036727 Maintenance ARM Architecture 1036741 Maintenance MIPS Architecture 1036742 Maintenance Power PC Architecture 1036744 Maintenance Super-H Architecture 1036745 Toolkit for Visual Basic 1036923 Toolkit for Visual C++ 1036924 Toolkit for Visual J++ 1036925 Embedded Toolkit for Visual C++ 1036926 Windows CE SDK/Emulation/Remote Tools 1036927 Windows CE Internal Tools 1036928 Windows CE Tools Localization 1036929
Page 5 131 [MICROSOFT LETTERHEAD] INDIVIDUAL PROJECT DESCRIPTIONS [MICROSOFT LOGO] Project Name ARM 720T Internal Reference Number #1036724 Total Payment Amount $111,500 Project Description: ARM compiler back-end and OS adaptation work.
JOB CATEGORY QUANTITY RATE START END DAYS HOURS TOTAL PAYMENT SDE1 1 125.00 11/1/97 12/12/97 30 240 $ 30,000.00 SDE2 1 105.00 11/1/97 12/12/97 30 240 $ 25,200.00 SDE1 2 125.00 1/1/98 1/15/98 10 160 $ 20,000.00 SDE2 3 105.00 1/1/98 1/15/98 10 240 $ 25,200.00 SDE3 95.00 STE1 95.00 STE2 2 85.00 1/1/98 1/15/98 10 160 $ 13,600.00 STE3 70.00 PM1 0.25 100.00 1/1/98 1/15/98 10 20 $ 2,000.00 PM2 75.00 UE1 75.00 UE2 65.00 Total $114,000.00
Page 6 132 [MICROSOFT LETTERHEAD] [MICROSOFT LOGO] Project Name ARM Thumb compiler/kernel support Internal Reference Number #1036726 Total Payment Amount $196,800 Project Description: ARM Thumb 16-bit code generator compiler back-end work and OS support.
JOB CATEGORY QUANTITY RATE START END DAYS HOURS TOTAL PAYMENT - ------------ -------- ------ ------- ------ ---- ----- ------------- SDE1 2 125.00 1/15/98 3/1/98 30 480 $ 60,000.00 SDE2 3 105.00 1/15/98 3/1/98 30 720 $ 75,600.00 SDE3 95.00 STE1 95.00 STE2 3 85.00 1/15/98 3/1/98 30 720 $ 61,200.00 STE3 70.00 PM1 100.00 PM2 75.00 UE1 75.00 UE2 65.00 Total $196,800.00
Page 7 133 [MICROSOFT LETTERHEAD] Project Name MIPS NEC 4300 floating point Internal Reference Number #1036727 Total Payment Amount $98,800 [MICROSOFT LOGO] Project Description: MIPS VR4300 hardware floating support in MIPS compiler back-end.
JOB CATEGORY QUANTITY RATE START END DAYS HOURS TOTAL PAYMENT - --- -------- -------- ------ ------- ------ ---- ----- ------------- SDE1 125.00 SDE2 1 105.00 12/1/97 3/1/98 65 520 $54,600.00 SDE3 95.00 STE1 95.00 STE2 1 85.00 12/1/97 3/1/98 65 520 $44,200.00 STE3 70.00 PM1 100.00 PM2 75.00 UE1 75.00 UE2 65.00 Total $98,800.00
Page 8 134 [MICROSOFT LETTERHEAD] [MICROSOFT LOGO] Project Name Maintenance ARM Architecture Internal Reference Number #1036741 Total Payment Amount $168,300 Project Description: Maintain and support ARM specific architecture instances in the Windows CE operating system and visual tools source bases.
JOB CATEGORY QUANTITY RATE START END DAYS HOURS TOTAL PAYMENT - ------------ -------- ------ ------- ------ ---- ----- ------------- SDE1 1 125.00 11/1/97 3/1/98 85 680 $ 85,000.00 SDE2 105.00 SDE3 95.00 STE1 95.00 STE2 1 85.00 11/1/97 3/1/98 85 680 $ 57,800.00 STE3 70.00 PM1 100.00 PM2 0.5 75.00 11/1/97 3/1/98 85 340 $ 25,500.00 UE1 75.00 UE2 65.00 Total $168,300.00
Page 9 135 [MICROSOFT LETTERHEAD] [MICROSOFT LOGO] Project Name Maintenance MIPS Architecture Internal Reference Number #1036742 Total Payment Amount $168,300 Project Description: Maintain and support MIPS specific architecture instances in the Windows CE operating system and visual tools source bases.
JOB CATEGORY QUANTITY RATE START END DAYS HOURS TOTAL PAYMENT - ------------ -------- ------ ------- ------ ---- ----- ------------- SDE1 1 125.00 11/1/97 3/1/98 85 680 $ 85,000.00 SDE2 105.00 SDE3 95.00 STE1 95.00 STE2 1 85.00 11/1/97 3/1/98 85 680 $ 57,800.00 STE3 70.00 PM1 100.00 PM2 0.5 75.00 11/1/97 3/1/98 85 340 $ 25,500.00 UE1 75.00 UE2 65.00 Total $168,300.00
Page 10 136 [MICROSOFT LETTERHEAD] [MICROSOFT LOGO] Project Name Maintenance Power PC Architecture Internal Reference Number #1036744 Total Payment Amount $168,300 Project Description: Maintain and support PowerPC specific architecture instances in the Windows CE operating system and visual tools source bases.
JOB CATEGORY QUANTITY RATE START END DAYS HOURS TOTAL PAYMENT - ------------ -------- ------ ------- ------ ---- ----- ------------- SDE1 1 125.00 11/1/98 3/1/98 85 680 $ 85,000.00 SDE2 105.00 SDE3 95.00 STE1 95.00 STE2 1 85.00 11/1/97 3/1/98 85 680 $ 57,800.00 STE3 70.00 PM1 100.00 PM2 0.5 75.00 11/1/97 3/1/98 85 340 $ 25,500.00 UE1 75.00 UE2 65.00 Total $168,300.00
Page 11 137 [MICROSOFT LETTERHEAD] [MICROSOFT LOGO] Project Name Maintenance Super-H Architecture Internal Reference Number #1036745 Total Payment Amount $168,300 Project Description: Maintain and support Super-H specific architecture instances in the Windows CE operating system and visual tools source bases.
JOB CATEGORY QUANTITY RATE START END DAYS HOURS TOTAL PAYMENT SDE1 1 125.00 11/1/97 3/1/97 85 680 $ 85,000.00 SDE2 105.00 SDE3 95.00 STE1 95.00 STE2 1 85.00 11/1/97 3/1/98 85 680 $ 57,800.00 STE3 70.00 PM1 100.00 PM2 0.5 75.00 11/1/97 3/1/98 85 340 $ 25,500.00 UE1 75.00 UE2 65.00 Total $168,300.00
Page 12 138 [MICROSOFT LETTERHEAD] Project Name Toolkit for Visual Basic Internal Reference Number #1036923 Total Payment Amount $606,900 [MICROSOFT LOGO] Project Description: Build, test and develop the Windows CE Toolkit for Visual Basic and the accompanying Visual Basic runtime for Windows CE.
JOB CATEGORY QUANTITY RATE START END DAYS HOURS TOTAL PAYMENT - ------------ -------- ------ ------- ------ ---- ----- ------------- SDE1 125.00 SDE2 105.00 SDE3 95.00 STE1 2 95.00 11/1/97 3/1/97 85 1360 $129,200.00 STE2 2.5 85.00 11/1/97 3/1/97 85 1700 $144,500.00 STE3 7 70.00 11/1/97 3/1/97 85 4760 $333,200.00 PM1 100.00 PM2 75.00 UE1 75.00 UE2 65.00 Total $606,900.00
Page 13 139 [MICROSOFT LETTERHEAD] Project Name Toolkit for Visual C++ Internal Reference Number #1036924 Total Payment Amount $2,186,200 [MICROSOFT LOGO] Project Description: Build, test and develop the Windows CE Toolkit for Visual Basic and the accompanying Visual Basic runtime for Windows CE.
JOB CATEGORY QUANTITY RATE START END DAYS HOURS TOTAL PAYMENT - ------------ -------- ------ ------- ------ ---- ----- ------------- SDE1 7 125.00 SDE2 13 105.00 11/1/97 3/1/98 85 4760 $ 499,800.00 SDE3 2 95.00 11/1/97 3/1/98 85 8840 $ 839,800.00 STE1 3 95.00 11/1/97 3/1/98 85 1360 $ 129,200.00 STE2 10 85.00 11/1/97 3/1/98 85 2040 $ 173,400.00 STE3 1 70.00 11/1/97 3/1/98 85 6800 $ 476,000.00 PM1 100.00 11/1/97 3/1/98 85 680 $ 68,000.00 PM2 75.00 UE1 75.00 UE2 65.00 Total $2,186,200.00
Page 14 140 [MICROSOFT LETTERHEAD] [MICROSOFT LOGO] Project Name Toolkit for Visual J++ Internal Reference Number #1036925 Total Payment Amount $354,900 Project Description: Build, test and develop the Windows CE Toolkit for Visual J++ and associated components including the remote Java debugger and Java VM emulation capability.
JOB CATEGORY QUANTITY RATE START END DAYS HOURS TOTAL PAYMENT - ------------ -------- ------ ------- ------ ---- ----- ------------- SDE1 125.00 SDE2 1 105.00 12/1/97 3/1/98 65 520 $ 54,600.00 SDE3 2 95.00 12/1/97 3/1/98 65 1040 $ 98,800.00 STE1 95.00 STE2 1.5 85.00 12/1/97 3/1/98 65 780 $ 66,300.00 STE3 3 70.00 12/1/97 3/1/98 65 1560 $109,200.00 PM1 0.5 100.00 12/1/97 3/1/98 65 260 $ 26,000.00 PM2 75.00 UE1 75.00 UE2 65.00 Total $354,900.00
Page 15 141 [MICROSOFT LETTERHEAD] Project Name Embedded Toolkit for Visual C++ Internal Reference Number #1036926 Total Payment Amount $926,500 [MICROSOFT LOGO] Project Description: Build, test and develop the Windows CE Embedded Toolkit for Visual C++ including the complete Windows CE component OS in binary form on all supported CPUs, the CESYSGEN build environment and supporting technical tools, sample OS configurations and miscellaneous supporting materials referred to as the OAK tools.
