-----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, PJzz3rRbqosy4DsJI6Z8zws/SXdmvp/lIM3gW4R3AphKQaiRFwbUfdMwPzQUsZ7U aW3rfLpaEK09Qm0APStZ/A== 0000891020-98-000317.txt : 19980317 0000891020-98-000317.hdr.sgml : 19980317 ACCESSION NUMBER: 0000891020-98-000317 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980313 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MOSAIX INC CENTRAL INDEX KEY: 0000853266 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 911273645 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-18511 FILM NUMBER: 98565182 BUSINESS ADDRESS: STREET 1: 6464 185TH AVE NE CITY: REDMOND STATE: WA ZIP: 98052-5032 BUSINESS PHONE: 2068817544 MAIL ADDRESS: STREET 1: 6464 185TH AVENUE NE CITY: REDMOND STATE: WA ZIP: 98052-5032 10-K 1 EDGAR FORM 10-K FOR MOSAIX 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-18511 MOSAIX, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ WASHINGTON 91-1273645 (STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.) OR ORGANIZATION) 6464 185TH AVENUE N.E REDMOND, WASHINGTON 98052 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (425) 881-7544 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $0.01 PER SHARE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the common stock held by nonaffiliates of the registrant as of February 23, 1998 was $119,717,920 (based on the closing sale price of $9.75 per share on the Nasdaq National Market on such date). The number of shares outstanding of the registrant's common stock, $0.01 par value per share as of February 23, 1998 was 12,278,761. DOCUMENTS INCORPORATED BY REFERENCE PART III of this Form 10-K incorporates information by reference from the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year. ================================================================================ 2 MOSAIX, INC. TABLE OF CONTENTS PART I Item One Business Item Two Properties Item Three Legal Proceedings Item Four Submission of Matters to a Vote of Security Holders PART II Item Five Market for the Registrant's Common Equity and Related Stockholder Matters Item Six Selected Financial Data Item Seven Management's Discussion and Analysis of Results of Operations and Financial Condition Item Eight Financial Statements and Supplementary Data Item Nine Changes in and Disagreements with Accountants on Accounting and Financial Disclosure PART III Item Ten Directors and Executive Officers of the Registrant Item Eleven Executive Compensation Item Twelve Security Ownership of Certain Beneficial Owners and Management Item Thirteen Certain Relationships and Related Transactions PART IV Item Fourteen Exhibits, Financial Statement Schedules, and Reports on Form 8-K
i 3 PART I ITEM ONE BUSINESS Mosaix, Inc. and subsidiaries (hereinafter referred to as "Mosaix" or the "Company") is a global provider of call management systems and customer relationship management applications that enable companies to acquire, retain, and develop customer relationships. With these products, companies can integrate sales, marketing, and customer services applications in their call centers with back-office applications throughout the enterprise. The three product areas include call management systems (CMS), agent effectiveness applications (AEA), and customer relationship management (CRM) applications. These product offerings constitute Mosaix's business solutions and are collectively referred to as Enterprise Customer Management (ECM) solutions. Mosaix call management systems are sophisticated enterprise-wide systems for processing and managing outbound and blended inbound/outbound telephone communications. These enterprise-wide predictive dialing applications allow customer information to be captured and correlated with a telephone call and quickly routed to the right person equipped to manage the customer relationship. With its technology of intelligently predicting the availability of the next agent available to manage a phone call, either inbound or outbound, Mosaix can optimally improve call center efficiencies. Mosaix offers a broad range of professional services and support for these call management systems. In addition, Mosaix also develops applications designed to enhance the effectiveness of call center agents once they receive the phone call. Known as agent effectiveness applications, these products and services lead an agent through a conversation presenting key information along the way. Mosaix call management systems are found in a broad range of industries, including financial services, credit card and consumer collections, telecommunications and utilities, retail, cable television, healthcare, fundraising, education and telemarketing. Customer relationship management applications are client/server-based software that enables customers to automate and integrate customer-facing business processes beginning in the call center and extending across the enterprise. This occurs through the implementation of the Company's workflow software which is a family of integrated software modules that provide a complete framework for rapidly designing, developing, and deploying customer-centric workflow applications across the enterprise. The workflow software allows for fulfillment processes, or back-office functions, to be tightly integrated with multiple channels of interaction used by consumers to communicate with corporations. Whether it be the telephone or the Internet, Mosaix CRM software will intelligently manage a customer contact in the most efficient and effective manner by matching the needs of the customer with the corresponding resources of a company. These solutions are used in a wide variety of applications, including consumer and mortgage lending, claims processing, underwriting, trust management, contract management, accounts payable, and customer service. Headquartered in Redmond, Washington, Mosaix has sales offices in Alameda and Costa Mesa, California; Wilmington, Delaware; Atlanta, Georgia; Chicago, Illinois; Rockville, Maryland; New York, New York; Charlotte, North Carolina; Cleveland, Ohio; Dallas, Texas; and near London, England. Additionally, Mosaix has established value-added reseller relationships in North America, Asia, South America, Africa and Europe. Mosaix, a Washington corporation, was incorporated in 1984. INDUSTRY BACKGROUND Over the past ten years, businesses and other organizations have increasingly used dedicated centers for processing and managing high volumes of incoming and outgoing telephone traffic. Call centers have been used extensively in such fields as credit card and consumer collections, catalog sales, telemarketing and customer service. In these call centers, activities such as placing and receiving telephone calls are linked to the computer functions of relational database management to capture, store and report on relevant customer information. As the importance of call centers has increased and as more functions and capabilities have been combined, a parallel industry has emerged to create and support the evolution of call centers. The industry 1 4 includes vendors who deliver systems, software and services that are designed to make call centers efficient, effective and well matched to the broader corporate mission of the enterprise. Call Centers are transforming from functional cost centers to strategic "profit centers" as their mission evolves to become highly integrated customer interaction and fulfillment centers that can handle multiple channels of communication. These multiple channels include correspondence, documents, faxes, e-mail, Internet calls, as well as traditional telephony contact. This resulting shift places a higher value on customer care as the primary call center mission. Typically, the call center is the primary "hub" within an organization for placing or receiving a large volume of customer calls. Customer Service Representatives (CSRs) or Agents are the call center's workforce responsible for working with customers to meet their needs in a variety of areas including reservations, product information, service requests, order fulfillment, account information and problem resolution. The communication objectives are as varied as the businesses that employ call centers as part of their marketing and/or services strategy. Mosaix believes that the call center has become a strategic business asset as well as the logical point of integration for customer communications within the enterprise. Call centers can range in size from fewer than five agents in one location to thousands of agents in multiple locations, networked together via computer and telecommunications systems. With the significant variability of call center sizes and call handling objectives, the industry relies on a variety of suppliers to provide product and service solutions to address their business and communication needs. Today these product and service solutions include: - Customer premise telephone call routing and switching systems (ACDs and PBXs) - Computer Telephony Integration (CTI) software which brings together data and voice - Application software to enhance, facilitate and manage inbound and outbound customer communications - Agent coaching and counseling software tools - Reporting tools to measure and report on agent effectiveness and overall system performance - Peripheral products (headsets, speakers, video displays) - Voice mail and interactive voice response (IVR) systems, which enable callers to access information in an organization's computer database via touch-tone dialing - Computer networking and communications systems, including e-mail and Internet access systems - Database/back office information processing systems BUSINESS PROCESS AUTOMATION IN THE CALL CENTER. The growth of client/server computing has also had a dramatic effect on the call center industry and has fueled the need for applications that process and manage unstructured as well as structured data. Structured data, such as financial or inventory data, are typically stored in the rows and columns of databases. Traditional relational database systems and their underlying technologies are not designed to manage the increasing complexity and variety of the information content and transaction requirements inherent in most business processes. According to some industry reports, as much as 80% of corporate data is unstructured, consisting of imaged documents, faxes, electronic documents, forms, mainframe-generated reports, digitized voice messages, electronic data interchange (EDI) records and World Wide Web (Web) documents. For example, customer service agents as well as loan officers who process loan applications need access to a variety of structured data, such as customer and product information, and unstructured data, including images of applications, credit reports, credit analysis spreadsheets and other documents. The ability to access, manage and process all relevant information content, including the seamless integration of structured and unstructured data, has emerged as a key requirement for call centers today. 2 5 Initial efforts to automate data-intensive processes began with electronic imaging technologies in the late 1980's. These early image-processing products provided on-line equivalents to paper-based storage and management of business information. These systems focused primarily on storage and retrieval applications and were generally only available on dedicated, expensive and proprietary platforms. Workflow technology emerged first with the development of rigid and highly customized software that addressed transaction-based applications focused on the automated routing of document images and related information. Although this software generated significant benefits both in improved operational efficiency and cost reductions, implementations were costly, limited in scope and difficult to change. At the same time, document management emerged as a means for managing electronic documents and certain other types of unstructured business information. While these solutions provide significant benefits by allowing an enterprise access to documents, document management systems do not generally address the fundamental need to improve business processes. This has resulted in growing market demand for solutions that combine sophisticated business process functionality with the ability to seamlessly manage both structured and unstructured business information. These Business Process Automation (BPA) applications were the next step for workflow and document management offerings. With the availability of the Internet and intranets, companies have also recognized the opportunity to provide their employees, business partners, and customers with even greater access to business information. By combining BPA and document management with Internet and intranet technologies, companies will be able to significantly broaden access to automated business processes within their enterprises. They will extend the reach and value of BPA to include business transactions with their partners and customers beyond their internal enterprise. As a result, businesses now seek next-generation business process automation solutions that include Internet and intranet capabilities. SERVICE LEADERSHIP. As companies face increasing pressure to retain and grow their customer base, corporate call centers, real or virtual, are emerging as a strategic weapon in the fight for customer loyalty and increased revenue. The new directive calls for more than efficiency; the call center must be effective in managing customer relationships. Corporate demand is on the rise for systems that foster customer relationships and that create a competitive advantage. This demand is driving the need to integrate telephony and computer-based applications to provide a "360-degree view" of customer attributes and account history. PRODUCTS CALL MANAGEMENT SYSTEMS (CMS). Mosaix Call Management Systems are the Company's UNIX-based suite of combined hardware and software systems used for the processing and management of a call center's inbound and outbound telephone activity. Integrating directly with an organization's existing telecommunications system and customer databases, the Mosaix CMS processes and manages inbound, outbound, and blended inbound/outbound customer contacts. Typical functions provided by Mosaix products for outbound calling include: acquiring, reviewing and organizing customer data; automatically dialing phone numbers quickly; monitoring, interpreting and acting upon each telephone call's progress; programming redials at the appropriate time and rate; routing live voice responses immediately to an operator; and posting and reporting record updates. For customers who want to efficiently manage incoming as well as outgoing telephone calls, Mosaix's Intelligent Call Blending technology allows call centers to blend their inbound (ACD) and outbound (Mosaix systems) call activity into a single environment, automatically moving calls between inbound and outbound agents to optimally handle call center traffic. Mosaix currently has three call center products available: the Mosaix 5000, Mosaix 4000 and Mosaix 3000 Call Management Systems. The Mosaix 5000 is the Company's most advanced system and is scaleable to 150 outbound workstations and 300 lines. The Mosaix 5000 performs all of the standard functions described above and, in addition, has Proactive Agent Blending, a patented technology that uses sophisticated algorithms to anticipate call volumes and to move agents before the expected inbound and outbound call workloads 3 6 actually occur. The Mosaix 4000 is similar to the Mosaix 5000 though limited to 60 outbound workstations and 180 lines with no predictive blend capabilities. The Mosaix 3000 is a limited-functionality predictive dialing solution designed for the Company's Value Added Reseller Channel. In order to help companies more effectively manage their call centers, Mosaix has also developed a variety of software products that work exclusively with the Mosaix CMS. Campaign Director, which ships with Mosaix systems, provides customers with the ability to create campaigns using a Microsoft Windows-based point and click interface. Campaign Director is also used to monitor, on a real-time basis, the status of the campaign and the effectiveness of the agents, and to make changes while the campaign is in process. Producer is a sophisticated configuration tool that enables customers to dynamically manage the operation and system parameters of their Mosaix CMS. Producer allows customers to record voice messages, design wait queues, edit agent function keys, and create and modify completion codes using a simple-to-use PC based software solution. Campaign Surfer is an Internet browser-based tool that enables a company or a company's customers to view information about calling campaigns and agent performance from virtually anywhere over the Internet; and Agent API simplifies the creation and maintenance of custom agent interfaces, which allow agents access to disparate information they need to more effectively serve customers. Mosaix also provides Campaign Analyst and Guide, software products that work with Mosaix systems or call management systems provided by Mosaix's competitors. Campaign Analyst software produces detailed reports, integrating statistics from various vendor products, including the ACD/PBX (telephone switch), the IVR system, host computer, dialer and other applications. It can also integrate with other software programs, such as payroll or executive reporting systems. This product is designed to assist call center managers in reviewing the performance of multiple call center systems by integrating and normalizing raw data and generating key statistics. Analyst also includes features that allow managers to establish goals for their agents as well as extracting data which can be utilized by other software programs. An example might be to generate an extract of all agent hours for use in the payroll system or an extract of system performance information to be placed into an executive presentation document. As part of the AEA product line, Guide is designed to allow a call center supervisor to control the content and flow of each customer contact. Call guides (or scripts) for call center employees have historically been programmed by the vendor or by application specialists, with any changes requiring system shut down and reprogramming. By contrast, Guide allows call center supervisors with minimal programming skills to design and maintain complex, sophisticated scripts without relying on the vendor or third party application specialists. Supervisors can modify scripts as necessary -- even mid-campaign -- providing increased flexibility and enabling the organization to tailor scripts based on agent skill levels and campaign objectives. All of the Company's currently shipping CMS products are year 2000 compliant. In addition, whenever possible, the Company has made system upgrades available to certain existing customers, that along with related hardware upgrades, will enable them to be year 2000 compliant. The Company does have some customers who have purchased systems in the past, where a hardware upgrade is not available to allow the customer to become year 2000 compliant and a complete system change will be the only way for these customers to become year 2000 compliant. Management does not expect the year 2000 to have a material impact on the operations of the Company. The Mosaix 4000 and 5000 CMS and related software products are marketed through Mosaix's telesales and direct sales force as well as a worldwide network of strategic partners. The Mosaix 4000 and 5000 are designed for mid- and high-end financial services, telecommunications, insurance, and telemarketing customers. The Mosaix 3000 and related software are sold by Mosaix's domestic and international value-added reseller network, who focus on small and medium-sized collections bureaus, telemarketing service bureaus, and internal telemarketing, telesales, and teleservicing departments. Mosaix's CMS are used in a broad range of industries, including financial services, credit card and consumer collections, insurance, telecommunications, utilities, retail, cable television, healthcare, fundraising, education and telemarketing. Historically, the majority of sales has been to the financial services and telecommunications industries. 4 7 CUSTOMER RELATIONSHIP MANAGEMENT SOFTWARE (CRM). Customer Relationship Management Software is an enterprise-class, client/server application framework that is built on Windows NT and utilizes Microsoft's enterprise-computing architecture. It is designed to automate customer-facing business processes and integrate structured and unstructured data, including imaged documents, faxes, electronic documents, forms, mainframe-generated reports, digitized voice messages, EDI records, and Web documents. In addition, this software will intelligently manage telephone calls and the systems that route those calls. The current version of CRM Software is ViewStar 5.0 and it is year 2000 compliant. ViewStar 5.0 is comprised of the following four components : Process Architect -- Mosaix's visual workflow and process modeling application framework that enables interactive definition, configuration and deployment of complex business processes. Using Process Architect, business analysts and application designers can define work content, business rules, workflow maps and user roles and activities. Process Architect provides a library of predefined business functions and reusable tasks that can be easily configured to create a workflow map representing the business process from the interaction in a call center to the back-office fulfillment of a customer's request. Through Process Architect's simulation feature, "what if" analyses of the throughput can be undertaken and bottlenecks predicted. Process Architect can also be used to dynamically change the business process and automatically rebuild the application with little impact on down-time or re-training. Application Designer -- Predefined application frameworks that can be "snapped together" to meet specific user, application, and job function requirements and that facilitate rapid application delivery. Components such as workflow tasks, user activities, and document operations are stored in object libraries and made available for selection and reuse through a standard Windows-based graphical interface. In addition, Application Designer provides pre-configured application templates for the most-requested users roles and job functions, such as document access and display, workpacket creation and indexing, document workflow processing, exception case handling, and legacy system integration. Business Process Interface ("BPI") -- A set of Object Link Embedding ("OLE") automation interfaces that enables the creation of workflow tasks and user applications using any OLE 2.0-compliant visual programming environments. BPI consists of high-level automation objects and a set of OLE customer controls. Any third-party development tool that supports OLE 2.0, such as Visual Basic, Visual C++, Delphi and PowerBuilder, can be used with BPI. In addition, BPI's OLE-based component architecture enables integration with third-party components, including document and data capture subsystems, 3270emulation packages for accessing mainframe data, and personal productivity applications, such as Microsoft Word or Excel. Call Center Edition. -- The CTI solution set which provides the functionality required to intelligently manage telephone calls and interfaces with telephony systems. By integrating with an IVR or ACD, ViewStar 5.0 allows companies to apply consistent business logic in managing calls just like any other piece of work. Information captured about the caller is compared with customer information from a company's disparate data repositories across the enterprise and is used to determine the appropriate resources needed to address that caller's requirements. System administration times are greatly reduced and training requirements are simplified. The Call Center Edition also provides the ability to present call-control tasks at the agent's desktop in conjunction with the workflow functions relating to the business process at hand. SERVICES PROFESSIONAL SERVICES Mosaix's professional services group provides fee-based business process consulting and computer/ telephony integration (CTI) services. This group helps clients plan, budget, design and implement new business processes and technologies with the goal of improving customer management and call center workflow. This group also utilizes its network of service providers and system integration partners to provide 5 8 customers with a broad range of application development, systems planning, configuration, and system integration services. CUSTOMER SUPPORT AND SERVICES Mosaix believes that customer service and support are an integral part of its strategy. Service capability, availability and responsiveness play an important role in marketing and selling its products. This is particularly true as the mission critical nature of the products and services and technological complexity increases. Mosaix earns system and software support fees by providing ongoing support and training for all of its CMS products. Mosaix offers a full range of product support options, including telephone support from "normal business hours" to "24 hours a day" and on-site response from the "next-half-day" to "immediate service (four hours or less)." CMS support representatives are able to service customer call center systems on a remote basis from the customer support center in Redmond, Washington and London, England. If needed, CMS support representatives will dispatch on-site support, which is provided by IBM in North America and the United Kingdom. Mosaix charges separate fees to upgrade CMS products to the latest version when a new product is released. Mosaix earns other fees by providing, upon customer request, certain special services, such as system relocation and additional training. The Company has CMS training facilities located in Redmond, Washington and at the principal office of its subsidiary in the United Kingdom. Customer support for the CRM is provided by customer support representatives in Alameda, California and London England. Fees are generally charged on an annual basis and include upgrades to the latest version when a new product is released. Mosaix earns other fees by providing, upon customer request, certain special services, such as additional training. PRODUCT DEVELOPMENT Mosaix engineers continue to develop new products and new applications of existing products that will improve the unique enterprise customer management missions of Mosaix's customers. In recent years, Mosaix increasingly has focused its development efforts on client/server, Windows NT-based and Internet-enabled software solutions that address issues and challenges facing call centers and workflow processes. Mosaix releases new features and enhancements to existing products, new products and new services on an ongoing basis. Mosaix supplements its product development efforts by reviewing customer feedback on existing products and working with customers and potential customers to anticipate future functionality requirements. Product development efforts are directed at increasing product functionality, improving product performance, and expanding product capabilities to shorten the application development and deployment cycle and further leverage the Microsoft Windows NT platform. Mosaix continues to identify and prioritize various technologies for potential future product offerings. Mosaix has committed and expects to continue to commit substantial resources to research and development. In 1997, 1996, and 1995, research and development expenses were $15.2 million, $14.9 million and $13.1 million, respectively, net of capitalized software development costs. During the same periods, Mosaix capitalized $0.3 million, $1.0 million and $2.2 million, respectively, of software development costs. The Mosaix CMS and Guide products have been localized for sale in the Japanese market. The ViewStar System has been double-byte enabled for sales in the Japanese and Korean markets. MANUFACTURING Mosaix's manufacturing operations for CMS products are primarily performed by an independent third party on a turnkey basis. The third party contracts with other vendors for components and subassemblies. Mosaix's CMS suppliers maintain quality control by subjecting components and subassemblies to rigorous testing, including in-circuit automated testing. Mosaix's manufacturing operations for CRM products are performed in-house and consist mainly of CD disk duplication. 6 9 SALES AND MARKETING Mosaix markets its CMS and CRM products and services through a direct sales force operating from Mosaix's headquarters in Redmond, Washington and offices in Alameda and Costa Mesa, California; Wilmington, Delaware; Atlanta, Georgia; Chicago, Illinois; Rockville, Maryland; New York, New York; Charlotte, North Carolina; Cleveland, Ohio; Dallas, Texas; New York, New York; and near London, England. Mosaix also has established value-added reseller relationships in North and South America, Asia, Africa, and Europe. COMPETITION The market for Mosaix's products and services is highly competitive. Important competitive factors include price, performance, diversity of product line, reliability, delivery capabilities, and customer service and support. Mosaix's principal competitors in the outbound call management systems market include Davox Corporation, EIS International, Inc. and Melita Electronic Labs. The potential entry into the market of major ACD and PBX suppliers (suppliers of customer-premise call routing and switching systems) also presents a strong competitive threat. These companies may elect to acquire or align with Mosaix's competitors, increasing their market presence and distribution; resell principal competitors' products; or elect to develop and market their own predictive dialing application software. As Mosaix expands its CMS offerings, it may also encounter increased competition from call center application providers such as Information Management Associates and Versatility. The traditional competition for horizontal workflow technology has been workflow software vendors, including direct competition from a number of public and private companies or divisions thereof, including Filenet, IBM, Action Technologies, Staffware, Optika, and Eastman Kodak. As ViewStar 5.0 extends its value into the customer management market space, it will face competition from new competitors, including process-oriented applications vendors such as Pegasystems, Chordiant, and DST. Mosaix's CRM applications may encounter competition from a number of customer management focused software companies including, Edify Corporation, Remedy Corporation, and Seibel Systems. Certain of these companies have announced and others may announce document workflow capabilities for their existing or future products. Mosaix relies on a number of system integration firms for implementation and other services as well as recommendations of its products during the evaluation stage of the purchasing process. Although Mosaix seeks to maintain close relationships with these service providers, many of these third parties have similar, and often more established relationships with Mosaix's principal competitors. If Mosaix is unable to develop and retain effective, long-term relationships with these third parties, Mosaix's competitive position would be materially adversely affected. See "Forward Looking Statements-Risk Factors Regarding Future Performance -- Competition" in Item Seven. INTERNATIONAL OPERATIONS Mosaix's sales to customers in international markets outside the United States comprised approximately 26.4%, 19.0% and 18.9% of total revenue in 1997, 1996, and 1995, respectively. In most cases, Mosaix markets its products and services internationally through value-added resellers. 7 10 The following table sets forth certain information relating to Mosaix's foreign and domestic operations for the years ended December 31, 1997, 1996, and 1995.
1997 1996 1995 -------- -------- ------- Revenue -- U.S. operations: United States........................... $ 89,153 $ 94,870 $75,593 United States export.................... 14,477 12,083 12,289 Revenue-foreign subsidiaries.............. 17,514 10,228 5,366 -------- -------- ------- $121,144 $117,181 $93,248 -------- -------- ------- Operating income: U.S. operations......................... $ 8,045 $ 4,235 $ 1,355 Foreign subsidiaries.................... 3,936 1,867 382 Eliminations............................ (215) 130 121 -------- -------- ------- $ 11,766 $ 6,232 $ 1,858 -------- -------- ------- Assets: U.S. operations......................... $ 74,725 $ 85,235 $90,597 Foreign subsidiaries.................... 9,653 5,528 2,974 -------- -------- ------- $ 84,378 $ 90,763 $93,571 ======== ======== =======
SEASONALITY Mosaix's quarterly operating results may be subject to seasonal influences. The Company generally has realized lower revenues in the first quarter of the year than the immediately preceding quarter. The Company believes that this has been due primarily to the concentration by some customers of larger capital purchases in the fourth quarter of the calendar year to avoid end-of-year budgetary limitations, followed by lower purchasing activity during the first quarter of the next calendar year. Further, to the extent that international operations in the future constitute a higher percentage of total revenues, the Company anticipates it will experience relatively weaker demand in the quarter ending September 30 due to reduced customer activity in Europe during the summer months. REGULATORY ENVIRONMENT Mosaix's CMS hardware and software products are subject to and conform with FCC regulations under the Communications Act of 1934. Future products developed by Mosaix also may be required to comply with certain registration and technical requirements before they can be sold in the United States. As Mosaix expands its operations in other countries, its products will become subject to regulation by foreign governments. While existing industry regulation does not directly regulate the manufacture and sale of Mosaix's call management products, certain existing laws and regulations may affect the ability of Mosaix's customers to utilize some of its product in certain ways. For example, Mosaix's call management systems may not be used for certain prohibited debt collection and remote telephone solicitation practices, nor may they be used under certain circumstances to leave or play artificial or prerecorded messages. These practices are governed by such federal laws as the Telephone Consumer Protection Act of 1991 and the Telemarketing and Consumer Fraud and Abuse Prevention Act, which authorize the FCC and Federal Trade Commission, respectively, to issue additional regulations and administer such laws. In addition, most states have enacted legislation limiting certain telephone solicitation practices or restricting use of automatic dialing and announcement devices. Other federal and state legislation that has been proposed from time to time include bills that would, if enacted, recognize certain privacy rights of employees at the work site and regulate the ability of employers to monitor job performance, including monitoring employees' telephone communication or gathering information regarding such communications. It is possible that such legislation or other legislation, if enacted, might directly or indirectly affect how Mosaix's products can be used. 8 11 Mosaix fully supports legislation designed to promote the responsible use of auto dialing equipment, and laws which otherwise restrict abusive collections or telemarketing activities. Mosaix endeavors to design its products to enable its customers to comply with the requirements of current and anticipated regulations. PROPRIETARY RIGHTS As new products are identified and created, Mosaix has sought, and will continue to seek, patent protection, where appropriate, for inventions arising out of its development efforts. On March 30, 1992, U.S. Patent (No. 5,101,425) was issued to Mosaix on Realtime Monitor, a device enabling real time monitoring of predictive dialing systems. On November 14, 1995, Mosaix obtained a U.S. Patent (No. 5,467,391) on its Integrated Intelligent Call Blending technology, which describes a system and method for sharing a pool of CSRs in a telephone call servicing operation so that CSRs are utilized effectively. Mosaix also intends to pursue, where appropriate, patent protection for these inventions in the international markets where they are offered. Although Mosaix has not registered its copyrighted software, such software is protected by copyright and trade secret laws. In addition, Mosaix enters into confidentiality agreements with certain of its employees, consultants, distributors, value-added resellers and customers; limits access to and distribution of its software, documentation and other proprietary information; and enters into noncompete agreements with certain of its employees. Mosaix further seeks the protection of trademark registration in the United States and various foreign jurisdictions for certain of its product trademarks including Adapts, Analyst, Campaign Director, Campaign Manager, Infostore@Work, Mosaix, Predictive Blend, Producer, Process Architect, Screenbuilder, Searchlink, the Foresight Report and ViewStar. Despite Mosaix's efforts to protect its proprietary rights, unauthorized parties may attempt to copy Mosaix's products or to obtain and use Mosaix's proprietary information. Policing unauthorized use of Mosaix's products is difficult, and since Mosaix is unable to determine the extent to which piracy of its software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect Mosaix's proprietary rights to as great an extent as the laws of the United States. There can be no assurance that Mosaix's means of protecting its proprietary rights will be adequate or that competitors will not independently develop similar technology. Mosaix also relies on certain software licensed from third parties, including software that is integrated with internally developed software and used in the Company's products to perform key functions. There can be no assurance that such third parties will remain in business, that they will continue to support their products or that their products will otherwise continue to be available to Mosaix on commercially reasonable terms. The loss or inability to maintain any of these software licenses could materially adversely affect the Company's business. See "Forward Looking Statements-Risk Factors Regarding Future Performance -- Dependence on Proprietary Rights; Infringement Claims; Uncertainty of Obtaining Licenses" in Item Seven. EMPLOYEES As of December 31, 1997 Mosaix employed approximately 600 persons (not including independent contractors and temporary employees) on a full-time basis. None of Mosaix's employees are covered by collective bargaining agreements, nor has it ever experienced a work stoppage. Mosaix considers its employee relations to be good. ITEM TWO PROPERTIES Mosaix's corporate offices are located in Redmond, Washington in an 84,000 square-foot leased office facility at 6464 185th Avenue N.E., Redmond, Washington 98052. The lease expires March 31, 1999. In December 1997, Mosaix's entered into a new 104,000 square foot lease at a different location in Redmond, 9 12 Washington for its corporate headquarters. The Company anticipates moving into the new facility during the fourth quarter of 1998. The corporate offices include sales and marketing, professional service and customer support, engineering, and finance. The Company also leases offices which occupy approximately 55,000 square feet in Alameda, California, under a lease which expires in May 1999 but has renewal options through September of 2004. Additional sales, marketing, engineering and service functions are located in Alameda. Mosaix also leases domestic sales offices in Atlanta, Charlotte, Chicago, Cleveland, Costa Mesa, Dallas, New York, Rockville and Wilmington. The Company's sales, marketing, service and administrative function for Europe, the Middle East and Africa is located in rented office space near London, England. The London facility lease expires in 2017. ITEM THREE LEGAL PROCEEDINGS Mosaix is subject to various legal proceedings that arise in the ordinary course of its business. While the outcome of these proceedings cannot be predicted with certainty, the Company believes that none of such proceedings, individually or in the aggregate, will have a material adverse effect on the Company's business or financial condition. ITEM FOUR SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 10 13 PART II ITEM FIVE MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Mosaix common stock, $0.01 par value per share, is traded over the counter under the symbol "MOSX" and is an authorized security for quotation on the National Association of Securities Dealers, Inc. Automated Quotations National Market ("Nasdaq/NM"). The market prices of a share of Mosaix common stock are set forth below. The prices reflect the high and low trading prices for each quarter as reported by Nasdaq/NM. Over-the-counter market quotations reflect interdealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
HIGH LOW ------- ------- 1997: 4th Quarter................................ $11.313 $ 7.938 3rd Quarter................................ $15.000 $ 9.000 2nd Quarter................................ $15.250 $11.750 1st Quarter................................ $16.000 $ 9.750 1996: 4th Quarter................................ $23.000 $10.000 3rd Quarter................................ $18.375 $12.000 2nd Quarter................................ $24.000 $13.500 1st Quarter................................ $16.750 $10.500
There were approximately 4,760 shareholders of the Company's common stock as of February 23, 1998. This includes approximately 4,200 street-name holders and 560 registered certificate holders. No cash dividends were declared or paid by Mosaix during any of the periods presented. Mosaix presently does not anticipate paying any cash dividends in the foreseeable future. ITEM SIX SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993 -------- -------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenue........................................ $121,144 $117,181 $93,248 $76,090 $69,237 Operating income (loss)........................ 11,766 6,232 1,858 (8,357) (7,349) Net earnings (loss)............................ 9,757 3,618 (563) (6,482) (9,081) Earnings (loss) per share: Basic........................................ 0.74 0.29 (0.06) (0.65) (0.94) Diluted...................................... 0.71 0.27 (0.06) (0.65) (0.94) Weighted average common shares outstanding: Basic........................................ 13,169 12,677 9,846 9,998 9,681 Diluted...................................... 13,667 13,570 9,846 9,998 9,681 Working capital................................ $ 46,257 $ 46,804 $37,624 $38,738 $38,555 Total assets................................... 84,378 90,763 93,571 95,796 86,156 Long-term obligations.......................... 97 575 1,085 1,123 1,924 Shareholders' equity........................... 55,805 57,343 48,683 52,799 55,360
11 14 ITEM SEVEN MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following table sets forth certain operating data for 1997, 1996 and 1995 expressed as a percentage of revenue for all items except cost of revenue and gross profit which are shown as a percentage of the corresponding revenue:
YEAR ENDED DECEMBER 31, ----------------------- 1997 1996 1995 ----- ----- ----- Revenue: System sales.............................................. 40.6% 45.6% 46.3% Software licenses......................................... 19.8 17.6 16.0 Services and other........................................ 39.6 36.8 37.7 ----- ----- ----- 100.0 100.0 100.0 Cost of revenue: System sales.............................................. 37.6 35.2 40.8 Software licenses......................................... 10.1 6.6 4.1 Services and other........................................ 51.1 50.0 48.9 ----- ----- ----- 37.5 35.6 38.0 Gross profit: System sales.............................................. 62.4 64.8 59.2 Software licenses......................................... 89.9 93.4 95.9 Services and other........................................ 48.9 50.0 51.1 ----- ----- ----- 62.5 64.4 62.0 Operating expenses: Selling, general and administrative....................... 39.4 38.7 44.2 Research and development.................................. 12.6 12.7 14.0 Restructuring charges..................................... 0.8 -- 1.3 Write-off of capitalized software costs................... -- 0.6 -- Purchase of in-process research and development........... -- 3.7 -- Merger related............................................ -- 3.3 0.5 ----- ----- ----- Total operating expenses.................................... 52.8 59.0 60.0 ----- ----- ----- Operating income............................................ 9.7 5.4 2.0 Interest and other income, net.............................. 1.8 1.4 1.9 ----- ----- ----- Earnings before income taxes................................ 11.5 6.8 3.9 Income tax expense.......................................... 3.4 3.7 4.5 ----- ----- ----- Net earnings (loss)......................................... 8.1% 3.1% (0.6)% ===== ===== =====
RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996 For 1997, Mosaix reported net earnings of $9.8 million, or $0.71 diluted earnings per share, compared to $3.6 million, or $0.27 diluted earnings per share, for 1996. During 1997, Mosaix incurred restructuring charges of $0.9 million ($0.6 million after tax). During 1996, Mosaix incurred the following charges: (a) the write-off of $4.3 million ($4.3 million after tax) of acquired in-process research and development costs; (b) $0.7 million ($0.5 million after tax) of previously capitalized software development costs related to the 1996 acquisition of Caleo; and (c) $3.9 million ($3.9 million after tax) related to the merger with ViewStar. Excluding these charges, net earnings for 1997 were $10.4 million, or $0.76 diluted earnings per share, compared to $12.3 million, or $0.91 diluted earnings per share, for 1996. 12 15 Revenue. Revenue of $121.1 million for 1997 represented a 3.3% increase over 1996 revenue of $117.2 million. System sales, however, decreased $4.2 million, or 7.8%, to $49.2 million in 1997. Historically, system sales have come from the large formal call center market segment, with a high percentage representing repeat business with established customers. During 1997, Mosaix experienced a decline in the number of large system sales, a decline in sales from its domestic installed base and fewer new name customers than in prior years. Software licenses revenue increased by 15.9% to $23.9 million for 1997. This increase was primarily due to increased sales of workflow products. Services and other revenue increased by $4.9 million, or 11.3%, for 1997 as a result of increased professional services related to large CRM projects. Customer support revenue increased as a result of new system and software sales. International revenue increased 43.4% to $32.0 million in 1997 and accounted for 26.4% of total revenue. This increase was primarily due to increased sales in the United Kingdom and continuing acceptance of Mosaix products in international markets. Currently, backlog is not significant in relation to Mosaix's revenue and may not be indicative of future performance. Gross Profit. Gross profit decreased to 62.5% in 1997 from 64.4% in 1996. System sales gross profit, which were 62.4% in 1997 and 64.8% in 1996, was influenced by the decrease in sales volume as well as product mix. Mosaix's highest gross margins occur on large system sales. During 1997, Mosaix sold fewer large systems than in 1996, which negatively impacted margins. Gross profit on software licenses decreased to 89.9% in 1997 from 93.4% in 1996, primarily due to increased amortization of previously capitalized software costs. Gross profit on services and other revenue for 1997 was 48.9% compared to 50.0% in the prior year, due to the growth in professional services which have a lower margin and have been growing faster than systems and software support fees. Selling, General and Administrative. For 1997, selling, general and administrative expenses were $47.8 million, or 39.4% of revenue, compared to $45.4 million, or 38.7% of revenue, in the prior year. The increase in spending was due primarily to the expansion of marketing activities, investments in sales and employee training and recruiting. Research and Development. For 1997, research and development expenses, net of amounts capitalized, were $15.2 million, or 12.6% of revenue, compared to $14.9 million, or 12.7% of revenue, in 1996. Research and development spending, without regard to amounts capitalized, was $15.5 million in 1997 compared to $15.9 million in 1996. Software costs capitalized were $0.3 million in 1997 and $1.0 million in 1996. Capitalized software continues to decrease, and as of December 31, 1997, has been reduced to $0.9 million versus $2.0 million as of December 31, 1996. Mosaix is committed to the ongoing development of enhancements to existing products as well as the development of new products. Mosaix is also pursuing the acquisition of new technologies and/or licensing of products from third parties. 13 16 Restructuring Charges. As a result of the December 1996 ViewStar merger, Mosaix streamlined the management structure and consolidated the sales, support and service operations in 1997. These changes resulted in a charge of $0.9 million for severance and other employee related costs. Interest and Other Income, Net. Interest and other income, net increased from $1.7 million in 1996 to $2.2 million in 1997. The increase is primarily the result of increased yields on investments and increased cash available for investment. Mosaix intends to continue to invest excess cash in interest bearing instruments with maturities of one year or less. Income Taxes. The effective income tax rate for 1997 was 30.2% compared to 54.2% in 1996. The 1997 variance from the statutory rate of 34% was primarily related to the utilization of ViewStar net operating loss carryforwards. The unusually high effective tax rate in 1996 was primarily the result of non-deductible merger related expenses and purchased in-process research and development costs. YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995 Revenue. Revenue of $117.2 million for 1996 represented a 25.7% increase over 1995 revenue of $93.2 million. System sales increased $10.2 million, or 23.7%, to $53.4 million in 1996. The increase was primarily the result of multiple purchases of large systems by a few of the Company's major customers. Software licenses revenue increased by 38.2% to $20.7 million for 1996. The primary reason for the growth was increased sales of the Company's workflow products and additional software products sold in conjunction with call management systems. Services and other revenue increased by $8.0 million, or 22.8%, to $43.1 million for 1996 as a result of increased professional services and system and software support fees. System and software support fees also increased due to additional support contracts sold in conjunction with a greater number of systems and software licenses. International revenue increased to $22.3 million in 1996, from $17.7 million in 1995, due to first time sales in Mexico, South America, and South Africa combined with increased sales in the United Kingdom and Japan. Gross Profit. Gross profit improved to 64.4% in 1996 from 62.0% in 1995. System sales gross profit, which increased to 64.8% in 1996 as compared to 59.2% in 1995, was primarily influenced by the increase in sales volume, product mix and software amortization expense. During 1996, Mosaix sold a greater proportion of large call management systems products which have a higher sales price and a greater gross margin percentage than other system products. In addition, 1995 system sales gross margins were negatively impacted by accelerated software amortization expense resulting from the replacement of earlier versions of the Company's call management system products with the newest versions of the Company's products. During 1996, Mosaix expensed $1.4 million related to software amortization compared to $2.8 million in 1995. Gross profit on software licenses decreased slightly to 93.4% in 1996 from 95.9% in 1995, primarily due to a referral fee paid to a partner on a license transaction. The decrease was partially offset by a decrease in royalty payments to third-party software vendors. Gross profit on services and other revenue for 1996 was 50.0% compared to 51.1% in the prior year. The change was due to a higher mix of lower-margin professional service revenues and a lower mix of system and software support fees than in prior years. 14 17 Selling, General and Administrative. For 1996, selling, general and administrative expenses were $45.4 million, or 38.7% of revenue, compared to $41.2 million, or 44.2% of revenue, in the prior year. While selling, general and administrative expenses decreased as a percentage of revenue, the increase in spending was due to the expansion of marketing activities and increased travel, advertising and personnel costs. Research and Development. For 1996, research and development expenses, net of amounts capitalized, were $14.9 million, or 12.7% of revenue, compared to $13.1 million, or 14.0% of revenue, in 1995. Gross research and development spending increased to $15.9 million from $15.3 million primarily due to increases in engineering staff and outside contractors. Software costs capitalized were $1.0 million in 1996 and $2.2 million in 1995. Write-Off of Capitalized Software Costs. When the Company completed the acquisition of Caleo as discussed below, certain technology the Company was developing was replaced by technology acquired in the Caleo purchase. The Company had previously capitalized $0.7 million of costs related to the replaced technology and, consequently, the costs were expensed. Purchase of In-Process Research and Development. In February 1996, the Company purchased Caleo Software, Inc. (Caleo) for approximately $4.8 million. The business combination was accounted for as a purchase and, accordingly, the purchase price was allocated to the underlying net assets based on the asset's fair values. Of the total purchase price, $4.3 million was allocated to in-process research and development and expensed at the time of the combination. Merger Related. In December 1996, the Company issued approximately 3.8 million shares of stock for ViewStar Corporation, a provider of workflow software. The business combination was accounted for as a pooling of interest and, accordingly, the merger related costs of $3.9 million were expensed. Interest and Other Income, Net. Interest and other income, net is comprised primarily of interest income and remained constant at $1.7 million for 1996 and 1995. Income Taxes. Mosaix's income tax expense was $4.3 million and $4.2 million in 1996 and 1995, respectively. The effective tax rate was 54.2% in 1996 and 115.7% in 1995. The unusually high effective tax rates were the result of non-deductible merger related expenses and purchased in-process research and development costs. The effective tax rates were also impacted by the merger with ViewStar because operating losses generated by ViewStar prior to the merger provided no income tax benefit to the consolidated organization in 1996 and 1995. LIQUIDITY AND CAPITAL RESOURCES Mosaix's financial condition remained strong as of December 31, 1997, with cash and cash equivalents and short-term investments totaling $36.1 million. The short-term investment portfolio is invested in corporate notes and bonds, and is diversified among security types and issuers. It does not include any derivative products. At December 31, 1997, Mosaix's working capital was $46.3 million, the current ratio was 2.6 to 1.0 and during 1997, Mosaix generated $10.5 million of cash from operations. 15 18 Historically, working capital used to finance Mosaix has been provided by cash flow from operations, leases, and various forms of stock including the exercise of stock options by employees. During 1997, Mosaix invested $4.8 million to purchase furniture and equipment including investments in internal customer management hardware and software systems. Additionally, Mosaix made repayments on long-term lease obligations of $1.0 million. On July 16, 1997, the Mosaix Board of Directors authorized, subject to certain terms and conditions, the repurchase of up to 1,700,000 shares of common stock. As of December 31, 1997, the Company had repurchased 1,437,500 shares at a total cost of $14.0 million. In February 1998, the Mosaix Board of Directors authorized the repurchase of an additional 1,000,000 shares of the Company's common stock. In addition to its cash and short-term investment balances, Mosaix has a $10 million domestic line of credit available to meet cash flow needs. The line of credit expires on May 31, 1998, however, the Company intends to renew the line of credit for another year. Management believes that existing cash and short-term investments and cash flow from operations, together with its available credit line, will continue to be sufficient to meet ongoing operating requirements as well as Mosaix's investment in capital assets and research and development activities. In connection with research and development and market expansion, cash may be used to acquire technology or to fund strategic ventures. FORWARD LOOKING STATEMENTS -- RISK FACTORS REGARDING FUTURE PERFORMANCE Certain statements in this Annual Report on Form 10-K contain "forward-looking" information (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties. Actual future results may differ materially depending on a variety of factors, including, without limitation, the following: Uncertainties Relating to the Management of Remote Operations. In December of 1996, the Company completed a merger with ViewStar, and during 1997, several administrative and management functions were combined. Certain sales, customer support, professional service and development functions remain in Alameda, California, and the Company does not have significant experience in the management of remote operations. The geographical separation of Alameda operations may hinder efforts to integrate operations and product development. The failure to effectively manage the operations in Alameda or to realize the potential product synergies could have a material adverse effect on the Company's business. Uncertainty of Future Operating Results; Fluctuations in Operating Results; Seasonality. The Company's system sales and software license revenues are difficult to forecast because sales cycles are relatively long, and quarterly revenues depend on a relatively few large contracts that are subject to changes in customer budgets and general economic conditions. Furthermore, because the Company's products generally are shipped as orders are received, revenues in any quarter are substantially dependent on orders booked and shipped in that quarter. The Company's operating results have fluctuated in the past and are likely to do so in the future, particularly on a quarterly basis. In addition, changes in levels of the Company's consulting activity and seasonality in its consulting revenues have resulted in variability of service revenues from quarter to quarter. Historically, the Company often has recognized a substantial portion of its revenues in the last month of the quarter, with these revenues frequently concentrated in the last week of the quarter. In addition, the Company generally has realized lower revenues from system sales and software license fees in the first quarter of the year than in the immediately preceding quarter. Mosaix believes that this has been due primarily to the concentration by some customers of larger capital purchases in the fourth quarter of the calendar year to avoid end-of-year budgetary limitations, followed by lower purchasing activity during the first quarter of the next calendar year. 16 19 Further, to the extent that international operations in the future constitute a higher percentage of total revenues, the Company anticipates that it ordinarily will experience relatively weaker demand in the quarter ending September 30, due to reduced customer activity in Europe during the summer months. The Company is in the process of adding additional functionality to workflow products to closely align with current CMS customers. The additional functionality may not be accepted by traditional workflow customers and not only license revenue but customer support revenues could be negatively impacted in the future. As a result of these and other factors, revenues for any quarter are difficult to forecast and are subject to significant variation. Moreover, results of operations for any particular period are not necessarily indicative of future performance. Due to all of the foregoing factors, it is likely that without advance warning or notice, in some future quarter the Company's operating results will be below the expectations of market analysts and investors. Lengthy Sales and Implementation Cycle; Complex Service Requirements. The purchase or license of the Company's products is usually a significant decision by prospective customers, requiring the Company to engage in a lengthy sales cycle, typically between six and twelve months, without any assurance that a sale will result. Moreover, the cost to the customer of the Company's products typically is only a portion of the cost of implementing a large-scale CMS or CRM solution. For these and other reasons, the sales cycle is subject to a number of significant delays over which the Company has little or no control. Successful implementation of the Company's products may also require lengthy and complex implementation and integration services, which services may be provided by the Company or by a third-party. In addition, it is becoming increasingly competitive to recruit the talent required to perform the required services. The Company's future operating results will depend upon its ability to coordinate these complex service resources and ensure successful implementation of its products, while managing costs. Competition. The market for Mosaix's products is highly competitive. Important competitive factors include price, performance, diversity of product line, reliability, delivery capabilities, customer support and service. Some of the Company's competitors have significantly greater financial, technical, manufacturing, marketing and other resources. Competitors may develop products and technologies that are less expensive or technologically superior to the Company's products. Mosaix's principal competitors in the outbound call management systems market include Davox Corporation, EIS International, Inc. and Melita Electronic Labs. The potential entry into the market of major ACD and PBX suppliers (suppliers of customer-premise call routing and switching systems) also presents a strong competitive threat. These companies may elect to acquire or align with Mosaix's competitors, increasing their market presence and distribution; resell principal competitors' products; or elect to develop and market their own predictive dialing application software. As Mosaix expands its CMS offerings, it may also encounter increased competition from call center application providers such as Information Management Associates and Versatility. The traditional competition for horizontal workflow technology has been workflow software vendors, including direct competition from a number of public and private companies or divisions thereof, including Filenet, IBM, Action Technologies, Staffware, Optika, and Eastman Kodak. As ViewStar 5.0 extends its value into the customer management market space, it will face competition from new competitors, including process-oriented applications vendors such as Pegasystems, Chordiant, and DST. Mosaix's CRM applications may encounter competition from a number of customer management focused software companies including, Edify Corporation, Remedy Corporation, and Seibel Systems. Certain of these companies have announced and others may announce document workflow capabilities for their existing or future products. Many of the Company's current or potential competitors have greater financial, technical and marketing resources. As the Company's markets mature and new and existing companies compete for the same customers, price competition is likely to intensify, which could adversely affect the operating results of the Company. 