UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-K
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þ
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended December 31, 2003 | ||
| or | ||
|
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) | |
Commission file number 000-27687
BSQUARE CORPORATION
|
Washington
|
91-1650880 | |
|
(State or other jurisdiction of
incorporation or organization) |
(I.R.S. Employer
Identification No.) |
3150 — 139th Avenue SE, Suite 500, Bellevue, Washington 98005-4081
(425) 519-5900
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No þ
State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, computed by reference to the price at which the common stock was last sold, as of June 30, 2003: $17,547,729
Number of shares of common stock outstanding as of February 25, 2004: 37,607,723
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement to be delivered to shareholders in connection with the annual meeting of shareholders to be held on April 29, 2004 are incorporated by reference into Part III of this Form 10-K.
BSQUARE CORPORATION
FORM 10-K
TABLE OF CONTENTS
1
PART I
| Item 1. | Business |
FORWARD-LOOKING STATEMENTS
This Form 10-K and the documents
incorporated herein by reference contain forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 based on current expectations, estimates
and projections about our industry and our management’s
beliefs and assumptions. When used in this Form 10-K and
elsewhere, the words “believes,” “plans,”
“estimates,” “intends,”
“anticipates,” “seeks” and
“expects” and similar expressions are intended to
identify forward-looking statements. These forward-looking
statements include, but are not limited to, statements about our
plans, objectives, expectations and intentions and other
statements that are not historical facts. These forward-looking
statements are not guarantees of future performance and are
subject to certain risks and uncertainties that are difficult to
predict. Accordingly, actual results may differ materially from
those anticipated or expressed in such statements as a result of
a variety of factors, including those set forth under “Risk
Factors.” Such forward-looking statements include, but are
not limited to, statements with respect to the following:
Readers are cautioned not to place undue reliance
on the forward-looking statements, which speak only as of the
date made. Except as required by law, we undertake no obligation
to update any forward-looking statement, whether as a result of
new information, future events or otherwise. Readers, however,
should carefully review the factors set forth in this and other
reports or documents that we file from time to time with the
Securities and Exchange Commission (SEC).
2
BUSINESS
Overview
BSQUARE provides software, professional service
and hardware offerings to the smart device marketplace. A smart
device is a dedicated purpose computing device that typically
has the ability to display information, runs an operating system
(e.g., Microsoft® Windows® CE .NET) and may be
connected to a network via a wired or wireless connection.
Examples of smart devices that BSQUARE targets include set-top
boxes, home gateways, point-of-sale terminals, kiosks, voting
machines, gaming platforms, Personal Digital Assistants (PDAs),
personal media players and smartphones.
BSQUARE provides its proprietary software,
third-party software and professional service solutions to smart
device makers. This business accounted for the majority of our
revenue in 2003. We have also begun to design and distribute our
proprietary smart device hardware product, the Power
Handheld
TM
. We recognized our first revenue from
shipments of the Power Handheld in the fourth quarter of 2003.
Our smart device businesses are focused on
devices running customized embedded versions of the Microsoft
Windows family of operating systems, specifically
Windows CE .NET, Windows XP Embedded and Windows
Mobile
TM
for Pocket PC and Smartphone.
We were incorporated in the State of Washington
in July 1994. Our principal office is located at 3150 139th
Avenue SE, Suite 500, Bellevue, Washington 98005, and
our telephone number is (425) 519-5900.
Industry Background
The increasing need for connectivity among both
business and consumer users is driving demand for easy-to-use,
cost-effective and customizable methods of electronic
communication. Although the PC has been the traditional means of
electronically connecting suppliers, partners and customers, the
benefits of “smart devices” are a primary factor in
their rapid adoption as a new class of powerful technology.
Smart devices are particularly attractive to
businesses and consumers because they are often less expensive
than desktop and laptop computers; have adaptable
configurations, including size, weight and shape; and are able
to support a variety of customized applications and user
interfaces that can be designed for specific tasks. These
devices also are typically compatible with existing business
information systems.
The smart device industry is characterized by a
wide variety of hardware configurations and end-user
applications, often designed to address a specific vertical
market. To accommodate these diverse characteristics in a
cost-effective manner, Original Equipment Manufacturers (OEMs)
and Original Design Manufacturers (ODMs) require operating
systems that can be integrated with a diverse set of smart
devices and can support an expanding range of industry-specific
functionality, content and applications. The Microsoft Windows
family of operating systems — specifically
Windows CE .NET, Windows XP Embedded and Windows
Mobile technologies — helps satisfy these requirements
because it leverages the existing industry-wide base of
Microsoft Windows developers and technology standards, can be
customized to operate across a variety of smart devices and
integrate with existing information systems, offer Internet
connectivity, and reduce systems requirements compared to
traditional PC operating systems.
The smart device marketplace is being influenced
by the following factors:
3
Software and Service Solutions for Smart
Device Makers
We have been providing software and service
solutions to the smart device marketplace since our inception.
We are considered a leader in our field. Our customers include
world class OEMs and ODMs, device component suppliers such
as silicon vendors (SVs) and peripheral vendors, and enterprises
with customized device needs such as retailers or field service
organizations and wireless operators that market and distribute
connected smart devices. The software and services we provide
our customers are utilized and deployed throughout various
phases of our customers’ device life cycle, including
design, development, customization, quality assurance and
deployment.
Representative customer relationships in 2003
included:
We offer a range of software products and service
offerings to our customers for the development and deployment of
smart devices. Software products are comprised of those
sub-licensed from third parties for resale, as well as our own
proprietary software products.
4
We have multiple license and distribution
agreements with third-party software vendors. Our ability to
resell these third-party software products, as stand-alone
products or in conjunction with our own proprietary software and
service offerings, provides our customers with a single source
for software products and services for smart devices. Our
third-party software product offerings include:
Our proprietary software offerings include:
Revenue from software sold to smart device makers
was $28.2 million, $19.5 million and $8.1 million
in 2003, 2002 and 2001, respectively, representing 75%, 52% and
13% of total revenue in each of those years, respectively. Of
these amounts, 89%, 82% and 33% in 2003, 2002 and 2001,
respectively, was generated through the resale of third-party
software products. Resale of Microsoft embedded operating
systems and related products accounted for 98%, 91% and 68% of
third-party software products revenue in 2003, 2002 and 2001,
respectively.
5
BSQUARE provides Windows Embedded and Windows
Mobile smart device makers with consulting and engineering
services that are comprehensive, yet highly customized. Our
service offerings include:
BSQUARE customers utilize our professional
service offerings because our deep experience with Windows
Embedded operating systems typically results in shorter
timelines, lower overall costs to complete projects, and product
robustness and features the customer may have been unable to
achieve through other means.
Revenue from professional services sold and
delivered to smart device makers was $9.4 million,
$18.0 million and $53.8 million in 2003, 2002 and
2001, respectively, representing 25%, 48% and 87% of total
revenue in each of those years, respectively. Revenue from our
discontinued Microsoft tools consulting business, which included
service provided directly to Microsoft as well as other
customers, was $974,000, $9.2 million and
$37.1 million in 2003, 2002 and 2001, respectively.
In addition to providing software and service
solutions to smart device makers, we design, manufacture and
distribute our own proprietary smart device hardware product,
which is sold to wireless network operators and OEMs. Our first
hardware product introduction is the Power Handheld, a
convergent wireless device. The BSQUARE Power Handheld reference
design combines wireless connectivity with laptop-like
functionality for e-mail, personal information management,
document viewing and creation and enterprise connectivity. The
Power Handheld bridges the functionality and usability gap that
exists between a laptop and a standard PDA. The Power Handheld
is based upon Microsoft’s Windows CE .NET operating system
and BSQUARE’s internally developed Power Handheld software.
The result is an open platform that can be tailored to the needs
of a wireless network operator or enterprise customers. The
Power Handheld is manufactured on our behalf by a contract
manufacturer located in China. 2003 was the first year that we
entered into any meaningful manufacturing for our proprietary
hardware product, which has not historically been a core
expertise of BSQUARE. In the fourth quarter of 2003, we shipped
the first units of the Power Handheld to customers and
recognized the first revenue from this business which was not
material to our 2003 results. Vodafone UK and Hoeft &
Wessel in Germany were initial customers of our Power Handheld
in 2003.
We believe that the Power Handheld has the
potential to tap into a large and growing opportunity for
handheld form-factor devices that are able to combine wireless
connectivity, laptop functionality, and an open platform that
can interface with enterprise data systems. Nevertheless, market
entry for the Power Handheld has taken longer than anticipated,
while the expenses and working capital required to bring this
device to market have increased and cannot be supported through
existing BSQUARE resources at current operating levels. In 2003,
we announced that our Board of Directors had formed a strategic
planning committee to explore options for this business. Options
we are exploring include a spin-out, sale, strategic partnering,
additional financing or a combination thereof. However, there
can be no assurance that a strategic option will be available on
acceptable terms, if at all.
6
Strategy
Our strategy is to continue to enhance our
position as a leading provider of complete smart device
solutions. To advance this strategy, we intend to focus on five
key areas:
A key element of our strategy is to expand our
share of the Microsoft Windows Embedded licensing, services and
products marketplace. Our means of expanding that market share
are:
By adding and/or acquiring Windows Embedded and
Windows Mobile-based software products that complement our
existing market position and our professional service and
software offerings, we believe we can create synergies that will
allow us to serve our customers more fully during their design
cycle.
We will also seek to establish leadership in the
market for Smartphone and Pocket PC add-on products and
services. We believe that Microsoft will continue to gain
momentum with Smartphone and Pocket PC-based designs, and
that some of these designs may displace Windows CE design
engagements that we have traditionally won.
Relationship with Microsoft and Impact on our
Smart Device Solutions Business
BSQUARE has a long relationship with Microsoft.
Our relationship gives us early access to new technologies and
allows us to leverage Microsoft’s sales and marketing
efforts to develop new business opportunities.
Our credentials as a Microsoft partner include:
7
BSQUARE works closely with Microsoft executives,
developers, and product managers. We leverage these
relationships in a variety of ways, including:
Customers
Customers of our smart device software and
service offerings include leading OEMs, ODMs, wireless network
operators, and SVs seeking to leverage the benefits of embedded
Windows-based operating systems to develop high-quality,
full-featured smart devices that meet the requirements of
numerous end-markets. In 2003, the largest customer of our smart
device software and service offerings was Cardinal Healthcare
Systems, representing 17% of our total revenue. There were no
other customers accounting for more than 10% of total revenue.
Other representative customers include Microsoft, HP, Motorola,
HTC, Compal, Mitac, Texas Instruments, Sharp, Hitachi, and AMD.
Customers of our proprietary Power Handheld
hardware device include wireless network operators and OEMs
targeting the delivery of applications and connectivity to the
enterprise marketplace. In 2003, customers of the Power Handheld
were Vodafone and Hoeft & Wessel.
Sales and Marketing
We market our products and services in two ways:
We do not make significant use of resellers,
channel partners, representative agents or other indirect
channels, and instead rely significantly on our direct sales
force.
Key elements of our sales and marketing strategy
include direct marketing, advertising, event marketing, public
relations, customer and strategic alliance partner co-marketing
programs and a comprehensive website.
8
Research and Development
Our research and development teams are
responsible for the design, development and release of our
software and hardware products. Members of our research and
development staff work closely with our sales and marketing
departments, as well as with our customers and potential
customers, to better understand market needs and requirements.
Competition
We face competition primarily from the
following
:
As we develop new offerings, particularly those
focused on specific industries, we may begin competing with
companies with which we have not previously competed. We compete
principally on the basis of the breadth of our product and
service offerings, the depth of our technical experience, the
quality of our products and professional services, and the
strength of our strategic partner relationships. Particularly in
the areas of professional service and software resale, price has
become an increasingly important competitive factor. We believe
we compete favorably in each of these areas.
International Operations
Historically, BSQUARE has had multiple
operational presences outside the United States. During 2003,
our international operations consisted of subsidiaries and
operations in Tokyo, Japan and Taipei, Taiwan. Both of these
operations have traditionally focused on providing software and
service solutions to smart device makers in the Asian
marketplace. Because our VAP agreement with Microsoft restricts
resale of Microsoft embedded operating systems to North America,
our foreign operations have traditionally focused on the sale of
our own proprietary software and service solutions. In the
fourth quarter of 2003, we began the closure of our Tokyo, Japan
operation, which was substantially completed in March 2004. Our
Taiwan operation will remain unaffected.
Personnel
As of February 29, 2004, we had
140 employees including 56 employees in professional
engineering services and 36 employees in research and
product development, of which 32 are directly related to our
Power Handheld business, and 48 employees in sales,
marketing and administrative services, including executive
officers. Of these employees, 131 are located in the United
States, one is located in Japan and eight are located in Taiwan.
In addition, from time to time, we employ temporary employees
and consultants.
9
The following highlights the number of employees
by area:
Intellectual Property and Other Proprietary
Rights
Our intellectual property is critical to our
success. In general, we attempt to protect our intellectual
property rights through patent, copyright, trademark and trade
secret laws and contractual arrangements. There can, however, be
no assurance that our efforts will be effective to prevent
misappropriation of our technology, or to prevent the
development and design by others of products or technologies
similar to or competitive with those developed by us.
Additionally, because a significant portion of
our revenue relates to the resale of third-party software
products, we are also reliant on our partners, particularly
Microsoft, to appropriately protect their own intellectual
property underlying these products.
We currently have a number of pending U.S. and
international patent applications. We have ten issued patents
world-wide and a number of registered trademarks. We will
continue to pursue appropriate protections for our intellectual
property.
Acquisitions
On March 13, 2002, we acquired all of the
issued and outstanding shares of Infogation Corporation, a
developer of on-board and handheld vehicle navigation systems
(telematics), for total consideration of $8.7 million,
including 1.2 million shares of our common stock. We
assumed Infogation’s outstanding vested and unvested
employee stock options, which were converted into options to
acquire approximately 200,000 shares of our common stock.
In addition, $300,000 of cash and 129,762 shares of common
stock were held in escrow subject to terms and conditions of the
merger agreement, which were subsequently distributed to
Infogation shareholders. The agreement contained a provision for
the payment of up to $3.0 million of additional
consideration in cash and/or common stock based upon the
attainment of certain revenue targets, as defined in the merger
agreement. In 2003, we issued 6,700 shares of common stock
as final settlement related to this provision. Due to
weaker-than-expected demand for telematics products and
services, we reduced the number of telematics personnel to four
at the end of 2002 and eliminated the remaining positions in
early 2003. In addition, we no longer expect to actively pursue
telematics work.
On May 24, 2000, we acquired all of the
issued and outstanding shares of Mainbrace Corporation, an
intellectual property licensing and enabling software firm. We
paid an aggregate of $10.8 million cash and issued
627,334 shares of our common stock and options to purchase
an additional 172,629 shares of our common stock in
exchange for all of the outstanding shares and options to
purchase shares of Mainbrace. The acquisition was accounted for
under the purchase method of accounting.
On January 5, 2000, we acquired all of the
issued and outstanding shares of BlueWater Systems, Inc., a
privately held designer of software development tools for the
creation of Windows-based smart devices. The transaction was
effected through the exchange of 261,391 shares of our
common stock and options to purchase
10
Internet Website
Our Internet website can be found at
www.bsquare.com
. We make available free of charge through
our investor relations section, under “SEC Filings,”
all our filings, including our annual reports on Form 10-K
and quarterly reports on Form 10-Q, filed pursuant to
Section 13(a) or 15(d) of the Exchange Act, as soon as
reasonably practicable after such material is filed with, or
furnished to, the SEC.
Directors and Executive Officers
The following table sets forth certain
information with respect to our directors and executive officers
as of February 29, 2004:
Donald B. Bibeault
has been Chairman of the Board at
BSQUARE since July 2003. Mr. Bibeault is currently
President of Bibeault & Associates, Inc. a
turnaround-consulting firm, a position he has held since 1975.
During that period, Mr. Bibeault has served as chairman,
CEO, or chief operating officer of numerous corporations,
including Pacific States Steel, PLM International, Best Pipe and
Steel, Inc., Ironstone Group, Inc., American National
Petroleum, Inc., Tyler-Dawson Supply and Iron Oak Supply
Corporation. He has also served as special turnaround advisor to
the CEOs of Silicon Graphics Inc., Varity Corporation, and Yipes
Networks. He has been a member of the Board of Overseers of
Columbia Business School, a trustee of Golden Gate University
and a member of the University of Rhode Island Business Advisory
Board. Mr. Bibeault received a B.S. in electrical
engineering from the University of Rhode Island, a M.B.A. from
Columbia University and a PhD from Golden Gate University.
Brian T. Crowley
has
been our President and CEO since July 2003. From April 2002 to
July 2003, Mr. Crowley served as our Vice President,
Product Development. From December 1999 to April 2002,
Mr. Crowley held various positions at DataChannel, a market
leader in enterprise portals, including Vice President of
Engineering and Vice President of Marketing. From April 1999 to
December 1999, Mr. Crowley was Vice President, Operations
of Consortio, a software company. From December 1997 to April
1999, Mr. Crowley was Director of Development at Sequel
Technology, a network solutions provider. From 1986 to December
1997, Mr. Crowley held various positions at Applied
Microsystems Corporation, including Vice President and General
Manager of the Motorola products and quality assurance
divisions. Mr. Crowley holds a B.S. in Electrical
Engineering from Arizona State University.
Scot E. Land
has
been a director of BSQUARE since February 1998. Mr. Land
was elected to our board of directors in connection with the
purchase of shares of our preferred stock by affiliates of
Encompass Group,
11
William L. Larson
has been a director of BSQUARE since
September 1998. Mr. Larson is currently a private investor.
From September 1993 to January 2001, Mr. Larson served as
the Chief Executive Officer of Network Associates, Inc., a
software company, where he also served as President and a
director from October 1993 to January 2001 and as Chairman of
the Board from April 1995 to January 2001. Mr. Larson also
served as Chairman of the Board of McAfee.com Corporation a
software company, from October 1998 to January 2001. From August
1988 to September 1993, Mr. Larson served as a Vice
President of SunSoft, Inc., a systems software subsidiary
of Sun Microsystems, where he was responsible for worldwide
sales and marketing. Prior to that, Mr. Larson held various
executive positions at Apple Computer, Inc. and Spinnaker
Software and was a consultant with Bain & Company.
Mr. Larson holds degrees from Stanford Law School and the
Wharton School of Finance and Commerce at the University of
Pennsylvania. Mr. Larson is a member of the California Bar
Association and serves on the boards of several technology
companies.
Elwood D.
Howse, Jr.
has been a director at
BSQUARE since November 2002. Mr. Howse is currently
President of Cable & Howse, LLC, a Northwest venture
capital management firm, a position he has held since 1981.
Mr. Howse has also served as a director of OrthoLogic
Corporation, a provider of orthopedic rehabilitation products,
since September 1987. In addition, he also serves as a director
of several private companies and charitable institutions.
Mr. Howse received both a B.S. in engineering and a M.B.A.
from Stanford University.
Elliott H.
Jurgensen, Jr.
has been a
director at BSQUARE since January 2003. Mr. Jurgensen
retired from KPMG LLP in 2003 after 32 years, including
23 years as a partner. During his career he has held a
number of leadership roles, including National Partner in Charge
of KPMG’s Hospitality Industry Practice from 1981 to 1993,
Managing Partner of the Bellevue, Washington office from 1982 to
1991 and Managing Partner of the Seattle, Washington office from
1993 to 2002. His professional experience focused on providing
business advisory and audit services to clients ranging from
emerging businesses to large multinational public companies. His
industry experience includes software, e-commerce, life
sciences, hospitality, long-term care and manufacturing. He is
also a director of Toolbuilders Laboratories, Inc., a
developer of innovative software security and development tools
for government and commercial enterprises. Mr. Jurgensen
has a B.S. in accounting from San Jose State University and
is a Certified Public Accountant.
Tracy A. Rees
has
been our Executive Vice President, Sales, Marketing and
International Operations since February 2003. He served in
positions of Sales Director — Licensing and Vice
President of Sales since joining the Company in May 2002. From
August 2001 to May 2002, Mr. Rees served as President and
from August 1999 to August 2001 as Vice President, Sales and
Marketing at Anna Technology, a provider of system design and
integration services, education services, and software for
manufacturers of smart devices. Mr. Rees served as
Director, Electronic Products at PG Design Electronics, a
manufacturer of industrial PCs, memory modules, and other
computer devices, from October 1998 to August 1999. From October
1995 to July 1998, Mr. Rees served as Vice President, Sales
and Marketing at Magnetec Corporation, a division of Transact
Technology, a company which designs, develops, manufactures and
markets transaction-based printers. From 1982 to 1995 he held
sales and sales management positions at leading computer
technology
12
Carey E. Butler
has
been our Vice President, Professional Engineering Services since
November 2003. From November 2002 to November 2003,
Ms. Butler served as Western Region Area Manager at
Information Builders, a business intelligence software and
services company. From January 2000 to July 2001,
Ms. Butler served as Vice President at Aris Corporation, a
professional services company, and from November 1996 to January
2000 as Partner at BDO Seidman, LLP, a public accounting and
technology consulting firm. From January 1990 to January 1996,
Ms. Butler served as Principal of Performance
Computing, Inc., a technology consulting company. From June
1982 to January 1990, Ms. Butler was Vice President of
Operations and Sales and Marketing of Mytec, Inc., a value
added reseller. Ms. Butler holds a B.A. in Business,
Quantitative Methods (Computer Science) from University of
Washington.
Brian M. Deutsch
has
been our Vice President, Wireless Services since July 2002, and
from May 2001 to July 2002, Mr. Deutsch served as our Vice
President, General Manager of Device Solutions. From May 1999 to
May 2001, Mr. Deutsch was the Chief Executive Officer and a
founder of Sageport, Inc., a provider of Internet
technology. From April 1997 to January 1999, he was interim
Chief Executive Officer of another company he co-founded,
TeamVision, Inc., a provider of advanced adaptive knowledge
networks and applications for companies such as Boeing and NASA.
From September 1989 to May 1999, Mr. Deutsch served as
Chief Executive Officer of Foursum International, a designer and
manufacturer of public telephony products and services. From
1992 to 1996, Mr. Deutsch was Chief Executive Officer of
American Wireless Corp., a wireless technology start-up, which
he co-founded. Mr. Deutsch holds a B.S. in Electrical
Engineering from the University of Miami.
Andre F.A. Fournier
has been our Vice President of Product
Development since October 2003. From November 2002 to October
2003, Mr. Fournier was an independent wireless technology
consultant. From May 2000 to November 2002, Mr. Fournier
was the Chief Technology Officer and Vice President of
Engineering for Airbiquity, a wireless and location technology
company. From March 1979 to May 2000, Mr. Fournier was
employed with Nortel, a telecommunication equipment development
company. At Nortel Mr. Fournier held numerous engineering
and management positions; his last position with Nortel was
Director of CDMA Project Management. From 1975 through 1979,
Mr. Fournier held engineering positions with Honeywell and
Digital Equipment of Canada.
Scott C. Mahan
has
been our Vice President, Finance, Chief Financial Officer,
Secretary and Treasurer since January 2004. From October 2003 to
December 2003, Mr. Mahan served as a consultant to BSQUARE.
From February 2003 to July 2003, Mr. Mahan served as the
Interim CFO and Head of Business & Corporate
Development at Cranium, Inc., a games manufacturer. From
March 2002 to November 2002, Mr. Mahan served as Chief
Operating Officer at Xylo, Inc., a company that provides
human resource technology and services to Fortune
1000 companies, and from June 1998 to December 2001 as CFO
and Vice President, Administration at Qpass, Inc, a
provider of billing serves to wireless carriers. From September
1996 to May 1998, Mr. Mahan served as Director of Finance
at Sequel Technology Corporation, a company that delivered
licensed software for the network traffic monitoring market.
From August 1994 to August 1996, Mr. Mahan was Controller
of Spry, Inc., an Internet software company and Internet
service provider. Prior to that, Mr. Mahan was the
Assistant Corporate Controller at Paccar Inc. from August 1993
to July 1994 and was an Audit Manager at Ernst & Young
LLP in Seattle where he was employed from July 1987 to August
1993. Mr. Mahan holds a B.S. in Management from Tulane
University.
Scott M. Sedlik
has
been our Vice President, Marketing since August 2003. From June
2001 to August 2003, Mr. Sedlik served as our Senior
Director of Product Management. From December 2000 to May 2001,
Mr. Sedlik served as Executive Vice President,
Sales & Marketing at Sageport, an Internet appliance
solutions company subsequently acquired by BSQUARE. From May
1999 to November 2000 he was Vice President, Marketing at
Infomove, a telematics company. Mr. Sedlik served as Vice
President Service Development, E-Services at USWeb/CKS, an
Internet professional services company, from January 1999 to
April 1999.
13
14
RISK FACTORS
If we do not maintain our Value Added Partner
agreement with Microsoft, our revenue would decrease and our
business would be adversely affected.
We have a Value Added Partner
(VAP) agreement with Microsoft which enables us to resell
Microsoft Windows Embedded operating systems to our customers in
North America. Software sales under this agreement constitute a
significant portion of our revenue. For the years ended 2003,
2002 and 2001, revenue under this agreement constituted 87%, 75%
and 22% of our total software revenue, respectively. If our VAP
agreement was terminated, our software and consulting revenue
would decrease significantly. Moreover, if our VAP agreement
with Microsoft is renewed on less favorable terms, our revenue
could decrease, and/or our gross margins from these
transactions, which are relatively low, could further decline.
Our VAP agreement is renewable annually, and there is no
automatic renewal provision in the agreement. Additionally,
there are provisions within the VAP agreement that require us to
maintain certain internal records and processes for royalty
auditing and other reasons. Non-compliance with these
requirements could result in the termination of our VAP
agreement. BSQUARE is currently undergoing an audit of our
royalty reporting for the period 1998 through 2003. The impact
of the audit, if any, is unknown at this time. However, the
final outcome of this audit could have a material adverse impact
on our results of operations and financial condition.
The market for resale of Microsoft Embedded
operating systems licenses is highly competitive and the margins
are relatively low. If the margins in this business erode, our
results will be negatively impacted.
The gross profit margin on sales of Microsoft
Embedded Windows licenses is relatively low. There are three
competitors which also sell Embedded Windows licenses to
substantially the same customer base in the North American
market place, which can create additional downward pressure on
gross profit. During 2003, our gross profit margin on the resale
of Microsoft Embedded operating systems and tools remained
relatively flat, but there can be no assurance that gross
profits on future sales will not decline. Additionally,
Microsoft offers BSQUARE and its competitors largely
volume-based rebates which have the effect of increasing our
software gross margins. If Microsoft were to reduce or eliminate
these rebate programs, our gross margins would be negatively
impacted.
If we do not maintain our favorable
relationship with Microsoft, we will have difficulty marketing
and selling our software and services and may not receive
developer releases of Windows Embedded operating systems and
Windows Mobile targeted platforms. As a result, our revenue and
operating margins could suffer.
We maintain a strategic marketing relationship
with Microsoft. In the event that our relationship with
Microsoft were to deteriorate, our efforts to market and sell
our software and services to OEMs and others could be adversely
affected and our business could be harmed. Microsoft has
significant influence over the development plans and buying
decisions of OEMs and others utilizing Windows Embedded
operating systems and Windows Mobile targeted platforms for
smart devices. Microsoft provides referrals of some of those
customers to us. Moreover, Microsoft controls the marketing
campaigns related to its operating systems. Microsoft’s
marketing activities; including trade shows, direct mail
campaigns and print advertising, are important to the continued
promotion and market acceptance of Windows Embedded operating
systems and Windows Mobile targeted platforms, and consequently,
to our sale of Windows-based embedded software and services. We
must maintain a favorable relationship with Microsoft to
continue to participate in its joint marketing activities with
them, which includes participating in “partner
pavilions” at trade shows, listing our services on
Microsoft’s website, and receiving customer referrals. In
the event that we are unable to continue our joint marketing
efforts with Microsoft, or fail to receive referrals from them,
we would be required to devote significant additional resources
and incur additional expenses to market software products and
services directly to potential customers. In addition, we depend
on Microsoft for developer releases of new versions of and
upgrades to Windows Embedded and Windows Mobile software in
order to facilitate timely development and shipment of our
products and services. If we are unable to receive these
developer releases, our revenue and profit margins could suffer.
15
Design, manufacture and distribution of the
Power Handheld device has and will continue to require
substantial working capital. Our current resources have been
determined to be inadequate to properly fund the foreseen
requirements of the Power Handheld device and business. We are
exploring strategic options with regard to meeting these working
capital requirements, but, if we are unable to execute on such a
strategy successfully, our business could be adversely
affected.
In the fourth quarter of 2003 we received our
first customer commitments to purchase Power Handheld devices,
and our belief is that customer orders for the device will
continue during 2004. The design, manufacture and distribution
of these devices is a new business for us, and we expect that
increased orders from customers will require substantial new
sources of working capital to fulfill those orders. Although we
outsource all of our manufacturing, we are nevertheless required
to finance such manufacturing and related inventory costs
through a variety of mechanisms, including letters of credit and
cash payments. We are also required to finance the related
distribution costs. To date, we have been able to finance our
relatively small-scale manufacturing, inventory and distribution
expenses internally, and we will continue to do so in the short
term. We expect that if we begin manufacturing and distribution
of the Power Handheld on a greater scale, however, we will need
additional working capital. We have determined that our current
cash reserves are likely to be inadequate to fund these
potential increased requirements, and we are exploring strategic
options with regard to our Power Handheld business. Such options
could include a spin-off, sale or other financing options for
this business, some of which may be dilutive to existing holders
of our common stock. Working capital financing alternatives
could involve restrictive covenants, which could impair our
ability to engage in certain business transactions. If other
financing sources are not available on acceptable terms, or not
at all, our ability to continue to manufacture and distribute
our Power Handheld devices would be negatively impacted, with a
corresponding effect on our future revenue and results of
operations.
We are devoting a substantial portion of our
resources to our Power Handheld device. The device market is new
to us and is subject to many uncertainties. If this initiative
is not successful, our potential future revenue and earnings
will suffer.
In connection with the cost-reduction efforts
described elsewhere in this report, we were forced to make
certain product development decisions based on limited
information regarding the future demand for those products.
There can be no assurance that we decided to pursue the right
product offerings to take advantage of future market
opportunities. Specifically, in 2003, we made the strategic
decision to devote a substantial portion of our research and
development and working capital resources toward the design,
development, and distribution of our Power Handheld device. We
have limited experience in producing or distributing such
devices, and there can be no assurance that the Power Handheld
device, or the underlying technology, will achieve substantial
market acceptance or that it will ultimately prove to be
profitable in light of the many uncertainties inherent in
introducing a new product or technology to market. These
uncertainties include the intense competition found in the
market generally for handheld computing devices, the various
manufacturing and distribution risks involved in producing and
marketing a new electronic product, the length of the sales
cycle and the variation in customer ordering patterns. In the
event that these product development initiatives do not meet our
expectations, our potential future revenue and earnings are
likely to suffer and we would continue to be dependent on our
other sources of revenue, including the low-margin revenue
generated from our VAP agreement with Microsoft.