JOB TOTAL CATEGORY QUANTITY RATE START END DAYS HOURS PAYMENT - -------- -------- ---- ----- --- ---- ----- ------- SDE1 125.00 SDE2 3 105.00 11/1/97 12/23/97 37 888 $ 93,240.00 SDE2 1 105.00 1/5/98 3/1/98 40 320 $ 33,600.00 SDE3 5 95.00 11/1/97 12/23/97 37 1480 $140,600.00 SDE3 5 95.00 1/5/98 3/1/98 40 1600 $152,000.00 STE1 95.00 STE2 2.5 85.00 11/1/97 12/23/97 37 740 $ 62,900.00 STE2 2 85.00 1/5/98 3/1/98 40 640 $ 54,400.00 STE3 10.5 70.00 11/1/97 12/23/97 37 3108 $217,560.00 STE3 7 70.00 1/5/98 3/1/98 40 2240 $156,800.00 PM2 75.00 PM1 0.25 100.00 11/1/97 12/23/97 37 74 $ 7,400.00 PM1 0.25 100.00 1/5/98 3/1/98 40 80 $ 8,000.00 UE1 75.00 UE2 65.00 Total $926,500.00
Page 16 142 MICROSOFT LETTERHEAD [MICROSOFT LOGO] Project Name Windows CE SDK, Emulation and Remote Tools Internal Reference Number #1036927 Total Payment Amount $991,100 Project Description: Build, test and develop the Windows CE SDK for all MEPU platforms including full support for the desktop emulation environment in Windows NT, the remote tools and all headers, libraries and samples distributed in the Windows CE SDK.
JOB CATEGORY QUANTITY RATE START END DAYS HOURS TOTAL PAYMENT - ------------ -------- ------ ------- ------ ---- ----- ------------- SDE1 125.00 SDE2 1 105.00 11/1/98 3/1/98 85 680 $ 71,400.00 SDE3 6 95.00 11/1/98 3/1/98 85 4080 $387,600.00 STE1 1 95.00 11/1/98 3/1/98 85 680 $ 64,600.00 STE2 7.5 85.00 11/1/97 3/1/98 85 5100 $433,500.00 STE3 70.00 PM1 0.5 100.00 11/1/97 3/1/98 85 340 $ 34,000.00 PM2 75.00 UE1 75.00 UE2 65.00 Total $991,100.00
Page 17 143 [MICROSOFT LETTERHEAD] Project Name Windows CE Internal Tools [MICROSOFT LOGO] Internal Reference Number #1036928 Total Payment Amount $89,400 Project Description: Build, develop and test internal tools used in support of Windows CE development including profiling tools, work for the instrumented kernel and others.
Job Category Quantity Rate Start End Days Hours Total Payment SDE1 125.00 SDE2 2 105.00 1/5/98 3/1/98 40 640 $67,200.00 SDE3 95.00 STE1 95.00 STE2 1 85.00 1/5/98 3/1/98 40 320 $27,200.00 STE3 70.00 PM1 100.00 PM2 75.00 UE1 75.00 UE2 65.00 Total $94,400.00
Page 18 144 [MICROSOFT LETTERHEAD] [MICROSOFT LOGO] Project Name Windows CE Tools Localization Internal Reference Number #1036729 Total Payment Amount $528,500 Project Description: Build, develop and test localized versions of all the Windows CE tools including the Emulation environment, the host environment for the toolkits and the VB and MFC runtimes.
JOB CATEGORY QUANTITY RATE START END DAYS HOURS TOTAL PAYMENT - ------------ -------- ------ ------- ------ ---- ----- ------------- SDE1 125.00 SDE2 105.00 SDE3 2 95.00 11/1/97 3/1/98 85 1360 $129,200.00 STE1 1 95.00 11/1/97 3/1/98 85 680 $ 64,600.00 STE2 0.5 85.00 11/1/97 3/1/98 85 340 $ 28,900.00 STE3 6 70.00 11/1/97 3/1/98 85 4080 $285,600.00 PM1 100.00 PM2 75.00 UE1 75.00 UE2 65.00 Total $508,300.00
Page 19 145 SECTION 3.11 See Section 2.17(a) of the Disclosure Schedule for the compensation of certain shareholders. 146 SECTION 3.13 A copy of the Non-Founder Shareholder Agreement is attached as Section 3.13 of the Disclosure Schedule. 147 SECTION 3.13 TO DISCLOSURE SCHEDULE SHAREHOLDER AGREEMENT This SHAREHOLDERS AGREEMENT dated as of ___________, 199__, is by and among BSQUARE CORPORATION, a Washington corporation (the "Company"), and the individuals listed on Schedule A, attached hereto (hereinafter sometimes referred to individually as a "Shareholder" and collectively as the "Shareholders"). RECITALS A. The Shareholders own the number of shares of issued and outstanding stock of the Company listed on Schedule A. B. The Company and the Shareholders desire to make provision with respect to certain affairs of the Company and to restrict the sale of the stock of the Company owned by the Shareholders. AGREEMENTS In consideration of the mutual covenants and promises herein contained, the Company and the Shareholders hereby agree as follows: 1. Definitions. For purposes of this Agreement: 1.1 Shareholders. The term "Shareholders" shall mean the individuals listed on Schedule A, attached hereto, and any other person or entity who shall become parties hereto as provided in Section 10 or 17 herein, and the term "Shareholder" shall mean any one of them. 1.2 Shares. The term "Shares" shall mean all shares of capital stock in the Company owned by the Shareholders, including without limitation all options, warrants, convertible stock and similar rights, and shall include all shares of capital stock which may be owned by the Shareholders upon exercise of outstanding warrants or options. If at any time during the term of this Agreement there is any capital reorganization of the Company or if any shares of stock in the Company shall be reclassified, split, exchanged or changed in any manner, or if any additional shares of the Company are issued or transferred to the Shareholders, then all such new, substituted or additional shares of the Company owned by the Shareholders shall be immediately deemed to be "Shares" for the purposes of this Agreement. 2. Restriction on Transfer. No Shareholder shall directly or indirectly sell, assign, transfer, mortgage, pledge, hypothecate, or encumber in any other manner whatsoever, or give away, bequeath, or in any other manner dispose of, any Shares, except in accordance with the terms and provisions of this Agreement. Any attempt to transfer any Shares in violation hereof shall be null and void. 1 148 3. Right of First Refusal. 3.1 Offer. If during the term of this Agreement a Shareholder (the "Selling Shareholder") receives and intends to accept an offer to purchase all or any number of Shares held by the Selling Shareholder (the "Offered Shares"), the Selling Shareholder shall request an unconditional, bona fide, written offer from the prospective purchaser (the "Offer") and shall first offer the Offered Shares for sale to the Company at the same price and on the same terms and conditions as set forth in the Offer. Immediately upon receiving the Offer, the Selling Shareholder shall transmit a copy of the Offer, setting forth in reasonable detail all material terms for the contemplated sale, to the Secretary of the Company. 3.2 Option of the Company. The Company shall have fifteen (15) calendar days following receipt of the Offer by the Secretary of the Company in which to give notice to the Selling Shareholder of its election to purchase some or all of the Offered Shares on the terms and conditions stated in the Offer. In the event the Company elects to purchase some or all of the Offered Shares, such purchase shall occur within 15 days after the date on which notice of such election is given, or on such later date as is stated in the Offer. 3.3 No Election Made. In the event any Offered Shares are not purchased pursuant to this Section 3, then the Selling Shareholder may sell such Shares to the purchaser identified in the Offer upon the terms and conditions stated in the Offer, but not otherwise provided, however, that if the Selling Shareholder does not sell such Shares in accordance with the Offer within 60 days immediately following the last date on which the Company may purchase the Offered Shares pursuant to Section 3.2 above, or such later date as is specified in the Offer, then any sale of all or any portion of the Offered Shares shall again be subject to the right of first refusal described in this Section 3. 4. Mandatory Offer to Sell. 4.1 Purchase Event. For purposes of this Agreement, any one of the following events shall constitutes a "Purchase Event": 4.1.1 The death of an individual Shareholder, provided that the date of the Purchase Event for purposes of this Agreement shall be deemed to be the date the Company receives notice of the appointment and qualification of the deceased Shareholder's personal representative. The personal representative of the deceased Shareholder shall be obligated to give such notice as soon as practicable. 4.1.2 The permanent disability of an individual Shareholder, where permanent disability" is defined as the Shareholder's inability, through physical or mental illness or other cause, to perform the majority of his or her usual duties for the Company for a period of six consecutive months. 4.1.3 Any decree of divorce, dissolution or separate maintenance, or any 2 149 property settlement or separation agreement (a "Property Settlement") wherein Shares are awarded to a Shareholder's former or separated spouse or partner who is not also a Shareholder (a "Former Spouse"). 4.1.4 The insolvency of a Shareholder or the making of an assignment for the benefit of creditors by a Shareholder or the filing of a petition in bankruptcy by or against a Shareholder. 4.1.5 The voluntary or involuntary termination of a Shareholder as an employee and/or director of the Company. 4.2 Offer;, Optional Purchase. Upon the occurrence of any Purchase Event with respect to a Shareholder (except the Purchase Event described in Section 4.1.3), the Company shall have the right to purchase such Shareholder's Shares (the "Proffered Shares") on the same terms and conditions as if such Shareholder or its trustee in bankruptcy, personal representative, guardian, executor or administrator, as appropriate (the "Seller"), had made an offer to sell such Shares pursuant to Section 3 at a price per Share equal to the determined price established pursuant to Section 4.3 below. Upon the occurrence of the Purchase Event specified in Section 4.1.3, first that Shareholder whose Former Spouse was awarded Shares, and then the Company, shall have the right to purchase any or all Shares owned, in whole or in part by that Shareholder's Former Spouse on the same terms and conditions as if such Shareholder's Former Spouse had made an offer to sell such Shares pursuant to Section 3 at a price per Share equal to the price per share at which the Shares were valued for purposes of the Former Spouse's Property Settlement or, if no value was ascribed to the Shares for purposes of the Property Settlement, the price determined in accordance with Section 4.3 below. In such event, the Shareholder shall have 15 days to either (a) purchase such Shares or (b) provide notice to the Company that he or she declined to purchase such Shares. The Company shall have 15 days after the date of the determination of the purchase price for the Proffered Shares in accordance with Section 4.3 (or, in the event of the Purchase Event described IN Section 4.1.3, 15 days after receiving notice from the Shareholder that he or she declined to purchase his or her Former Spouse's Shares) within which to accept or reject such offer by giving written notice of its acceptance or rejection to the Seller. 4.3 Purchase Price. 4.3.1 The price at which the Proffered Share shall be purchased and sold pursuant to Section 4.2 hereof shall be the "fair market value" of such shares as determined by the Company's Board of Directors within 30 days after the date of the Purchase Event. 4.3.2 If the Board of Directors has not determined a price within such 30day period, then the price at which the Proffered Shares shall be purchased and sold pursuant to Section 4.2 hereof shall be the "fair market value" of such shares as determined by appraisal by an independent professional appraiser experienced in the valuation of businesses such as the Company. Such appraiser shall be selected in good faith by the Board of Directors within 15 days after the end of such 30-day period and shall render his or her opinion of the fair market value of 3 150 the Proffered Shares within 30 days thereafter. In determining the fair market value, the appraiser shall consider all appropriate factors, including but not limited to minority discounts and discounts for lack of marketability. The determination of the appraiser shall be final and binding upon the parties and no party shall have the right of appeal from the determination. The appraiser shall be paid a fixed fee per day (or part of a day) for his or her services, such fee to be agreed upon at the outset of the appraisal, as distinguished from percentage compensation based on the value of the Proffered Shares. All fees and expenses of such appraisal shall be paid by the Company. 