17 20 Mosaix also relies on a number of system integration firms for implementation and other services as well as recommendations of its products during the evaluation stage of the purchasing process. Although Mosaix seeks to maintain close relationships with these service providers, many of these third parties have similar, and often more established relationships with Mosaix's principal competitors. If Mosaix is unable to develop and retain effective, long-term relationships with these third parties, Mosaix's competitive position would be materially adversely affected. Technological Change and New Products. The document management and workflow software market and the call management market are characterized by rapid technological change and frequent product introductions and improvements. Accordingly, the success of Mosaix will depend to a great extent upon its ability to develop product enhancements and new products that keep pace with continuing changes in technology and customer preferences while remaining price competitive. Mosaix has incurred, and expects to continue to incur, substantial expenses associated with the introduction and promotion of new products. There can be no assurance that the expenses incurred will not exceed development budgets, that Mosaix will introduce products in a timely fashion, if at all, or that such products will achieve market acceptance and generate sales sufficient to offset development costs. In addition, the success of the Company's products which are designed for use on the Internet or intranets will depend upon the acceptance of the Internet, intranets and World Wide Web technologies, as well as the products' compatibility with such technologies. Competition for Employees. Competition for engineers, professional services, customer support and sales employees has continued to increase in the high tech industry. In order for the Company to develop new and enhanced versions of existing products and to properly support customers, the Company must continue to successfully retain existing employees and recruit additional skilled people. In the event the Company is not able to attract the skill sets required in a reasonable time frame or as the cost of acquiring those skill sets increase, the Company could be materially adversely affected. Limited Source of Supply. The Company purchases two principal components for its system product from sole-source vendors. One vendor has announced that it will discontinue a component. The Company has a next generation replacement part in testing which will replace the discontinued component, but if this is unsuccessful and the existing component becomes unavailable, the establishment of an alternate source could not be accomplished quickly and would require investment of additional resources. This would affect the Company's ability to manufacture its call center system products. Any such delay could materially adversely affect the operating results of the Company. Dependence on Windows NT and Other Core Microsoft Technologies. The success of many of the Company's products and potential products depends upon the continued acceptance and use in critical business applications of Microsoft's Windows NT platform and other core Microsoft technologies, such as the Windows NT Server, the Microsoft SQL Server database and related Back Office software on which such products are, or will be, based. If the Windows NT platform market fails to grow, grows more slowly than anticipated or becomes obsolete, the Company's business, results of operations and financial condition would be materially adversely affected. Lack of Product Revenue Diversification. While the Company has developed new software products and services and has multiple distribution channels, the Company expects that its CMS and CRM products will continue to account for a significant amount of the Company's revenues in the future. A decline in demand for those products as a result of 18 21 competition, technological change or other factors would have a material adverse effect on the Company's results of operations. International Sales. Mosaix sells products to customers in international markets, with such sales accounting for 26.4% of the Company's total sales in 1997, and accordingly is subject to the normal risks of international sales, such as currency fluctuations, longer payment cycles, greater difficulties in accounts receivable collections and compliance with export laws and a wide variety of foreign laws. Any difficulties with respect to foreign export or other laws would have a material adverse effect on the Company's international sales. The current year financial crisis in Asia did not have a material effect on the Company but anticipated growth in Asia may be negatively impacted. Because the Company invoices certain of its foreign sales in local currency and does not hedge these transactions, fluctuations in exchange rates could adversely affect the Company's revenues and costs and could create significant foreign currency losses. Dependence on Proprietary Rights; Infringement Claims; Uncertainty of Obtaining Licenses. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy the Company's products or to obtain and use the Company's proprietary information. Policing unauthorized use of the Company's products is difficult, and since Mosaix is unable to determine the extent to which piracy of its software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to as great an extent as the laws of the United States. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that its competitors will not independently develop similar technology. The Company has received communications from time to time, asserting that its products infringe the proprietary rights of third parties, or seeking indemnification against such infringement. Although the Company believes that none of its products infringe the proprietary rights of third parties, there can be no assurance that third parties will not claim infringement with respect to current or future products. The Company expects that software product developers will increasingly be subject to infringement claims as the number of products and competitors grows and the functionality of products in different markets overlaps. Any such claims, with or without merit, could be time-consuming, result in costly litigation, adversely affect revenues, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company, if at all, which could have a material adverse effect on the Company's business, results of operations and financial condition. Mosaix also relies on certain software licensed from third parties, including software that is integrated with internally developed software and used in the Company's products to perform key functions. There can be no assurance that such third parties will remain in business, that they will continue to support their products or that their products will otherwise continue to be available to the Company on commercially reasonable terms. The loss or inability to maintain any of these software licenses could materially adversely affect the Company's business. Risk of Product Defects. Software and other products as internally complex, with as many interfaces to third party vendors as those offered by the Company, frequently contain errors or defects, especially when first introduced or when new versions are released. Although Mosaix conducts extensive product testing during product development, it has experienced delays in the commercial release of products pending the correction of software problems and, in some cases, has provided product enhancements to correct errors or defects in released products due to the difficulty in testing for all possible conditions that may be encountered at a customer site. The Company could therefore, in the future, lose revenues as a result of software errors or other product defects. The Company's products and future products are intended for use in applications that are critical to a customer's business. As a 19 22 result, Mosaix expects that its customers and potential customers have a greater sensitivity to product defects than the market for software products generally. Governmental Regulation. While existing industry legislation does not directly regulate the manufacture and sale of Mosaix's call management products, certain existing legislation may affect the ability of Mosaix's customers to utilize some of its products in certain ways. For example, Mosaix's call management systems may not be used for certain prohibited debt collection and remote telephone solicitation practices, nor may they be used under certain circumstances to leave or play artificial or prerecorded messages. These practices are governed by such federal laws as the Telephone Consumer Protection Act of 1991 and the Telemarketing and Consumer Fraud and Abuse Prevention Act, which authorize the FCC and Federal Trade Commission, respectively, to issue additional regulations and administer such laws. In addition, most states have enacted legislation limiting certain telephone solicitation practices or restricting use of automatic dialing and announcement devices. Other federal and state legislation that has been proposed from time to time include bills that would, if enacted, recognize certain privacy rights of employees at the work site and regulate the ability of employers to monitor job performance, including monitoring employees' telephone communication or gathering information regarding such communications. It is possible that such legislation or other legislation, if enacted, might directly or indirectly affect how Mosaix's call management systems, or some feature thereof, can be used. Mosaix fully supports legislation designed to promote the responsible use of auto dialing equipment. Mosaix endeavors to design its products to enable its customers to comply with the requirements of current and anticipated regulations. Similarly, international regulations and laws, particularly in Europe and Asia, could have a negative impact on the Company. Change in Accounting for Software Revenue Recognition. In October 1997, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 97-2 "Software Revenue Recognition," which Mosaix will be required to adopt beginning January 1, 1998. SOP 97-2 provides guidance on software revenue recognition and the allocation of revenue when multiple products and services are bundled. In the past, Mosaix has deferred revenue on delivered software that required more than minor modifications but in the event that bundled products and services can no longer be separated, Mosaix will be required to recognize revenue using the percentage of completion method instead of upon shipment of the software. Mosaix intends to continue to separate software licenses from professional service contracts but if Mosaix is unable to maintain the separation, a material adverse effect could occur in the Company's results of operations. Year 2000 Computer Problems. The Company is aware of the issues associated with the programming code in existing computer systems as the millennium (year 2000) approaches. The "year 2000" problem is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two digit year value, 00. The issue is whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause system failure. All of the Company's currently shipping products are year 2000 compliant. In addition, whenever possible, the Company has made software upgrades available to existing customers, that along with related hardware upgrades, will enable them to be year 2000 compliant. The Company does have some customers who have purchased systems in the past, where a hardware upgrade is not available to allow the customer to become year 2000 compliant. The Company has, and will continue to encourage such customers to migrate to current product versions. It is possible that the Company may incur additional expenses in addressing these migration issues. Additionally, there can be no assurances that the Company's current products do not contain undetected errors related to year 2000 that may result in material additional costs or liabilities which could have a material adverse effect on the Company. 20 23 With regard to the Company's internal processing and operational systems, the Company is in the process of installing an enterprise-wide financial and operational system from a major vendor that is year 2000 compliant. Significant portions of the system are currently operational and the Company anticipates all critical components of the system will be operational by December, 1998. The Company has capitalized the price of the system and third party consulting costs incurred to date and will continue to do so as the system is completed. With regard to other systems, the Company is identifying, reprogramming and testing all systems for year 2000 compliance. Although the Company is not aware of any additional material operational issues or costs associated with preparing the internal systems for the year 2000, there can be no assurances that the Company will not experience material adverse effects from undetected errors or the failure of such systems to be year 2000 compliant. ITEM EIGHT FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA For financial statements, see F-1 to F-18. ITEM NINE CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM TEN DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated by reference to the Company's Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the close of the Company's fiscal year. ITEM ELEVEN EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the Company's Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the close of the Company's fiscal year. ITEM TWELVE SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the Company's Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the close of the Company's fiscal year. ITEM THIRTEEN CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 21 24 PART IV ITEM FOURTEEN EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K CONSOLIDATED FINANCIAL STATEMENTS: See F-1 to F-18. FINANCIAL STATEMENTS SCHEDULES: Independent Auditors' Report (contained on page F-19) Schedule II Valuation and Qualifying Accounts (contained on page F-20) All other Schedules are omitted because they are inapplicable or because the requested information is shown in the Consolidated Financial Statements of the Company or in the related Notes thereto.
EXHIBITS -------- 2.1 Agreement and Plan of Merger, dated October 14, 1996, among the Registrant, Vision Merger Corporation and ViewStar Corporation (I) 3.1 Restated Articles of Incorporation of the Registrant (B) 3.2 Restated Bylaws of the Registrant (D) 4.1 Form of Certificate Evidencing Common Stock, par value $0.01 per share (B) 4.2 Warrant to purchase 12,245 shares of ViewStar Common Stock issued to Comdisco, Inc. dated May 31, 1996 (I) 10.1 Restated 1987 Stock Option Plan, as amended* (H) 10.2 1996 Management and Company Performance Bonus Plan* (H) 10.3 1997 Management and Company Performance Bonus Plan* (J) 10.4 Restated 1992 Stock Option Plan for Non-Employee Directors, as amended* (H) 10.5 1991 Employee Stock Purchase Plan, as amended* (F) 10.6 Executive Employment Agreement dated as of November 8, 1994 with Patrick S. Howard* (E) 10.7 Executive Employment Agreement dated as of March 1, 1995 with Thomas R. Clark* (G) 10.8 Executive Employment Agreement dated as of March 1, 1995 with John J. Flavio* (G) 10.9 Executive Employment Agreement dated as of March 1, 1995 with Edmund D. Wilsbach* (G) 10.10 Lease for Building 17 dated January 15, 1991 among Michael E. Mastro, Redmond East Associates and the Registrant (C) 10.11 Business Loan Agreement dated June 25, 1997 with Seattle-First National Bank (A) 10.12 Customer Purchase Agreement dated December 27, 1990 with Summa Four, Inc.** (D) 10.13 Software Source Code and Manufacturing Data Deposit and Escrow Agreement dated December 27, 1990 with Summa Four, Inc. and Data Securities International Ind.** (D) 10.14 Purchase Agreement (AWA 99) with Hewlett Packard, dated March 1, 1995 (H) 10.15 Shareholders Agreement, dated October 14, 1996, with certain former shareholders of ViewStar Corporation (I)
22 25
EXHIBITS -------- 10.16 ViewStar Corporation Amended 1986 Incentive Stock Plan and form of agreement thereunder* (I) 10.17 ViewStar Corporation Amended 1994 Stock Plan, as amended, and form of agreement thereunder* (I) 10.18 ViewStar Corporation 1996 Incentive Stock Plan* (I) 10.19 Sublease Agreement between the ASK Group, Inc. and ViewStar Corporation, dated October 8, 1993, for ViewStar's facility located at 1101 Marina Village Parkway, Alameda, California (I) 10.20 First Amendment to Sublease Agreement between the ASK Group, Inc. and ViewStar Corporation, dated September 8, 1994, for ViewStar's facility located at 1101 Marina Village Parkway, Alameda, California (A) 10.21 Promissory Note issued by Kamran Kheirolomoom to ViewStar Corporation dated July 2, 1996* (I) 10.22 Executive Employment Agreement, dated October 14, 1996, between Kamran Kheirolomoom and the Registrant* (I) 10.23 Executive Employment Agreement, dated October 14, 1996, between Robert I. Pender, Jr. and the Registrant* (I) 10.24 Executive Employment Agreement, dated October 14, 1996, between Gayle A. Crowell and the Registrant* (I) 10.25 Executive Employment Agreement, dated October 14, 1996, between Steve Russell and the Registrant* (A) 10.26 Executive Employment Agreement, dated February 14, 1996, between Steve L. Adams and the Registrant* (A) 10.27 Executive Employment Agreement, dated July 1, 1997, between Omar Saleh and the Registrant* (A) 10.28 Executive Employment Agreement, dated February 5, 1998, between Jeff Jarvis and the Registrant* (A) 10.29 Executive Employment Agreement, dated February 5, 1998, between Bruce Leader and the Registrant* (A) 10.30 Executive Employment Agreement, dated February 5, 1998, between Nicholas A. Tiliacos and the Registrant* (A) 10.31 Lease Agreement between Millennium Corporate Park, L.L.C. and the Registrant, dated December 11, 1997, for the Company's corporate headquarters in Redmond, Washington (A) 10.32 1998 Management and Performance Bonus Plans* (A) 21.1 List of Subsidiaries of the Registrant (A) 23.1 Consent of KPMG Peat Marwick LLP (A) 27.1 Financial Data Schedule (A)
- --------------- * Management contract or compensation plan. ** Confidential treatment has been requested with respect to portions of the agreement. 23 26 (A) Filed herewith. (B) Incorporated by reference from exhibits filed in connection with the Registrant's Registration Statement on Form S-1 (Registration No. 33-34561) filed with the Securities and Exchange Commission on April 26, 1990, as amended. (C) Incorporated by reference from exhibits filed in connection with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990. (D) Incorporated by reference from exhibits filed in connection with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992. (E) Incorporated by reference from exhibits filed in connection with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. (F) Incorporated by reference from exhibits filed in connection with the Registrant's Annual Report on Form 10-K/A for the year ended December 31, 1994. (G) Incorporated by reference from exhibits filed in connection with the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. (H) Incorporated by reference from exhibits filed in connection with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. (I) Incorporated by reference from exhibits filed in connection with the Registrant's Registration Statement on Form S4 (Registration No. 333-14887) initially filed with the Securities and Exchange Commission on October 25, 1996. (J) Incorporated by reference from exhibits filed in connection with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996. 24 27 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MOSAIX, INC. By: /s/ NICHOLAS A. TILIACOS ------------------------------------ Nicholas A. Tiliacos Director and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ HARVEY N. GILLIS Chairman of the Board and March 2, 1998 - ----------------------------------------------------- Director Harvey N. Gillis /s/ NICHOLAS A. TILIACOS President, Chief Operating March 2, 1998 - ----------------------------------------------------- Officer and Director Nicholas A. Tiliacos /s/ JOHN J. FLAVIO Senior Vice President and Chief March 2, 1998 - ----------------------------------------------------- Financial Officer John J. Flavio /s/ MICHAEL A. JACOBSEN Controller and Principal March 2, 1998 - ----------------------------------------------------- Accounting Officer Michael A. Jacobsen /s/ TOM A. ALBERG Director March 2, 1998 - ----------------------------------------------------- Tom A. Alberg /s/ H. ROBERT GILL Director March 2, 1998 - ----------------------------------------------------- H. Robert Gill /s/ UMANG GUPTA Director March 2, 1998 - ----------------------------------------------------- Umang Gupta /s/ PATRICK S. HOWARD Director March 2, 1998 - ----------------------------------------------------- Patrick S. Howard /s/ DAVID J. LADD Director March 2, 1998 - ----------------------------------------------------- David J. Ladd /s/ ROBERT S. LEVENTHAL Director March 2, 1998 - ----------------------------------------------------- Robert S. Leventhal
25 28 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Mosaix, Inc.: We have audited the accompanying consolidated balance sheets of Mosaix, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 Mosaix, Inc. and subsidiaries as of December 31, 1997 and 1996 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Seattle, Washington February 2, 1998 F-1 29 MOSAIX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenue: Systems sales............................................ $ 49,198 $ 53,384 $ 43,169 Software licenses........................................ 23,947 20,654 14,949 Services and other....................................... 47,999 43,143 35,130 -------- -------- -------- Total revenue......................................... 121,144 117,181 93,248 -------- -------- -------- Cost of revenue: System sales............................................. 18,510 18,813 17,627 Software licenses........................................ 2,416 1,364 612 Services and other....................................... 24,504 21,588 17,178 -------- -------- -------- Total cost of revenue................................. 45,430 41,765 35,417 -------- -------- -------- Gross profit............................................... 75,714 75,416 57,831 -------- -------- -------- Operating expenses: Selling, general and administrative...................... 47,774 45,355 41,179 Research and development................................. 15,226 14,912 13,054 Restructuring charge..................................... 948 -- 1,240 Write-off of capitalized software costs.................. -- 705 -- Purchase of in-process research and development.......... -- 4,307 -- Merger related........................................... -- 3,905 500 -------- -------- -------- Total operating expenses.............................. 63,948 69,184 55,973 -------- -------- -------- Operating income........................................... 11,766 6,232 1,858 Interest and other income, net............................. 2,208 1,674 1,730 -------- -------- -------- Earnings before income taxes............................... 13,974 7,906 3,588 Income tax expense......................................... 4,217 4,288 4,151 -------- -------- -------- Net earnings (loss)........................................ $ 9,757 $ 3,618 $ (563) ======== ======== ======== Earnings (loss) per share: Basic.................................................... $ 0.74 $ 0.29 $ (0.06) Diluted.................................................. $ 0.71 $ 0.27 $ (0.06) Weighted average common shares outstanding: Basic.................................................... 13,169 12,677 9,846 Diluted.................................................. 13,667 13,570 9,846
See accompanying notes to consolidated financial statements. F-2 30 MOSAIX, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, ------------------ 1997 1996 ------- ------- (IN THOUSANDS) Current assets: Cash and cash equivalents................................. $ 5,532 $10,984 Short-term investments.................................... 30,548 31,825 Trade accounts receivable, less allowance for doubtful accounts of $1,749 in 1997 and $1,593 in 1996.......... 30,325 26,061 Inventories............................................... 2,532 2,814 Current installments of contracts receivable, less allowance for doubtful accounts of $497 in 1997........ 1,555 1,764 Deferred income taxes..................................... 1,338 1,560 Prepaid expenses and other current assets................. 2,881 4,277 ------- ------- Total current assets................................... 74,711 79,285 Furniture, equipment and leasehold improvements, net........ 7,449 7,393 Contracts receivable, less allowance for doubtful contracts of $423 in 1996, excluding current installments........... -- 670 Capitalized software costs, net of accumulated amortization of $701 in 1997 and $3,464 in 1996........................ 930 1,993 Deferred income taxes....................................... 837 178 Other assets, net........................................... 451 1,244 ------- ------- Total assets...................................... $84,378 $90,763 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 5,455 $ 5,064 Accrued compensation...................................... 8,762 9,097 Other accrued expenses.................................... 6,413 7,272 Current portion of long-term obligations.................. 381 934 Customer deposits and unearned revenue.................... 7,443 10,114 ------- ------- Total current liabilities.............................. 28,454 32,481 Long-term obligations, excluding current installments....... 97 575 Unearned revenue, less current portion...................... 22 364 ------- ------- Total liabilities...................................... 28,573 33,420 Shareholders' equity: Common stock, $.01 par value. Authorized 25,000 shares; issued and outstanding 12,229 shares in 1997 and 13,237 shares in 1996......................................... 122 132 Additional paid-in-capital................................ 50,040 61,841 Cumulative translation adjustments........................ (3) (201) Notes receivable from shareholders........................ (272) (590) Accumulated earnings (deficit)............................ 5,918 (3,839) ------- ------- Total shareholders' equity............................. 55,805 57,343 ------- ------- Total liabilities and shareholders' equity........ $84,378 $90,763 ======= =======
See accompanying notes to consolidated financial statements. F-3 31 MOSAIX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS)
NOTES DEFERRED PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE CUMULATIVE STOCK OPTION --------------- --------------- PAID-IN FROM TRANSLATION COMPENSATION SHARES AMOUNT SHARES AMOUNT CAPITAL SHAREHOLDERS ADJUSTMENT EXPENSE ------- ------- ------ ------ ---------- ------------ ----------- ------------ Balances at December 31, 1994...... 1,847 $ 18 10,160 $102 $ 60,116 $(119) $(339) $(85) Exercise of stock options........ -- -- 187 2 537 (180) -- -- Amortization of deferred compensation expense........... -- -- -- -- -- -- -- 54 Tax benefit realized upon exercise of stock options...... -- -- -- -- 103 -- -- -- Common stock sold pursuant to employee stock purchase plan... -- -- 29 -- 226 -- -- -- Translation adjustment........... -- -- -- -- -- -- 5 -- Repurchase of common stock....... -- -- (608) (6) (4,294) -- -- -- Net loss......................... -- -- -- -- -- -- -- -- ------ ---- ------ ---- -------- ----- ----- ---- Balances at December 31, 1995...... 1,847 18 9,768 98 56,688 (299) (334) (31) Issuance of preferred stock...... 3,293 33 -- -- 3,294 -- -- -- Exercise of stock options........ -- -- 369 4 1,440 (136) -- -- Amortization of deferred compensation expense........... -- -- -- -- -- -- -- 31 Tax benefit realized upon exercise of stock options...... -- -- -- -- 1,051 -- -- -- Common stock sold pursuant to employee stock purchase plan... -- -- 33 -- 388 -- -- -- Translation adjustment........... -- -- -- -- -- -- 133 -- Restricted stock issued in exchange for note receivable... -- -- 311 3 152 (155) -- -- Conversion of preferred stock to common stock................... (5,140) (51) 2,797 28 23 -- -- -- Exercise of stock warrants....... -- -- 42 -- 30 -- -- -- Repurchase of common stock....... -- -- (83) (1) (1,225) -- -- -- Net earnings..................... -- -- -- -- -- -- -- -- ------ ---- ------ ---- -------- ----- ----- ---- Balances at December 31, 1996...... -- -- 13,237 132 61,841 (590) (201) -- Exercise of stock options........ -- -- 409 4 1,161 -- -- -- Tax benefit realized upon exercise of stock options...... -- -- -- -- 700 -- -- -- Common stock sold pursuant to employee stock purchase plan... -- -- 38 1 365 -- -- -- Translation adjustment........... -- -- -- -- -- -- 198 -- Collection of shareholder notes.......................... -- -- -- -- -- 318 -- -- Repurchase of common stock....... -- -- (1,455) (15) (14,027) -- -- -- Net earnings..................... -- -- -- -- -- -- -- -- ------ ---- ------ ---- -------- ----- ----- ---- Balances at December 31, 1997...... -- $ -- 12,229 $122 $ 50,040 $(272) $ (3) $ -- ====== ==== ====== ==== ======== ===== ===== ==== ACCUMULATED TOTAL EARNINGS SHAREHOLDERS' (DEFICIT) EQUITY ----------- ------------- Balances at December 31, 1994...... $(6,894) $ 52,799 Exercise of stock options........ -- 359 Amortization of deferred compensation expense........... -- 54 Tax benefit realized upon exercise of stock options...... -- 103 Common stock sold pursuant to employee stock purchase plan... -- 226 Translation adjustment........... -- 5 Repurchase of common stock....... -- (4,300) Net loss......................... (563) (563) ------- -------- Balances at December 31, 1995...... (7,457) 48,683 Issuance of preferred stock...... -- 3,327 Exercise of stock options........ -- 1,308 Amortization of deferred compensation expense........... -- 31 Tax benefit realized upon exercise of stock options...... -- 1,051 Common stock sold pursuant to employee stock purchase plan... -- 388 Translation adjustment........... -- 133 Restricted stock issued in exchange for note receivable... -- -- Conversion of preferred stock to common stock................... -- -- Exercise of stock warrants....... -- 30 Repurchase of common stock....... -- (1,226) Net earnings..................... 3,618 3,618 ------- -------- Balances at December 31, 1996...... (3,839) 57,343 Exercise of stock options........ -- 1,165 Tax benefit realized upon exercise of stock options...... -- 700 Common stock sold pursuant to employee stock purchase plan... -- 366 Translation adjustment........... -- 198 Collection of shareholder notes.......................... -- 318 Repurchase of common stock....... -- (14,042) Net earnings..................... 9,757 9,757 ------- -------- Balances at December 31, 1997...... $ 5,918 $ 55,805 ======= ========
See accompanying notes to consolidated financial statements. F-4 32 MOSAIX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 -------- -------- -------- (IN THOUSANDS) Cash flows from operating activities: Net earnings (loss)...................................... $ 9,757 $ 3,618 $ (563) Depreciation and amortization............................ 6,028 6,315 7,266 Trade and other receivables.............................. (3,385) 1,181 (3,174) Other assets............................................. 1,927 (2,162) (466) Accounts payable and accrued expenses.................... (803) 2,977 4,439 Customer deposits and unearned revenue................... (3,013) (7,023) (1,270) -------- -------- -------- Net cash provided by operating activities........ 10,511 4,906 6,232 -------- -------- -------- Cash flows from investing activities: Purchase of short-term investments....................... (35,978) (40,635) (50,433) Proceeds from maturities of short-term investments....... 37,255 42,658 16,585 Purchases of furniture and equipment..................... (4,778) (3,456) (2,781) Increase in capitalized software costs................... (256) (976) (2,157) Other.................................................... 820 207 588 -------- -------- -------- Net cash used in investing activities............ (2,937) (2,202) (38,198) -------- -------- -------- Cash flows from financing activities: Payments of borrowings under bank line of credit......... -- -- (1,500) Proceeds from subordinated notes issued to shareholders.......................................... -- -- 2,000 Collection of shareholder notes receivable............... 318 -- -- Repayment of long-term obligations....................... (1,031) (1,262) (2,151) Common stock repurchased................................. (14,042) (1,226) (4,299) Proceeds from issuance of preferred and common stock..... 1,531 2,905 585 -------- -------- -------- Net cash provided by (used in) financing activities..................................... (13,224) 417 (5,365) -------- -------- -------- Effect of exchange rate changes on cash.................... 198 117 12 -------- -------- -------- Increase (decrease) in cash and cash equivalents........... (5,452) 3,238 (37,319) Cash and cash equivalents, beginning of year............... 10,984 7,746 45,065 -------- -------- -------- Cash and cash equivalents, end of year..................... 5,532 10,984 7,746 Short-term investments..................................... 30,548 31,825 33,848 -------- -------- -------- Cash and cash equivalents and short-term investments....... $ 36,080 $ 42,809 $ 41,594 ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes.......................................... $ 1,816 $ 5,611 $ 3,255 Interest.............................................. $ 105 $ 290 $ 568 Noncash investing and financing activities: Equipment transferred from inventory..................... $ 14 $ 363 $ 238 Tax benefit realized upon exercise of stock options...... $ 700 $ 1,051 $ 103 Equipment acquired under capital leases.................. $ -- $ 554 1,058 Issuance of common stock in exchange for notes receivable............................................ $ -- $ 291 $ 180 Issuance of preferred stock in exchange for subordinated notes payable and related accrued interest............ $ -- $ 2,148 $ --
See accompanying notes to consolidated financial statements. F-5 33 MOSAIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Description of Business. Mosaix, Inc. and subsidiaries (hereinafter referred to as "Mosaix" or the "Company") is a global provider of predictive dialing systems, workflow software and enterprise customer management solutions that automate and optimize an organization's interactions with its customers. By employing Mosaix' customer interaction software, call management applications and business process applications, companies are creating and managing profitable customer relationships. Mosaix maintains a global professional service and customer support organization and a network of development, co-marketing, and strategic partnerships. Mosaix' principal markets are North America, Europe, and Asia. Credit is extended to customers in the normal course of business. b. Basis of Presentation. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. c. Cash Equivalents and Short-Term Investments. All short-term investments with a maturity of three months or less at the date of purchase are considered to be cash equivalents. The Company's investment securities are classified as held-to-maturity and, as such, are carried at amortized cost. d. Inventories. Inventories are stated at the lower of cost (first-in, first-out) or market (replacement cost for raw materials and net realizable value for finished goods, work-in-process and spare parts). e. Furniture, Equipment and Leasehold Improvements. Furniture, equipment and leasehold improvements are stated at cost. Depreciation of furniture and equipment (including rental systems) is provided on the straight-line method over the three to five year estimated useful lives of the assets. Leasehold improvements and assets recorded under capital leases are amortized over the shorter of their estimated useful lives or the related lease term. Maintenance and repairs are expensed as incurred. When furniture, equipment and leasehold improvements are retired or otherwise disposed, gains and losses are reflected in the consolidated statement of operations. f. Capitalized Software Costs. Software development costs incurred in conjunction with product development are charged to research and development expense until technological feasibility has been established. Once technological feasibility of a software product to be marketed has been established, development and enhancement costs are capitalized and reported at the lower of unamortized cost or net realizable value. Net realizable value for a particular product is assessed based on anticipated gross margins applicable to sales of the related product in future periods. Fully amortized software development costs are removed from the Company's accounts. Amortization of capitalized software costs begins when the related product is available for general release to customers and is computed for each product based on the greater of (a) the ratio of current gross revenue for a product to the total of current and anticipated future gross revenue for the product or (b) the straight line method over the estimated life of the product. Amortization expense related to capitalized software costs F-6 34 MOSAIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED) amounted to $1,318, $1,448 and $2,823 for 1997, 1996 and 1995, respectively. These amounts are included in cost of systems and software revenue. g. Revenue Recognition. The Company's revenues are primarily derived from: systems sales, software licenses and services. Systems sales are comprised of revenue related to products sold that include both hardware and software. Software licenses include revenue related to software-only applications that operate on industry standard hardware available from the Company and other vendors. Services revenue consists of consulting services and recurring software and system support fees. Revenue on system sales is generally recognized when the units are shipped and the Company has no significant remaining obligations. For system sales requiring significant customization or for new products, revenue is recognized upon completion of the customization or customer acceptance. Installation fees relating to system sales are recognized when the related system is installed. Revenue from the sale of software licenses is recognized when (i) a signed contract exists, (ii) delivery has occurred, (iii) collectibility is probable, and (iv) remaining Company obligations are insignificant. Generally, revenues from the sale of software licenses through distributors are recognized after contract signing and shipment, and upon the earlier of sale to the end user or upon receipt of nonrefundable cash payments from the distributors. Revenue from system and software support service is recognized using the straight-line method over the term of the contract. Revenue from professional services is recognized as the related work is performed. Customer payment terms vary. Amounts billed in advance of satisfying revenue recognition criteria are classified in "customer deposits and unearned revenue." Costs incurred prior to satisfying revenue recognition criteria are deferred and are classified as a component of inventories. The Company has historically sold and licensed systems pursuant to lease agreements which qualify as sales type leases with an initial term of three years or more. Revenue from these contracts was recognized when units were shipped, at the present value of the minimum payments at the beginning of the contract discounted at the Company's incremental borrowing rate. No such contracts were sold in 1997 or 1996. h. Research and Development Costs. Research and development costs are charged to expense as incurred, except as described in f. i. Income Taxes. 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. j. Product Warranties. The Company generally provides a 90-day warranty for all systems sold and a 30 day warranty for software products. A charge to the statement of operations is made at the time of sale for estimated costs of repair or replacement of the products during the warranty period. F-7 35 MOSAIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED) k. Net Earnings (Loss) Per Share. During 1997, Mosaix adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," and restated earnings (loss) per share for all prior periods. In accordance with SFAS No. 128, basic net earnings (loss) per share is computed using the weighted average number of common shares outstanding. Diluted net earnings (loss) per share is computed using the weighted average number of common shares plus dilutive common share equivalents outstanding during the period using the treasury stock method. Common share equivalents consist of employee stock options and convertible preferred stock. l. Foreign Currency Translation. Assets and liabilities of foreign operations are translated into U.S. dollars using rates of exchange in effect at the end of the year. Income and expense accounts are translated into U.S. dollars using annual average rates of exchange. The net gain or loss resulting from translation is shown as a cumulative translation adjustment in shareholders' equity. Gains and losses from foreign currency transactions are included in other income (expense), net. m. Financial Instruments and Concentrations of Credit Risk. The Company's financial instruments consist of cash and cash equivalents, short-term investments, trade accounts and contracts receivable, accounts payable, and long-term obligations. The Company's cash and cash equivalents and short-term investments are diversified among security types and issuers, and approximate fair value. The fair value of financial instruments that are short-term and/or that have little or no 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, accrued liabilities and long term obligations. Concentrations of credit risk with respect to receivables are limited due to the diversity in geographic location of customers as well as diversity in industries. In addition, the Company performs initial and ongoing evaluations of its customers' financial position, and generally extends credit on open account without requiring collateral. n. Stock Based Compensation. In 1996, Mosaix adopted SFAS No. 123, "Accounting for Stock Based Compensation." In accordance with the provisions of SFAS No. 123, Mosaix has elected to continue to apply the provisions of Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option and stock purchase plans and, accordingly, does not recognize compensation expense for options granted with an exercise price equal to or in excess of fair value at the date of grant. Note 8 to the consolidated financial statements contains a summary of pro forma results of operations for 1997, 1996 and 1995 as if Mosaix had recognized compensation expense based on the fair value of the options and stock purchase rights granted at grant date as required by SFAS No. 123. o. New Accounting Pronouncements. In October 1997, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 97-2, "Software Revenue Recognition," which supersedes SOP 91-1. The Company will be required to adopt SOP 97-2 beginning January 1, 1998. SOP 97-2 provides guidance on software revenue recognition and the allocation of revenue when multiple products and services are bundled. In the past, the Company has deferred revenue on delivered software that required more than minor modifications. In the event that bundled products and services can no longer be separated, the Company will be required to defer revenue recognition on both product and service elements until revenue recognition criteria have been satisfied for all elements. F-8 36 MOSAIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED) The Company intends to continue to separate software licenses from professional service contracts and accordingly the impact on the consolidated financial statements is not expected to be material. p. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. q. Reclassifications. Certain reclassifications have been made to the prior period financial statements to conform with the current year presentation. 2. BUSINESS COMBINATIONS a. ViewStar Corporation. In December 1996, the Company issued 3,777,078 shares of $.01 par value common stock in exchange for all of the outstanding common shares of ViewStar Corporation, a provider of client/server document management and workflow software. This business combination was accounted for as a pooling-of-interests and, accordingly, the consolidated financial statements for all periods prior to the combination were restated to include the accounts and results of operations of ViewStar. In connection with the business combination, $3,905 of merger related costs were incurred. During 1995, ViewStar incurred $500 of costs associated with the termination of a proposed merger. b. Caleo Software, Inc. In February 1996, the Company purchased Caleo Software, Inc. (Caleo) for $4,750 in cash. The business combination was accounted for using the purchase method whereby the purchase price was allocated to the underlying net assets based on their relative fair values. Of the total purchase price, $4,307 was charged to operations as the purchase of in-process research and development. The results of operations of Caleo were not significant in relation to the Company. At the time of the combination, the Company also wrote off $705 of previously capitalized software costs for duplicative technology. F-9 37 MOSAIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED) 3. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company's cash and cash equivalents and short-term investments as of December 31 consist of the following:
1997 1996 ------- ------- Cash and cash equivalents: Cash...................................................... $ 1,682 $ 5,973 Money market instruments.................................. 3,850 5,011 ------- ------- Total cash and cash equivalents........................ 5,532 10,984 ------- ------- Short-term investments: Municipal securities...................................... -- 10,212 Corporate notes and bonds................................. 30,548 21,613 ------- ------- Total short-term investments........................... 30,548 31,825 ------- ------- Total cash and cash equivalents and short-term investments..................................... $36,080 $42,809 ======= =======
The short-term investments are classified as held-to-maturity. 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. These securities are carried at amortized cost which approximates fair value. At December 31, 1997, all short-term investments have contractural maturities of one year or less. Interest income, net for 1997, 1996 and 1995 was $2,355, $1,665 and $1,393, respectively. 4. INVENTORIES A summary of inventories at December 31 are as follows:
1997 1996 ------- ------- Raw materials............................................... $ 759 $ 1,879 Work-in-process............................................. 64 333 Finished goods.............................................. 501 136 Installations in progress................................... 853 257 Spare parts................................................. 355 209 ------- ------- $ 2,532 $ 2,814 ======= =======
5. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Furniture, equipment and leasehold improvements consist of the following as of December 31:
1997 1996 ------- ------- Furniture and fixtures...................................... $ 1,814 $ 2,620 Computer equipment.......................................... 14,907 15,012 Equipment under capital lease............................... 5,327 6,500 Office equipment............................................ 825 1,684 Leasehold improvements...................................... 1,859 1,390 ------- ------- 24,732 27,206 Less accumulated depreciation and amortization.............. 17,283 19,813 ------- ------- $ 7,449 $ 7,393 ======= =======
F-10 38 MOSAIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED) During 1997, 1996 and 1995, amortization expense related to equipment under capital leases was $717, $627 and $239, respectively. Accumulated amortization for equipment under capital leases at December 31, 1997 and 1996 was $4,913 and $5,383, respectively. 6. BANK LINE OF CREDIT At December 31, 1997, the Company had available a $10,000 unsecured domestic bank line of credit. Restrictive terms of this line of credit require, among other things, that the Company maintain minimum net worth and working capital. The Company was in compliance with all terms and conditions of this line of credit as of December 31, 1997. There were no borrowings outstanding under this line as of December 31, 1997. 7. LONG-TERM OBLIGATIONS A summary of long-term obligations as of December 31 follows:
1997 1996 ---- ------ Capital lease obligations................................... $433 $1,329 Other....................................................... 45 180 ---- ------ Total long-term obligations................................. 478 1,509 Less current installments................................... 381 934 ---- ------ Long-term obligations, excluding current installments.......................................... $ 97 $ 575 ==== ======
Principal maturities of long-term obligations at December 31, 1997 are as follows: 1998................................................... $381 1999................................................... 97 ---- $478 ====
In May 1995, ViewStar obtained $2.0 million in cash from certain of its shareholders in exchange for 9% subordinated notes payable upon demand at any time after April 15, 1996. In March 1996, the subordinated notes were exchanged for shares of preferred stock which were in turn exchanged for shares of common stock as described in Note 8(e). 8. SHAREHOLDERS' EQUITY a. Stock Option Plans. In 1997, the Board of Directors authorized a 1997 Stock Incentive Compensation Plan (1997 Plan) which allowed for the reservation of 520,031 shares of common stock. These shares are primarily intended to replace the Restated 1987 Stock Option Plan (1987 Plan) shares related to the repricing (see below) and the balance is to be used for other general employee retention purposes. Shares granted under the 1997 Plan are non-qualified options for non-officer employees. Prior to the merger in 1996, the shareholders of ViewStar approved a plan amendment to increase the shares available for grant by 1,159,000. Additionally, as part of the business combination, the shareholders of Mosaix approved the 1996 Stock Incentive Compensation Plan (1996 Plan) to replace the 1987 Plan. The 1996 Plan, which allowed for the reservation of 1,500,000 shares of common stock, was intended primarily to replace expired options under the 1987 Plan, to replace ViewStar options with Mosaix options and to grant new options to officers of ViewStar. As part of the business combination, 1,559,000 shares authorized under the ViewStar Plans expired. F-11 39 MOSAIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED) The Company's 1987 Plan allowed for the reservation of 2,800,000 shares of common stock for grants. Options granted under the 1987 Plan were designated as qualified or non-qualified at the discretion of the Board of Directors. The 1987 Plan expired in 1996 and 165,000 and 412,000 shares that were authorized under the 1987 Plan expired in 1997 and 1996, respectively. In January 1998, the Company offered certain employees the right to have their outstanding stock options repriced in exchange for a 20% reduction in the options outstanding and an agreement not to exercise any of the repriced options for one year. The repricing took place January 14, 1998 and 776,802 options with exercise prices of $10.88 to $19.75, were returned and canceled, and 621,480 new options were issued at $9.50. Of the options returned and canceled, 320,031 were 1987 Plan options that could not be regranted under the expired 1987 Plan and accordingly, 256,025 replacement options were issued under the 1997 and 1996 Plans. Generally, options vest over a four-year period in cumulative increments of 25% beginning one year from the date of grant or, in certain instances, one year from the individual's employment date. All options expire ten years or less from the date of grant and are currently granted at prices not less than fair market value. The Company applies APB Opinion No. 25 in accounting for its plans. Had the Company determined compensation cost based on the fair value at the grant date for its stock options and stock purchase rights under SFAS No. 123 for options and purchase rights granted in 1997, 1996 and in 1995, the Company's net earnings (loss) would have been adjusted to the pro forma amounts indicated below:
1997 1996 1995 ------ ------ ------ Net earnings (loss): As reported........................................ $9,757 $3,618 $ (563) Pro forma.......................................... 6,517 1,786 (931) Basic earnings (loss) per share: As reported........................................ 0.74 0.29 (0.06) Pro forma.......................................... 0.49 0.14 (0.09) Diluted earnings (loss) per share: As reported........................................ 0.71 0.27 (0.06) Pro forma.......................................... 0.48 0.13 (0.09)
The per share weighted-average fair value of stock options granted during 1997, 1996 and 1995 was $6.78, $5.30 and $2.97, respectively on the date of grant using the Black Scholes option-pricing model with the following assumptions:
1997 1996 1995 ------ ------ ------ Expected dividend yield.............................. 0.0% 0.0% 0.0% Volatility........................................... 76.0% 62.0% 62.0% Expected weighted average life (in years)............ 3.8 4.5 4.5 Weighted average risk free interest rate............. 5.8% 6.3% 6.2%
F-12 40 MOSAIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED) The per share weighted-average fair value of stock purchase rights during 1997, 1996 and 1995 was $5.52, $4.44 and $3.31, respectively, on the date of grant using the Black Scholes option-pricing model with the following assumptions:
1997 1996 1995 ------ ------ ------ Expected dividend yield.............................. 0.0% 0.0% 0.0% Volatility........................................... 76.0% 62.0% 62.0% Expected weighted average life (in years)............ 0.5 0.5 0.5 Weighted average risk free interest rate............. 5.6% 5.2% 5.2%
Pro forma net earnings (loss) and earnings (loss) per share reflect only options granted after January 1, 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net earnings (loss) and net earnings (loss) per share amounts presented above because compensation cost is reflected over the options' vesting period of four to five years, and compensation cost for options granted prior to January 1, 1995 is not considered. A summary of stock options follows:
SHARES NUMBER OF AVAILABLE OPTIONS WEIGHTED FOR GRANT OUTSTANDING AVERAGE (IN 000'S) (IN 000'S) EXERCISE PRICE ---------- ----------- -------------- Balance at December 31, 1994..................... 428 2,116 $ 4.41 Plan amendment................................. 400 -- -- Granted........................................ (521) 521 4.74 Exercised...................................... -- (187) 2.88 Canceled....................................... 504 (504) 4.08 ------ ----- ------ Balance at December 31, 1995..................... 811 1,946 4.70 Plan amendment................................. 2,659 -- -- Granted........................................ (721) 721 11.19 Exercised...................................... -- (369) 3.91 Expired: 1987 Plan................................... (412) -- -- ViewStar Plans.............................. (1,559) -- -- Canceled....................................... 240 (240) 4.99 ------ ----- ------ Balance at December 31, 1996..................... 1,018 2,058 6.62 Additional authorization....................... 520 -- -- Granted........................................ (1,459) 1,459 11.91 Exercised...................................... -- (409) 2.85 Expired........................................ (165) -- -- Canceled....................................... 479 (479) 10.51 ------ ----- ------ Balance at December 31, 1997..................... 393 2,629 $ 9.98 ====== ===== ======
As discussed previously, a stock option repricing took place on January 14, 1998. Of the options returned and canceled, 320,031 were 1987 Plan Options that could not be regranted from the 1987 Plan because the 1987 Plan had expired. These options were replaced with 256,025 options that were available for grant at December 31, 1997 and, after this reissuance, approximately 182,000 shares remain available to grant to employees under the 1996 and 1997 Plans. The 1992 Director's Plan shares were not repriced and 46,000 shares are available for grant at December 31, 1997. F-13 41 MOSAIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED) The following table summarizes options outstanding and exercisable at December 31, 1997.