If we fail to develop, manufacture and sell
products successfully and in a timely manner, including our
Power Handheld hardware device, we may not be able to compete
effectively and our ability to generate revenue could
suffer.
The markets for Windows-based embedded products
and services are competitive, new and evolving. As a result, the
life cycles of our products and services are difficult to
estimate. To be successful, we believe we must continue to
enhance our current product line and provide new products and
service offerings that appeal to our customers with attractive
features, prices and terms. We have experienced delays in
enhancements and new product release dates in the past and may
be unable to introduce enhancements or new products successfully
or in a timely manner in the future. Our business may be harmed
if we delay releases of our
16
Our marketplace is extremely competitive,
which may result in price reductions, lower gross margins and
loss of market share.
The market for Windows-based software products
and services is extremely competitive, as is the market for our
Power Handheld device. In addition, competition is intense for
the business of the limited number of customers that are capable
of building and shipping large quantities of smart devices.
Increased competition may result in price reductions, lower
gross margins and loss of market share, which would harm our
business. We face competition from:
As we develop new products, particularly products
focused on specific industries, we may begin competing with
companies with which we have not previously competed. It is also
possible that new competitors will enter the market or that our
competitors will form alliances, including alliances with
Microsoft, that may enable them to rapidly increase their market
share. Microsoft has not agreed to any exclusive arrangement
with us, nor has it agreed not to compete with us. Microsoft may
decide to bring more of the core development services and
expertise that we provide in-house, possibly resulting in
reduced service revenue opportunities for us. The barrier to
entering the market as a provider or distributor of
Windows-based smart device software and services is low. In
addition, Microsoft has created marketing programs to encourage
systems integrators to work on Windows Embedded operating system
products and services. These systems integrators are given
substantially the same access by Microsoft to the Windows
technology as we are. New competitors may have lower overhead
than we do and may be able undercut our pricing. We expect that
competition will increase as other established and emerging
companies enter the Windows-based smart device market, and as
new products and technologies are introduced.
If Microsoft adds features to its Windows
operating system or develops products that directly compete with
products and services we provide, our revenue could be reduced
and our profit margins could suffer.
As the developer of Windows, Windows XP Embedded,
Windows CE, Windows Mobile for Smartphone and Windows Mobile for
PocketPC, Microsoft could add features to its operating systems
or could develop products that directly compete with the
products and services we provide to our customers. Such features
could include, for example, software that competes with our own
proprietary software products, driver development tools, faxing,
hardware-support packages and quality-assurance tools. The
ability of our customers or potential customers to obtain
products and services directly from Microsoft that compete with
our products and services could harm our business. Even if the
standard features of future Microsoft operating system software
were more limited than our offerings, a significant number of
our customers and potential customers might elect to accept more
limited functionality in lieu of purchasing additional software
from us. Moreover, the resulting competitive pressures could
lead to price reductions for our products and reduce our gross
margins.
17
Microsoft has plans to release a new version
of its Windows CE .NET embedded operating system in 2004,
incorporating certain of our existing SDIO
Now!
functionality. This is expected to decrease overall demand for
our current SDIO
Now!
software product and may adversely
impact future revenue generated from our proprietary software
products.
A portion of our software revenue comes from
proprietary software products, most notably our SDIO
Now!
software product. Microsoft plans on releasing new Windows
Embedded operating system versions in 2004 which will
incorporate some of our existing SDIO
Now!
functionality
which we believe will decrease overall demand for our current
SDIO
Now!
software product. Our ability to maintain and
grow our revenue from our SDIO
Now!
software product is
contingent on the timing of the Microsoft releases and the
specific functionality of those offerings. We are currently
designing our next generation SDIO software product to
complement the functionality expected to be included in upcoming
Windows Embedded operating system releases. However, there can
be no assurance that our next-generation SDIO products will be
as competitive in the marketplace as they are now.
During the years 2003, 2002 and 2001, sales of
our proprietary software products comprised 11%, 18% and 67% of
our software revenue, respectively. These software products
carry much higher gross profit margins than third-party software
products, which we resell to our customers. Accordingly,
Microsoft’s next generation operating system releases
incorporating SDIO technology may have an adverse impact on
revenue and may have a more significant adverse impact on our
overall software gross profits.
Our ability to maintain or grow the portion of
our software revenue attributable to sales of our proprietary
software products is contingent on our ability to bring to
market competitive, unique offerings that keep pace with
technological changes and needs. If we are not successful in
doing so, our business would be harmed.
The amount and percentage of revenue attributable
to sales of our proprietary software products has decreased over
the last three years due to a more competitive marketplace,
changing technological needs and the elimination of certain
proprietary software products which were determined to be
unprofitable and non-competitive. Our ability to maintain the
revenue contribution from proprietary software products, as well
as the higher gross profit contribution from these products is
contingent on our ability to enhance the features and
functionality of our current proprietary products as well as
introduce new products which may not be guaranteed.
If the market for smart devices does not
develop or develops more slowly than we expect, our revenue may
not develop as anticipated, if at all, and our business would be
harmed.
The market for smart devices is emerging and the
potential size of this market and the timing of its development
are not known. As a result, our profit potential is uncertain
and our revenue may not develop as anticipated, if at all. We
are dependent upon the broad acceptance by businesses and
consumers of a wide variety of smart devices, which will depend
on many factors, including:
18
If the market for Windows Embedded operating
systems and Windows Mobile targeted platforms fails to develop
further, develops more slowly than we expect, or declines, our
business and operating results may be materially
harmed.
Because a significant portion of our revenue to
date has been generated by software products and services
dependent on the Windows Embedded operating systems and Windows
Mobile targeted platforms, if the market fails to develop
further or develops more slowly than we expect, or declines, our
business and operating results may be significantly harmed.
Market acceptance of Windows Embedded and Windows Mobile will
depend on many factors, including:
Unexpected delays or announcement of delays by
Microsoft of Windows Embedded operating systems and Windows
Mobile targeted platforms product releases could adversely
affect our revenue.
Unexpected delays or announcement of delays, in
Microsoft’s delivery schedule for new versions of its
Windows Embedded operating systems could cause us to delay our
product introductions and impede our ability to complete
customer projects on a timely basis. These delays or
announcements of delays, by Microsoft could also cause our
customers to delay or cancel their project development
activities or product introductions, which may have a negative
impact on our revenue. Any resulting delays in, or cancellations
of, our planned product introductions or in our ability to
commence or complete customer projects may adversely affect our
revenue and operating results.
19
The success and profitability of our service
offerings targeted at smart device makers is contingent on our
ability to differentiate our offerings adequately in the
marketplace and defend our billing rate structures against those
of competitors, including those using lower-cost offshore
resources. If we are unable to do so successfully, our business
could be harmed.
BSQUARE is a leader in providing service
solutions to our smart device customers. Our market
differentiation is created through several factors; including
our deep experience with a variety of smart device platforms and
applications. Our differentiation, in part, is contingent on our
ability to attract and retain employees with this expertise;
significantly all of whom currently are based in the United
States. To the extent we are unable to retain critical
engineering services talent or our competition is able to
deliver the same services by using lower-cost offshore
resources, our service revenue and gross profit could be
adversely impacted.
The success and profitability of our service
engagements is contingent upon our ability to scope and bid
engagements profitably. If we are unable to do this, our service
revenue and profitability may be significantly adversely
impacted.
During 2003, we entered into several fixed-price
service engagements that ultimately proved to be less profitable
than expected due to a number of factors, including inadequate
project scoping, inefficient service delivery and fixed-price
contract structures. While we have taken steps to address these
inadequacies and risks going forward, there can be no assurance
that we will be successful given customer demands, competitive
pressures and other factors. If we are unable to adequately
scope, bid and deliver on service engagements successfully, our
revenue and gross profit could be negatively impacted.
If we are unable to license key software from
third parties, our business could be harmed.
We often integrate third-party software with our
proprietary software or hardware to provide products and
services for our customers. If our relationships with our
third-party vendors were to deteriorate, we might be unable to
obtain licenses on commercially reasonable terms, if at all, for
newer versions of their software required to maintain
compatibility. In the event that we are unable to obtain
additional licenses, we would be required to develop this
technology internally, which could delay or limit our ability to
introduce enhancements or new products or to continue to sell
existing products.
Our revenue may remain flat or decline, or we
may not be able to return to profitability in accordance with
our plans.
Our revenue increased slightly from 2002 to 2003,
declined 39% from 2001 to 2002, and declined 3% from 2000 to
2001. The stagnation or decline in our revenue may continue in
the future. In addition, the continuing slowness in the
U.S. economy has created economic and consumer uncertainty
that has adversely affected our revenue and could continue to do
so. We expect that our expenses will continue to be substantial
in the foreseeable future, as we continue to develop our
technology and refocus our product and service offerings. These
efforts may prove more expensive than we currently expect, and
we may not succeed in increasing our revenue sufficiently to
offset our expenses.
Non-compliance with certain agreements could
have a material adverse impact on our financial
position.
In addition to our Microsoft VAP agreement
described above, we have entered into agreements with
third-parties with respect to which non-compliance could have a
material adverse impact on our financial position. Most notably
is a new lease entered into in February 2004 for our new
corporate headquarters, and an amendment entered into that same
time for our current corporate headquarters. Both of these
agreements were entered into with the same landlord. Under both
of these leases, we are not required to make any cash lease
payments during 2004. However, in the event we were to default
under our new corporate headquarters lease, the landlord has the
ability to demand cash payments forgiven in 2004 under both
leases. The total cash payments forgiven in 2004 is expected to
be $3.0 million. The amount of the forgiven payments that
the
20
We rely on a third party to manufacture our
Power Handheld device, and our reputation and revenue could be
adversely affected if this third party fails to meet their
performance obligations.
We outsource all manufacturing of our Power
Handheld device to a third party, upon which we depend to
produce a sufficient volume of our products in a timely fashion
and of satisfactory quality. Were our third party manufacturer
to fail to produce quality products on time and in sufficient
quantities, our reputation and results of operations could
suffer. In addition, we rely on our third party manufacturer to
place orders with suppliers for the components they need to
manufacture our products. If it fails to place timely and
sufficient orders with suppliers, our revenue could suffer. Our
Power Handheld device is currently manufactured by a third party
manufacturer at its international facilities, located in China.
The cost, quality and availability of third party manufacturing
operations are essential to the successful production and sale
of our handheld device. Our reliance on third party
manufacturers exposes us to risks that are not in our control,
with the potential to negatively impact our revenue or gross
profit. For example, another outbreak of Severe Acute
Respiratory Syndrome (SARS) in China could result in
quarantines or closures of our third party manufacturers or of
its suppliers. In the event of such a quarantine or closure, our
ability to deliver the Power Handheld device on a timely basis
could be impaired and, as a result, our revenue, expenses and
results of operations could be negatively impacted. We do not
have manufacturing agreements with our third-party manufacturer.
The absence of a manufacturing agreement means that, with little
or no notice, our contract manufacturer could refuse to continue
to manufacture all or some of the units of our devices that we
require, or change the terms under which they manufacture our
device products. If this manufacturer were to stop manufacturing
our devices, we may be unable to replace the lost manufacturing
capacity on a timely basis and our results of operations could
be harmed. In addition, if our manufacturer were to change the
terms under which they manufacture for us, our manufacturing
costs could increase and our gross profit could decrease. We
have experienced delays in the manufacturing of our products in
the past, and there can be no guarantee that we will not
experience delays in the future.
Unexpected fluctuations in our operating
results could cause our stock price to decline
significantly.
Our operating results have fluctuated in the
past, and we expect that they will continue to do so. Because
our business has shifted over the past two years from a business
model based upon performing outsource for Microsoft to a more
broad-based supplier of products and services to smart device
makers, we believe that period to period comparisons of our
operating results are not meaningful, and you should not rely on
such comparisons to predict our future performance. If our
operating results fall below the expectations of stock analysts
and investors, the price of our common stock may fall. Factors
that have in the past and may continue in the future to cause
our operating results to fluctuate include those described in
this “Risk Factors” section. In addition, our stock
price may fluctuate due to conditions unrelated to our operating
performance, including general economic conditions in the
technology industry and the market for technology stocks.
Our efforts to reduce expenses, including
reductions in work force, may not achieve the results we intend
and may harm our business.
During 2003, we continued our efforts to
streamline operations and reduce expenses, including cuts in
discretionary spending, reductions in capital expenditures,
reductions in our work force and consolidation of certain office
locations, including the closure of our Japanese subsidiary. In
connection with our cost reduction efforts, we were required to
make certain product and product development decisions with
limited information regarding the future demand for those
products. There can be no assurance that we made the correct
decisions to pursue the right product offerings to take
advantage of future market opportunities. Furthermore, the
implementation of such measures has placed, and may continue to
place, a significant strain on our managerial, operational,
financial, employee and other resources. Additionally, the
restructuring may negatively affect our recruiting and retention
of important employees. It is possible that these reductions
could impair our marketing, sales and customer support efforts
or alter our product development plans. If we
21
The long sales cycle of our products and
services makes our revenue susceptible to
fluctuations.
Our sales cycle is typically three to nine months
because the expense and complexity of our products and services
generally require a lengthy customer approval process and may be
subject to a number of significant risks over which we have
little or no control, including:
In addition, to successfully sell our products
and services, we frequently must educate our potential customers
about the full benefits of our products and services, which can
require significant time. If our sales cycle further lengthens
unexpectedly, it could adversely affect the timing of our
revenue which could cause our quarterly results to fluctuate.
Erosion of the financial condition of our
customers could adversely affect our business.
Our business could be adversely affected should
the financial condition of our customers erode, given that such
erosion could reduce demand from those customers for our
products and services or even terminate their relationships with
us, and also could enhance the credit risk of those customers.
If the global information technology market weakens, the
likelihood of the erosion of the financial condition of our
customers increases, which could adversely affect the demand for
our products and services. Moreover, our distribution of
Microsoft licenses is a relatively low-margin business, and we
could face increased credit risk with the accounts receivable
from certain customers. While we believe that our allowance for
doubtful accounts is adequate, those allowances may not cover
actual losses, which could adversely affect our business.
Our software, services and hardware offerings,
including the Power Handheld device, could infringe the
intellectual property rights of third parties, which could
expose us to additional costs and litigation and could adversely
affect our ability to sell our products or cause shipment delays
or stoppages.
It is difficult to determine whether our products
and services infringe third-party intellectual property rights,
particularly in a rapidly evolving technological environment in
which technologies often overlap and where there may be numerous
patent applications pending, many of which are confidential when
filed, with regard to similar technologies. If we were to
discover that one of our products, or a product based on one of
our reference designs, violated a third party’s proprietary
rights, we may not be able to obtain a license on commercially
reasonable terms, or at all, to continue offering that product.
Similarly, third parties may claim that our current or future
products and services, infringe their proprietary rights,
regardless of merit. Any such claims could increase our costs
and harm our business. In certain cases, we have been unable to
obtain indemnification against potential claims that the
technology we license from third parties infringes the
proprietary rights of others. Moreover, any indemnification we
do obtain may be limited in scope or amount. Even if we receive
broad third-party indemnification, these entities may not have
the financial capability to indemnify us in the event of
infringement. In addition, in some circumstances we could be
required to indemnify our customers for claims made against them
that are based on our solutions. There can be no assurance that
infringement or invalidity claims related to the products and
services we provide or arising from the incorporation by us of
third-party technology, and claims for indemnification from our
customers resulting from such claims, will not be asserted or
prosecuted against us. Some of our competitors, with respect to
the products we develop have or are affiliated with, are
companies with substantially greater resources than we have and
these competitors may be able to sustain the costs of complex
intellectual property litigation to a greater degree and for
longer periods of time than we could. In addition, we expect
that software product developers will be increasingly subject to
infringement claims, as the number of products and competitors in
22
If we fail to adequately protect our
intellectual property rights, competitors may be able to use our
technology or trademarks, which could weaken our competitive
position, reduce our revenue and increase our costs.
If we fail to adequately protect our intellectual
property, our competitive position could be weakened and our
revenue adversely affected. We rely primarily on a combination
of patent, copyright, trade secret and trademark laws,
confidentiality procedures and contractual provisions to protect
our intellectual property. These laws and procedures provide
only limited protection. We have applied for a number of patents
relating to our engineering work. These patents, if issued, may
not provide sufficiently broad protection or they may not prove
to be enforceable against alleged infringers. There can be no
assurance that any of our pending patents will be granted. Even
if granted, these patents may be circumvented or challenged and,
if challenged, may be invalidated. Any patents obtained may
provide limited or no competitive advantage to us. It is also
possible that another party could obtain patents that block our
use of some, or all, of our products and services. If that
occurred, we would need to obtain a license from the patent
holder or design around those patents. The patent holder may or
may not choose to make a license available to us at all or on
acceptable terms. Similarly, it may not be possible to design
around such a blocking patent. In general, there can be no
assurance that our efforts to protect our intellectual property
rights through patent, copyright, trade secret and trademark
laws will be effective to prevent misappropriation of our
technology, or to prevent the development and design by others
of products or technologies similar to or competitive with those
developed by us. We frequently license the source code of our
products and the source code results of our services to
customers. There can be no assurance that customers with access
to our source code will comply with the license terms or that we
will discover any violations of the license terms or, in the
event of discovery of violations that we will be able to
successfully enforce the license terms and/or recover the
economic value lost from such violations. To license many of our
software products, we rely in part on “shrinkwrap” and
“clickwrap” licenses that are not signed by the end
user and, therefore, may be unenforceable under the laws of
certain jurisdictions. As with other software, our products are
susceptible to unauthorized copying and uses that may go
undetected, and policing such unauthorized use is difficult. A
significant portion of our marks include the word
“BSQUARE” or the preface “b.” Other
companies use forms of “BSQUARE” or the preface
“b” in their marks alone or in combination with other
words, and we cannot prevent all such third-party uses. We
license certain trademark rights to third parties. Such
licensees may not abide by our compliance and quality control
guidelines with respect to such trademark rights and may take
actions that would harm our business. The computer software
market is characterized by frequent and substantial intellectual
property litigation, which is often complex and expensive, and
involves a significant diversion of resources and uncertainty of
outcome. Litigation may be necessary in the future to enforce
our intellectual property or to defend against a claim of
infringement or invalidity. Litigation could result in
substantial costs and the diversion of resources and could harm
our business and operating results.
We may be subject to product liability claims
that could result in significant costs.
Our license agreements with our customers
typically contain provisions designed to limit our exposure to
potential product liability claims. It is possible, however,
that these provisions may be ineffective under the laws of
certain jurisdictions. Although we have not experienced any
product liability claims to date, the sale and support of our
products and services entail the risk of such claims, and we may
be subject to such claims in the future. In addition, to the
extent we develop and sell increasingly comprehensive,
customized turnkey
23
Our software or hardware products or the
third-party hardware or software integrated with our products
and services may suffer from defects or errors that could impair
our ability to sell our products and services.
Software and hardware components as complex as
those needed for smart devices frequently contain errors or
defects, especially when first introduced or when new versions
are released. We have had to delay commercial release of certain
versions of our products until problems were corrected, and in
some cases have provided product enhancements to correct errors
in released products. Some of our contracts require us to repair
or replace products that fail to work. To the extent that we
repair or replace products our expenses may increase, resulting
in a decline in our gross profit. In addition, it is possible
that by the time defects are fixed, the market opportunity may
decline which may result in lost revenue. Moreover, to the
extent that we provide increasingly comprehensive products and
rely on third-party manufacturers and suppliers to manufacture
our and our customers’ products, including those related to
our Power Handheld device that we distribute, we will be
dependent on the ability of third-party manufacturers to
correct, identify and prevent manufacturing errors. Errors that
are discovered after commercial release could result in loss of
revenue or delay in market acceptance, diversion of development
resources, damage to our reputation and increased service and
warranty costs, all of which could harm our business.
Our international operations expose us to
greater intellectual property, management, collections,
regulatory and other risks.
Foreign operations generated approximately 5%, 7%
and 4% of our total revenue in the years ended 2003, 2002 and
2001, respectively. Our international operations expose us to a
number of risks, including the following:
We currently have operations in Taipei, Taiwan
and Tokyo, Japan. However, as previously announced, we are in
process of closing our Japan operation.
As we increase the amount of product and
service development conducted in non-US locations, potential
delays and quality issues may impact our ability to deliver our
products and services on-time, potentially impacting our revenue
and profitability.
During 2003, we initiated a program to move
certain development activities to non-US locations, primarily
India, to take advantage of the high-quality, low-cost software
development resources found in some
24
Past acquisitions have proven difficult to
integrate, and future acquisitions, if any, could disrupt our
business, dilute shareholder value and adversely affect our
operating results.
We have acquired the technologies and/or
operations of other companies in the past and may acquire or
make investments in companies, products, services and
technologies in the future. If we fail to properly evaluate,
integrate and execute on our acquisitions and investments, our
business and prospects may be seriously harmed. In some cases,
we have been required to implement reductions in force and
office closures in connection with an acquisition, which has
resulted in significant costs to us. To successfully complete an
acquisition, we must properly evaluate the technology,
accurately forecast the financial impact of the transaction,
including accounting charges and transaction expenses, integrate
and retain personnel, combine potentially different corporate
cultures and effectively integrate products and research and
development, sales, marketing and support operations. If we fail
to do any of these, we may suffer losses and impair
relationships with our employees, customers and strategic
partners, and our management may be distracted from day-to-day
operations. We also may be unable to maintain uniform standards,
controls, procedures and policies, and significant demands may
be placed on our management and our operations, information
services and financial, legal and marketing resources. Finally,
acquired businesses sometimes result in unexpected liabilities
and contingencies, which could be significant.
Our senior management has experienced
significant turnover and change of job function, which could
disrupt our business and operations.
Since June 2003, there have been numerous changes
in our senior management team. On June 17, 2003, we
announced the departures of James R. Ladd, Senior Vice President
of Finance & Operations and Chief Financial Officer,
and Kent A. Hellebust, Senior Vice President of
Marketing & Product Management. On that same date, we
announced that Nogi Asp was promoted from Director of Finance to
Vice President of Finance and Chief Financial Officer. On
July 24, 2003, we announced that one of our founders,
William T. Baxter, resigned as Chairman of the Board and Chief
Executive Officer. Mr. Baxter remained as a member of our
Board of Directors and our Chief Technology Officer.
Subsequently, on January 12, 2004, we announced that
Mr. Baxter resigned his position on our Board of Directors
and as our Chief Technology Officer. On July 24, 2003 we
also announced that Brian T. Crowley, our then Vice President of
Product Development, was appointed by our Board of Directors to
succeed Mr. Baxter as Chief Executive Officer and to serve
on our Board, that Donald D. Bibeault was elected to the
position of Chairman of the Board, and that Jeffrey T. Chambers
had resigned from our Board of Directors. On December 17,
2004, we announced the hiring of Carey Butler to lead our
Professional Engineering Services organization. On
January 5, 2004, we announced that Mr. Asp had left
the company and that Scott Mahan had been appointed as our new
Chief Financial Officer.
Because of these recent management departures,
additions and changes in roles, our current management team has
not worked together in their current positions for a significant
length of time and may not be able to work together effectively
in these new positions to successfully develop and implement
business strategies. In addition, as a result of these
management changes, management may need to devote significant
attention and resources to preserve and strengthen relationships
with employees and customers. Mr. Crowley and
Mr. Mahan, in particular, will need to successfully meet
the increased internal and external challenges and
responsibilities of their new positions. All members of our
management team will need to overcome the challenges created by
any vacancies in our senior management positions that remain
unfilled. If our new management team is unable to develop
successful business strategies, achieve our business objectives
or
25
A small number of our existing shareholders
can exert control over us.
Principal shareholders individually holding more
than 5% of our common stock together control a majority of our
outstanding common stock. As a result, these shareholders, if
they act together, could control our management and affairs of
the company and all matters requiring shareholder approval,
including the election of directors and approval of significant
corporate transactions. This concentration of ownership may have
the effect of delaying or preventing a change in control of
BSQUARE and might affect the market price of our common stock.
It might be difficult for a third party to
acquire us even if doing so would be beneficial to our
shareholders.
Certain provisions of our articles of
incorporation, bylaws and Washington law may discourage, delay
or prevent a change in the control of us or a change in our
management even if doing so would be beneficial to our
shareholders. Our board of directors has the authority under our
amended and restated articles of incorporation to issue
preferred stock with rights superior to the rights of the
holders of common stock. As a result, preferred stock could be
issued quickly and easily with terms calculated to delay or
prevent a change in control of our company or make removal of
our management more difficult. In addition, our board of
directors is divided into three classes. The directors in each
class serve for three-year terms, one class being elected each
year by our shareholders. This system of electing and removing
directors may discourage a third party from making a tender
offer or otherwise attempting to obtain control of our company
because it generally makes it more difficult for shareholders to
replace a majority of our directors. In addition,
Chapter 19 of the Washington Business Corporation Act
generally prohibits a “target corporation” from
engaging in certain significant business transactions with a
defined “acquiring person” for a period of five years
after the acquisition, unless the transaction or acquisition of
shares is approved by a majority of the members of the target
corporation’s board of directors prior to the time of
acquisition. This provision may have the effect of delaying,
deterring or preventing a change in control of our company. The
existence of these anti-takeover provisions could limit the
price that investors might be willing to pay in the future for
shares of our common stock.
A continued decline in our stock price could
cause us ultimately to be delisted from the NASDAQ National
Market.
During 2002 and 2003, our common stock has traded
at times near or below the $1.00 Nasdaq National Market minimum
bid price. In May 2003, we received notification from The Nasdaq
Stock Market, advising that we were not in compliance with the
Nasdaq National Market’s listing maintenance standards
requiring minimum bid price and listed security market value. In
September 2003, we received notification from The Nasdaq Stock
Market that we regained compliance with the Nasdaq National
Market’s listing maintenance standards regarding minimum
bid price. If our stock price declines and remains below $1.00
for a period of thirty consecutive trading days, we face the
possibility of receiving notification from the Listing
Qualifications Department of The Nasdaq Stock Market, Inc.
indicating that our common stock has not maintained the required
minimum bid price for continued quotation on the Nasdaq National
Market and is subject to delisting. If our common stock is
delisted from trading on the NASDAQ National Market as a result
of listing requirement violations and is neither relisted
thereon nor listed for trading on the NASDAQ SmallCap Market,
trading in our common stock may continue to be conducted on the
OTC Bulletin Board or in a non-NASDAQ over-the-counter market,
such as the “pink sheets.” Delisting of our common
stock from trading on the NASDAQ National Market would adversely
affect the price and liquidity of our common stock and could
adversely affect our ability to issue additional securities or
to secure additional financing. In that event our common stock
could also be deemed to be a “penny stock” under the
Securities Enforcement and Penny Stock Reform Act of 1990, which
would require additional disclosure in connection with trades in
the common stock, including the delivery of a disclosure
schedule explaining the nature and risks of the penny stock
market. Such requirements could further adversely affect the
liquidity of our common stock.
26
•
The development of the smart device market and
our ability to address its opportunities and challenges;
•
The emergence of Windows CE, Windows XP
Embedded, Pocket PC and Smartphone as operating systems of
choice for many smart device hardware and software applications
vendors;
•
Our business plan, its advantages and our
strategy for implementing our plan;
•
Our ability to expand our strategic relationships
with hardware and software vendors;
•
Our ability to retain and expand our relationship
with Microsoft;
•
Our ability to meet significant working capital
and cash flow requirements of our Power Handheld hardware
business which includes assessment of various strategic options
and execution thereon;
•
Our ability to address challenges and
opportunities in the international marketplace;
•
Our ability to increase our revenue through
software and service revenue growth attributable to original
equipment manufacturers and semiconductor vendors;
•
Our ability to develop our technology and expand
our proprietary software and service offerings;
•
Our ability to successfully work with our
contract manufacturing partner to manufacture our Power Handheld
device; and
•
Our anticipated working capital and capital
expenditure requirements, including our ability to meet our
anticipated cash needs.
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•
A growing macro economy and increase in IT
spending has influenced new project starts. Many retailers, for
example, who avoided major infrastructure investments over the
past few years are now investing in upgrading their
point-of-sale (POS) systems and back-end infrastructure;
•
The ubiquity of cellular and WLAN wireless
networks is driving rapid adoption of smart devices which
leverage broadband and high-speed wireless data networks,
including IP set-top boxes, voice-over-IP (VoIP) phones,
residential gateways, and home networking solutions linking
smart devices with PCs; and
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•
The baseline expectation for device functionality
continues to grow. Users of smart devices expect to be able to
access email and the Internet and synchronize their devices with
corporate data sources. Microsoft operating systems are already
well positioned to leverage this trend with built-in
synchronization capabilities, access to Exchange email servers,
and similar functionality.
•
Texas Instruments engaged BSQUARE to port the
Microsoft Windows Mobile software for Smartphone onto a new
convergent device for one of the world’s leading handset
manufacturers;
•
Sharp Microelectronics of America, a leading SV,
engaged BSQUARE to create a series of Board Support Packages for
Sharp hardware reference designs;
•
NEC America engaged BSQUARE to provide software
and services in support of the new Mobile PRO 900 handheld
product line and licensed BSQUARE’s Power Handheld software
for inclusion in this same product line;
•
We worked with an OEM that creates handheld
devices for military applications to create a new ruggedized
battlefield device based on the Windows CE .NET operating
system;
•
Advanced Micro Devices (AMD) engaged BSQUARE
to create a Board Support Package for AMD’s Alchemy line of
microprocessors;
•
60 OEMs and SVs — including Dell,
HP, Intel, Matsushita Electric Works (MEW), Motorola,
Sharp, Texas Instruments, and Toshiba — have licensed
BSQUARE’s SDIO
Now!
technology for integration in
their smart devices;
•
The University of Washington Medical Center
engaged BSQUARE to create a remote management solution for its
Windows XP Embedded-based thin client terminals;
•
Major North American OEMs licensed Microsoft
Embedded toolkits and operating systems for incorporation into
their products, often in conjunction with proprietary BSQUARE
software products and services;
•
A medical device manufacturer engaged BSQUARE for
migration of its audiology device from Windows 2000 to
Windows XP Embedded. We provided this OEM with training,
hardware needs evaluation, application componentization, and
other services; and
•
BSQUARE assisted a large entertainment retailer
in creating a CE .NET based POS system tightly integrated with
Microsoft server technologies. Another large retailer engaged
Microsoft and BSQUARE to create a proof of concept and
applications for their POS terminals based upon Windows XP
Embedded.