5. Method and Time of Payment. The purchase price determined in accordance with Section 4.3 hereof shall be paid to Seller (i) as the parties agree within 30 days after giving notice of her, his or its election to purchase the Shares or (ii) if they can't agree, then by payment of at least twenty-five percent (25%) of the purchase price within such time period and execution and delivery of a promissory note payable in three equal annual installments including annual interest at the then Applicable Federal Rate, which note shall be secured by the Shares to be purchased (the "Collateral"). In connection with such security interest, the Collateral shall be subject to a stock pledge agreement in a form reasonably satisfactory to the purchaser(s) (the "Pledgor") and the Seller (the "Pledgee"); provided, however, that any such stock pledge agreement shall provide, at a minimum, for the following shareholder rights: (a) the Pledgor shall deliver all dividends paid in cash or property on the Collateral to the Pledgee and the Pledgee shall hold, as additional collateral, any stock or securities received as dividends and shall apply the proceeds of all other distributions to paying off the purchase price and (b) as long as the Pledgor is not in default under the promissory note, the Pledgor may vote the Collateral for all purposes, other than in a way which undermines the value of the Collateral. The maker of the note shall have the right to prepay such note at any time without premium or penalty. Such note shall provide that, in the case of any default, at the election of the holder, the entire sum of principal and interest shall immediately be due and payable. Notwithstanding the foregoing, in the event of the death of an insured Shareholder, the proceeds of such insurance that are to be applied to the payment of the purchase price owed by the Company for the Shares held by the insured Shareholder shall be paid in cash within 120 days following the Appointment Date. 6. Inter Vivos Gifts to Family Members. Subject to the provisions of Section 10 hereof, any Shareholder who is a natural person may transfer any or all of such Shareholder's Shares by gift to such Shareholder's spouse, child or grandchild (or any trust or other entity in which the only owners or beneficiaries are such Shareholder, spouse, child or grandchild) provided that the initial transferee shall retain all voting rights with respect to any Shares so transferred. 7. Payment by Company. If, as a result of the Company making any payment on the purchase price for any Shares under this Agreement, the Company would not be able to pay its debts as they become due in the usual course of business or the Company's total assets would be less than its total liabilities or for any other reason the Company would be prohibited from making such payment under applicable law, then the remaining Shareholders shall contribute additional capital to the Company and take such additional steps as are necessary, such that the Company may 4 151 lawfully pay the entire amount due. 8. Insurance. 8.1 Insurance for Purchase of Shares. Insurance may be carried from time to time on the lives of any of the Shareholders by the Company for the purpose of funding the potential liability to acquire the stock of an insured Shareholder. All such insurance shall be owned by and be payable to the Company. 8.2 Proceeds upon Death of Insured Shareholder. In the event of the death of an insured Shareholder, the proceeds of such insurance shall be applied forthwith to the payment of the purchase price owed by the Company up to the full amount of such proceeds. 8.2.1 In the event such proceeds are less than the full purchase price for such Shares, it is understood and agreed that the net amount of such proceeds shall (at least) constitute a down payment against the purchase price. 8.2.2 In the event such proceeds exceed the purchase price, such excess shall belong to the Company and not to the estate of the insured Shareholder. 8.3 Cash Surrender Value. In the event any Shareholder sells his Shares to the Company to the terms of this Agreement other than in the case of his or her death, it is understood and agreed that the then cash surrender value of any insurance held on the life of such Shareholder for the purpose of providing funds for the purchase of his or her Shares may constitute the down payment of the purchase obligation of the Company. The selling Shareholder shall have the option of requesting either that the policy be cashed and the proceeds thereof applied against such purchase obligation or that the policy be assigned to him or her and the purchase price be reduced by an amount equivalent to the cash surrender value of the policy. 8.4 Valuation of Stock. Insurance proceeds from any policies on the life of the selling Shareholder purchased pursuant to this Section 8 shall not be taken into account in determining the value of the stock of the Company under Section 4.3. hereof. 9. Copy of Agreement. A copy of this Agreement shall at all times be kept in the office of the Secretary of the Company. 10. Transferees. Marring of Shareholder. In the event of the issuance of any new Shares, or the transfer in any manner of any Shares by a Shareholder in accordance with the provisions of this Agreement, to any person who is not a party to this Agreement, the issuing or transferring party shall obtain, as a condition to and upon such issuance or transfer, the written consent of the new Shareholder or the transferee to become a party to and be bound by the terms of this Agreement and to the placing of the legend as required hereby upon the certificate representing such Shares, and the consent of the spouse of the new Shareholder or transferee, if married, to the terms of this Agreement. Without limiting the foregoing, in the event that any Shareholder gets 5 152 married during the term of this Agreement, then such Shareholder agrees to obtain the written consent of his or her new spouse to the terms of this Agreement. 11. Legends. 11.1 Securities Law Legend. All certificates of stock of the Company issued to any of the parties hereto shall bear a legend upon the face thereof, in form and substance as follows: These securities are not registered under state or federal securities laws and may not be offered, sold, pledged (except a pledge pursuant to the terms of which any offer or sale upon foreclosure would be made in a manner that would not violate the registration provisions of federal or state securities laws) or otherwise distributed for value, nor may these securities be transferred on the books of the company, unless such transfer has been registered or is exempt from such registration under said laws and the rules and regulations thereunder. 11.2 Shareholders Agreement Legend. All certificates of stock of the Company issued to any of the parties hereto shall also bear a legend upon the face thereof, in form and substance as follows: The sale, pledge, hypothecation or other transfer of this certificate and the shares evidenced by this certificate is subject to an Agreement dated , 199_, among the Company, the holder of this certificate and other shareholders of the Company. A copy of the Agreement is on file in the office of the Secretary of the Company. By accepting the shares evidenced by this certificate, the holder agrees to be bound by such Agreement. 12. Termination of Agreement. This Agreement shall terminate and be of no further force or effect upon the earlier of 12.1 the written agreement of all of the parties hereto; 12.2 the event that one person shall become the beneficial owner of all of the Shares which are subject to this Agreement; 12.3 the dissolution of the Company, or in the event proceedings in bankruptcy, receivership or insolvency are instituted by the Company or against the Company other than by a Shareholder, or in the event the Company becomes insolvent or makes an assignment for the benefit of creditors;, 12.4 the closing date of a primary, firm commitment underwritten public offering by this Company of shares of Common Stock, registered under the Securities Act of 1933, as 6 153 amended, in which the aggregate offering proceeds paid to the Company are at least Ten Million Dollars ($10,000,000) and the per share price at which such shares of Common Stock are offered to the public is at least six Dollars ($6.00), subject to equitable adjustments for divisions and combinations of Common Stock; or 12.5 when the Company first becomes subject to the periodic reporting requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934. 13. Notices. Any notice required or permitted hereunder shall be given in writing by personal delivery, by mail, postage prepaid, certified or registered, return receipt requested, or via facsimile machine to the intended recipient at the address indicated for such party on the signature page hereof or on Schedule A hereto, or at such other address as such party may designate by ten days' advance written notice to the other parties given in the foregoing manner. The date on which any such notice is so personally delivered, or if such notice is given by mail, the second business day after its deposit in the U.S. mail, or if by facsimile machine during normal business hours upon transmission with confirmation of receipt by the receiving party's facsimile terminal and if not sent during normal business hours, then on the next business day, shall be deemed to be the effective date of such notice. 14. Specific Performance. The Shares cannot be readily purchased or sold in the open market, and for that reason, among others, the Shareholders and the Company will be irreparably damaged in the event that this Agreement is not specifically enforced. If any Shareholder so required under this Agreement fails to give a notice, make an offer, sell Shares, or obtain written consent or if any Shareholder fails to accurately disclose the terms and conditions of an Offer or the identity of the offeror as required hereby, then, in any such event, any of the Shareholders or the Company may institute and maintain a proceeding to compel the specific performance of this Agreement, and each Shareholder specifically submits himself or herself to the jurisdiction and venue of the courts of the State of Washington for purposes of any such action. Each Shareholder further agrees that service of process against such Shareholder in any such action or proceeding may be made by United States mail, certified or registered, return receipt requested, postage prepaid. Such remedy shall, however, be cumulative and not exclusive, and shall be in addition to any other remedy at law or in equity which the Shareholders or the Company may have. 15. Binding Effect; Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the successors, assigns and personal representatives of the parties hereto. 16. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 17. Modifications. This Agreement contains the entire agreement between the parties hereto relating to the subject matter hereof and may be modified or amended only by written agreement among the Company and all of the Shareholders, provided, however, that additional Shareholders may be added to this Agreement simply by having such Shareholders execute an 7 154 additional signature page for this Agreement and adding the Shareholders to Schedule A, and such revision shall not require the consent or agreement of the other parties. 18. Severability. Invalidation of any one of the provisions of this Agreement for any reason shall in no way affect any other provision hereof, and all such other provisions shall remain in full force and effect. 19. Further Acts. Each party agrees to perform any further acts and to execute and deliver any documents which may be reasonably necessary to carry out the provisions of this Agreement. 20. Applicable Law. This Agreement and its validity, construction, and performance shall be governed by the laws of the State of Washington. EXECUTED on the day and year first above written. Company: BSQUARE CORPORATION By: ---------------------------- Its: ---------------------------- Address: 3633 136th Place S.E. Suite 1000 Shareholders: --------------------------------- --------------------------------- --------------------------------- --------------------------------- --------------------------------- --------------------------------- 8 155 CONSENT OF SPOUSE The undersigned is the wife/husband of , one of the parties to the foregoing Shareholders Agreement, and she/he acknowledges that she/he has read such Agreement and knows of its contents; that she/he is aware that by its provisions her/his husband/wife agrees to sell all of his/her shares of , including her/his community property interest therein, if any, upon the happening of certain events; she/he hereby consents to such a sale and approves the provisions of such Agreement; she/he hereby agrees, on behalf of herself/himself and all persons who may claim on her/his behalf, that upon her/his legal separation from or the dissolution of her/his marriage to her/his present husband/wife, or upon her/his or her/his husband/wife's death, neither she/he nor anyone claiming on her/his behalf will seek to partition her/his or her/his husband/wife's community property interest in such shares and that in any such event she/he shall comply with the terms of this Agreement and shall be entitled only to the value of her/his interest in such shares, if any (determined in light of the existence of such Agreement), and that she/he shall have no claim or right to the shares themselves. EXECUTED this _ day of______________________________ , 19__. -------------------------------------- ------------------------------------- 9 156 SCHEDULE A LIST OF SHAREHOLDERS (INCLUDING NUMBER OF SHARES AND ADDRESS) 10 157 SECTION 3.16 A copy of the Certificate of Designation is attached as Section 3.16 of the Disclosure Schedule. 