OPTIONS OUTSTANDING ------------------------------------------------- WEIGHTED OPTIONS EXERCISABLE AVERAGE WEIGHTED ------------------------------- RANGE OF EXERCISE NUMBER REMAINING AVERAGE NUMBER WEIGHTED AVERAGE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - ----------------- ----------- ---------------- -------------- ----------- ---------------- $ 0.51 - 0.51 186,413 3.65 $ 0.51 125,878 $ 0.51 3.79 - 6.75 503,192 5.93 4.52 434,231 4.41 7.58 - 10.38 510,784 9.04 9.50 87,206 8.66 10.69 - 12.25 706,238 8.03 11.77 138,651 11.01 12.62 - 15.00 502,447 8.67 13.74 81,259 13.50 15.06 - 19.75 220,320 8.72 17.29 61,047 17.98 -------------- --------- ---- ------ ------- ------ $ 0.51 - 19.75 2,629,394 7.69 $ 9.98 928,272 $ 6.96 ============== ========= ==== ====== ======= ======
b. Stock Option Plan for Non-Employee Directors. Under the Company's 1992 Stock Option Plan for Non-Employee Directors (1992 Plan), 125,000 shares of the Company's common stock are reserved for issuance to non-employee directors of the Company. An initial grant of 5,000 options is automatically made to each non-employee director upon appointment as a director of the Company. Initial grants vest over a five-year period in cumulative increments of 20% each year beginning from the date of the first subsequent annual meeting of shareholders following grant. An additional 2,000 options are granted following each annual shareholders' meeting. Each additional grant is immediately vested and exercisable. All options expire ten years from the date of grant or, if earlier, five years after termination as a director of the Company. Options are exercisable at the fair market value of the stock at the date of grant. At December 31, 1997, 72,000 options were outstanding under the 1992 Plan at a weighted average exercise price of $11.77 per share and 58,000 options were exercisable at a weighted average price of $11.73 per share. c. Employee Stock Purchase Plan. The Company's 1991 Employee Stock Purchase Plan provides for 200,000 shares of the Company's common stock to be reserved for issuance upon exercise of purchase rights granted to participating employees of the Company. The purchase rights are exercisable semiannually on June 30 and December 31 of each year at a price equal to the lesser of 85% of the fair market value of the Company's stock at the beginning or end of the respective semi-annual periods. At December 31, all authorized shares had been issued. d. Stock Repurchase Plan. In 1997, the Company's Board of Directors authorized a plan to repurchase up to 1,700,000 shares of the Company's common stock, subject to certain limitations and conditions. The repurchased shares are used primarily to service the Company's employee stock plans. During 1997, the Company repurchased 1,437,500 shares for a total cost of $14,035. In January 1998, the Company's Board of Directors authorized an additional 1,000,000 shares to be repurchased under the same limitations and conditions. In 1995, the Company's Board of Directors had authorized a similar plan to repurchase up to 1,600,000 shares of the Company's common stock. The Company had purchased 691,000 shares at a total cost of $5,526 when the plan was discontinued on October 2, 1996. F-14 42 MOSAIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED) e. ViewStar Preferred Shares. In March and June 1996, ViewStar completed a preferred stock financing transaction in which a total of 3,293,467 shares were issued. ViewStar issued 2,126,024 shares in repayment of $2,000 subordinated notes outstanding plus the related accrued interest of $148 and issued 1,167,444 shares for $1,179 in cash. All preferred shares were converted to common stock in 1996. 9. INCOME TAXES The components of earnings before income taxes are as follows:
1997 1996 1995 ------- ------ ------ U.S. operations......................................... $10,073 $6,524 $2,906 Foreign................................................. 3,901 1,382 682 ------- ------ ------ $13,974 $7,906 $3,588 ======= ====== ======
Components of income tax expense are summarized as follows:
1997 1996 1995 ------- ------ ------ Current: Federal............................................... $ 2,871 $4,053 $3,493 State................................................. 544 446 522 Foreign............................................... 1,239 705 276 ------- ------ ------ Total current................................. 4,654 5,204 4,291 Deferred -- Federal..................................... (437) (916) (140) ------- ------ ------ $ 4,217 $4,288 $4,151 ======= ====== ======
Income tax expense on earnings before income taxes differs from "expected" income tax expense as computed by applying the U.S. federal income tax rate of 34% as follows:
1997 1996 1995 ------- ------ ------ Computed "expected" tax expense......................... $ 4,751 $2,688 $1,220 Research and experimentation tax credits and foreign tax credits........................................... (462) (387) (100) State income taxes, net of federal benefit.............. 359 296 355 Reduction of valuation allowance........................ (1,065) -- -- Losses of subsidiary not currently deductible........... -- 301 2,503 Purchase of in-process research and development......... -- 1,464 -- Merger related costs.................................... -- 438 -- Foreign taxes withheld.................................. -- 161 226 Other................................................... 634 (673) (53) ------- ------ ------ $ 4,217 $4,288 $4,151 ======= ====== ======
F-15 43 MOSAIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED) Deferred income tax assets and liabilities are comprised of the following at December 31:
1997 1996 ------- -------- Capitalized software development costs, net of amortization.............................................. $ 316 $ 678 Contract revenue............................................ 233 415 ------- -------- Deferred tax liabilities.................................. 549 1,093 ------- -------- Provision for doubtful receivables.......................... 655 940 Provision for inventory obsolescence........................ 161 219 Provision for warranties and returns........................ 230 143 Unearned revenue............................................ 1,284 1,130 Provision for accrued compensation.......................... 1,595 1,580 Net operating loss carryforwards............................ 7,064 8,649 Research and experimentation tax credit carryforwards....... 1,211 1,086 Other....................................................... 736 454 ------- -------- Gross deferred tax assets................................. 12,936 14,201 Deferred tax asset valuation allowance.................... (10,212) (11,370) ------- -------- Deferred tax assets....................................... 2,724 2,831 ------- -------- Net deferred tax assets................................... $ 2,175 $ 1,738 ======= ========
As of December 31, 1997, the Company had net operating loss carryforwards for federal income tax purposes of approximately $20,053, expiring in the years 2004 through 2011, and net operating loss 'carryforwards for state income tax purposes of approximately $7,605, expiring in the years 1999 through 2009. The Company also had federal and state research and experimentation tax credit carryforwards of approximately $997 and $630, respectively, which expire in the years 2000 through 2009. Utilization of the Company's net operating loss carryforwards and research and experimentation tax credit carryforwards and other deferred income tax assets which relate primarily to ViewStar are subject to Internal Revenue Code Section 382 limitations due to a change of ownership. Due to uncertainty regarding their recoverability, the Company has established valuation allowances for the related deferred income tax assets. With regard to the remaining deferred income tax assets, it is more likely than not that the results of future operations will generate sufficient taxable income to recognize the net deferred income tax assets. The deferred income tax valuation allowance decreased $1,158 and $940 in 1997 and 1996, respectively. F-16 44 MOSAIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED) 10. EARNINGS PER SHARE The following table reconciles the numerator and the denominator of the basic and diluted per share computations for earnings (loss) per share.
NET EARNINGS WEIGHTED (LOSS) AVERAGE SHARES EARNINGS (IN 000'S) (IN 000'S) (LOSS) PER (NUMERATOR) (DENOMINATOR) SHARE ------------ -------------- ---------- 1997: Basic earnings per share.................... $9,757 13,169 $ 0.74 Effect of dilutive stock options............ -- 498 ------ ------ Diluted earnings per share.................. $9,757 13,667 $ 0.71 ====== ====== 1996: Basic earnings per share.................... $3,618 12,677 $ 0.29 Effect of dilutive stock options and convertible preferred stock.............. -- 893 ------ ------ Diluted earnings per share.................. $3,618 13,570 $ 0.27 ====== ====== 1995: Basic and dilutive loss per share........... $ (563) 9,846 $(0.06) ====== ======
Stock options and convertible preferred stock were not included in the computation of diluted loss per share for 1995 because the representative share increments would be anti-dilutive. In addition, options to purchase shares of common stock where the exercise price exceeded the average market price were excluded from the computations in 1997 and 1996 because they would be anti-dilutive. Anti-dilutive stock options and convertible preferred stock excluded from the computations are as follows:
ANTI-DILUTIVE OPTIONS AND STOCK (IN 000'S) EXERCISE PRICE ----------------- --------------- 1997.............................................. 1,154 $12.13 - $19.75 1996.............................................. 251 $16.06 - $19.75 1995.............................................. 3,793 $ 0.51 - $12.88
11. COMMITMENTS AND CONTINGENCIES a. 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's matching contributions to the Profit Sharing Plan were $752, $471 and $409 for 1997, 1996 and 1995, respectively. b. Lease Commitments. The Company leases its office and warehouse space under terms of noncancelable operating leases expiring at various dates through 2009. F-17 45 MOSAIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED) Future minimum lease payments under noncancelable operating leases at December 31, 1997 are as follows: 1998....................................................... $ 3,134 1999....................................................... 2,684 2000....................................................... 1,950 2001....................................................... 1,811 2002....................................................... 1,811 Thereafter................................................. 13,258 ------- $24,648 =======
Rent expense under noncancelable operating leases amounted to $3,176, $2,712 and $2,907 for 1997, 1996 and 1995, respectively. c. Litigation. The Company is subject to various legal proceedings that arise in the ordinary course of its business. While the outcome of these proceedings cannot be predicted with certainty, the Company believes that none of such proceedings, individually or in the aggregate will have a material adverse effect on the Company's business or financial condition. 12. GEOGRAPHIC SEGMENT INFORMATION The Company's products are marketed internationally through its subsidiaries in the United Kingdom, the U.S. parent and independent distributors.
1997 1996 1995 -------- -------- -------- Revenue -- U.S. operations: United States.................................... $ 89,153 $ 94,870 $ 75,593 United States export............................. 14,477 12,083 12,289 Revenue -- International operations: Foreign subsidiaries............................. 17,514 10,228 5,366 -------- -------- -------- $121,144 $117,181 $ 93,248 ======== ======== ======== Operating income: U.S. operations.................................. $ 8,045 $ 4,235 $ 1,355 Foreign subsidiaries............................. 3,936 1,867 382 Eliminations..................................... (215) 130 121 -------- -------- -------- $ 11,766 $ 6,232 $ 1,858 ======== ======== ======== Assets: U.S. operations.................................. $ 74,725 $ 85,235 $ 90,597 Foreign subsidiaries............................. 9,653 5,528 2,974 -------- -------- -------- $ 84,378 $ 90,763 $ 93,571 ======== ======== ========
13. RESTRUCTURING CHARGES During 1997, Mosaix incurred $948 of expenses for severance pay and related costs from streamlining operations. During 1995, ViewStar incurred $1,240 for a similar reduction in headcount. F-18 46 MOSAIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS, UNLESS OTHERWISE INDICATED) 14. QUARTERLY FINANCIAL DATA (UNAUDITED) The following table summarizes the unaudited statement of operations for each quarter of 1997 and 1996:
FIRST SECOND THIRD FOURTH TOTAL ------- ------- ------- ------- -------- 1997: Revenue....................... $30,614 $31,674 $28,043 $30,813 $121,144 Operating income.............. 3,600 4,412 991 2,763 11,766 Net earnings.................. 2,918 3,336 1,149 2,354 9,757 Basic earnings per share...... 0.22 0.25 0.09 0.19 0.74 Diluted earnings per share.... 0.21 0.24 0.08 0.18 0.71 1996: Revenue....................... $26,997 $28,585 $30,202 $31,397 $117,181 Operating income (loss)....... (1,829) 3,569 4,083 409 6,232 Net earnings (loss)........... (2,413) 2,643 3,292 96 3,618 Basic earnings (loss) per share...................... (0.21) 0.21 0.25 0.01 0.29 Diluted earnings (loss) per share.................. (0.21) 0.19 0.24 0.01 0.27
The quarterly earnings (loss) per share presented above may not total to the year end totals due to changes in the weighted average common shares and common equivalent shares outstanding during the year. F-19 47 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Mosaix, Inc.: Under date of February 2, 1998, we reported on the consolidated balance sheets of Mosaix, Inc. and subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997, as contained in the 1997 annual report on Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule of valuation and qualifying accounts. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this consolidated financial statement schedule based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respect the, information set forth therein. KPMG Peat Marwick LLP Seattle, Washington February 2, 1998 F-20 48 MOSAIX, INC. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- --------- ------------ ---------- -------- BALANCE AT CHARGED TO BALANCE BEGINNING OTHER COSTS (1) AT END DESCRIPTION OF YEAR AND EXPENSES DEDUCTIONS OF YEAR ----------- --------- ------------ ---------- -------- Year ended December 31, 1997: Valuation accounts deducted from assets: Allowance for doubtful receivables........ $2,016 $694 $464 $2,246 ====== ==== ==== ====== Year ended December 31, 1996: Valuation accounts deducted from assets: Allowance for doubtful receivables........ $1,863 $395 $242 $2,016 ====== ==== ==== ====== Year ended December 31, 1995: Valuation accounts deducted from assets: Allowance for doubtful receivables........ $1,581 $794 $512 $1,863 ====== ==== ==== ======
- --------------- (1) Represents amounts written off. F-21 49 EXIBIT INDEX
EXHIBITS -------- 2.1 Agreement and Plan of Merger, dated October 14, 1996, among the Registrant, Vision Merger Corporation and ViewStar Corporation (I) 3.1 Restated Articles of Incorporation of the Registrant (B) 3.2 Restated Bylaws of the Registrant (D) 4.1 Form of Certificate Evidencing Common Stock, par value $0.01 per share (B) 4.2 Warrant to purchase 12,245 shares of ViewStar Common Stock issued to Comdisco, Inc. dated May 31, 1996 (I) 10.1 Restated 1987 Stock Option Plan, as amended* (H) 10.2 1996 Management and Company Performance Bonus Plan* (H) 10.3 1997 Management and Company Performance Bonus Plan* (J) 10.4 Restated 1992 Stock Option Plan for Non-Employee Directors, as amended* (H) 10.5 1991 Employee Stock Purchase Plan, as amended* (F) 10.6 Executive Employment Agreement dated as of November 8, 1994 with Patrick S. Howard* (E) 10.7 Executive Employment Agreement dated as of March 1, 1995 with Thomas R. Clark* (G) 10.8 Executive Employment Agreement dated as of March 1, 1995 with John J. Flavio* (G) 10.9 Executive Employment Agreement dated as of March 1, 1995 with Edmund D. Wilsbach* (G) 10.10 Lease for Building 17 dated January 15, 1991 among Michael E. Mastro, Redmond East Associates and the Registrant (C) 10.11 Business Loan Agreement dated June 25, 1997 with Seattle-First National Bank (A) 10.12 Customer Purchase Agreement dated December 27, 1990 with Summa Four, Inc.** (D) 10.13 Software Source Code and Manufacturing Data Deposit and Escrow Agreement dated December 27, 1990 with Summa Four, Inc. and Data Securities International Ind.** (D) 10.14 Purchase Agreement (AWA 99) with Hewlett Packard, dated March 1, 1995 (H) 10.15 Shareholders Agreement, dated October 14, 1996, with certain former shareholders of ViewStar Corporation (I) 10.16 ViewStar Corporation Amended 1986 Incentive Stock Plan and form of agreement thereunder* (I) 10.17 ViewStar Corporation Amended 1994 Stock Plan, as amended, and form of agreement thereunder* (I) 10.18 ViewStar Corporation 1996 Incentive Stock Plan* (I) 10.19 Sublease Agreement between the ASK Group, Inc. and ViewStar Corporation, dated October 8, 1993, for ViewStar's facility located at 1101 Marina Village Parkway, Alameda, California (I) 10.20 First Amendment to Sublease Agreement between the ASK Group, Inc. and ViewStar Corporation, dated September 8, 1994, for ViewStar's facility located at 1101 Marina Village Parkway, Alameda, California (A) 10.21 Promissory Note issued by Kamran Kheirolomoom to ViewStar Corporation dated July 2, 1996* (I) 10.22 Executive Employment Agreement, dated October 14, 1996, between Kamran Kheirolomoom and the Registrant* (I)
50
EXHIBITS -------- 10.23 Executive Employment Agreement, dated October 14, 1996, between Robert I. Pender, Jr. and the Registrant* (I) 10.24 Executive Employment Agreement, dated October 14, 1996, between Gayle A. Crowell and the Registrant* (I) 10.25 Executive Employment Agreement, dated October 14, 1996, between Steve Russell and the Registrant* (A) 10.26 Executive Employment Agreement, dated February 14, 1996, between Steve L. Adams and the Registrant* (A) 10.27 Executive Employment Agreement, dated July 1, 1997, between Omar Saleh and the Registrant* (A) 10.28 Executive Employment Agreement, dated February 5, 1998, between Jeff Jarvis and the Registrant* (A) 10.29 Executive Employment Agreement, dated February 5, 1998, between Bruce Leader and the Registrant* (A) 10.30 Executive Employment Agreement, dated February 5, 1998, between Nicholas A. Tiliacos and the Registrant* (A) 10.31 Lease Agreement between Millennium Corporate Park, L.L.C. and the Registrant, dated December 11, 1997, for the Company's corporate headquarters in Redmond, Washington (A) 10.32 1998 Management and Performance Bonus Plans* (A) 21.1 List of Subsidiaries of the Registrant (A) 23.1 Consent of KPMG Peat Marwick LLP (A) 27.1 Financial Data Schedule (A)
- --------------- * Management contract or compensation plan. ** Confidential treatment has been requested with respect to portions of the agreement. (A) Filed herewith. (B) Incorporated by reference from exhibits filed in connection with the Registrant's Registration Statement on Form S-1 (Registration No. 33-34561) filed with the Securities and Exchange Commission on April 26, 1990, as amended. (C) Incorporated by reference from exhibits filed in connection with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990. (D) Incorporated by reference from exhibits filed in connection with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992. (E) Incorporated by reference from exhibits filed in connection with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. (F) Incorporated by reference from exhibits filed in connection with the Registrant's Annual Report on Form 10-K/A for the year ended December 31, 1994. (G) Incorporated by reference from exhibits filed in connection with the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. (H) Incorporated by reference from exhibits filed in connection with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. (I) Incorporated by reference from exhibits filed in connection with the Registrant's Registration Statement on Form S4 (Registration No. 333-14887) initially filed with the Securities and Exchange Commission on October 25, 1996. (J) Incorporated by reference from exhibits filed in connection with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996. EX-10.11 2 BUSINESS LOAN AGREEMENT DATED JUNE 25, 1997 1 EXHIBIT 10.11 [SEAFIRST LOGO] MOSAIX, INC. SUMMARY TERM SHEET CREDIT FACILITY: 1. REVOLVING LINE OF CREDIT BORROWER: Mosaix, Inc. LINE AMOUNT: Ten Million Dollars ($10,000,000). LOAN PURPOSE: Working capital and general corporate purposes. INTEREST RATE: Options: - Bank of America's publicly announced reference rate; or - Adjusted LIBOR plus 130 basis points. Term Option: - Bank of America's publicly announced reference rate; or - Adjusted LIBOR plus 175 basis points FEE: Commitment Fee: - 0.20 of 1.00 percent per annum, payable quarterly in arrears. Fee upon execution of Term Option: - 0.125 of 1.00 percent of the principal outstanding at time of conversion. EXPIRATION: May 31, 1998. EXPIRATION TERM OPTION: On or before May 31, 1998, Borrower shall have the option to convert revolving credit line to a two-year term loan. REPAYMENT TERM OPTION: Repayable in twenty-four equal monthly principal installments, plus monthly interest. COLLATERAL: Unsecured. II. OTHER TERMS BUSINESS LOAN AGREEMENT: - Amendment to existing Business Loan Agreement to be signed by Borrower and Bank. REPORTING REQUIREMENTS: - Annual audited financial statements and 10-K report within 120 days. - Quarterly company-prepared financial statements and 10-Q report within 45 days. - Annual forecast income statement within 75 days. FINANCIAL COVENANTS: - Minimum current ratio 1.75:1 (Previously 2.50:1) - Minimum working capital $22,000,000 (Unchanged) - Minimum tangible net worth $45,000,000 (Previously $42,000,000) - Maximum debt-to-worth 1.00:1 (Unchanged) TERM OPTION: - Minimum operating cash flow/CPLTD (Unchanged). Definition: Operating income of not less than $500,000 plus depreciation and amortization expense divided by scheduled principal payment of long-term debt plus interest expense on a four quarter trailing average, tested quarterly. 2 AMENDMENT TO BUSINESS LOAN AGREEMENT This Agreement is made between Bank of America National Trust and Savings Association, doing business as Seafirst Bank, successor by merger to Bank of America NW, N.A. ("Bank") and Mosaix, Inc., a Washington Corporation and successor by name change to Digital Systems International, Inc. ("Borrower"). Bank and Borrower are parties to a Business Loan Agreement and wish to make certain revisions to their loan arrangements as set forth in that Agreement. Upon execution hereof, that Agreement shall be amended as follows effective immediately: PART A: Availability Period: Availability period is hereby extended to May 31, 1998. PART B, SECTION 4.2 is hereby amended: Maintain current assets in an amount at least equal to 1.75 times current liabilities, and not less than $22,000,000. PART B, SECTION 4.3 is hereby amended: Maintain a tangible net worth of at least $45,000,000 and not permit Borrower's total indebtedness which is not subordinated in a manner satisfactory to Bank to exceed 1.00 times Borrower's tangible net worth. Except as specifically set forth herein, all provisions of the Agreement remain in full force and effect. This Amendment to Business Loan Agreement is executed by the parties on this 25 day of June, 1997. SEAFIRST BANK Western Wholesale Banking Division By: /s/ STEVEN E. MELBY ------------------- Steven E. Melby Vice President MOSAIX, INC. By: /s/ JOHN J. FLAVIO ------------------ John J. Flavio Senior Vice President - Finance & Administration 3 [SEAFIRST BANK LOGO] LOAN MODIFICATION AGREEMENT - ----------------------------------------------------------------------------- This agreement amends the MASTER NOTE FOR MULTIPLE ADVANCES - BUSINESS PURPOSE dated MAY 31, 1995 ("Note") executed by DIGITAL SYSTEMS INTERNATIONAL, INC. ("Borrower") in favor of Bank of America N.T.&S.A., doing business as Seafirst Bank, successor by name change to Seattle-First National Bank ("Bank"), regarding a loan in the maximum principal amount of $10,000,000.00 (the "Loan"). For mutual consideration, Borrower and Bank agree to amend the above loan documents as follow: 1. Maturity Date. The maturity date of the Note is changed to MAY 31, 1998. Bank's commitment to make advances to Borrower under its line of credit is also extended to MAY 31, 1998. 2. Name change. Borrower's name has been changed from Digital Systems International, Inc. to Mosaix, Inc. 3. Other Terms. Except as specifically amended by this agreement or any prior amendment, all other terms, conditions, and definitions of the Note and all other security agreements, guarantees, deeds of trust, mortgages, and other instruments or agreements entered into with regard to the Loan shall remain in full force and effect. DATED JUNE 3, 1997. Bank: Borrower: SEAFIRST BANK MOSAIX, INC. By: /s/ STEVEN E. MELBY By: /s/ JOHN J. FLAVIO -------------------------------- -------------------------------- Title: Vice President Title: Sr. Vice President ----------------------------- ----------------------------- 4 [SEAFIRST LOGO] BUSINESS LOAN AGREEMENT Part A This Seafirst Business Loan Agreement ("Agreement") is made between Bank of America NW, N.A., doing business as Seafirst Bank, ("Bank") and Digital Systems International, Inc. ("Borrower") with respect to the following: LINE OF CREDIT Subject to the terms of this Agreement, Bank will make loans to Borrower under a revolving line of credit as follows: Total Amount Available: Borrower may borrow, repay and reborrow up to a maximum of Ten Million Dollars ($10,000,000.00). Availability Period: Date of Note through May 31, 1997. However, if loans are made and/or new promissory notes executed after the last date, such advances will be subject to the terms of this Agreement until repaid in full unless a written statement signed by the Bank and Borrower provides otherwise, or a replacement loan agreement is executed. The making of such additional advances alone, however, does not constitute a commitment by the Bank to make any further advances or extend the availability period. Term Period: On any Business Day prior to May 31, 1997, so long as Borrower is then in compliance in all respects with the terms and conditions of the Business Loan Agreement, Borrower may elect, in writing delivered to Bank, to convert the loan represented by the Note from a revolving loan to a term loan to be repaid in 24 equal monthly principal installments of the principal amount outstanding under the facility on the date of conversion, provided that the maturity date for this Term Period shall not extend beyond May 31, 1998. The Term Period shall mean the period beginning on the earlier of (a) the date such election is made, or (b) May 31, 1996 (the Conversion Date). Borrower shall pay to Bank a Conversion Fee on the Conversion Date equal to 0.125% of the outstanding principal balance of the Note on the Conversion Date; and the nonusage fee provided for below shall cease to accrue on the Conversion Date. Borrower shall pay to Bank on the Conversion Date the remaining accrued but unpaid nonusage fee. Interest Rate: At Borrower's option: (a) Bank's publicly announced prime rate plus 0.00% percent of principal per annum, adjusted on the date of any Bank prime rate change, or; (b) Adjusted LIBOR Rate shall mean for any day that per annum rate equal to the sum of (a) the Margin of 1.30%, (b) the Assessment Rate, if any, and (c) the quotient of (i) the LIBOR Rate as determined for such day, divided by (ii) the Reserve Adjustment. The Adjusted LIBOR Rate on the first day of each Interest Period and on the effective day of any change in the Assessment Rate or Reserve Adjustment. The Adjusted LIBOR Rate shall be for periods of one, two, three or six months. Page 1 5 (c) In the event Borrower elects the Term Option provided for above, the Margin referred to in paragraph (b) above shall be 1.75%. (d) Bank's reserve adjusted Fixed Rate Index as quoted by Bank on the date the funds are converted for the period for which the rate is being fixed plus 1.75%. The Fixed Rate Index will be adjusted at the holder's option to reflect the holder's cost of statutory reserves, deposit insurance, regulatory capital, taxes and assessments. Interest Rate Basis: All interest will be calculated at the per annum interest rate based on a 360-day year and applied to the actual number of days elapsed. Prepayment: Bank may assess a prepayment fee in the event of a partial or complete prepayment. Such prepayment fee will be fully defined and disclosed to Borrower at the time the interest rate is fixed. Conversion Fee: On the Conversion Date set forth in the Term Period section above, Borrower shall pay the Conversion Fee described therein; provided that no Conversion Fee shall be due if Borrower pays the Note in full at the end of the revolving period without converting to the Term Period. Fee on Unutilized Portion of Line: On June 30, 1996 and every quarter thereafter, Borrower shall pay a fee based on the average daily unused portion of the line of credit. This fee is calculated as follows: 1/5 of 1.00% per annum, payable quarterly in arrears. This nonusage fee shall cease to accrue on the Conversion Date (as defined above). Borrower shall pay back to Bank on the Conversion Date the remaining accrued but unpaid nonusage fee. Repayment: At the times and in amounts as set forth in note(s) required under Part B Article 1 of this Agreement. Collateral: Unsecured. Page 2 6 [SEAFIRST LOGO] BUSINESS LOAN AGREEMENT PART B 1. PROMISSORY NOTE(S). All loans shall be evidenced by promissory notes in a form and substance satisfactory to Bank. 2. CONDITIONS TO AVAILABILITY OF LOAN/LINE OF CREDIT. Before Bank is obligated to disburse/make any advance, or at any time thereafter which Bank deems necessary and appropriate, Bank must receive all of the following, each of which must be in form and substance satisfactory to Bank ("loan documents"): 2.1 Original, executed promissory note(s); 2.2 Original executed security agreement(s) and/or deed(s) of trust covering the collateral described in Part A; N/A 2.3 All collateral described in Part A in which Bank wishes to have a possessory security interest; N/A 2.4 Financing statement(s) executed by Borrower; N/A 2.5 Such evidence that Bank may deem appropriate that the security interests and liens in favor of Bank are valid, enforceable, and prior to the rights and interests of others except those consenting to in writing by Bank; N/A +2.6 The following guaranty(ies) in favor of the Bank; N/A +2.7 Subordination agreement(s) in favor of Bank executed by; N/A 2.8 Evidence that the execution, delivery, and performance by Borrower of this Agreement and the execution, delivery, and performance by Borrower and any corporate guarantor or corporate subordinating creditor of any instrument or agreement required under this Agreement, as appropriate, have been duly authorized; 2.9 Any other document which is deemed by the Bank to be required from time to time to evidence loans or to effect the provisions of this Agreement; 2.10 If requested by Bank, a written legal opinion expressed to Bank, of counsel for Borrower as to the matters set forth in sections 3.1 and 3.2, and to the best of such counsel's knowledge after reasonable investigation, the matters set forth in sections 3.3, 3.5, 3.6, 3.7, 3.8 and such other matters as the Bank may reasonably request; N/A 2.11 Pay or reimburse Bank for any out-of-pocket expenses expended in making or administering the loans made hereunder including without limitation attorney's fees (including allocated costs of in-house counsel); +2.12 Other (describe): N/A Page 3 Rev. 11/93 7 3. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Bank, except as Borrower has disclosed to Bank in writing, as of the date of this Agreement and hereafter so long as credit granted under this Agreement is available and until full and final payment of all sums outstanding under this Agreement is available and until full and final payment of all sums outstanding under this Agreement and promissory notes that: +3.1 Borrower is duly organized and existing under the laws of the state of its organization as a: General Limited Sole X Corporation Partnership Partnership Proprietorship --- --- --- --- dba ---------------------------- Borrower is properly licensed and in good standing in each state in which Borrower is doing business and Borrower has qualified under, and complied with, where required, the fictitious or trade name statutes of each state in which Borrower is doing business, and Borrower has obtained all necessary government approvals for its business activities; the execution, delivery, and performance of this Agreement and such notes and other instruments required herein are within Borrower's powers, have been duly authorized, and, as to Borrower and any guarantor, are not in conflict with the terms of any charter, bylaw, or other organization papers of Borrower, and this Agreement, such notes and the loan documents are valid and enforceable according to their terms; 3.2 The execution, delivery, and performance of this Agreement, the loan documents and any other instruments are not in conflict with any law or any indenture, agreement or undertaking to which Borrower is a party or by which Borrower is bound or affected; 3.3 Borrower has title to each of the properties and assets as reflected in its financial statements (except such assets which have been sold or otherwise disposed of in the ordinary course of business), and no assets or revenues of the Borrower are subject to any lien except as required or permitted by this Agreement, disclosed in its financial statements or otherwise previously disclosed to Bank in writing; 3.4 All financial information, statements as to ownership of Borrower and all other statements submitted by Borrower to Bank, whether previously or in the future, are and will be true and correct in all material respects upon submission and are and will be complete upon submission insofar as may be necessary to give Bank a true and accurate knowledge of the subject matter thereof; 3.5 Borrower has filed all tax returns and reports as required by law to be filed and has paid all taxes and assessments applicable to Borrower or to its properties which are presently due and payable, except those being contested in good faith; 3.6 There are no proceedings, litigation or claims (including unpaid taxes) against Borrower pending or, to the knowledge of the Borrower, threatened, before any court or government agency, and no other event has occurred which may have a material adverse effect on Borrower's financial condition; 3.7 There is no event which is, or with notice or lapse of time, or both, would be, an Event of Default (as defined in Section 7) under this Agreement; 4. AFFIRMATIVE COVENANTS. So long as credit granted under this Agreement is available and until full and final payment of all sums outstanding under this Agreement and promissory note(s) Borrower will: +4.1 Use the proceeds of the loans covered by this Agreement only in connection with Borrower's business activities and exclusively for the following purposes: Working capital and general corporate purposes. +4.2 Maintain current assets in an amount at least equal to 2.50 times current liabilities, and not less than $22,000,000. Current assets and current liabilities shall be determined in accordance with generally accepted accounting principles and practices, consistently applied; +4.3 Maintain a tangible net worth of at least $42,000,000 and not permit Borrower's total indebtedness which is not subordinated in a manner satisfactory to Bank to exceed Page 4 Rev. 11/93 8 1.00 times Borrower's tangible net worth. "Tangible net worth" means the excess of total assets over total liabilities, excluding, however, from the determination of total assets (a) all assets which should be classified as intangible assets such as goodwill, patents, trademarks, copyrights, franchises, and deferred charges (including unamortized debt discount and research and development costs), (b) treasury stock, (c) cash held in a sinking or other similar fund established for the purpose of redemption or other retirement of capital stock, (d) to the extent not already deducted from total assets, reserves for depreciation, depletion, obsolescence or amortization of properties and other reserves or appropriations of retained earnings which have been or should be established in connection with the business conducted by the relevant corporation, and (e) any revaluation or other write-up in book value of assets subsequent to the fiscal year of such corporation last ended at the date of this Agreement. "Tangible Net Worth" definition - tangible assets to include net capitalized software costs of Borrower; 4.4 N/A +4.5 Promptly give written notice to Bank of: (a) all litigation and claims made or threatened affecting Borrower where the amount is $1,000,000 or more; (b) any substantial dispute which may exist between Borrower and any governmental regulatory body or law enforcement authority; (c) any Event of Default under this Agreement or any other agreement with Bank or any other creditor or any event which become an Event of Default; and (d) any other matter which has resulted or might result in a material adverse change in Borrower's financial condition or operations; +4.6 Borrower shall as soon as available, but in any event within 120 days following the end of each Borrower's fiscal years and within 45 days following the end of each quarter provide to Bank, in a form satisfactory to Bank such financial statements, Form 10-K Reports and Form 10-Q Reports and other information respecting the financial condition and operations of Borrower as Bank may reasonably request. Borrower's fiscal year financial statement shall be audited by an independent certified public accounting firm. 4.7 Borrower will maintain in effect insurance with responsible insurance companies in such amounts and against such risks as is customarily maintained by persons engaged in businesses similar to that of Borrower and all policies covering property given as security for the loans shall have loss payable clauses in favor of Bank. Borrower agrees to deliver to Bank such evidence of insurance as Bank may reasonably require and, within thirty (30) days after notice from Bank, to obtain such additional insurance with an insurer satisfactory to the Bank; 4.8 Borrower will pay all indebtedness taxes and other obligations for which the Borrower is liable or to which its income or property is subject before they shall become delinquent, except any which is being contested by the Borrower in good faith; 4.9 Borrower will continue to conduct its business as presently constituted, and will maintain and preserve all rights, privileges and franchises now enjoyed, conduct Borrower's business in an orderly, efficient and customary manner, keep all Borrowers properties in good working order and condition, and from time to time make all needed repairs, renewals or replacements so that the efficiency of Borrower's properties shall be fully maintained and preserved; 4.10 Borrower will maintain adequate books, accounts and records and prepare all financial statements required hereunder in accordance with generally accepted accounting principles and practices consistently applied, and in compliance with the regulations of any governmental regulatory body having jurisdiction over Borrower or Borrower's business; 4.11 Borrower will permit representatives of Bank to examine and make copies of the books and records of Borrower and to examine the collateral of the Borrower at reasonable times; 4.12 Borrower will perform, on request of Bank, such acts as may be necessary or advisable to perfect any lien or security interest provided for herein or otherwise carry out the intent of this Agreement; 4.13 Borrower will comply with all applicable federal, state and municipal laws, ordinances, rules and regulations relating to its properties, charters, businesses and operations, including compliance with all minimum funding and other requirements related to any of Borrower's employee benefit plans; 4.14 Borrower will permit representatives of Bank to enter onto Borrower's properties to inspect and test Borrower's properties as Bank, in its sole discretion, may deem appropriate to determine Borrower's compliance with section 5.8 of this Agreement; provided, however, that any such inspections and tests shall be for Bank's sole benefit and shall not be Page 5 Rev. 11/93 9 construed to create any responsibility or liability on the part of Bank to Borrower or to any third party. 4.15 In the event Borrower elects to convert the loan represented by the Note from a revolving loan to a term loan, Borrower shall maintain minimum Debt Service Coverage of at least 1.20:1. Debt Service Coverage shall be defined as Operating Income of not less than $500,000 plus Depreciation and Amortization divided by scheduled principal payments of long-term debt plus interest expense on a four quarter trailing average, tested quarterly. Operating income is that amount scheduled in Borrower's financial statements. 5. NEGATIVE COVENANTS. So long as credit granted under this Agreement is available and until full and final payment of all sums outstanding under this Agreement and promissory note(s): *5.1 N/A; 5.2 N/A; *5.3 N/A; 5.4 N/A; *5.5 N/A; 5.6 Borrower will not liquidate or dissolve or enter into any consolidation, merger, pool, joint venture, syndicate or other combination, or sell, lease, or dispose of Borrower's business assets as a whole or such as in the opinion of Bank constitute a substantial portion of Borrower's business or assets; 5.7 Borrower will not engage in any business activities or operations substantially different from or unrelated to present business activities or operations; and 5.8 N/A; 6. WAIVER, RELEASE AND INDEMNIFICATION. Borrower hereby: (a) releases and waives any claims against Bank for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any of the applicable federal, state or local laws, regulations or ordinances, including without limitation those described in section 3.8, and (b) agrees to indemnify and hold Bank harmless from and against any and all claims, losses, liabilities, damages, penalties and expenses which Bank may directly or indirectly sustain or suffer resulting from a breach of (i) any of Borrower's representations and warranties with respect to hazardous wastes and hazardous substances contained in section 3.8, or (ii) section 5.8. The provisions of this section 6 shall survive the full and final payment of all sums outstanding under this Agreement and promissory notes and shall not be affected by Bank's acquisition of any interest in any of the Borrower's properties, whether by foreclosure or otherwise. 7. Events of Default. The occurrence of any of the following events ("Events of Default") shall terminate any and all obligations on the part of Bank to make or continue the loan and/or line of credit and, at the option of Bank, shall make all sums of interest and principal outstanding under the loan and/or line of credit immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of non payment or dishonor, or other notices or demands of any kind or character, all of which are waived by Borrower, and Bank may proceed with collection of such obligations and enforcement and realization upon all security which it may hold and to the enforcement of all rights hereunder or at law: 7.1 The Borrower shall fail to pay when due any amount payable by it hereunder on any loans or notes executed in connection herewith; 7.2 Borrower shall fail to comply with the provisions of any other covenant, obligation or term of this Agreement for a period of fifteen (15) days after the earlier of written notice thereof shall have been given to the Borrower by Bank or Borrower or any Guarantor has knowledge of an Event of Default or an event that can become an Event of Default; 7.3 Borrower shall fail to pay when due any other obligation for borrowed money, or to perform any term or covenant on its part to be performed under any agreement relating to such obligation or any such other debt shall be declared to be due and payable and such failure shall continue after the applicable grace period; 7.4 Any representation or warranty made by Borrower in this Agreement or in any other statement to Bank shall prove to have been false or misleading in any material respect when made; Page 6 Rev. 11/93 10 7.5 Borrower makes an assignment for the benefit of creditors, files a petition in bankruptcy, is adjudicated insolvent or bankrupt, petitions to any court for a receiver or trustee for Borrower or any substantial part of its property, commences any proceeding relating to the arrangement, readjustment, reorganization of liquidation under any bankruptcy or similar laws, or if there is commenced against Borrower any such proceedings which remain undismissed for a period of thirty (30) days or, if Borrower by any act indicates its consent or acquiescence in any such proceeding or the appointment of any such trustee or receiver; +7.6 Any judgment attaches against Borrower or any of its properties for an amount in excess of $1,000,000 which remains unpaid, unstayed on appeal, unbonded, or undismissed for a period of thirty (30) days; 7.7 Loss of any required government approvals, and/or any governmental regulatory authority takes or institutes action which, in the opinion of Bank, will adversely affect Borrower's condition, operations or ability to repay the loan and/or line of credit; 7.8 Failure of Bank to have a legal, valid and binding first lien on, or a valid and enforceable prior perfected security interest in, any property covered by any deed of trust or security agreement required under this Agreement; 7.9 Borrower ceases to exist as a going concern; 7.10 Occurrence of an extraordinary situation which gives Bank reasonable grounds to believe that Borrower may not, or will be unable to, perform its obligations under this or any other agreement between Bank and Borrower; or 7.11 Any of the preceding events occur with respect to any guarantor of credit under this Agreement, or such guarantor dies or becomes incompetent, unless the obligations arising under the guaranty and related agreements have been unconditionally assumed by the guarantor's estate in a manner satisfactory to Bank. 8. SUCCESSORS; WAIVERS. Notwithstanding the Events of Default above, this Agreement shall be binding upon and inure to the benefit of Borrower and Bank, their respective successors and assigns, except that Borrower may not assign its rights hereunder. No consent or waiver under this Agreement shall be effective unless in writing and signed by the Bank and shall not waive or affect any other default, whether prior or subsequent thereto, and whether of the same or different type. No delay or omission on the part of the Bank in exercising any right shall operate as a waiver of such right or any other right. 9. ARBITRATION. 9.1 At the request of either Bank or Borrower any controversy or claim between the Bank and Borrower, arising from or relating to this Agreement or any Loan Document executed in connection with this Agreement or arising from any alleged tort shall be settled by arbitration in King County, Washington. The United States Arbitration Act will apply to the arbitration proceedings which will be administered by the American Arbitration Association under its commercial rules of arbitration except that unless the amount of the claim(s) being arbitrated exceeds $5,000,000 there shall be only one arbitrator. Any controversy over whether any issue is arbitrable shall be determined by the arbitrator(s). Judgment upon the arbitration award may be entered in any court having jurisdiction. The institution and maintenance of any action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of either party, including plaintiff, to submit the controversy or claim to arbitration if such action for judicial relief is contested. For purposes of the application of the statute of limitations the filing of an arbitration as provided herein is the equivalent of filing a lawsuit and the arbitrator(s) will have the authority to decide whether any claim or controversy is barred by the statute of limitations, and if so, to dismiss the arbitration on that basis. The parties consent to the joinder in the arbitration proceedings of any guarantor, hypothecator or other party having an interest related to the claim or controversy being arbitrated. 9.2 Notwithstanding the provisions of Section 9.1, no controversy or claim shall be submitted to arbitration without the consent of all parties if at the time of the proposed submission, such controversy or claim arises from or relates to an obligation secured by real property; 9.3 No provision of this Section 9 shall limit the right of the Borrower or the Bank to exercise self-help remedies such as setoff, foreclosure or sale of any collateral, or obtaining any ancillary provisional or interim remedies from a court of competent jurisdiction before, after or during the pendency of any arbitration proceeding. The exercise of any such remedy does not waive the right of either party to request arbitration. At Bank's open foreclosure Rev. 11/93 Page 7 11 under any deed of trust may be accomplished by exercise of the power of sale under the deed of trust or judicial foreclosure as a mortgage. 10. COLLECTION ACTIVITIES, LAWSUITS AND GOVERNING LAW. Borrower agrees to pay Bank all costs and expenses (including reasonable attorney's fees and the allocated cost for in-house legal services incurred by Bank), to enforce this Agreement, any notes or any Loan Documents pursuant to this Agreement, whether or not suit is instituted. If suit is instituted by Bank to enforce this Agreement, or any of these documents, Borrower consents to the personal jurisdiction of the Courts of the State of Washington and Federal Courts located in the State of Washington. Borrower further consents to the venue of this suit, being laid in King County, Washington. This Agreement and any notes and security agreements entered into pursuant to this Agreement shall be construed in accordance with the laws of the State of Washington. +11. ADDITIONAL PROVISIONS. Borrower agrees to the additional provisions set forth immediately following this Section 11 or on any Exhibit attached to and hereby incorporated into Agreement. This Agreement supersedes all oral negotiations or agreements between Bank and Borrower with respect to the subject matter hereof and constitutes the entire understanding and Agreement of the matters set forth in this Agreement. 11.1 If any provision of this Agreement is held to be invalid or unenforceable, then (a) such provision shall be deemed modified if possible, or if not possible, such provision shall be deemed stricken, and (b) all other provisions shall remain in full force and effect. 11.2 If the imposition of or any change in any law, rule, or regulation guideline or the interpretation or application of any thereof by any court of administrative or governmental authority (including any request or policy whether or not having the force of law) shall impose or modify any taxes (except U.S. federal, state or local income or franchise taxes imposed on Bank), reserve requirements, capital adequacy requirements or other obligations which would: (a) increase the cost to Bank for extending or maintaining any loans and/or line of credit to which this Agreement relates, (b) reduce the amounts payable to Bank under this Agreement, such notes and other instruments, or (c) reduce the rate of return on Bank's capital as a consequence of Bank's obligations with respect to any loan and/or line of credit to which this Agreement relates, then Borrower agrees to pay Bank such additional amounts as will compensate Bank therefor, within five (5) days after Bank's written demand for such payment, which demand shall be accompanied by an explanation of such imposition or charge and a calculation in reasonable detail of the additional amounts payable by Borrower, which explanation and calculations shall be conclusive, absent manifest error. 