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Third-Party Software Products
•
We are a Microsoft authorized Value-Added
Provider (VAP) of Windows Embedded operating systems (OS) and
toolkits for Windows CE.NET, Windows XP/NT Embedded and
Microsoft “Classic” operating systems with Embedded
restrictions, including DOS and Windows 98/2000/ME/NT. The
majority of our software revenue in 2003 was earned through the
resale of Microsoft embedded operating systems; and
•
We sub-license and resell other third-party
software such as the Esmertec Jeode Java Virtual Machine
(JVM) under the BSQUARE JEM-CE
TM
brand name and
the Stellent Quick View Plus file viewing utility for viewing
Microsoft Office and Adobe Acrobat files. We also resell
software from the following third parties: Macromedia, Citrix
Systems, Socket Communications, Datalight, M-Systems, Odyssey
Software, Stellent and RealNetworks.
Proprietary Software Products
•
SDIO
Now!
— SDIO (Secure Digital
Input Output) is an industry standard format that allows very
small form-factor peripheral and memory cards to be used with
smart devices. BSQUARE’s SDIO
Now!
solution has
become the industry standard software development kit used by
OEMs, SVs and others who are creating SDIO solutions for smart
devices running Microsoft Windows CE, Pocket PC and Smartphone
operating systems. There are currently 60 licensees of our SDIO
technology.
We will continue to sell our SDIO
Now!
software products in 2004. However, Microsoft is incorporating
our SDIO technology into future Windows Embedded operating
system releases, and we expect that when these new operating
system versions are released, the demand for our current SDIO
Now!
software products will decrease. BSQUARE is
currently designing its next generation SDIO software product to
complement the functionality expected to be included in these
upcoming Windows Embedded operating system releases;
•
Universal serial bus (USB) interfaces;
•
A suite of BSQUARE productivity applications for
CE.NET based devices including bFax, bFile, and bBackup; and
•
Board Support Packages (BSP’s) for AMD,
Sharp and Texas Instruments hardware reference designs. Board
Support Packages are comprised of low-level software that
“glues” the operating system, such as Windows CE
.NET, to the hardware. We have created BSP’s for a variety
of SV hardware reference designs. Our customers license these
BSP’s from us, and often utilize our professional
engineering services to customize and test these board support
packages in conjunction with their custom hardware.
Table of Contents
Professional Service Offerings to Smart
Device Makers
•
Device solution strategy consulting;
•
Software and hardware design and development
services;
•
Systems integration;
•
Application development;
•
Quality assurance;
•
Customer technical support; and
•
Platform development training.
Smart Device Design and
Distribution — the Power Handheld
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•
Leverage the growth in the overall smart device
marketplace to sell Windows Embedded licenses as a Microsoft
VAP, as well as provide additional Windows Embedded and Windows
Mobile value-add products that we can offer as solution bundles;
•
Enhance our proprietary software portfolio to
generate additional revenue, particularly higher margin revenue,
which will have the added benefit of increasing opportunities to
sell additional BSQUARE services and Microsoft licenses to our
customers;
•
Expand our professional service offerings by
adding new packaged professional services, training and custom
consulting offerings;
•
Sell additional software and service offerings to
smart device customers which, today, may take advantage of only
a subset of our total offerings; and
•
Maximize the value of our Power Handheld device
through a variety of potential options, including a spin-out,
sale, strategic partnering, additional financing or a
combination thereof.
•
Adding offerings and capabilities around
Windows XP Embedded, as we believe that Windows XP
Embedded will continue to gain market share;
•
Further adding to our Windows Embedded and
Windows Mobile-based proprietary product portfolio through
partnerships and/or acquisitions;
•
Continuing to differentiate our Windows Embedded
licensing efforts by offering our customers additional BSQUARE
proprietary products and services.
•
We are one of Microsoft’s largest VAPs
worldwide;
•
We won Microsoft’s most recent
“Windows CE Value Added Partner of the Year”
award;
•
We are a Windows Embedded Gold Systems Integrator
and won Microsoft’s most recent “Windows XP
Embedded Systems Integrator of the Year” award;
•
We are a provider of Microsoft Official
Curriculum Training for Windows CE and Windows XP
Embedded;
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•
We are a member of the Microsoft Mobile Partner
Program (MPAC) and a leading Systems Integration provider for
Smartphone and Pocket PC;
•
We are a Premier partner in Microsoft’s
Porting Program, providing Windows CE software support for
semiconductor manufacturers;
•
We are a Preferred Provider of Visual Tools to
Microsoft;
•
We are a Gold-Level member of Microsoft’s
Third Party Tools Provider Program;
•
We are an authorized Microsoft Windows CE for
Automotive Solutions Integrator; and
•
We have been engaged by Microsoft on various
service engagements.
•
We are able to leverage co-marketing resources
from Microsoft, including market development funds, to support
our own marketing and sales efforts;
•
We participate in Microsoft-sponsored trade
shows, seminars, and other events;
•
We receive sales leads from Microsoft that enable
us to sell our smart device software and service solutions;
•
We receive certain rebates based upon our demand
generation activities, training, and licensing sales
volume; and
•
We participate in Windows Embedded and Windows
Mobile design reviews, enabling early access to product roadmap
information wherein we provide important technical and customer
feedback.
•
We market our smart device software and services
to OEMs, ODMs, enterprises, wireless network operators and SVs
through our direct sales force located in the United States and
in Taipei, Taiwan; and
•
We market our Power Handheld hardware device
through a separate direct sales force located in the United
States, as well as through a third-party representative based in
the United Kingdom.
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•
Our current and potential customers’
internal research and development departments which may seek to
develop their own proprietary products and solutions;
•
Professional engineering service firms including
Insyde Software, Intrinsyc and others;
•
Software and component distributors including
Avnet, Arrow Electronics and Venturcom; and
•
Hardware manufacturers and others, such as
Motorola, Inc., Nokia Corporation, Sharp, Toshiba
Corporation, Samsung Electronics, Palm, Inc. and NEC
Corporation, which manufacture and distribute hardware devices
similar to our Power Handheld hardware product.
Table of Contents
December 31,
2003
2002
2001
65
84
224
32
68
147
51
70
100
148
222
471
Infogation Corporation
Mainbrace Corporation
BlueWater Systems, Inc.
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Name
Age
Position
62
Chairman of the Board
43
President and Chief Executive Officer, Director
49
Director
47
Director
64
Director
59
Director
46
Executive Vice President of Sales, Marketing and
International Operations
49
Vice President, Professional Engineering Services
42
Vice President, Wireless Services
51
Vice President, Product Development
39
Vice President, Finance, Chief Financial Officer,
Secretary and Treasurer
38
Vice President, Marketing
Table of Contents
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•
Our current and potential customers’
internal research and development departments, which may seek to
develop their own proprietary products and solutions;
•
Professional engineering service firms;
•
Software and component distributors; and
•
Hardware manufacturers and others that
manufacture and distribute hardware devices targeted at the
enterprise marketplace.
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•
The development of content and applications for
smart devices;
•
The willingness of large numbers of businesses
and consumers to use devices such as smartphones, PDAs and
handheld industrial data collectors to perform functions
currently carried out manually or by traditional PCs, including
inputting and sharing data, communicating among users and
connecting to the Internet; and
•
The evolution of industry standards or the
necessary infrastructure that facilitated the distribution of
content over the Internet to these devices via wired and
wireless telecommunications systems, satellite or cable.
Table of Contents
•
Microsoft’s development and support of the
Windows Embedded and Windows Mobile market. As the developer and
primary promoter of Windows CE, Windows XP Embedded, Windows
Mobile for Smartphone and Windows Mobile for PocketPC, if
Microsoft were to decide to discontinue or lessen its support of
these operating systems and platforms, potential customers could
select competing operating systems, which could reduce the
demand for our Windows Embedded and Windows Mobile software
products and services;
•
The ability of the Microsoft Windows Embedded
operating systems and Windows Mobile software to compete against
existing and emerging operating systems for the smart device
market, including: VxWorks and pSOS from WindRiver Systems Inc.,
Linux, Symbian, Palm OS from PalmSource, JavaOS from Sun
Microsystems, Inc., and other proprietary operating
systems. In particular, in the market for handheld devices,
Windows Mobile software for Pocket PC and Windows CE face
intense competition from PalmSource. In the market for
convergent devices, Windows Mobile for Pocket PC Phone Edition
and for Smartphone, face competition from the EPOC operating
system from Symbian, a joint venture among several of the
largest manufacturers of cellular phones. Windows Embedded
operating systems and Windows Mobile for Smartphone may be
unsuccessful in capturing a significant share of these two
segments of the smart device market, or in maintaining its
market share in those other segments of the smart device market
on which our business currently focuses, including the markets
for point-of-sale devices, gaming devices, medical devices,
kiosks, and consumer devices such as television set-top boxes;
•
The acceptance by OEMs and consumers of the mix
of features and functions offered by Windows embedded operating
systems and Windows Mobile targeted platforms; and
•
The willingness of software developers to
continue to develop and expand the applications that run on
Windows Embedded operating systems and Windows Mobile targeted
platforms. To the extent that software developers write
applications for competing operating systems that are more
attractive to smart device users than those available on Windows
Embedded operating systems and Windows Mobile targeted
platforms, potential purchasers could select competing operating
systems over Windows Embedded operating systems and Windows
Mobile targeted platforms.
Table of Contents
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•
Customers’ budgetary constraints and
internal acceptance review procedures;
•
The timing of budget cycles; and
•
The timing of customers’ competitive
evaluation processes.
Table of Contents
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•
Greater difficulty in protecting intellectual
property due to less stringent foreign intellectual property
laws and enforcement policies;
•
Greater difficulty in managing foreign operations
due to the lack of proximity between our headquarters and our
foreign operations;
•
Longer collection cycles than we typically
experience in the U.S.;
•
Unfavorable changes in regulatory practices and
tariffs;
•
Adverse changes in tax laws;
•
The impact of fluctuating exchange rates between
the U.S. dollar and foreign currencies; and
•
General economic and political conditions in
Asian and European markets, as a result of such events as the
spread of SARS and other illnesses, which may differ from those
in the U.S. These risks could have a material adverse
effect on the financial and managerial resources required to
operate our foreign offices, as well as on our future
international revenue, which could harm our business.
Table of Contents
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| Item 2. | Properties. |
Our corporate headquarters are currently located in 92,800 square feet of space in a single location in Bellevue, Washington. In 2002, we agreed to pay certain early lease termination fees related to our corporate headquarters of which $1.1 million, payable in quarterly installments in 2004, remained outstanding at December 31, 2003. In February 2004, we signed an amendment to the lease for our current corporate headquarters and simultaneously entered into a ten-year lease for a new corporate headquarters, also located in Bellevue, Washington. The new corporate headquarters facility contains 43,400 square feet and the underlying lease expires in 2014. The amendment of the current headquarters lease, which is scheduled to terminate on December 31, 2004, provides that no cash lease payments will be made for the remainder of the lease term. Similarly, the new corporate headquarters lease also provides that no cash payments will be made during 2004. In previous quarters, we had recognized a restructuring charge for excess space at our current corporate headquarters. As a result of these agreements, the associated remaining liability of $970,000 was reversed in the fourth quarter of 2003.
In addition, we lease office space domestically in Eden Prairie, Minnesota and San Diego, California, both of which leases terminate in January 2005, and internationally for our offices in Tokyo, Japan and Taipei, Taiwan, which leases terminate in January 2004 and August 2004, respectively. As a result of the decision to close our operations in Japan, we gave notice to our landlord there in November 2003 and the primary facilities lease expired on January 31, 2004.
As described above, there is no cash payment due for the existing or new corporate headquarters facility in 2004. The cash payments due for the non-headquarter leases in 2004 are approximately $164,000. The non-cash expense related to our corporate headquarters is expected to be approximately $380,000 in 2004.
| Item 3. | Legal Proceedings. |
In summer and early fall 2001, four purported shareholder class action lawsuits were filed in the United States District Court for the Southern District of New York against us, certain of our current and former officers and directors (the “Individual Defendants”), and the underwriters of our initial public offering. The suits purport to be class actions filed on behalf of purchasers of our common stock during the period from October 19, 1999 to December 6, 2000. The complaints against us have been consolidated into a single action and a Consolidated Amended Complaint, which was filed on April 19, 2002 and is now the operative complaint.
Plaintiffs allege that the underwriter defendants agreed to allocate stock in our initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at pre-determined prices. Plaintiffs allege that the prospectus for our initial public offering was false and misleading in violation of the securities laws because it did not disclose these arrangements. The action seeks damages in an unspecified amount.
The action is being coordinated with approximately 300 other nearly identical actions filed against other companies. On July 15, 2002, we moved to dismiss all claims against us and the Individual Defendants. On October 9, 2002, the Court dismissed the Individual Defendants from the case without prejudice based upon Stipulations of Dismissal filed by the plaintiffs and the Individual Defendants. On February 19, 2003, the Court denied the motion to dismiss the complaint against us. In June 2003, we approved a Memorandum of Understanding (“MOU”) and related agreements which set forth the terms of a settlement between us, the plaintiff class and the vast majority of the other approximately 300 issuer defendants. Among other provisions, the settlement contemplated by the MOU provides for a release of us and the individual defendants for the conduct alleged in the action to be wrongful. We would agree to undertake certain responsibilities, including agreeing to assign away, not assert, or release certain potential claims we may have against the underwriters. It is anticipated that any potential financial obligation by us to plaintiffs pursuant to the terms of the MOU and related agreements will be covered by existing insurance. Therefore, we do not expect that the settlement will involve any direct payment by us. The MOU and related agreements are subject to a number of contingencies, including the negotiation of a settlement agreement and its approval by the Court. We cannot predict whether or when a settlement will occur or be finalized and are unable at this time to determine whether the outcome
27
| Item 4. | Submission of Matters to a Vote of Security Holders. |
No matters were submitted to a vote of shareholders during the fourth quarter ended December 31, 2003.
PART II
| Item 5. | Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities. |
Market Prices of Common Stock
Our common stock is traded on the NASDAQ National Market under the symbol “BSQR.” The following table sets forth the high and low sale prices for our common stock for the periods indicated, as reported by the NASDAQ National Market. These quotations represent prices between dealers and do not include retail markups, markdowns, or commissions and may not necessarily represent actual transactions.
| High | Low | ||||||||
|
|
|
||||||||
|
Year Ended December 31, 2003:
|
|||||||||
|
First Quarter
|
$ | 1.60 | $ | 0.99 | |||||
|
Second Quarter
|
$ | 1.16 | $ | 0.73 | |||||
|
Third Quarter
|
$ | 2.21 | $ | 0.77 | |||||
|
Fourth Quarter
|
$ | 1.97 | $ | 1.41 | |||||
|
Year Ended December 31, 2002:
|
|||||||||
|
First Quarter
|
$ | 4.15 | $ | 2.98 | |||||
|
Second Quarter
|
$ | 4.13 | $ | 1.74 | |||||
|
Third Quarter
|
$ | 2.19 | $ | 0.72 | |||||
|
Fourth Quarter
|
$ | 1.50 | $ | 0.83 | |||||
Holders
As of February 25, 2004 there were approximately 155 record owners of our common stock.
Dividends
We have never paid cash dividends on our common stock. We currently intend to retain any future earnings to fund future development and growth and, therefore, do not anticipate paying any cash dividends in the foreseeable future.
28
| Item 6. | Selected Consolidated Financial Data. |
The following selected consolidated financial
data should be read in conjunction with the consolidated
financial statements and the notes thereto in Item 8 of
Part II, “Financial Statements and Supplementary
Data,” and the information contained in Item 7 of
Part II, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.” Historical
results are not necessarily indicative of future results.
Year Ended December 31,
2003
2002
2001
2000
1999(1)
(In thousands, except per share data)
$
37,615
$
37,506
$
61,852
$
63,502
$
41,406
31,204
30,795
32,682
29,786
19,509
6,411
6,711
29,170
33,716
21,897
9,857
16,692
12,761
9,259
7,506
13,446
19,230
19,241
17,229
12,518
—
1,698
—
4,100
—
583
1,380
5,745
2,920
—
453
6,472
1,336
—
—
(2,960
)
16,249
6,707
—
—
21,379
61,721
45,790
33,508
20,024
(14,968
)
(55,010
)
(16,620
)
208
1,873
1,059
(1,900
)
2,657
3,282
926
—
—
—
(620
)
—
(13,909
)
(56,910
)
(13,963
)
2,870
2,799
(75
)
(1,696
)
3,679
(2,136
)
(1,104
)
(13,984
)
(58,606
)
(10,284
)
734
1,695
—
(14,932
)
—
—
—
$
(13,984
)
$
(73,538
)
$
(10,284
)
$
734
$
1,695
$
(0.38
)
$
(2.02
)
$
(0.30
)
$
0.02
$
0.08
$
(0.38
)
$
(2.02
)
$
(0.30
)
$
0.02
$
0.06
37,270
36,413
34,314
33,275
21,430
37,270
36,413
34,314
35,932
30,800
29
December 31,
2003
2002
2001
2000
1999(1)
(In thousands)
$
17,745
$
35,425
$
69,711
$
72,351
$
82,972
$
16,490
$
27,957
$
74,887
$
76,560
$
81,675
$
30,113
$
53,569
$
115,666
$
122,262
$
96,642
$
—
$
5,431
$
3,087
$
353
$
—
19,338
32,634
98,821
108,347
89,125
| (1) | Reflects restatement for 2000 business acquisition accounted for under the pooling-of-interests method. |
| (2) | For further discussion of earnings (loss) per share, see Notes 1 and 15 of Item 8 of Part II, “Financial Statements and Supplementary Data.” |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and related notes. Some statements and information contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are not historical facts but are forward-looking statements. For a discussion of these forward-looking statements and of important factors that could cause results to differ materially from the forward-looking statements contained in this report, see Item 1 of Part I, “Business — Forward-Looking Statements” and “— Risk Factors.”
Overview
BSQUARE Corporation provides software, professional services and hardware offerings to the smart device marketplace. A smart device is a dedicated purpose computing device that typically has the ability to display information, run an operating system (e.g., Microsoft® Windows® CE .NET) and may be connected to a network via a wired or wireless connection. Examples of smart devices that BSQUARE targets include set-top boxes, home gateways, point-of-sale terminals, kiosks, voting machines, gaming platforms, Personal Digital Assistants (PDAs), personal media players and smartphones. We primarily focus on smart devices that utilize embedded versions of the Microsoft Windows family of operating systems, specifically Windows CE .NET, Windows XP Embedded and Windows Mobile TM for Pocket PC and Smartphone.
We have been providing software and professional service solutions to the smart device marketplace since our inception. Our customers include world class original equipment manufacturers (OEMs) and original design manufacturers (ODMs), device component suppliers such as silicon vendors (SVs) and peripheral vendors, and enterprises with customized device needs such as retailers and wireless operators that market and distribute connected smart devices. The software and professional services we provide our customers are utilized and deployed throughout various phases of our customers’ device life cycle, including design, development, customization, quality assurance and deployment.
In addition to providing software and service solutions to smart device makers, BSQUARE designed, manufactures and distributes its own proprietary smart device hardware product. Our first hardware product introduction is the Power Handheld, a convergent wireless device that provides our customers with data capabilities, such as email and internet access, as well as an open platform for integration into enterprise systems, along with voice capabilities, all in a convenient handheld form-factor. As described above we are currently considering strategic options for the Power Handheld business, including a spin-out, sale, strategic partnering, additional financing or a combination thereof. However, there can be no assurance that a strategic option will be available on acceptable terms, if at all.
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Fiscal 2003 was a year of significant change for BSQUARE. Revenue from the Microsoft tools consulting business, which made up 51% and 24% of our service and overall revenue in 2002, respectively, declined to 10% and 3% of our service and overall revenue in 2003, respectively. We do not expect any further significant revenue from the Microsoft tools consulting business in the future. We were able to replace the decline in Microsoft tools consulting revenue with revenue from other software and service offerings, primarily the resale of Microsoft Windows Embedded licenses. We finished 2003 with revenue of $37.6 million, versus revenue of $37.5 million in 2002. However, because our revenue shifted away from the higher-margin Microsoft tools consulting revenue toward lower-margin software licensing revenue during 2003, our gross margin declined to 17% in 2003 from 18% in 2002.
In mid-2003, we implemented a comprehensive turnaround plan designed to improve our operations and focus our long-term strategy. Elements of our plan included:
| • | The elimination of unprofitable product lines and operations; | |
| • | A reduction in operating expenses, particularly in the area of excess facility obligations; and | |
| • | Strengthening our management team. |
Our turnaround plan is continuing into 2004 as we complete the closure of our unprofitable Japanese operation.
Critical Accounting Judgments
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company’s critical accounting policies as those that are most important to the portrayal of our financial condition and results of operations, and which require us to make its most difficult and subjective judgments, often as a result of the need to make estimates related to matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are relevant to understanding our results. For additional information see Item 8 of Part II, “Financial Statements and Supplementary Data — Note 1 — Description of Business and Accounting Policies.” Although we believe that our estimates, assumptions and judgments are reasonable, they are necessarily based upon presently available information. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.
| Revenue Recognition |
We recognize revenue from software, service and hardware sales when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the selling price is fixed or determinable; and collectibility is reasonably assured. Contracts and customer purchase orders are generally used to determine the existence of an arrangement. Shipping documents and customer acceptance, when applicable, are used to verify delivery. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess collectibility based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history.
We recognize software revenue upon shipment provided that collection is determined to be probable and no significant obligations remain on our part. We also enter into arrangements in which a customer purchases a combination of software licenses, post-contract customer support (“PCS”), and/or professional services. As a result, significant contract interpretation is sometimes required to determine the appropriate accounting, including how the price should be allocated among the deliverable elements if there are multiple elements, whether undelivered elements are essential to the functionality of delivered elements, and when to recognize revenue. PCS, or maintenance, includes rights to upgrades, when and if available, telephone support, updates,
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Service revenue from fixed-priced contracts is recognized using the percentage of completion method. Percentage of completion is measured based primarily on input measures such as hours incurred to date compared to total estimated hours to complete, with consideration given to output measures, such as contract milestones, when applicable. We rely on estimates of total expected hours as a measure of performance and cost in order to determine the amount of revenue to be recognized. Revisions to hour and cost estimates are recorded in the period the facts that give rise to the revision become known. Losses on fixed-priced contracts are recognized in the period when they become known. Service revenue from time and materials contracts and training services is recognized as revenue as services are performed.
We recognize revenue from sales of hardware products upon shipment provided that title and risk of loss has been transferred to the customer and provided that product acceptance has occurred, collection is determined to be probable and no significant obligations remain. We record revenue from sales of hardware products net of estimated customer returns.
When elements such as hardware products, software and engineering services are contained in a single arrangement, or in related arrangements with the same customer, we allocate revenue to each element based on its relative fair value, provided that such element meets the criteria for treatment as a separate unit of accounting. In the absence of fair value for a delivered element, we allocate revenue first to the fair value of the undelivered elements and allocate the residual revenue to the delivered elements. In the absence of fair value for an undelivered element, the arrangement is accounted for as a single unit of accounting, resulting in a delay of revenue recognition for the delivered elements until the undelivered elements are fulfilled. As a result, contract interpretations and assessments of fair value are sometimes required to determine the appropriate accounting.
Estimated costs of future warranty claims and claims under indemnification provisions in certain licensing agreements are accrued based on historical experience. If actual costs of claims differ from our estimates, revision to the estimated warranty liability would be required.
We perform ongoing credit evaluations of our customers’ financial condition and generally do not require collateral. We maintain allowances for estimated credit losses.
| Long-Lived Assets |
We assess the impairment of our long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider, which could trigger an impairment review, include significant underperformance relative to expected historical or projected future operating results and a significant change in the manner of use of the assets or business strategy. When we determine that the carrying value of certain long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we then measure any impairment based on a projected discounted cash flow method using a discount rate determined to be commensurate with the risk inherent in our current business. This approach uses our estimates of future market growth, forecasted revenue and costs, expected periods the assets will be utilized and appropriate discount rates.
| Restructuring |
We have engaged, and may continue to engage, in restructuring initiatives which require management to make significant estimates. Restructuring-related liabilities include estimates for, among other things, anticipated disposition costs of lease obligations. Key variables in determining such estimates include
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| Taxes |
As part of the process of preparing our
consolidated financial statements, we are required to estimate
income taxes in each of the countries in which we operate. This
process involves estimating our current tax exposure together
with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities. We
must then assess the likelihood that our deferred tax assets
will be recovered from future taxable income, and, to the extent
we believe that recovery is not likely, we must establish a
valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, it may result
in an expense within the tax provision in the statement of
operations. Significant management judgment is required in
determining our provision for income taxes, deferred tax assets
and liabilities and any valuation allowance recorded against our
net deferred tax assets. We have provided a full valuation
allowance on deferred tax assets because of our uncertainty
regarding their realizability based on our valuation estimates.
If we determine that it is more likely than not that the
deferred tax assets would be realized, the valuation allowance
would be reversed. In order to realize our deferred tax assets,
we must be able to generate sufficient taxable income.
Results of Operations
The following table presents certain financial
data as a percentage of total revenue for the periods indicated.
Our historical operating results are not necessarily indicative
of the results for any future period.
33
Comparison of the Years Ended
December 31, 2003, 2002 and 2001
Total revenue consists of sales of software and
services provided to smart device makers and, to a much lesser
extent, revenue from hardware sales. Software revenue consists
of resale of third-party software, sales of our proprietary
software products and royalties from our software development
tool products, debugging tools and applications and smart device
reference designs. Service revenue is derived from hardware and
software development consulting and engineering services fees,
porting contracts, maintenance and support contracts, and fees
for customer training. Hardware revenue is derived from the sale
of our Power Handheld hardware device.
Total revenue was $37.6 million,
$37.5 million and $61.9 million in 2003, 2002 and
2001, respectively, representing a slight increase from 2002 to
2003, and a decrease of 39% for 2002 as compared to 2001.
Although the overall revenue increase from 2002 to 2003 was
small, it was significant considering we experienced an
$8.2 million decrease in revenue from the discontinued
Microsoft tools consulting activities from 2002 to 2003. Revenue
from the Microsoft tools consulting activities, which included
service provided directly to Microsoft as well as to other
customers, accounted for 3%, 24% and 60% of total revenue in
2003, 2002 and 2001, respectively. Relatedly, we experienced a
decline in the amount of services provided directly to
Microsoft, which represented 2%, 16% and 40% of total revenue in
2003, 2002 and 2001, respectively. While we continue to provide
services to Microsoft under our Master Agreement, which expires
in July 2004, we do not expect the related revenue from these
engagements to be as significant a percentage of our total
revenue as in prior years.
Revenue from customers located outside of the
United States was $5.9 million, $7.8 million and
$20.9 million in 2003, 2002 and 2001, representing
decreases of 24% and 63% for 2003 and 2002, respectively. These
amounts include revenue attributable to our foreign operations,
as well as services delivered to foreign customers from our
operations located in the United States. The decrease in
international revenue was primarily due to a decrease in the
number and size of software service projects with international
customers. As a result of the decision to close our Japan
operations, made in the fourth quarter of 2003, we expect total
international revenue to continue to decrease in the near-term.
Total revenue attributable to our Japan operation was
$1.4 million, $2.3 million and $1.8 million in
2003, 2002 and 2001, respectively. Our other international
operation is located in Taipei, Taiwan.
34
Software revenue was $28.2 million,
$19.5 million and $8.1 million in 2003, 2002 and 2001,
respectively, representing increases of 45% and 141% in 2003 and
2002. These increases were primarily due to increased sales of
third-party software products and, to a lesser extent, increased
sales of our proprietary SDIO
Now!
product. The primary
cause of the increase in third party sales was an increased
focus on sales of Microsoft embedded operating systems
coinciding with the acquisition of a customer list and the
employment of a team of salespeople experienced in this area in
2002. As a percentage of total revenue, software revenue was 75%
in 2003, 52% in 2002 and 13% in 2001. As a percentage of
software revenue, third-party software revenue was 89%, 82% and
33% in 2003, 2002 and 2001, respectively. Of those amounts,
software revenue associated with the licensing of Microsoft
embedded operating systems was 87%, 75% and 22% in 2003, 2002
and 2001, respectively. We expect third-party software sales to
continue to be a significant percentage of our software revenue.
Service revenue was $9.4 million,
$18.0 million and $53.8 million in 2003, 2002 and
2001, respectively, representing decreases of 48% and 66% for
2003 and 2002, respectively. The decreases were due primarily to
reductions in our discontinued Microsoft tools consulting
activities and underlying projects. Revenue from the
discontinued Microsoft tools consulting activities, which
included services provided directly to Microsoft as well as
other customers, was $974,000, $9.2 million and
$37.1 million in 2003, 2002 and 2001, respectively. Revenue
from the Microsoft tools consulting activities, which included
services provided directly to Microsoft as well as other
customers, accounted for 10%, 51% and 69% of service revenue in
2003, 2002 and 2001, respectively. Relatedly, we experienced a
further decline in the amount of services provided directly to
Microsoft, which represented 8%, 33% and 46% of service revenue
in 2003, 2002 and 2001, respectively.
Hardware revenue was $73,000 in 2003, all of
which occurred in the fourth quarter of 2003, representing the
first shipments of our Power Handheld hardware product. There
was no hardware revenue in 2002 or 2001. We expect hardware
revenue to increase in the immediate future as we deliver
product for current orders. However, expenses and working
capital required to support this product in the market have
increased and cannot be supported through our existing resources
at current operational levels. As described above, in 2003, we
announced that our Board of Directors had formed a strategic
planning committee to explore options for this business. Options
we are exploring include a spin-out, sale, strategic partnering,
additional financing or a combination thereof. However, there
can be no assurance that a strategic option will be available on
acceptable terms, if at all.
Gross profit is revenue less the cost of revenue,
which consists of cost of software, services and hardware
revenue. Gross profit was $6.4 million, $6.7 million
and $29.2 million in 2003, 2002 and 2001, representing
decreases of 4% and 77% for 2003 and 2002, respectively. As a
percentage of revenue, gross profit was 17% in 2003, 18% in
2002, and 47% in 2001. The overall decrease in gross profit for
2003 and 2002, compared to 2001, is a result of the reduction in
the Microsoft tools revenue, which generated higher margins,
which was offset by software revenue, particularly third-party
software revenue, which carries a significantly lower margin.
Cost of sales related to software revenue
consists primarily of license fees and royalties for third-party
software and the costs of product media, product duplication and
manuals. Software gross profit was 24%, 28% and 74% in 2003,
2002 and 2001, respectively. Beginning in mid-2002, our sales of
third-party software, particularly Microsoft embedded operating
systems, increased significantly coinciding with the acquisition
of a customer list and the employment of a team of salespeople
experienced in this area. The gross profit on third-party
software is significantly lower than the gross profit on our
proprietary software, which accounts for the
35
Cost of sales related to service revenue consists
primarily of salaries and benefits for our engineers, plus
related facilities and depreciation costs. Service gross profit
(loss) was (4)%, 7% and 43% in 2003, 2002 and 2001,
respectively. As the work associated with the Microsoft tools
activities declined, we experienced a significant reduction in
our margin due to two factors. First, our other service business
has traditionally generated lower margins than the discontinued
Microsoft tools consulting activities due to competitive
pressures and other factors. Second, our service costs did not
decline proportionately to the decrease in our service revenue.