158 SECTION 3.16 OF DISCLOSURE SCHEDULE CERTIFICATE OF DESIGNATION STATE OF WASHINGTON FILED OF THE STATE OF WASHINGTON JANUARY 29, 1998 RELATIVE RIGHTS AND PREFERENCES RALPH MUNRO OF THE SECRETARY OF STATE SERIES A CONVERTIBLE PREFERRED STOCK OF BSQUARE CORPORATION The undersigned Senior Vice President of BSQUARE CORPORATION, a Washington corporation (the "Corporation"), in accordance with the provisions of RCW 23B.06.020, does hereby certify that, pursuant to the authority conferred upon the Board of Directors by the Articles of Incorporation of the Corporation, the following resolution creating a series of Series A Convertible Preferred Stock was duly adopted by the Board of Directors of the Corporation as of January 29, 1998: RESOLVED, that, pursuant to the authority conferred an the Board of Directors of the Corporation by the Articles of Incorporation of the Corporation, the Board of Directors does hereby provide for the designation of a series of preferred stork to be named "Series A Convertible Preferred Stock," initially consisting of 8,333,333 shares, and that to the extent that the designation, powers, preferences and relative and other special rights and the qualifications, limitations and restrictions of the Series A Convertible Preferred Stock are not stated and expressed in the Articles of Incorporation, the Board of Directors does hereby fix and herein state and express such designation, powers, preferences and relative and other special rights and the qualifications, limitations and restrictions of the Series A Convertible Preferred Stock as follows: SERIES A CONVERTIBLE PREFERRED STOCK The designations and the powers, preferences and rights of the Series A Convertible Preferred Stock arc as follows: Section l. Designation and Dividends. The Corporation hereby designates 8,333,333 shares of the Preferred Stock as Series A Convertible Preferred Stock (the "Series A Preferred Stock"), which shall have the rights, preferences and terms set forth herein. The holders of the Series A Preferred Stock shall be entitled to receive dividends at the same rate as dividends (other than dividends paid in additional shares of Common Stock) are paid with respect to the Common Stock (treating each share of Series A Preferred Stock as being equal to the number of shares of Common Stock into which each such share of Series A Preferred Stock could be converted pursuant to the provisions of Section 4 hereof with such number determined as of the record date for the determination of holders of Common Stock entitled to receive such dividend) (the "Participating Dividends"). 1 159 Section 2. Liquidation, Dissolution or Winding Up. (a) In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, each holder of outstanding shares of Series A Preferred Stock shall be entitled to be paid, out of the assets of the Corporation available for distribution to stockholders, whether such assets are capital, surplus, or earnings and before any amount shall be paid or distributed to the holders of any class of Common Stock or of any other stock ranking on liquidation junior to the Series A Preferred Stock, the greater of: (i) an amount in cash equal to $1.80 per share (adjusted appropriately for stock splits, stock dividends and the like) together with declared but unpaid dividends to which the holders of outstanding shares of Series A Preferred Stock are entitled pursuant to Section 1 hereof (the "Minimum Liquidation Amount"); provided, however, that if, upon any liquidation, dissolution or winding up of the Corporation, the amounts payable with respect to the Series A Preferred Stock and any other stock ranking as to any such distribution on a parity with the Series A Preferred Stock are not paid in full, the holders of the Series A Preferred Stock and such other stock shall share ratably in any distribution of assets in proportion to the full respective preferential amounts to which they are entitled; or (ii) cash in an amount equal to the portion of the assets of the Corporation remaining for distribution to shareholders which such holder would have received if each share of Series A Preferred Stock held by such holder had been converted into the number of shares of Common Stock issuable upon the conversion of a share of Series A Preferred Stock immediately prior to any such liquidation, dissolution or winding up of the Corporation after taking into account the rights of holders of any other class or series of capital stock of the Corporation (including the Common Stock) entitled to share in such distribution in either case, plus any declared but unpaid dividends to which the holders of outstanding shares of Series A Preferred Stock are entitled pursuant to Section 1 hereof (the "Aggregate Liquidation Amount"). (b) A consolidation, merger or capital reorganization of the Corporation (except (i) into or with a wholly-owned subsidiary of the Corporation with requisite shareholder approval or (ii) a merger in which the beneficial owners of the Corporation's outstanding capital stock immediately prior to such transaction hold no less than fifty-one percent (51%) of the voting power in the resulting entity) or a sale of all or substantially all of the assets of the Corporation shall be regarded as a liquidation, dissolution or winding up of the affairs of the Corporation within the meaning of this Section 2; provided, however, that each holder of the Series A Preferred Stock shall have the right to elect the benefits of the provisions of Section 4(i) hereof in lieu of receiving payment in liquidation, dissolution or winding up of the Corporation pursuant to this Section 2. 2 160 Section 3. Voting, Power. Except as otherwise expressly provided herein or as required by law, the holder of each share of Series A Preferred Stock shall be entitled to vote on all matters. Each share of Series A Preferred Stock shall entitle the holder thereof to such number of votes per share as shall equal the number of shares of Common Stock into which each share of Series A Preferred Stock is then convertible. Except as otherwise expressly provided herein (including without limitation the provisions of Section 6 hereof) or as required by law, the holders of shares of the Series A Preferred Stock and the Common Stock shall vote together as a single class on all matters. Section 4. Conversion. The holders of the Series A Preferred Stock shall have the following conversion rights: (a) Voluntary Conversion. Holders of a majority of the outstanding shares of Series A Preferred Stock shall be entitled, at any time and from time to time after the date hereof, to cause any or all of such shares to be converted into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing $1.80 by the conversion price applicable to such shares, determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. Initially the conversion price shall be $1.80 per share of Common Stock, which price shall be adjusted as hereinafter provided (and, as so adjusted, is hereinafter sometimes referred to as the "Conversion Price"). If a holder of Series A Preferred Stock elects to convert his or her Series A Preferred Stock at a time when there are any accrued and unpaid dividends or other amounts due on such shares (including any Participating Dividends), such dividends and other amounts shall, to the extent permitted by applicable law, be paid in full by the Corporation in connection with such conversion. (b) Automatic Conversion. Each share of Series A Preferred Stock outstanding shall automatically, and without the requirement of any consent of any holder, be converted into the number of shares of Common Stock into which such shares are convertible at the then effective Conversion Price upon the closing of a Qualified Public Offering. For purposes hereof, the term "Qualified Public Offering" shall mean an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), covering the offer and sale of Common Stock of the Corporation to the public at a minimum price of $4.50 per share and pursuant to which (i) the gross proceeds received by the Corporation equal or exceed $30,000,000 and (ii) the shares of Common Stock sold under such registration statement are approved for listing on the New York Stock Exchange or approved for quotation on The Nasdaq Stock Market, Inc.'s National Market. (c) Conversion Procedures. Any holder of Series A Preferred Stock converting such shares into shares of Common Stock pursuant to Section 4(a), or whose shares are automatically converted pursuant to Section 4(b), shall surrender the certificate or certificates representing the Series A Preferred Stock being converted, duly assigned or endorsed for transfer to the Corporation (or accompanied by duly executed stock powers relating thereto), at the principal 3 161 executive office of the Corporation or the offices of the transfer agent for the Series A Preferred Stock or such office or offices in the continental United States of an agent for conversion as may from time to time be designated by notice to the holders of the Series A Preferred Stock by the Corporation, accompanied by written notice of conversion. Such notice of conversion shall (i) specify the number of shares of Series A Preferred Stock to be converted, (ii) specify the name or names in which such holder wishes the certificate or certificates for Common Stock and for any Series A Preferred Stock not to be so converted to be issued, (iii) include payment of any applicable transfer tax and (iv) specify the address to which such holder wishes delivery to be made of such new certificates to be issued upon such conversion. Upon surrender of a certificate representing Series A Preferred Stock for conversion, the Corporation shall issue and send by hand delivery, by courier or by first class mail (postage prepaid) to the holder thereof or to such holder's designee, at the address designated by such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled upon conversion. In the event that there shall have been surrendered a certificate or certificates representing Series A Preferred Stock, only part of which are to be converted, the Corporation shall issue and send to such holder or such holder's designee, in the manner set forth in the preceding sentence, a new certificate or certificates representing the number of shares of Series A Preferred Stock which shall not have been converted. (d) Effective Date of Conversion. The issuance by the Corporation of shares of Common Stock upon a conversion of Series A Preferred Stock into shares of Common Stock made at the option of the holder thereof pursuant to Section 4(a) hereof shall be effective as of the surrender of the certificate or certificates for the Series A Preferred Stock to be converted, duly assigned or endorsed for transfer to the Corporation (or accompanied by duly executed stock powers relating thereto). The issuance by the Corporation of shares of Common Stock upon a conversion of Series A Preferred Stock into Common Stock pursuant to Section 4(b) hereof shall be deemed to be effective immediately prior to the closing of the Qualified Public Offering. On and after the effective date of conversion, the person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock. (e) Fractional Shares. The Corporation shall not be obligated to deliver to holders of Series A Preferred Stock any fractional share of Common Stock issuable upon any conversion of such Series A Preferred Stock, but in lieu thereof may make a cash payment in respect thereof in any manner permitted by law. (f) Reservation of Common Stock. The Corporation shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for issuance upon the conversion of Series A Preferred Stock as herein provided, free from any preemptive rights or other obligations, such number of shares of the Common Stock as shall from time to time be issuable upon the conversion of all the Series A Preferred Stock then outstanding provided that the shares of Common Stock so reserved shall not be reduced or affected in any manner whatsoever so long as any Series A Preferred Stock is outstanding, except in the case of a reverse stock split or stock combination. The Corporation shall prepare and shall use its reasonable business efforts to obtain 4 162 and keep in force such governmental or regulatory permits or other authorizations as may be required by law, and shall comply with all requirements as to registration, qualification or listing of the Common Stock, in order to enable the Corporation lawfully to issue and deliver to each holder of record of Series A Preferred Stock such number of shares of its Common Stock as shall from time to time be sufficient to effect the conversion of all shares of Series A Preferred Stock then outstanding and convertible into shares of Common Stock. (g) Adjustments to Conversion Price. The Conversion Price in effect from time to time shall be subject to adjustment as follows: (i) Stock Dividends, Subdivisions and Combinations. Upon the issuance of additional shares of Common Stock as a dividend or other distribution on outstanding Common Stock, the subdivision of outstanding shares of Common Stock into a greater number of shares of Common Stock, or the combination of outstanding shares of Common Stock into a smaller number of shares of Common Stock, the Conversion Price shall, simultaneously with the happening of such dividend, subdivision or combination be adjusted by multiplying the then effective Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event. An adjustment made pursuant to this Section 4(g)(i) shall be given effect, upon payment of such a dividend or