11.3 Bank may sell participations in or assign this loan in whole or in part without notice to Borrower and Bank may provide information regarding the Borrower and this Agreement to any prospective participant or assignee. If a participation is sold or the loan is assigned the purchaser will have the right to set off against the Borrower and may enforce its interest in the Loan irrespective of any claims or defenses the Borrower may have against the Bank. 11.4 Nothing in this Business Loan Agreement is intended to restrict the Borrower's normal business activities, including marketing new product lines similar to the existing product lines into existing markets or marketing the existing product lines into new markets. 11.5 Nothing in this Business Loan Agreement is intended to restrict the sale of a portion or all of the Borrower to new investors. However, if a controlling interest in the Borrower is to be sold to a new investor, the Bank shall have the right to demand immediate payment in full of all loans outstanding and accrued interest and fees prior to that sale. 11.6 Borrower will provide Bank with annual operating statement projections within 75 days of fiscal year-end. 12. NOTICES. Any notices shall be given in writing to the opposite party's signature below or as that party may otherwise specify in writing. 13. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW. Rev. 11/93 Page 8 12 This Business Loan Agreement (Parts A and B) executed by the parties on _______, 1996. Borrower acknowledges having read all of the provisions of this Agreement and Borrower agrees to its terms. SEAFIRST BANK Western Commercial Banking Division, Team 2 By: /s/ STEVEN E. MELBY -------------------------------- Steven E. Melby, Vice President Address: 10500 N.E. 8th Street, Suite 500 Bellevue, WA 98004 Phone: (206) 585-6390 Fax: (206) 585-6393 DIGITAL SYSTEMS INTERNATIONAL, INC. By: -------------------------------------- Patrick S. Howard, Chairman and C.E.O. By: /s/ JOHN J. ELEVIO -------------------------------------- John J. Elevio, Senior Vice President - Finance & Administration By: /s/ RICHARD L. ANDERSON -------------------------------------- Richard L. Anderson, Vice President/Controller Address: 6464 185th Avenue N.E. Redmond, WA 98052 Phone: (206) 881-7544 Fax: (206) 881-1871 Rev. 11/93 Page 9 EX-10.20 3 AMENDMENT NO. 1 TO SUBLEASE AGREEMENT W/ASK GROUP 1 EXHIBIT 10.20 FIRST AMENDMENT TO SUBLEASE AGREEMENT THIS AMENDMENT (the "Amendment") entered into as of the 8th day of September, 1994, between COMPUTER ASSOCIATES INTERNATIONAL, INC., (hereinafter called "Sublandlord"), as successor-in-interest to Ask Computer Systems, and VIEWSTAR CORPORATION (hereinafter called "Subtenant") hereby amends and modifies the Sublease entered into between Sublandlord and Subtenant dated October 8, 1993 (the "Sublease"). Capitalized terms used herein shall have the same meaning assigned to such terms in the Sublease, unless otherwise defined herein. W I T N E S S E T H WHEREAS, Subtenant desires to exercise part of its option under Article 13 of the Sublease to expand the Subleased Premises to include an additional 4,416 rentable square feet ("Expansion Space"); NOW, THEREFORE, in consideration of the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Article 1A entitled SUBLEASED PREMISES is hereby deleted in its entirety and replaced with the following: "Subleased Premises: Sublandlord hereby subleases to Subtenant, and Subtenant subleases from Sublandlord, a total of 48,416 square feet of Rentable Area consisting of the entire second floor of the Master Premises and approximately 17,652 square feet of Rentable Area located on the first floor of the Master Premises, in the location and configuration as shown on that floor plan ("Floor Plan") attached hereto as Exhibit "B-1" (the "Subleased Premises"). As used herein, the term "Rentable Area" shall have the meaning ascribed to it by the Master Lease, pursuant to the application of Section 6.A hereof." 2. For the purposes of the Expansion Space, the Commencement Date of this Sublease shall be September 9, 1994 ("Expansion Commencement Date"), and the Sublease shall terminate in accordance with the terms of the Sublease. The Expansion Space shall be in "as in" condition. Any references in the Sublease to improvements shall not be applicable to this Amendment. 3. Article 3 entitled RENT is hereby amended by adding the following as Articles A-1 and B-1: "A-1. Base Monthly Rent For Expansion Space During Initial Sublease Term: 2 Commencing on the Expansion Commencement Date, and thereafter on the first (1st) day of each calendar month occurring thereafter during the remainder of the Sublease Term, Subtenant shall pay to Sublandlord the following sum as Base Monthly Rent in addition to the Base Monthly Rent set forth in Article 3A. Any reference to Base Monthly Rent in the Sublease shall be deemed to include these amounts: (1) $1.160 per square foot of Expansion Space within the Subleased Premises for the period commencing on the Expansion Commencement Date and continuing until March 31, 1995; (2) $1.305 per square foot of Expansion Space within the Subleased Premises for the period commencing April 1, 1995 and continuing until March 31, 1998; (3) $1.468 per square foot of Expansion Space within the Subleased Premises for the period commencing April 1, 1998 and continuing until the expiration of the initial Sublease Term. Subtenant's obligation to pay rent shall be prorated at the commencement and termination of the Sublease Term. B-1. Base Monthly Rent for Expansion Space During Option Period: If the option to extend granted by Section 2.C hereof is exercised, the Base Monthly Rent payable for the Expansion Space during the option period shall be the following, in addition to the Base Monthly Rent set forth in Article 3B: (1) $1.468 per square foot of Expansion Space within the Subleased Premises for the period commencing June 1, 1999 and continuing until March 31, 2001; (2) $1.651 per square foot of Expansion Space within the Subleased Premises for the period commencing April 1, 2001 and continuing until March 31, 2004; (3) $1.857 per square foot of Expansion Space within the Subleased Premises for the period commencing April 1, 2004 and continuing until September 30, 2004." 4. Article 3D is amended by changing the fraction set forth in the third sentence thereof from 44,000/58,318 to 48,416/58,318. 5. The following language is added after the first sentence of Article 4 of the Sublease: "In addition, upon execution of the First Amendment to the Sublease, Subtenant shall deposit with Sublandlord Five Thousand, One Hundred and Twenty-Two and 56/100 Dollars ($5,122.56) in cash, as security for the performance by Subtenant of the terms and conditions of this Sublease." 3 6. Article 6(y) of the Sublease is amended by changing the address of the Sublandlord to: Computer Associates International, Inc. One Computer Associates Plaza Islandia, New York 11788-7000 Attn: Senior Vice President - Facilities with another copy to the same address: Attn. Legal Department 7. Article 13 of the Sublease is hereby amended to reduce the remaining optional Expansion Space to approximately 10,000 rentable square feet as a result of this Amendment. 8. The Sublease, as amended by this First Amendment to Sublease, and the Exhibits thereto, contains the entire agreement between the parties hereto and there are no agreements, warranties, or representations which are not set forth therein or herein. This Amendment may not be modified or amended except by an instrument in writing duly signed by or on behalf of the parties hereto. 9. This Amendment may be executed simultaneously in any number of counterparts, each of which shall be deemed to be an original but all of which together constitute one and the same instrument. Executed the date first above written. COMPUTER ASSOCIATES VIEWSTAR CORPORATION INTERNATIONAL, INC. By: [SIG] By: /s/ STEPHEN E. RECHT --------------------------- --------------------------- [ILLEGIBLE] Poznanski Stephen E. Recht - ------------------------------- ------------------------------- Sr. Vice President Vice President/CEO - ------------------------------- ------------------------------- 4 [FLOOR PLAN DIAGRAM] 1101 MARINA VILLAGE PARKWAY ALAMEDA, CA 94501 1st FLOOR [ ] 4,416 Square Feet Added Space [ ] 44,000 Square Feet Currently Leased by Viewstar (includes also: all of 2nd floor) [ ] Approx. 10,000 Square Feet Option Space 1st Floor EXHIBIT B-1 EX-10.25 4 EMPLOYMENT AGREEMENT DTD 10/14/96; STEVE RUSSELL 1 Exhibit 10.25 EXECUTIVE EMPLOYMENT AGREEMENT THIS AGREEMENT is made as of the 14th day of October, 1996, between STEVE RUSSELL ("Executive"), and DIGITAL SYSTEMS INTERNATIONAL, INC., a Washington corporation ("Company"). IN CONSIDERATION of the mutual covenants and promises contained herein, the parties agree as follows: 1. EMPLOYMENT. Effective as of the date of the consummation of the Transaction, as defined below (the "Effective Date"), the Company will employ Executive, and Executive will accept employment by the Company, as Company's Senior Vice President, Product Development, responsible for the management and direction of Product Development Department of the Company, subject to the direction and control of the President and the Chief Executive Officer of the Company. The Executive will perform such additional duties as may be assigned from time to time by the President and the CEO of the Company which relate to the business of the Company, its subsidiaries or any business ventures in which the Company or its subsidiaries may participate. This Agreement has been made and entered into in contemplation of the acquisition of ViewStar by the Company in a merger transaction (the "Transaction") to be consummated in December of 1996. Executive was an executive officer of ViewStar prior to consummation of such merger transaction. Each party has agreed to the terms and conditions as set forth herein to induce the other to go forward with and consummate the merger transaction. Of specific importance to Company is Executive's commitment to stay with the Company at least through 1997 and covenant not to compete with the business of the Company or ViewStar during 1997 or as described in Section 8 hereof. Executive acknowledges that he has been represented by his own counsel and has received his own independent tax advice in connection with negotiation of this Agreement. 2. ATTENTION AND EFFORT. Executive will devote his full business time, attention and effort to the Company's business and will use his skills and render services to the best of his ability to serve the interests of the Company. 3. TERM. Unless otherwise terminated as provided in Section 6 of this Agreement, Executive's term of employment under this Agreement shall commence as of the date hereof and shall expire upon Executive's resignation or termination. 4. COMPENSATION. 4.1 BASE SALARY Executive's compensation shall consist, in part, of an annual base salary of $140,000 before all customary payroll deductions (the "Base Salary"). The Base Salary shall be paid in substantially equal installments at the same interval as other officers of the Company are paid, or otherwise in conformance with the Company's standard payroll practices. The Board of Directors of the Company shall determine any increases in the Base Salary in future years. 4.2 BONUS Executive shall be entitled to receive, in addition to the Base Salary, an annual bonus (the "Bonus") in an amount to be determined pursuant to the Company's Management and Company Performance Bonus Plan, at appropriate level, as approved by the Board of Directors of the Company, in effect for each calendar year, but in no event less than the bonus at plan provided for under the 1996 incentive plan of ViewStar. 4.3 STOCK OPTIONS As of the Effective Date, Executive shall be granted incentive stock options and/or nonqualified stock options to purchase shares of common stock of the Company, issued to replace options previously granted to Executive by ViewStar, pursuant to the terms of certain Stock Option Plans maintained by ViewStar 1 2 (the "ViewStar Option Plans"). Such options shall continue to vest during the term of this Agreement and during any subsequent service as a consultant to the Company. As inducement to continue working for the Company through at least June 1998, the Company agrees to recommend to the Board of Directors of the Company award of options in 1Q97 to Executive to purchase 75,000 shares of common stock of the Company, pursuant to the terms of the Company's 1996 Stock Incentive Compensation Plan, except that vesting for such options (at a rate of 25% per year) shall not commence until January 1, 1998. 4.4 SIGNING BONUS As further inducement to Executive to enter into this Agreement and serve through 1997, Company agrees to pay to Executive, through the Company's normal payroll and subject to customary payroll deductions, a one-time signing bonus in an amount equal to 17.5% of Executive's Base Salary. In the event that Executive voluntarily gives notice of termination under this Agreement prior to December 31, 1997, Executive agrees to repay to Company the amount of such signing bonus. 5. BENEFITS AND EXPENSES. 5.1 EXPENSES The Company shall promptly reimburse Executive for all reasonable and necessary business expenses incurred and advanced by him in carrying out his duties under this Agreement, consistent with Company policies in connection therewith. Executive shall present to the Company from time to time an itemized account of such expenses in such form as Company policies may require. 5.2 BENEFITS During the term of employment hereunder, Executive shall be entitled to participate fully in any benefit plans, programs, policies and fringe benefits which may be made available to the senior executives of the Company generally, including medical, dental, disability, pension and retirement benefits, life insurance and other death benefits. Executive will initially be entitle to three weeks vacation per year and any other vacation or personal time off in accordance with Company policy. 5.3 OTHER The Company shall provide Executive an office and with secretarial support suitable to the position of Vice President. 5.4 MOVING EXPENSES To the extent required, the Company will reimburse Executive for normal and reasonable household moving expenses in accordance with standard Company policy or as otherwise agreed between the parties. 6. TERMINATION. 6.1 BY THE COMPANY With or without "Cause" (as defined in the Company's 19967 Stock Incentive Compensation Plan), the Company may terminate the employment of Executive at any time during the term upon giving at least 30 days Notice of Termination (as defined below). 6.2 BY EXECUTIVE Executive may terminate his employment at any time for Good Reason (as defined below) or otherwise upon giving at least 30 days Notice of Termination. 6.3 AUTOMATIC TERMINATION Employment shall terminate automatically upon death or total disability of Executive. The term "total disability" as used herein means an inability to perform the duties set forth in paragraph 1 of this Agreement because of illness or physical or mental disability for a period or periods aggregating 180 calendar days in any 12-month period, unless Executive is granted a leave of absence by the Company. Executive and Company hereby acknowledge that Executive's ability to perform the duties specified in paragraph 1 hereof is of the essence of this Agreement. Termination hereunder shall be deemed to be 2 3 effective immediately upon Executive's death or 30 days following a Notice of Termination based upon a determination by the Board of Directors of the Company of Executive's total disability as defined herein. 6.4 NOTICE The term "Notice of Termination" means written notice of termination of Executive's employment. 6.5 GOOD REASON For the purpose of this Agreement, "Good Reason" is defined in Section 2.11 of the Company's 1996 Stock Incentive Compensation Plan. 7. SEVERANCE PAYMENTS. In the event of termination of the employment of Executive, all compensation and benefits set forth in this Agreement shall terminate as of the effective date of termination, provided, however, that if the Company terminates Executive's employment without cause, or if Executive terminates his employment for Good Reason, the Company shall be obligated to pay to Executive the greater (if such termination is during 1997) of Executive Base Salary, Bonus and stock option vesting through 1997 or six months of Executive's Base Salary and stock option vesting. Such amounts shall be paid as Salary and Bonus continuation payments in accordance with Section 4 hereof. 8. AGREEMENT NOT TO COMPETE NOR SOLICIT EMPLOYEES. Following voluntary termination of employment with the Company by Executive, during 1997 and, if longer, for six months from the effective date of such termination, Executive agrees not to directly or indirectly engage in (whether as an employee, consultant, proprietary partner, director or otherwise), or have an ownership interest in, or participate in the financing, operation, management or control of any firm, corporation or business, other than the Company or its subsidiaries, that engages in the directly competitive manufacture, sale or design of directly competitive Call Flow, Work Flow, or CTI (Computer Telephony Integration) products or services. In the event of such voluntary termination after January 1, 1998, and compliance by Executive with this covenant not to compete, in addition to other compensation and benefits to which Executive is entitled under this Agreement (except for compensation as provided in Section 7 above), Executive will also be entitled to six months' Base Salary, six months' benefits per Section 5.2, and to the extent permitted by law and the applicable stock option plan, continuation of vesting of stock options awarded Executive by Company beyond the effective date of termination of employment. Such amounts shall be paid at Salary and Bonus continuation payments in accordance with Section 4 hereof. Withholding such benefits shall be the Company's sole remedy in the event of any breach of such covenant not to compete by Executive. The above notwithstanding, beneficial ownership by the Executive (together with any one or more members of his immediate family and together with any entity under his direct or indirect control) of less than 5% of the outstanding shares of capital stock of any corporation whose stock is listed on a national securities exchange or publicly traded in the over-the-counter market shall not constitute a breach of the covenant not to compete of this Section 8. During the term of employment and for so long after that as Executive continues to provide consulting services as mutually agreed, Executive shall not solicit or induce employees to leave the Company's (nor its affiliates or subsidiaries) employ. The foregoing shall not prohibit the executive or any entity with which the Executive may be affiliated from hiring a former employee of the Company who approaches Executive on his own initiative or in response to a general recruitment effort by or through Executive, or if Executive first communicates with the former Company employee about potential employment after the employee has left employment with the Company. 9. AGREEMENT NOT TO DISCLOSE CONFIDENTIAL INFORMATION. As a condition of his employment hereunder, Executive has executed and delivered to the Company an agreement addressing the nondisclosure of confidential information and ownership of inventions (the "Non-Disclosure Agreement") in accordance with standard Company policy, which Non-Disclosure Agreement shall survive termination of Executive's employment. 3 4 10. FORM OF NOTICE. Every notice required by the terms of this Agreement shall be given in writing by serving the same upon the party to whom it was addressed personally, by courier, by facsimile transmission (with hard copy delivered by overnight courier) or by registered or certified mail, return receipt requested, at the address set forth below or at such other address as may hereafter be designated by notice given in compliance with the terms hereof: If to Executive: Steve Russell At address maintained by Company HR Department If to Company: Digital Systems International, Inc. 6464 185th Ave NE Redmond, WA 98052 Attn.: Wm. Bradford Weller, General Counsel Notice shall be effective upon personal delivery, delivery by courier, receipt of facsimile transmission or three days after mailing. 11. ASSIGNMENT. Executive agrees that this Agreement may be transferred or assigned by the Company to (a) any corporation resulting from any merger, consolidation or other reorganization to which the Company is a party or (b) any corporation, partnership, association or other person to which the Company may transfer all or substantially all of the assets and business, and such assignee or transferee shall succeed to the rights and obligations of the Company hereunder. This Agreement may not be assigned by Executive. 12. WAIVER. No waiver of any of the provisions of this Agreement shall be valid unless in writing, signed by the party against whom such claim or waiver is sought to be enforced, nor shall failure to enforce any right hereunder constitute a continuing waiver of the same of a waiver of any other right hereunder. 13. AMENDMENTS IN WRITING. No amendment, modification, waiver, termination or discharge of any provision of this Agreement, nor consent to any departure therefrom by either party hereto, shall in any event be effective unless the same shall be in writing, specifically identifying this Agreement and the provision intended to be amended, modified, waived, terminated or discharged, and signed by the Company and Executive. No provision of this Agreement shall be varied, contradicted or explained by any oral agreement, course of dealing or performance or any other matter not set forth in an agreement in writing and signed by the Company and Executive. 14. APPLICABLE LAW - VENUE. This Agreement shall be governed by the laws of the state of California, without regard to its conflicts of laws provisions. Venue of any action brought to enforce or interpret this Agreement shall be in Alameda, California, and the parties consent to jurisdiction in the federal and state courts in such venue. 15. SEVERABILITY. In the event that any provision of this Agreement shall be determined by any court or arbitrator of competent jurisdiction to be unenforceable or otherwise invalid for any reason, such provision shall be enforced and validated to the extent permitted by law, and the court or arbitrator shall have the power to reform such provision to the extent necessary for such provision to be enforceable under applicable law. All provisions of this Agreement are severable, and the unenforceability of any single provision hereof shall not affect the remaining provisions. 16. HEADINGS. All headings or titles in this Agreement are for the purpose of reference only and shall not in any way affect the interpretation or construction of this Agreement. 4 5 17. ATTORNEYS FEES & COSTS. In any action or proceeding brought by either party against the other arising out of or in any way relating to this Agreement, the prevailing party shall, in addition to other allowable costs and remedies, be entitled to an award of reasonable attorneys' fees and costs incurred in connection with such action or proceeding. IN WITNESS WHEREOF, the parties have executed and entered into this Agreement as of the date above first written. EXECUTIVE: COMPANY: DIGITAL SYSTEMS INTERNATIONAL, INC. a Washington Corporation /s/ STEVE RUSSELL By [SIG] - ------------------------------- ----------------------------------- Steve Russell Its President & CEO ---------------------------- 5 EX-10.26 5 EMPLOYMENT AGREEMENT DTD 2/14/96; STEVE L. ADAMS 1 Exhibit 10.26 EXECUTIVE EMPLOYMENT AGREEMENT THIS AGREEMENT is made as of the 14th day of February, 1996, between STEVE L. ADAMS, a Washington resident ("Executive"), and DIGITAL SYSTEMS INTERNATIONAL, INC., a Washington corporation ("Company"). IN CONSIDERATION of the mutual covenants and promises contained herein, the parties agree as follows: 1. EMPLOYMENT. The Company hereby employs Executive, and Executive hereby accepts employment by the Company, as Company's Senior Vice President, Marketing and Business Development, responsible for the management and direction of the Marketing and Business Development of the Company, subject to the direction and control of the President and Chief Executive Officer of the Company. The Executive will perform such additional duties as may be assigned from time to time by the President & CEO of the Company which relate to the business of the Company, its subsidiaries or any business ventures in which the Company or its subsidiaries may participate. 2. ATTENTION AND EFFORT. Executive will devote his full business time, attention and effort to the Company's business and will use his skills and render services to the best of his ability to serve the interests of the Company. 3. TERM. Unless otherwise terminated as provided in Section 6 of this Agreement, Executive's term of employment under this Agreement shall commence as of the date hereof and shall expire upon Executive's resignation or termination. 4. COMPENSATION. 4.1 BASE SALARY Executive's compensation shall consist, in part, of an annual base salary of $162,000 before all customary payroll deductions (the "Base Salary"). The Base Salary shall be paid in substantially equal installments at the same interval as other officers of the Company are paid, or otherwise in conformance with the Company's standard payroll practices. The Board of Directors of the Company shall determine any increases in the Base Salary in future years. 4.2 BONUS Executive may be entitled to receive, in addition to the Base Salary, an annual bonus (the "Bonus") in an amount to be determined pursuant to the Company's Management Bonus Plan, at appropriate level, as approved by the Board of Directors of the Company, in effect for each calendar year. 4.3 STOCK OPTIONS Executive has been granted incentive stock options &/or nonqualified stock options to purchase100,000 shares of common stock of the Company pursuant to the terms of the Company's Restated 1987 Stock Option Plan (the "Option Plan"). With reference to Section 7.1.3 of the Option Plan, the right of the Company to take any action to prevent, or limit in any way, acceleration of such options in the event of any Change in Control, as defined in the Option Plan, is hereby waived. 5. BENEFITS AND EXPENSES. 5.1 EXPENSES The Company shall promptly reimburse Executive for all reasonable and necessary business expenses incurred and advanced by him in carrying out his duties under this Agreement, consistent with Company policies in connection therewith. Executive shall present to the Company from time to time an itemized account of such expenses in such form as Company policies may require. 5.2 BENEFITS During the term of employment hereunder, Executive shall be entitled to participate fully in any benefit plans, programs, policies and fringe benefits which may be made available to the senior executives of the Company generally, including medical, dental, disability, pension and retirement benefits, life insurance and other death benefits. Executive will initially be entitled to 2 weeks vacation per year and any other vacation or personal time off in accordance with Company policy. 5.3 OTHER The Company shall provide Executive an office and with secretarial support suitable to the position of Vice President 1 2 5.4 MOVING EXPENSES To the extent required, the Company will reimburse Executive for normal and reasonable household moving expenses in accordance with standard Company policy or as otherwise agreed between the parties. 6. TERMINATION. 6.1 BY THE COMPANY With or without "Cause" (defined for the purposes of this Agreement as any act by Executive that would disqualify him from indemnification by the Company by virtue of his position as an officer and director of the Company, in accordance with the Articles of Incorporation and Bylaws of the Company and the laws of the state of Washington), the Company may terminate the employment of Executive at any time during the term upon giving Notice of Termination (as defined below). 6.2 BY EXECUTIVE Executive may terminate his employment at any time for Good Reason (as defined below) or otherwise upon giving Notice of Termination. 6.3 AUTOMATIC TERMINATION Employment shall terminate automatically upon death or total disability of Executive. The term "total disability" as used herein means an inability to perform the duties set forth in paragraph 1 of this Agreement because of illness or physical or mental disability for a period or periods aggregating 180 calendar days in any 12-month period, unless Executive is granted a leave of absence by the President or the Board of Directors of the Company. Executive and Company hereby acknowledge that Executive's ability to perform the duties specified in paragraph 1 hereof is of the essence of this Agreement. Termination hereunder shall be deemed to be effective immediately upon Executive's death or 30 days following a Notice of Termination based upon a determination by the Board of Directors of the Company of Executive's total disability as defined herein. 6.4 NOTICE The term "Notice of Termination" means written notice of termination of Executive's employment. At the election of the Company, as set forth in its Notice of Termination or in a written response to Executive's Notice of Termination, Executive's employment and performance of services shall continue for a period of 30 days following the Notice of Termination. Otherwise Executive's employment shall terminate effective upon receipt of the Notice of Termination, provided however that, in either case, the Executive shall be entitled to termination payments in accordance with paragraph 7. 6.5 GOOD REASON For the purposes of this Agreement, "Good Reason" means, as a result of or following a "Change of Control" of the Company (as defined in the Company's 1987 Restated Stock Option Plan), a material alteration of Executive's position or duties, a reduction of Executive's Base Salary, or a requirement that Executive move more than 100 miles, provided that Executive gives Notice of Termination within 30 days of such change. 7. SEVERANCE PAYMENTS. In the event of termination of the employment of Executive, all compensation and benefits set forth in this Agreement shall terminate as of the effective date of termination, provided, however, that if the Company terminates Executive's employment without Cause, or if Executive terminates his employment for Good Reason, the Company shall be obligated to pay to Executive his regular Base Salary for a period of 6 months after the effective date of termination of employment. 8. AGREEMENT NOT TO COMPETE As a condition of his employment hereunder, Executive has executed and delivered to the Company an agreement addressing his obligation not to compete with the business of the Company (the "Non-Compete Agreement") in accordance with standard Company policy, which Non-Compete Agreement shall survive termination of Executive's employment. 9. AGREEMENT NOT TO DISCLOSE CONFIDENTIAL INFORMATION As a condition of his employment hereunder, Executive has executed and delivered to the Company an agreement addressing the nondisclosure of confidential information and ownership of inventions (the "Non-Disclosure Agreement") in accordance with standard Company policy, which Non-Disclosure Agreement shall survive termination of Executive's employment. 2 3 10. FORM OF NOTICE. Every notice required by the terms of this Agreement shall be given in writing by serving the same upon the party to whom it was addressed personally, by courier, by facsimile transmission (with hard copy delivered by overnight courier) or by registered or certified mail, return receipt requested, at the address set forth below or at such other address as may hereafter be designated by notice given in compliance with the terms hereof: If to Executive: Steve L. Adams To address on DSI file If to Company: Digital Systems International, Inc. 6464 185th Ave NE Redmond, WA 98052 Attn.: Wm. Bradford Weller, General Counsel Notice shall be effective upon personal delivery, delivery by courier, receipt of facsimile transmission or three days after mailing. 11. ASSIGNMENT. Executive agrees that this Agreement may be transferred or assigned by the Company to (a) any corporation resulting from any merger, consolidation or other reorganization to which the Company is a party or (b) any corporation, partnership, association or other person to which the Company may transfer all or substantially all of the assets and business, and such assignee or transferee shall succeed to the rights and obligations of the Company hereunder. This Agreement may not be assigned by Executive. 12. WAIVER. No waiver of any of the provisions of this Agreement shall be valid unless in writing, signed by the party against whom such claim or waiver is sought to be enforced, nor shall failure to enforce any right hereunder constitute a continuing waiver of the same of a waiver of any other right hereunder. 13. AMENDMENTS IN WRITING. No amendment, modification, waiver, termination or discharge of any provision of this Agreement, nor consent to any departure therefrom by either party hereto, shall in any event be effective unless the same shall be in writing, specifically identifying this Agreement and the provision intended to be amended, modified, waived, terminated or discharged, and signed by the Company and Executive. No provision of this Agreement shall be varied, contradicted or explained by any oral agreement, course of dealing or performance or any other matter not set forth in an agreement in writing and signed by the Company and Executive. 14. APPLICABLE LAW -- VENUE. This Agreement shall be governed by the laws of the state of Washington, without regard to its conflicts of laws provisions. Venue of any action brought to enforce or interpret this Agreement shall be in Seattle, Washington, and the parties consent to jurisdiction in the federal and state courts in such venue. 15. SEVERABILITY. In the event that any provision of this Agreement shall be determined by any court or arbitrator of competent jurisdiction to be unenforceable or otherwise invalid for any reason, such provision shall be enforced and validated to the extent permitted by law, and the court or arbitrator shall have the power to reform such provision to the extent necessary for such provision to be enforceable under applicable law. All provisions of this Agreement are severable, and the unenforceability of any single provision hereof shall not affect the remaining provisions. 16. HEADINGS. All headings or titles in this Agreement are for the purpose of reference only and shall not in any way affect the interpretation or construction of this Agreement 17. ATTORNEYS FEES & COSTS. In any action or proceeding brought by either party against the other arising out of or in any way relating to this Agreement, the prevailing party shall, in addition to other allowable costs and remedies, be entitled to an award of reasonable attorneys' fees and costs incurred in connection with such action or proceeding. 3 4 IN WITNESS WHEREOF, the parties have executed and entered into this Agreement as of the date above first written. EXECUTIVE: COMPANY: DIGITAL SYSTEMS INTERNATIONAL, INC., a Washington Corporation - --------------------------------- STEVEN L. ADAMS By: JOHN J. FLAVIO Its Sr. Vice President, Finance & Administration 4 EX-10.27 6 EMPLOYMENT AGREEMENT DTD 7/1/97; OMAR SALEH 1 Exhibit 10.27 EXECUTIVE EMPLOYMENT AGREEMENT THIS AGREEMENT is made as of the 1st day of July, 1997, between OMAR SALEH, a resident of the United Kingdom ("Executive"), and MOSAIX, INC., a Washington corporation ("Company"). IN CONSIDERATION of the mutual covenants and promises contained herein, the parties agree as follows: 1. EMPLOYMENT. The Company hereby employs Executive, and Executive hereby accepts employment by the Company, as Company's Sr. Vice President, Worldwide Sales, based out of the UK office of Mosaix Ltd., responsible for the management and direction of the sales organization of the Company, subject to the direction and control of the President and Chief Operating Officer of the Company. The Executive will perform such additional duties as may be assigned from time to time by the President & COO of the Company which relate to the business of the Company, its subsidiaries or any business ventures in which the Company or its subsidiaries may participate. 2. ATTENTION AND EFFORT. Executive will devote his full business time, attention and effort to the Company's business and will use his skills and render services to the best of his ability to serve the interests of the Company. 3. TERM. Unless otherwise terminated as provided in Section 6 of this Agreement, Executive's term of employment under this Agreement shall commence as of the date hereof and shall expire upon Executive's resignation or termination. 4. COMPENSATION. 4.1 BASE SALARY Executive's compensation shall consist, in part, of an annual base salary of $170,000 before all customary payroll deductions (paid in the U.K. through Mosaix Ltd. at an exchange rate of British Pound = US$1.54)(the "Base Salary"). The Base Salary shall be paid in substantially equal installments at the same interval as other officers of the Company are paid, or otherwise in conformance with the Company's standard payroll practices. The Board of Directors of the Company shall determine any increases in the Base Salary in future years. 4.2 BONUS Executive may be entitled to receive, in addition to the Base Salary, an annual bonus (the "Bonus") in an amount to be determined pursuant to the Company's Management Bonus Plan, at Level 1, plus such additional bonuses as may be approved by the Board of Directors of the Company, in effect for each calendar year. 4.3 STOCK OPTIONS Executive has been granted incentive stock options &/or nonqualified stock options to purchase 100,000 shares of common stock of the Company pursuant to the terms of the Company's 1996 Stock Incentive Compensation Plan (the "Option Plan"). 5. BENEFITS AND EXPENSES. 5.1 EXPENSES The Company shall promptly reimburse Executive for all reasonable and necessary business expenses incurred and advanced by him in carrying out his duties under this Agreement, consistent with Company policies in connection therewith. Executive shall present to the Company from time to time an itemized account of such expenses in such form as Company policies may require. 5.2 BENEFITS During the term of employment hereunder, Executive shall be entitled to participate fully in any benefit plans, programs, policies and fringe benefits which may be made available to the senior executives of the Company generally, including medical, dental, disability, pension and retirement benefits, life insurance and other death benefits. Executive will initially be entitled to 4 weeks vacation per year and any other vacation or personal time off in accordance with Company policy. 5.3 OTHER The Company shall provide Executive an office and with secretarial support suitable to the position of Sr. Vice President. 1 2 5.4 MOVING EXPENSES To the extent required, the Company will reimburse Executive for normal and reasonable household moving expenses in accordance with standard Company policy or as otherwise agreed between the parties. 6. TERMINATION. 6.1 BY THE COMPANY With or without "Cause" (defined for the purposes of this Agreement as any act by Executive that would disqualify him from indemnification by the Company by virtue of his position as an officer and director of the Company, in accordance with the Articles of Incorporation and Bylaws of the Company and the laws of the state of Washington), the Company may terminate the employment of Executive at any time during the term upon giving Notice of Termination (as defined below). 6.2 BY EXECUTIVE Executive may terminate his employment at any time for Good Reason (as defined below) or otherwise upon giving Notice of Termination. 6.3 AUTOMATIC TERMINATION Employment shall terminate automatically upon death or total disability of Executive. The term "total disability" as used herein means an inability to perform the duties set forth in paragraph 1 of this Agreement because of illness or physical or mental disability for a period or periods aggregating 180 calendar days in any 12-month period, unless Executive is granted a leave of absence by the President or the Board of Directors of the Company. Executive and Company hereby acknowledge that Executive's ability to perform the duties specified in paragraph 1 hereof is of the essence of this Agreement. Termination hereunder shall be deemed to be effective immediately upon Executive's death or 45 days following a Notice of Termination based upon a determination by the Board of Directors of the Company of Executive's total disability as defined herein. 6.4 NOTICE The term "Notice of Termination" means written notice of termination of Executive's employment. At the election of the Company, as set forth in its Notice of Termination or in a written response to Executive's Notice of Termination, Executive's employment and performance of services shall continue for a period of 45 days following the Notice of Termination. Otherwise Executive's employment shall terminate effective upon receipt of the Notice of Termination, provided however that, in either case, the Executive shall be entitled to termination payments in accordance with paragraph 7. 6.5 GOOD REASON For the purposes of this Agreement, "Good Reason" is defined in the Company's 1996 Stock Incentive Compensation Plan. 7. SEVERANCE PAYMENTS. In the event of termination of the employment of Executive, all compensation and benefits set forth in this Agreement shall terminate as of the effective date of termination, provided, however, that if the Company terminates Executive's employment without Cause, or if Executive terminates his employment for Good Reason, the Company shall be obligated to pay to Executive his regular Base Salary for a period of 6 months after the effective date of termination of employment. In case of termination, the Company shall pay repatriation and moving costs to the U.K. if Executive had taken up residence in the USA by date of termination. 8. AGREEMENT NOT TO COMPETE As a condition of his employment hereunder, Executive has executed and delivered to the Company an agreement addressing his obligation not to compete with the business of the Company (the "Non-Compete Agreement") in accordance with standard Company policy, which Non-Compete Agreement shall survive termination of Executive's employment. Executive shall further refrain from recruiting employees of the Company for one year after the date of termination. 9. AGREEMENT NOT TO DISCLOSE CONFIDENTIAL INFORMATION As a condition of his employment hereunder, Executive has executed and delivered to the Company an agreement addressing the nondisclosure of confidential information and ownership of inventions (the "Non-Disclosure Agreement") in accordance with standard Company policy, which Non-Disclosure Agreement shall survive termination of Executive's employment. 2 3 10. FORM OF NOTICE. Every notice required by the terms of this Agreement shall be given in writing by serving the same upon the party to whom it was addressed personally, by courier, by facsimile transmission (with hard copy delivered by overnight courier) or by registered or certified mail, return receipt requested, at the address set forth below or at such other address as may hereafter be designated by notice given in compliance with the terms hereof: If to Executive: Omar Saleh Mosaix Ltd. The Oaks 2-4 Packhorse Road Gerrards Cross Bucks SL9 7QE U.K. If to Company: Mosaix, Inc. 6464 185th Avenue NE Redmond, WA 98052 Attn.: Wm. Bradford Weller, General Counsel Notice shall be effective upon personal delivery, delivery by courier, receipt of facsimile transmission or three days after mailing. 11. ASSIGNMENT. Executive agrees that this Agreement may be transferred or assigned by the Company to (a) any corporation resulting from any merger, consolidation or other reorganization to which the Company is a party or (b) any corporation, partnership, association or other person to which the Company may transfer all or substantially all of the assets and business, and such assignee or transferee shall succeed to the rights and obligations of the Company hereunder. This Agreement may not be assigned by Executive. 12. WAIVER. No waiver of any of the provisions of this Agreement shall be valid unless in writing, signed by the party against whom such claim or waiver is sought to be enforced, nor shall failure to enforce any right hereunder constitute a continuing waiver of the same of a waiver of any other right hereunder. 13. AMENDMENTS IN WRITING. No amendment, modification, waiver, termination or discharge of any provision of this Agreement, nor consent to any departure therefrom by either party hereto, shall in any event be effective unless the same shall be in writing, specifically identifying this Agreement and the provision intended to be amended, modified, waived, terminated or discharged, and signed by the Company and Executive. No provision of this Agreement shall be varied, contradicted or explained by any oral agreement, course of dealing or performance or any other matter not set forth in an agreement in writing and signed by the Company and Executive. All other conditions and benefits described and agreed in offer letter of employment dated October 31, 1997 (DSI letterhead) remain unchanged. 14. APPLICABLE LAW -- VENUE. This Agreement shall be governed by the laws of the state of Washington, without regard to its conflicts of laws provisions. Venue of any action brought to enforce or interpret this Agreement shall be in Seattle, Washington, and the parties consent to jurisdiction in the federal and state courts in such venue. 15. SEVERABILITY. In the event that any provision of this Agreement shall be determined by any court or arbitrator of competent jurisdiction to be unenforceable or otherwise invalid for any reason, such provision shall be enforced and validated to the extent permitted by law, and the court or arbitrator shall have the power to reform such provision to the extent necessary for such provision to be enforceable under applicable law. All provisions of this Agreement are severable, and the unenforceability of any single provision hereof shall not affect the remaining provisions. 16. HEADINGS. All headings or titles in this Agreement are for the purpose of reference only and shall not in any way affect the interpretation or construction of this Agreement. 3 4 17. ATTORNEYS FEES & COSTS. In any action or proceeding brought by either party against the other arising out of or in any way relating to this Agreement, the prevailing party shall, in addition to other allowable costs and remedies, be entitled to an award of reasonable attorneys' fees and costs incurred in connection with such action or proceeding. IN WITNESS WHEREOF, the parties have executed and entered into this Agreement as of the date above first written. EXECUTIVE: COMPANY: MOSAIX, INC., a Washington Corporation OMAR SALEH By: Wm. Bradford Weller Its General Counsel & Assistant Secretary 4 EX-10.28 7 EMPLOYMENT AGREEMENT DTD 2/5/98; JEFF JARVIS 1 EXECUTIVE EMPLOYMENT AGREEMENT THIS AGREEMENT is made as of the 5th day of February, 1998, between JEFFERY F. JARVIS, a Washington resident ("Executive"), and MOSAIX, INC., a Washington corporation ("Company"). IN CONSIDERATION of the mutual covenants and promises contained herein, the parties agree as follows: 1. EMPLOYMENT. The Company hereby employs Executive, and Executive hereby accepts employment by the Company, as Company's Vice President, Customer Services, responsible for the management and direction of the Customer Services operations of the Company, subject to the direction and control of the President and Chief Executive Officer of the Company. The Executive will perform such additional duties as may be assigned from time to time by the President & CEO of the Company which relate to the business of the Company, its subsidiaries or any business ventures in which the Company or its subsidiaries may participate. 2. ATTENTION AND EFFORT. Executive will devote his full business time, attention and effort to the Company's business and will use his skills and render services to the best of his ability to serve the interests of the Company. 3. TERM. Unless otherwise terminated as provided in Section 6 of this Agreement, Executive's term of employment under this Agreement shall commence as of the date hereof and shall expire upon Executive's resignation or termination. 4. COMPENSATION. 4.1 BASE SALARY Executive's compensation shall consist, in part, of an annual base salary of $132,000 before all customary payroll deductions (the "Base Salary"). The Base Salary shall be paid in substantially equal installments at the same interval as other officers of the Company are paid, or otherwise in conformance with the Company's standard payroll practices. The Board of Directors of the Company shall determine any increases in the Base Salary in future years. 4.2 BONUS Executive may be entitled to receive, in addition to the Base Salary, an annual bonus (the "Bonus") in an amount to be determined pursuant to the Company's Management Bonus Plan, at appropriate level, as approved by the Board of Directors of the Company, in effect for each calendar year. 4.3 STOCK OPTIONS Executive has been granted incentive stock options &/or nonqualified stock options to purchase 49,500 shares of common stock of the Company pursuant to the terms of the Company's Restated 1987 Stock Option Plan (the "1987 Option Plan") and 1996 Stock Incentive Compensation Plan (the "1996 Option Plan"). With reference to Section 7.1.3 of the Restated 1987 Stock Option Plan, the right of the Company to take any action to prevent, or limit in any way, acceleration of such options in the event of any Change in Control, as defined in the Option Plan, is hereby waived. 5. BENEFITS AND EXPENSES. 5.1 EXPENSES The Company shall promptly reimburse Executive for all reasonable and necessary business expenses incurred and advanced by him in carrying out his duties under this Agreement, consistent with Company policies in connection therewith. Executive shall present to the Company from time to time an itemized account of such expenses in such form as Company policies may require. 5.2 BENEFITS During the term of employment hereunder, Executive shall be entitled to participate fully in any benefit plans, programs, policies and fringe benefits which may be made available to the senior executives of the Company generally, including medical, dental, disability, pension and retirement benefits, life insurance and other death benefits. Executive will initially be entitled to 3 weeks vacation per year and any other vacation or personal time off in accordance with Company policy. 5.3 OTHER The Company shall provide Executive an office and with secretarial support suitable to the position of Vice President. 1 2 6. TERMINATION. 6.1 BY THE COMPANY With or without "Cause" (as defined in the 1996 Option Plan), the Company may terminate the employment of Executive at any time during the term upon giving Notice of Termination (as defined below). 6.2 BY EXECUTIVE Executive may terminate his employment at any time for Good Reason (as defined below) or otherwise upon giving Notice of Termination. 