In late 2001 and 2002, we eliminated excess service capacity by
reducing headcount in our services organization from 224
employees at December 31, 2001 to 84 employees as of
December 31, 2002, and to 65 employees as of
December 31, 2003. In addition, in 2002 and 2003, we
successfully negotiated with the landlords of several facilities
where we had excess space. As a result, we eliminated
approximately 90,000 square feet of excess space, which
reduced the facilities costs included in service cost of sales.
Cost of sales related to hardware revenue
consists primarily of the cost to manufacture the Power Handheld
device, plus royalties for third-party software included within
the device. Hardware gross profit was 14% in 2003.
Operating expenses
Research and development expenses consist
primarily of salaries and benefits for software developers,
quality assurance personnel, program managers, related
facilities and depreciation costs and costs of outside vendors.
Research and development expenses also include the cost of
operations personnel and related costs associated with
development of the Power Handheld device.
Research and development expenses were
$9.9 million, $16.7 million and $12.8 million in
2003, 2002 and 2001, respectively, representing a decrease of
41% in 2003 and an increase of 31% for 2002. As a percentage of
total revenue, research and development expenses were 26%, 45%
and 21% in 2003, 2002 and 2001, respectively. Of these amounts,
research and development expenses associated with our Power
Handheld hardware initiative totaled $6.6 million,
$5.9 million and $1.6 million in 2003, 2002 and 2001,
respectively. The decrease in overall research and development
expenses in 2003 was primarily due to reductions in our
developer workforce targeting proprietary software products.
Specifically, from 2002 to 2003, we terminated a number of
proprietary products and associated development efforts and,
consequently, terminated a number of personnel associated with
these products. In addition, the development activities related
to our initial Power Handheld design were largely completed in
the fourth quarter of 2003, which allowed us to reduce costs in
certain areas, particularly costs related to outside vendors. In
2002, the percentage increase was due primarily to increases in
our research and development activities for new products,
particularly the Power Handheld, and an overall decline in our
total revenue.
Selling, general and administrative expenses
consist primarily of salaries and benefits for our sales,
marketing and administrative personnel and related facilities
and depreciation costs
.
Selling, general and administrative expenses were
$13.4 million, $19.2 million and $19.2 million in
2003, 2002 and 2001, respectively, representing a decrease of
30% in 2003 and no significant change in 2002. Selling, general
and administrative expenses represented 36%, 51% and 31% of our
total revenue in 2003, 2002 and 2001, respectively. As a
percentage of revenue, the decrease in 2003 was due primarily to
restructuring steps that reduced personnel and facilities costs
during 2003. Since 2001, we reduced headcount related to selling,
36
On March 13, 2002, we acquired Infogation
Corporation, a telematics company, in a purchase transaction
valued at approximately $8.7 million. The purchase price
was allocated to the fair value of the acquired assets and
assumed liabilities based on their fair market values at the
date of the acquisition. Of the total purchase price, we
allocated $1.7 million to acquired in-process research and
development, $6.8 million to goodwill and other intangible
assets and $200,000 to working capital and tangible assets. The
amount allocated to in-process research and development was
determined based on an independent valuation and was recorded as
a charge to expense because its technological feasibility had
not been established and it had no alternative future use at the
date of acquisition. Due to weaker-than-expected demand for
telematics products and services, we subsequently terminated all
telematics personnel and are no longer actively pursuing
telematics work. As a result, we evaluated the carrying value of
the goodwill and other intangible assets associated with the
purchase of Infogation and recognized an impairment loss of
$6.5 million in the third quarter of 2002.
In March 2003, $300,000 and 129,729 shares
of common stock (together, the “Escrow Consideration”)
previously held in an escrow account related to our purchase of
Infogation were released to the former owners of Infogation (the
“Sellers”). The escrow account was designated for a
variety of uncertainties and potential claims related to
representations and warranties of the Sellers. The Escrow
Consideration related to the purchase of Infogation and, upon
its release date, was valued at $435,000 and considered a
purchase price adjustment. Because of the 2002 decision to
significantly reduce telematics personnel and no longer pursue
such work, we evaluated this amount and recorded an impairment
charge for the entire value of the Escrow Consideration.
In September 2003, we entered into an agreement
with one of the former owners of Infogation to assign all
remaining active contracts and related warranty provisions to
his corporation. In addition, we sold the outstanding shares of
BSQUARE San Diego Corporation, formally a wholly-owned
subsidiary, to the former owner for $1.00. All tangible and
intangible assets related to Infogation were previously written
off in 2002.
Restructuring and other related charges
(credits) represent expenses and credits associated with
our efforts to reduce our overall operating costs. During 2003,
2002 and 2001, we approved restructuring plans to reduce
headcount and eliminate excess facilities, among other things.
Restructuring and other related charges (reversal) were
$(3.0) million, $16.2 million and $6.7 million in
2003, 2002 and 2001, respectively.
37
The components of the charges
(reversal) recorded for the years ended December 31,
2001, 2002 and 2003, and a roll-forward of the restructuring
liability are as follows (in thousands):
During the 2003, we made significant progress in
our efforts to mitigate excess facility commitments. The most
significant mitigation was the restructuring of our corporate
headquarters lease, which began with the signing of a Rent
Deferral Agreement with the landlord of our corporate
headquarters in December 2003. Subsequently, in February 2004,
we signed an amendment to the lease for our current corporate
headquarters and simultaneously entered into a ten-year lease
for a new corporate headquarters. The amendment of the current
headquarters lease, which is scheduled to terminate on
December 31, 2004, provides that no cash lease payments
will be made for the remainder of the lease term. Similarly, the
new corporate headquarters lease also provides that no cash
payments will be made during 2004. In previous quarters, we had
recognized a restructuring charge for early lease termination
fees and lease payments for excess space associated with our
corporate headquarters lease. As a result of these agreements,
the associated remaining liability related to excess facilities
of $970,000 was reversed in the fourth quarter of 2003. At
December 31, 2003, early lease termination fees of
$1.1 million remain outstanding and are due in quarterly
installments in 2004.
In June 2003, we negotiated a termination of our
Sunnyvale, California facility lease. This lease termination
resulted in accelerated cash payments of approximately $698,000
made during the second quarter of 2003 and the issuance of a
warrant to purchase up to 400,000 shares of our common
stock at a price of $1.14 per share. The warrant value was
estimated at $332,000 using the Black-Scholes model with an
expected dividend yield of 0.0%, a risk-free interest rate of
1.5%, volatility of 180% (estimated based on the two-year
average volatility of our common stock price) and a contractual
life of five years. During the third quarter of 2003, we
finalized negotiations for the termination of our
San Diego, California facility lease, resulting in
accelerated cash payments of approximately $300,000 made in July
2003. In addition, we agreed to enter into a new lease with the
landlord, at a reduced rate, for approximately 2,600 square
feet through
38
In the fourth quarter of 2003, we decided to
close our Japan office. In connection with this decision, we
recognized a restructuring charge of $412,000, of which $86,000
related to severance for all remaining employees, $42,000 was
associated with remaining lease payments on the excess facility,
$140,000 related to the impairment of fixed assets, and $144,000
was for other related charges.
In addition to the reductions in our Japan
office, we announced two company-wide reductions in 2003
totaling 30 employees, approximately 15% of our remaining
workforce. In connection with these headcount reductions, we
paid approximately $375,000 in severance and other benefits in
2003. During the first, third and fourth quarters of 2002, we
initiated restructuring activities to reduce headcount and
infrastructure, and to eliminate excess leased facilities.
During 2002, we recorded $16.2 million in restructuring and
other related charges.
Included in the charges recorded in 2002 were net
non-cash adjustments of $1.1 million, due to changes in
estimates and assumptions related to the impact of subleasing
excess facilities and the successful negotiation of an early
lease termination. Other related charges recorded in 2002
included impairment losses of $3.2 million for property and
equipment disposed of or abandoned. In calculating the
impairment loss, we evaluated the fair value of the assets
located in the facilities to be abandoned by estimating the
expected present value of their future cash flows.
During 2001, we recorded a restructuring charge
of $6.7 million related to the consolidation of excess
facilities and other restructuring activities. Of this amount,
approximately $5.4 million represents the value of excess
facilities under non-cancelable leases. Property and equipment
disposed of or removed from operations resulted in a charge of
$1.1 million and primarily consisted of leasehold
improvements, computer equipment and related software,
production, engineering, and other equipment. In July 2001, we
also recorded restructuring costs of $227,000 for severance and
other costs associated with a reduction of workforce.
Other income (expense), net, was
$1.1 million, $(1.9) million and $2.7 million in
2003, 2002 and 2001, respectively, and consists of interest
earnings on our cash, cash equivalents and short-term
investments as well as adjustments made to the carrying value of
cost-based investments. In September 2003, we sold cost-based
investments for a gain of $627,000. In 2002, we recorded a
charge of $3.5 million for the impairment of the carrying
value of cost-based investments. Interest earnings have
decreased from 2002 and 2001 due to lower average balances of
cash, cash equivalent and short-term investment balances.
In 2003, 2002 and 2001, federal, state and
foreign income taxes resulted in a provision of $75,000,
$1.7 million and a benefit of $3.7 million, yielding
an effective rate of 0.5%, 3.0% and (26.3)%, respectively. The
tax provision in 2003 primarily related to foreign withholding
taxes. In 2002, the tax provision of $1.7 million primarily
related to a deferred tax provision of $4.7 million for a
valuation allowance provided on previously recorded net deferred
tax assets, offset in part by a current benefit of
$2.9 million for net operating loss carrybacks. The income
tax benefit for 2001 resulted primarily from our ability to
carry back the net operating losses generated in that year to
recapture taxes paid in prior years.
We provided full valuation allowances on deferred
tax assets during 2003 and 2002 because of uncertainty regarding
their realizability. The increase in the valuation allowance on
our deferred tax assets was $411,000 and $25.7 million
during 2003 and 2002, respectively. At December 31, 2003 we
had approximately $53.3 million of net operating loss
carryforwards and $2.2 million of tax credit carryforwards,
which begin to expire in 2022. In addition, we have
$2.8 million of capital loss carryforwards, which expire in
2008.
39
Effective January 1, 2002, we adopted
SFAS No. 142, “Goodwill and Other Intangible
Assets,” which requires companies to discontinue amortizing
goodwill and certain intangible assets with an indefinite useful
life. SAFS No. 142 requires that goodwill and indefinite
life intangible assets be reviewed for impairment upon adoption
of the accounting standard and annually thereafter, or more
frequently if impairment indicators arise. During the second
quarter of 2002, we performed the first of the required
impairment tests of goodwill and indefinite lived intangible
assets and found instances of impairment in our recorded
goodwill. Accordingly, during the third quarter of 2002, we
completed our evaluation of goodwill and other intangible assets
acquired in prior years. As a result, we retroactively recorded
an impairment loss of $14.9 million as of January 1,
2002 as a cumulative effect of a change in accounting principle.
Liquidity and Capital Resources
As of December 31, 2003, we had
$17.7 million of cash, cash equivalents, restricted cash,
and short-term investments compared to $35.4 million at
December 31, 2002. Specifically, we had $13.8 million
of unrestricted cash and $3.9 million of restricted cash as
of December 31, 2003. Our restricted cash balance relates
to securitization of obligations associated with our current
corporate headquarters lease. All the restricted cash balance as
of December 31, 2003, is expected to become unrestricted
during 2004. We are obligated to issue a $1.2 million
letter of credit and deposit restricted cash of
$1.2 million in July 2004 under terms of our new corporate
headquarters facility lease. Our working capital at
December 31, 2003 was $16.5 million compared to
$28.0 million at December 31, 2002, resulting
primarily from the decrease in overall cash balances used to
fund operating losses.
During 2003, net cash used in operating
activities was $16.5 million primarily due to our net loss
of $14.0 million, the use of approximately
$2.3 million for purchases of inventory and deposits made
with the contract manufacturer of our Power Handheld and
$6.3 million for payment of obligations resulting from our
restructuring activities, offset by receipts in the second
quarter of $2.8 million from the refund of prior
years’ income taxes and $1.5 million from the
settlement of a legal dispute. In 2002, our operating activities
resulted in cash outflow of $35.3 million primarily due to
our net operating loss of $73.5 million offset primarily by
a non-cash charge of $14.9 million for the cumulative
effect of change in an accounting principle, a non-cash charge
of $16.2 million for restructuring and a non-cash charge of
$6.5 million for impairment of goodwill and other
intangible assets. In 2001, cash provided by operating
activities of $2.8 million resulted primarily from our net
loss of $10.3 million offset by $8.7 million for
depreciation and amortization of intangible assets, and a
non-cash charge of $6.7 million for restructuring and
non-cash impairment charges.
Investing activities provided cash of
$10.9 million and $14.8 million in 2003 and 2002,
respectively, and used $13.7 million in 2001. Investing
activities in 2003 included $10.3 million provided by
maturities of short-term investments, proceeds of $759,000 from
the sale of an investment, offset by $143,000 used for capital
equipment purchases. Investing activities in 2002 included
$21.0 million provided by maturities of short-term
investments, offset by $3.9 million of net cash used in the
acquisition of Infogation Corporation and $2.2 million used
for capital equipment purchases. Investing activities for 2001
included $6.6 million used for the purchase of short-term
investments, $4.9 million used in purchases of leasehold
improvements and capital equipment and $2.2 million in net
cash used for an acquisition and strategic investments.
Financing activities in 2003, 2002 and 2001
generated $268,000, $1.1 million and $1.8 million,
respectively, primarily as a result of exercises of stock
options.
In the fourth quarter of 2003 we received our
first customer commitments to purchase Power Handheld devices,
and our belief is that orders for the device will continue
during 2004. The design, manufacture and distribution of these
devices is a new business for us, and we expect that increased
orders from customers will require substantial new sources of
working capital to fulfill those orders. Although we outsource
all of our manufacturing, we are nevertheless required to
finance such manufacturing and related inventory costs through a
variety of mechanisms, including letters of credit and cash
payments. We are also required to finance the related
distribution costs. To date, we have been able to finance our
relatively small-scale manufacturing, inventory and distribution
expenses internally, and we will continue to do so in the short
term.
40
We have a Value Added Partner
(VAP) agreement with Microsoft, which enables us to resell
Microsoft Windows Embedded operating systems. There are
provisions within the VAP agreement that allow for the audit of
our internal records and processes. We are currently undergoing
an audit of our royalty reporting for the period 1998 through
2003. The impact of the audit, if any, is unknown at this time.
However, the final outcome of this audit could have a material
adverse impact on our results of operations and financial
condition.
In 2003, we paid a total of $6.3 million in
restructuring-related costs. As of December 31, 2003, we
had an accrued balance of $1.4 million in estimated
remaining restructuring-related costs, consisting of
$1.1 million for early lease termination obligations,
$53,000 for severance, $121,000 for excess facilities primarily
related to non-cancelable leases and $159,000 for other related
charges. Substantially all of our remaining accrued
restructuring liability will be paid in 2004.
Our other principal commitments consist of
obligations outstanding under operating leases, which expire
through 2014. In 2002 we agreed to certain early lease
termination fees related to our corporate headquarters in
Bellevue, Washington, of which $1.1 million, payable in
quarterly installments in 2004, remained outstanding at
December 31, 2003. In February 2004, we signed an amendment
to the lease for our current corporate headquarters and
simultaneously entered into a ten-year lease for a new corporate
headquarters, also located in Bellevue, Washington. The
amendment of the current headquarters lease, which is scheduled
to terminate on December 31, 2004, provides that no cash
lease payments will be made for the remainder of that lease
term. Similarly, the new corporate headquarters lease also
provides that no cash lease payments will be made during 2004.
However, in the event that we were to default under our new
corporate headquarters lease, the landlord has the ability to
demand payment for cash payments forgiven in 2004 under both
leases. The total cash payments forgiven in 2004 is expected to
be $3.0 million. The amount of the forgiven payments that
the landlord has the ability to demand payment for reduces over
time in accordance with the underlying agreements.
We also have lease commitments for office space
in Eden Prairie, Minnesota; San Diego, California; Tokyo,
Japan; and Taipei, Taiwan. As a result of the decision to
terminate our operations in Japan, we gave notice to our
landlord there in November 2003 and the primary facilities lease
expired on January 31, 2004. The annual obligations under
all of these leases are detailed in the table below.
As of December 31, 2003, we had
$3.9 million pledged as collateral for bank letters of
credit issued to landlords related to lease obligations, which
will terminate in 2004. The pledged cash is recorded as
restricted cash.
41
Contractual commitments at December 31,
2003, adjusted to reflect the lease commitments associated with
our new corporate headquarters lease, signed in February 2004,
are as follows (in thousands):
Our total revenue increased slightly in 2003
compared to 2002 and decreased 39% in 2002 compared to 2001. If
our revenue remains flat or declines faster than we reduce
costs, we will continue to experience losses and will be
required to use our existing cash to fund our operations. If
other financing sources for the Power Handheld business are not
available on acceptable terms, or not at all, our ability to
continue to manufacture and distribute our Power Handheld
devices would be negatively impacted, with a corresponding
effect on our future revenue and results of operations. We
believe that our existing cash, cash equivalents and short-term
investments will be sufficient to meet our remaining needs for
working capital and capital expenditures for the next
12 months. See “Factors That May Affect Future
Results.”
Related Party Transactions
During the second quarter of 2003, we hired
Bibeault & Associates as turnaround consultants. Under
this consulting arrangement, we incurred approximately $355,000
of consulting fees. In July 2003, we named Donald Bibeault, the
President of Bibeault & Associates, as Chairman of the
Board of Directors and entered into a new six-month consulting
agreement. Under the new agreement, Mr. Bibeault provides
us 10 days per month of onsite consulting services. We
incurred expenses of approximately $115,000 in 2003 under the
new agreement.
Recent Accounting Pronouncements
In January 2003, the FASB issued Interpretation
No. 46, “Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51,” or FIN 46.
FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the
investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional
subordinated financial support from other parties. We do not
expect the adoption of FIN 46 to have any impact on our
financial position or results of operations.
As a Percentage of Total
Revenue
Year Ended December 31,
2003
2002
2001
75
%
52
%
13
%
25
48
87
—
—
—
100
100
100
57
37
3
26
45
50
—
—
—
83
82
53
Table of Contents
As a Percentage of Total
Revenue
Year Ended December 31,
2003
2002
2001
17
18
47
26
45
21
36
51
31
—
5
—
2
4
9
1
17
2
(8
)
43
11
57
165
74
(40
)
(147
)
(27
)
(1)
The consolidated statements of operations data
include a charge of $1.7 million (5% of total revenue) for
the year ended December 31, 2002 for acquired in-process
research and development costs associated with our purchase of
Infogation Corporation in March 2002.
Revenue
Table of Contents
Software revenue
Service revenue
Hardware revenue
Gross profit
Software gross profit
Table of Contents
Service gross profit
Hardware gross profit
Research and development
Selling, general and
administrative
Table of Contents
Acquired in-process research and
development; and Impairment of goodwill and other intangible
assets
Restructuring and other related charges
(reversal)
Table of Contents
Employee
Other
Separation
Excess
Related
Costs
Facilities
Charges
Total
$
—
$
—
$
—
$
—
227
6,480
—
6,707
—
(1,120
)
—
(1,120
)
(217
)
(836
)
—
(1,053
)
10
4,524
—
4,534
3,757
9,287
3,205
16,249
—
1,108
—
1,108
(2,513
)
(5,083
)
—
(7,596
)
—
—
(3,205
)
(3,205
)
1,254
9,836
—
11,090
461
328
757
1,546
—
(4,506
)
—
(4,506
)
—
(332
)
—
(332
)
—
—
(140
)
(140
)
—
—
57
57
—
(998
)
—
(998
)
(1,662
)
(3,107
)
(515
)
(5,284
)
$
53
$
1,221
$
159
$
1,433
Table of Contents
Other Income (Expense), Net
Income Taxes
Table of Contents
Cumulative effect of change in accounting
principle
Table of Contents
Table of Contents
2004
2005
2006
2007
2008
Thereafter
Total
$
1,141
$
—
$
—
$
—
$
—
$
—
$
1,141
72
8
—
—
—
—
80
1,213
8
1,221
92
390
391
391
391
2,430
4,085
$
1,305
$
398
$
391
$
391
$
391
$
2,430
$
5,306
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
Interest Rate Risk. We do not hold derivative financial instruments or equity securities in our short-term investment portfolio. Our cash equivalents consist of high-quality securities, as specified in our investment policy guidelines. The policy limits the amount of credit exposure to any one issue to a maximum of 15% and any one issuer to a maximum of 10% of the total portfolio with the exception of treasury securities, commercial paper and money market funds, which are exempt from size limitation. The policy limits all short-term investments to mature in two years or less, with the average maturity being one year or less. These securities are subject to interest rate risk and will decrease in value if interest rates increase.
42
The following table presents the amounts of our
cash equivalents and short-term investments that are subject to
market risk by range of expected maturity and weighted average
interest rates as of December 31, 2003 and 2002. This table
does not include money market funds, as those funds are not
subject to market risk.
Maturing in
Three Months
Three Months
Greater Than
Fair
or Less
to One Year
One Year
Total
Value
(Dollars in thousands)
$
1,601
—
—
$
1,601
$
1,601
0.9
%
—
—
$
4,925
$
2,612
$
602
$
8,139
$
8,139
2.1
%
0.9
%
0.2
%
$
10,571
—
—
$
10,571
$
10,574
1.4
%
—
—
$
4,273
$
8,461
$
4,642
$
17,376
$
17,315
3.2
%
3.6
%
3.8
%
Foreign Currency Exchange Rate Risk. Currently, the majority of our revenue and expenses is denominated in U.S. dollars, and, as a result, we have not experienced significant foreign exchange gains and losses to date. While we have conducted some transactions in foreign currencies and expect to continue to do so, we do not anticipate that foreign exchange gains or losses will be significant. We have not engaged in foreign currency hedging to date, although we may do so in the future.
Our international businesses are subject to risks typical of international activity, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, our future results could be materially adversely impacted by changes in these or other factors.
Our exposure to foreign exchange rate fluctuations can vary as the financial results of our foreign subsidiaries are translated into U.S. dollars in consolidation. The effect of foreign exchange rate fluctuations for the year ended December 31, 2003 was not material.
43
| Item 8. | Financial Statements and Supplementary Data. |
BSQUARE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
Report of Ernst & Young
LLP, Independent Auditors
|
45 | |||
|
Report of Prior Independent Public Accountants
|
46 | |||
|
Consolidated Balance Sheets
|
47 | |||
|
Consolidated Statements of Operations
|
48 | |||
|
Consolidated Statements of Shareholders’
Equity
|
49 | |||
|
Consolidated Statements of Cash Flows
|
50 | |||
|
Notes to Consolidated Financial Statements
|
51 |
44
REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS
The Board of Directors and Shareholders of
BSQUARE Corporation:
We have audited the accompanying consolidated
balance sheets of BSQUARE Corporation and subsidiaries as of
December 31, 2003 and 2002 and the related consolidated
statements of operations, shareholders’ equity, and cash
flows for the years then ended. Our audits also included the
2003 and 2002 financial statement schedule listed at
Item 15(a)(2). These financial statements and schedule are
the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits. The financial
statements and schedule of BSQUARE Corporation for the year
ended December 31, 2001 were audited by other auditors who
have ceased operations and whose report dated January 25,
2002 expressed an unqualified opinion on those statements and
schedule before the supplemental disclosures provided in
Note 4.
We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of BSQUARE Corporation and
subsidiaries at December 31, 2003 and 2002 and the
consolidated results of their operations and their cash flows
for the years then ended in conformity with accounting
principles generally accepted in the United States. Also, in our
opinion, the related 2003 and 2002 financial statement schedule,
when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in the Note 4 to the financial
statements, in 2002 the Company changed its method of accounting
for goodwill and other intangible assets in connection with the
adoption of Statement of Financial Accounting Standards
Statement No. 142,
Goodwill and Other intangible Assets
(SFAS No. 142).
As discussed above, the financial statements of
BSQUARE Corporation for the year ended December 31, 2001
were audited by other auditors who have ceased operations. As
described in Note 4, these financial statements have been
revised to include the transitional disclosures required by
SFAS No. 142, which was adopted by the Company as of
January 1, 2002. Our audit procedures related to the
disclosures in Note 4 with respect to 2001 included
(a) agreeing the previously reported net loss to the
previously issued financial statements and the adjustments to
reported net loss representing amortization expense recognized
in 2001 related to goodwill and the impairment of goodwill,
including any related tax effects, to the Company’s
underlying records obtained from management, and
(b) testing the mathematical accuracy of the reconciliation
of adjusted net loss to reported net loss, and the related
loss-per-share amounts. In our opinion, the disclosures for 2001
in Note 4 is appropriate. However, we were not engaged to
audit, review, or apply any procedures to the 2001 financial
statements of the Company other than with respect to the
disclosures referred to above and, accordingly, we do not
express an opinion or any other form of assurance on the 2001
financial statements taken as a whole.
January 23, 2004
45
/s/ ERNST & YOUNG LLP
Table of Contents
REPORT OF PRIOR INDEPENDENT PUBLIC
ACCOUNTANTS
THE FOLLOWING REPORT OF ARTHUR ANDERSEN LLP
(ANDERSEN) IS A COPY OF THE REPORT PREVIOUSLY ISSUED BY
ANDERSEN ON JANUARY 25, 2002. THE REPORT OF ANDERSEN IS
INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K PURSUANT TO
RULE 2-02(E) OF REGULATION S-X. AFTER REASONABLE EFFORTS
THE COMPANY HAS NOT BEEN ABLE TO OBTAIN A REISSUED REPORT FROM
ANDERSEN. ANDERSEN HAS NOT CONSENTED TO THE INCLUSION OF ITS
REPORT IN THIS ANNUAL REPORT ON FORM 10-K. BECAUSE ANDERSEN HAS
NOT CONSENTED TO THE INCLUSION OF ITS REPORT IN THIS ANNUAL
REPORT, IT MAY BE DIFFICULT TO SEEK REMEDIES AGAINST
ANDERSEN AND THE ABILITY TO SEEK RELIEF AGAINST ANDERSEN MAY BE
IMPAIRED.
To BSQUARE Corporation:
We have audited the accompanying consolidated
balance sheets of BSQUARE Corporation and subsidiaries as of
December 31, 2001 and 2000, and the related consolidated
statements of operations and comprehensive income,
shareholders’ equity and cash flows for each of the three
years in the period ended December 31, 2001. These
financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial
position of BSQUARE Corporation and subsidiaries as of
December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.
Seattle, Washington,
46
BSQUARE CORPORATION
CONSOLIDATED BALANCE SHEETS
See notes to Consolidated Financial Statements.
47
ARTHUR ANDERSEN LLP
Table of Contents
Table of Contents
BSQUARE CORPORATION
CONSOLIDATED STATEMENTS OF
OPERATIONS
Year Ended December 31,
2003
2002
2001
(In thousands, except per share
amounts)
$
28,163
$
19,478
$
8,077
9,379
18,028
53,775
73
—
—
37,615
37,506
61,852
21,401
13,948
2,126
9,740
16,847
30,556
63
—
—
31,204
30,795
32,682
6,411
6,711
29,170
9,857
16,692
12,761
13,446
19,230
19,241
—
1,698
—
583
1,380
5,745
453
6,472
1,336
(2,960
)
16,249
6,707
21,379
61,721
45,790
(14,968
)
(55,010
)
(16,620
)
1,059
(1,900
)
2,657
(13,909
)
(56,910
)
(13,963
)
(75
)
(1,696
)
3,679
(13,984
)
(58,606
)
(10,284
)
—
(14,932
)
—
$
(13,984
)
$
(73,538
)
$
(10,284
)
$
(0.38
)
$
(1.61
)
$
(0.30
)
—
(0.41
)
—
$
(0.38
)
$
(2.02
)
$
(0.30
)
37,270
36,413
34,314
See notes to Consolidated Financial Statements.
48
BSQUARE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’
EQUITY
Preferred Stock
Common Stock
Deferred
Accumulated Other
Total
Stock-Based
Comprehensive
Accumulated
Shareholders’
Shares
Amount
Shares
Amount
Compensation
Loss
Deficit
Equity
(In thousands, except share amounts)
—
$
—
33,975,187
$
109,268
$
(314
)
$
(254
)
$
(353
)
$
108,347
—
—
—
—
—
—
(10,284
)
(10,284
)
—
—
—
—
—
(259
)
—
(259
)
—
—
—
—
—
(1,367
)
—
(1,367
)
(11,910
)
—
—
900,398
2,191
—
—
—
2,191
—
—
—
—
193
—
—
193
—
—
34,875,585
111,459
(121
)
(1,880
)
(10,637
)
98,821
—
—
—
—
—
—
(73,538
)
(73,538
)
—
—
—
—
—
188
—
188
—
—
—
—
—
1,367
—
1,367
(71,983
)
—
—
924,689
1,544
—
—
—
1,544
—
—
—
—
106
—
—
106
—
—
1,167,854
4,146
—
—
—
4,146
—
—
36,968,128
117,149
(15
)
(325
)
(84,175
)
32,634
—
—
—
—
—
—
(13,984
)
(13,984
)
—
—
—
—
—
(67
)
—
(67
)
(14,051
)
—
—
398,586
268
—
—
—
268
—
—
—
—
15
—
—
15
—
—
—
332
—
—
—
332
—
—
6,700
5
—
—
—
5
—
—
129,762
135
—
—
—
135
—
$
—
37,503,176
$
117,889
$
—
$
(392
)
$
(98,159
)
$
19,338
See notes to Consolidated Financial Statements.
49
BSQUARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH
FLOWS
Year Ended December 31,
2003
2002
2001
(In thousands)
$
(13,984
)
$
(73,538
)
$
(10,284
)
2,081
3,853
8,651
—
4,721
(3,854
)
78
3,476
—
(627
)
—
—
—
1,698
—
—
14,932
—
(2,960
)
16,249
6,707
453
6,472
1,336
53
64
507
1,734
(5,940
)
—
231
2,339
3,732
2,779
(1,465
)
345
(359
)
—
—
(1,886
)
—
—
1,109
(926
)
(1,253
)
1,548
(142
)
224
(6,404
)
(5,787
)
(2,563
)
(324
)
(1,324
)
(707
)
(16,478
)
(35,318
)
2,841
(249
)
(2,234
)
(4,875
)
10,305
20,964
(6,623
)
—
(3,893
)
—
—
—
(1,183
)
—
(75
)
—
121
759
—
(1,000
)
10,936
14,762
(13,681
)
—
—
(353
)
268
1,106
2,191
268
1,106
1,838
(67
)
188
(261
)
(5,341
)
(19,262
)
(9,263
)
11,041
30,303
39,566
$
5,700
$
11,041
$
30,303
See notes to Consolidated Financial Statements.