distribution, as of the record date for the determination of shareholders entitled to receive such dividend or distribution (on a retroactive basis) and, in the case of a subdivision or combination, immediately as of the effective date thereof. (ii) Sale of Common Stock. In the event the Corporation shall at any time or from time to time while the Series A Preferred Stock is outstanding, issue, sell or exchange any shares of Common Stock (including shares held in the Corporation's treasury, but excluding: (i) any Common Stock which may be issued upon conversion of the Series A Preferred Stock; and (ii) up to 3,625,000 shares of Common Stock issued to officers, directors, employees, consultants or agents of the Corporation pursuant to the Corporation's Stock Option Plan (the "Plan") or upon the exercise of options issued pursuant to such Plan, or such greater number of shares as may be issuable pursuant to the adjustment provisions of such Plan as in effect on the date hereof (collectively, the "Excluded Shares")), for a consideration per share less than the Conversion Price in effect immediately prior to the issuance, sale or exchange of such shares (any such issuance, sale or exchange hereinafter referred to as a "Dilutive Transaction"), then, and thereafter successively upon the consummation of any Dilutive Transaction, the Conversion Price in effect immediately prior to the Dilutive Transaction shall forthwith be reduced to an amount (calculated to the nearest cent) determined by multiplying such Conversion Price by a fraction: (A) the numerator of which shall be (1) the number of shares of Common Stock of all classes outstanding immediately prior to the Dilutive Transaction 5 163 (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Series A Preferred Stock, options, warrants, rights or convertible securities), plus (2) the number of shares of Common Stock which the net aggregate consideration received by the Corporation for the total number of such additional shares of Common Stock so issued in the Dilutive Transaction would purchase at the Conversion Price (prior to adjustment), and (B) the denominator of which shall be (1) the number of shares of Common Stock of all classes outstanding immediately prior to the Dilutive Transaction (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Series A Preferred Stock, options, warrants, rights or convertible securities), plus (2) the number of such additional shares of Common Stock so issued in the Dilutive Transaction. (iii) Sale of Options, Rights or Convertible Securities. In the event the Corporation shall at any time or from time to time while the Series A Preferred Stock is outstanding, issue options, warrants or rights to subscribe for shares of Common Stock (other than any options for Excluded Shares), or issue any securities convertible into or exercisable or exchangeable for shares of Common Stock, for a consideration per share (determined by dividing the Net Aggregate Consideration (as determined below) by the aggregate number of shares of Common Stock that would be issued if all such options, warrants, rights or convertible securities were exercised or converted to the fullest extent permitted by their terms) less than the Conversion Price in effect immediately prior to the issuance of such options or rights or convertible or exchangeable securities, the Conversion Price in effect immediately prior to the issuance of such options, warrants or rights or securities shall be reduced to an amount determined by multiplying such Conversion Price by a fraction: (A) the numerator of which shall be (1) the number of shares of Common Stock of all classes outstanding immediately prior to the issuance of such options, rights or convertible securities (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Series A Preferred Stock, options, warrants, rights or convertible securities), plus (2) the number of shares of Common Stock which the total amount of consideration received by the Corporation for the issuance of such options, warrants, rights or convertible securities plus the minimum amount set forth in the terms of such security as payable to the Corporation upon the exercise or conversion thereof (the "Net Aggregate Consideration") would purchase at the Conversion Price prior to adjustment, and (B) the denominator of which shall be (1) the number of shares of Common Stock of all classes outstanding immediately prior to the issuance of such options, warrants, rights or convertible securities (excluding treasury shares but including all shares of Common Stock issuable upon conversion or exercise of any outstanding Series A Preferred Stock, options, warrants, rights or convertible 6 164 securities), plus (2) the aggregate number of shares of Common Stock that would be issued if all such options, warrants, rights or convertible securities were exercised or converted. (iv) Expiration or Change in Price. If the consideration per share provided for in any options or rights to subscribe for shares of Common Stock or any securities exercisable or exchangeable for or convertible into shares of Common Stock, changes at any time, the Conversion Price in effect at the time of such change shall be readjusted to the Conversion Price which would have been in effect at such time had such options or convertible securities provided for such changed consideration per share (determined as provided in Section 4(g)(iii) hereof) at the time initially granted, issued or sold; provided, that such adjustment of the Conversion Price will be made only as and to the extent that the Conversion Price effective upon such adjustment remains less than or equal to the Conversion Price that would be in effect if such options, rights or securities had not been issued. No adjustment of the Conversion Price shall be made under this Section 4 upon the issuance of any additional shares of Common Stock which are issued pursuant to the exercise of any warrants, options or other subscription or purchase rights or pursuant to the exercise of any conversion or exchange rights in any convertible securities if an adjustment shall previously have been made upon the issuance of such warrants, options or other rights. Any adjustment of the Conversion Price shall be disregarded if, as, and when the rights to acquire shares of Common Stock upon exercise or conversion of the warrants, options, rights or convertible securities which gave rise to such adjustment expire or are canceled without having been exercised, so that the Conversion Price effective immediately upon such cancellation or expiration shall be equal to the Conversion Price in effect at the time of the issuance of the expired or canceled warrants, options, rights or convertible securities, with such additional adjustments as would have been made to that Conversion Price had the expired or canceled warrants, options, rights or convertible securities not been issued. (h) Other Adjustments. In the event the Corporation shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, then and in each such event lawful and adequate provision shall be made so that the holders of Series A Preferred Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the number of securities of the Corporation which they would have received had their Series A Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the conversion date (calculated in accordance with Section 4(d) hereof), retained such securities receivable by them as aforesaid during such period, giving application to all adjustments called for during such period under this Section 4 as applied to such distributed securities. If the Common Stock issuable upon the conversion of the Series A Preferred Stock shall be changed into the same or different number of shares of any class or classes of stock, whether by reclassification or otherwise (other than a subdivision or combination of shares or stock dividend 7 165 provided for above, or a reorganization, merger, consolidation or sale of assets provided for elsewhere in this Section 4), then and in each such event the holder of each share of Series A Preferred Stock shall have the right thereafter to convert each such share into the kind and amount of shares of stock and other securities and property receivable upon such reorganization, reclassification or other change, by holders of the number of shares of Common Stock into which such shares of Series A Preferred Stock might have been converted immediately prior to such reorganization, reclassification or change, all subject to further adjustment as provided herein. (i) Mergers and Other Reorganizations. If at any time or from time to time there shall be a capital reorganization of the Common Stock (other than a subdivision, combination, reclassification or exchange of shares provided for elsewhere in this Section 4) or a merger or consolidation of the Corporation with or into another Corporation or the sale of all or substantially all of the Corporation's properties and assets to any other person, then, as a part of and as a condition to the effectiveness of such reorganization, merger, consolidation or sale, lawful and adequate provision shall be made so that the holders of the Series A Preferred Stock shall thereafter be entitled to receive upon conversion of the Series A Preferred Stock the number of shares of stock or other securities or property of the Corporation or of the successor corporation resulting from such merger or consolidation or sale, to which a holder of Common Stock deliverable upon conversion would have been entitled on such capital reorganization, merger, consolidation, or sale. In any such case, appropriate provisions shall be made with respect to the rights of the holders of the Series A Preferred Stock after the reorganization, merger, consolidation or sale to the end that the provisions of this Section 4 (including, without limitation, provisions for adjustment of the Conversion Price and the number of shares purchasable upon conversion of the Series A Preferred Stock) shall thereafter be applicable, as nearly as may be, with respect to any shares of stock, securities or assets to be deliverable thereafter upon the conversion of the Series A Preferred Stock. Each holder of Series A Preferred Stock upon the occurrence of a capital reorganization, merger or consolidation of the Corporation or the sale of all or substantially all its assets and properties as such events are more fully set forth in the first paragraph of this Section 4(i), shall have the option of electing treatment of his or her shares of' Series A Preferred Stock under either this Section 4(i) or Section 2(b) hereof, notice of which election shall be submitted in writing to the Corporation at its principal offices no later than ten (10) days before the effective date of such event, provided that any such notice shall be effective if given not later than fifteen (15) days after the date of the Corporation's notice, pursuant to Section 8, with respect to such event. (j) Notices. In each case of an adjustment or readjustment of the Conversion Price, the Corporation will furnish each holder of Series A Preferred Stock with a certificate, prepared by the chief financial officer of the Corporation, showing such adjustment or readjustment, and stating in detail the facts upon which such adjustment or readjustment is based. 