6.3 AUTOMATIC TERMINATION Employment shall terminate automatically upon death or total disability of Executive. The term "total disability" as used herein means an inability to perform the duties set forth in paragraph 1 of this Agreement because of illness or physical or mental disability for a period or periods aggregating 180 calendar days in any 12-month period, unless Executive is granted a leave of absence by the President or the Board of Directors of the Company. Executive and Company hereby acknowledge that Executive's ability to perform the duties specified in paragraph 1 hereof is of the essence of this Agreement. Termination hereunder shall be deemed to be effective immediately upon Executive's death or 30 days following a Notice of Termination based upon a determination by the Board of Directors of the Company of Executive's total disability as defined herein. 6.4 NOTICE The term "Notice of Termination" means written notice of termination of Executive's employment. At the election of the Company, as set forth in its Notice of Termination or in a written response to Executive's Notice of Termination, Executive's employment and performance of services shall continue for a period of 30 days following the Notice of Termination. Otherwise Executive's employment shall terminate effective upon receipt of the Notice of Termination, unless otherwise agreed between the parties. 6.5 GOOD REASON For the purposes of this Agreement, "Good Reason" means, as a result of or following a "Corporate Transaction" of the Company (as defined in the 1996 Option Plan) or "Change of Control" of the Company (as defined in the 1987 Option Plan), a material alteration of Executive's position or duties, a reduction of Executive's Base Salary, or a requirement that Executive move more than 100 miles, provided that Executive gives Notice of Termination within 30 days of such change. 7. SEVERANCE PAYMENTS. In the event of termination of the employment of Executive, all compensation and benefits set forth in this Agreement shall terminate as of the effective date of termination, provided, however, that if the Company terminates Executive's employment without Cause, or if Executive terminates his employment for Good Reason, the Company shall be obligated to pay to Executive his then regular Base Salary for a period of 6 months after the effective date of termination of employment. 8. AGREEMENT NOT TO COMPETE As a condition of his employment hereunder, Executive has executed and delivered to the Company an agreement addressing his obligation not to compete with the business of the Company (the "Non-Compete Agreement") in accordance with standard Company policy, which Non-Compete Agreement shall survive termination of Executive's employment. During the term of this Agreement, and for 12 months following termination of employment hereunder, Executive will not solicit or otherwise recruit, directly or indirectly, any employees of the Company for employment elsewhere. 9. AGREEMENT NOT TO DISCLOSE CONFIDENTIAL INFORMATION As a condition of his employment hereunder, Executive has executed and delivered to the Company an agreement addressing the nondisclosure of confidential information and ownership of inventions (the "Non-Disclosure Agreement") in accordance with standard Company policy, which Non-Disclosure Agreement shall survive termination of Executive's employment. 10. FORM OF NOTICE. Every notice required by the terms of this Agreement shall be given in writing by serving the same upon the party to whom it was addressed personally, by courier, by facsimile transmission (with hard copy delivered by overnight courier) or by registered or certified mail, return receipt requested, at the address set forth below or at such other address as may hereafter be designated by notice given in compliance with the terms hereof: 2 3 If to Executive: 17122 NE 126th Place Redmond, WA 98052 If to Company: Mosaix, Inc. 6464 185th Avenue NE Redmond, WA 98052 Attn.: Wm. Bradford Weller, General Counsel Notice shall be effective upon personal delivery, delivery by courier, receipt of facsimile transmission or three days after mailing. 11. ASSIGNMENT. Executive agrees that this Agreement may be transferred or assigned by the Company to (a) any corporation resulting from any merger, consolidation or other reorganization to which the Company is a party or (b) any corporation, partnership, association or other person to which the Company may transfer all or substantially all of the assets and business, and such assignee or transferee shall succeed to the rights and obligations of the Company hereunder. This Agreement may not be assigned by Executive. 12. WAIVER. No waiver of any of the provisions of this Agreement shall be valid unless in writing, signed by the party against whom such claim or waiver is sought to be enforced, nor shall failure to enforce any right hereunder constitute a continuing waiver of the same of a waiver of any other right hereunder. 13. AMENDMENTS IN WRITING. No amendment, modification, waiver, termination or discharge of any provision of this Agreement, nor consent to any departure therefrom by either party hereto, shall in any event be effective unless the same shall be in writing, specifically identifying this Agreement and the provision intended to be amended, modified, waived, terminated or discharged, and signed by the Company and Executive. No provision of this Agreement shall be varied, contradicted or explained by any oral agreement, course of dealing or performance or any other matter not set forth in an agreement in writing and signed by the Company and Executive. 14. APPLICABLE LAW -- VENUE. This Agreement shall be governed by the laws of the state of Washington, without regard to its conflicts of laws provisions. Venue of any action brought to enforce or interpret this Agreement shall be in Seattle, Washington, and the parties consent to jurisdiction in the federal and state courts in such venue. 15. SEVERABILITY. In the event that any provision of this Agreement shall be determined by any court or arbitrator of competent jurisdiction to be unenforceable or otherwise invalid for any reason, such provision shall be enforced and validated to the extent permitted by law, and the court or arbitrator shall have the power to reform such provision to the extent necessary for such provision to be enforceable under applicable law. All provisions of this Agreement are severable, and the unenforceability of any single provision hereof shall not affect the remaining provisions. 16. HEADINGS. All headings or titles in this Agreement are for the purpose of reference only and shall not in any way affect the interpretation or construction of this Agreement 17. ATTORNEYS FEES & COSTS. In any action or proceeding brought by either party against the other arising out of or in any way relating to this Agreement, the prevailing party shall, in addition to other allowable costs and remedies, be entitled to an award of reasonable attorneys' fees and costs incurred in connection with such action or proceeding. 3 4 IN WITNESS WHEREOF, the parties have executed and entered into this Agreement as of the date above first written. EXECUTIVE: COMPANY: MOSAIX, INC., a Washington Corporation JEFFERY F. JARVIS By:___________________________________ Wm. Bradford Weller Its General Counsel & Assistant Secretary 4 EX-10.29 8 EMPLOYMENT AGREEMENT DTD 2/5/98; BRUCE LEADER 1 EXECUTIVE EMPLOYMENT AGREEMENT THIS AGREEMENT is made as of the 5th day of February, 1998, between BRUCE A. LEADER, a Washington resident ("Executive"), and MOSAIX, INC., a Washington corporation ("Company"). IN CONSIDERATION of the mutual covenants and promises contained herein, the parties agree as follows: 1. EMPLOYMENT. The Company hereby employs Executive, and Executive hereby accepts employment by the Company, as Company's Senior Vice President, Consulting and Professional Services, responsible for the management and direction of Consulting and Professional Services operations of the Company, subject to the direction and control of the President and Chief Executive Officer of the Company. The Executive will perform such additional duties as may be assigned from time to time by the President & CEO of the Company which relate to the business of the Company, its subsidiaries or any business ventures in which the Company or its subsidiaries may participate. 2. ATTENTION AND EFFORT. Executive will devote his full business time, attention and effort to the Company's business and will use his skills and render services to the best of his ability to serve the interests of the Company. 3. TERM. Unless otherwise terminated as provided in Section 6 of this Agreement, Executive's term of employment under this Agreement shall expire upon Executive's resignation or termination. 4. COMPENSATION. 4.1 BASE SALARY Executive's compensation shall consist, in part, of an annual base salary of $160,000 before all customary payroll deductions (the "Base Salary"). The Base Salary shall be paid in substantially equal installments at the same interval as other officers of the Company are paid, or otherwise in conformance with the Company's standard payroll practices. The Board of Directors of the Company shall determine any increases in the Base Salary in future years. 4.2 BONUS Executive may be entitled to receive, in addition to the Base Salary, an annual bonus (the "Bonus") in an amount to be determined pursuant to the Company's Management Bonus Plan, at appropriate level, as approved by the Board of Directors of the Company, in effect for each calendar year. 4.3 STOCK OPTIONS Executive has been granted incentive stock options &/or nonqualified stock options to purchase 55,000 shares of common stock of the Company pursuant to the terms of the Company's 1996 Stock Incentive Compensation Plan (the "Option Plan"). For the purposes of such Plan, Executive shall be considered an "Executive Officer" of the Company. 5. BENEFITS AND EXPENSES. 5.1 EXPENSES The Company shall promptly reimburse Executive for all reasonable and necessary business expenses incurred and advanced by him in carrying out his duties under this Agreement, consistent with Company policies in connection therewith. Executive shall present to the Company from time to time an itemized account of such expenses in such form as Company policies may require. 5.2 BENEFITS During the term of employment hereunder, Executive shall be entitled to participate fully in any benefit plans, programs, policies and fringe benefits which may be made available to the senior executives of the Company generally, including medical, dental, disability, pension and retirement benefits, life insurance and other death benefits. Executive will initially be entitled to 2 weeks vacation per year and any other vacation or personal time off in accordance with Company policy. 5.3 OTHER The Company shall provide Executive an office and with secretarial support suitable to the position of Vice President. 1 2 5.4 MOVING EXPENSES To the extent required, the Company will reimburse Executive for normal and reasonable household moving expenses in accordance with standard Company policy or as otherwise agreed between the parties. 6. TERMINATION. 6.1 BY THE COMPANY With or without "Cause" (as defined in the Option Plan), the Company may terminate the employment of Executive at any time during the term upon giving Notice of Termination (as defined below). 6.2 BY EXECUTIVE Executive may terminate his employment at any time for Good Reason (as defined below) or otherwise upon giving Notice of Termination. 6.3 AUTOMATIC TERMINATION Employment shall terminate automatically upon death or total disability of Executive. The term "total disability" as used herein means an inability to perform the duties set forth in paragraph 1 of this Agreement because of illness or physical or mental disability for a period or periods aggregating 180 calendar days in any 12-month period, unless Executive is granted a leave of absence by the President or the Board of Directors of the Company. Executive and Company hereby acknowledge that Executive's ability to perform the duties specified in paragraph 1 hereof is of the essence of this Agreement. Termination hereunder shall be deemed to be effective immediately upon Executive's death or 30 days following a Notice of Termination based upon a determination by the Board of Directors of the Company of Executive's total disability as defined herein. 6.4 NOTICE The term "Notice of Termination" means written notice of termination of Executive's employment. At the election of the Company, as set forth in its Notice of Termination or in a written response to Executive's Notice of Termination, Executive's employment and performance of services shall continue for a period of 30 days following the Notice of Termination. Otherwise Executive's employment shall terminate effective upon receipt of the Notice of Termination, unless otherwise agreed between the parties. 6.5 GOOD REASON For the purposes of this Agreement, "Good Reason" means, as a result of or following a "Corporate Transaction" (as defined in the Option Plan), a material alteration of Executive's position or duties, a reduction of Executive's Base Salary, or a requirement that Executive move more than 100 miles, provided that Executive gives Notice of Termination within 30 days of such change. 7. SEVERANCE PAYMENTS. In the event of termination of the employment of Executive, all compensation and benefits set forth in this Agreement shall terminate as of the effective date of termination, provided, however, that if the Company terminates Executive's employment without Cause, or if Executive terminates his employment for Good Reason, the Company shall be obligated to pay to Executive his then regular Base Salary for a period of 6 months after the effective date of termination of employment. 8. AGREEMENT NOT TO COMPETE As a condition of his employment hereunder, Executive has executed and delivered to the Company an agreement addressing his obligation not to compete with the business of the Company (the "Non-Compete Agreement") in accordance with standard Company policy, which Non-Compete Agreement shall survive termination of Executive's employment. During the term of this Agreement, and for 12 months following termination of employment hereunder, Executive will not solicit or otherwise recruit, directly or indirectly, any employees of the Company for employment elsewhere. 9. AGREEMENT NOT TO DISCLOSE CONFIDENTIAL INFORMATION As a condition of his employment hereunder, Executive has executed and delivered to the Company an agreement addressing the nondisclosure of confidential information and ownership of inventions (the "Non-Disclosure Agreement") in accordance with standard Company policy, which Non-Disclosure Agreement shall survive termination of Executive's employment. 10. FORM OF NOTICE. Every notice required by the terms of this Agreement shall be given in writing by serving the same upon the party to whom it was addressed personally, by courier, by facsimile transmission (with hard copy delivered by overnight 2 3 courier) or by registered or certified mail, return receipt requested, at the address set forth below or at such other address as may hereafter be designated by notice given in compliance with the terms hereof: If to Executive: 6133 164th Avenue SE Bellevue, WA 98006 If to Company: Mosaix, Inc. 6464 185th Avenue NE Redmond, WA 98052 Attn.: Wm. Bradford Weller, General Counsel Notice shall be effective upon personal delivery, delivery by courier, receipt of facsimile transmission or three days after mailing. 11. ASSIGNMENT. Executive agrees that this Agreement may be transferred or assigned by the Company to (a) any corporation resulting from any merger, consolidation or other reorganization to which the Company is a party or (b) any corporation, partnership, association or other person to which the Company may transfer all or substantially all of the assets and business, and such assignee or transferee shall succeed to the rights and obligations of the Company hereunder. This Agreement may not be assigned by Executive. 12. WAIVER. No waiver of any of the provisions of this Agreement shall be valid unless in writing, signed by the party against whom such claim or waiver is sought to be enforced, nor shall failure to enforce any right hereunder constitute a continuing waiver of the same of a waiver of any other right hereunder. 13. AMENDMENTS IN WRITING. No amendment, modification, waiver, termination or discharge of any provision of this Agreement, nor consent to any departure therefrom by either party hereto, shall in any event be effective unless the same shall be in writing, specifically identifying this Agreement and the provision intended to be amended, modified, waived, terminated or discharged, and signed by the Company and Executive. No provision of this Agreement shall be varied, contradicted or explained by any oral agreement, course of dealing or performance or any other matter not set forth in an agreement in writing and signed by the Company and Executive. 14. APPLICABLE LAW -- VENUE. This Agreement shall be governed by the laws of the state of Washington, without regard to its conflicts of laws provisions. Venue of any action brought to enforce or interpret this Agreement shall be in Seattle, Washington, and the parties consent to jurisdiction in the federal and state courts in such venue. 15. SEVERABILITY. In the event that any provision of this Agreement shall be determined by any court or arbitrator of competent jurisdiction to be unenforceable or otherwise invalid for any reason, such provision shall be enforced and validated to the extent permitted by law, and the court or arbitrator shall have the power to reform such provision to the extent necessary for such provision to be enforceable under applicable law. All provisions of this Agreement are severable, and the unenforceability of any single provision hereof shall not affect the remaining provisions. 16. HEADINGS. All headings or titles in this Agreement are for the purpose of reference only and shall not in any way affect the interpretation or construction of this Agreement 17. ATTORNEYS FEES & COSTS. In any action or proceeding brought by either party against the other arising out of or in any way relating to this Agreement, the prevailing party shall, in addition to other allowable costs and remedies, be entitled to an award of reasonable attorneys' fees and costs incurred in connection with such action or proceeding. 3 4 IN WITNESS WHEREOF, the parties have executed and entered into this Agreement as of the date above first written. EXECUTIVE: COMPANY: MOSAIX, INC., a Washington Corporation BRUCE A. LEADER By:___________________________________ Wm. Bradford Weller Its General Counsel & Assistant Secretary 4 EX-10.30 9 EMPLOYMENT AGREEMENT DTD 2/5/98; NICHOLAS TILIACOS 1 EXECUTIVE EMPLOYMENT AGREEMENT THIS AGREEMENT is made as of the 5th day of February, 1998, between NICHOLAS A. TILIACOS, a Washington resident ("Executive"), and MOSAIX, INC., a Washington corporation ("Company"). IN CONSIDERATION of the mutual covenants and promises contained herein, the parties agree as follows: 1. EMPLOYMENT. The Company hereby employs Executive, and Executive hereby accepts employment by the Company, as the Company's President and Chief Executive Officer, responsible for the management and direction of the day-to-day business operations of the Company, subject to the direction and control of the Board of Directors of the Company and to the terms of the Articles of Incorporation and Bylaws of the Company. The Executive will perform such additional duties as may be assigned from time to time by the Board of Directors of the Company which relate to the business of the Company, its subsidiaries or any business ventures in which the Company or its subsidiaries may participate. This Agreement supersedes in its entirety that certain Executive Employment Agreement dated February 26, 1996 between Executive and the Company. 2. APPOINTMENT AS DIRECTOR. Executive shall initially be a member of the Company's Board of Directors. Thereafter, subject to and consistent with the Company's Articles of Incorporation and ByLaws, and subject to and consistent with its responsibilities under law, the Board of Directors will include Executive as a part of the appropriate slate of Directors for whom it solicits proxies in connection with the annual meeting of shareholders. Consistent herewith, it is the intent of the Board of Directors to nominate Executive for election to serve a three year term as a director of the Company at the next annual meeting of the Company. If Executive's employment as President and Chief Executive Officer terminates for any reason, Executive hereby resigns as a director, effective upon such termination. 3. ATTENTION AND EFFORT. Executive will devote his full business time, attention and effort to the Company's business and will use his skills and render services to the best of his ability to serve the interests of the Company. 4. TERM. Unless otherwise terminated as provided in Section 7 of this Agreement, Executive's term of employment under this Agreement shall commence as of the date hereof and shall expire upon Executive's resignation or termination. 5. COMPENSATION. 5.1 BASE SALARY Executive's compensation shall consist, in part, of an annual base salary of $215,000 before all customary payroll deductions (the "Base Salary"). The Base Salary shall be paid in substantially equal installments at the same interval as other officers of the Company are paid, or otherwise in conformance with the Company's standard payroll practices. The Board of Directors of the Company shall determine any increases in the Base Salary in future years. 5.2 BONUS Executive may be entitled to receive, in addition to the Base Salary, an annual bonus (the "Bonus") in an amount to be determined pursuant to the Company's Management Bonus Plan, CEO level, as approved by the Board of Directors of the Company, in effect for each calendar year. 5.3 STOCK OPTIONS Executive has been granted incentive stock options &/or nonqualified stock options to purchase 187,500 shares of common stock of the Company pursuant to the terms of the Company's 1996 Stock Incentive Compensation Plan (the "Option Plan"). 6. BENEFITS AND EXPENSES. 6.1 EXPENSES The Company shall promptly reimburse Executive for all reasonable and necessary business expenses incurred and advanced by him in carrying out his duties under this Agreement, consistent with Company policies in connection therewith. Executive shall present to the Company from time to time an itemized account of such expenses in such form as Company policies may require. 1 2 6.2 BENEFITS During the term of employment hereunder, Executive shall be entitled to participate fully in any benefit plans, programs, policies and fringe benefits which may be made available to the senior executives of the Company generally, including medical, dental, disability, pension and retirement benefits, life insurance and other death benefits. Executive will initially be entitled to 3 weeks vacation per year and any other vacation or personal time off in accordance with Company policy. 6.3 OTHER The Company shall provide Executive an office and with secretarial support suitable to the position of President. 7. TERMINATION. 7.1 BY THE COMPANY With or without "Cause" (as defined in the Option Plan), the Company may terminate the employment of Executive at any time during the term upon giving Notice of Termination (as defined below). 7.2 BY EXECUTIVE Executive may terminate his employment at any time for Good Reason (as defined below) or otherwise upon giving Notice of Termination. 7.3 AUTOMATIC TERMINATION Employment shall terminate automatically upon death or total disability of Executive. The term "total disability" as used herein means an inability to perform the duties set forth in paragraph 1 of this Agreement because of illness or physical or mental disability for a period or periods aggregating 180 calendar days in any 12-month period, unless Executive is granted a leave of absence by the President or the Board of Directors of the Company. Executive and Company hereby acknowledge that Executive's ability to perform the duties specified in paragraph 1 hereof is of the essence of this Agreement. Termination hereunder shall be deemed to be effective immediately upon Executive's death or 30 days following a Notice of Termination based upon a determination by the Board of Directors of the Company of Executive's total disability as defined herein. 7.4 NOTICE The term "Notice of Termination" means written notice of termination of Executive's employment. At the election of the Company, as set forth in its Notice of Termination or in a written response to Executive's Notice of Termination, Executive's employment and performance of services shall continue for a period of 30 days following the Notice of Termination. Otherwise Executive's employment shall terminate effective upon receipt of the Notice of Termination, unless otherwise agreed between the parties. 7.5 GOOD REASON For the purposes of this Agreement, "Good Reason" means, as a result of or following a "Corporate Transaction" of the Company (as defined in the Option Plan), a material alteration of Executive's position or duties, a reduction of Executive's Base Salary, or a requirement that Executive move more than 100 miles, provided that Executive gives Notice of Termination within 30 days of such change. 8. SEVERANCE PAYMENTS. In the event of termination of the employment of Executive, all compensation and benefits set forth in this Agreement shall terminate as of the effective date of termination, provided, however, that if the Company terminates Executive's employment without Cause, or if Executive terminates his employment for Good Reason, the Company shall be obligated to pay to Executive his then regular Base Salary for a period of 12 months after the effective date of termination of employment. 9. AGREEMENT NOT TO COMPETE OR SOLICIT EMPLOYEES As a condition of his employment hereunder, Executive has executed and delivered to the Company an agreement addressing his obligation not to compete with the business of the Company (the "Non-Compete Agreement") in accordance with standard Company policy, which Non-Compete Agreement shall survive termination of Executive's employment. During the term of this Agreement, and for 12 months following termination of employment hereunder, Executive will not solicit or otherwise recruit, directly or indirectly, any employees of the Company for employment elsewhere. 10. AGREEMENT NOT TO DISCLOSE CONFIDENTIAL INFORMATION As a condition of his employment hereunder, Executive has executed and delivered to the Company an agreement addressing the nondisclosure of confidential information and ownership of inventions (the "Non-Disclosure 2 3 Agreement") in accordance with standard Company policy, which Non-Disclosure Agreement shall survive termination of Executive's employment. 11. FORM OF NOTICE. Every notice required by the terms of this Agreement shall be given in writing by serving the same upon the party to whom it was addressed personally, by courier, by facsimile transmission (with hard copy delivered by overnight courier) or by registered or certified mail, return receipt requested, at the address set forth below or at such other address as may hereafter be designated by notice given in compliance with the terms hereof: If to Executive: Nicholas A. Tiliacos 1130 Lancaster Way SE Issaquah, WA 98029 If to Company: Mosaix, Inc. 6464 185th Avenue NE Redmond, WA 98052 Attn.: Wm. Bradford Weller, General Counsel Notice shall be effective upon personal delivery, delivery by courier, receipt of facsimile transmission or three days after mailing. 12. ASSIGNMENT. Executive agrees that this Agreement may be transferred or assigned by the Company to (a) any corporation resulting from any merger, consolidation or other reorganization to which the Company is a party or (b) any corporation, partnership, association or other person to which the Company may transfer all or substantially all of the assets and business, and such assignee or transferee shall succeed to the rights and obligations of the Company hereunder. This Agreement may not be assigned by Executive. 13. WAIVER. No waiver of any of the provisions of this Agreement shall be valid unless in writing, signed by the party against whom such claim or waiver is sought to be enforced, nor shall failure to enforce any right hereunder constitute a continuing waiver of the same of a waiver of any other right hereunder. 14. AMENDMENTS IN WRITING. No amendment, modification, waiver, termination or discharge of any provision of this Agreement, nor consent to any departure therefrom by either party hereto, shall in any event be effective unless the same shall be in writing, specifically identifying this Agreement and the provision intended to be amended, modified, waived, terminated or discharged, and signed by the Company and Executive. No provision of this Agreement shall be varied, contradicted or explained by any oral agreement, course of dealing or performance or any other matter not set forth in an agreement in writing and signed by the Company and Executive. 15. APPLICABLE LAW -- VENUE. This Agreement shall be governed by the laws of the state of Washington, without regard to its conflicts of laws provisions. Venue of any action brought to enforce or interpret this Agreement shall be in Seattle, Washington, and the parties consent to jurisdiction in the federal and state courts in such venue. 16. SEVERABILITY. In the event that any provision of this Agreement shall be determined by any court or arbitrator of competent jurisdiction to be unenforceable or otherwise invalid for any reason, such provision shall be enforced and validated to the extent permitted by law, and the court or arbitrator shall have the power to reform such provision to the extent necessary for such provision to be enforceable under applicable law. All provisions of this Agreement are severable, and the unenforceability of any single provision hereof shall not affect the remaining provisions. 17. HEADINGS. All headings or titles in this Agreement are for the purpose of reference only and shall not in any way affect the interpretation or construction of this Agreement 18. ATTORNEYS FEES & COSTS. In any action or proceeding brought by either party against the other arising out of or in any way relating to this Agreement, the prevailing party shall, in addition to other allowable costs and remedies, be entitled to an award of reasonable attorneys' fees and costs incurred in connection with such action or proceeding. 3 4 IN WITNESS WHEREOF, the parties have executed and entered into this Agreement as of the date above first written. EXECUTIVE: COMPANY: MOSAIX, INC., a Washington Corporation NICHOLAS A. TILIACOS By : ___________________________________ Wm. Bradford Weller Its General Counsel & Assistant Secretary 4 EX-10.31 10 LEASE AGREEMENT DATED 12/11/97 1 EXHIBIT 10.31 MILLENNIUM CORPORATE PARK LEASE AGREEMENT REDMOND, WASHINGTON 2 THIS LEASE is made the 11th day of December, 1997, between MILLENNIUM CORPORATE PARK L.L.C., A WASHINGTON LIMITED LIABILITY COMPANY (the "Landlord"), and MOSAIX, INC., a Washington corporation (the "Tenant"). RECITALS (A) Capitalized terms used herein are defined in Article 20 of this Lease. (B) The Landlord is the owner of the Lands, subject however to existing liens and encumbrances of record, and has constructed, or is in the process of constructing, improvements thereon, including the Building generally in accordance with the plans set forth in SCHEDULE "A". (C) The Landlord and the Tenant desire to enter into a lease with respect to the Leased Premises. NOW THEREFORE in consideration of the rents, covenants and agreements hereinafter reserved and contained, the parties agree to this Lease of the Leased Premises on the terms and conditions set forth herein: BASIC TERMS
.01 AREA OF LEASED PREMISES: All of Building C, consisting of approximately 102,594 square feet. The actual Area of the Leased Premises shall be measured in accordance with BOMA (as defined in Section 20.02) by Landlord's Architect following completion of the Building shell and the Monthly Rent and other charges due from Tenant under this Lease shall be based on such actual measurement.
.02 BASIC TRIPLE NET RENT: Monthly Rate Months Per Square Foot Monthly Rent ------ --------------- ------------ Commencement Date through February 28, 1999 $1.13 $115,931.22 March 1, 1999 through February 28, 2002 $1.13 $115,931.22 March 1, 2002 through February 28, 2005 $1.20 $123,112.80 March 1, 2005 through February 28, 2009 $1.35 $138,501.90 .03 PERMITTED USE: General office use. .04 TERM: Commencement Date through February 28, 2009, with two (2) options to renew pursuant to Article 1.02 below. .05 SECURITY DEPOSIT: $0.00
The foregoing Basic Terms are agreed to by the Landlord and the Tenant and any reference in this Lease to any one of the same shall include the provisions set forth above with respect thereto and in addition any more specific definition or reference hereinafter provided. ARTICLE I DEMISE AND TERM 1.01 DEMISE AND TERM The Landlord does hereby demise and lease unto the Tenant the Leased Premises to have and to hold for and during the Term. For so long as the Tenant duly and punctually pays the Rent, and performs and observes its covenants herein undertaken, the Tenant shall be entitled for the benefit of the Leased Premises to enjoy, upon the terms and conditions established or altered pursuant to this Lease, the use in common with others entitled thereto of the Common Areas and the Common Facilities. 3 1.02 OPTION TO RENEW TERM. (a) OPTION GRANTED. Provided Tenant is not in default under this Lease, and subject to the conditions described in this Article, Tenant shall have the option to renew the Term of this Lease for two (2) consecutive periods of three (3) to five (5) years each (such renewal periods are hereinafter referred to as a "Renewal Term" or as the "First Renewal Term" and the "Second Renewal Term"). The First Renewal Term shall commence immediately following the expiration of the Term and the Second Renewal Term shall commence immediately following the expiration of the First Renewal Term. (b) EXERCISE OF OPTION. With respect to the First Renewal Term, Tenant shall exercise its option to renew, if at all, by giving Landlord written notice (the "First Exercise Notice") of Tenant's intention to do so at least nine (9) months prior to the expiration of the Term. The First Exercise Notice shall set forth the duration of the First Renewal Term, which shall be a minimum of three (3) years and a maximum of five (5) years. With respect to the Second Renewal Term, Tenant shall exercise its option, if at all, by giving Landlord written notice (the "Second Exercise Notice") of Tenant's intention to do so at least nine (9) months prior to the expiration of the First Renewal Term. The Second Exercise Notice shall set forth the duration of the Second Renewal Term, which shall be a minimum of three (3) years and a maximum of five (5) years. In the event Tenant fails to timely exercise its renewal option for either the First Renewal Term or the Second Renewal Term, this Article 1.02 shall be considered null and void and of no further force and effect. If Tenant is in default under this Lease, Tenant shall have no right to renew the term of this Lease; provided, that the period of time within which said option may be exercised shall not be extended or enlarged by reason of Tenant's inability to exercise said option because of a default. (c) TERMS OF RENEWAL. In the event Tenant validly exercises its option to renew the Term as herein provided, Tenant's lease of the Leased Premises for each Renewal Term shall be on the same terms and conditions contained in the Lease, except that (i) Basic Triple Net Rent for each Renewal Term shall be as set forth hereinbelow, (ii) there shall be no allowances, commissions, or other concessions paid by Landlord except as otherwise provided for herein and expressly made applicable to a Renewal Term, and (iii) no additional options to renew shall apply following the expiration of the Second Renewal Term. Basic Triple Net Rent shall be adjusted as of the commencement date of each applicable Renewal Term as follows: (1) Landlord shall notify Tenant in writing (the "Option Rent Proposal") within fifteen (15) days after receipt of the applicable Exercise Notice of the Basic Triple Net Rent for which Landlord is willing to lease the Premises during the applicable Renewal Term, and any new or revised Lease provisions which Landlord is then using in Landlord's standard lease form and which Landlord wishes to include in the Renewal Term lease (the "New Terms"). The rental rate quoted in the Option Rent Proposal shall be based on the then "Prevailing Market Rental Rate" as defined hereinafter. (2) Upon receipt of the Option Rent Proposal, Tenant shall have an additional fifteen (15) days during which to notify Landlord in writing (the "Option Rent Acceptance Notice") that Tenant elects to exercise the applicable renewal option and lease the Premises for the applicable Renewal Term at the Basic Triple Net Rent and upon New Terms presented by Landlord in the Option Rent Proposal. (3) Notwithstanding subsection (2) above to the contrary, Tenant may during the fifteen (15) days after the receipt of Option Rent Notice submit in writing ("Option Rent Counter Proposal") to Landlord notice of the Basic Triple Net Rent Tenant is willing to lease the Premises for with respect to the applicable Renewal Term and any comments Tenant may have on the New Terms as presented by Landlord. The rental rate contained in the Option Rent Counter Proposal shall be based on the then Prevailing Market Rental Rate as defined hereinafter. In the event Tenant submits an Option Rent Counter Proposal, Landlord and Tenant shall attempt to agree upon the Basic Triple Net Rent and New Terms for the applicable Renewal Term within an additional thirty (30) days from the receipt of the Option Rent Counter Proposal. If Landlord and Tenant are successful in agreeing on Basic Triple Net Rent and New Terms within the said thirty (30) day period, Tenant then shall submit an Option Rent Acceptance Notice to Landlord reflecting such amount and New Terms as agreed. If Landlord and Tenant fail to agree upon the Basic Triple Net Rent and New Terms within said thirty (30) day period, and provided that Tenant has not exercised its Contraction Option under Section 1.04 below and will be occupying the entire Leased Premises initially leased under this Lease during the applicable Renewal Term, such Basic Triple Net Rent and terms shall be determined pursuant to subsection 1.02(c)(4) below. If Tenant will be occupying less than the entire Leased Premises initially leased under this Lease during the applicable Renewal Term and Tenant has not exercised its Contraction Option under Section 1.04 below and Landlord and Tenant fail to agree upon the Basic Triple Net Rent and New Terms within said thirty (30) day period, Tenant shall be deemed to have elected to relinquish its option to renew for the applicable Renewal Term and all other rights under this Article 1.02, and this Lease shall terminate upon the original termination date. 2 4 (4) Within ten (10) days after the expiration of the thirty (30) day period set forth in the previous sentence, each party, at its own cost and by giving notice to the other party, shall appoint a real estate appraiser with at least five (5) years full-time commercial real estate appraisal experience in the area in which the Leased Premises are located to set Basic Triple Net Rent and establish the New Terms for the applicable Renewal Term. If a party does not appoint an appraiser within ten (10) days after the other party has given notice of the name of its appraiser, the single appraiser appointed shall be the sole appraiser and shall set Basic Triple Net Rent and the New Terms for the applicable Renewal Term. If each party shall have so appointed an appraiser, the two appraisers shall meet promptly and attempt to set the Basic Triple Net Rent and New Terms for the applicable Renewal Term. The Basic Triple Net Rent shall be based on the Prevailing Market Rental Rate. If the two appraisers are unable to agree within ten (10) days after the second appraiser has been appointed, they shall attempt to select a third appraiser meeting the qualifications herein stated within ten (10) days after the last day the two appraisers are given to set Basic Triple Net Rent and New Terms. If the two appraisers are unable to agree on the third appraiser within such ten (10) day period, either of the parties to this Lease, by giving five (5) days notice to the other party, may apply to the then presiding judge of the Superior Court of King County for the selection of a third appraiser meeting the qualifications stated in this paragraph. Each of the parties shall bear one-half (1/2) of the cost of appointing the third appraiser and of paying the third appraiser's fee. The third appraiser, however selected, shall be a person who has not previously acted in any capacity for either party. Within ten (10) days after the selection of the third appraiser, a majority of the appraisers shall set Basic Triple Net Rent and New Terms for the applicable Renewal Term. If a majority of the appraisers are unable to agree upon the Basic Triple Net Rent and New Terms within the stipulated period of time, the three appraisals shall be added together and their total divided by three (3). The resulting quotient shall be the Basic Triple Net Rent for the Leased Premises during the applicable Renewal Term. If, however, the low appraisal and/or the high appraisal is/are more than five percent (5%) lower and/or higher than the middle appraisal, the low appraisal and/or the high appraisal shall be disregarded. If only one (1) appraisal is disregarded, the remaining two (2) appraisals shall be added together and their total divided by two (2), and the resulting quotient shall be Basic Triple Net Rent for the Leased Premises during the applicable Renewal Term. If the appraisers are unable to agree on all of the New Terms, such New Terms as are agreed upon, if any, shall be applicable for the Renewal Term. (5) The term "Prevailing Market Rental Rate" as used in this Article 1.02 shall mean rental rates that a majority of landlords in the area, whose ownership status are similar to the Landlord, are willing to lease premises that are in comparable condition and location with the Premises, to tenants of similar financial and credit worthiness as Tenant, for a similar term of the lease, as of the applicable Renewal Term commencement date if such premises were exposed for lease on the open market for a reasonable period of time. Rental rates quoted or used under sublease agreements or predetermined option rights shall be considered rates of special circumstances and shall be excluded from the definition of the Prevailing Market Rental Rate under this Article 1.02. (6) Notwithstanding anything to the contrary provided in this Article 1.02, if Landlord and Tenant fail to agree on the Basic Triple Net Rent and other terms for the applicable Renewal Term within the thirty (30) day period set forth in subsection (3) above, Landlord shall have the right to actively market the Premises to any potential third party tenants. (d) OPTION PERSONAL TO TENANT. The renewal option set forth in this Article 1.02 is granted for Tenant's personal benefit and may not be assigned or transferred by Tenant, either voluntarily or by operation of law, in any manner whatsoever. In the event that Landlord consents to a sublease or assignment under this Lease, the renewal option granted hereunder shall be void and of no further force and effect, whether or not Tenant shall have purported to exercise the renewal option prior to such assignment or sublease. (e) AMENDMENT TO LEASE. In the event Tenant timely and properly exercises the renewal option, Landlord and Tenant shall within fifteen (15) days after the determination of Basic Triple Net Rent and the New Terms for the applicable Renewal Term execute an amendment to this Lease extending the Term for the applicable Renewal Term at the established Basic Triple Net Rent and on the New Terms agreed upon or, if applicable, as determined by the appraisers. 1.03 RIGHT OF FIRST REFUSAL (a) GRANT OF RIGHT. Landlord agrees that, to the extent that portions of the 25,000 square feet of space located on the first (1st) floor of Building B in the location shown on SCHEDULE A-2 become available to lease during the first thirty-six (36) months of the Term, prior to leasing any portion of the space (each such portion being referred to as "Right of First Refusal Space") to a third party, Landlord shall notify Tenant in writing that Landlord has received an offer to lease a portion of the Right of First Refusal Space from a third party (the "Offer") and Tenant shall have the right (each, a "Right of First Refusal") to rent the Right of First Refusal Space on the terms set forth in this Article 1.03. 3 5 (b) EXERCISE OF RIGHT OF FIRST REFUSAL. Provided that Tenant is not then in default hereunder, Tenant may exercise the Right of First Refusal by sending Landlord, within five (5) days of receipt by Tenant of the Offer, a notice stating that Tenant elects to rent the Right of First Refusal Space upon the terms and conditions set forth in this Article 1.03. If Tenant duly and timely exercises the Right of First Refusal, Landlord and Tenant shall promptly enter into an amendment to this Lease incorporating the Right of First Refusal Space upon the terms set forth in this Article 1.03. If for any reason Tenant fails to duly and timely exercise its Right of First Refusal, or if Tenant properly exercises such right but thereafter does not enter into an amendment within ten (10) days after Landlord delivers such amendment, Landlord shall be free to lease the Right of First Refusal Space to any third party on the terms of the Offer. Should Landlord not lease the Right of First Refusal Space to a third party on the Offer terms, or if the Right of First Refusal Space leased to a third party in accordance with this provision becomes available again during the Term, Tenant's Right of First Refusal shall continue in accordance with the foregoing provisions for the first thirty-six (36) months of the Term, upon which date this Right of First Refusal shall expire. Each Right of First Refusal shall, at Landlord's election, be null and void if Tenant is in default under this Lease at the date Landlord would otherwise notify Tenant of the Offer or at any time thereafter and prior to commencement of Tenant's lease of the Right of First Refusal Space. (c) TERMS OF RIGHT OF FIRST REFUSAL SPACE. Tenant's lease of the Right of First Refusal Space shall be on terms identical to those set forth in this Lease, except that (i) the lease term for such Right of First Refusal Space shall be co-terminus with the Term (including any renewal options) of this Lease, (ii) Basic Triple Net Rent for the Right of First Refusal Space shall be at the per rentable square foot rate in effect under this Lease during the term of Tenant's lease of such Right of First Refusal Space, (iii) notwithstanding anything to the contrary in the Offer, Tenant shall lease the greater of (1) 5,000 square feet of the Right of First Refusal Space, or (2) a minimum of 75% of the amount of Right of First Refusal Space covered by the Offer, (plus any applicable load factor) each time it exercises a Right of First Refusal, and (iv) other than the "Right of First Refusal Space Allowance" set forth below, there shall be no concessions with respect to the Right of First Refusal Space including, without limitation, free rent, allowances, or leasing commissions, or other concessions made by the Landlord initially with respect to this Lease except as otherwise provided for herein and expressly made applicable to the Right of First Refusal Space. If Tenant duly and timely exercises its Right of First Refusal, Landlord shall provide Tenant with an allowance (the "Right of First Refusal Space Allowance") equal to $31.00 per useable square foot of Right of First Refusal Space leased by Tenant. The Right of First Refusal Space Allowance shall be used solely for the design and construction of permanently affixed tenant improvements to the Right of First Refusal Space. Any tenant improvements to the Right of First Refusal Space shall be constructed by Landlord in accordance with the provisions set forth on Schedule B with respect to the construction of the initial Tenant Improvements. (d) RIGHT PERSONAL TO TENANT. The Right of First Refusal set forth in this Article 1.03 is granted for Tenant's personal benefit and may not be assigned or transferred by Tenant, either voluntarily or by operation of law, in any manner whatsoever. In the event that Landlord consents to a sublease or assignment under this Lease, the Right of First Refusal granted hereunder shall be void and of no further force and effect, except to the extent that Tenant then occupies Right of First Refusal Space. 1.04 CONTRACTION OPTION. (a) OPTION GRANTED. Subject to the conditions set forth in this Article 1.04, Tenant shall have the one-time option to terminate this Lease with respect to a portion of the Leased Premises (the "Contraction Option") effective on the fifth (5th) anniversary of the Commencement Date (the "Contraction Date"). (b) CONDITIONS. Tenant's Contraction Option shall be subject to Tenant satisfying the following conditions: (1) Tenant shall give Landlord at least nine (9) months prior written notice (the "Contraction Notice") of its election to exercise the Contraction Option. The Contraction Notice shall contain a floor plan showing the proposed space to be returned (the "Released Space") and an estimate of the rentable square footage of such Released Space. (2) On or before the date which is ninety (90) days prior to the Contraction Date, Tenant shall pay to Landlord a fee equal to Landlord's reasonable determination of a pro rata share of the unamortized portion of all leasing commissions, tenant improvement costs, all other allowances, and concessions granted or paid by Landlord under this Lease as of the Contraction Date. Such pro rata share shall be based on the size of the Released Space. (3) The Released Space shall be contiguous space of not less than 5,000 rentable square feet and not more than 20,000 rentable square feet. 4 6 (4) The Released Space shall be in a location reasonably acceptable to Landlord and, at a minimum, shall (A) have access to a common corridor, (B) have reasonable access to Common Areas and Common Area Facilities, and (C) be space that a reasonable tenant and a reasonable landlord would consider leasing, taking into account such factors as space configuration. (5) At least ninety (90) days prior to the Contraction Date, Landlord and its contractors shall have access to the Leased Premises for the purpose of planning any necessary demising walls, doors, or other necessary modifications to segregate the Released Space from the Leased Premises. (6) The Contraction Option shall be void if Tenant is in default under the Lease at the time Tenant exercises its Contraction Option or on the Contraction Date. (c) TERMS OF REMAINING LEASED PREMISES. Provided that the conditions set forth in subsection (b) above are met, effective on the Contraction Date, all Lease terms shall remain in effect except that (1) the Leased Premises shall consist of the Leased Premises minus the Released Space, and (2) Basic Triple Net Rent and Additional Rent shall be reduced proportionately to reflect the removal of the Released Space from the Leased Premises. (d) AMENDMENT TO LEASE. In the event Tenant timely and properly exercises the Contraction Option, Landlord and Tenant shall within sixty (60) days after receipt of the Contraction Notice by Landlord sign an amendment to this Lease confirming the size of the Released Space, the size of the remaining Leased Premises, the Basic Triple Net Rent and Additional Rent applicable to the remaining Leased Premises, and any other terms related to the downsizing that either party reasonably requests. 