50
BSQUARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
BSQUARE Corporation, a Washington corporation,
and its subsidiaries (collectively, the “Company”)
provides software, professional service and hardware offerings
to the smart device marketplace. A smart device is a dedicated
purpose computing device that typically has the ability to
display information, runs an operating system (e.g.,
Microsoft® Windows® CE .NET) and may be connected to a
network via a wired or wireless connection. Examples of smart
devices that BSQUARE targets include set-top boxes, home
gateways, point-of-sale terminals, kiosks, voting machines,
gaming platforms, Personal Digital Assistants (PDAs), personal
media players and smartphones.
BSQUARE provides proprietary and third-party
software and professional service solutions to smart device
makers. This business accounted for the majority of its revenue
in 2003. The Company has also begun to design and distribute a
proprietary smart device hardware product, the Power
Handheld
TM
. The Company recognized its first revenue
from shipments of the Power Handheld in the fourth quarter of
2003.
The Company’s smart device businesses are
focused on devices running customized embedded versions of the
Microsoft Windows family of operating systems, specifically
Windows CE .NET, Windows XP Embedded and Windows
Mobile
TM
for Pocket PC and Smartphone.
The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All
intercompany balances and transactions have been eliminated.
The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could
differ from those estimates. Estimates are used for, but not
limited to, assessing the collectibility of accounts receivable,
realizability of inventory amounts, the realization of deferred
tax assets, useful lives of tangible and intangible assets,
restructuring-related liabilities and contingencies. Estimates
and assumptions are reviewed periodically, and the effects of
revisions are reflected in the consolidated financial statements
in the period they are determined to be necessary.
Basic earnings per share is computed using the
weighted average number of common shares outstanding during the
period, net of shares subject to repurchase, and excludes any
dilutive effects of common stock equivalent shares, such as
options and warrants (using the treasury stock method) and
convertible securities (using the if-converted method). Diluted
earnings per share is computed using the weighted average number
of common and common stock equivalent shares outstanding during
the period; common stock equivalent shares are excluded from the
computation if their effect is antidilutive.
Cash and cash equivalents include demand
deposits, money market accounts and all highly liquid debt
instruments with a maturity date at the time of purchase of
three months or less.
51
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Restricted cash represents deposits held at
financial institutions as security for outstanding letters of
credit expiring through 2004 related to the Company’s
corporate office lease obligations.
The Company’s short-term investments consist
primarily of investment-grade marketable securities, which are
classified as held to maturity and recorded at amortized cost,
which approximates fair value. 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.
In 2003, the Company sold its remaining
investment. The Company’s other investment consisted of
voting capital stock of technology companies. These investments
were accounted for under the cost method as the Company owned
less than 20% of the outstanding shares and did not have
significant influence. To the extent the capital stock held was
in a public company and the securities have a quoted market
price, the investments were marked to market.
The Company has the following financial
instruments: cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued liabilities.
The carrying value of cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and accrued
liabilities approximates fair value based on the liquidity of
these financial instruments or based on their short-term nature.
The Company’s Power Handheld device is
manufactured on its behalf by one contract manufacturer located
in China.
The Company performs ongoing credit evaluations
of its customers’ financial condition, and generally does
not require collateral. The Company estimates the
uncollectibility of its accounts receivable and records an
allowance for potential credit losses. The Company considers
many factors when making its estimates, including analyzing
accounts receivable and historical bad debts, customer
concentrations, customer creditworthiness, current economic
trends and changes in its customer payment terms when evaluating
the adequacy of the reserve for uncollectible accounts. When a
specific account is deemed uncollectible, the account is written
off against the allowance.
Inventory purchases and purchase commitments are
based upon forecasts of future demand. The Company values its
inventory at the lower of standard cost (which approximates
first-in, first-out cost) or market. If the Company believes
that demand no longer allows it to sell its inventory above
cost, or at all, then the Company writes down that inventory to
market or writes off excess inventory levels. Inventory consists
of components and purchased parts for the production of the
Power Handheld.
52
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Furniture, equipment and leasehold improvements
are stated at cost less accumulated depreciation and
amortization. Depreciation is provided on the straight-line
method over estimated useful lives:
Leasehold improvements are amortized over the
shorter of the lease term or estimated useful lives. Maintenance
and repairs costs are expensed as incurred. When properties are
retired or otherwise disposed of, gains or losses are reflected
in the statement of operations. When facts and circumstances
indicate that the cost of long-lived assets may be impaired, an
evaluation of recoverability is performed by comparing the
carrying value of the asset to projected future cash flows. Upon
indication that the carrying value of such assets may not be
recoverable, the Company recognizes an impairment loss as a
charge against current operations.
Effective January 1, 2002, the Company
adopted Statement of Financial Accounting Standards
(SFAS) No. 142 “Goodwill and Other Intangible
Assets.” SFAS No. 142 requires that purchased
goodwill and certain indefinite-lived intangibles no longer be
amortized, but instead be tested for impairment at least
annually. SFAS No. 142 prescribes a two-phase process
for impairment testing of goodwill. The first phase screens for
impairment; while the second phase measures impairment. See
Note 4 for further discussion.
Under the criteria set forth in
SFAS No. 86, “Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise
Marketed,” capitalization of software development costs
begins upon the establishment of technological feasibility of
the product, which the Company has defined as the completion of
beta testing of a working product. The establishment of
technological feasibility and the ongoing assessment of the
recoverability of these costs require considerable judgment by
management with respect to certain external factors, including,
but not limited to, anticipated future gross product revenue,
estimated economic life and changes in software and hardware
technology. Amounts that could have been capitalized under this
statement after consideration of the above factors were
immaterial and, therefore, no software development costs have
been capitalized by the Company to date.
Research and development costs are expensed as
incurred.
All costs of advertising, including cooperative
marketing arrangements, are expensed as incurred. Advertising
expense was $5, $220 and $192 for the years ended
December 31, 2003, 2002 and 2001, respectively.
The Company has elected to follow Accounting
Principles Board (APB) Opinion No. 25,
“Accounting for Stock Issued to Employees,” and
related interpretations, in accounting for employee stock
options rather than the alternative fair value accounting
allowed by Statement of Financial Accounting Standards
(SFAS) No. 123, “Accounting for Stock-Based
Compensation.” Under APB No. 25, compensation expense
53
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
related to the Company’s employee stock
options is measured based on the intrinsic value of the stock
option. SFAS No. 123, amended by
SFAS No. 148 “Accounting for
Stock-Based-Compensation — Transition and
Disclosure,” requires companies that continue to follow APB
No. 25 to provide pro forma disclosure of the impact of
applying the fair value method of SFAS No. 123. The
Company recognizes compensation expense for options granted to
non-employees in accordance with the provisions of
SFAS No. 123 and the Emerging Issues Task Force
consensus Issue 96-18, “Accounting for Equity Instruments
that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling Goods or Services,” which require
using the Black-Scholes option pricing model and re-measuring
such stock options to the current fair market value as the
underlying options vest.
Deferred stock-based compensation consists of
amounts recorded when the exercise price of an option is lower
than the fair value of the underlying common stock on the date
of grant. Deferred stock-based compensation is amortized in
accordance with Financial Accounting Standards Board (FASB)
Interpretation No. 28, on a graded vesting basis, over the
vesting period of the underlying option.
Pro forma information regarding net loss is
required by SFAS No. 123 and SFAS No. 148 as
if the Company had accounted for its employee stock options
under the fair value method. The fair value of the
Company’s options was estimated on the date of grant using
the Black-Scholes method, with the following weighted average
assumptions:
For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over
the options’ vesting period. The following table
illustrates what net loss would have been had the Company
accounted for its stock options under the provisions of
SFAS 123:
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
54
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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.
The functional currency of foreign subsidiaries
is the local currency. Accordingly, assets and liabilities are
translated into U.S. dollars at exchange rates in effect at
the balance sheet date and income and expense accounts at the
average exchange rates during the year. Resulting translation
adjustments are included in “Accumulated other
comprehensive loss,” a separate component of
shareholders’ equity. The net gains and losses resulting
from foreign currency transactions are recorded in the period
incurred and were not significant for any of the periods
presented.
The Company recognizes revenue from software,
service and hardware sales when the following four revenue
recognition criteria are met: persuasive evidence of an
arrangement exists; delivery has occurred or services have been
rendered; the selling price is fixed or determinable; and
collectibility is reasonably assured. Contracts and customer
purchase orders are generally used to determine the existence of
an arrangement. Shipping documents and customer acceptance, when
applicable, are used to verify delivery. The Company assesses
whether the fee is fixed or determinable based on the payment
terms associated with the transaction and whether the sales
price is subject to refund or adjustment. The Company assesses
collectibility based primarily on the creditworthiness of the
customer as determined by credit checks and analysis, as well as
the customer’s payment history.
The Company recognizes software revenue upon
shipment provided that collection is determined to be probable
and no significant obligations remain on its part. The Company
also enters into arrangements in which a customer purchases a
combination of software licenses, post-contract customer support
(“PCS”), and/or professional services. As a result,
significant contract interpretation is sometimes required to
determine the appropriate accounting, including how the price
should be allocated among the deliverable elements if there are
multiple elements, whether undelivered elements are essential to
the functionality of delivered elements, and when to recognize
revenue. PCS, or maintenance, includes rights to upgrades, when
and if available, telephone support, updates, and enhancements.
Professional services relate to consulting and development
services and training. When vendor specific objective evidence
(“VSOE”) of fair value exists for all elements in a
multiple element arrangement, revenue is allocated to each
element based on the relative fair value of each of the
elements. VSOE of fair value is established by the price charged
when the same element is sold separately. Generally, the Company
determines VSOE of fair value of PCS based on the price charged
when the same element is sold separately. In a multiple element
arrangement whereby VSOE of fair value of all undelivered
elements exists but VSOE of fair value does not exist for one or
more delivered elements, revenue is recognized using the
residual method. Under the residual method, the fair value of
the undelivered elements is deferred and the remaining portion
of the arrangement fees associated with the delivered elements
is recognized as revenue, assuming delivery has occurred and
collectibility is probable. Revenue allocated to PCS is
recognized ratably over the contract term, typically one to two
years.
Service revenue from fixed-priced contracts is
recognized using the percentage of completion method. Percentage
of completion is measured monthly based primarily on input
measures such as hours incurred to date compared to total
estimated hours to complete, with consideration given to output
measures, such as contract milestones, when applicable. Losses
on fixed-priced contracts are recognized in the period when they
become known. Service revenue from time and materials contracts
and training services is recognized as revenue as services are
performed.
The Company recognizes revenue from sales of
hardware products upon shipment provided that title and risk of
loss has been transferred to the customer and provided that
product acceptance has occurred, collection
55
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
is determined to be probable and no significant
obligations remain. The Company records revenue from sales of
hardware products net of estimated customer returns.
When elements such as hardware products, software
and engineering services are contained in a single arrangement,
or in related arrangements with the same customer, the Company
allocates revenue to each element based on its relative fair
value, provided that such element meets the criteria for
treatment as a separate unit of accounting. The price charged
when the element is sold separately generally determines fair
value. In the absence of fair value for a delivered element, the
Company allocates revenue first to the fair value of the
undelivered elements and allocates the residual revenue to the
delivered elements. In the absence of fair value for an
undelivered element, the arrangement is accounted for as a
single unit of accounting, resulting in a delay of revenue
recognition for the delivered elements until the undelivered
elements are fulfilled. The Company limits the amount of revenue
recognition for delivered elements to the amount that is not
contingent on the future delivery of products or services or
subject to customer-specified return or refund privileges.
The Company records OEM licensing revenue,
primarily royalties, when OEM partners ship products
incorporating its software, if collection of such revenue is
deemed probable.
Deferred revenue includes deposits received from
customers for service contracts and unamortized service contract
revenue, customer advances under OEM licensing agreements and
maintenance revenue. In instances where final acceptance of the
software, services or hardware is specified by the customer,
revenue is deferred until all acceptance criteria have been met.
Estimated costs of future warranty claims and
claims under indemnification provisions in certain licensing
agreements are accrued based on historical experience. Costs
related to shipping and handling are included in cost of sales.
In January 2003, the FASB issued Interpretation
No. 46, “Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51,” or FIN 46.
FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the
investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional
subordinated financial support from other parties. The Company
does not expect the adoption of FIN 46 to have any impact
on its financial position or results of operations.
Certain prior year amounts have been reclassified
to conform to the current year presentation.
56
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company’s cash, cash equivalents and
short-term investments consist of the following:
The contractual maturities of debt securities are
all within one year.
Major components of furniture, equipment tooling
and leasehold improvements consist of the following:
Depreciation and amortization expense was
$1.5 million, $2.5 million and $2.9 million for
the years ended December 31, 2003, 2002 and 2001,
respectively.
Effective January 1, 2002, the Company
adopted SFAS No. 142, which requires companies to
discontinue amortizing goodwill and certain intangible assets
with an indefinite useful life. SFAS No. 142 requires
that goodwill and indefinite life intangible assets be reviewed
for impairment upon adoption of the accounting standard and
annually thereafter, or more frequently if impairment indicators
arise. In 2002, the
57
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Company recorded an impairment loss of
$14.9 million attributable to goodwill as the cumulative
effect of this change in accounting principle.
In addition, due to weaker-than-expected demand
for telematics products and services, the Company significantly
reduced its telematics personnel, most of whom joined the
Company through the acquisition of Infogation Corporation. As a
result, the Company evaluated the carrying value of the goodwill
and other intangible assets associated with the purchase of
Infogation and recognized an impairment loss of
$6.5 million in the third quarter of 2002. In calculating
these impairment losses, the Company evaluated the fair value of
its reporting units by estimating the expected present value of
their future cash flows. The Company no longer actively pursues
telematics work.
In March 2003, $300 and 129,729 shares of
common stock (together, the Escrow Consideration) previously
held in escrow related to the March 2002 purchase of Infogation
Corporation (Infogation) were released to the former owners of
Infogation (the Sellers). The escrow account was designated for
a variety of uncertainties and potential claims related to
representations and warranties of the Sellers. The Escrow
Consideration related to the original purchase price of
Infogation and upon its release date, was valued at $435 and
considered a purchase price adjustment. Because of the 2002
decision to significantly reduce telematics personnel and no
longer pursue such work, the Company recorded an impairment
charge for the entire value of the Escrow Consideration in the
first quarter of 2003.
During 2001, the Company recognized an impairment
loss of $1.3 million related to goodwill associated with an
engineering facility in Eden Prairie, Minnesota, which was
closed in January 2002.
The 2001 results on a historical basis do not
reflect the provisions of SFAS No. 142. Had the
Company applied SFAS No. 142 for all periods
presented, the historical net loss and basic and diluted net
loss per share would have been changed to the adjusted amounts
indicated below:
The Company’s intangible assets subject to
amortization consist of the following:
58
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Intangible assets subject to amortization are
amortized over their estimated useful lives, ranging from
eighteen to thirty-six months. Based on the current amount of
intangible assets subject to amortization, the estimated
amortization expense for the year ending December 31, 2004
is $267 and zero thereafter.
The income tax benefit (provision) consists
of the following:
The components of net deferred tax assets consist
of the following:
59
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The provision for income taxes differs from the
amount of income tax determined by applying the applicable
U.S. statutory federal income tax rate to pre-tax income,
as a result of the following:
The Company has provided a full valuation
allowance on deferred tax assets during 2003 and 2002 because of
the uncertainty regarding their realizability. The valuation
allowance increased $411 in 2003, $25.7 million in 2002 and
$450 in 2001. At December 31, 2003, the Company had
approximately $53.3 million of net operating loss
carryforwards and $2.2 million of tax credit carryforwards,
which begin to expire in 2022. In addition, the Company has
$2.8 million of capital loss carryforwards, which expire in
2008.
The Company’s principal commitments consist
of obligations outstanding under operating leases, which expire
through 2014. In 2002, the Company agreed to certain early lease
termination fees related to its corporate headquarters in
Bellevue, Washington of which $1.1 million, payable in
quarterly installments in 2004, remained outstanding at
December 31, 2003. In February 2004, the Company signed an
amendment to the lease for its current corporate headquarters
and simultaneously entered into a ten-year lease for a new
corporate headquarters, also located in Bellevue, Washington.
The amendment of the current headquarters lease, which is
scheduled to terminate on December 31, 2004, provides that
no cash lease payments will be made for the remainder of that
lease term. Similarly, the new corporate headquarters lease also
provides that no cash lease payments will be made during 2004.
However, in the event the Company were to default under its new
corporate headquarters lease, the landlord has the ability to
demand payment for cash payments forgiven in 2004 under both
leases. The total cash payments forgiven in 2004 is expected to
be $3.0 million. The lease agreement for the new corporate
headquarters contains a lease escalation clause calling for
increased rents during the second half of the lease.
The Company also has lease commitments for office
space in Eden Prairie, Minnesota; San Diego, California;
Tokyo, Japan; and Taipei, Taiwan.
During the years ended December 31, 2003,
2002 and 2001, rental expense was $2.6 million,
$4.6 million and $6.5 million, respectively.
As of December 31, 2003, the Company had
$3.9 million pledged as collateral for bank letters of
credit issued to landlords to secure certain lease obligations,
all of which will terminate in 2004. The Company is
60
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
obligated to issue a $1.2 million letter of
credit and deposit restricted cash of $1.2 million in July
2004 under terms of its new corporate headquarters facility
lease. The pledged cash is recorded as restricted cash.
Contractual commitments at December 31,
2003, adjusted to reflect the lease commitments associated with
the new corporate headquarters lease signed in February 2004,
are as follows (in thousands):
In summer and early fall 2001, four purported
shareholder class action lawsuits were filed in the United
States District Court for the Southern District of New York
against the Company, certain of its current and former officers
and directors (the “Individual Defendants”), and the
underwriters of its initial public offering. The suits purport
to be class actions filed on behalf of purchasers of the
Company’s common stock during the period from
October 19, 1999 to December 6, 2000. The complaints
against the Company have been consolidated into a single action
and a Consolidated Amended Complaint, which was filed on
April 19, 2002 and is now the operative complaint.
Plaintiffs allege that the underwriter defendants
agreed to allocate stock in the Company’s initial public
offering to certain investors in exchange for excessive and
undisclosed commissions and agreements by those investors to
make additional purchases of stock in the aftermarket at
pre-determined prices. Plaintiffs allege that the prospectus for
the Company’s initial public offering was false and
misleading in violation of the securities laws because it did
not disclose these arrangements. The action seeks damages in an
unspecified amount.
The action is being coordinated with
approximately 300 other nearly identical actions filed against
other companies. On July 15, 2002, the Company moved to
dismiss all claims against it and the Individual Defendants. On
October 9, 2002, the Court dismissed the Individual
Defendants from the case without prejudice based upon
Stipulations of Dismissal filed by the plaintiffs and the
Individual Defendants. On February 19, 2003, the Court
denied the motion to dismiss the complaint against the Company.
In June 2003, the Company approved a Memorandum of Understanding
(“MOU”) and related agreements which set forth the
terms of a settlement between the Company, the plaintiff class
and the vast majority of the other approximately 300 issuer
defendants. Among other provisions, the settlement contemplated
by the MOU provides for a release of the Company and the
individual defendants for the conduct alleged in the action to
be wrongful. The Company would agree to undertake certain
responsibilities, including agreeing to assign away, not assert,
or release certain potential claims the Company may have against
its underwriters. It is anticipated that any potential financial
obligation of the Company to plaintiffs pursuant to the terms of
the MOU and related agreements will be covered by existing
insurance. Therefore, the Company does not expect that the
settlement will involve any payment by the Company. The MOU and
related agreements are subject to a number of contingencies,
including the negotiation of a settlement agreement and its
approval by the Court. The Company cannot predict whether or
when a settlement will occur or be finalized and are unable at
this
61
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
time to determine whether the outcome of the
litigation will have a material impact on its results of
operations or financial condition in any future period.
The Company has a Value Added Partner
(VAP) agreement with Microsoft, which enables the Company
to resell Microsoft Windows Embedded operating systems. There
are provisions within the VAP agreement that allow for the audit
of the Company’s internal records and processes. The
Company is currently undergoing an audit of its royalty
reporting for the period 1998 through 2003. The impact of the
audit, if any, is unknown at this time. However, the final
outcome of this audit could have a material adverse impact on
the Company’s results of operations and financial condition.
At December 31, 2003, the Company had the
following shares of common stock reserved for future issuance:
In June 2003, as a result of a facilities
restructuring settlement agreement, the Company issued warrants
to purchase up to 400,000 shares of the Company’s
common stock at an exercise price of $1.14 per share. The
warrants expire in June 2008. The warrant value was estimated at
$332 using the Black-Scholes model with an expected dividend
yield of 0.0%, a risk-free interest rate of 1.5%, volatility of
180% (estimated based on the two-year average volatility of the
Company’s common stock price) and a contractual life of
five years.
In May 1997, the Company adopted the Amended and
Restated Stock Option Plan (the Amended Plan). Under the Amended
Plan, the Board of Directors may grant non-qualified stock
options at a price determined by the Board, not to be less than
85% of the fair market value of the common stock. These options
have a term of up to 10 years and vest over a schedule
determined by the Board of Directors, generally four years.
Incentive stock options granted under this program may only be
granted to employees and directors of the Company, have a term
of up to 10 years, and shall be granted at a price equal to
the fair market value of the Company’s stock. The Amended
Plan was amended in 2003 to allow for an automatic annual
increase in the number of shares reserved for issuance during
each of the Company’s fiscal years by an amount equal to
the lesser of (i) four percent of the Company’s
outstanding shares at the end of the previous fiscal year,
(ii) an amount determined by the Company’s Board of
Directors, or (iii) 1,500,000 shares.
In July 2000, the Company adopted the 2000
Non-Qualified Stock Option Plan (the 2000 Plan). Under the 2000
Plan, the Board of Directors may grant non-qualified stock
options at a price determined by the Board. These stock options
have a term of up to 10 years and vest over a schedule
determined by the Board of Directors, generally over four years.
The Company has assumed certain options granted
to employees of acquired companies, referred to as acquired
options. These acquired options were assumed by the Company
outside of its stock option plans, and are administered as if
issued under their original plans. All of the acquired options
have been adjusted to
62
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
reflect the price conversion under the terms of
the agreements between the Company and the companies acquired.
The acquired options generally become exercisable over a
four-year period and generally expire ten years from the date of
grant. No additional options will be granted under any of the
acquired companies’ plans.
A summary of all stock option activity follows:
The following table summarizes information
concerning currently outstanding and exercisable options at
December 31, 2003:
As of December 31, 2003, 2002 and 2001,
there were 2,173,483, 2,063,769 and 1,960,987 options
exercisable, respectively, at a weighted average exercise price
of $3.62, $5.57 and $5.13, respectively.
On July 21, 1999, the Board of Directors
approved the adoption of the Company’s 1999 Employee Stock
Purchase Plan (the “1999 Purchase Plan”). Under the
1999 Purchase Plan, the Company was authorized to sell up to
1,500,000 shares of common stock in a series of
eighteen-month offerings. In March 2002, the Company’s
shareholders approved an amendment to the 1999 Purchase Plan to
increase the authorized shares
63
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
of common stock to 2,500,000. The 1999 Purchase
Plan permitted eligible employees of the Company and its
subsidiaries to acquire shares of the Company’s common
stock through periodic payroll deductions of up to 10% of base
cash compensation. The price at which the common stock was
purchased was 85% of the lesser of 1) the fair market value
of the Company’s common stock on the first day of the
applicable offering period or 2) the fair market value of
the shares on the purchase date. The initial offering period
commenced on the effectiveness of the initial public offering.
During the years ended December 31, 2002 and 2001, the
Company issued 230,129 and 468,894 shares under the plan,
respectively. The plan was terminated during 2002.
In connection with the grant of certain stock
options to employees and consultants during 1999, the Company
recorded deferred-stock based compensation of $1.1 million,
representing the difference between the estimated fair value of
the common stock for accounting purposes and the option exercise
price of such options at the date of grant. Such amount is
presented as a reduction of shareholders’ equity and
amortized, in accordance with FASB Interpretation No. 28,
on a graded vesting basis over the vesting period of the
applicable options (generally four years). During the years
ended December 31, 2003, 2002 and 2001, the Company
recorded stock-based compensation of $15, $106 and $193,
respectively. Compensation expense is decreased in the period of
forfeiture for any accrued but unvested compensation arising
from the early termination of an option holder’s services.
Accumulated balances within other comprehensive
loss were as follows:
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 and any applicable vesting upon retirement or
termination, subject to a vesting schedule. The Company
suspended matching contributions in September 2003. During the
years ended December 31, 2003, 2002 and 2001, the Company
made matching contributions of $235, $665 and $922, respectively.
64
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
All other significant non-cash financing
activities are listed elsewhere in the financial statements or
the notes thereto.
For the years ended December 31, 2003, 2002
and 2001, approximately 17%, 6% and 0%, respectively, of the
Company’s revenue was generated from Cardinal Healthcare
Systems pursuant to purchase orders. At December 31, 2003
and 2002, Cardinal Health represented 13% and 8% of total
accounts receivable, respectively.
For the years ended December 31, 2003, 2002
and 2001, approximately 2%, 16% and 40% of the Company’s
revenue, respectively, was generated under its master
development and license agreement with Microsoft, which
concludes in 2004. As of December 31, 2003 and 2002,
Microsoft represented 3% and 1% of total accounts receivable,
respectively.
During the second quarter of 2003, the Company
hired Bibeault & Associates as turnaround consultants.
Under this consulting arrangement, the Company incurred
approximately $355 of consulting fees. In July 2003, the Company
named Donald Bibeault, the President of Bibeault &
Associates, as Chairman of the Board of Directors and entered
into a new six-month consulting agreement. Under the new
agreement, Mr. Bibeault provides the Company 10 days
per month of consulting services. The Company incurred expenses
of approximately $115 in 2003 under the new agreement.
The Company follows the requirements of Statement
of Financial Accounting Standards No. 131 (SFAS 131),
“Disclosures About Segments of an Enterprise and Related
Information.” During 2003, the Company’s chief
operating decision makers began reviewing operating results as
two segments: software and services sold to smart device makers,
and hardware which the Company designs, manufactures and
distributes. This represents a change from prior years. All
historical amounts have been appropriately restated.
The Company measures operating results of its
segments using an internal performance of direct segment
operating expenses that exclude amortization of intangible
assets, impairment of goodwill, restructuring and other related
charges, each of which is not allocated to segment results. All
other centrally-incurred operating costs are allocated to
segment results. There are no internal revenue transactions
between reporting segments.
The Company provides software and service
solutions to smart device makers. Customers include world class
original equipment manufacturers (OEMs) original design
manufacturers (ODMs), device component suppliers such as silicon
vendors (SVs) and peripheral vendors, and enterprises with
customized device needs such as retailers or field service
organizations and wireless operators that market and distribute
connected smart devices. The software and services the Company
provides its customers are utilized and deployed throughout
various phases of the customers’ device life cycle,
including design, development, customization, quality assurance
and deployment.
The Company designs, manufactures and distributes
its own proprietary smart device hardware products, which are
sold to wireless network operators and OEMs. The Company’s
first hardware product introduction is the Power Handheld, a
convergent wireless device. The BSQUARE Power Handheld reference
design
65
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
combines wireless connectivity with laptop-like
functionality for e-mail, personal information management,
document viewing and creation and enterprise connectivity.
The method for determining what information to
report is based on the way that management organizes the
segments within the Company for making operating decisions and
assessing financial performance. Information about the
Company’s reportable segments is summarized in the
following table:
66
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes information about
the Company’s revenue and long-lived asset information by
geographic areas:
The Company does not track assets by operating
segments. Consequently, it is not practicable to show assets by
operating segments.
Summarized quarterly financial information for
2003 and 2002 are as follows:
67
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following is a reconciliation of the
numerators and denominators used in computing basic and diluted
loss per share (in thousands except per share amounts):
Restructuring and other related charges
(reversal) represent the Company’s efforts to reduce
its overall cost structure. During 2003, 2002 and 2001, the
Company approved restructuring plans to reduce headcount and
eliminate excess facilities among other things.
68
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The components of the charges
(reversal) recorded for 2003, 2002 and 2001, and a
rollforward of the restructuring liability are as follows (in
thousands):
During 2003 the Company made significant progress
in its efforts to mitigate excess facility commitments. The most
significant mitigation was the restructuring of its corporate
headquarters lease, which began with the signing of a Rent
Deferral Agreement with the landlord of its corporate
headquarters in December 2003. Subsequently, in February 2004,
the Company signed an amendment to the lease for its current
corporate headquarters and simultaneously entered into a
ten-year lease for a new corporate headquarters, also located in
Bellevue, Washington. The amendment of the current headquarters
lease, which is scheduled to terminate on December 31,
2004, provides that no cash lease payments will be made for the
remainder of the lease term. Similarly, the new corporate
headquarters lease also provides that no cash payments will be
made during 2004. In previous quarters, the Company recognized a
restructuring charge for early lease termination fees and lease
payments for excess space associated with its corporate
headquarters lease. As a result of these agreements, the
associated remaining liability of $970,000, related to excess
facilities, was reversed in the fourth quarter of 2003. At
December 31, 2003, early lease termination fees of
$1.1 million remain outstanding and are due in quarterly
installments in 2004.
In June 2003 the Company negotiated a termination
of its Sunnyvale, California facility lease. This lease
termination resulted in accelerated cash payments of
approximately $698,000 made during the second quarter of 2003
and the issuance of a warrant to purchase up to
400,000 shares of the Company’s common stock at a
price of $1.14 per share. The warrant value was estimated
at $332,000 using the Black-Scholes model with an expected
dividend yield of 0.0%, a risk-free interest rate of 1.5%,
volatility of 180% (estimated based on the
69
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
two-year average volatility of its common stock
price) and an contractual life of five years. During the third
quarter of 2003, the Company finalized negotiations for the
termination of its San Diego, California facility lease,
resulting in accelerated cash payments of approximately $300,000
made in July 2003. In addition, the Company agreed to enter into
a new lease with the landlord, at a reduced rate, for
approximately 2,600 square feet through January 2005. These
arrangements resulted in a change in estimate of the
Company’s obligation for future minimum lease payments of
$3.5 million.
In the fourth quarter of 2003, the Company
decided to close its Japan office. In connection with this
decision, the Company recognized a restructuring charge of
$412,000 in that quarter, of which $86,000 related to severance
for all remaining employees, $42,000 was associated with
remaining lease payments on the excess facility, $140,000
related to the impairment of fixed assets, and $144,000 was for
other related charges.
In addition to the reductions in its Japan
office, the Company announced two company-wide reductions in
workforce of 30 employees, approximately 15% of its remaining
workforce. In connection with these headcount reductions, the
Company paid approximately $375,000 in severance and other
benefits in 2003.