8 166 Section 5. Redemption. (a) Any holder of shares of Series A Preferred Stock may request that up to 50% of the Series A Preferred Stock then held by such holder be redeemed by the Corporation at any time on or after January 30, 2003 (the "First Redemption Date"), or that up to 100% of the Series A Preferred Stock then held by such holder be redeemed by the Corporation at any time on or after January 30, 2004 (the "Second Redemption Date," and, collectively with the First Redemption Date, the "Redemption Date"), by giving 90 days written notice to the Corporation, stating in such notice the number of shares to be redeemed and delivering the certificates for the shares of Series A Preferred Stock to be so redeemed to the Corporation by the Redemption Date. The Corporation shall redeem all shares as to which it has received requests for redemption from the holders thereof in accordance with the foregoing. Any redemption hereunder shall be at a per share redemption price equal to $1.80 per share (adjusted appropriately for stock splits, stock dividends and the like), plus any accrued but unpaid dividends (including any Participating Dividends) to which the holders of outstanding shares of Series A Preferred Stock are entitled pursuant to Section 1 hereof (the "Redemption Price"). (b) If the Corporation does not have sufficient funds legally available to redeem all 1 shares for which redemption is requested hereunder, then it shall redeem such shares on a pro-rata basis among the holders of the Series A Preferred Stock in proportion to the shares of Series A Preferred Stock then held by them to the extent possible and shall redeem the remaining shares to be redeemed as soon as sufficient funds are legally available. In the event that the Corporation fails to timely redeem shares for which redemption is requested pursuant to Section 5(a) for any reason whatsoever, then during the period from the Redemption Date through the date on which such shares are redeemed, the Redemption Price of such shares shall bear interest at a per annum rate equal to the Prime Rate (as reported in The Wall Street Journal from time to time) plus two percent, which interest rate shall increase by an additional 1% at the end of each three (3) month period thereafter until the Redemption Price (and any interest thereon) is paid in full, subject to a maximum interest rate of the greater of 15% or such Prime Rate plus ten percent, but in no event greater than 18%. Section 6. Restrictions and Limitations. (a) So long as any shares of the Series A Preferred Stock remain outstanding, the Corporation shall not without the affirmative vote or written consent of the holders of two-thirds in interest of the Series A Preferred Stock: (i) sell, lease or otherwise dispose of (whether in one transaction or a series of related transactions) all or substantially all of its assets or business, (ii) merge with or into or consolidate with another entity or enter into or engage in any other transaction or series of related transactions, in any such case in connection with or as a result of which the Company is not the surviving entity or the owners of the Company's outstanding equity securities immediately prior to the transaction or series 9 167 of related transactions do not own at least a majority of the outstanding equity securities of the surviving, resulting or consolidated entity, (iii) dissolve, liquidate or wind up its operations, (iv) directly or indirectly redeem, purchase, or otherwise acquire for consideration any shares of its Common Stock or any other class of its capital stock except (A) for the redemption of Convertible Preferred Shares pursuant to and as provided in Sections 2, 4 and 5 hereof, (B) as contemplated by Sections 1.2, 4.6, and 5.2 of that certain Stock Purchase and Shareholders Agreement, dated as of January 30, 1998, (C) as contemplated by that certain Redemption Agreement, dated as of January 30, 1998, or (D) as contemplated by the Corporation's standard form of agreement, as approved by the Board of Directors, to be executed by employees, officers, and consultants of the Corporation upon the grant to such employees, officers, and consultants of options under the Plan, or upon exercise of such options, (v) adopt any amendment to this Certificate of Designation, or any amendment to its Articles of Incorporation or By-Laws, that eliminates, amends, restricts or otherwise adversely affects the rights and preferences of the Convertible Preferred Stock, or that increases the authorized shares of Convertible Preferred Stock, (vi) declare or make dividend payments on any shares of its Common Stock or any other class of its capital stock, (vii) create, or obligate itself to create, any class or series of shares that has a preference over, or is on a parity with, the Convertible Preferred Stock, (viii) increase the size of the Board of Directors to more than seven (7) members, (ix) enter into any agreement or arrangement or take any other action that eliminates, amends, restricts or otherwise adversely affects the rights of the holders of Convertible Preferred Stock or its ability to perform its obligations hereunder; or (x) enter into or be a party to any transaction or agreement, including, without limitation, any lease or other rental or purchase agreement providing for loans or extensions of credit by or to the Company, with or for the benefit of any person or entity which is a shareholder, officer or director of the Company, or which is a relative by blood or marriage of, a trust or estate for the benefit of, or a person or entity which directly or indirectly controls, is controlled by, or is under common control with, any such person or entity, except for normal compensation paid to employees of the Company in the ordinary course of business. 10 168 Section 7. No Reissuance of Series A Preferred Stock. No share or shares of the Series A Preferred Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be reissued, and all such shares shall be canceled, retired, and eliminated from the shares which the Corporation shall be authorized to issue. The Corporation may from time to time take such appropriate corporate action as may be necessary to reduce the authorized number of shares of the Series A Preferred Stock accordingly. Section 8. Other Rights. Except as otherwise provided in this Certificate of Designation, each share of Series A Preferred Stock and each share of Common Stock shall be identical in all respects, shall have the same powers, preferences and rights, without preference of any such class or share over any other such class or share. IN WITNESS WHEREOF, the undersigned has executed and subscribed this Certificate and does affirm the foregoing as true as of the 29th day of January, 1998. BSQUARE CORPORATION /S/ ALBERT T. DOSSER --------------------------------------- Albert T. Dosser, Senior Vice President 11 169
SECTION 4.14 USE OF PROCEEDS: 1. Repayment of Certain Notes to Shareholders: $1,779,966.39 2. Redemption of Shares from Certain Shareholders: $6,000,000.00 3. Dain Rauscher Fee $ 600,000.00 4. Working Capital $6,620,033.61
170 EXHIBIT F 171 EXHIBIT F FORM OF OPINION OF COUNSEL January 30, 1998 Those investors listed on Exhibit A to the BSQUARE Corporation Stock Purchase and Shareholders Agreement Dated as of January 30, 1998 Ladies and Gentlemen: We have acted as counsel to BSQUARE Corporation, a Washington corporation (the "Company"), in connection with (i) the issuance and sale of Series A Convertible Preferred Stock pursuant to the Stock Purchase and Shareholders Agreement dated as of January 30, 1998 (the "Purchase Agreement"), by and among the Company, William T. Baxter, Albert T. Dosser, Peter R. Gregory, Joseph Notarangelo (collectively, the "Shareholders") and you, and (ii) the redemption by the Company of shares of its Common Stock pursuant to certain redemption agreements dated as of January 30, 1998 (each a "Redemption Agreement" and collectively, the "Redemption Agreements") by and between the Company and each of William T. Baxter, Albert T. Dosser and Peter R. Gregory (the "Redeeming Shareholders"). This opinion is delivered to you pursuant to Section 3.4 of the Purchase Agreement. Capitalized terms used and not otherwise defined herein shall have the respective meanings set forth in the Purchase Agreement. We have examined the originals or copies of such documents, certificates and records as we have deemed relevant or necessary as the basis for the opinions hereinafter expressed. We have assumed the genuineness of all signatures, the authenticity of all documents, certificates and records submitted to us as originals and the conformity to originals of such documents, certificates and records submitted to us as certified, conformed or photostatic copies. We have also assumed, without verification, the legal capacity of each individual who has executed such documents, certificates and records, and the completeness and accuracy as of the date of this opinion letter of the information contained in such documents, certificates and records. 172 Those Investors Listed on Exhibit A to the BSQUARE Corporation Stock Purchase and Shareholders Agreement dated as of January 30, 1998 This opinion letter is subject to all assumptions, qualifications and limitations not inconsistent herewith that are described in the Legal Opinion Accord of the ABA Section of Business Law (1991) at Section 4 ("Reliance by Opinion Giver on Assumptions"), Section 14 ("Other Common Qualifications"), Section 16 ("No Violation of Law") and Section 19 ("Specific Legal Issues"). The law covered by opinions expressed herein is limited to the federal law of the United States and the law of the State of Washington. We express no opinion with respect to the laws, regulations or ordinances of any county, municipality or other local government agency. As used in this opinion letter, the expression "to our knowledge" means the conscious awareness of facts or other information by the lawyers in our office representing the Company in connection with the negotiation and preparation of the Purchase Agreement, Redemption Agreements and Certificate of Designation. It does not include information that might by revealed if there were to be undertaken a canvass of all lawyers in our office or a review of all of our files. Based upon and subject to the foregoing, we are of the opinion that: 1. The Company is a corporation duly incorporated and validly existing under the laws of the State of Washington with the requisite corporate power and authority to own and use its properties and assets and to carry on its business as currently conducted. The Company has the requisite corporate power and authority to carry on its business as presently conducted, to enter into and to consummate the transactions contemplated by the Purchase Agreement and the Redemption Agreements and otherwise to carry out its obligations under such agreements, including the issuance of the Convertible Preferred Stock and the redemption of the Redemption Shares. 2. The execution and delivery of the Purchase Agreement and the Redemption Agreements by the Company and the consummation by it of the transactions contemplated thereby, including the issuance and delivery of (i) the Convertible Preferred Shares, and (ii) upon the conversion of the Convertible Preferred Shares, the Conversion Shares, have been duly authorized by all necessary corporate action on the part of the Company. Each of the Purchase Agreement and Redemption Agreements will, upon due execution and delivery by the Company, constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except: (a) the enforceability thereof may by affected by bankruptcy, insolvency, reorganization, receivership, moratorium and other similar laws affecting the rights; 2 173 Those Investors Listed on Exhibit A to the BSQUARE Corporation Stock Purchase and Shareholders Agreement dated as of January 30, 1998 (b) the courts of the State of Washington will consider extrinsic evidence of circumstances surrounding the making of the Purchase Agreement and Redemption Agreements to ascertain the intent of the parties in using the language employed in such Purchase Agreement and Redemption Agreements regardless of whether or not the language used in such Purchase Agreement and Redemption Agreements is plain and unambiguous on its face, and may incorporate additional or supplementary terms into such Purchase Agreement and Redemption Agreements; and (c) We express no opinion as to the enforceability of Sections 7.5 and 9.2 of the Purchase Agreement. 3. The execution and delivery of the Purchase Agreement and the Redemption Agreements by the Company and the consummation by the Company of the transactions contemplated thereby, including, without limitation, the issuance and delivery of (i) the Convertible Preferred Shares and (ii) upon the conversion of the Convertible Preferred Shares, the Conversion Shares, do not and will not (A) conflict with or violate any provision of the Articles of Incorporation or Bylaws, (B) to our knowledge, except as disclosed in the Disclosure Schedule, breach or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company is a party or by which it or any of its assets are bound and which is listed in the Disclosure Schedule, or (C) to our knowledge, result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company is subject (including federal and state securities laws and regulations), or by which any property or asset of the Company is bound or affected. 4. The capitalization of the Company immediately prior to the Closing consists of 50,000,000 shares of Common Stock, of which 21,375,000 shares are issued and outstanding, and 10,000,000 shares of Preferred Stock, of which 8,333,333 shares are designated as Convertible Preferred Stock, of which no shares are issued and outstanding. As of the Closing, the respective rights, preferences and privileges of the Convertible Preferred Stock will be as stated in the Certificate of Designation. As of the Closing, and after giving effect to the transactions contemplated by the Purchase Agreement, all of the outstanding shares of capital stock of the Company (including, without limitation, the Convertible Preferred Shares) will have been duly and validly authorized and issued, fully paid and nonassessable and, except as set forth in the Purchase Agreement, to our knowledge, not subject to any preemptive rights and will have been offered, issued, sold and delivered in compliance with applicable federal and state securities and blue sky laws. To our knowledge, there are no outstanding preemptive or other rights, plans, options, warrants, conversion rights or agreements for the purchase or acquisition from the Company of any shares of its capital stock, except for (i) the conversion 3 174 Those Investors Listed on Exhibit A to the BSQUARE Corporation Stock Purchase and Shareholders Agreement dated as of January 30, 1998 privileges of the Convertible Preferred Stock and (ii) 1,375,000 shares of Common Stock reserved for issuance upon the exercise of outstanding options granted under the Company's Stock Option Plan. Except with respect to the Purchase Agreement, to our knowledge, the Company is not a party or subject to any agreement or understanding, and there is no agreement or understanding between any persons and/or entities, which affects or relates to the voting or giving of written consents with respect to any security of the Company. 