1.05 SURRENDER OF LEASED PREMISES Upon the expiration or sooner termination of this Lease, the Tenant shall vacate and surrender to the Landlord the Leased Premises in accordance with the provisions of this Lease. Except to the extent as otherwise expressly agreed by the Landlord in writing, no leasehold improvements shall be removed by the Tenant from the Leased Premises either during or at the expiration or sooner termination of the Term except that the Tenant shall at the end of the Term remove such leasehold improvements as the Landlord shall require to be removed together with all of Tenant's trade fixtures, furnishings, equipment and inventory and special improvements installed by Tenant following the initial build-out of the Leased Premises. The Tenant shall, in the case of every installation and removal of any improvements, trade fixtures, furniture or equipment, either during or at the end of the Term, make good any damage caused to the Leased Premises and any leasehold improvements therein by such installation and removal. ARTICLE 2 RENT 2.01 BASIC TRIPLE NET RENT The Tenant shall pay to the Landlord for the Term the Basic Triple Net Rent specified in Basic Term .02 in advance on the first day of each and every month during the Term. The first monthly payment shall be paid on the Commencement Date. If the Term commences on a day which is not the first day of a calendar month, then the first payment of Basic Triple Net Rent payable on the broken portion of a calendar month at the beginning of the Term shall be pro rated on a daily basis. 2.02 Additional Rent The Tenant shall pay to the Landlord for each and every Lease Year or portion thereof, the Additional Rent for such Lease Year or portion thereof. The amount of Additional Rent which the Tenant is to pay in each Lease Year or portion thereof shall be estimated by the Landlord in advance and the Tenant shall pay to the Landlord such amount in equal monthly payments in advance during such Lease Year or the portion thereof. The amount of the estimated Additional Rent may be adjusted, from time to time, during a Lease Year by the Landlord giving notice to the Tenant, in which event the remaining payments to be made by the Tenant as aforesaid in such Lease Year shall be adjusted accordingly. All remedies of the Landlord on non-payment of rent shall be applicable to the Additional Rent and the obligation of the Tenant to pay any monies pursuant to this Lease shall survive the expiration or sooner termination of this Lease. Notwithstanding the above provisions to the contrary, Tenant shall not be obligated to pay increases in the Controllable Costs above twelve percent (12%) per year following the first full calendar year of the Term. 5 7 2.03 ADJUSTMENT OF ADDITIONAL RENT Within ninety (90) days after the end of each Lease Year, the Landlord shall furnish to the Tenant a statement of the actual amount of Additional Rent payable by the Tenant for such preceding Lease Year and showing in reasonable detail the information relevant and necessary to the calculation thereof. If the amount payable by the Tenant as shown on such statement is more or less than the Additional Rent paid by the Tenant to the Landlord for such Lease Year pursuant to Article 2.02, the appropriate adjustment as between the Landlord and the Tenant shall be made within fourteen (14) days of delivery of such statement. Any payment made by the Landlord or made by the Tenant and accepted by the Landlord in respect of any adjustment made pursuant to this Article 2.03 shall be without prejudice to the right of the Landlord or the Tenant to claim a re-adjustment provided such claim if made by the Tenant is made within ninety (90) days after, or if made by the Landlord is made within one hundred twenty (120) days after, the date of delivery of the statement referred to in this Article 2.03. The Tenant shall have the right for a period of ninety (90) days following receipt of the aforesaid statement to, at its sole expense, inspect during the Landlord's normal business hours, subject to the inspection being reasonable in all the circumstances, any record kept or held by the Landlord of the costs or expenses claimed by the Landlord for such Lease Year and the Landlord shall make its said records available accordingly. 2.04 MANNER AND PLACE OF PAYMENT All Rent and all other sums payable by the Tenant to the Landlord hereunder shall be paid to the Landlord at the office of the Landlord hereinafter set forth, or at such other place as the Landlord may in writing, from time to time, direct without notice or demand, except as otherwise specifically provided herein, and without deduction, set off or abatement for any reason whatsoever. The Landlord may at its option apply all or any sums received from or due to the Tenant against amounts due and payable by the Tenant hereunder in such manner as the Landlord sees fit, regardless of any designation or instructions by the Tenant to the contrary. If Tenant fails to pay when due any Rent, Additional Rent, or any other sum, such unpaid amount will bear interest at the rate equal to the Prime Rate plus five percent per annum (but no more than the maximum rate permitted by law) from the due date until paid. In addition, Tenant acknowledges that the late payment by Tenant of any payment of Rent, Additional Rent or of any other sum due to Landlord will cause Landlord to incur certain costs and expenses not contemplated under this Lease, the exact amount of these costs being extremely difficult and impractical to ascertain. These costs include processing and accounting expenses and late charges which may be imposed on Landlord by its lender. Therefore, if any sum due from Tenant is not received by Landlord within 10 days after notice from Landlord that such sum is due, Tenant shall pay Landlord a late charge equal to three percent of the late payment or $100, whichever is greater. If any such sum is not received by Landlord within 20 days after notice from Landlord, the amount of the late charge paid by Tenant shall be five percent of the late payment or $175, whichever is greater. If any such sum is not received by Landlord within 30 days after notice from Landlord, the amount of the late charge to be paid by Tenant shall be seven percent of the late payment or $300, whichever is greater. The parties agree these late charges represent a reasonable estimate of the costs that Landlord will incur by reason of Tenant's late payment. 2.05 IRREGULAR CALCULATION OF BASIC TRIPLE NET RENT If for any reason it becomes necessary to calculate Basic Triple Net Rent for a period of less than one month the same shall be pro rated on a daily basis based on the number of days in the applicable month. 2.06 DISPROPORTIONATE ALLOCATION Notwithstanding anything else herein otherwise contained, to the extent that the Landlord, acting reasonably, determines that an item included in Additional Rent properly related to only a portion of the Development or to a portion of the Building, the Landlord may allocate such item to such portion of the Development or Building, as the case may be, in which event the Tenant's Proportionate Share, if the Leased Premises are within such portion, shall be calculated in relation to the Gross Rentable Area of all leasable premises in such portion. 2.07 NET LEASE INTENT Except to that extent otherwise specifically provided herein this Lease shall be a net lease to the Landlord such that the Basic Triple Net Rent shall be received by the Landlord free of all expenses whatsoever, it being the intent that the Tenant shall pay for its own account all amounts, charges, costs, duties, fees, rates and taxes in any way relating to the Leased Premises as well as the Additional Rent herein provided. 2.08 SECURITY DEPOSIT. INTENTIONALLY DELETED. 6 8 ARTICLE 3 CONSTRUCTION AND FIXTURING OF LEASED PREMISES 3.01 LANDLORD'S WORK AND TENANT IMPROVEMENTS Landlord shall complete the base, shell and core of the Building (the "Landlord's Work"). All improvements to the Leased Premises not included in Landlord's Work (the "Tenant Improvements") shall be constructed by Landlord or Landlord's contractor pursuant to the provisions of SCHEDULE "B" hereto. Except to the extent that the Building core work is included in the description of Tenant Improvements on Schedule "B", the Landlord's Work shall be performed at Landlord's expense. 3.02 COMMENCEMENT OF THE CONSTRUCTION If, at any time prior to the commencement of construction of the Building or the Development, the Landlord is in its opinion unable to obtain satisfactory government approvals including, without limiting the generality of the foregoing, development permits or building permits, with respect to the Building or the Development, then the Landlord shall have the right and option at any time thereafter to cancel this Lease and in such event, any money or security deposited hereunder shall be returned to the Tenant without interest, this Lease shall thereafter be null and void and neither party shall have any further claim, the one against the other. 3.03 PAYMENT FOR OTHER WORK All work done at the Tenant's request over and above the Tenant Improvements (including the supplying of materials or equipment) by the Landlord or its contractors or sub-contractors in or relating to the Leased Premises shall be paid for by the Tenant within thirty (30) days of Landlord's request for payment. 3.04 ACCEPTANCE OF LEASED PREMISES The taking of possession of the Leased Premises by the Tenant shall be deemed to be conclusive proof that except for items noted in a "punch-list" prepared by the Tenant during a joint inspection by the Tenant and the Landlord at the time of the taking of such possession, the Leased Premises are in the condition called for by this Lease to the extent that the Landlord is responsible therefor and that the Landlord has performed all of the Landlord's Work and Tenant Improvements with respect thereto in a good and workmanlike manner and Tenant has accepted the Leased Premises in "as is" condition. The itemizing of any matter in such list by the Tenant shall not preclude the Landlord from disputing the categorization of such matter as a deficiency. ARTICLE 4 CONDUCT OF BUSINESS 4.01 USE OF LEASED PREMISES The Tenant shall not use or occupy the Leased Premises or any part thereof for any purpose other than the Permitted Use without first obtaining the written consent of the Landlord. Tenant represents and warrants to Landlord that the Permitted Use is a lawful and permitted use under the zoning code of the City of Redmond. 4.02 PROHIBITED USES The Tenant shall not, at any time, carry on nor cause, permit or allow to be carried on in the Leased Premises any fire sale, distress sale, bankruptcy sale, going-out-of-business sale, or any other business sale designed to convey to the public that business operations are to be discontinued, an auction, a pawn business, a mail order business or any other business which because of the merchandise likely to be sold or the merchandising or pricing methods likely to be used would, in the reasonable opinion of the Landlord, tend to lower the character of the Development. 4.03 OPERATIONS DURING THE TERM The Tenant acknowledges that its continued occupancy of the Leased Premises and the regular conduct of its business therein are of the utmost importance to the Landlord in avoiding the appearance and impression generally created by vacant space in a development, in facilitating the leasing of vacant space, and in the renewal of other leases, and that the Landlord will suffer substantial damage if the Leased Premises are vacated or left vacant during the Term even if Basic Triple Net Rent is paid. The Tenant shall on the Commencement Date commence and thereafter during the Term, actively and diligently carry on in the Leased Premises the business specified as the Permitted Use, and 7 9 shall without limiting the generality of the foregoing, conduct its business in the entire Leased Premises. The Tenant will not during the Term vacate or abandon the Leased Premises either in full or in part. 4.04 SIGNS The Tenant shall not erect or place, or cause or allow to be erected or placed or maintain any signs of any nature or kind whatsoever either on the exterior walls of the Leased Premises or elsewhere in the Development. The Tenant shall not erect or place or cause or allow to be erected or placed in the windows of the Leased Premises, any signs, decoration, lettering or advertising matter of any kind (including signs placed in the interior of the Leased Premises for exterior view). Notwithstanding the above to the contrary, Landlord will install appropriate location and direction signs, two (2) exterior signs on the Building, and an entrance monument sign adjacent to Building C with Tenant's name on it, with a design to be agreed upon between Landlord and Tenant and of sizes and in locations acceptable to Landlord in Landlord's discretion. Landlord shall have the right, at the expiration of the Term or such shorter period to which the approval relates, to remove all of Tenant's signage at Tenant's sole cost and expense. Landlord will obtain all necessary approvals from the City of Redmond with respect to any sign of Tenant installed in the Development. 4.05 NUISANCE AND ANNOYANCE The Tenant shall not use or occupy the Leased Premises or cause or permit the same to be used or occupied for any unlawful purpose, or for any dangerous, noxious or offensive trade or business, or for any purpose likely to cause a nuisance or annoyance to the Landlord or any other tenants of the Development nor undertake any operation likely to cause the same, nor commit or cause to be done any waste, damage or disfigurement or injury to the Development or any part thereof nor permit or cause the overloading of any floors therein. 4.06 DELIVERY OF SUPPLIES AND MATERIALS The delivery and shipping of merchandise, supplies, fixtures and other materials or goods of whatsoever nature to or from the Leased Premises and all loading, unloading and handling thereof shall be done through such entrances as designated by the Landlord. 4.07 ORDINANCES AND REGULATIONS The Tenant shall, at Tenant's expense, observe and fulfill the provisions and requirements of all statutes, ordinances, laws, rules and regulations now in force or which may hereafter be in force, relating directly or indirectly to the use or occupancy of the Leased Premises and shall comply with all reasonable requirements of any insurer under any policy of insurance affecting the Development. 4.08 RULES AND REGULATIONS The Tenant shall observe and comply with and use its best efforts to cause its employees, agents, licensees and invitees to observe and comply with any and all rules and regulations communicated by the Landlord to the Tenant (including the Rules and Regulations attached hereto as SCHEDULE "C"), from time to time, which in the judgment of the Landlord are necessary or desirable in relation to all aspects of the use and occupancy by the Tenant of the Leased Premises, the Building, the Common Areas and the Common Facilities including for the reputation, care, safety and appearance of the Development, the preservation of good order therein and the operation and maintenance thereof, provided that such rules and regulations do not conflict with any express provisions of this Lease and are not discriminatory against the Tenant. The Tenant specifically acknowledges that the Landlord has and shall have the right to make rules and regulations as aforesaid. ARTICLE 5 REPAIRS 5.01 TENANT'S REPAIRS Except for repairs which are the Landlord's responsibility pursuant to Article 5.06 below (including all repairs to the heating, ventilating and air-conditioning systems), the Tenant shall at all times during the Term, at its own cost and expense, repair, maintain, operate and keep the Leased Premises, all equipment, fixtures, plumbing and electrical systems installed within the Leased Premises by or for the sole use of the Tenant, and any improvements now or hereafter made to the Leased Premises in good order, first class condition and repair (reasonable wear and tear excepted). The Tenant shall be responsible for all janitorial services respecting the Leased Premises (including the washing of the inside of windows therein) so as to keep the Leased Premises in a clean and tidy condition. Tenant may request that repairs or maintenance required under this Article 5.01 be performed by Landlord and, if Landlord 8 10 elects to perform repairs or maintenance requested by Tenant, the costs and expenses thereof shall be paid by Tenant to Landlord as Additional Rent within ten (10) days of Landlord's request for payment. 5.02 PERIMETER WALLS AND GLASS The Tenant shall promptly repair or make whole all damaged glass, plate glass, doors, windows, and perimeter walls in the Leased Premises as and whenever the same is required if the damage is caused by the negligent act or omission of Tenant. 5.03 LANDLORD'S EXAMINATION OF LEASED PREMISES The Landlord and any employee, agent or contractor of the Landlord shall be entitled, upon reasonable advance notice, at any time during normal business hours and at any time without notice in the event of an emergency, to enter and examine the state of maintenance, repair, decoration and cleanliness of the Leased Premises, all equipment and fixtures within the Leased Premises and any improvements now or hereafter made to the Leased Premises and the Landlord may give notice to the Tenant requiring that the Tenant perform such maintenance or effect such repairs, replacements or decoration or cleaning as is the responsibility of the Tenant and as may be found necessary from such examination. 5.04 LANDLORD'S RIGHT TO REPAIR In the event that the Tenant fails forthwith after receipt of written notice thereof, or within such reasonable time thereafter if for any cause beyond the control of the Tenant it is not reasonable in the circumstances (it being agreed that lack of finances on the part of the Tenant shall not be treated as a cause beyond the Tenant's control), to commence and diligently proceed to perform such maintenance or effect such repairs, replacements, decorations or cleaning as so specified in any notice given by the Landlord, the Landlord, its employees, agents or contractors may, but shall not be obligated to, enter the Leased Premises and at the Tenant's expense, perform and carry out the same and the Landlord in so doing shall not be liable for inconvenience, disturbance, loss of business or other damage resulting therefrom and in the event the Landlord expends any monies pursuant to the provisions of this Article 5.04, the Tenant shall pay the same to the Landlord on demand with a fee of twenty (20%) percent of such amount for the Landlord's supervisory function and in addition shall pay interest on the aggregate of the foregoing at the rate provided in this Lease from the date of the expenditure of such first mentioned monies by the Landlord. 5.05 LANDLORD'S RIGHT TO ENTER FOR OTHER REPAIRS The Landlord, and any employee, agent or contractor of the Landlord shall have the right to enter the Leased Premises at all times during business hours and at any time in the case of an emergency to make such alterations or repairs as the Landlord is required to make pursuant to the terms of this Lease or shall deem necessary for the safety, preservation, proper administration or improvement of the Development or any portion thereof and the Landlord in so doing, shall not be liable for inconvenience, disturbance, loss of business or other damage resulting therefrom except to the extent caused by the negligence of Landlord or any employee, agent or contractor of Landlord. 5.06 LANDLORD'S REPAIRS The Landlord shall, from time to time, throughout the Term: (a) carry out necessary repairs to the structural portions of the Building including the foundations, exterior walls, structural subfloors, the structural portions of bearing walls and structural columns and beams; (b) carry out repairs or replacements to the Common Areas and the Common Facilities, including the heating, ventilating and air-conditioning systems forming part of the Common Facilities; (c) repair and maintain the heating, ventilating and air-conditioning systems and other building standard equipment and systems within or serving the Leased Premises (excluding plumbing and electrical systems installed within the Leased Premises by or for the sole use of the Tenant) and the costs thereof shall form part of the HVAC Costs or Building Operation and Maintenance Costs, as the case may be hereunder; and (d) repair all damage to the Leased Premises which is covered by any insurance effected by the Landlord in accordance with the provisions of Article 8.03 hereof to the extent of the proceeds of such insurance applicable thereto; 9 11 PROVIDED HOWEVER that if any such repairs are necessitated by the negligence or misconduct of the Tenant, its agents, contractors, licensees, employees or others for whom in law the Tenant is responsible, the Tenant shall pay to the Landlord on demand the cost of such repairs and a fee of two and one-half percent (21/2%) for the Landlord's supervisory function and interest on the aggregate amount of both of the foregoing from the date of expenditure of the first mentioned monies by the Landlord. PROVIDED FURTHER that in any event the Landlord shall not be responsible for any damages, loss or injury sustained by the Tenant or any person or persons claiming through or under it, by reason of defects giving rise to the need for such repairs or the consequence thereof, including the inconvenience occasioned to the Tenant by the entry of the Landlord, its employees, agents, or contractors on the Leased Premises to effect such repairs except to the extent caused by the negligence of Landlord or any employee, agent or contractor of Landlord. 5.07 LANDLORD'S OBLIGATION TO MAINTAIN The Landlord shall maintain and keep the Common Areas and the Common Facilities in a state of repair and cleanliness consistent with the standard of a first class development of a similar nature. 5.08 DAMAGE AND DESTRUCTION In the event of damage or destruction of the Leased Premises or of the Building by fire, lightning, earthquake, windstorm or other casualty so that: (a) the same is damaged or destroyed to the extent that the same cannot with reasonable diligence be rebuilt, repaired or restored within one hundred and twenty (120) days of the date of damage or destruction (as determined in the opinion in writing of the Landlord's Architect, which written opinion shall be delivered to the Tenant within thirty (30) days of the occurrence of such damage or destruction) or the estimated cost of rebuilding, repairing or restoring such damage or destruction will exceed twenty percent (20%) of the full insurable value thereof, then, notwithstanding any other term or condition of this Lease to the contrary, the Landlord may terminate this Lease by notice in writing to the Tenant given within sixty (60) days of the occurrence of such damage or destruction, such notice to be effective as of the date of the damage or destruction if the Leased Premises are not capable of being utilized by the Tenant as determined by the Landlord's Architect and otherwise to be effective at the date specified in such notice of termination which shall not be less than thirty (30) days following receipt of such notice by the Tenant and in either of such events, the Rent hereby reserved shall be forthwith payable by the Tenant to the effective date of the termination, the Term hereby granted shall terminate as of that date and the Landlord may as of the effective date of termination re-enter and take possession of the Leased Premises and deal with the same as fully and effectively as if these presents had not been entered into. But if within the said period of sixty (60) days, the Landlord shall not give notice terminating this Lease, then as soon as reasonably practicable thereafter, the Landlord shall undertake or continue the rebuilding, repair or restoration with all reasonable diligence and the Basic Triple Net Rent hereby reserved, or a proportionate part thereof depending upon the proportion of the Leased Premises that are not fit for use by the Tenant for the intended purpose of this Lease, shall abate until the Leased Premises have been rebuilt and made fit for the intended purposes of this Lease; (b) the same is damaged or destroyed to the extent that the same can with reasonable diligence be rebuilt, repaired or restored within one hundred and twenty (120) days of the date of such damage or destruction (as determined in the opinion in writing of the Landlord's Architect, which written opinion shall be delivered to the Tenant within thirty (30) days of the occurrence of such damage or destruction) and the Landlord is not otherwise entitled to terminate this Lease pursuant to Article 5.08(a) the Landlord shall as soon as reasonably practicable after such determination, undertake or continue the repair of the same with all reasonable diligence provided, however, that nothing herein contained shall impose any obligation upon the Landlord to complete such repair within the said period of one hundred and twenty (120) days and the Basic Triple Net Rent hereby reserved, or a proportionate part thereof depending upon the proportion of the Leased Premises that are not fit for use by the Tenant for the intended purposes of this Lease, shall abate until the Leased Premises have been rebuilt and made fit for the intended purposes of this Lease. 10 12 5.09 QUALIFICATIONS (a) For the purposes of Article 5.08 the terms "Leased Premises" and "Building" shall be deemed not to include the Tenant's trade fixtures, merchandise, stock-in-trade, furniture or any other improvements installed in the Leased Premises by or on behalf of the Tenant. (b) If the Landlord rebuilds, repairs, or restores the Building or the Leased Premises as contemplated in Article 5.08 it will not be required to reproduce exactly the Leased Premises or the Building or restore the same to the exact condition that existed before the damage or destruction provided that it reproduces or restores or rebuilds the same to a comparable condition and configuration. (c) The certificate of the Landlord's Architect in charge of the rebuilding, repair or restoration shall bind the Landlord and the Tenant as to the state and proportion of the suitability for occupancy of the Leased Premises and as to the date upon which the Landlord's work of reconstruction or restoration is completed and the Leased Premises fit for the purposes of the Tenant. (d) Notwithstanding any of the provisions of Article 5.08 to the contrary, in the event the damage or destruction referred to therein is caused by the negligence or misconduct of the Tenant, its agents, employees, contractors, licensees or other persons for whom in law the Tenant is responsible: (i) and this Lease is not terminated as a result of such damage or destruction there shall be no abatement of Basic Triple Net Rent as contemplated in Article 5.08; and (ii) the Tenant shall indemnify and hold harmless the Landlord from and against any liabilities, damages, costs, claims, suits or actions of any nature whatsoever suffered by or incurred by the Landlord as a result of such damage or destruction and this indemnity and hold harmless covenant shall survive the expiration of the Term. 5.10 CONDITION OF EXPIRATION Upon the expiration of the Term the Tenant shall surrender and deliver up to the Landlord vacant possession of the Leased Premises, which Leased Premises at such time, unless the expiration of the Term has occurred pursuant to Article 5.08(i), shall be in the condition in which the same must be maintained during the Term pursuant to Articles 5.01 and 5.02 and as the same must otherwise be restored pursuant to Article 9.02. ARTICLE 6 COMMON AREAS AND COMMON FACILITIES 6.01 TENANT'S USE OF PARKING AREAS The Tenant shall be permitted to use three (3) parking stalls per 1,000 square feet of the useable area of the Leased Premises and shall park its vehicles and shall cause its employees to park their vehicles only in such parking areas as designated by the Landlord from time to time. The use of said parking stalls shall be at no additional charge to Tenant for the Term (including any Renewal Term). 6.02 LANDLORD'S RIGHT TO REMOVE VEHICLES Should the Tenant, its employees, suppliers or other persons not licensees or invitees of the Tenant park vehicles in areas not allocated for that purpose, the Landlord shall have the right to remove the said trespassing vehicles and the Tenant will save harmless the Landlord from any and all damages arising therefrom and the Tenant will pay the costs of such removal. 6.03 CONTROL OF COMMON AREAS AND COMMON FACILITIES The Landlord shall at all times have exclusive control and management of the Common Areas and the Common Facilities. Such control applies to signs, use of show windows, and the Tenant's publicity visible from the Common Areas, as well as to the use made by the Tenant and/or the public of the Common Areas. The Landlord shall have the right to alter, vary, designate and redesignate the Common Areas and the Common Facilities from time to time and to interfere with the use of the Common Areas and the Common Facilities to the extent necessary to make such alterations or variations or any other repairs required or permitted to be made by the Landlord under this Lease. 11 13 6.04 MERCHANDISE ON COMMON AREA In particular, but without in any way limiting the generality of the provisions of Article 6.03, the Tenant shall not keep, display, or sell any merchandise on or otherwise obstruct or use any part of the Common Areas or the Common Facilities, except as permitted by the Landlord and except for displays included in Development promotions when recognized and permitted by the Landlord. 6.05 VISITOR PARKING The Landlord shall at all times during the Term of this Lease, designate for the benefit of the licensees and invitees of the Tenant, visitor parking facilities, and Landlord agrees not to charge Tenant's licensees or invitees for the use of such parking facilities. ARTICLE 7 ASSIGNMENT AND SUB-LETTING 7.01 PROHIBITIONS The Tenant shall not assign or transfer this Lease or the Term or any portion thereof or let or sublet all or any part of the Leased Premises or grant any license with respect thereto (any of the foregoing being hereinafter called a "Transfer") without the written consent of the Landlord first had and obtained, which consent shall not be unreasonably withheld or delayed. All requests to the Landlord for consent to any Transfer shall be made to the Landlord in writing together with payment to the Landlord of three hundred dollars ($300.00) as a deposit on account of all costs incurred by the Landlord in considering and processing the request for consent and such information in writing as the Landlord might reasonably require respecting a transferee including, without limiting the generality of the foregoing, the name, address, business experience, financial position and banking and personal references of such transferee, and in the event the transferee is a corporation, similar information respecting the corporation and its principal shareholders, officers and directors. In addition, the request shall contain a comprehensive summary of the terms and conditions upon which the Transfer is to occur. Notwithstanding any provisions of this Article 7.01 to the contrary, after the Landlord receives such request and information in writing, it shall have the option, to be exercised by written notice within ten (10) days after the receipt of such request and information, to terminate this Lease and the Term hereof on not less than thirty (30) days and not more than ninety (90) days notice to the Tenant. If the Landlord elects to terminate this Lease as aforesaid, the Tenant shall have the right, to be exercised by written notice to the landlord within ten (10) days after receipt of such notice of termination, to withdraw the request for consent to the proposed Transfer, in which case the Tenant shall not proceed with such Transfer, the notice of termination shall be null and void and this Lease shall continue in full force and effect in accordance with its terms. If the Landlord consents to a Transfer, the Landlord shall have the following rights: (a) to require the Tenant to enter into an agreement in writing to implement all amendments to the Lease to give effect to the Landlord's exercise of its foregoing rights; and (b) to require the Transferee to enter into an agreement directly with the Landlord to perform and observe all the terms and conditions of the Tenant pursuant to this Lease. Whether or not the Landlord consents to any request to Transfer, the Tenant shall pay Landlord's out-of-pocket legal costs (not to exceed $500.00) incurred by the Landlord in considering any request for consent to Transfer and in completing any of the documentation involved in implementing such Transfer. If Landlord consents to any assignment of this Lease, Tenant shall pay to Landlord, as additional rent, one-half of all sums and other considerations payable to and for the benefit of Tenant by the assignee on account of the Assignment, as and when such sums and other consideration are due and payable by the assignee to or for the benefit of Tenant (or, if Landlord so requires, and without any release of Tenant's liability for the same, Tenant shall instruct the assignee to pay such sums and other consideration directly to Landlord). If for any proposed sublease Tenant receives rent or other consideration, either initially or over the term of the sublease, in excess of the rent called for hereunder or, in case of the sublease of a portion of the Premises, in excess of such rent fairly allocable to such portion, Tenant shall pay to Landlord as additional rent hereunder one-half of the excess of each such payment of rent or other consideration received by Tenant promptly after its receipt. Notwithstanding any other provisions of this Article 7.01 to the contrary, neither the Transfer nor the taking of any documentation in relation thereto shall affect the obligation of the Tenant 12 14 to perform and observe all of the terms and conditions in this Lease to be observed and performed by the Tenant. 7.02 CONTROL OF CORPORATION If the Tenant is a corporation, other than a corporation the shares of which are listed on any recognized stock exchange, effective control of the corporation shall not be changed directly or indirectly by a sale, encumbrance or other disposition of shares or otherwise howsoever without first obtaining the written consent of the Landlord; provided that the Landlord's consent shall not be required for any sale or other disposition of shares by present shareholders to and between themselves or in the event of any transmission of shares on death and provided further that the Landlord's consent shall not be unreasonably withheld where control of the Tenant is to pass to a subsidiary or parent of the Tenant. 7.03 JUDICIALLY-IMPOSED ASSIGNMENT If the non-assignment provisions of this Article 7 are deemed to be unenforceable in any bankruptcy proceeding, Landlord and Tenant agree that a showing of adequate assurance of future performance by a prospective assignee of this Lease must include, without limitation, clear and convincing evidence that: i) Landlord will receive the full benefit of every term of its bargain under this Lease, except for the non-assignment and related termination clauses, but including all rental obligations hereunder; ii) the Premises will continue to be used solely for the Permitted Use; iii) a judicially-imposed assignment will not cause an acceleration or increase in the interest rate, or fees in connection with any loan secured by Landlord's interest in the Building or this Lease; and iv) the prospective assignee has the means, expertise and experience to operate the business to be conducted on the Leased Premises in a first-class manner. 7.04 ASSIGNMENT BY LANDLORD The Landlord may assign all or a part of its interest in this Lease without the Tenant's knowledge or consent. ARTICLE 8 INSURANCE 8.01 TENANT TO INSURE The Tenant, at its sole cost and expense, shall take out and keep in force during the Term, standard fire and extended coverage, and malicious damage insurance on the stock-in-trade, furniture, fixtures, glass, improvements and all other contents of the Leased Premises to their full replacement value, and comprehensive general liability insurance in an amount of not less than five million dollars ($5,000,000) all in amounts and with policies in a form satisfactory to the Landlord with insurers acceptable to the Landlord. Each such policy shall name the Landlord as an additional insured as its interest may appear and such comprehensive public liability insurance shall contain a provision for cross liability as between the Landlord and the Tenant. Each policy other than public liability policies shall provide that the insurer shall not have any right of subrogation against the Landlord, its agents or employees on account of any loss or damage covered by such insurance or on account of payments made to discharge claims against or liabilities of the Landlord or Tenant covered by such insurance. The cost or premium for each and every such policy shall be paid by the Tenant. The Tenant shall obtain from the insurers under such policies, undertakings to notify the Landlord in writing at least thirty (30) days prior to any cancellation or reduction in coverage thereof. If the Tenant fails to take out or keep in force, or provide to the Landlord proof, as hereafter contemplated, of such insurance, the Landlord shall have the right to place such insurance on behalf of the Tenant and to pay the premium therefor and in such event, the Tenant shall repay to the Landlord the amount paid therefor, which repayment shall be deemed to be Additional Rent payable on the first day of the next month following the said payment by the Landlord. The Tenant agrees to provide the Landlord with current copies of the insurance policies or certificates of insurance described herein at least annually and more frequently if requested by Landlord. 8.02 NOT TO AFFECT LANDLORD'S INSURANCE The Tenant will not upon the Leased Premises do or permit to be done, or omit to do anything which causes or has the effect of causing the rate of insurance upon the Development or any part thereof to be increased and if the insurance rate shall be thereby increased by any action of the Tenant, the Tenant shall pay to the Landlord on demand as Additional Rent the amount by which the insurance premiums shall be so increased. The Tenant will not store or permit to be stored upon or in the Leased Premises anything of a dangerous, inflammable or explosive nature nor anything which would have the effect of increasing the Landlord's insurance costs or of leading to the cancellation of such insurance. It is agreed that if any insurance policy upon the Leased Premises shall be cancelled by the insurer by reason of the use and occupation of the Leased Premises or any part thereof by the Tenant or by any assignee, sub-tenant, concessionaire or licensee of the Tenant, or by anyone permitted by the Tenant to 13 15 be upon the Leased Premises, the Landlord may, at its option, forthwith enter upon the Leased Premises and rectify the situation causing such cancellation or rate increase, and the Tenant shall forthwith on demand pay to the Landlord the costs of the Landlord related to such rectification together with a supervisory fee of twenty (20%) percent of such cost and with interest on the aggregate of the foregoing from the date funds were expended by the Landlord. 8.03 LANDLORD TO INSURE The Landlord shall throughout the Term, carry fire insurance with normal coverage endorsements in respect of the buildings and improvements forming part of the Development (but excluding the Tenant's trade fixtures, merchandise, stock-in-trade, furniture or any other improvements installed in the Leased Premises by or on behalf of the Tenant) in an amount not less than ninety (90) percent of the full replacement cost (excluding the cost of foundations, footings, underground utilities and architects and other fees associated with these items) from time to time, on a stated amount basis, provided that such insurance, without further consent or notice to the Tenant, may have a deductible amount as determined by Landlord. The Landlord may, but shall not be obligated to, carry such other insurance including public liability insurance and rental loss insurance related to the Lands or such risks and perils in relation thereto or the Landlord's interest derived therein as the Landlord may so determine. All such insurance so obtained by the Landlord shall be for the sole benefit of the Landlord and the Tenant shall be entitled to no interest therein or benefit thereof. ARTICLE 9 TENANT ALTERATIONS 9.01 PAINTING, DECORATING AND ALTERATIONS The Tenant may, provided it first obtains the written consent of the Landlord which consent shall not be unreasonably withheld or delayed, at any time and from time to time at its expense, paint and decorate, in accordance with the manner and standard referred to in Article 5.01, the interior of the Leased Premises and make such changes, alterations, additions and improvements in and to the Leased Premises as will in the judgment of the Tenant better adapt the Leased Premises for the purposes of its business; provided, however, that no changes, alterations, additions or improvements to the structure, any perimeter wall, the sprinkler system, the heating, ventilating, air-conditioning, plumbing, electrical or mechanical equipment or the concrete floor or the roof shall be made without the prior written consent of the Landlord, and without the use of contractors or other qualified workmen approved by the Landlord. All changes, alterations, additions and improvements, whether structural or otherwise, shall be carried out in accordance with the reasonable requirements or rules of the Landlord and shall comply with all applicable statutes, regulations and laws of any governmental authority. As part of the process of the Landlord's examination and approval of the Tenant's plans and specifications, materials may, in addition to being submitted to the Landlord's Architect, be submitted by the Landlord to other architects, engineers, and special consultants, and progress and completion of the work may require supervision and/or inspection by the Landlord or any of the foregoing persons on behalf of the Landlord. Any fees and costs incurred by the Landlord in relation to the foregoing will be paid by the Tenant to the Landlord within fifteen (15) days of billing. The Tenant shall pay to the Landlord the amount of the increase for any insurance coverage of the Landlord directly attributable to any action by the Tenant as hereinbefore in this Article 9.01 provided and the Tenant covenants that such insurance shall not thereby be made liable to avoidance or cancellation by the insurer by reason of such changes, alterations, additions or improvements. 9.02 LANDLORD'S PROPERTY At the expiration of the Term all changes, alterations, additions and improvements made to or installed upon or in the Leased Premises whether made pursuant to this Article 9 or otherwise and which in any manner are attached in, to on or under the floors, walls or ceilings (other than unattached movable trade fixtures) shall remain upon and be surrendered to the Landlord with the Leased Premises as part thereof, without disturbance, molestation or injury and shall be and become the absolute property of the Landlord without any payment or indemnity by the Landlord or any third party to the Tenant or any other party. Notwithstanding the foregoing provisions of this Article 9.02, unless the Lease has been terminated pursuant to Article 5.06(a) the Landlord may remove the aforesaid changes, alterations, additions and improvements in whole or in part, in which event the Tenant shall reimburse Landlord for the costs of such removal and the cost to restore the Leased Premises to the state in which they were prior to the installation of such changes, alterations, additions and improvements. The obligations of the Tenant under this Article 9.02 shall survive the expiration of the Term. 9.03 PROHIBITIONS The Tenant, its employees, agents and representatives, are expressly prohibited from entering upon the roof of the Building or any Other Buildings for any reason whatsoever. The Tenant shall not make any repairs, openings or additions to any part of the exterior of the Leased Premises, nor place any attachments, decorations, signs or displays in or upon any Common Area or the exterior of the Leased 14 16 Premises failing which the Tenant will be held responsible for all ensuing costs and damages whether to remove such items or to effect repairs needed as a result of such acts and shall pay the cost thereof to the Landlord forthwith on demand together with a supervisory fee to the Landlord of twenty (20%) percent of such cost as well as interest on the aggregate of the foregoing from the date funds are so expended by the Landlord. 9.04 NO LIENS The Tenant covenants with the Landlord that it will not permit, do, or cause anything to be done to the Leased Premises during the period of construction and fixturing of the Leased Premises or at any time which would allow any lien, lis pendens, judgment of any court or any mortgage, deed of trust, or encumbrance of any nature whatsoever to be imposed or to remain upon the Leased Premises or the Development. In the event of the recording of any lien or other encumbrance as aforesaid, the Tenant shall at its own expense immediately cause the same to be discharged. Should the Tenant fail to discharge such lien or encumbrance within two (2) days of notice from the Landlord to do so, the Landlord shall be at liberty to pay and discharge such lien or encumbrance and any amount so paid by the Landlord together with any attorneys' fees and costs incurred by the Landlord together with interest on any such amounts from the date of expenditure of such funds by the Landlord shall be paid by the Tenant to the Landlord forthwith. ARTICLE 10 UTILITIES AND TAXES 10.01 UTILITIES, BUSINESS TAX AND MACHINERY TAX The Tenant shall pay and discharge as the same fall due all charges for utilities provided to or consumed on the Leased Premises during the Term including telephone installations, water, electrical power, gas and telephone charges metered separately or charged separately by the authority providing the same to the Leased Premises as well as any charges of any such authority based thereon for treatment or other facilities and all other charges similar in nature, and shall also pay and discharge as the same fall due all business taxes and rates, personal property taxes, license fees or similar fees which may be imposed by any municipal, legislative or other authority in respect of the use or occupancy of the Leased Premises or any personal property situate thereon or in respect of any fixtures, machinery, equipment or apparatus installed in the Leased Premises (or elsewhere in the Development by the Tenant). PROVIDED ALWAYS that if any of the aforesaid utilities are provided to the Leased Premises through a common metering device or on any other shared basis with any other premises or portions of the Building or the Development, or if the Tenant shall use any of such utilities beyond the normal business hours established from time to time by Landlord for the Building, the Tenant shall pay to the Landlord forthwith on demand, from time to time by the Landlord, the Tenant's share of the cost thereof based on such allocation as the Landlord may reasonably determine in relation to the other premises or portions of the Building or the Development being so served. The refusal on the part of Tenant to pay upon demand of Landlord the amount established by Landlord for Tenant's share of the costs of utilities shall constitute a breach of the obligation to pay rent under this Lease and shall entitle Landlord to the rights herein granted for such breach. 10.02 PAYMENT OF REAL PROPERTY TAXES BY LANDLORD The Landlord shall, without derogating from any of the Tenant's obligations with respect to payment of Additional Rent, pay or cause to be paid when due to the municipality or other taxing authorities having jurisdiction all Real Property Taxes, PROVIDED ALWAYS that the Landlord may postpone such payment to the extent permitted by law if pursuing in good faith any appeal against the imposition thereof. 10.03 INCREASE IN REAL PROPERTY TAXES ATTRIBUTABLE TO TENANT The Tenant shall from time to time if requested by the Landlord, pay to the Landlord forthwith on demand by the Landlord, an amount equal to any increase in the amount of Real Property Taxes by reason of any installation, alteration, or use made in or to the Leased Premises by or for the benefit of the Tenant or any party claiming by or through the Tenant. 10.04 TAX ON RENT Despite any other section or clause of this Lease, the Tenant shall pay to the Landlord upon demand an amount equal to any and all Rent Tax (as defined below), it being the intention of the parties that the Landlord shall be fully reimbursed by the Tenant with respect to any and all Rent Tax at the full tax rate applicable from time to time in respect of the Rent payable for the lease of the Leased 15 17 Premises pursuant to this Lease. The amount of the Rent Tax so payable by the Tenant shall be calculated by the Landlord in accordance with the applicable legislation and shall be paid to the Landlord at the same time as the amounts to which such Rent Tax apply and is payable to the Landlord under the terms of this Lease or upon demand at such other time or times as the Landlord from time to time determines. Despite any other section or clause in this Lease, the amount payable by the Tenant under this paragraph shall be deemed not to be Rent, but the Landlord shall have all of the same remedies for and rights of recovery of such amount as it has for recovery of Rent under this Lease. As referred to herein "Rent Tax" means any tax imposed on the rents paid to Landlord hereunder. ARTICLE 11 EXCLUSION OF LIABILITY AND INDEMNITY 11.01 EXCLUSION OF LIABILITY It is agreed between the Landlord and the Tenant that, except with respect to the negligent acts of Landlord, its agents and employees: (a) the Landlord, its agents, and employees shall not be liable for damage or injury to any property of the Tenant which is entrusted to the care or control of the Landlord, its agents, or employees; (b) the Landlord, its agents, and employees shall not be liable nor responsible in any way for any personal or consequential injury of any nature whatsoever that may be suffered or sustained by the Tenant or any employee, agent, customer, invitee or licensee of the Tenant or any other person who may be upon the Leased Premises or the Development or for any loss of or damage or injury to any property belonging to the Tenant or to its employees or to any other person while such property is on the Leased Premises or the Development and, in particular (without limiting the generality of the foregoing) the Landlord shall not be liable for any damage or damages of any nature whatsoever to any such property caused by the failure by reason of a breakdown or other cause, to supply adequate drainage, snow or ice removal, or by reason of the interruption of any public utility or service or in the event that steam, water, rain or snow may leak into, issue or flow from any part of the Development or from the water, steam, sprinkler, or drainage pipes or plumbing works, or from another place or quarter or for any damage caused by any thing done or omitted by any tenant, but the Landlord shall, after notice of the same and where it is within its obligation so to do, use all reasonable diligence to remedy such condition, failure or interruption of service when not directly or indirectly attributable to the Tenant, and the Tenant shall not be entitled to any abatement of Rent in respect of any such condition, failure or interruption of service; and (c) the Landlord, its agents, employees or contractors shall not be liable for any damage suffered to the Leased Premises or the contents thereof by reason of the Landlord, its agents, employees or contractors entering upon the Leased Premises to undertake any examination thereof or any work therein or in the case of an emergency. 