During the first, third and fourth quarters of
2002, the Company initiated restructuring activities to reduce
headcount and infrastructure, and to eliminate excess leased
facilities. During 2002, the Company recorded $16.2 million
in restructuring and other related charges.
Included in the charges recorded in 2002 were net
non-cash adjustments of $1.1 million, due to changes in
estimates and assumptions related to the impact of subleasing
excess facilities and the successful negotiation of an early
lease termination. Other related charges recorded in 2002
included impairment losses of $3.2 million for property and
equipment disposed of or abandoned. In calculating the
impairment loss, the Company evaluated the fair value of the
assets located in the facilities to be abandoned by estimating
the expected present value of their future cash flows.
During 2001, the Company recorded a restructuring
charge of $6.7 million related to the consolidation of
excess facilities and other restructuring activities. Of this
amount, approximately $5.4 million represents the value of
excess facilities under non-cancelable leases. Property and
equipment disposed of or removed from operations resulted in a
charge of $1.1 million and primarily consisted of leasehold
improvements, computer equipment and related software,
production, engineering, and other equipment. In July 2001, the
Company also recorded restructuring costs of $227,000 for
severance and other costs associated with a reduction of
workforce.
On March 13, 2002, the Company acquired
Infogation Corporation (Infogation) in a purchase transaction
valued at approximately $8.7 million. Infogation, located
in San Diego, California, was dedicated to the development
of on-board and handheld vehicle navigation systems
(telematics). Total consideration included the issuance of
approximately 1.2 million shares of BSQUARE common stock
valued at $3.55 per share, the market price on the date of
closing, and approximately $3.9 million in cash. The
Company assumed Infogation’s outstanding vested and
unvested employee stock options, which were converted into
options to acquire approximately 200,000 shares of the
Company’s common stock. The fair value of these vested and
unvested options were included in the purchase price net of the
intrinsic value of the unvested options, which was recorded as
deferred stock compensation. In addition, $300 of cash and
129,762 shares of common stock were held in escrow subject
to the indemnification provisions of the merger agreement. The
agreement also contained provision for the payment of up to
$3.0 million of additional consideration in cash and/or
common stock based upon the attainment of certain revenue
targets, as defined in the merger agreement. In 2003, the
Company issued 6,700 shares of common stock as final
settlement related to this provision.
70
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A summary of the purchase price paid in
connection with the acquisition of Infogation is as follows:
The purchase price was allocated as follows:
The excess of consideration paid over the fair
value of the net assets acquired was recorded as goodwill and
developed technology. In accordance with generally accepted
accounting principles, the amount allocated to in-process
research and development was recorded as a charge to expense in
the first quarter of 2002 because its technological feasibility
had not been established and it had no alternative future use at
the date of acquisition.
Due to weaker-than-expected demand for telematics
products and services, the Company eliminated all telematics
personnel in early 2003. During the third quarter of 2002, the
Company recorded an impairment charge of $6.5 million for
goodwill and intangible assets resulting from the curtailment of
the telematics operations.
In March 2003, $300 and 129,729 shares of
common stock (together, the Escrow Consideration) previously
held in escrow related to the March 2002 purchase of Infogation
were released to the former owners of Infogation (the Sellers).
The escrow account was designated for a variety of uncertainties
and potential claims related to representations and warranties
of the Sellers. The Escrow Consideration related to the purchase
of Infogation and upon its release date, was valued at $435 and
considered a purchase price adjustment. Because of the 2002
decision to significantly reduce telematics personnel and no
longer pursue such work, the Company evaluated this amount and
recorded an impairment charge for the entire value.
In September 2003, the Company entered into an
agreement with one of the former owners of Infogation
Corporation to assign all remaining active contracts and related
warranty provisions to his corporation. In addition, the Company
sold the outstanding shares of BSQUARE San Diego
Corporation, formally a wholly owned subsidiary, to the former
owner for one dollar. All tangible and intangible assets related
to Infogation were previously written off by the Company in 2002.
71
1.
Description of Business and Accounting
Policies
Description of Business
Principles of Consolidation
Use of Estimates
Earnings Per Share
Cash and Cash Equivalents
Table of Contents
Restricted Cash
Short-term Investments
Other Investments
Financial Instruments and Concentrations of
Risk
Allowance for Doubtful
Accounts
Inventory
Table of Contents
Furniture, Equipment, Tooling and Leasehold
Improvements
3 years
4 years
18 months
Goodwill and Other Intangible
Assets
Software Development Costs
Research and Development
Advertising Costs
Stock-Based Compensation
Table of Contents
Year Ended December 31,
2003
2002
2001
0
%
0
%
0
%
4 years
5 years
5 years
175
%
180
%
133
%
2.5
%
2.8
%
4.5
%
Year Ended December 31,
2003
2002
2001
$
(13,984
)
$
(73,538
)
$
(10,284
)
15
106
193
(586
)
(1,115
)
(9,341
)
$
(14,555
)
$
(74,547
)
$
(19,432
)
$
(0.38
)
$
(2.02
)
$
(0.30
)
$
(0.39
)
$
(2.05
)
$
(0.57
)
37,270
36,413
34,314
Income Taxes
Table of Contents
Foreign Currency Translation
Revenue Recognition
Table of Contents
Recent Accounting
Pronouncements
Reclassifications
Table of Contents
2.
Cash, Restricted Cash and Short-Term
Investments
December 31,
2003
2002
$
724
$
631
3,375
832
600
2,074
1,001
7,504
$
5,700
$
11,041
$
3,906
$
5,940
$
1,724
$
515
—
1,745
1,851
4,557
4,564
11,627
$
8,139
$
18,444
3.
Furniture, Equipment, Tooling and Leasehold
Improvements
December 31,
2003
2002
$
2,157
$
2,909
982
1,042
303
917
997
997
4,439
5,865
(2,858
)
(2,741
)
$
1,581
$
3,124
4.
Goodwill and Other Intangible Assets
Table of Contents
For the Year Ended December 31,
2003
2002
2001
$
(13,984
)
$
(73,538
)
$
(10,284
)
—
—
4,978
—
14,932
(14,932
)
$
(13,984
)
(58,606
)
(20,238
)
$
(0.38
)
$
(2.02
)
$
(0.30
)
—
—
0.15
—
0.41
(0.44
)
$
(0.38
)
$
(1.61
)
$
(0.59
)
December 31, 2003
December 31, 2002
Accumulated
Accumulated
Gross
Amortization
Net
Gross
Amortization
Net
$
1,600
$
(1,333
)
$
267
$
1,600
$
(800
)
$
800
75
(75
)
—
75
(25
)
50
$
1,675
$
(1,408
)
$
267
$
1,675
$
(825
)
$
850
Table of Contents
5.
Income Taxes
Year Ended December 31,
2003
2002
2001
$
—
$
2,856
$
768
(75
)
169
(69
)
—
(4,721
)
2,980
$
(75
)
$
(1,696
)
$
3,679
December 31,
2003
2002
$
2,139
$
2,829
1,125
4,986
18,122
16,753
2,773
—
2,182
1,020
—
358
261
245
(26,602
)
(26,191
)
$
—
$
—
Table of Contents
Year Ended December 31,
2003
2002
2001
34.0
%
35.0
%
34.0
%
(25.6
)
(28.3
)
—
—
(6.4
)
—
1.5
0.4
5.1
(0.5
)
—
(7.2
)
(5.2
)
1.1
—
—
—
4.7
—
(5.0
)
(7.0
)
(4.7
)
0.2
(3.3
)
(0.5
)%
(3.0
)%
26.3
%
6.
Commitments and Contingencies
Contractual Commitments
Table of Contents
2004
2005
2006
2007
2008
Thereafter
Total
$
1,141
$
—
$
—
$
—
$
—
$
—
$
1,141
72
8
—
—
—
—
80
1,213
8
1,221
92
390
391
391
391
2,430
4,085
$
1,305
$
398
$
391
$
391
$
391
$
2,430
$
5,306
Legal Proceedings
Table of Contents
Microsoft Audit
8.
Shareholders’ Equity
Common Stock Reserved for Future
Issuance
9,666,096
400,000
10,066,096
Warrants
Stock Options
Table of Contents
Number of
Weighted
Available for
Options
Average
Issuance
Outstanding
Exercise Price
2,393,016
4,072,597
$
8.58
1,594,933
—
—
(2,550,814
)
2,550,814
5.73
—
(431,504
)
0.69
1,013,237
(1,013,237
)
0.27
2,450,372
5,178,670
7.48
1,660,356
—
—
(178,893
)
178,893
0.86
(3,613,178
)
3,613,178
1.34
—
(724,716
)
0.73
2,520,173
(2,520,173
)
7.70
2,838,830
5,725,852
4.12
1,500,000
—
—
(3,063,058
)
3,063,058
1.29
—
(398,586
)
0.67
2,622,974
(2,622,974
)
5.08
3,898,746
5,767,350
2.42
Outstanding
Exercisable
Weighted
Average
Weighted
Remaining
Average
Number of
Contractual
Number of
Exercise
Options
Life (Years)
Options
Price
2,025,179
8.41
982,222
$
0.67
2,103,358
9.55
215,099
1.22
1,469,364
7.52
843,304
5.25
169,449
6.35
132,858
18.89
5,767,350
8.54
2,173,483
3.62
1999 Employee Stock Purchase
Plan
Table of Contents
Deferred Stock-Based
Compensation
Accumulated Other Comprehensive
Loss
Years Ended December 31,
2003
2002
2001
$
(392
)
$
(325
)
$
(513
)
—
—
(1,367
)
$
(392
)
$
(325
)
$
(1,880
)
9.
Employee Benefit Plan
Profit Sharing and Deferred Compensation
Plan
10.
Supplemental Disclosure of Cash Flow
Information
Year Ended December 31,
2003
2002
2001
$
4
$
1
$
41
(2,779
)
(1,692
)
(328
)
135
4,146
—
332
—
—
Table of Contents
11.
Significant Customers
12.
Related Party Transactions
13.
Geographic and Segment Information
Software and Services Solutions for Smart
Device Makers
Smart Device Design and Distribution
(Hardware)
Table of Contents
Software and
Services
Hardware
Consolidated
$
37,542
$
73
$
37,615
6,401
10
6,411
(8,538
)
(8,354
)
(16,892
)
—
—
(583
)
—
—
(453
)
—
—
2,960
—
—
1,059
$
(13,909
)
Software and
Services
Hardware
Consolidated
$
37,506
$
—
$
37,506
6,711
—
6,711
(23,266
)
(5,945
)
(29,211
)
—
—
(1,698
)
—
—
(1,380
)
—
—
(6,472
)
—
—
(16,249
)
—
—
(1,900
)
$
(56,910
)
Software and
Services
Hardware
Consolidated
$
61,852
$
—
$
61,852
29,170
—
29,170
(1,266
)
(1,566
)
(2,832
)
—
—
(5,745
)
—
—
(1,336
)
—
—
(6,707
)
—
—
2,657
$
(13,963
)
Table of Contents
Year Ended December 31,
2003
2002
2001
$
31,667
$
29,716
$
40,993
1,856
4,996
13,004
4,092
2,794
7,855
$
37,615
$
37,506
$
61,852
December 31,
2003
2002
2001
$
2,030
$
5,011
$
6,518
496
593
578
55
86
37
$
2,581
$
5,690
$
7,133
(1)
Revenue is attributed to countries based on
location of customer invoiced.
(2)
Long-lived assets do not include acquired
intangible assets, goodwill or long-term investments.
14.
Quarterly Financial Information
(Unaudited)
2003 Quarter Ended
March 31
June 30
September 30
December 31
$
8,068
$
9,381
$
9,408
$
10,758
777
2,232
1,965
1,437
(6,707
)
(825
)
(3,664
)
(3,772
)
$
(6,599
)
$
(743
)
$
(2,969
)
$
(3,673
)
$
(0.18
)
$
(0.02
)
$
(0.08
)
$
(0.10
)
37,029
37,183
37,323
37,474
Table of Contents
2002 Quarter Ended
March 31
June 30
September 30
December 31
$
8,696
$
9,520
$
10,006
$
9,284
3,261
1,800
968
682
(9,799
)
(9,232
)
(24,201
)
(11,778
)
(9,235
)
(12,744
)
(25,547
)
(11,080
)
14,932
—
—
—
$
(24,167
)
$
(12,744
)
$
(25,547
)
$
(11,080
)
$
(0.68
)
$
(0.35
)
$
(0.69
)
$
(0.30
)
35,364
36,572
36,783
36,912
(1)
Amounts presented for the quarter ended
March 31, 2002 reflect the cumulative effect of change in
accounting principal attributable to the adoption of
SFAS 142, not previously reported in the Company’s
Form 10-Q for that period.
15.
Loss Per Share
Year Ended December 31,
2003
2002
2001
$
(13,984
)
$
(73,538
)
$
(10,284
)
37,270
36,413
34,314
$
(0.38
)
$
(2.02
)
$
(0.30
)
(1)
Common stock equivalents of 1,381, 1,660 and 748
have not been included in the calculation of diluted net loss
per share for 2003, 2002 and 2001 as their effect is
anti-dilutive.
16.
Consolidation of Excess Facilities and
Restructuring Charges (reversal)
Table of Contents
Employee
Other
Separation
Excess
Related
Costs
Facilities
Charges
Total
$
—
$
—
$
$
—
227
6,480
—
6,707
—
(1,120
)
—
(1,120
)
(217
)
(836
)
(1,053
)
10
4,524
—
4,534
3,757
9,287
3,205
16,249
—
1,108
—
1,108
(2,513
)
(5,083
)
—
(7,596
)
—
—
(3,205
)
(3,205
)
1,254
9,836
—
11,090
461
328
757
1,546
—
(4,506
)
—
(4,506
)
—
(332
)
—
(332
)
—
—
(140
)
(140
)
—
—
57
57
—
(998
)
—
(998
)
(1,662
)
(3,107
)
(515
)
(5,284
)
$
53
$
1,221
$
159
$
1,433
Table of Contents
17.
Acquisitions
Infogation Corporation
Table of Contents
$
2,700
4,146
603
971
429
8,849
(190
)
$
8,659
$
(358
)
557
4,152
2,610
1,698
$
8,659
Table of Contents
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
On May 23, 2002 our Board of Directors approved the dismissal of Arthur Andersen LLP as our independent auditors and the appointment of Ernst & Young LLP to serve as our auditors for the fiscal year ended December 31, 2002. We filed a Current Report on Form 8-K dated May 28, 2002, as amended, to report this change.
| Item 9A. | Controls and Procedures |
We carried out an evaluation required by the Securities Exchange Act of 1934, under the supervision and with the participation of our senior management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, and subject to the disclosure below, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, are effective in timely alerting them to material information required to be included in our periodic SEC reports.
There has been no change in our internal control over financial reporting during our fourth fiscal quarter of 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
In the course of finalizing our fiscal 2003 financial statements, and after consultation with our external auditors, we made certain minor adjustments to fourth quarter 2003 results, reflecting expenses identified subsequent to the announcement of our fourth quarter results on January 29, 2004. The adjustments increased the previously reported fourth quarter net loss of $3.4 million by approximately $300,000, or $.01 per diluted share, and the previously reported fiscal year loss of $13.7 million similarly. These adjustments increased cost of revenue and operating expenses. There was no adjustment of revenue. As a result of these adjustments, we have made certain improvements to our expense accounting procedures.
As described elsewhere in this report, there are provisions within our VAP agreement with Microsoft Corporation that require us to maintain certain internal records and processes for royalty reporting and license inventory accounting for royalty auditing and other reasons. Non-compliance with these requirements could result in the termination of the VAP agreement. We are currently undergoing an audit of our royalty reporting for the period 1998 through 2003. The impact of the audit, if any, is unknown at this time. However, the final outcome of this audit could have a material adverse impact on our results of operations and financial condition. In conjunction with the audit and review of our underlying controls and processes, we have strengthened certain controls and processes for royalty reporting and license inventory accounting and are continuing to review these controls and processes to ensure continued compliance with the VAP agreement.
PART III
| Item 10. | Directors and Executive Officers of the Registrant. |
The information required by this Item regarding our directors and executive officers is set forth in Part I of this report under the heading “Directors and Executive Officers” and is incorporated herein by this reference.
The information required by this Item regarding compliance by our directors, executive officers and holders of ten percent of a registered class of our equity securities with Section 16(a) of the Securities Exchange Act of 1934 is included in our definitive proxy statement for our 2004 annual meeting of shareholders to be filed with the SEC under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated herein by this reference.
The information required by this Item regarding our audit committee and audit committee financial expert is included in our definitive proxy statement for our 2004 annual meeting of shareholders to be filed
72
We have adopted a Code of Business Conduct and Ethics in compliance with the applicable rules of the SEC that applies to our principal executive officer, our principal financial officer and our principal accounting officer or controller, or persons performing similar functions. A copy of this policy is available free of charge upon written request to the attention of the Company’s Corporate Secretary by regular mail, email to investorrelations@bsquare.com , or facsimile at 425-519-5998. We intend to disclose any amendment to, or a waiver from, a provision of our code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and that relates to any element of the code of ethics enumerated in applicable rules of the SEC.
| Item 11. | Executive Compensation. |
The information required by this Item is included in our definitive proxy statement for our 2004 annual meeting of shareholders to be filed with the SEC under the caption “Information Regarding Executive Officer Compensation” and is incorporated herein by this reference.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters. |
The information required by this Item regarding security ownership is included in our definitive proxy statement for our 2004 annual meeting of shareholders to be filed with the SEC under the caption “Security Ownership of Principal Shareholders, Directors and Management” and is incorporated herein by this reference.
The information required by this Item regarding equity compensation plan information is included in our definitive proxy statement for our 2004 annual meeting of shareholders to be filed with the SEC under the caption “Equity Compensation Plan Information” and is incorporated herein by this reference.
| Item 13. | Certain Relationships and Related Transactions. |
The information required by this Item is included in our definitive proxy statement for our 2004 annual meeting of shareholders to be filed with the SEC under the caption “Certain Relationships and Related Transactions” and is incorporated herein by this reference.
| Item 14. | Principal Accountant Fees and Services. |
The information required by this Item with respect to principal accountant fees and services is included in our definitive proxy statement for our 2004 annual meeting shareholders to be filed with the SEC under the caption “The Company’s Independent Auditors” and is incorporated herein by this reference.
PART IV
| Item 15. | Exhibits, Financial Statement Schedules and Reports on Form 8-K. |
| (a) | Financial Statements and Schedules |
1. Financial Statements.
The following consolidated financial statements are filed as part of this report under: Item 8 of Part II “Financial Statements and Supplementary Data.”
| A. Consolidated Balance Sheets at December 31, 2003 and 2002. | |
| B. Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001. |
73
| C. Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2003, 2002 and 2001. | |
| D. Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001. |
2. Financial Statement Schedules.
The following financial statement schedule is filed as part of this report:
| A. Schedule II — Valuation and Qualifying Accounts. |
Financial statement schedules not included herein have been omitted because they are either not required, not applicable, or the information is otherwise included herein.
| (b) | Reports on Form 8-K |
On October 23, 2003, we filed a Current Report on Form 8-K announcing our financial results for the quarter ended September 30, 2003.
On November 24, 2003, we filed a Current Report on Form 8-K announcing the establishment of a Strategic Planning Committee of our Board of Directors.
| (c) | Exhibits |
| Exhibit | ||||
| Number | Description | |||
|
|
|
|||
| 3 | .1 | Amended and Restated Articles of Incorporation(1) | ||
| 3 | .1(a) | Articles of Amendment to Amended and Restated Articles of Incorporation(2) | ||
| 3 | .2 | Bylaws and all amendments thereto(14) | ||
| 4 | .1 | See Exhibits 3.1, 3.1(a) and 3.2 for provisions defining the rights of the holders of common stock | ||
| 4 | .2 | Form of Warrant to purchase common stock(16) | ||
| 10 | .1 | Amended and Restated Stock Option Plan(1) | ||
| 10 | .1(a) | 1998 Mainbrace Stock Option Plan(3) | ||
| 10 | .1(b) | 2000 Non-Qualified Stock Option Plan(4) | ||
| 10 | .1(c) | Infogation Corporation 1996 Stock Option Plan(12) | ||
| 10 | .1(d) | Infogation Corporation 2001 Stock Options/Stock Issuance Plan(12) | ||
| 10 | .1(e) | Amended and Restated Stock Option Plan, as amended in April 2003(15) | ||
| 10 | .2 | Employee Stock Purchase Plan(1) | ||
| 10 | .2(a) | Amendment No. 1 to the Employee Stock Purchase Plan(13) | ||
| 10 | .3 | 401(k) Plan(1) | ||
| 10 | .4 | Form of Indemnification Agreement(1) | ||
| 10 | .6 | Office Lease Agreement between Seattle Office Associates, LLC and BSQUARE Corporation dated March 24, 1997 (for Suite 100)(1) | ||
| 10 | .7 | Sunset North Corporate Campus Lease Agreement between WRC Sunset North and BSQUARE Corporation(1) | ||
| 10 | .8 | First Amendment to Office Lease Agreement between WRC Sunset North LLC and BSQUARE(5) | ||
| 10 | .9* | Master Development & License Agreement between Microsoft Corporation and BSQUARE Corporation dated effective as of October 1, 1998(1) | ||
| 10 | .9(a)* | Amendment No. 1 to the Master Development and License Agreement between BSQUARE Corporation and Microsoft Corporation dated December 23, 1999(6) | ||
| 10 | .9(b)* | Amendment No. 2 to the Master Development and License Agreement between BSQUARE Corporation and Microsoft Corporation dated July 26, 2001(6) | ||
74
Exhibit
Number
Description
10
.10
Stock Purchase and Shareholders Agreement dated
as of January 30, 1998(1)
10
.11
Stock Purchase Agreement dated August 18,
1999 by and between BSQUARE Corporation and Vulcan Ventures
Incorporated(1)
10
.12
Agreement and Plan of Merger among BSQUARE,
BlueWater Systems, Inc. and H2O Merger Corporation dated as
of January 5, 2000(7)
10
.13
Agreement and Plan of Merger among BSQUARE
Corporation, Mainbrace Corporation and Mainbrace Acquisition
Inc. dated as of May 10, 2000(8)
10
.14
Single-Tenant Commercial Space Lease among One
South Park Investors, Paul Enterprises and FKLM as Landlord and
BSQUARE as Tenant(9)
10
.14(a)
Lease cancellation, termination, and release
agreement among One South Park Investors, Partnership as
Landlord and BSQUARE as Tenant(16)
10
.15
Single-Tenant Commercial Space Lease (NNN), dated
as of August 30, 2000, by and between One South Park
Investors, Partnership and BSQUARE Corporation(10)
10
.16
Fourth Amendment to Office Lease Agreement
between WRC Sunset North LLC and BSQUARE Corporation(11)
10
.16(a)
Fifth Amendment to Office Lease Agreement between
WA — Sunset North Bellevue LLC and BSQUARE Corporation
10
.16(b)
Rent Deferral Agreement between WA —
Sunset North Bellevue, L.L.C and BSQUARE Corporation
10
.17
Agreement and Plan of Merger among BSQUARE,
BSQUARE San Diego Corporation and Infogation Corporation
dated as of March 10, 2002(14)
10
.18*
OEM Distribution Agreement for Software Products
for Embedded Systems between BSQUARE Corporation and Microsoft
Licensing, GP dated September 16, 2003(17)
10
.19
Office lease Agreement between WA 110 Atrium
Place, LLC and BSQUARE Corporation
10
.20
Employment Agreement between Scott C. Mahan and
BSQUARE Corporation
10
.21
Employment Agreement between Carey E. Butler and
BSQUARE Corporation
21
.1
Subsidiaries of the registrant
23
.1
Consent of Ernst & Young
LLP, Independent Auditors
23
.2
Notice Regarding Consent of Arthur Andersen LLP **
24
.1
Power of Attorney (included on signature page
hereof)
31
.1
Certification of Chief Executive Officer pursuant
to Exchange Act Rule 13a-14(a) under the Securities and
Exchange Act of 1934
31
.2
Certification of Chief Financial Officer pursuant
to Exchange Act Rule 13a-14(a) under the Securities and
Exchange Act of 1934
32
.1
Certification of Chief Executive Officer Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32
.2
Certification of Chief Financial Officer Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
| * | Subject to confidential treatment. |
| ** | Pursuant to Rule 437A promulgated under the Securities Act of 1933, no consent is filed herewith. |
| (1) | Incorporated by reference to the registrant’s registration statement on Form S-1 (File No. 333-85351) filed with the Securities and Exchange Commission on October 19, 1999. |
| (2) | Incorporated by reference to the registrant’s quarterly report on Form 10-Q filed with the Securities and Exchange Commission on August 7, 2000. |
| (3) | Incorporated by reference to the registrant’s registration statement on Form S-8 (File No. 333-44306) filed with the Securities and Exchange Commission on August 23, 2000. |
75
| (4) | Incorporated by reference to the registrant’s registration statement on Form S-8 (File No. 333-70290) filed with the Securities and Exchange Commission on September 27, 2001 |
| (5) | Incorporated by reference to the registrant’s annual report on Form 10-K filed with the Securities and Exchange Commission on March 2, 2000. |
| (6) | Incorporated by reference to the registrant’s quarterly report on Form 10-Q filed with the Securities and Exchange Commission on November 9, 2001. |
| (7) | Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2000. |
| (8) | Incorporated by reference to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 23, 2000. |
| (9) | Incorporated by reference to the registrant’s registration statement on Form S-1 (File No. 333-45506) filed with the Securities and Exchange Commission on September 14, 2000. |
| (10) | Incorporated by reference to the registrant’s annual report on Form 10-K filed with the Securities and Exchange Commission on March 26, 2001. |
| (11) | Incorporated by reference to the registrant’s quarterly report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2002. |
| (12) | Incorporated by reference to the registrant’s statement on Form S-8 (File No. 333-85340) filed with the Securities and Exchange Commission on April 2, 2002. |
| (13) | Incorporated by reference to the registrant’s statement on Form S-8 (File No. 333-90848) filed with the Securities and Exchange Commission on June 20, 2002. |
| (14) | Incorporated by reference to the registrant’s annual report on Form 10-K filed with the Securities and Exchange Commission on March 19, 2003. |
| (15) | Incorporated by reference to the registrant’s quarterly report on Form 10-Q filed with the Securities and Exchange Commission on May 8, 2003. |
| (16) | Incorporated by reference to the registrant’s quarterly report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 2003. |
| (17) | Incorporated by reference to the registrant’s quarterly report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2003. |
76
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.
| BSQUARE CORPORATION |
Date: March 29, 2004
| By: | /s/ BRIAN T. CROWLEY |
|
|
|
| Brian T. Crowley | |
| President and Chief Executive Officer |
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and appoints Brian T. Crowley and Scott C. Mahan, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his true and lawful attorney-in-fact and agent to act in his name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file, any and all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on March 29, 2004, on behalf of the registrant and in the capacities indicated.
| Signature | Title | |||
|
|
|
|||
|
/s/ BRIAN T. CROWLEY
Brian T. Crowley |
President and Chief Executive Officer
(Principal Executive Officer) |
|||
|
/s/ SCOTT C. MAHAN
Scott C. Mahan |
Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) | |||
|
/s/ DONALD B. BIBEAULT
Donald B. Bibeault |
Chairman of the Board | |||
|
/s/ SCOT E. LAND
Scot E. Land |
Director | |||
|
/s/ WILLIAM L. LARSON
William L. Larson |
Director | |||
|
/s/ ELWOOD D. HOWSE, JR.
Elwood D. Howse, Jr. |
Director | |||
|
/s/ ELLIOTT H. JURGENSEN, JR.
Elliott H. Jurgensen, Jr. |
Director | |||
77
BSQUARE CORPORATION
SCHEDULE II — VALUATION AND
QUALIFYING ACCOUNTS
Allowance for doubtful accounts
Balance at
Charged to
Beginning
Costs and
Charged to
Amounts
Balance at
Year Ended
of Period
Expenses
Other Accounts
Written Off
End of Period
(In thousands)
$
860
$
182
$
—
$
722
$
320
$
1,721
$
1,137
$
—
$
1,998
$
860
$
502
$
1,238
$
—
$
19
$
1,721
78
BSQUARE CORPORATION
INDEX TO EXHIBITS
Exhibit
Number
Description
3
.1
Amended and Restated Articles of Incorporation(1)
3
.1(a)
Articles of Amendment to Amended and Restated
Articles of Incorporation(2)
3
.2
Bylaws and all amendments thereto(14)
4
.1
See Exhibits 3.1, 3.1(a) and 3.2 for
provisions defining the rights of the holders of common stock
4
.2
Form of Warrant to purchase common stock(16)
10
.1
Amended and Restated Stock Option Plan(1)
10
.1(a)
1998 Mainbrace Stock Option Plan(3)
10
.1(b)
2000 Non-Qualified Stock Option Plan(4)
10
.1(c)
Infogation Corporation 1996 Stock Option Plan(12)
10
.1(d)
Infogation Corporation 2001 Stock Options/Stock
Issuance Plan(12)
10
.1(e)
Amended and Restated Stock Option Plan, as
amended in April 2003(15)
10
.2
Employee Stock Purchase Plan(1)
10
.2(a)
Amendment No. 1 to the Employee Stock
Purchase Plan(13)
10
.3
401(k) Plan(1)
10
.4
Form of Indemnification Agreement(1)
10
.6
Office Lease Agreement between Seattle Office
Associates, LLC and BSQUARE Corporation dated March 24,
1997 (for Suite 100)(1)
10
.7
Sunset North Corporate Campus Lease Agreement
between WRC Sunset North and BSQUARE Corporation(1)
10
.8
First Amendment to Office Lease Agreement between
WRC Sunset North LLC and BSQUARE(5)
10
.9*
Master Development & License Agreement
between Microsoft Corporation and BSQUARE Corporation dated
effective as of October 1, 1998(1)
10
.9(a)*
Amendment No. 1 to the Master Development
and License Agreement between BSQUARE Corporation and Microsoft
Corporation dated December 23, 1999(6)
10
.9(b)*
Amendment No. 2 to the Master Development
and License Agreement between BSQUARE Corporation and Microsoft
Corporation dated July 26, 2001(6)
10
.10
Stock Purchase and Shareholders Agreement dated
as of January 30, 1998(1)
10
.11
Stock Purchase Agreement dated August 18,
1999 by and between BSQUARE Corporation and Vulcan Ventures
Incorporated(1)
10
.12
Agreement and Plan of Merger among BSQUARE,
BlueWater Systems, Inc. and H2O Merger Corporation dated as
of January 5, 2000(7)
10
.13
Agreement and Plan of Merger among BSQUARE
Corporation, Mainbrace Corporation and Mainbrace Acquisition
Inc. dated as of May 10, 2000(8)
10
.14
Single-Tenant Commercial Space Lease among One
South Park Investors, Paul Enterprises and FKLM as Landlord and
BSQUARE as Tenant(9)
10
.14(a)
Lease cancellation, termination, and release
agreement among One South Park Investors, Partnership as
Landlord and BSQUARE as Tenant(16)
10
.15
Single-Tenant Commercial Space Lease (NNN), dated
as of August 30, 2000, by and between One South Park
Investors, Partnership and BSQUARE Corporation(10)
10
.16
Fourth Amendment to Office Lease Agreement
between WRC Sunset North LLC and BSQUARE Corporation(11)
10
.16(a)
Fifth Amendment to Office Lease Agreement between
WA — Sunset North Bellevue LLC and BSQUARE Corporation
10
.16(b)
Rent Deferral Agreement between WA —
Sunset North Bellevue, L.L.C and BSQUARE Corporation
Table of Contents
Exhibit
Number
Description
10
.17
Agreement and Plan of Merger among BSQUARE,
BSQUARE San Diego Corporation and Infogation Corporation
dated as of March 10, 2002
10
.18*
OEM Distribution Agreement for Software Products
for Embedded Systems between BSQUARE Corporation and Microsoft
Licensing, GP dated September 16, 2003.