5. To our knowledge, except as set forth in the Disclosure Schedule, the Company has no subsidiaries or ownership interests in any corporation, joint venture, partnership or other entity. 6. The Articles of Incorporation of the Company (the "Articles") have been duly authorized and adopted by the Board of Directors of the Company, have been approved by all necessary action on the part of the Company's shareholders, has been duly filed with the Secretary of State of the State of Washington and has become effective. 7. The certificates representing the Convertible Preferred Shares are in due and proper form and have been duly and validly executed by the officers of the Company named thereon. The issuance of the Convertible Preferred Shares is not subject to any preemptive rights or, to our knowledge, rights of first refusal created by the Company. The Conversion Shares issuable upon conversion of the Convertible Preferred Shares are not subject to any preemptive rights or, to our knowledge, rights of first refusal created by the Company, and, upon conversion of the Convertible Preferred Shares in accordance with the terms of the Certificate of Designation, such Conversion Shares will be duly authorized, validly issued, fully paid and nonassessable. 8. To our knowledge, except as set forth in the Disclosure Schedule, no suit, action, proceeding or governmental investigation is pending or threatened against the Company or its properties. 9. Assuming the accuracy of the representations and warranties of the Company and the Shareholders set forth in Section 2 of the Purchase Agreement and of the Purchasers set forth in Section 2A of the Purchase Agreement, it is not necessary, in connection with the offer, and sale of the Shares to the Purchasers pursuant to the Purchase Agreement, to register the Convertible Preferred Shares or the Conversion Shares under the 1933 Act or the Securities Act of the State of Washington. 10. Other than any required filings or approvals of federal and state regulatory agencies, including the Securities Exchange Commission and state securities administrators with jurisdiction over the transaction, to our knowledge, the Company is not required to obtain any 4 175 Those Investors Listed on Exhibit A to the BSQUARE Corporation Stock Purchase and Shareholders Agreement dated as of January 30, 1998 consent, waiver, authorization or order of, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other person in connection with the execution, delivery and performance by the Company of the Purchase Agreement. 11. Each of the Redeeming Shareholders is the sole registered owner of the Redemption Shares. To our knowledge, each Redeeming Shareholder has good and marketable title to the Redemption Shares, free and clear of all liens, encumbrances and claims whatsoever. 12. To our knowledge, each Shareholder has full right, authority, power and capacity to enter into the Purchase Agreement and to carry out the transactions contemplated thereby. To our knowledge, each Redeeming Shareholder has full right, authority, power and capacity to enter into their respective Redemption Agreement and to carry out the transactions contemplated thereby. The Purchase Agreement and, if applicable, respective Redemption Agreement when executed and delivered in accordance with their terms will constitute valid and binding obligations of such Shareholder or Redeeming Shareholder, as the case may be, enforceable in accordance with their respective terms, except: (a) the enforceability thereof may by affected by bankruptcy, insolvency, reorganization, receivership, moratorium and other similar laws affecting the rights; (b) the courts of the State of Washington will consider extrinsic evidence of circumstances surrounding the making of the Purchase Agreement and the respective Redemption Agreement to ascertain the intent of the parties in using the language employed in such Purchase Agreement and respective Redemption Agreement, regardless of whether or not the language used in such Purchase Agreement and respective Redemption Agreement is plain and unambiguous on its face, and may incorporate additional or supplementary terms into such Purchase Agreement and respective Redemption Agreement; and (c) We express no opinion as to the enforceability of Sections 7.5 and 9.2 of the Purchase Agreement. With respect to our opinion set forth in Paragraphs 1, 2 and 3 above, we advise you that the Company's Board of Directors relied upon certain information in making the determinations required by RCW 23B.06.400(2) in order to have the Company redeem shares of its Common Stock as provided in the Redemption Agreements. The Board of Directors of the Company believes that it is reasonable in the circumstances to rely on such information as permitted by RCW 23B.06.400(3). We express no opinion as to the reasonableness of such reliance. 5 176 Those Investors Listed on Exhibit A to the BSQUARE Corporation Stock Purchase and Shareholders Agreement dated as of January 30, 1998 This opinion letter is delivered as of its date and we do not undertake to advise you or anyone else of any changes in the opinions expressed herein resulting from changes in law, changes in facts or any other matters that hereafter might occur or be brought to our attention that did not exist on the date hereof or of which we had no knowledge. This opinion letter may be relied upon by you only in connection with the transaction described in the initial paragraph of this opinion letter and may not be used or relied upon by you for any other purpose or by any other person for any purpose whatsoever without, in each instance, our prior written consent. Yours very truly, Summit Law Group PLLC 6 177 EXHIBIT G 178 EXHIBIT G FORM OF CONSENT OF SPOUSE I, _________________, spouse of _________________, acknowledge that I have read the Stock Purchase and Shareholders Agreement dated as of January 30, 1998, to which this Consent is attached as Exhibit H (the "Agreement") and that I know its contents. I am aware that by its provisions, including without limitation the provisions of Section 5 of the Agreement, certain restrictions are imposed upon the sale or other disposition of any shares of the Company of which I may become possessed as a result of a gift from my spouse or a court decree and/or any property settlement in any domestic litigation. I hereby agree that my interest, if any, in the shares subject to the Agreement will be irrevocably bound by the Agreement and further understand and agree that any community property interest I may have in the shares will be similarly bound by the Agreement. I am aware that the legal, financial and related matters contained in the Agreement are complex and that I am free to seek independent professional guidance or counsel with respect to this Consent. I have either sought such guidance or counsel or determined after reviewing the Agreement carefully that I waive such right. Dated as of the 30th day of January, 1998. ----------------------------------- 179 EXHIBIT H 180 EXHIBIT H FORM OF DIRECTOR INDEMNIFICATION This Indemnification Agreement (this "Agreement") dated as of January 30, 1998, is made between BSQUARE CORPORATION, a Washington corporation (the "Company"), and Albert T. Dosser ("Indemnitee"). RECITALS A. Indemnitee is an officer or director of the Company and in such capacity is performing valuable services for the Company. B. The Company and Indemnitee recognize the difficulty in obtaining directors' and officers' liability insurance, the significant cost of such insurance and the general reduction in the coverage of such insurance. C. The Company and Indemnitee further recognize the substantial increase in litigation subjecting officers and directors to expensive litigation risks at the same time that such liability insurance has been severely limited. D. The shareholders of the Company have adopted articles of incorporation (the "Articles") and bylaws (the "Bylaws") providing for indemnification of the officers, directors, agents and employees of the Company to the full extent permitted by the Washington Business Corporation Act (the "Statute"). E. The Articles, Bylaws and the Statute specifically provide that they are not exclusive, and thereby contemplate that contracts may be entered into between the Company and the members of its Board of Directors and its officers with respect to indemnification of such directors and officers. F. The Company desires to provide Indemnitee with specific contractual assurance of Indemnitee's rights to full indemnification against litigation risks and expenses (regardless, among other things, of any amendment to or revocation of the Company's Articles or Bylaws or any change in the ownership of the Company or the composition of its Board of Directors), which indemnification is intended to be greater than that which is afforded by the Company's Articles, Bylaws and, to the extent insurance is available, the coverage of Indemnitee under the Company's director and officers liability insurance policies, but in no event shall such indemnification be greater than that allowed by law. G. In order to induce Indemnitee to continue to serve as an officer and/or director, as the case may be, of the Company, the Company has agreed to enter into this Agreement with Indemnitee. AGREEMENT In consideration of the recitals above, the mutual covenants and agreements herein contained, and Indemnitee's continued service as an officer and/or director, as the case may be, of the Company after the date hereof, the parties to this Agreement agree as follows. -1- 181 1. INDEMNITY OF INDEMNITEE 1.1 SCOPE The Company agrees to hold harmless and indemnify Indemnitee to the full extent permitted by law, notwithstanding that such indemnification is not specifically authorized by this Agreement, the Articles, the Bylaws, the Statute or otherwise. In the event of any change, after the date of this Agreement, in any applicable law, statute or rule regarding the right of a Washington corporation to indemnify a member of its board of directors or an officer, such changes, to the extent that they would expand Indemnitee's rights hereunder, shall be within the purview of Indemnitee's rights and the Company's obligations hereunder, and, to the extent that they would narrow Indemnitee's rights hereunder, shall be excluded from this Agreement; provided, however, that any change that is required by applicable laws, statutes or rules to be applied to this Agreement shall be so applied regardless of whether the effect of such change is to narrow Indemnitee's rights hereunder. 1.2 NONEXCLUSIVITY The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Articles, the Bylaws, any agreement, any vote of shareholders or disinterested directors, the Statute, or otherwise, whether as to action in Indemnitee's official capacity or otherwise. 1.3 ADDITIONAL INDEMNITY If Indemnitee was or is made a party, or is threatened to be made a party, to or is otherwise involved (including, without limitation, as a witness) in any Proceeding (as defined below), the Company shall hold harmless and indemnify Indemnitee from and against any and all losses, claims, damages, liabilities or expenses (including reasonable attorneys' fees, judgments, fines, ERISA excise taxes or penalties, amounts paid in settlement and other expenses incurred in connection with such Proceeding) (collectively, "Damages"). 1.4 DEFINITION OF PROCEEDING For purposes of this Agreement, "Proceeding" shall mean any actual, pending or threatened action, suit, arbitration, alternative dispute resolution process, claim or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal, in which Indemnitee is, was or becomes involved by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company or that, being or having been such a director, officer, employee or agent, Indemnitee is or was serving at the request of the Company as a director, officer, employee, trustee or agent of another corporation or of a partnership, joint venture, trust or other enterprise (collectively a "Related Company"), including service with respect to an employee benefit plan, whether the basis of such proceeding is alleged action (or inaction) by Indemnitee in an official capacity as a director, officer, employee, trustee or agent or in any other capacity while serving as a director, officer, employee, trustee or agent; provided, however, that, except with respect to an action to enforce the provisions of this Agreement, "Proceeding" shall not include any action, suit, claim or proceeding instituted by or at the direction of Indemnitee unless such action, suit, claim or proceeding is or was authorized by the Company's Board of Directors. -2- 182 1.5 DETERMINATION OF ENTITLEMENT In the event that a determination of Indemnitee's entitlement to indemnification is required pursuant to Section 23B.08.550 of the Statute or any successor thereto or pursuant to other applicable law, the appropriate decision-maker shall make such determination; provided, however, that Indemnitee shall initially be presumed in all cases to be entitled to indemnification, that Indemnitee may establish a conclusive presumption of any fact necessary to such a determination by delivering to the Company a declaration made under penalty of perjury that such fact is true and that, unless the Company shall deliver to Indemnitee written notice of a determination that Indemnitee is not entitled to indemnification within twenty (20) days of the Company's receipt of Indemnitee's initial written request for indemnification, such determination shall conclusively be deemed to have been made in favor of the Company's provision of indemnification and Company hereby agrees not to assert otherwise. 