11.02 INDEMNIFICATION Notwithstanding any other provision of this Lease to the contrary, and except to the extent of Landlord's negligence, the Tenant shall: (a) be liable to the Landlord for, and (b) indemnify and hold harmless the Landlord, its agents, advisors, and employees from and against: any and all liabilities, claims, suits or actions, costs, damages and expenses (and without limiting the generality of the foregoing, any direct losses, costs, damages and expenses of the Landlord including attorneys' fees and costs) which may be brought or made against the Landlord, or which the Landlord may pay or incur as a result of or in connection with: (c) any breach, violation or non-performance of any covenant, condition or agreement in this Lease set forth and contained on the part of the Tenant to be fulfilled, kept, observed and performed; 16 18 (d) any damage to property, including property of the Landlord, occasioned by the operations of the Tenant's business on, or the Tenant's occupation of, the Leased Premises; or (e) any injury to person or persons, including death resulting at any time therefrom, occasioned by the operation of the Tenant's business on, or the Tenant's occupation of, the Leased Premises; such indemnity and hold harmless to survive the expiration of the Term. Landlord agrees to provide Tenant with prompt written notice of any claim made against Landlord covered by the indemnity set forth above and Tenant shall have the right to defend any such claim with counsel reasonably selected by Tenant. ARTICLE 12 LANDLORD'S RIGHTS AND REMEDIES 12.01 DEFAULT Tenant shall be in default if and whenever: (a) the Rent hereby reserved, or any part thereof, be not paid when due, or there is non-payment of any other sum which the Tenant is obligated to pay under any provisions hereof, and such default shall continue for three (3) business days after written notice by the Landlord requiring the Tenant to rectify the same; (b) any goods, chattels, equipment or other personal property of the Tenant shall be taken or be subject to execution or attachment, or if a writ of execution or attachment shall issue against the Tenant; (c) the Tenant shall become insolvent or commit any act of bankruptcy or become bankrupt or take the benefit of any Act that maybe in force for bankrupt or insolvent debtors, or become involved in a winding-up proceeding, voluntary or otherwise, or if a receiver shall be appointed for the business, property, affairs or revenues of the Tenant, or if any governmental authority should take possession of the business or property of the Tenant; (d) the Tenant shall make a bulk sale of its goods or move or commence, attempt or threaten to move its goods, chattels and equipment out of the Leased Premises (other than in the routine course of its business); (e) the Tenant shall vacate or abandon the Leased Premises in whole or in part; (f) the Tenant shall transfer or purport to Transfer any portion or all of the Term of the Leased Premises without the written consent of the Landlord or control of the Tenant if a corporation is changed without the prior written consent of the Landlord, in either case as required pursuant to Article 7; (g) the Tenant shall fail to remedy any condition giving rise to cancellation, threatened cancellation, reduction or threatened reduction of any insurance policy on the Development or any part thereof within twenty-four (24) hours after notice thereof by the Landlord; (h) the Tenant shall fail to use the Leased Premises for the Permitted Use or change the use of the Leased Premises to any use other than the Permitted Use without Landlord's prior written consent; (i) the Tenant shall fail to maintain the insurance required to be maintained by Tenant under this Lease; or (j) the Tenant shall not observe, perform and keep any other of the covenants, agreements, provisions, stipulations and conditions herein to be observed, performed and kept by the Tenant and shall persist in such failure for thirty (30) days after notice by the Landlord requiring that the Tenant remedy, correct, desist or comply (or in the case of any such breach which reasonably would require more than thirty (30) days to rectify unless the Tenant shall commence rectification within the said thirty (30) day period and thereafter promptly and diligently and continuously proceed with the rectification of the breach). 17 19 In the event of any default by Tenant, at the option of the Landlord, the Landlord may without notice or any form of legal process forthwith re-enter upon and take possession of the Leased Premises or any part thereof and remove and sell the Tenant's goods, chattels, equipment and any other property therefrom, any rule of law or equity to the contrary notwithstanding; and the Landlord may seize and sell such goods, chattels, equipment and other property of the Tenant as are in the Leased Premises or at any place to which the Tenant or any other person may have removed them in the same manner as if they had remained and been distrained upon the Leased Premises; and such sale may be effected in the discretion of the Landlord either by public auction or by private sale, and either in bulk or by individual item, or partly by one means and partly by another, all as the Landlord in its entire discretion may decide, and the Tenant waives and renounces the benefit of any present or future statute or amendments thereto taking away or limiting the Landlord's right of distress. 12.02 CONSEQUENCES OF DEFAULT If and whenever the Tenant is in default under this Lease, the Landlord may terminate this Lease and the Term by giving written notice of termination to the Tenant or by posting notice of termination in the Leased Premises, and in such event the Tenant will forthwith vacate and surrender the Leased Premises. Alternatively, the Landlord may from time to time without terminating the Tenant's obligations under this Lease, re-enter the Leased Premises, make alterations and repairs considered by the Landlord necessary to facilitate a sub-letting and sub-let the Leased Premises or any part thereof as agent of the Tenant for such term or terms and at such rent or rents and upon such other terms and conditions as the Landlord in its sole discretion considers advisable. Upon each subletting all rent and other monies received by the Landlord from the sub-letting shall be applied first to the payment of indebtedness other than Rent due hereunder from the Tenant to the Landlord, second to the payment of costs and expenses of the sub-letting including brokerage fees and attorneys fees and the cost of alterations and repairs, and third to the payment of Rent due and unpaid hereunder. The residue, if any, shall be held by the Landlord and applied in payment of future Rent as it becomes due and payable, If the Rent received from the subletting during a month and any surplus then held by the Landlord to the credit of the Tenant is less than the Rent to be paid during that month by the Tenant, the Tenant will pay the deficiency to the Landlord. The deficiency will be calculated and paid monthly. No re-entry by the Landlord will be construed as an election on its part to terminate this Lease unless a written notice of that termination is given to the Tenant or posted as aforesaid. Despite a subletting without termination, the Landlord may elect at any time to terminate this Lease for a previous breach. If the Landlord so terminates this Lease, the Tenant shall pay to the Landlord on demand therefor: (a) Basic Triple Net Rent and Additional Rent accrued due up to the time of re-entry or termination, whichever is later; (b) all costs payable by the Tenant pursuant to the provisions of this Lease up until the date of re-entry or termination, whichever is later; (c) such expenses as the Landlord may incur or has incurred in connection with re-entering or terminating and re-letting, or collecting sums due or payable by the Tenant or realizing upon assets seized including brokerage expenses, legal fees, receivership costs, unamortized improvement costs, and other disbursements determined on a full indemnity basis, and including the expense of keeping the Leased Premises in good order and repairing or maintaining the same or preparing the Leased Premises for re-letting; and (d) as liquidated damages for the loss of Rent and other income of the Landlord expected to be derived from this Lease during the period which would have constituted the unexpired portion of the Term had the Lease not been so terminated, the amount, if any, by which the rental value of the Leased Premises for such period established by reference to the terms and provisions of this Lease exceeds the rental value of the Leased Premises for such period established by reference to the terms and provisions upon which the Landlord relet them, if such re-letting is accomplished within a reasonable time after termination of this Lease, and otherwise with reference to all market and other relevant circumstances. Rental value is to be computed in each case by reducing to present worth at an assumed interest rate of ten percent (10%) per annum all Rent and other amounts to become payable for such period and where the ascertainment of amounts to become payable requires the same, the Landlord may make estimates and assumptions of fact which will govern unless shown to be unreasonable or erroneous; such obligations of the Tenant to survive the expiration of the Term. If any of the events described in Article 12.01 occur, and if Landlord chooses not to exercise, or by law is unable to exercise, its rights to terminate this Lease, then, in addition to any other Landlord's rights under this Lease or by law; i) Landlord will not be obligated to provide Tenant with any 18 20 services unless Landlord receives compensation in advance for the services, and the parties agree that Landlord's estimate of the compensation required will control; and ii) neither Tenant as debtor in possession, nor any trustee or other person (the "Assuming Tenant") will be entitled to assume this Lease unless, on or before the date of the assumption, the Assuming Tenant: a) cures or provides adequate assurance that it will promptly cure, any existing default under this Lease; b) compensates or provides adequate assurance that it will promptly compensate, Landlord for any pecuniary loss (including attorneys' fees and costs) resulting from the default; and c) provides adequate assurance of future performance under this Lease. For the purposes of this Article, the parties agree that any cure or compensation shall be effected solely by the establishment of an escrow fund for the amount at issue or by bonding. Any sums paid by Tenant to Landlord within 90 days of any filing by or against Tenant of a petition to have Tenant declared a bankrupt will be applied to the expenses most recently incurred by Landlord. The parties agree that this Article is a material part of the consideration of the Lease. 12.03 NON-WAIVER The failure of the Landlord to insist in any one or more cases upon the strict performance of any of the covenants of this Lease or to exercise any option herein contained shall not be construed as a waiver or a relinquishment for the future of such covenant or option and the acceptance of Rent by the Landlord with knowledge of the breach by the Tenant of any covenants or conditions of this Lease shall not be deemed to be a waiver of such breach and no waiver by the Landlord of any provisions of this Lease shall be deemed to have been made unless expressed in writing by the Landlord. 12.04 RIGHT OF LANDLORD TO PERFORM TENANT'S COVENANTS If at any time and so often as the same shall happen, the Tenant shall make default in the observance or performance of any of the Tenant's covenants herein contained, then the Landlord may, but shall not be obligated to, without waiving or releasing the Tenant from its obligations under the terms of this Lease, itself observe and perform the covenant or covenants in respect of which the Tenant is in default, and in that connection may pay such monies as may be required or as the Landlord may reasonably deem expedient, and the Landlord may thereupon charge all monies so paid and expended by it to the Tenant together with interest thereon from the date upon which the Landlord shall have paid out the same; provided however that if the Landlord commences and completes either the performance of any such covenant or covenants or any part thereof, the Landlord shall not be obliged to complete such performance or be later obliged to act in like fashion. 12.05 TIME FOR PAYMENT AND LEGAL COSTS Unless otherwise expressly provided in this Lease, all sums and costs paid by the Landlord, including attorneys' fees and costs on account of any default by the Tenant under this Lease, shall be payable to the Landlord by the Tenant forthwith, with interest thereon at the rate aforesaid from date of payment of such sums or costs by the Landlord. Unless otherwise expressly provided in the Lease, all amounts (other than Rent) required to be paid by the Tenant to the Landlord pursuant to this Lease shall be payable on demand at the place designated by the Landlord for payment of Rent. 12.06 REMEDIES CUMULATIVE All rights and remedies of the Landlord in this Lease contained shall be cumulative and not alternative and are not dependent the one on the other and mention of any particular remedy or remedies of the Landlord in respect of any default by the Tenant shall not preclude the Landlord from any other remedy in respect thereof, whether available at law or in equity or as expressly provided for herein. 12.07 LANDLORD DEFAULT If Landlord fails to perform its obligations under this Lease within a reasonable time, but in no event later than 30 days after Landlord receives written notice from Tenant specifying Landlord's default, Landlord is in default provided, however, if the nature of Landlord's obligation is such that more than 30 days are required to perform its obligation, Landlord will not be in default if Landlord starts to perform the cure within the 30 day period and diligently carries out the cure to completion. Landlord will act expeditiously after receiving notice from Tenant of the need to make repairs pursuant to Article 5.01 if emergency repair is required to terminate a major interruption of or threat to Tenant's business. If such an emergency repair is required, and Landlord fails to make such repair within a reasonable amount of time after receiving notice from Tenant, Tenant shall have the right to make such emergency repair and Landlord shall reimburse Tenant for the actual cost thereof within ten (10) days after Tenant's written request for reimbursement, which request must contain invoices or other evidence acceptable to Landlord of the cost of the repair performed by Tenant. Tenant shall not have the right to terminate this Lease as a result of Landlord's default or to perform maintenance or repairs and deduct the cost from amounts payable by Tenant to Landlord. Tenant's remedies are limited to an action for monetary damages or an injunction or both. As a material part of the consideration to Landlord, Tenant agrees that the execution 19 21 of any judgment obtained by Tenant against Landlord for damages due to Landlord's default under this Lease is limited to Landlord's interest in the Building. A copy of any notice of default sent to Landlord by Tenant must be sent to Landlord's lender, if the lender has requested copies of such notices and given Tenant the address to send the notices. Landlord's lender will have at least the same rights as Landlord to cure Landlord's default. ARTICLE 13 MORTGAGES AND ASSIGNMENT BY LANDLORD 13.01 SALE OR FINANCING OF DEVELOPMENT The Landlord may sell, transfer, lease, mortgage, encumber or otherwise dispose of the Development or any portion thereof or any interest of the Landlord therein, in every case without the consent of the Tenant, and the rights of the Landlord under this Lease may be mortgaged, charged, transferred or assigned in conjunction therewith. The Tenant acknowledges that in the event of the sale or lease by the Landlord of the lands or a portion thereof containing the Leased Premises or the assignment by the Landlord of this Lease or of any interest of the Landlord hereunder, to the extent that any such purchaser, lessee or assignee has assumed the covenants and obligations of the Landlord hereunder, the Landlord shall, without further written agreement, be freed and relieved of liability upon such covenants and obligations. 13.02 SUBORDINATION AND ACKNOWLEDGMENT This Lease shall at the option of the Landlord or the mortgagee under any mortgage or the beneficiary under any deed of trust now or hereafter existing affecting the Development, exercisable at any time and from time to time by the Landlord or such mortgagee or beneficiary, be either subject and subordinate to such mortgage and accordingly not binding upon such mortgagee or alternatively rank prior to such mortgage or deed of trust and accordingly be binding upon such mortgagee or beneficiary. On request at any time and from time to time of the Landlord or such mortgagee or beneficiary, the Tenant shall subordinate this Lease to such mortgage or deed of trust with the intent and effect that this Lease and all rights of the Tenant shall be subject to the rights of such mortgagee or beneficiary as fully as if the mortgage or deed of trust (regardless of when made) had been made prior to the making of this Lease, or alternatively to attorn to such mortgagee or beneficiary and become bound to it as its tenant of the Leased Premises for the then expired residue of the Term and upon the terms and conditions contained in this Lease, in each case as the Landlord or such mortgagee or beneficiary may require provided, however, as long as Tenant is not in default under this Lease, the mortgagee or beneficiary shall not disturb Tenant's right to possession of the Leased Premises. Without limiting the foregoing (and notwithstanding that any previous attornment or subordination in favor of such mortgagee or beneficiary shall have been given) the Tenant shall execute promptly the appropriate instrument of subordination or alternatively the appropriate instrument of attornment as the case may be, in order to give effect to the foregoing. Landlord agrees to provide Tenant with a reasonably acceptable subordination, attornment and non-disturbance agreement from Landlord's lender. 13.03 TENANT ESTOPPEL STATEMENT Within ten (10) business days following request therefor by the Landlord, from time to time, the Tenant shall execute and deliver to the Landlord and if required by the Landlord, to any mortgagee or beneficiary, assignee, or transferee of the Lease or the Development a certificate in writing as to the then status of this Lease, including whether it is in full force and effect, as modified or unmodified, confirming the Rent payable hereunder, the state of accounts between the Landlord and the Tenant and the existence or non-existence of defaults and any other matters pertaining to the Lease which the Landlord shall request be included in such certificate. An example of such a certificate is attached hereto as SCHEDULE "D". 13.04 ATTORNMENT In the event of a foreclosure or exercise of the power of sale under any mortgage or deed of trust covering the Premises, or if any sale in lieu thereof occurs, Tenant shall attorn to the purchaser on any such foreclosure or sale and recognize such purchaser as the Landlord under this Lease provided that the purchaser expressly agrees, in writing, that so long as Tenant is not in default under the Lease, Tenant's possession and occupancy of the Premises will not be disturbed. 13.05 RECORDING This Lease shall not be recorded against title to the Lands. The Tenant may, with the prior written consent of Landlord, record a short form memorandum of this Lease, in a form approved by Landlord, in the official records of the county in which the Lands are located. 20 22 ARTICLE 14 HOLDING OVER 14.01 NO TACIT RENEWAL In the event the Tenant remains in possession of the Leased Premises after the end of the Term and without the execution and delivery of a new lease, there shall be no tacit renewal of this Lease and the Term hereby granted and the Tenant shall be deemed to be occupying the Leased Premises as a Tenant from month to month on the terms and conditions contained herein except that the Basic Triple Net Rent shall be one hundred and fifty percent (150%) of the Basic Triple Net Rent required to be paid pursuant to this Lease in the immediately preceding Year of the Term, but otherwise on the terms and conditions of this Lease which shall be read with such changes as are appropriate to a monthly tenancy; provided however that this provision shall not authorize the Tenant to so holdover where the Landlord has objected to such over holding or has required the Tenant to vacate the Leased Premises. ARTICLE 15 QUIET POSSESSION 15.01 QUIET POSSESSION Upon the Tenant paying the Rent hereby reserved and all other charges herein provided and observing, performing and keeping the covenants and agreements herein contained, the Tenant shall and may peaceably possess and enjoy the Leased Premises for the Term granted without any interruption or disturbance from the Landlord or any person or persons lawfully claiming by, from or under it. ARTICLE 16 LEGAL RELATIONSHIPS 16.01 NO PARTNERSHIP Nothing contained in this Lease nor in any acts of the Landlord and Tenant pursuant to this Lease shall be deemed to create any relationship between the parties hereto other than the relationship of Landlord and Tenant, it being expressly provided that there is no intention to create a relationship of partners or a joint venture. 16.02 JOINT AND SEVERAL LIABILITY Should the Tenant comprise two (2) or more persons or entities, each of them, and not one for the other or others, shall be jointly and severally bound with the other or others for the due performance of the obligations of the Tenant hereunder. Where required by the context hereof the singular shall include the plural and the masculine gender shall include either the feminine or neuter genders, as the case may be and vice versa. 16.03 SUCCESSORS AND ASSIGNS This Lease and everything herein contained shall enure to the benefit of and be binding upon the parties hereto, to successors and assigns of the Landlord, and the approved successors and assigns of the Tenant. ARTICLE 17 NOTICES 17.01 NOTICES Any notices herein provided or permitted to be given by the Tenant to the Landlord shall, be sufficiently given if delivered or sent by either facsimile transmission or certified or registered mail, return receipt requested and postage prepaid, addressed to the Landlord at: Millennium Corporate Park L.L.C. c/o Continental Pacific, Inc. 1380 112th Avenue, N.E. Suite 307 Bellevue, WA 98004 Facsimile No. (425) 462-0760 21 23 or to such other address as might be designated in writing by the Landlord from time to time, and any notice herein provided or permitted to be given by the Landlord to the Tenant shall be sufficiently given if delivered, sent by facsimile or mailed, postage prepaid, addressed to the Tenant at: If Prior to Tenant Opening for Business: -------------------------------------------- -------------------------------------------- Facsimile No. ------------------------------ If After Tenant Opens for Business: At the Leased Premises Notice given as aforesaid, delivered by mail, shall be conclusively deemed to have been given on the third business day following the day on which such notice was mailed, or if delivered or sent by facsimile, on the date of delivery or facsimile. The Landlord may at any time give in writing to the Tenant notice of a change of address for the Landlord and from and after the giving of such notice the address therein specified shall be deemed to be the address of the Landlord for the giving of notice hereunder. The word "notice" in this Article 17.01 shall be deemed to include any request, statement, demand, or other writing in this Lease provided or permitted to be given by the Landlord to the Tenant or by the Tenant to the Landlord. ARTICLE 18 ENVIRONMENTAL COVENANTS 18.01 DEFINITIONS. In this Article 18: "Hazardous Substance" means: (a) any radioactive material; (b) any explosive; (c) any substance that if added to any water, would degrade or alter or form part of a process of degradation or alteration of the quality of that water to the extent that it is detrimental to its use by man or by any animal, fish or plant; (d) any solid, liquid, gas or odor or combination of any of them that, if emitted into the air, would create or contribute to the creation of a condition of the air that: (i) endangers the health, safety or welfare of persons or the health of animal life; (ii) interferes with normal enjoyment of life or property; or (iii) causes damage to plant life or to property; (e) any toxic substance; (f) any substance declared to be hazardous or toxic under any Law, Regulation or Order (as defined below) now or hereafter enacted or promulgated by any governmental authority having jurisdiction over the Landlord, the Tenant, the Leased Premises or the Development of which the Leased Premises form a part; and (g) any other substance which is or may become hazardous, dangerous or toxic to persons or property; "Laws" means all applicable federal, state, municipal, or local laws, statutes, or ordinances, relating to Hazardous Substances; "Regulations" mean all rules, regulations or the like promulgated under or pursuant to any Laws; and "Orders" mean all applicable orders, decisions, or the like rendered by any ministry, department or administrative or regulatory agency. 22 24 18.02. TENANT'S COVENANT AS TO USE Without limiting the generality of the covenants of the Tenant in the Lease contained including Basic Term .03 thereof, the Tenant covenants and agrees that the Tenant will not bring upon the Leased Premises or any part thereof any Hazardous Substances (except for commonly used office equipment, including a back-up generator) and if at any time, notwithstanding the foregoing covenant of the Tenant, there shall be any Hazardous Substances upon the Leased Premises or a part thereof whether or not brought thereupon by the Tenant, the Tenant shall, at its own expense: (a) immediately give the Landlord notice specifying the nature and location of the Hazardous Substances and thereafter give the Landlord from time to time written notice of the extent and nature of the Tenant's compliance with the following provisions of this paragraph; (b) promptly remove the Hazardous Substances from the Leased Premises in a manner which conforms with all Laws, Regulations and Orders governing the movement of the same and the reasonable requirements of the Landlord in connection with the movement; and (c) if requested by the Landlord, obtain at the Tenant's cost and expense from an independent consultant designated or approved by the Landlord verifying the complete and proper removal thereof from the Leased Premises or, if such is not the case, reporting as to the extent and nature of any failure to comply with the foregoing provisions of this paragraph. 18.03. COMPLIANCE WITH LAWS Without limiting the generality of the covenants of the Tenant in the Lease contained including Article 4.09, the Tenant shall, at its own cost and expense, comply with all Laws, Regulations and Orders from time to time in force relating to the Landlord, the Tenant, the business of the Tenant, the Leased Premises or the Development relating to Hazardous Substances and the protection of the environment and shall immediately give written notice to the Landlord of the occurrence of any event in the Leased Premises or on the Development or a contravention thereof and, if the Tenant shall, either alone or with others, cause the occurrence of such event the Tenant shall, at its own expense: (a) immediately give the Landlord notice of the occurrence and the contravention and thereafter give the Landlord from time to time written notice of the extent and nature of the Tenant's compliance with the following provisions of this paragraph; (b) promptly remedy the contravention in a manner which conforms with all Laws, Regulations and Orders governing the movement of the same; and (c) if requested by the Landlord, obtain at the Tenant's cost and expense from an independent consultant designated or approved by the Landlord verifying the complete and proper remedying of the contravention or, if such is not the case, reporting as to the extent and nature of any failure to comply with the foregoing provisions of this paragraph. The Tenant shall, at its own expense, remedy any damage to the Leased Premises and the Development caused by such event within the Leased Premises or by the performance of the Tenant's obligations under this paragraph as a result of such occurrence. If the Tenant fails to do so, the Landlord may at its option remedy the damage, and may recover its cost and expenses of so doing from the Tenant as additional rental under the Lease. Tenant shall indemnify, defend and hold harmless Landlord from any costs, fees, penalties, and charges assessed against, or imposed, on Landlord and Landlord's lender as a result of Tenant's use, release, disposal, transportation, or generation of Hazardous Substances. This provision survives the expiration or earlier termination of this Lease. If any governmental authority having jurisdiction shall require the clean-up of any Hazardous Substances held, released, spilled, abandoned or placed upon the Leased Premises or the Development or released into the environment by the Tenant in the course of the Tenant's business or as a result of the Tenant's use or occupancy of the Leased Premises, then the Tenant shall, at its own expense, prepare all necessary studies, plans and proposals and submit the same for approval, provide all bonds and other security required by governmental authorities having jurisdiction and carry out the work required and shall keep the Landlord fully informed and provide to the Landlord full information with respect to the proposed plans and comply with the Landlord's reasonable requirements with respect to such plans. The Tenant agrees that if the Landlord determines, in its own discretion, that the Landlord, the Development or its reputation is placed in any jeopardy by the requirement for any such work, the Landlord may itself undertake such work or any part thereof at the cost and expense of the Tenant. All costs and expenses incurred by Landlord shall be paid by Tenant on demand together with a fee of twenty (20%) 23 25 percent of such amount and in addition shall pay interest on the aggregate of the foregoing at the rate provided in this Lease from the date of the expenditure of such first mentioned monies by the Landlord. 18.04. INQUIRIES BY LANDLORD The Tenant hereby authorizes the Landlord to make inquiries from time to time of any government or governmental agency with respect to the Tenant's compliance with any and all laws and regulations pertaining to the Tenant, the Tenant's business and the Leased Premises including without limitation Laws, Regulations and Orders pertaining to Hazardous Substances and the protection of the environment; and the Tenant covenants and agrees that the Tenant will from time to time provide to the Landlord such written authorization as the Landlord may reasonably require in order to facilitate the obtaining of such information. 18.05. EVENT OF DEFAULT The presence of any Hazardous Substances in the Leased Premises without the prior written approval of the Landlord shall be considered to be a default for the purposes of the Lease if such presence remains after the applicable notice period set forth in Section 12.01. 18.06. OWNERSHIP OF HAZARDOUS SUBSTANCES If the Tenant shall bring or create upon the Development or the Leased Premises any Hazardous Substance or if the conduct of the Tenant's business shall cause there to be any Hazardous Substance upon the Development or the Leased Premises then, notwithstanding any rule of law to the contrary, such Hazardous Substance shall be and remain the sole and exclusive property of the Tenant and shall not become the property of Landlord notwithstanding the degree of affixation of the Hazardous Substance or the goods containing the Hazardous Substance to the Leased Premises or the Development and notwithstanding the expiration or earlier termination of this Lease. 18.07. SURVIVAL OF COVENANTS The obligations of the Tenant hereunder relating to Hazardous Substances shall survive the expiry or earlier termination of this Lease save only that, to the extent that the performance of those obligations requires access to or entry upon the Leased Premises or the Development or any part thereof, the Tenant shall have such entry and access only at such times and upon such terms and conditions as the Landlord may from time to time specify; and the Landlord may, at the Tenant's cost and expense, itself or by its agents, servants, employees, contractors and subcontractors, undertake the performance of any necessary work in order to complete such obligations of the Tenant; but having commenced such work, the Landlord shall have no obligation to the Tenant to complete such work. 18.08. RIGHT TO USE HAZARDOUS SUBSTANCES Notwithstanding anything to the contrary herein contained, the Landlord acknowledges and agrees that the Tenant uses certain substances and materials in the conduct of the Tenant's business which would be considered Hazardous Substances hereunder. Accordingly, the Landlord hereby consents and agrees to the presence of such Hazardous Substances upon the Development and the Leased Premises, provided the following conditions are met: (a) the Tenant shall only bring upon the Development and upon the Leased Premises such Hazardous Substances as are reasonably required for the conduct of its business operations within the Leased Premises, and shall forthwith remove from the Development and from the Leased Premises any Hazardous Substances which are no longer required for such business operations; (b) under no circumstances will the Tenant use the Leased Premises or any portion thereof to stockpile or warehouse Hazardous Substances, other than in such reasonable quantities as may be required for its business operations within the Leased Premises; (c) the Tenant will comply fully with all Laws, Regulations and Orders related to the transportation, storage, use and disposal of all Hazardous Substances so brought upon the Development or the Leased Premises by the Tenant; and (d) save for the right to bring Hazardous Substances upon the Development and the Leased Premises for use as aforesaid, the Tenant shall be bound by all of the other terms and conditions of this Section including, without limitation, the obligation to remedy any damage to the Leased Premises or to the Development caused by the Tenant's exercise of its rights hereunder. 24 26 ARTICLE 19 GENERAL 19.01 COLLATERAL REPRESENTATIONS AND AGREEMENTS The Tenant acknowledges that the Leased Premises are taken without representation of any kind on the part of the Landlord or its agent other than as set forth herein, that the plans attached as SCHEDULE "A" set forth the general layout of the Building and shall not be deemed to be a representation or agreement of the Landlord that the Building will be exactly as indicated on such plans, and that nothing contained in the Lease shall be construed so as to prevent the Landlord from varying or altering the location or size of parking areas, driveways, sidewalks or from erecting additional buildings or extending buildings after the Commencement Date and without limiting the foregoing, the Landlord shall have the unrestricted right to add additional lands to the Development, which upon such addition, these additional lands will be included within the definition of the Lands and Development, to construct additional buildings from time to time on the Lands, add or change any building, or alter the ingress and egress to the Development and to change the loading or unloading facilities and service entrances from time to time without in any way being responsible to the Tenant, provided only that the Landlord shall at all times provide reasonable access to the Leased Premises across the Lands for the Tenant, its employees, suppliers, agents, licensees and invitees. Subject to the foregoing and to the obligations of the Landlord to maintain at all times adequate parking facilities, the Landlord may transfer or dispose of portions of the Lands to the owners of abutting property, or dedicate or transfer to the municipal authorities portions of the Lands for road-widening and other purposes, and when and so often as the Landlord shall dispose or transfer or dedicate any portion of the Lands, then the reference herein to the Lands shall mean and refer to the portion of the Lands remaining after any such transfer, disposition or dedication together with any adjacent land which may be acquired by the Landlord on any such transfer, disposition or dedication. The Tenant further agrees that no representative of or agent of the Landlord is or shall be authorized or permitted to make any representation with reference to this Lease, or to vary or modify this Lease in any way, and that this Lease contains all the agreements and conditions made between the Landlord and the Tenant hereto respecting the Leased Premises. Any addition to or alteration of or change in this Lease or other agreements hereafter made or conditions created, to be binding, must be made in writing and signed by the Landlord and the Tenant. 19.02 MANAGEMENT OF DEVELOPMENT The Tenant acknowledges to the Landlord that the Development may be managed by such party or parties as the Landlord may in writing designate and to all intents and purposes the manager of the Development shall be the party at the Development authorized to deal with the Tenant on behalf of the Landlord. 19.03 TIME OF THE ESSENCE Time shall be of the essence of this Lease. 19.04 UNAVOIDABLE DELAYS In the event that the Landlord shall be delayed, hindered or prevented from the performance of any covenant hereunder by Force Majeure, the performance of such covenant shall be excused for the period during which such performance is tendered impossible and the time for performance thereof shall be extended accordingly, but this shall not excuse the Tenant from the prompt payment of Rent or any other amount required to be paid by the Tenant under the provisions of this Lease. 19.05 ACCORD AND SATISFACTION No payment by the Tenant hereunder or receipt by the Landlord of a lesser amount than the payment of Basic Triple Net Rent or Additional Rent or any other payments herein stipulated shall be deemed to be other than on account of the stipulated sum, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, and the Landlord may accept such check or payment without prejudice to the Landlord's right to recover the balance due or pursue any other remedy provided in this Lease. 19.06 COVENANTS Each of the terms and conditions of this Lease to be performed and observed by the Tenant or by the Landlord, as the case may be, is and shall be construed as a covenant of the party so required to perform and observe the same. 25 27 19.07 CONSENT OR APPROVAL OF LANDLORD Wherever and whenever the consent, approval or permission of the Landlord is required by the Tenant pursuant to the terms of this Lease, and unless otherwise specifically provided, the Landlord shall have the right to withhold, grant, or conditionally grant such consent, approval or permission in its sole and arbitrary discretion. Such consent, approval or permission must be in writing to be effective, and such consent approval or permissions must be obtained prior to the taking of the action to which the same refers. 19.08 FOR LEASE SIGNS The Landlord shall have the right during the last six (6) months of the Term to place upon the Leased Premises, a notice of reasonable dimensions stating that the Leased Premises are for lease and the Tenant shall not obscure or remove such notice or permit the same to be obscured or removed. 19.09 NO EXCLUSIVITY This Lease shall not in any way be construed as giving to or conferring upon the Tenant any rights to carry on any business or undertaking in or from the Leased Premises to the exclusion of third parties in the Development. 19.10 SCHEDULES Any and all schedules attached hereto are deemed to be incorporated into and form part hereof. 19.11 APPLICABLE LAW This Lease shall be governed by and construed in accordance with the laws in force in the State of Washington. 19.12 HEADINGS The index and headings in this Lease are inserted for convenience of reference only and shall not affect the construction of this Lease or any provision hereof. 19.13 TENANT'S ACCEPTANCE The Tenant hereby accepts the Lease of the Leased Premises to be held by the Tenant, subject to the conditions, restrictions and covenants set forth herein. 19.14 SEVERABILITY Should any provision of this Lease be unenforceable it shall be considered separate and severable from the remaining provision of this Lease, which shall remain in force and be binding as though the said provision had not been included. 19.15 EMINENT DOMAIN If any portion of the Leased Premises is taken by any public or quasi-public authority under the power of eminent domain, or it is purchased by the condemnor in lieu of a taking, either party may terminate this Lease on 30 days written notice to the other with termination being the date that possession is given to the condemnor. If neither party terminates the Lease, the Basic Triple Net Rent and Additional Rent will be proportionately abated. If any part of the Building or Development other than the Leased Premises is taken, Landlord may, at its option, terminate this Lease on 30 days written notice to Tenant. Tenant is entitled to receive all portions of any condemnation award or settlement attributable to Tenant's moving costs or the unamortized portion of any Tenant paid tenant improvements other than through payments in any form, including rent, to the Landlord. Landlord is entitled to receive all other portions of any condemnation award or settlement. Landlord shall have the exclusive right to negotiate with any condemning authority with respect to any settlement in lieu of condemnation award. 19.16 TENANT'S CAPACITY Tenant is a Washington Corporation, and the individuals that signed this Lease on behalf of Tenant are authorized to do so and their signatures are the only signatures required. 26 28 19.17 LANDLORD'S CAPACITY Landlord is a Washington Limited Liability Corporation and the individuals that signed this Lease on behalf of the Landlord are authorized to do so and the signatures are the only signatures required. 19.18 ATTORNEYS' FEES If any action is brought by either party against the other arising out of or in connection with this Lease, the substantially prevailing party shall be entitled to recover its costs, including, but not limited to, attorneys' and accountants' fees incurred in the action including any appeal or arbitration. ARTICLE 20 DEFINITIONS In this Lease, the following words, phrases and expressions are used with the meanings described as follows: 20.01 "ADDITIONAL RENT" for a Lease Year or portion thereof means in addition to the Basic Triple Net Rent all other amounts which shall become due and payable hereunder by the Tenant to the Landlord and includes the amounts which is the aggregate of: (i) the Tenant's Proportionate Share of the HVAC Costs, (ii) the Tenant's Proportionate Share of the Building Operation and Maintenance Costs, (iii) the Tenant's Proportionate Share of the Development Operation and Maintenance Costs, and (iv) the Tenant's Proportionate Share of the Tax Cost. In each case the items comprising or being deducted from the aforesaid Costs or Cost are to be allocated to such Lease Year by the Landlord in accordance with generally accepted accounting practice, provided that if the Term commences other than at the beginning of a Lease Year or ends other than at the conclusion of a Lease Year a prorate adjustment of the aforesaid costs for such Lease Year shall be made based on the length of the Term falling within such Lease Year, provided further that the Tax Cost shall, unless otherwise specifically stated in the enabling legislation giving rise thereto, be deemed to accrue equally from day to day in the calendar year to which the same related and shall, if adjustment is required as aforesaid, be adjusted on that basis and not on a straight pro rata basis as provided aforesaid. 20.02 "AREA OF LEASED PREMISES" means the gross Building area of the Leased Premises including any load factor measured by the Landlord's Architect in accordance with the then current standard for floor measurement as established by the Building Owners and Managers Association (BOMA) based on the Tenant's space plan as described in "SCHEDULE B". 20.03 "BASIC TRIPLE NET RENT" means the monthly rent payable by the Tenant to the Landlord in accordance with Article 2.01 for the Term, being the amount set forth in Basic Term .02. 20.04 "BASIC TERM" means each of those terms defined as such at the commencement of this Lease. 20.05 (a) "BUILDING" means the building or buildings in which the Leased Premises are located as shown on Schedule "A" hereto. (b) "BUILDING C" means the Building identified as Building C on the plan attached as Schedule "A" attached hereto. 20.06 "BUILDING OPERATION AND MAINTENANCE COSTS" means all of the Landlord's costs, charges and expenses for owning, operating, maintaining, managing, repairing (excluding repairs of a structural nature), inspecting, insuring, supervising and administering the Building including the Common Areas and Common Facilities of the Building, if any, and includes without limiting the generality of the foregoing: (a) the cost of lighting, heating, ventilating, air-conditioning and supplying water and other utilities to the Common Facilities and Common Areas, as aforesaid; cleaning and janitorial services relating to the Building; wages and other employment related costs and expenses of on-site maintenance and management personnel 27 29 as well as wages and other related costs and expenses of off-site maintenance and management personnel to the extent applicable to the Building, Common Areas or Common Facilities; accounting and legal fees incurred in the management of the Building (with the exception of those fees attributable to another tenant by virtue of a direct tenant related issue); the fair market rental value of on-site facilities (including office space and/or storage space) utilized for the maintenance and/or management of the Building, Common Areas and/or Common Facilities; repairs and replacements to the Building other than structural repairs required to be carried out by the Landlord pursuant to Article 5.06(a) but including any changes made to the Building, whether or not structural in nature, required by any governmental or other agencies which regulate the operation of the Development, provided that capital improvements costing in excess of $20,000 shall be amortized over their useful life; insurance premiums for any insurance carried by the Landlord pursuant to the terms of this Lease and related only to the Building; (b) management fees paid by Landlord or a fee for Landlord's management and administration not to exceed two and one-half percent (2.5%) of the sum of the Basic Triple Net Rent; and (c) depreciation, at rates determined by the Landlord, but not to exceed the maximum permitted to the Landlord under the provisions of the Internal Revenue Code, as amended from time to time or any legislation substituted therefore on the equipment and machinery employed in operating, managing, maintaining, repairing or replacing the Common Areas or the Common Facilities of the Building, if any, and a carrying cost at the rate of two (2%) percent above the Prime Rate on the undepreciated portion of the costs of such equipment and machinery; and there shall be excluded from such costs the following: (i) payments of principal and interest under any mortgage or mortgages on the Development; and (ii) corporate income, profits or excess profits taxes assessed upon the income of the Landlord; and there shall be deducted from such costs the amount of proceeds actually recovered by the Landlord from insurance and relating to damage, the cost of repair of which was included in Building Operation and Maintenance Costs. 20.07 "COMMENCEMENT DATE" means the later of (a) five (5) days after Substantial Completion of the Tenant Improvements in accordance with SCHEDULE "B" or (b) May 1, 1998. 20.08 "COMMON AREAS" means those areas located either in the Building or on the Lands but not in any Other Buildings, that are not intended for lease and designated (which designation may be changed from time to time) by the Landlord as Common Areas set aside by the Landlord for the common or joint use and benefit of the Tenant, its employees, customers and other entities in common with others entitled to the use and benefit of such areas in the manner and for the purposes established or altered pursuant to the terms of this Lease. 20.09 "COMMON FACILITIES" means the electrical, heating, ventilating, air conditioning, plumbing and drainage equipment, any music and public address systems, installations and any enclosures constructed therefor, fountains, service rooms, customer and service stairways, elevators, signs, lamps, public washroom facilities, recreational facilities (including without limitation a common amenity building) and all other facilities which are provided and designated (and which designation may be changed from time to time) by the Landlord for the common or joint use and benefit of the occupants of the Development. 20.10 "CONTROLLABLE COSTS" means all Additional Rent except insurance costs, utility costs, and the Tax Cost. Controllable Costs shall not exceed $0.15 per sq. ft. per month for the first twelve (12) months of occupancy. 20.11 "DEVELOPMENT" means the Lands, Building, Other Buildings and all buildings and improvements existing on the Lands from time to time. 20.12 "DEVELOPMENT OPERATION AND MAINTENANCE COSTS" means all of the Landlord's costs, charges and expenses of operating, maintaining, managing, repairing, inspecting, insuring, supervising and administering the Development other than the Building or any Other Buildings, but including the Common 28 30 Areas and the Common Facilities of the Development and include without limiting the generality of the foregoing: (a) the cost of lighting, heating, ventilating, air-conditioning and supplying water and other utilities to the Common Areas and Common Facilities; cleaning, janitorial services, snow and ice removal, striping or repairing parking areas; supervising, policing and security; wages and other employment related costs and expenses of on-site maintenance and management personnel as well as wages and other related costs and expenses of off-site maintenance and management personnel; accounting and legal fees incurred in the management of the Development (with the exception of those fees attributable to another tenant by virtue of a direct tenant related issue); the fair market rental value of on-site facilities (including office space and/or storage space) utilized for the maintenance and/or management of the Development; painting, planting or landscaping; operating and maintaining the garbage compaction equipment if any; the cost of maintaining, repairing, replacing or leasing the pylon signs and public address, intercom, music, and alarm systems; repairs and replacements to the Development, business taxes, place of business taxes and other taxes levied in respect thereof or fairly attributable to the Common Areas or the Common Facilities; the cost of all capital improvements required by governmental agencies following completion of the Development, amortized over the useful life of the capital improvements; insurance premiums for any insurance carried by the Landlord pursuant to the terms of this Lease other than for the Building or any Other Buildings; supplies, personnel wages and payroll expenses; and (b) depreciation, at rates determined by the Landlord, but not to exceed the maximum permitted to the Landlord under the provisions of the Internal Revenue Code from time to time or any legislation substituted therefor, on the equipment and machinery employed in operating, maintaining, repairing or replacing the Common Areas or the Common Facilities and a carrying cost at the rate of two (2%) percent above the Prime Rate on the undepreciated portion of the costs of such equipment and machinery; and there shall be excluded from such costs the following: (i) payments of principal and interest under any mortgage or mortgages on the development; (ii) corporate income, profits or excess profits taxes assessed upon the income of the Landlord; and (iii) Building Operation and Maintenance Costs; and there shall be deducted from such costs the amount of proceeds actually recovered by the Landlord from insurance and relating to damage, the cost of repair of which was included in Development Operation and Maintenance costs. 