10
.19
Office lease Agreement between WA 110 Atrium
Place, LLC and BSQUARE Corporation
10
.20
Employment Agreement between Scott C. Mahan and
BSQUARE Corporation
10
.21
Employment Agreement between Carey E. Butler and
BSQUARE Corporation
21
.1
Subsidiaries of the registrant
23
.1
Consent of Ernst & Young
LLP, Independent Auditors
23
.2
Notice Regarding Consent of Arthur Andersen LLP **
24
.1
Power of Attorney (included on signature page
hereof)
31
.1
Certification of Chief Executive Officer pursuant
to Exchange Act Rule 13a-14(a) under the Securities and Exchange
Act of 1934
31
.2
Certification of Chief Financial Officer pursuant
to Exchange Act Rule 13a-14(a) under the Securities and Exchange
Act of 1934
32
.1
Certification of Chief Executive Officer Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32
.2
Certification of Chief Financial Officer Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
*
Subject to confidential treatment.
**
Pursuant to Rule 437A promulgated under the
Securities Act of 1933, no consent is filed herewith.
(1)
Incorporated by reference to the
registrant’s registration statement on Form S-1 (File
No. 333-85351) filed with the Securities and Exchange
Commission on October 19, 1999.
(2)
Incorporated by reference to the
registrant’s quarterly report on Form 10-Q filed with
the Securities and Exchange Commission on August 7, 2000.
(3)
Incorporated by reference to the
registrant’s registration statement on Form S-8 (File
No. 333-44306) filed with the Securities and Exchange
Commission on August 23, 2000.
(4)
Incorporated by reference to the
registrant’s registration statement on Form S-8 (File
No. 333-70290) filed with the Securities and Exchange
Commission on September 27, 2001
(5)
Incorporated by reference to the
registrant’s annual report on Form 10-K filed with the
Securities and Exchange Commission on March 2, 2000.
(6)
Incorporated by reference to the
registrant’s quarterly report on Form 10-Q filed with
the Securities and Exchange Commission on November 9, 2001.
(7)
Incorporated by reference to the
registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 18, 2000.
(8)
Incorporated by reference to the
registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on May 23, 2000.
(9)
Incorporated by reference to the
registrant’s registration statement on Form S-1 (File
No. 333-45506) filed with the Securities and Exchange
Commission on September 14, 2000.
(10)
Incorporated by reference to the
registrant’s annual report on Form 10-K filed with the
Securities and Exchange Commission on March 26, 2001.
(11)
Incorporated by reference to the
registrant’s quarterly report on Form 10-Q filed with
the Securities and Exchange Commission on November 14, 2002.
(12)
Incorporated by reference to the
registrant’s statement on Form S-8 (File
No. 333-85340) filed with the Securities and Exchange
Commission on April 2, 2002.
(13)
Incorporated by reference to the
registrant’s statement on Form S-8 (File
No. 333-90848) filed with the Securities and Exchange
Commission on June 20, 2002.
Table of Contents
(14)
Incorporated by reference to the
registrant’s annual report on Form 10-K filed with the
Securities and Exchange Commission on March 19, 2003.
(15)
Incorporated by reference to the
registrant’s quarterly report on Form 10-Q filed with
the Securities and Exchange Commission on May 8, 2003.
(16)
Incorporated by reference to the
registrant’s quarterly report on Form 10-Q filed with
the Securities and Exchange Commission on August 14, 2003.
(17)
Incorporated by reference to the
registrant’s quarterly report on Form 10-Q filed with
the Securities and Exchange Commission on November 14, 2003.
EXHIBIT 10.16(a)
FIFTH AMENDMENT TO OFFICE LEASE AGREEMENT
This FIFTH AMENDMENT TO OFFICE LEASE AGREEMENT (this "AMENDMENT") is entered as of January 1, 2004, by and between WA - SUNSET NORTH BELLEVUE, L.L.C., a Washington limited liability company formerly known as EOP - Sunset North Bellevue, L.L.C. ("LANDLORD"), and BSQUARE CORPORATION, a Washington corporation ("TENANT").
RECITALS
A. WRC Sunset North LLC, a Washington limited liability company ("WRC"), and Tenant entered into that certain Office Lease Agreement dated as of January 15, 1999 (the "ORIGINAL LEASE"), and that certain First Amendment to Office Lease Agreement dated as of July 27, 1999 (the "FIRST AMENDMENT").
B. Landlord, as successor to WRC, and Tenant further amended the Original Lease (as amended by the First Amendment) by entering into that certain Second Amendment dated as of January 3, 2001, and that certain Third Amendment dated as of April 2, 2001, and that certain Fourth Amendment dated as of September 13, 2002, and that certain Rent Deferral Agreement dated as of December 30, 2003 (the "RENT DEFERRAL AGREEMENT"). The Original Lease and the First Amendment, collectively with the foregoing described amendments, is defined herein as the "LEASE." The Lease relates to premises located in the City of Bellevue, State of Washington, consisting of a portion of Building 4 of the Sunset North Corporate Campus, as more particularly described in the Lease (the "PREMISES"). Capitalized terms used in this Amendment and not otherwise defined herein shall have the meanings assigned to them in the Lease.
C. The Lease Term is scheduled to expire on December 31, 2004.
D. Pursuant to the terms of the Lease, Landlord holds a Security Deposit in the total amount of $2,900,000.00, consisting of (i) cash in the amount of $135,000.00 (THE "CASH SECURITY DEPOSIT"), and (ii) Letter of Credit No. 577173-41, dated as of October 1, 2002, issued by Comerica Bank - California in the amount of $2,765,000 (the "LETTER OF CREDIT").
E. Contemporaneously herewith, Tenant, as tenant, and WA-110 Atrium Place, L.L.C., a Delaware limited liability company (the "ATRIUM LANDLORD"), an affiliate of Landlord, as landlord, are entering into that certain Office Lease Agreement (the "ATRIUM LEASE") dated as of the same date as this Amendment, for space located at 110 Atrium Place, Bellevue, Washington, as more particularly described in the Atrium Lease (the "ATRIUM PREMISES"). The Atrium Lease is contingent upon Landlord and Tenant entering into this Amendment.
F. Landlord and Tenant now desire to amend the Lease according to the terms and conditions set forth herein.
AGREEMENT
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows:
1.
1. DEFERRAL, REDUCTION AND FORGIVENESS OF RENT AND TERMINATION PAYMENT. Notwithstanding anything in the Lease to the contrary:
1.1 All Rent otherwise payable under the Lease for the
period commencing on January 1, 2004 and ending on December 31, 2004 (as such
Rent may be adjusted pursuant to the third-to-last sentence of Section 3.1
below), together with any Termination Payments (as defined in Section 3.2 below)
payable to Landlord pursuant to Section 3.2 below (collectively, the "DEFERRED
RENT"), shall be deferred until the date, if any (the "DEFERRAL DATE"), which is
the earlier to occur of (a) the date, if any, on which Tenant defaults in the
payment of rent under the Atrium Lease beyond any applicable notice or cure
period, or (b) the date, if any, as of which the Atrium Lease is terminated by
reason of or on the grounds of: (i) any default by Tenant (other than in the
payment of rent) under the Atrium Lease, or (ii) the occurrence of a Casualty
(as defined in Section 16 of the Atrium Lease) or a Taking (as defined in
Section 17 of the Atrium Lease), except where (x) such termination results from
Landlord's exercise of a right of termination (as distinguished, for instance,
from a case where such termination results from Tenant's exercise of a right of
termination or occurs automatically by operation of the Atrium Lease or by
operation of law), and (y) in the case of a Taking, less than the entire
Premises is the subject of the Taking, or (iii) Tenant's exercise of any right
it may have to terminate the Atrium Lease pursuant to Section 3.02 thereof. On
the Deferral Date, if any, the then-remaining balance of the Deferred Rent shall
immediately become due and payable in full (subject to Sections 1.2, 1.3 and 1.4
below).
1.2 Provided that Tenant has not previously defaulted under the Atrium Lease beyond any applicable notice or cure period, on the first day of each of the 120 consecutive calendar months beginning with September 2004, a portion of the Deferred Rent equal to the lesser of (i) 1/120th of the original amount of Deferred Rent or (ii) the then-remaining amount of the Deferred Rent, shall be forgiven.
1.3 In addition, if Landlord enters into any Replacement Lease (as defined in Section 3.1 below) with any Replacement Tenant (as defined in Section 3.1 below) with respect to all or any portion of any Termination Space (as defined in Section 3.1 below) following the termination of the Lease with respect to such Termination Space pursuant to Section 3.1 below, then the Deferred Rent shall automatically be reduced to the extent of the amount of any rent that is actually payable under such Replacement Lease with respect to calendar year 2004 (after giving effect to any adjustment to such amount provided for in such Replacement Lease based on any early or late delivery of possession of the leased premises or any portion thereof) ("ALLOCABLE REPLACEMENT RENT"). Landlord shall provide Tenant with written notice of the amount of any such Allocable Replacement Rent within twenty (20) days after the applicable Replacement Tenant takes possession of the leased premises.
1.4 If, pursuant to Section 1.1 above, the Deferral Date is triggered by the occurrence of a Casualty, then, provided that Tenant is not then in default under the Atrium Lease beyond any applicable notice or cure period, the Deferred Rent shall be reduced by (and, within 30 days after such Deferral Date, Landlord shall reimburse Tenant to the extent of) the amount of any insurance proceeds to which Landlord may be entitled as a result of such Casualty
2.
under any policy of rent interruption insurance maintained by Landlord, but solely to the extent that such insurance proceeds are fairly allocable to the Atrium Premises. In addition, if: (a) pursuant to Section 1.1 above, the Deferral Date is triggered by the occurrence of a Taking; and (b) Tenant is not then in default under the Atrium Lease beyond any applicable notice or cure period; and (c) a court of competent jurisdiction determines, in a final and non-appealable judgment rendered in a legal proceeding commenced by Tenant not later than 30 days after such Deferral Date, that a portion of the condemnation award received by Landlord is fairly allocable to the outstanding balance of the rent to be paid under the Atrium Lease as of the date of such Taking, then the Deferred Rent shall be reduced by (and, within 15 days after the date of such judgment, Landlord shall reimburse Tenant to the extent of) the amount of such portion of such condemnation award.
1.5 Tenant's obligation to pay the Deferred Rent as provided in this Section 1, together with all of Landlord's rights and remedies under the Lease (including, without limitation, under the applicable provisions of Articles 25, 26, 28, 30, 33 and 34) relating to the enforcement of such obligation, shall survive the termination of the Lease.
2. REDUCTION OF SECURITY DEPOSIT. Notwithstanding anything in the Lease to the contrary, but without limiting any other provisions of the Lease permitting reductions in the amount of the Security Deposit, if any Allocable Replacement Rent is payable by any Replacement Tenant pursuant to any Replacement Lease, and if Tenant is not then in default under the Lease beyond any applicable notice or cure period, then, effective as of the date on which Tenant receives Landlord's written notice pursuant to Section 1.3 above, the Security Deposit shall be reduced by the amount of such Allocable Replacement Rent. Such reduction shall be applied, first, to the Cash Security Deposit, and, second, to the Letter of Credit. Landlord agrees to cooperate reasonably with Tenant so that Tenant may effect such reduction.
3. EARLY TERMINATION; TERMINATION PAYMENT. Notwithstanding anything in the Lease to the contrary:
3.1 At any time after March 1, 2004 and before December 31, 2004, Landlord may deliver written notice to Tenant (a "TERMINATION NOTICE") that Landlord is willing to: (a) terminate the Lease with respect to any one or more full floors of the Premises (a "TERMINATION SPACE") as of a date (an "EARLY TERMINATION DATE") specified by Landlord in such notice, and (b) upon such termination, enter into a lease (a "REPLACEMENT LEASE") with respect to such Termination Space with a new tenant (a "REPLACEMENT TENANT") designated by Landlord in such Termination Notice, which Replacement Lease shall provide: (i) that its commencement date shall occur on the date immediately following such Early Termination Date (provided, however, that such commencement date may be delayed as a result of any failure by Landlord to deliver possession of such Termination Space to such Replacement Tenant as a result of any holdover or unlawful possession of such Termination Space by any party); (ii) for the payment of a total amount of Allocable Replacement Rent which (assuming that Landlord will deliver such Termination Space to such Replacement Tenant on the date immediately following such Early Termination Date) is not less than an amount specified by Landlord in such Termination Notice; and (iii) for such other terms and conditions as Landlord may approve in its
3.
sole and absolute discretion (but not inconsistent with the terms described in
the preceding clauses (i) and (ii)). Upon receipt of such Termination Notice,
Tenant may, in its sole and absolute discretion, by written notice to Landlord
delivered not later than ten (10) business days before the applicable Early
Termination Date, elect to terminate the Lease with respect to such Termination
Space, effective as of such Early Termination Date, but subject to the condition
that Landlord and the applicable Replacement Tenant shall mutually execute and
deliver the applicable Replacement Lease, and Landlord shall provide Tenant with
written notice of such execution and delivery, in each case at least five (5)
business days before such Early Termination Date. If Tenant timely delivers such
notice to Landlord, then, provided that Landlord and the applicable Replacement
Tenant mutually execute and deliver the applicable Replacement Lease (it being
agreed that Landlord shall have no obligation to cause such Replacement Tenant
to execute and deliver such Replacement Lease), and further provided that
Landlord provides Tenant with written notice of such execution and delivery, in
each case at least five (5) business days before the applicable Early
Termination Date, the Lease shall be deemed terminated as to such Termination
Space effective as of such Early Termination Date. In such event, Tenant shall,
on or before the Early Termination Date, fulfill all covenants and obligations
of Tenant under the Lease (as amended hereby) with respect to the Termination
Space applicable to the period prior to and including the Early Termination Date
and completely vacate and surrender the Termination Space to Landlord in
accordance with the terms of the Lease, including those provisions relating to
the condition of the Termination Space and removal of Tenant's Property
therefrom; provided, however, that if the applicable Termination Notice
identifies one or more Required Removables located in the Termination Space and
states that, upon the termination of the Lease with respect to the Termination
Space, Landlord agrees to waive Tenant's obligation under the Lease to remove
such identified Required Removables, then, notwithstanding anything to the
contrary in the Lease, Tenant shall not be required to remove such identified
Required Removables upon such termination. Notwithstanding anything in this
Section 3.1 to the contrary, Landlord and Tenant shall remain liable for all
year-end adjustments with respect to Additional Base Rental for the Termination
Space for that portion of the calendar year up to and including the Early
Termination Date. Except as otherwise provided in Section 1 above, such
adjustments shall be paid at the time, in the manner and otherwise in accordance
with the terms of the Lease. Article 18 of the Lease shall survive the
termination of the Lease with respect to any Termination Space pursuant to this
Section 3.1, but, as to such Termination Space, shall apply only to matters
occurring, arising or existing on or before the applicable Early Termination
Date.
3.2 Notwithstanding anything herein or in the Lease to
the contrary, but subject to the second sentence of this Section 3.2 below, if
the Lease is terminated with respect to any Termination Space pursuant to
Section 3.1 above, Tenant shall pay to Landlord, by cashier's or certified check
or by wire transfer of immediately available funds to an account designated by
Landlord, an amount (a "TERMINATION PAYMENT") equal to the amount of Rent that
Tenant would have been obligated to pay to Landlord under the Lease with respect
to such Termination Space, in the absence of such termination, for the portion
of calendar year 2004 which follows the applicable Early Termination Date.
Notwithstanding the foregoing, the payment of such Termination Payment shall be
deferred and forgiven as and to the extent provided in Section 1 above.
4.
4. CONTINGENCY; RENT DEFERRAL AGREEMENT.
4.1 Notwithstanding anything herein to the contrary, this Amendment is contingent upon the Atrium Landlord and Tenant contemporaneously herewith entering into the Atrium Lease. If the Atrium Landlord and Tenant fail to enter into the Atrium Lease contemporaneously herewith, then either Landlord or Tenant may terminate this Amendment by providing written notice thereof to the other party on or before the earlier of (i) the fifth (5th) business day after the date on which this Amendment is fully executed and delivered, or (ii) the date of mutual execution and delivery of the Atrium Lease by the Atrium Landlord and Tenant, whereupon, notwithstanding anything herein to the contrary, this Amendment shall be null and void and of no force or effect.
4.2 This Amendment shall supersede the Rent Deferral Agreement.
5. MISCELLANEOUS.
5.1 Tenant represents and warrants that (a) Tenant is the rightful owner of all of the Tenant's interest in the Lease; (b) Tenant has not made any disposition, assignment, sublease, conveyance, pledge or hypothecation of the Lease or Tenant's interest therein; (c) Tenant has no knowledge of any fact or circumstance which would give rise to any claim, demand, obligation, liability, action or cause of action arising out of or in connection with Tenant's occupancy of the Premises; and (d) there are no outstanding contracts for the supply of labor or material and no work has been done or is being done in, to or about the Premises which has not been fully paid for and for which appropriate waivers of mechanic's liens have not been obtained. The foregoing representation and warranty shall be deemed to be remade by Tenant in full as of any Early Termination Date.
5.2 Tenant hereby represents to Landlord that Tenant has dealt with no broker in connection with this Amendment. Tenant agrees to indemnify and hold Landlord, its members, principals, beneficiaries, partners, officers, directors, employees, mortgagee(s) and agents, and the respective principals and members of any such agents harmless from all claims of any brokers claiming to have represented Tenant in connection with this Amendment. Landlord hereby represents to Tenant that Landlord has dealt with no broker in connection with this Amendment. Landlord agrees to indemnify and hold Tenant, its members, principals, beneficiaries, partners, officers, directors, employees, and agents, and the respective principals and members of any such agents harmless from all claims of any brokers claiming to have represented Landlord in connection with this Amendment.
5.3 The Lease, as amended by this Amendment, is hereby ratified by Landlord and Tenant and Landlord and Tenant hereby agree that the Lease, as so amended, shall continue in full force and effect.
5.4 This Amendment may be signed in two or more counterparts. When at least one such counterpart has been signed by each party, this Amendment shall be deemed to have been fully executed, each counterpart shall be deemed to be an original, and all counterparts shall be deemed to be one and the same agreement.
5.
5.5 This Amendment sets forth the entire agreement between the parties with respect to the matters set forth herein. There have been no additional oral or written representations or agreements.
5.6 In the case of any inconsistency between the provisions of the Lease and this Amendment, the provisions of this Amendment shall govern and control.
5.7 Submission of this Amendment by Landlord is not an offer to enter into this Amendment but rather is a solicitation for such an offer by Tenant. Landlord shall not be bound by this Amendment until Landlord has executed and delivered the same to Tenant.
5.8 Each party to this Amendment represents hereby that the person signing as signatory for such party has the authority to execute and deliver the same on behalf of such party.
6.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of the date first written above.
LANDLORD:
WA - SUNSET NORTH BELLEVUE, L.L.C.,
a Washington limited liability company
By: EQUITY OFFICE MANAGEMENT, L.L.C.,
a Delaware limited liability company, its
non-member manager
By: _______________________
Its: M. Patrick Callahan
Title: Senior Vice President - Seattle Region
TENANT:
BSQUARE CORPORATION,
a Washington corporation
By: ______________________________
Name: ____________________________
Title: ___________________________
7.
STATE OF ____________)
COUNTY OF ___________) ss:
On this the ___ day of ________________, 20__, before me a Notary Public duly authorized in and for the said County in the State aforesaid to take acknowledgments personally appeared M. Patrick Callahan, known to me to be a Senior Vice President - Seattle Region of a Delaware limited liability company known as Equity Office Management, L.L.C., the manager of one of the parties described in the foregoing instrument, and acknowledged that being authorized so to do, (s)he executed the foregoing instrument on behalf of said partnership by subscribing the name of said partnership by himself/herself, as a free and voluntary act, and as the free and voluntary act of said partnership, for the uses and purposes therein set forth.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
My Commission Expires: __________
8.
STATE OF ____________)
COUNTY OF ___________) ss:
On this the ___ day of ____________, 20__, before me a Notary Public duly authorized in and for the said County in the State aforesaid to take acknowledgments personally appeared __________________________ known to me to be ____________ President of BSquare Corporation, one of the parties described in the foregoing instrument, and acknowledged that as such officer, being authorized so to do, (s)he executed the foregoing instrument on behalf of said corporation by subscribing the name of such corporation by himself/herself as such officer and caused the corporate seal of said corporation to be affixed thereto, as a free and voluntary act, and as the free and voluntary act of said corporation, for the uses and purposes therein set forth.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
My Commission Expires: ______________
9.
EXHIBIT 10.16(b)
RENT DEFERRAL AGREEMENT
This RENT DEFERRAL AGREEMENT ("Agreement") is entered as of this 30th day of December, 2003, by and between WA - SUNSET NORTH BELLEVUE, L.L.C., a Washington limited liability company formerly known as EOP - Sunset North Bellevue, L.L.C. ("LANDLORD"), and BSQUARE CORPORATION, a Washington corporation ("TENANT").
RECITALS
A. WRC Sunset North LLC, a Washington limited liability company ("WRC") and Tenant entered into that certain Office Lease Agreement dated as of January 15, 1999 (the "ORIGINAL LEASE"), and that certain First Amendment to Office Lease Agreement dated as of July 27, 1999 (the "FIRST AMENDMENT").
B. Landlord, as successor to WRC, and Tenant further amended the Original Lease (as amended by the First Amendment) by entering into that certain Second Amendment dated as of January 3, 2001, and that certain Third Amendment dated as of April 2, 2001, and that certain Fourth Amendment dated as of September 13, 2002. The Original Lease and the First Amendment, collectively with the foregoing described amendments, is defined herein as the "LEASE." The Lease relates to premises located in the City of Bellevue, State of Washington, consisting of a portion of Building 4 of the Sunset North Corporate Campus, as more particularly described in the Lease.
C. Landlord and Tenant are currently negotiating the terms of a further amendment of the Lease (the "FIFTH AMENDMENT").
D. Tenant, as tenant, and an affiliate of Landlord (the "ATRIUM LANDLORD"), as landlord, are also currently negotiating the terms of a lease (the "ATRIUM LEASE") to be dated as of the same date as the Fifth Amendment, for space located at 110 Atrium Place, Bellevue, Washington, as more particularly described in the Atrium Lease.
E. Because Landlord and Tenant currently contemplate that the Fifth Amendment, if entered into, would defer and partially forgive (and may eventually completely forgive) all rent due under the Lease for the period commencing on January 1, 2004, Landlord and Tenant now desire to provide for a deferral of such rent during the period, if any, commencing on January 1, 2004 and ending on the earlier of (i) the date that the Fifth Amendment and the Atrium Lease are entered into, or (ii) the date that negotiations are terminated as described in Paragraph 1 below. Capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings assigned to them in the Lease.
AGREEMENT
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows:
1. RENT DEFERRAL. So long as Tenant and Landlord or Atrium Landlord, as applicable, are negotiating the terms of the Fifth Amendment and/or Atrium Lease, all rent
1.
otherwise due under the Lease for the period commencing on January 1, 2004 and ending on December 31, 2004, shall be deferred until the Fifth Amendment and Atrium Lease are entered into by Tenant and Landlord and Atrium Landlord, as applicable, at which point the Fifth Amendment shall be deemed to control and be retroactive to January 1, 2004. In the event that Landlord or Tenant notifies the other that negotiations are being terminated without the Fifth Amendment and Atrium Lease having been entered into, then all rent deferred pursuant to this Agreement shall become due and payable within ten days of the date Tenant gives or receives such notice.
2. MISCELLANEOUS.
2.1 The Lease, as amended by this Agreement, is hereby ratified by Landlord and Tenant and Landlord and Tenant hereby agree that the Lease, as so amended, shall continue in full force and effect.
2.2 This Agreement may be signed in two or more counterparts. When at least one such counterpart has been signed by each party, this Agreement shall be deemed to have been fully executed, each counterpart shall be deemed to be an original, and all counterparts shall be deemed to be one and the same agreement.
2.3 This Agreement sets forth the entire agreement between the parties with respect to the matters set forth herein. There have been no additional oral or written representations or agreements.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Agreement as of the date first written above.
LANDLORD:
WA - SUNSET NORTH BELLEVUE, L.L.C.,
a Washington limited liability company
By: EQUITY OFFICE MANAGEMENT, L.L.C.,
a Delaware limited liability company, its
non-member manager
By: ____________________________________
Its: ___________________________________
Title: _________________________________
2.
TENANT:
BSQUARE CORPORATION, a Washington corporation
By: ____________________________________
Name: __________________________________
Title: _________________________________
3.
STATE OF ____________)
COUNTY OF ___________) ss:
On this the ___ day of ________________, 20__, before me a Notary Public duly authorized in and for the said County in the State aforesaid to take acknowledgments personally appeared Susan J. Murphy, known to me to be a Vice President of a Delaware limited liability company known as Equity Office Management, L.L.C., the manager of one of the parties described in the foregoing instrument, and acknowledged that being authorized so to do, (s)he executed the foregoing instrument on behalf of said partnership by subscribing the name of said partnership by himself/herself, as a free and voluntary act, and as the free and voluntary act of said partnership, for the uses and purposes therein set forth.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
My Commission Expires: _____________
STATE OF ____________)
COUNTY OF ___________) ss:
On this the ___ day of ____________, 20__, before me a Notary Public duly authorized in and for the said County in the State aforesaid to take acknowledgments personally appeared _________________________________ known to me to be a ___________________________________ of BSquare Corporation, one of the parties described in the foregoing instrument, and acknowledged that as such officer, being authorized so to do, (s)he executed the foregoing instrument on behalf of said corporation by subscribing the name of such corporation by himself/herself as such officer and caused the corporate seal of said corporation to be affixed thereto, as a free and voluntary act, and as the free and voluntary act of said corporation, for the uses and purposes therein set forth.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
4.
EXHIBIT 10.19
110 ATRIUM PLACE
BELLEVUE, WASHINGTON
OFFICE LEASE AGREEMENT
BETWEEN
WA-110 ATRIUM PLACE, L.L.C.,
A DELAWARE LIMITED LIABILITY COMPANY
("LANDLORD")
AND
BSQUARE CORPORATION,
A WASHINGTON CORPORATION
("TENANT")
OFFICE LEASE AGREEMENT
THIS OFFICE LEASE AGREEMENT (the "LEASE") is made and entered into as
of January 1, 2004, by and between WA-110 ATRIUM PLACE, L.L.C., A DELAWARE
LIMITED LIABILITY COMPANY ("LANDLORD"), and BSQUARE CORPORATION, A WASHINGTON
CORPORATION ("TENANT"). The following exhibits and attachments are incorporated
into and made a part of this Lease: ADDENDUM, EXHIBIT A-1 (Outline and Location
of Premises), EXHIBIT A-2 (Legal Description of Property), EXHIBIT B (Expenses
and Taxes), EXHIBIT C (Work Letter - INTENTIONALLY OMITTED), EXHIBIT D
(Commencement Letter - INTENTIONALLY OMITTED), EXHIBIT E (Building Rules and
Regulations), EXHIBIT F (Additional Provisions), and EXHIBIT G (Letter of Credit
Form).
1. BASIC LEASE INFORMATION.
1.01 "BUILDING" shall mean the building located at 110 110th Avenue NE, Bellevue, Washington 98004 commonly known as 110 Atrium Place. "RENTABLE SQUARE FOOTAGE OF THE BUILDING" is deemed to be 224,725 square feet.
1.02 "PREMISES" shall mean the area shown on EXHIBIT A-1 to this Lease. The Premises is located on the 2nd floor of the Building and known as suites 200, 215, 220 and 230. If the Premises include one or more floors in their entirety, all corridors and restroom facilities located on such full floor(s) shall be considered part of the Premises. The "RENTABLE SQUARE FOOTAGE OF THE PREMISES" is deemed to be 43,396 square feet. Landlord and Tenant stipulate and agree that the Rentable Square Footage of the Building and the Rentable Square Footage of the Premises are correct.
1.03 "BASE RENT":
ANNUAL RATE MONTHLY
PERIOD PER SQUARE FOOT BASE RENT
------------------------------------------------------------------------------------------
9/1/04 through 8/31/09 $ 9.00 $32,547.00
------------------------------------------------------------------------------------------
9/1/09 through 8/31/14 $10.00 $36,163.33
------------------------------------------------------------------------------------------
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Notwithstanding anything in this Section 1.03 to the contrary, if the Commencement Date (defined in Section 1.06 below) occurs on or before December 31, 2004, then, so long as Tenant is not in default under this Lease, Tenant shall be entitled to an abatement of Base Rent and Additional Rent, in the approximate amount of $63,430.49 per month (i.e. $32,547.00 in Base Rent and approximately $30,883.49 in Additional Rent), for the period commencing on the Commencement Date and expiring on December 31, 2004 (the "RENT ABATEMENT PERIOD"). By way of example but not of limitation, if the Commencement Date occurs on September 1, 2004, the total amount of Rent abated during the Rent Abatement Period shall equal approximately $253,7212.96.
1.04 "TENANT'S PRO RATA SHARE": 19.3107%.
1.05 "BASE YEAR" [INTENTIONALLY OMITTED]
1.06 "TERM": A period of 120 months. Subject to Section 3, the Term shall commence on September 1, 2004 (the "COMMENCEMENT DATE") and, unless terminated early in accordance with this Lease, end on August 31, 2014 (the "TERMINATION DATE").
1.07 Allowance(s): None.
1.08 "SECURITY DEPOSIT": None.
1.09 "GUARANTOR(S)": As of the date of this Lease, there are no Guarantors.
1.10 "BROKER(S)": Equity Office Properties Management Corp. ("Landlord's Broker"), which represented Landlord in connection with this transaction.
1.11 "PERMITTED USE": General office use and administrative use, together with uses reasonably incident thereto. The Permitted Use shall also include the testing of computers and intelligent computing devices, including hardware, software and wired or wireless embedded smart devices; provided, however, that in no event shall the Permitted Use include chemical or biological testing.