1.6 SURVIVAL The indemnification provided under this Agreement shall apply to any and all Proceedings, notwithstanding that Indemnitee has ceased to be a director, officer, employee, trustee or agent of the Company or a Related Company. 2. EXPENSE ADVANCES 2.1 GENERALLY The right to indemnification of Damages conferred by Section 1 shall include the right to have the Company pay Indemnitee's expenses in any Proceeding as such expenses are incurred and in advance of such Proceeding's final disposition (such right is referred to hereinafter as an "Expense Advance"). 2.2 CONDITIONS TO EXPENSE ADVANCE The Company's obligation to provide an Expense Advance is subject to the following conditions: 2.2.1 UNDERTAKING If the Proceeding arose in connection with Indemnitee's service as a director or officer of the Company (and not in any other capacity in which Indemnitee rendered service, including service to any Related Company), then Indemnitee or his or her representative shall have executed and delivered to the Company an undertaking, which need not be secured and shall be accepted without reference to Indemnitee's financial ability to make repayment, by or on behalf of Indemnitee to repay all Expense Advances if and to the extent that it shall ultimately be determined by a final, unappealable decision rendered by a court having jurisdiction over the parties and the question that Indemnitee is not entitled to be indemnified for such Expense Advance under this Agreement or otherwise. 2.2.2 COOPERATION Indemnitee shall give the Company such information and cooperation as it may reasonably request and as shall be within Indemnitee's power. -3- 183 2.2.3 AFFIRMATION Indemnitee shall furnish, upon request by the Company and if required under applicable law, a written affirmation of Indemnitee's good faith belief that any applicable standards of conduct have been met by Indemnitee. 3. PROCEDURES FOR ENFORCEMENT 3.1 ENFORCEMENT In the event that a claim for indemnity, an Expense Advance or otherwise is made hereunder and is not paid in full within sixty days (twenty days for an Expense Advance) after written notice of such claim is delivered to the Company, Indemnitee may, but need not, at any time thereafter bring suit against the Company to recover the unpaid amount of the claim (an "Enforcement Action"). 3.2 PRESUMPTIONS IN ENFORCEMENT ACTION In any Enforcement Action the following presumptions (and limitation on presumptions) shall apply: (a) The Company shall conclusively be presumed to have entered into this Agreement and assumed the obligations imposed on it hereunder in order to induce Indemnitee to continue as an officer and/or director, as the case may be, of the Company; (b) Neither (i) the failure of the Company (including the Company's Board of Directors, independent or special legal counsel or the Company's shareholders) to have made a determination prior to the commencement of the Enforcement Action that indemnification of Indemnitee is proper in the circumstances nor (ii) an actual determination by the Company, its Board of Directors, independent or special legal counsel or shareholders that Indemnitee is not entitled to indemnification shall be a defense to the Enforcement Action or create a presumption that Indemnitee is not entitled to indemnification hereunder; and (c) If Indemnitee is or was serving as a director, officer, employee, trustee or agent of a corporation of which a majority of the shares entitled to vote in the election of its directors is held by the Company or in an executive or management capacity in a partnership, joint venture, trust or other enterprise of which the Company or a wholly owned subsidiary of the Company is a general partner or has a majority ownership, then such corporation, partnership, joint venture, trust or enterprise shall conclusively be deemed a Related Company and Indemnitee shall conclusively be deemed to be serving such Related Company at the request of the Company. 3.3 ATTORNEYS' FEES AND EXPENSES FOR ENFORCEMENT ACTION In the event Indemnitee is required to bring an Enforcement Action, the Company shall indemnify and hold harmless Indemnitee against all of Indemnitee's fees and expenses in bringing and pursuing the Enforcement Action (including reasonable attorneys' fees at any stage, including on appeal); provided, however, that the Company shall not be required to provide such indemnity for such attorneys' fees or expenses if a court of competent jurisdiction determines that each of the material assertions made by Indemnitee in such Enforcement Action was not made in good faith or was frivolous. -4- 184 4. LIMITATIONS ON INDEMNITY; MUTUAL ACKNOWLEDGEMENT 4.1 LIMITATION ON INDEMNITY No indemnity pursuant to this Agreement shall be provided by the Company: (a) On account of any suit in which a final, unappealable judgment is rendered against Indemnitee for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Company in violation of the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto; (b) For Damages that have been paid directly to Indemnitee by an insurance carrier under a policy of officers' and directors' liability insurance maintained by the Company; (c) On account of Indemnitee's conduct which is finally adjudged to have been intentional misconduct, a knowing violation of law or the RCW 23B.08.310 or any successor provision of the Statute, or a transaction from which Indemnitee derived benefit in money, property or services to which Indemnitee is not legally entitled; or (d) If a final decision by a court having jurisdiction in the matter shall determine that such indemnification is not lawful. 4.2 MUTUAL ACKNOWLEDGEMENT The Company and Indemnitee acknowledge that, in certain instances, federal law or public policy may override applicable state law and prohibit the Company from indemnifying Indemnitee under this Agreement or otherwise. For example, the Company and Indemnitee acknowledge that the Securities and Exchange Commission (the "SEC") has taken the position that indemnification is not permissible for liabilities arising under certain federal securities laws, and federal legislation prohibits indemnification for certain ERISA violations. Furthermore, Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the SEC to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 5. NOTIFICATION AND DEFENSE OF CLAIM 5.1 NOTIFICATION Promptly after receipt by Indemnitee of notice of the commencement of any Proceeding, Indemnitee will, if a claim in respect thereof is to be made against the Company under this Agreement, notify the Company of the commencement thereof; but the omission so to notify the Company will not relieve the Company from any liability which it may have to Indemnitee under this Agreement unless and only to the extent that such omission can be shown to have prejudiced the Company's ability to defend the Proceeding. 5.2 DEFENSE OF CLAIM With respect to any such Proceeding as to which Indemnitee notifies the Company of the commencement thereof: (a) The Company may participate therein at its own expense; (b) The Company, jointly with any other indemnifying party similarly notified, may assume the defense thereof, with counsel satisfactory to Indemnitee. After notice from the Company to Indemnitee of its election so to assume the defense thereof, the Company shall not be liable to Indemnitee under this Agreement for any legal or other expenses (other than reasonable costs of investigation) subsequently incurred by Indemnitee in connection with the defense thereof unless (i) the employment of counsel by Indemnitee has been authorized by the Company, (ii) Indemnitee shall have reasonably concluded that there may be a conflict -5- 185 of interest between the Company and Indemnitee in the conduct of the defense of such action, or (iii) the Company shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of counsel shall be at the expense of the Company. The Company shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of the Company or as to which Indemnitee shall have made the conclusion provided for in (ii) above; (c) The Company shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any Proceeding effected without its written consent; (d) The Company shall not settle any action or claim in any manner which would impose any penalty or limitation on Indemnitee without Indemnitee's written consent; and (e) Neither the Company nor Indemnitee will unreasonably withhold its, his or her consent to any proposed settlement. 6. SEVERABILITY Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable, as provided in this Section 6. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms. 7. REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to Indemnitee as follows: (a) Authority. The Company has all necessary power and authority to enter into, and be bound by the terms of, this Agreement, and the execution, delivery and performance of the undertakings contemplated by this Agreement have been duly authorized by the Company. (b) Enforceability. This Agreement, when executed and delivered by the Company in accordance with the provisions hereof, shall be a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, moratorium, reorganization or similar laws affecting the enforcement of creditors' rights generally. 8. GOVERNING LAW; BINDING EFFECT; AMENDMENT AND TERMINATION (a) This Agreement shall be interpreted and enforced in accordance with the laws of the State of Washington. (b) This Agreement shall be binding upon Indemnitee and upon the Company, its successors and assigns, and shall inure to the benefit of Indemnitee, Indemnitee's heirs, personal representatives and assigns and to the benefit of the Company, its successors and assigns. (c) No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto. -6- 186 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. COMPANY: BSQUARE CORPORATION By ------------------------------------- William T. Baxter, President INDEMNITEE: By -------------------------------------- -7- EX-21.1 19 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 LIST OF SUBSIDIARIES BSQUARE GmbH, a German corporation BSQUARE K.K., a Japanese corporation EX-23.1 20 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports and to all references to our Firm included in or made part of this registration statement and prospectus. /s/ ARTHUR ANDERSEN LLP Seattle, Washington August 13, 1999 2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To BSQUARE Corporation We have audited in accordance with generally accepted auditing standards, the financial statements of BSQUARE Corporation and subsidiaries included in this registration statement and have issued our report thereon dated August 13, 1999. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying schedule listed in the index of financial statements is presented for purposes of complying with the Securities and Exchange Commissions rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Seattle, Washington August 13, 1999 3 BSQUARE CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COLUMN C -- ADDITIONS COLUMN B ------------------------- COLUMN E BALANCE AT CHARGED TO COLUMN D BALANCE AT BEGINNING COSTS AND DEDUCTIONS- END OF DESCRIPTION OF PERIOD EXPENSES DESCRIBE PERIOD ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS) For the year ended December 31, 1996: Allowance for doubtful accounts..................... $-- $-- $-- $ -- For the year ended December 31, 1997: Allowance for doubtful accounts..................... $-- $10 $-- $ 10 For the year ended December 31, 1998: Allowance for doubtful accounts..................... $10 $60 $ 3 $ 67 For the six months ended June 30, 1999: Allowance for doubtful accounts..................... $67 $45 $-- $112
EX-27.1 21 FINANCIAL DATA SCHEDULE
5 YEAR 6-MOS DEC-31-1998 JUN-30-1999 JAN-01-1998 JAN-01-1999 DEC-31-1998 JUN-30-1999 5,324,000 9,284,000 1,582,000 0 5,554,000 4,643,000 (67,000) (112,000) 0 0 526,000 1,068,000 4,275,000 5,299,000 (1,214,000) (1,919,000) 16,158,000 18,749,000 2,639,000 4,238,000 289,000 210,000 14,417,000 14,475,000 0 0 2,123,000 3,209,000 (3,421,000) (3,464,000) 16,158,000 18,749,000 1,219,000 695,000 23,393,000 17,848,000 166,000 108,000 11,135,000 8,791,000 10,081,000 8,151,000 60,000 45,000 17,000 19,000 3,489,000 1,578,000 1,189,000 712,000 2,300,000 0 0 0 0 0 0 0 2,300,000 866,000 0.12 0.04 0.08 0.03
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