20.13 "FORCE MAJEURE" means any cause beyond the control of the Landlord delaying, hindering or preventing the Landlord from performing any term, covenant or act required hereunder and, without limiting the generality of the foregoing, includes lock-outs (including lock-outs decreed or recommended for its members by a recognized contractors' association of which the Landlord is a member or to which the Landlord is otherwise bound), strikes, labor disputes, inability to procure materials or services, restrictive governmental laws or regulations, fire, act of God, floods, delays in transportation, acts of civil or military authorities, riots, insurrection, sabotage, rebellion and war. 20.14 "GROSS RENTABLE AREA" means the aggregate floor area (expressed in square feet), from time to time, determined by the Landlord's Architect of all premises leased to or intended to be leased to tenants and located within the area to which the measurement is being applied. 20.15 "HVAC COSTS" includes with respect to the Building: (a) all of the Landlord's costs, charges and expenses of operating, maintaining, managing, replacing, repairing and supervising the apparatus for heating, ventilating and air conditioning installed in the Building, from time to time, other than those part of such apparatus installed by or on behalf of the Tenant or any other tenant (the "HVAC System"); and 29 31 (b) an administrative fee equal to two and one-half percent (2.5%) of the total of the costs, charges and expenses incurred by the Landlord under the preceding provision of this definition; 20.16 "LANDLORD'S ARCHITECT" means an architect or engineer from time to time selected by the Landlord for the purpose of making any certification or determination in accordance with the terms of this Lease. 20.17 "LANDLORD'S WORK" means the work specified in Article 3.01. 20.18 "LANDS" means those lands located in the City of Redmond, in the County of King, State of Washington, legally described on SCHEDULE "A-1" attached hereto. 20.19 "LEASE" means this agreement, including any and all schedules attached hereto as the same may be amended from time to time. 20.20 "LEASE YEAR" means each calendar year in which a portion of the Term falls, provided that the Landlord, if it deems the same convenient or necessary for its accounting purposes, may, from time to time, by notice to the Tenant alter the Lease Year to any other twelve (12) month period in which a portion of the Term falls by specifying an annual date, being the first day of a calendar month, upon which a subsequent Lease Year is to commence and in such event the current Lease Year shall terminate on the day preceding the specified date. 20.21 "LEASED PREMISES" means that portion of the Building outlined in red on Schedule "A" hereto, subject to such minor variations as may occur in the course of construction of the Building by the Landlord. 20.22 "OTHER BUILDINGS" means any building or buildings existing on the Lands from time to time containing premises that are leased or intended to be leased to tenants, but excluding the Building. 20.23 "PERMITTED USE" means the use set forth in Basic Term .03. 20.24 "PRIME RATE" means the rate of interest expressed as an annual rate, at the relevant time or times, determined by the Seafirst Bank at its main branch in Seattle, Washington, as a reference rate for commercial demand loans to its major commercial borrowers made by such bank in Seattle, Washington and adjusted from time to time. 20.25 "REAL PROPERTY TAXES" means all general, special, local improvement and other taxes, levies, rates and charges levied, assessed or imposed against the Development or any part thereof and all business taxes, assessments, rates and levies, including any corporation capital tax, levied, assessed or imposed on the Landlord in respect of the ownership or management of the Development by city or other governmental authority having jurisdiction, whether of a nature now or hereafter levied, assessed or imposed, together with the cost to the Landlord of contesting, appealing or negotiating the same in good faith but excluding those taxes and fees of the Tenant or other tenants referred to in Article 10.01 hereof. 20.26 "RENT" means Basic Triple Net Rent and Additional Rent. 20.27 "TAX COST" means the cost of Real Property Taxes. 20.28 "TENANT'S PROPORTIONATE SHARE" means: (a) in relation to each of Building Operation and Maintenance Costs and HVAC Costs the proportion that the Area of the Leased Premises is of the Gross Rentable Area of the Building; and (b) in relation to Development Operation and Maintenance Costs, and Tax Cost, the proportion that the Area of the Leased Premises is of the Gross Rentable Area of the Development. Prior to completion of construction of all buildings in the Development, the estimated Gross Rentable Area of all buildings planned in the Development from time to time shall be used for the purposes of determining Tenant's Proportionate Share of Development Operation and Maintenance Costs. 20.29 "TENANT IMPROVEMENTS" means the improvements described in SCHEDULE "B" hereto. 20.30 "TERM" means the term of the Lease, as set out in Basic Term .04. 20.31 "YEAR OF THE TERM" means each successive twelve (12) month period of the Term, the first of which commences on the Commencement Date. 30 32 ARTICLE 21 CONTINGENCIES 21.1 TENANT'S CONTINGENCY. If Landlord has not obtained approval of Landlord's proposed site plan for the Development by January 31, 1998, Tenant shall have the right to terminate this Lease by giving Landlord written notice of Tenant's election to terminate the Lease on or before February 10, 1998. If Tenant elects to terminate this Lease under this Article 21.1, this Lease shall terminate effective as of the date of Tenant's notice of termination. ARTICLE 22 REIMBURSEMENT OF TENANT'S RENT OBLIGATIONS Commencing on the Commencement Date and continuing through February 28, 1999, Landlord agrees to pay Tenant, on a monthly basis on or before the first day of each calendar month, the amount of $37,778.00 (the "Rent Reimbursement"), which amount represents one-half (1/2) of Tenant's base rental obligations under Tenant's existing lease with Carr Realty Corporation for space at 6464 - 185th Avenue N.E., Redmond, Washington (the "Existing Lease"). In no event shall Landlord be obligated to pay Tenant more than the above established amount of the Rent Reimbursement and nothing in this Article 22 shall be construed to be an assumption by Landlord of any of Tenant's obligations under the Existing Lease. Notwithstanding anything herein to the contrary, if the Existing Lease or Tenant's obligation to pay rent thereunder terminates or is reduced prior to February 28, 1999, Landlord's obligation to pay Tenant the Rent Reimbursement shall also terminate or be reduced accordingly. Tenant hereby authorizes Landlord to negotiate directly with the landlord under the Existing Lease to obtain an agreement for the early termination of the Existing Lease and/or a reduction in the amounts due thereunder on terms reasonably acceptable to Tenant. ARTICLE 23 NAME OF DEVELOPMENT Landlord agrees to name the first phase of the Development after Tenant and shall keep such name in place for so long as Tenant occupies the Leased Premises. The exact name shall be mutually agreed upon between Landlord and Tenant and shall be similar to "Mosaix Center at Millennium Corporate Park". ARTICLE 24 REFIT ALLOWANCE Provided Tenant is not then in default under the Lease, Landlord agrees to provide Tenant with an additional tenant improvement allowance of $250,000 (the "Refit Allowance") following the seventh (7th) anniversary of the Commencement Date. The Refit Allowance shall be used exclusively for the installation of new carpet and interior paint (the "Refit Improvements") unless otherwise agreed to by Landlord. The Refit Improvements shall be constructed by Landlord in accordance with the procedures set forth in Schedule B for the construction of the initial Tenant Improvements or, at Landlord's option, Tenant shall construct the Refit Improvements in compliance with the requirements to make alterations set out in paragraph 9.01. ARTICLE 25 BROKERS Landlord shall pay Tenant's real estate broker, Pacific Real Estate Partners, Inc. ("Tenant's Broker"), a fee of five percent (5%) of the total Basic Triple Net Rent for the first five (5) years of the Term (which, for purposes of this Article 25, shall be March 1, 1999 to February 28, 2004) and two and one-half percent (21/2%) of the Basic Triple Net Rent for the second five (5) years of the Term (which, for purposes of this Article 25, shall be March 1, 2004 to February 28, 2009). Such fee shall be paid by Landlord when Tenant takes occupancy of the Leased Premises. In the event Tenant expands or is negotiating to expand the Leased Premises during the first two (2) years the Term, Landlord agrees to pay a fee with respect to the expansion space of two and one-half percent (21/2%) of the Basic Triple Net Rent for the remaining first five years of the Term and one and one-quarter percent (11/4%) of the Basic Triple Net Rent for the last five years of the Term. Tenant represents and warrants to Landlord that it has not dealt with any real estate broker other than Tenant's Broker with respect to this Lease. If Tenant has dealt with any other person or real estate broker with respect to this transaction, Tenant shall be solely responsible for the payment of any fee due said person or firm and Tenant shall hold Landlord free and harmless against any liability in respect thereto, including attorney's fees and costs. 31 33 IN WITNESS WHEREOF the parties hereto have executed this agreement by their respective duly authorized officers in that behalf, as of the day and year first above written. LANDLORD: MILLENNIUM CORPORATE PARK L.L.C., A WASHINGTON LIMITED LIABILITY COMPANY By: Continental Pacific, Inc., a Washington corporation, its managing member By: ----------------------------- Its: ----------------------------- TENANT: MOSAIX, INC., a Washington corporation By: [SIG] ------------------------------------ Its: President and CEO ------------------------------------ 32 34 LANDLORD NOTARY STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) I certify that I know or have satisfactory evidence that the person appearing before me and making this acknowledgment is the person whose true signature appears on this document. On this ____ day of ________________, 1997, before me personally appeared ________________________, to me known to be the ____________ of Continental Pacific, Inc., a member of MILLENNIUM CORPORATE PARK L.L.C., the limited liability company that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said limited liability company, for the uses and purposes therein mentioned, and on oath stated that he/she was authorized to execute said instrument. WITNESS my hand and official seal hereto affixed the day and year first above written. [ S E A L ] -------------------------------------- Notary Public in and for the State Of Washington, residing at ___________ My commission expires:________________ -------------------------------------- [Type or Print Notary Name] 33 35 TENANT NOTARY STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) I certify that I know or have satisfactory evidence that the person appearing before me and making this acknowledgment is the person whose true signature appears on this document. On this 11TH day of December, 1997, before me personally appeared NICHOLAS A. TILIACOS, to me known to be the PRESIDENT of MOSAIX, INC., 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 he/she was 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 hereto affixed the day and year first above written. [ S E A L ] /S/ LAURA E. BORDA Notary public in and for the State LAURA E. BORDA Of Washington, residing at Woodinville, WA STATE OF WASHINGTON My commission expires: 11-9-98 LAURA E. BORDA NOTARY PUBLIC [Type or Print Notary Name] MY COMMISSION EXPIRES 11-09-98 34 36 SCHEDULE "A" (PLAN OF THE BUILDING) BUILDING "C" LOCATION 37 GROUND FLOOR OF BUILDING FLOOR PLAN 38 SECOND FLOOR OF BUILDING FLOOR PLAN 39 THIRD FLOOR OF BUILDING FLOOR PLAN 40 SCHEDULE "A-1" LEGAL DESCRIPTION BUILDING "C" IN PHASE I OF MILLENNIUM CORPORATE PARK TO BE CONSTRUCTED ON A PORTION OF THE LAND LEGALLY DESCRIBED IN THE ATTACHED EXHIBIT "A". 41 SCHEDULE "A-2" RIGHT OF FIRST REFUSAL SPACE BUILDING "B" 42 SCHEDULE "B" TENANT IMPROVEMENTS 1. Plan for the Leased Premises. (a) Landlord and Tenant have agreed to a space plan ("Space Plan") and work letter ("Work Letter") for installation of the Tenant Improvements in the Leased Premises. A copy of the Space Plan is attached hereto as Schedule "B-1" and a copy of the Work Letter is attached hereto as Schedule "B-2". The "Tenant Improvements" are set forth in detail in the Space Plan and Work Letter and include, but are not limited to, locations and specifications of doors, partitioning, ceilings, electrical fixtures, outlets and switches, telephone outlets, floor coverings, window coverings, HVAC equipment, fire and life safety equipment. (b) As soon as reasonably possible after the execution of the Lease, Landlord shall cause Landlord's Architect to coordinate the preparation of final working drawings and specifications ("Working Drawings") for the Tenant Improvements in the Leased Premises. All Working Drawings shall include, as required, architectural, mechanical, electrical and structural engineering drawings for installation of the Tenant Improvements in the Leased Premises in accordance with the Space Plan and Work Letter. (c) The Working Drawings shall be reviewed by Landlord and Tenant for compliance with the Space Plan and Work Letter. They also shall be submitted by Landlord to the appropriate governmental body for plan checking and a building permit. Landlord shall make any changes in the Working Drawings required to obtain the building permit. Tenant shall have five (5) working days from its receipt of the Working Drawings to approve the Working Drawings in writing. Tenant shall be deemed to have approved the Working Drawings if Landlord fails to receive a reply or approval of the Working Drawings within those five (5) working days. 2. Construction and Completion of Tenant Improvements. After the Working Drawings have been prepared and approved, and a building permit for the Tenant Improvements has been issued, Landlord shall enter into a construction contract with its contractor for the installation of the Tenant Improvements in accordance with the Working Drawings. Landlord shall supervise the completion of such work and shall use its reasonable best efforts to secure Substantial Completion (as defined below) of the Tenant Improvements by October 1, 1998. Notwithstanding the foregoing, if Landlord shall be delayed in Substantially Completing its work in accordance with the Space Plans and/or Working Drawings as a result of Tenant's failure to approve any item or perform any other obligation in accordance with and by the date specified herein; or Tenant's request for materials, finishes or installations other than those readily available; or Tenant's changes in the Working Drawings or Space Plan after approval thereof by Tenant, then the Commencement Date shall not be extended by any reason of Tenant delay. The terms "Substantial Completion," "Substantially Complete" and words of similar import as used herein, shall mean the date that Landlord's Architect certifies that the Tenant Improvements as described in this Schedule B are substantially complete except for punch list items. Certification by Landlord's architect of Substantial Completion of the Tenant Improvements in accordance with the terms of this Schedule B shall be conclusive and shall be binding upon Landlord and Tenant. 3. Penalty for Delay. Except in the event of a delay in Substantial Completion caused in whole or in part by Tenant or caused by Force Majeure, Landlord shall pay Tenant a penalty for a delay in Substantial Completion of the Tenant Improvements beyond May 1, 1998 as follows: (a) If Substantial Completion of the Tenant Improvements occurs between May 2, 1998, and August 1, 1998, then Landlord shall pay Tenant a penalty of $15,000 per month; (b) If Substantial Completion occurs between August 2, 1998, and November 1, 1998, then Landlord shall pay Tenant a penalty of $15,000 per month for May, June, and July, and a penalty of $25,000 per month for August, September and October; (c) If Substantial Completion occurs between November 2, 1998, and February 28, 1999, then Landlord shall pay Tenant a penalty of $15,000 per month for May, June, and July, $25,000 per month for August, September and October, and $50,000 per month for November, December, January, and February; and (d) If Substantial Completion occurs on or after March 1, 1999, then Landlord shall pay Tenant a penalty of $15,000 per month for May, June, and July, $25,000 per month for August, September and October, $50,000 per month for November, December, January, and February, and from March 1, 1999 forward Landlord shall pay Tenant a penalty equal to the hold- 38 43 over penalty (excluding any late charges, default interest, or other obligations of the Tenant), which Tenant actually pays to the landlord under the Existing Lease. In the event Landlord is obligated to pay Tenant a penalty under this subsection (d), Landlord shall have the right to negotiate directly with the landlord under the Existing Lease for a reduction in Tenant's obligations thereunder. (e) Upon issuance of Landlord's building permits for the Building, Landlord shall notify Tenant of Landlord's anticipated date of Substantial Completion (the "Updated Commencement Date"). Notwithstanding the above to the contrary, if Substantial Completion occurs after the Updated Commencement Date, then Landlord shall pay Tenant a penalty for each month of delay after the Updated Commencement Date equal to the amount of monthly base rent (excluding any late charges, default interest, or other obligations of the Tenant) which Tenant actually pays to the landlord under the Existing Lease. The penalty paid by Landlord under this subsection (e) shall be in lieu of any other applicable penalty that would be due under subsections (a) through (d) above for the time period following the Updated Commencement Date. In the event Landlord is obligated to pay Tenant a penalty under this subsection (e), Landlord shall have the right to negotiate directly with the landlord under the Existing Lease for a reduction in Tenant's obligations thereunder. (f) If Substantial Completion occurs on a date other than the first day of a calendar month, any applicable penalty shall be pro-rated based on the actual numbers of days in such calendar month. 4. Cost of Tenant Improvements. (a) The Tenant Improvements shall be paid for by Landlord up to a cost of $3,803,040.00 ("Tenant Improvement Allowance"). That portion of the cost of the Tenant Improvements which exceeds the Tenant Improvement Allowance shall be paid by Tenant in advance by a cash deposit with Landlord in the full amount of the cost of the Tenant Improvements which exceeds the Tenant Improvement Allowance; provided, that if not all of the excess costs can be determined prior to construction, then Tenant shall pay the portion which can be determined in advance in cash prior to the commencement of the work and the balance of such excess costs within ten (10) days after Landlord's written demand for payment which demand shall set forth in reasonable detail the costs to be paid. The Tenant Improvement Allowance (and Tenant's payment for excess costs, if any) will be used to pay for the costs of constructing and installing the Tenant Improvements and Building Common Areas including, without limitation, Building lobbies, restrooms, showers, HVAC systems and dropped ceilings; Washington State Sales Tax; Landlord's reasonable construction coordination fee; and other costs and expenses incurred by Landlord under this Schedule B; provided, that the Tenant Improvement Allowance shall not be used to pay any costs associated with Tenant's telephone, computer and/or data services or related cabling with respect thereto, all of which costs shall be paid solely by Tenant. (b) Any change in specifications in the Space Plan, or in the Working Drawings after the initialling thereof by Landlord and Tenant, made at Tenant's request after the date of the execution of the Lease shall be made only after prior written approval of Landlord and shall be made at Tenant's sole cost and expense. The costs and expenses associated with any changes shall include any architectural, mechanical, electrical and structural engineering drawings, plans and specifications required by the changes. 5. Punch List Items. Immediately prior to Tenant's occupancy of the Leased Premises, Landlord and Tenant shall jointly inspect the Tenant Improvements and create a written punch-list setting forth the additional corrective work to the Tenant Improvements are required to be performed pursuant to the Space Plan. Landlord shall promptly take such measures as are reasonably necessary to correct such punch-list items. 6. Additional Allowance. In addition to the Tenant Improvement Allowance, Tenant shall, at Tenant's option, be entitled to receive an additional allowance toward the cost of the Tenant Improvements in the amount of $5.00 per useable square foot of the Leased Premises (the "Additional Allowance"). If Tenant desires to utilize the Additional Allowance, Tenant shall provide Landlord written notice thereof at the time the Space Plan is approved. If Tenant exercises its right to utilize the Additional Allowance by giving Landlord written notice thereof at the time of Space Plan approval, Landlord shall apply the Additional Allowance towards the cost of the Tenant Improvements and Tenant shall pay to Landlord, as additional Basic Triple Net Rent, an amount equal to the Additional Allowance, together with interest thereon at the Prime Rate, in equal monthly installments amortized over the initial Term. The first installment shall be due at the same time as the first payment of Basic Triple Net Rent and all future installments shall be due at the same time and in the same manner as payments of Basic Triple Net Rent. 39 44 7. Interior Space Consultant Allowance. In addition to the Tenant Improvement Allowance, Landlord shall provide Tenant with an allowance of up to $90,000 (the "Interior Space Consultant Allowance") for Tenant's actual costs of interior design and construction administration consultant services for the Leased Premises. The Interior Space Consultant Allowance will be paid by Landlord directly to Tenant's interior space planner within thirty (30) days after Landlord's receipt of Tenant's written invoices for payment and evidence reasonably satisfactory to Landlord of the cost of Tenant's interior space consultant services. 40 45 SCHEDULE "B-1" SPACE PLAN 41 46 SCHEDULE "C" RULES AND REGULATIONS 1. The sidewalks, entrances, passages, courts, elevators, vestibules, stairways, corridors or halls shall not be obstructed or encumbered by any tenant or used for any purpose other than ingress and egress to and from the Leased Premises. 2. No awnings or other projections shall be attached to the outside walls of the Building. All curtains, blinds, shades or screens attached to or hung in or used in connection with any window or door of the Leased Premises shall be subject to the approval of the Landlord. 3. Interior signs on doors and the directory shall be inscribed, painted or affixed for each tenant by the Landlord at the expense of the Tenant, and shall be of a size, color and style acceptable to the Landlord. 4. The skylights, windows and doors that reflect or admit light and air into the halls, passageways or other public places in the Building shall not be covered or obstructed by any tenant, nor shall any bottles, parcels or other articles be placed on the window sills. 5. The water and wash closets and other plumbing fixtures shall not be used for any purpose other than those for which they were constructed, and no sweepings, rubbish, rags, or other substances shall be thrown therein. All damages resulting from any misuse of the fixtures shall be borne by the tenant who, or whose servants, employees, agents, visitors or licensees, shall have caused the same. 6. No tenant shall mark, paint, drill into, or in any way deface any part of the Leased Premises or the Building. No boring, cutting or stringing of wires shall be permitted, except with the prior written consent of the Landlord, and as the Landlord may direct. 7. No bicycles, vehicles or animals of any kind shall be brought into or kept in or about the Leased Premises. No tenant shall cause or permit any unusual or objectionable odors to be produced upon or emanate from the Leased Premises. 8. No additional locks or bolts of any kind shall be placed upon any of the doors or windows by any tenant, nor shall any changes be made in existing locks or the mechanism thereof. Each tenant must, upon the termination of its tenancy, restore to the Landlord all keys of stores, offices and toilet rooms, either furnished to, or otherwise procured by, such tenant, and in the event of the loss of any keys, so furnished, such tenant shall pay to the Landlord the cost thereof. 9. All removals, or the carrying in or out of any safes, freight, furniture or bulky matter of any description must take place during the hours which the Landlord or its agent may determine from time to time. The Landlord reserves the right to inspect all freight to be brought into the Building and to exclude from the Building all freight which violates any of these Rules and Regulations or the Lease of which these Rules and Regulations are a part. 10. The Leased Premises shall not be used for lodging or sleeping or for any illegal purpose. 11. Canvassing, soliciting and peddling in the Development is prohibited and each tenant shall co-operate to prevent the same. 12. There shall not be used in any space, or in the public halls of the Building, either by any tenant or by jobbers or others, in the delivery or receipt of merchandise, mail or other materials, any hand trucks, except those equipped with rubber tires and side guards. No hand trucks shall be used in passenger elevators. 13. The Tenant shall not have or permit or cause to be on the Leased Premises any machines selling merchandise or services or providing entertainment, whether by coins, credit cards or otherwise, unless expressly approved by the Landlord in writing. 14. The Tenant shall not have or permit any public address, music broadcast or other sound system which may be heard beyond the limits of the Leased Premises. 15. 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 43 47 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. 16. Tenant shall not install any radio or television antenna or other devices on the roof(s) or exterior walls of the Building. Tenant shall not interfere with radio or television broadcasting or reception from or in the Development or elsewhere. 17. Tenant shall store all its trash and garbage within its Leased 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. 18. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency. 19. Tenant assumes any and all responsibility for protecting its Leased Premises from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Leased Premises closed. 20. Tenant's requirements will be attended to only upon appropriate application to the Development 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 Landlord. 21. 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 Development. 22. 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 the Lease. 23. Landlord reserves the right 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 Development 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. 24. Tenant shall be responsible for the observance of all of the foregoing rules by Tenant's employees, agents, clients, customers, invitees and guests. 44 48 SCHEDULE "D" Tenant Estoppel Certificate (Example Only) RE: Lease Dated: Landlord: Premises: Rent Amount: Lease Term: To whom it may concern: Tenant represents and certifies knowing that the reader is relying on the contents the following: 1. That Tenant is the tenant under the above described Lease and the Lease is in full force and effect and has not been amended since the date of the Lease, except as follows: 2. Tenant has taken possession of the premises, such possession having been delivered by Landlord and having been accepted by Tenant. 3. That the improvements, space, parking and common area facilities, if any, required to be furnished have been completed in all respects to the satisfaction of Tenant and have been accepted and are in use by Tenant, its customers, employees and invitees. 4. Tenant knows of no existing default by Landlord. Tenant does not have a claim against Landlord which might be set off or credited against future accruing rents. 5. No rents have been prepaid except as provided by the Lease. 6. The Basic Triple Net Rent for the premises is $____________ per month and the total rentable square footage is __________ square feet. The current Additional Rent for the premises is $____________ per month. 7. Rent started on __________, 19__, and rent is paid to __________, 19__. 8. A security deposit of $____________ was paid to Landlord. 9. If by foreclosure or otherwise, the lender, its successor or assigns ("Lender") comes into possession of the premises, then Tenant agrees to attorn to, be liable to, and recognize Lender as Landlord under the Lease and be bound by all the obligations imposed by the Lease on Tenant. 10. No actions, whether voluntary or otherwise, are pending against Tenant under the bankruptcy laws of the United States. 11. Tenant will give prompt written notice to Lender, at such address as Lender may designate, if Landlord defaults under the Lease giving Lender details of the nature of the default. Prior to terminating the Lease for any reason before the expiration of the Lease Term, Tenant will allow Lender 30 days after receipt of notice to rectify or cure the default constituting the basis of the termination. Dated: ____________________ Tenant: 45 49 EXHIBIT A CHICAGO TITLE INSURANCE COMPANY A.L.T.A. COMMITMENT SCHEDULE A (Continued) Order No.: 457560 Your No.: KELLER PROPERTY - ------------------------------------------------------------------------------- LEGAL DESCRIPTION EXHIBIT (Paragraph 4 of Schedule A continuation) THAT PORTION OF THE EAST HALF OF THE SOUTHWEST QUARTER OF SECTION 6, TOWNSHIP 25 NORTH, RANGE 6 EAST, WILLAMETTE MERIDIAN, IN KING COUNTY, WASHINGTON, LYING NORTHERLY OF THE NORTH MARGIN OF NORTHEAST UNION HILL ROAD; TOGETHER WITH THAT PORTION OF GOVERNMENT LOTS 6 AND 7 OF SECTION 6, TOWNSHIP 25 NORTH, RANGE 6 EAST, WILLAMETTE MERIDIAN, IN KING COUNTY, WASHINGTON, LYING NORTHERLY OF THE NORTH MARGIN OF NORTHEAST UNION HILL ROAD AND EASTERLY OF THE FOLLOWING DESCRIBED LINE: BEGINNING AT THE INTERSECTION OF THE NORTH MARGIN OF NORTHEAST UNION HILL ROAD WITH THE WEST LINE OF GOVERNMENT LOT 7; THENCE NORTH 80 DEGREES 03'32" EAST ALONG SAID NORTH MARGIN 515.00 FEET; THENCE NORTH 02 DEGREES 14'11" EAST 2191.78 FEET TO A POINT ON THE NORTH LINE OF SAID GOVERNMENT LOT 6, DISTANT 545.75 FEET EAST, AS MEASURED ALONG SAID NORTH LINE, FROM THE NORTHWEST CORNER THEREOF AND THE TERMINUS OF SAID LINE; EXCEPT ANY PORTION THEREOF LYING NORTHERLY OF THE CENTERLINE OF BEAR CREEK AND MARTIN CREEK, SAID CENTERLINES BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS: BEGINNING AT THE INTERSECTION OF THE NORTH MARGIN OF SAID NORTHEAST UNION HILL ROAD WITH THE WEST LINE OF SAID GOVERNMENT LOT 7; THENCE NORTH 80 DEGREES 03'32" EAST ALONG SAID NORTH MARGIN 515.00 FEET; THENCE NORTH 02 DEGREES 14'11" EAST 679.60 FEET TO SAID CENTERLINE OF BEAR CREEK AND THE TRUE POINT OF BEGINNING OF SAID DESCRIBED LINE; THENCE NORTHEASTERLY ALONG THE CENTERLINE OF BEAR CREEK AND MARTIN CREEK THE FOLLOWING COURSES: THENCE SOUTH 77 DEGREES 53'16" EAST 117.10 FEET; THENCE NORTH 81 DEGREES 16'20" EAST 95.53 FEET; THENCE NORTH 76 DEGREES 48'29" EAST 151.88 FEET; THENCE NORTH 72 DEGREES 38'17" EAST 129.88 FEET; THENCE NORTH 85 DEGREES 08'33" EAST 118.81 FEET; THENCE SOUTH 70 DEGREES 52'10" EAST 80.73 FEET; THENCE SOUTH 86 DEGREES 12'17" EAST 103.83 FEET; THENCE NORTH 74 DEGREES 27'30" EAST 93.10 FEET; THENCE NORTH 66 DEGREES 48'56" EAST 141.68 FEET; THENCE NORTH 72 DEGREES 54'14" EAST 96.15 FEET; THENCE NORTH 60 DEGREES 28'37" EAST 43.05 FEET; THENCE NORTH 56 DEGREES 52'39" EAST 85.84 FEET; THENCE NORTH 84 DEGREES 58'45" EAST 99.88 FEET; THENCE NORTH 35 DEGREES 12'27" EAST 66.37 FEET; - ------------------------------------------------------------------------------- CHICAGO TITLE INSURANCE COMPANY 50 EXHIBIT A (continued) CHICAGO TITLE INSURANCE COMPANY A.L.T.A. COMMITMENT SCHEDULE A (Continued) Order No.: 457560 Your No.: KELLER PROPERTY - -------------------------------------------------------------------------------- LEGAL DESCRIPTION EXHIBIT (Paragraph 4 of Schedule A continuation) THENCE NORTH 76 DEGREES 31'20" EAST 65.11 FEET; THENCE NORTH 85 DEGREES 47'58" EAST 88.54 FEET; THENCE SOUTH 86 DEGREES 45'20" EAST 85.89 FEET; THENCE NORTH 72 DEGREES 43'20" EAST 85.47 FEET; THENCE SOUTH 88 DEGREES 38'44" EAST 37.29 FEET; THENCE SOUTH 69 DEGREES 21'52" EAST 19.70 FEET; THENCE SOUTH 52 DEGREES 44'57" EAST 57.69 FEET; THENCE SOUTH 84 DEGREES 58'59" EAST 37.73 FEET; THENCE NORTH 79 DEGREES 51'55" EAST 89.63 FEET; THENCE NORTH 82 DEGREES 02'53" EAST 149.28 FEET TO THE EAST LINE OF SAID EAST HALF OF THE SOUTHWEST QUARTER OF SECTION 6 AND THE TERMINUS OF SAID DESCRIBED LINE. (ALSO KNOWN AS REVISED PARCEL 4 OF CITY OF REDMOND LOT LINE REVISION NO. LLR94-016, RECORDED UNDER RECORDING NUMBER 9603049006.) - -------------------------------------------------------------------------------- CHICAGO TITLE INSURANCE COMPANY 51 SCHEDULE B-2 WORK LETTER GENERAL DESCRIPTION The following specifications shall be read in conjunction with the schematic space plan to be prepared by JPC and the schematic shell and core documents prepared by Mithun Partners dated June 5, 1997. The drawings and specifications represent the Tenant's design intent for the purposes of budgeting and definition of interior improvements for allocation of Tenant Improvement Allowance. OWNER RESPONSIBILITIES A. GENERAL: 1. Codes and Ordinances -- The Building Shell and Interior Improvements shall comply with all applicable codes as enforced by the City of Redmond. 2. Permits -- The cost of all permits, fees, and licenses required for construction of the shell shall be paid by Landlord. 3. Final Inspections -- Landlord shall be responsible for obtaining final inspection from all governing agencies as required to obtain Certificate of Occupancy for the building shell at Landlord's cost. Landlord shall coordinate final inspections required to obtain Certificate of Occupancy of the Tenant premises at Tenant's cost (Tenant Improvement Allowance). 4. Schedules -- Landlord shall provide and maintain a detailed schedule of construction and occupancy based on agreed upon delivery dates for tenant provided materials, equipment, and furnishings. Landlord shall notify Tenant in writing of any tenant provided information or approvals that will affect the schedule. Tenant shall be given reasonable time to provide the requested information. B. IMPROVEMENTS TO BE PROVIDED BY LANDLORD: 1. SIGNAGE -- Landlord shall provide a tenant monument sign adjacent to Building C. Landlord shall also provide signage for disabled and visitor parking stalls near the entrance to the building. All signage must conform to the City of Redmond Sign Code Standards. 2. Sign Lighting -- Landlord shall provide adequate site and parking area lighting customary to suburban office parks and as required by City of Redmond Code. 3. Floors -- Landlord shall provide cured and sealed concrete floors that are level to within industry standards and ready to receive tenant's finish flooring. 4. Lobby Stairwell -- Landlord to provide unfinished lobby stairwell. Tenant is responsible for hand rail and finishes. 5. Perimeter Stairwells -- Landlord to provide one unfinished stairwell at each end of building as shown on plan. Tenant is responsible for all finishes. 6. Elevator -- Landlord shall provide two 2500 lb hydraulic elevators. Tenant is responsible for cab finishes. 7. Insulation -- Landlord will insulate the building slab, roof, and all piping, waterlines, and rain leaders as required by code. All exterior wall insulation and acoustical insulation of ceilings and partitions will be part of Tenant Improvements. 8. Sprinkler -- Landlord shall provide a complete sprinkler system to meet local standards based on class B occupancy. All downheads and head modifications due to Tenant Improvement partitioning are part of Tenant Improvements. 9. Plumbing -- Plumbing will include installation of a 2" copper waterline which will run below the second floor deck, approximately at the building center. A 6" sewer drain line will run under-slab. Included are related shut-off valves, clean-outs, and other miscellaneous items. Landlord shall provide rough plumbing associated with Toilet Rooms, Shower Rooms, drinking fountains on each floor, roof drains and miscellaneous core drain waste and vent piping per standard building design. 10. Exhaust -- Landlord shall provide exhaust fan and ductwork for Toilet Room and Shower Room exhaust per standard building design. 52 11. Fire Alarm System - Landlord to provide a sprinkler system alarm including flow and tamper switches as required by code for shell letter. TENANT IMPROVEMENTS A. GENERAL: 1. Tenant Improvement Work - The Tenant Improvement Items defined herein consists of work items approved by Landlord to be paid out of the Tenant Improvement Allowance. Unless otherwise addressed all Tenant Improvements will be constructed to a level of quality and finish which meets or exceeds Landlord's building standards. 2. Codes and Ordinances - The Tenant Improvements shall comply with all applicable codes as enforced by the City of Redmond. 3. Permits - The cost of all permits, fees, and licenses required for construction of the Tenant Improvements shall be paid out of the Tenant Improvement Allowance. 4. Schedules - Tenant will provide Landlord with completed specifications and drawings of its Tenant Improvements no later than ____________, 1997. Tenant will provide "Tenant Provided" materials, equipment, and furnishings within the time frames specified by Landlord provided that that Landlord gives Tenant reasonable prior notice to provide such items. B. TENANT IMPROVEMENT ITEMS: 1. Patio - Construction of an outdoor patio area on the West side of Building C providing said patio does not interfere with project walkways, parking or Building B - Size and exact location are subject to Landlord's approval. 2. Raised Access Flooring - Computer Room shall receive 12" height raised access flooring with ramp and handrail. 3. Food Services - Food service equipment associated with cafeteria and coffee break areas, such as refrigerators, microwaves, dishwashers, garbage disposals, refrigerated display cases, sinks, cooking surfaces, etc. and all required plumbing, venting, and fire suppression systems. 4. Signage - Purchase and installation of tenant signage mounted to face of building as allowed by City Ordinances and subject to approval by Landlord. 5. HVAC - Purchase and installation of HVAC system for the building - Tenant shall have the right to review and approve the proposed system to assure the system provides the level of control and capacity required for tenant's loads. Tenant will require 24 hour and/or extended hours HVAC in designated areas of the building. 6. Restrooms - Tenant to provide finished restrooms in the locations designated on building plan. Minimum restrooms finish will include toilet partitions, plastic laminate countertops with mirror above and ceramic tile on floors, base and wet walls. Other walls to receive vinyl wall covering. 7. Shower Rooms - Tenant will be responsible for installing shower stalls. 8. Entry and Elevator Lobbies - Tenant to provide a first floor entry lobby with building standard finishes or better. 9. Electrical - Tenant shall provide one 2,400 Amp, 277/480V, 3 phase, 4-wire service. House power to include a 200 Amp, 277/480V panel; 15 KVA transformer and 60 Amp, 120/208V sub-panel. 10. Sprinklers - All downheads and head modifications due to Tenant Improvement Partitioning - Tenant may choose to purchase and install a preaction sprinkler system for the Computer Room. 11. Electrical Work - All electrical work necessary to install the Tenant's electrical service and distribution system. 12. Emergency Generator - Emergency Generator and associated sitework and infrastructure - size and location are subject to Landlord's Approval. 13. Frames - Hollow metal frames located in shipping/receiving, and cafeteria areas. 14. Exterior Doors - One pair of 3'-0" x 7'-0" exterior doors at shipping/receiving area. 15. Lighting - Installation of building standard or better lighting - Tenant may choose to install an indirect lighting system for the open office areas. 53 16. Relites - Wood frame relites with 1/4" tempered glass shall be located as indicated on space plan subject to City approval 17. Security System - Provision and installation, including rough in, of a card access or security system 18. Partitions & Exterior Walls - All interior partitions and the furring, insulation and finish of all exterior walls 19. Window Coverings - All window coverings BUILDING STANDARDS All building standards are subject to Landlords finalization of Building Standard Specifications, however said Building Standards will generally include the following: BUILDING STANDARDS All building standards are subject to Landlords finalization of Building Standard Specifications, however said Building Standards will generally include the following: 1. Finish Carpentry and Millwork - Millwork shall consist of countertops, cabinets, shelving and trim and shall be constructed as follow: Quality: Custom grade matching commercial standard product lines using European style construction. Marine grade plywood shall be used at all cafeteria countertops. Door Design: Flush Overlay Hinges: Concealed, Soss or equal Pulls: Wire type, finish to match hardware Millwork Finish: All surfaces shall have plastic laminate, matte finish, Wilsonart or equal Backsplash: 4" plastic laminate in all wet areas 2. Finish Carpentry - All wood finish material shall be pre-finished stain grade birch solids and veneers. 3. Doors - All interior doors shall be 1 3/4" x 3'-0" x 7'-0". Doors shall be solid core Birch veneer with solid hardwood edge and stained finish. 4. Frames - All interior frames shall be birch, finish to match doors. Jambs to be fire-rated where required by code. 5. Hardware - Hardware shall be specified to meet tenant's security and access requirements. Locks and latches shall be commercial grade with lever handle. 6. Interior Partitions - Building standard partition shall consist of 5/8" GWB over 2 1/2" metal studs at 2'-0" O.C. with 1/2" reveal at ceiling. 7. Core Partitions - Core wall partitions shall have taped and finished GWB surface. 8. Ceiling - Ceilings may consist of GWB over metal stud framing for limited soffited areas, or lay-in acoustical tile ceilings in suspended metal grid for the primary ceiling. 9. Light Fixtures - 2x4 parabolic deep cell, 3 lamp with electronic ballasts. 10. Carpet - 28 oz. loop pile, glued down. 11. Base - 4" Rubber base. 12. Paint - Eggshell finish, applied in two coats over primer. 13. Window Coverings - Horizontal 1" mini-blinds at all exterior windows. EX-10.32 11 1998 MANAGEMENT AND PERFORMANCE BONUS PLANS 1 Exhibit 10.32 [MOSAIX] LOGO 1998 MANAGEMENT BONUS PLAN Executive Summary ================================================================================ PLAN SUMMARY The MBP is an annual bonus plan that rewards Mosaix's senior executives for yearly company performance achieved relative to planned performance. o For participants with a corporate focus only, the company's consolidated annual net operating income and revenue achieved versus plan will determine a percentage of annual base salary to be paid out as a bonus. This percentage will be different across the three participation levels below but will be the same for each participant in a particular level. o Participants in Mosaix's business units may receive incentive compensation based on a combination of both company and business unit performance. The performance measures for the business unit portion will be the unit's revenue and contribution achieved versus plan. o The minimum hurdle for payouts is achievement of 75% of planned financial targets. There will be no business unit payouts unless corporate performance is at least 75% of plan. o A participant's final bonus may be increased or decreased by a factor that is based on an assessment of individual performance. The maximum bonus that may be earned is 150% of eligible base salary. CHANGE FROM 1997 PLAN o The Plan is being retitled as the "Management Bonus Plan" from the "Management & Company Performance Bonus Plan" o The split of the incentive compensation target for Level II participants has been modified from 15% of base salary based on corporate performance and 5% of salary based on business unit performance to 10% of salary for both. PLAN PARTICIPATION LEVELS AND BONUS TARGETS
Target Bonus Corporate Business Unit Level Participating Position(s) As % of Salary Component Component - ----- ------------------------- -------------- --------- --------- CEO Chief Executive Officer 50% 50% Not applicable Level I Senior Vice Presidents 35% 25% 10% Level II VPs and Directors 20% 10% 10%
Mosaix's CEO will determine which Level I and II MBP participants will have a portion of their target bonuses tied to business unit performance. 1997 business units will include the Professional Services Group and Mosaix Ltd. PLAN PARTICIPATION o If an employee leaves a Plan position but stays with the company in a non-Plan position, he or she will participate in the Plan only for each full quarter worked in the Plan position. o Likewise, if an employee moves into a Plan position from a non-Plan position during the year, he or she will participate in the Plan only for full quarters worked in the Plan position. o Finally, an individual must work at Mosaix for at least one full financial quarter to participate in the Plan and must be employed by Mosaix at the time bonus checks are distributed in order to receive a bonus under the Plan. PERFORMANCE FACTOR The performance factor will be multiplied by the bonus percentage determined by company and/or business performance to yield a final bonus percentage. The performance factor may vary between 0 and 2.0 and may be fractional. It is anticipated that performance factors will be tightly distributed around 1.0. Individual Performance >> >> >> >> >> Better Performance >> >> >> >> >> Performance Factor 0.0 1.0 2.0 ================================================================================ December 10, 1997 Page 1 of 1 2 [MOSAIX LOGO] 1998 PERFORMANCE BONUS PLAN Executive Summary ================================================================================ OBJECTIVES The 1998 Performance Bonus Plan (the "Plan") is designed to: o Focus Plan participants on the achievement of team goals or productivity targets. o Reward participants for the company's achievement of profitability targets. PLAN DESIGN The Performance Bonus Plan has two components, the first of which is similar to the 1997 Profitability Bonus Plan: 1) The CORPORATE COMPONENT is an annual bonus plan that pays out based on Mosaix's operating income achieved versus targeted performance for the year. o The annual bonus target under the corporate component is 5% of the participant's annual base salary rate on December 31, 1998. The maximum bonus under this component is 10% of salary. o Quarterly non-recoverable advance bonuses under the Plan may be paid out after the first, second, and third quarters if net operating income (NOI) performance targets are met for those quarters. - The quarterly corporate bonus target is 1.25% of base salary. - The threshold for an advance bonus is 90% of quarterly targeted performance. - Participants may earn bonuses between 90% and 100% of the quarterly bonus targets. o When the year is over, the Plan will pay out the difference between the annual bonus earned and the sum of the advance bonuses. 2) The TEAM COMPONENT will be a quarterly bonus plan based on the achievement of quarterly objectives that are established at the beginning of the quarter. The Team Component represents a framework for individual departmental plans. o The annual bonus target under the Plan is 5% of base salary, consisting of four quarterly targets of 1.25% of salary or an annual target of 5%. o If based on goal achievement, the bonus may pay in increments if 50%, 75%, or 100% of target, but will not pay out above 100%. o If based on productivity measures, the bonus may be scaled but will but have an annual maximum of 5% of base salary. o The Team Component will not pay out unless the company is profitable over the time period. The measurement will be positive net operating income, including the accrual for the PBP. CHANGES FROM 1997 PLAN 1) The Corporate Component has a 5% annual target (versus 10%) and pays out advances based on quarterly results, not year-to-date results. 2) The Team Component is new and comprises the remaining 5% of the bonus target. ANNUAL CORPORATE BONUS COMPONENT SCHEDULE The following schedule will be used to determine an annual bonus earned under the Plan:
% ANNUAL TARGET ACHIEVED <75% 75% 80% 90% 100% 110% 120% 150% >150% --- ---- --- --- --- --- --- --- ---- % of eligible salary to be 0% 3.75% 4.0% 4.5% 5% 6% 7% 10% 10% earned as a bonus for 1998 --- ---- --- --- --- --- --- --- ----
QUARTERLY CORPORATE BONUS COMPONENT SCHEDULE The following schedule will be used to determine a quarterly advance bonus earned under the Plan:
QUARTERLY PERFORMANCE TARGET ACHIEVED <90% 90% 100% >100% --- ------ ----- ---- Quarterly advance as % of base salary 0% 1.125% 1.25% 1.25% --- ------ ----- ----
================================================================================ December 10, 1997 Page 1 of 1 EX-21.1 12 LIST OF SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF MOSAIX, INC. SUBSIDIARY NAME OWNERSHIP PERCENTAGE JURISDICTION - --------------- -------------------- ------------ CALEO SOFTWARE, INC. 100% GEORGIA MOSAIX FSC, INC. 100% GUAM VIEWSTAR CORPORATION 100% CALIFORNIA MOSAIX LIMITED 100% UNITED KINGDOM EX-23.1 13 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Mosaix, Inc.: We consent to incorporation by reference in the registration statements (Nos. 333-18577, 33-93948, 33-88544, 33-51620, 33-41199, 33-41197 and 33-36617) on Form S-8 of Mosaix, Inc. and subsidiaries (the "Company") of our reports dated February 2, 1998, relating to the consolidated balance sheets of the Company as of December 31, 1997, and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows and the related financial statement schedule for each of the years in the three-year period ended December 31, 1997, which reports appear in the Company's annual report on Form 10-K for the year ended December 31, 1997. /s/ KPMG PEAT MARWICK LLP Seattle, Washington March 10, 1998 EX-27.1 14 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1997 DEC-31-1997 5,532 30,548 32,074 1,749 2,532 74,711 24,732 17,283 84,378 28,454 0 0 0 122 55,683 84,378 73,145 121,144 20,426 45,430 63,254 694 105 13,974 4,217 0 0 0 0 9,757 .740 .710
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