1.12 "NOTICE ADDRESS(ES)":
Landlord: Tenant:
WA-110 Atrium Place, L.L.C. Prior to the Commencement Date, notices shall be sent to
c/o Equity Office Management, L.L.C. Tenant at the following address:
701 5th Avenue 3150 139th Avenue, S.E.
Suite 4000 Suite 500
Seattle, Washington 98104 Bellevue, Washington 98005
Attn: Property Manager, 110 Atrium Place
On and after the Commencement Date, notices shall be sent to
Tenant at the Premises, with a copy to:
Ball Janik LLP
One Main Place
101 SW Main Street, Suite 1100
Portland, Oregon 97204-3219
Attn: Dina E. Alexander
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A copy of any notices to Landlord shall be sent to Equity Office, One Market, Spear Tower, Suite 600, San Francisco, California 94105, Attn: Seattle Regional Counsel.
1.13 "BUSINESS DAY(S)" are Monday through Friday of each week, exclusive of New Year's Day, Presidents Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day ("HOLIDAYS"). Landlord may designate additional Holidays that are commonly recognized by other office buildings in the area where the Building is located. "BUILDING SERVICE HOURS" are 6:00 A.M. to 6:00 P.M. on Business Days and 8:00 A.M. to 1:00 P.M. on Saturdays.
1.14 "LANDLORD WORK" [INTENTIONALLY OMITTED]
1.15 "PROPERTY" means the Building and the parcel(s) of land on which it is located and, at Landlord's discretion, the parking facilities and other improvements, if any, serving the Building and the parcel(s) of land on which they are located.
1.16 "LETTER OF CREDIT": $1,200,00.00, as more fully described in
Section I of EXHIBIT F.
2. LEASE GRANT.
The Premises are hereby leased to Tenant from Landlord, together with the right to use any portions of the Property that are designated by Landlord for the common use of tenants and others (the "COMMON AREAS").
3. ADJUSTMENT OF COMMENCEMENT DATE; POSSESSION.
3.01 [INTENTIONALLY OMITTED]
3.02 The Premises are accepted by Tenant in "as is" condition and
configuration without any representations or warranties by Landlord (other than
any such representations or warranties that may be expressly set forth herein).
Notwithstanding the foregoing, Landlord agrees to deliver the Premises to Tenant
in broom-clean condition (except as otherwise provided in Section V of EXHIBIT F
attached hereto) and with all carpets cleaned. By taking possession of the
Premises, Tenant agrees that the Premises are in good order and satisfactory
condition. Landlord shall not be liable for a failure to deliver possession of
the Premises or any other space due to the holdover or unlawful possession of
such space by another party; however Landlord shall use reasonable efforts to
obtain possession of the space. The Commencement Date, in such event, shall be
postponed until the date Landlord delivers possession of the Premises to Tenant
free from occupancy by any party. Notwithstanding the foregoing, if the
Commencement Date has not occurred on or before the Required Delivery Date
(defined below), then: (a) Landlord shall not be in default hereunder; however,
(b) if Tenant is not then in default hereunder, Tenant, as its sole remedy, may
terminate this Lease by giving Landlord written notice of termination on or
before the earlier to occur of: (i) 5 Business Days after the Required Delivery
Date; or (ii) the Commencement Date. In the event of such termination, this
Lease shall be deemed null and void and of no further force and effect and
Landlord shall promptly refund any prepaid rent and Letter of Credit previously
delivered by Tenant under this Lease and the parties hereto shall have no
further responsibilities or obligations to each other with respect to this
Lease. The "REQUIRED DELIVERY DATE" shall mean September 1, 2004; provided,
however, that the Required Delivery Date shall be postponed by the number of
days the Commencement Date is delayed due to events of Force Majeure (defined in
Section 26.03) (including, without limitation, any holdover of all or any
portion of the Premises by tenants
thereof). Promptly after the determination of the Commencement Date, Landlord and Tenant shall execute and deliver a commencement letter in the form attached as EXHIBIT D.
3.03 Before the Commencement Date, Landlord shall permit Tenant to take
possession of any separately demised portion of the Premises on or before the
later to occur of (a) March 1, 2004, or (b) the date occurring 10 days after the
latest to occur of (i) Tenant's written request for delivery of such portion of
the Premises; (ii) Landlord's recovery of possession of such portion of the
Premises (if Landlord is not in possession thereof as of the date of this
Lease); or (iii) the completion of any work that Landlord is required to perform
in such portion of the Premises under Section 3.02 above (which work Landlord
agrees to use commercially reasonable efforts to complete within 10 Business
Days after the later to occur of (A) the mutual execution and delivery of this
Lease, or (B) Landlord's recovery of possession of such portion of the Premises
[if Landlord is not in possession thereof as of the date of this Lease]). If
Landlord permits Tenant to take possession of the Premises before the
Commencement Date, such possession shall be subject to the terms and conditions
of this Lease; provided, however, that during such period Tenant shall not be
required to pay Rent (defined in Section 4.01) except for the cost of services
requested by Tenant (e.g. freight elevator usage).
4. RENT.
4.01 Tenant shall pay Landlord, without any setoff or deduction, unless expressly set forth in this Lease, all Base Rent and Additional Rent due for the Term (collectively referred to as "RENT"). "ADDITIONAL RENT" means all sums (exclusive of Base Rent) that Tenant is required to pay Landlord under this Lease. Tenant shall pay and be liable for all rental, sales and use taxes (but excluding income taxes), if any, imposed upon or measured by Rent. Base Rent and recurring monthly charges of Additional Rent shall be due and payable in advance on the first day of each calendar month without notice or demand, provided that the first installment of Base Rent and the first monthly installment of Additional Rent for Expenses and Taxes shall be payable on December 1, 2004 (and shall apply to the month of January 2005 unless the Commencement Date does not occur on or before January 1, 2005, in which event such payment shall apply to the first full calendar month of the Term). All other items of Rent shall be due and payable by Tenant on or before 30 days after billing by Landlord. Rent shall be made payable to the entity, and sent to the address, Landlord designates in writing and shall be made by good and sufficient check or by other means acceptable to Landlord. Tenant shall pay Landlord an administration fee equal to 5% of all past due Rent, provided that Tenant shall be entitled to a grace period of 5 days for the first 2 late payments of Rent in a calendar year. In addition, past due Rent shall accrue interest at 12% per annum. Landlord's acceptance of less than the correct amount of Rent shall be considered a payment on account of the earliest Rent due. Rent for any partial month during the Term shall be prorated based on the actual number of days in such month. No endorsement or statement on a check or letter accompanying payment shall be considered an accord and satisfaction. Tenant's covenant to pay Rent is independent of every other covenant in this Lease.
4.02 Tenant shall pay Tenant's Pro Rata Share of Taxes and Expenses in accordance with EXHIBIT B of this Lease.
5. COMPLIANCE WITH LAWS; USE.
The Premises shall be used for the Permitted Use and for no other use whatsoever. Tenant shall comply with all statutes, codes, ordinances, orders, rules and regulations of any municipal or governmental entity whether in effect now or later, including the Americans with Disabilities Act (the "ADA") (collectively, "LAW(S)"), regarding the operation of Tenant's business and the use, condition, configuration and occupancy of the Premises. In addition, Tenant shall, at its sole cost and expense, promptly comply with any Laws that relate to the "Base Building" (defined below), but only to the extent such obligations are triggered by Tenant's use of the Premises, other than for general office use, or Alterations or improvements in the Premises performed or requested by Tenant. "BASE BUILDING" shall include the structural portions of the Building, the Common Areas (including the public restrooms) and the Building mechanical, electrical and plumbing systems and equipment located in the internal core of the Building on the floor or floors on which the Premises are located. Tenant shall promptly provide Landlord with copies of any notices it receives regarding an alleged violation of Law. Tenant shall comply with the rules and regulations of the Building attached as EXHIBIT E and such other reasonable rules and regulations adopted by Landlord from time to time, including rules and regulations for the performance of Alterations (defined in Section 9).
Landlord shall, at Landlord's expense (except to the extent properly
included in Expenses), be responsible for correcting any violation of Law
(including, without limitation, the ADA) with respect to the Base Building;
provided, however, that Landlord shall not be responsible for correcting any
such violation to the extent such violation (i) is caused or triggered by any of
the matters that are Tenant's responsibility under any provision of this Lease,
including, without limitation, the preceding paragraph or Section 9 below, or
(ii) arises under any provision of the ADA other than Title III thereof.
Notwithstanding the foregoing, Landlord shall have the right to contest any
alleged violation in good faith, including, without limitation, the right to
apply for and obtain a waiver or deferment of compliance,
the right to assert any and all defenses allowed by Law and the right to appeal any decisions, judgments or rulings to the fullest extent permitted by Law. Landlord, after the exhaustion of any and all rights to appeal or contest, will make all repairs, additions, alterations or improvements necessary to comply with the terms of any final order or judgment, provided that if Landlord elects not to contest any alleged violation, Landlord will promptly make all repairs, additions, alterations or improvements necessary to comply with the notice of violation. Landlord represents and warrants to Tenant that, as of the date hereof, Landlord has not received written notice from any governmental agency that the Building is in violation of the ADA.
6. SECURITY DEPOSIT.
The Security Deposit, if any, shall be delivered to Landlord upon the execution of this Lease by Tenant and held by Landlord without liability for interest (unless required by Law) as security for the performance of Tenant's obligations. The Security Deposit is not an advance payment of Rent or a measure of damages. Landlord may use all or a portion of the Security Deposit to satisfy past due Rent or to cure any Default (defined in Section 18) by Tenant. If Landlord uses any portion of the Security Deposit, Tenant shall, within 5 days after demand, restore the Security Deposit to its original amount. Landlord shall return any unapplied portion of the Security Deposit to Tenant within 45 days after the later to occur of: (a) determination of the final Rent due from Tenant; or (b) the later to occur of the Termination Date or the date Tenant surrenders the Premises to Landlord in compliance with Section 25. Landlord may assign the Security Deposit to a successor or transferee and, following the assignment, Landlord shall have no further liability for the return of the Security Deposit. Landlord shall not be required to keep the Security Deposit separate from its other accounts.
7. BUILDING SERVICES.
7.01 Landlord shall furnish Tenant with the following services: (a) water for use in the Base Building lavatories and drinking fountains and any lavatories and kitchenettes located in the Premises; (b) customary heat and air conditioning in season during Building Service Hours. Tenant shall have the right to receive HVAC service during hours other than Building Service Hours by paying Landlord's then standard charge for additional HVAC service and providing such prior notice as is reasonably specified by Landlord; (c) standard janitorial service on Business Days (which janitorial service shall be in accordance with the standards generally met by other class "A" office buildings in the Bellevue Central Business District); (d) elevator service; (e) electricity in accordance with the terms and conditions in Section 7.02; (f) access to the Building for Tenant and its employees 24 hours per day/7 days per week, subject to the terms of this Lease and such security or monitoring systems as Landlord may reasonably impose, including, without limitation, sign-in procedures and/or presentation of identification cards; and (g) such other services as Landlord reasonably determines are necessary or appropriate for the Property.
7.02 Electricity used by Tenant in the Premises shall, at Landlord's option, be paid for by Tenant either: (a) through inclusion in Expenses (except as provided for excess usage); (b) by a separate charge payable by Tenant to Landlord based on Tenant's usage; or (c) if the Premises is separately metered, by separate charge billed by the applicable utility company and payable directly by Tenant. Without the consent of Landlord, Tenant's use of electrical service shall not exceed, either in voltage, rated capacity, use beyond Building Service Hours or overall load, that which Landlord reasonably deems to be standard for the Building. Landlord shall have the right to measure electrical usage by commonly accepted methods. If it is determined that Tenant is using excess electricity, Tenant shall pay Landlord for the cost of such excess electrical usage as Additional Rent.
7.03 Landlord's failure to furnish, or any interruption, diminishment or termination of services due to the application of Laws, the failure of any equipment, the performance of repairs, improvements or alterations, utility interruptions or the occurrence of an event of Force Majeure (defined in Section 26.03) (collectively a "SERVICE FAILURE") shall not render Landlord liable to Tenant, constitute a constructive eviction of Tenant, give rise to an abatement of Rent, nor relieve Tenant from the obligation to fulfill any covenant or agreement. However, if the Premises, or a material portion of the Premises, are made untenantable for a period in excess of 3 consecutive Business Days as a result of a Service Failure that is reasonably within the control of Landlord to correct, then Tenant, as its sole remedy, shall be entitled to receive an abatement of Rent payable hereunder during the period beginning on the 4th consecutive Business Day of the Service Failure and ending on the day the service has been restored. If the entire Premises have not been rendered untenantable by the Service Failure, the amount of abatement shall be equitably prorated. Notwithstanding the foregoing, if a Service Failure is reasonably within the control of Landlord and (a) continues for 180 consecutive days after the Service Failure and (b) is not being diligently remedied by Landlord, then Tenant, as its sole remedy, shall have the right to elect to terminate this Lease within 10 days after the expiration of said 180-day period without penalty, by delivering written notice to Landlord of its election thereof; provided, however, that if Landlord is diligently pursuing the repair or restoration of the service, Tenant shall not be entitled to terminate this Lease but rather Tenant's sole remedy shall be to abate Rent as provided above. The foregoing termination right
shall not apply if the Service Failure is due to fire or other casualty; instead, in such event, the terms and provisions of Section 16 shall apply.
8. LEASEHOLD IMPROVEMENTS.
All improvements in and to the Premises, including any Alterations (collectively, "LEASEHOLD IMPROVEMENTS") shall remain upon the Premises at the end of the Term without compensation to Tenant. Landlord, however, by written notice to Tenant at least 30 days prior to the Termination Date, may require Tenant, at its expense, to remove (a) any Cable (defined in Section 9.01) installed by or for the benefit of Tenant, and (b) any Landlord Work or Alterations that, in Landlord's reasonable judgment, are of a nature that would require removal and repair costs that are materially in excess of the removal and repair costs associated with standard office improvements (collectively referred to as "REQUIRED REMOVABLES"). Required Removables shall include, without limitation, internal stairways, raised floors, personal baths and showers, vaults, rolling file systems and structural alterations and modifications. The designated Required Removables shall be removed by Tenant before the Termination Date. Tenant shall repair damage caused by the installation or removal of Required Removables. If Tenant fails to perform its obligations in a timely manner, Landlord may perform such work at Tenant's expense. Tenant, at the time it requests approval for a proposed Alteration, may request in writing that Landlord advise Tenant whether the Alteration or any portion of the Alteration is a Required Removable. Within 10 days after receipt of Tenant's request, Landlord shall advise Tenant in writing as to which portions of the Alteration are Required Removables. Tenant shall have the right, subject to Landlord's prior written approval (which shall not be unreasonably withheld), to select all vendors for the installation of, and the provision of services relating to, Cable in the Premises.
9. REPAIRS AND ALTERATIONS.
9.01 Tenant shall periodically inspect the Premises to identify any conditions that are dangerous or in need of maintenance or repair. Tenant shall promptly provide Landlord with notice of any such conditions. Tenant shall, at its sole cost and expense, perform all maintenance and repairs to the Premises that are not Landlord's express responsibility under this Lease, and keep the Premises in good condition and repair, reasonable wear and tear and (subject to the terms of Section 16) damage by Casualty (defined in Section 16) excepted. Tenant's repair and maintenance obligations include, without limitation, repairs to: (a) floor covering; (b) interior partitions; (c) doors; (d) the interior side of demising walls; (e) electronic, phone, video and data cabling and related equipment that is installed by or for the exclusive benefit of Tenant (collectively, "CABLE"); (f) supplemental air conditioning units serving only the Premises, kitchens, including hot water heaters, plumbing, and similar facilities exclusively serving Tenant; and (g) Alterations. To the extent Landlord is not reimbursed by insurance proceeds, Tenant shall reimburse Landlord for the cost of repairing damage to the Building caused by the acts of Tenant, Tenant Related Parties and their respective contractors and vendors. If Tenant fails to make any repairs to the Premises for more than 15 days after notice from Landlord (although notice shall not be required in an emergency), Landlord may make the repairs, and Tenant shall pay the reasonable cost of the repairs, together with an administrative charge in an amount equal to 10% of the cost of the repairs.
9.02 Landlord shall keep and maintain in good repair and working order
and perform maintenance upon the: (a) structural elements of the Building
(including foundation); (b) mechanical (including HVAC), electrical, plumbing
and fire/life safety systems serving the Building in general; (c) Common Areas;
(d) roof of the Building; (e) exterior doors and windows of the Building; and
(f) elevators serving the Building. Landlord shall promptly make repairs for
which Landlord is responsible.
9.03 Tenant shall not make alterations, repairs, additions or improvements or install any Cable (collectively referred to as "ALTERATIONS") without first obtaining the written consent of Landlord in each instance, which consent shall not be unreasonably withheld, conditioned or delayed. However, Landlord's consent shall not be required for any Alteration that satisfies all of the following criteria (a "COSMETIC ALTERATION"): (a) is of a cosmetic nature such as painting, wallpapering, hanging pictures and installing carpeting; (b) is not visible from the exterior of the Premises or Building; (c) will not affect the Base Building; and (d) does not require work to be performed inside the walls or above the ceiling of the Premises. Cosmetic Alterations shall be subject to all the other provisions of this Section 9.03. Prior to starting work, Tenant shall furnish Landlord with plans and specifications; names of contractors reasonably acceptable to Landlord (provided that Landlord may designate specific contractors with respect to Base Building); required permits and approvals; evidence of contractor's and subcontractor's insurance in amounts reasonably required by Landlord and naming Landlord as an additional insured; and any security for performance in amounts reasonably required by Landlord. Changes to the plans and specifications must also be submitted to Landlord for its approval. Alterations shall be constructed in a good and workmanlike manner using materials of a quality reasonably approved by Landlord. Tenant shall reimburse Landlord for any sums paid by Landlord for third party examination of Tenant's plans for non-Cosmetic Alterations. In addition, Tenant shall pay Landlord a fee for Landlord's oversight and coordination of any non-Cosmetic Alterations equal to 10% of the cost of the Alterations. Upon completion, Tenant shall furnish "as-built" plans for non-Cosmetic Alterations, completion affidavits and
full and final waivers of lien. Landlord's approval of an Alteration shall not be deemed a representation by Landlord that the Alteration complies with Law.
10. ENTRY BY LANDLORD.
Landlord may enter the Premises to inspect, show or clean the Premises or to perform or facilitate the performance of repairs, alterations or additions to the Premises or any portion of the Building. Except in emergencies or to provide Building services, Landlord shall provide Tenant with reasonable prior verbal notice of entry and shall use reasonable efforts to minimize any interference with Tenant's use of the Premises. If reasonably necessary, Landlord may temporarily close all or a portion of the Premises to perform repairs, alterations and additions. However, except in emergencies, Landlord will not close the Premises if the work can reasonably be completed on weekends and after Building Service Hours. Entry by Landlord in accordance with the terms of this Section 10 shall not constitute a constructive eviction or entitle Tenant to an abatement or reduction of Rent.
11. ASSIGNMENT AND SUBLETTING.
11.01 Except in connection with a Permitted Transfer (defined in
Section 11.04), Tenant shall not assign, sublease, transfer or encumber any
interest in this Lease or allow any third party to use any portion of the
Premises (collectively or individually, a "TRANSFER") without the prior written
consent of Landlord, which consent shall not be unreasonably withheld,
conditioned or delayed if Landlord does not exercise its recapture rights under
Section 11.02. If the entity which controls the voting shares/rights of Tenant
changes at any time, such change of ownership or control shall constitute a
Transfer unless Tenant is an entity whose outstanding stock is listed on a
recognized securities exchange or if at least 80% of its voting stock is owned
by another entity, the voting stock of which is so listed. Any attempted
Transfer in violation of this Section is voidable by Landlord. In no event shall
any Transfer, including a Permitted Transfer, release or relieve Tenant from any
obligation under this Lease.
11.02 Tenant shall provide Landlord with financial statements for the proposed transferee, a fully executed copy of the proposed assignment, sublease or other Transfer documentation (or an unexecuted copy of the same in substantially the same form as that which is to be executed by the parties thereto) and such other information as Landlord may reasonably request. Within 15 Business Days after receipt of the required information and documentation, Landlord shall either: (a) consent to the Transfer by execution of a consent agreement in a form reasonably designated by Landlord; (b) reasonably refuse to consent to the Transfer in writing; or (c) in the event of an assignment of this Lease or subletting of more than 20% of the Rentable Square Footage of the Premises for more than 50% of the remaining Term (excluding unexercised options), recapture the portion of the Premises that Tenant is proposing to Transfer. If Tenant has not previously done so, Tenant shall provide Landlord with a fully executed copy of the assignment, sublease or other Transfer documentation promptly following the full execution thereof. If Landlord exercises its right to recapture, this Lease shall automatically be amended (or terminated if the entire Premises is being assigned or sublet) to delete the applicable portion of the Premises effective on the proposed effective date of the Transfer. Tenant shall pay Landlord a review fee of $1,500.00 for Landlord's review of any Permitted Transfer or requested Transfer.
11.03 Tenant shall pay Landlord 50% of all rent and other consideration which Tenant receives as a result of a Transfer that is in excess of the Rent payable to Landlord for the portion of the Premises and Term covered by the Transfer. Tenant shall pay Landlord for Landlord's share of the excess within 30 days after Tenant's receipt of the excess. Tenant may deduct from the excess, on a straight-line basis, all reasonable and customary expenses directly incurred by Tenant attributable to the Transfer, including brokerage fees, legal fees and construction costs. If Tenant is in Default, Landlord may require that all sublease payments be made directly to Landlord, in which case Tenant shall receive a credit against Rent in the amount of Tenant's share of payments received by Landlord.
11.04 Tenant may assign this Lease to a successor to Tenant by
purchase, merger, consolidation or reorganization (an "OWNERSHIP CHANGE") or
assign this Lease or sublet all or a portion of the Premises to an Affiliate
without the consent of Landlord, provided that all of the following conditions
are satisfied (a "PERMITTED TRANSFER"): (a) Tenant is not in Default; (b) in the
event of an Ownership Change, Tenant's successor shall own substantially all of
the assets of Tenant and have a net worth which is at least equal to Tenant's
net worth as of the day prior to the proposed Ownership Change; (c) the
Permitted Use does not allow the Premises to be used for retail purposes; and
(d) Tenant shall give Landlord written notice at least 15 Business Days prior to
the effective date of the Permitted Transfer. Tenant's notice to Landlord shall
include information and documentation evidencing the Permitted Transfer and
showing that each of the above conditions has been satisfied. If requested by
Landlord, Tenant's successor shall sign a commercially reasonable form of
assumption agreement. "AFFILIATE" shall mean an entity controlled by,
controlling or under common control with Tenant.
12. LIENS.
Tenant shall not permit mechanics' or other liens to be placed upon the Property, Premises or Tenant's leasehold interest in connection with any work or service done or purportedly done by or for the benefit of Tenant or its transferees. Tenant shall give Landlord notice at least 15 days prior to the commencement of any work in the Premises to afford Landlord the opportunity, where applicable, to post and record notices of non-responsibility. Tenant, within 10 days of notice from Landlord, shall fully discharge any lien by settlement, by bonding or by insuring over the lien in the manner prescribed by the applicable lien Law. If Tenant fails to do so, Landlord may bond, insure over or otherwise discharge the lien. Tenant shall reimburse Landlord for any amount paid by Landlord, including, without limitation, reasonable attorneys' fees.
13. INDEMNITY AND WAIVER OF CLAIMS.
Tenant hereby waives all claims against and releases Landlord and its trustees, members, principals, beneficiaries, partners, officers, directors, employees, Mortgagees (defined in Section 23) and agents (the "LANDLORD RELATED PARTIES") from all claims for any injury to or death of persons, damage to property or business loss in any manner related to (a) Force Majeure, (b) acts of third parties (to the extent not acting as agents of Landlord), (c) the bursting or leaking of any tank, water closet, drain or other pipe (except to the extent resulting from Landlord's failure to maintain the same as required under this Lease), (d) the inadequacy or failure of any security services, personnel or equipment, or (e) any matter not within the reasonable control of Landlord. Except to the extent caused by the negligence or willful misconduct of Landlord or any Landlord Related Parties, Tenant shall indemnify, defend and hold Landlord and Landlord Related Parties harmless against and from all liabilities, obligations, damages, penalties, claims, actions, costs, charges and expenses, including, without limitation, reasonable attorneys' fees and other professional fees (if and to the extent permitted by Law) (collectively referred to as "LOSSES"), which may be imposed upon, incurred by or asserted against Landlord or any of the Landlord Related Parties by any third party and arising out of or in connection with any damage or injury occurring in the Premises or any acts or omissions (including violations of Law) of Tenant, the Tenant Related Parties or any of Tenant's transferees, contractors or licensees. Except to the extent caused by the negligence or willful misconduct of Tenant or any Tenant Related Parties, Landlord shall indemnify, defend and hold Tenant, its trustees, members, principals, beneficiaries, partners, officers, directors, employees and agents ("TENANT RELATED PARTIES") harmless against and from all Losses which may be imposed upon, incurred by or asserted against Tenant or any of the Tenant Related Parties by any third party and arising out of or in connection with the acts or omissions (including violations of Law) of Landlord or the Landlord Related Parties.
14. INSURANCE.
Tenant shall maintain the following insurance ("TENANT'S INSURANCE"):
(a) Commercial General Liability Insurance applicable to the Premises and its
appurtenances providing, on an occurrence basis, a minimum combined single limit
of $2,000,000.00; (b) Property/Business Interruption Insurance written on an All
Risk or Special Perils form, with coverage for broad form water damage including
earthquake sprinkler leakage, at replacement cost value and with a replacement
cost endorsement covering all of Tenant's business and trade fixtures,
equipment, movable partitions, furniture, merchandise and other personal
property within the Premises ("TENANT'S PROPERTY") and any Leasehold
Improvements performed by or for the benefit of Tenant; (c) Workers'
Compensation Insurance in amounts required by Law; and (d) Employers Liability
Coverage of at least $1,000,000.00 per occurrence (provided that if this
coverage is unavailable from the Worker's Compensation carrier or applicable
State Fund, a "Stop Gap Liability" endorsement to the Commercial General
Liability Policy is acceptable). Any company writing Tenant's Insurance shall
have an A.M. Best rating of not less than A-VIII (provided, however, that, until
June 16, 2004, Atlantic Mutual Insurance Company may write Tenant's Insurance
even though its A.M. Best rating is less than A-VIII, but only so long as its
A.M. Best rating is not less than B+). All Commercial General Liability
Insurance policies shall name as additional insureds Landlord (or its successors
and assignees), the managing agent for the Building (or any successor), EOP
Operating Limited Partnership, Equity Office Properties Trust and their
respective members, principals, beneficiaries, partners, officers, directors,
employees, and agents, and other designees of Landlord and its successors as the
interest of such designees shall appear. All policies of Tenant's Insurance
shall contain endorsements that the insurer(s) shall give Landlord and its
designees at least 30 days' advance written notice of any cancellation,
termination, material change or lapse of insurance. Tenant shall provide
Landlord with a certificate of insurance evidencing Tenant's Insurance prior to
the earlier to occur of the Commencement Date or the date Tenant is provided
with possession of the Premises, and thereafter as necessary to assure that
Landlord always has current certificates evidencing Tenant's Insurance. Landlord
shall maintain so called All Risk property insurance on the Building at
replacement cost value as reasonably estimated by Landlord.
15. SUBROGATION.
Landlord and Tenant hereby waive and shall cause their respective insurance carriers to waive any and all rights of recovery, claims, actions or causes of action against the other for any loss or damage with respect to Tenant's Property, Leasehold Improvements, the Building, the Premises, or any contents thereof, including rights, claims, actions and causes of action based on negligence, which loss or damage is (or would have been, had the insurance required by this Lease been carried) covered by insurance.
16. CASUALTY DAMAGE.
16.01 If all or any portion of the Premises becomes untenantable by fire or other casualty to the Premises (collectively a "CASUALTY"), Landlord, with reasonable promptness, shall cause a general contractor selected by Landlord to provide Landlord and Tenant with a written estimate of the amount of time required using standard working methods to Substantially Complete the repair and restoration of the Premises and any Common Areas necessary to provide access to the Premises ("COMPLETION ESTIMATE"). If the Completion Estimate indicates that the Premises or any Common Areas necessary to provide access to the Premises cannot be made tenantable within 270 days from the date the repair is started, then either party shall have the right to terminate this Lease upon written notice to the other within 10 days after receipt of the Completion Estimate, in which event such termination shall be effective as of the date of the Casualty. Tenant, however, shall not have the right to terminate this Lease if the Casualty was caused by the negligence or intentional misconduct of Tenant or any Tenant Related Parties. In addition, Landlord, by notice to Tenant within 90 days after the date of the Casualty, shall have the right to terminate this Lease if: (1) the Premises have been materially damaged and there is less than 2 years of the Term remaining on the date of the Casualty; (2) any Mortgagee requires that the insurance proceeds be applied to the payment of the mortgage debt; or (3) a material uninsured loss to the Building occurs. In addition to Landlord's right to terminate as provided herein, Tenant shall have the right to terminate this Lease if: (a) a substantial portion of the Premises has been damaged by the Casualty and such damage cannot reasonably be repaired within 60 days after receipt of the Completion Estimate; (b) there is less than 1 year of the Term remaining on the date of such Casualty; (c) the Casualty was not caused by the negligence or willful misconduct of Tenant or its agents, employees or contractors; and (d) Tenant provides Landlord with written notice of its intent to terminate within 30 days after the date of the Casualty.
16.02 If this Lease is not terminated, Landlord shall promptly and diligently, subject to reasonable delays for insurance adjustment or other matters beyond Landlord's reasonable control, restore the Premises and Common Areas. Such restoration shall be to substantially the same condition that existed prior to the Casualty, except for modifications required by Law or any other modifications to the Common Areas deemed desirable by Landlord. Upon notice from Landlord, Tenant shall assign to Landlord (or to any party designated by Landlord) all property insurance proceeds payable to Tenant under Tenant's Insurance with respect to any Leasehold Improvements performed by or for the benefit of Tenant; provided if the estimated cost to repair such Leasehold Improvements (as reasonably determined by Landlord, assuming that such repair will be performed pursuant to a construction contract providing for a guaranteed maximum price) exceeds the amount of insurance proceeds received by Landlord from Tenant's insurance carrier, the excess cost of such repairs shall be paid by Tenant to Landlord prior to Landlord's commencement of repairs. Landlord shall not be liable for any inconvenience to Tenant, or injury to Tenant's business resulting in any way from the Casualty or the repair thereof. Provided that Tenant is not in Default, during any period of time that all or a material portion of the Premises is rendered untenantable as a result of a Casualty, the Rent shall abate for the portion of the Premises that is untenantable and not used by Tenant.
17. CONDEMNATION.
Either party may terminate this Lease if any material part of the Premises is taken or condemned for any public or quasi-public use under Law, by eminent domain or private purchase in lieu thereof (a "TAKING"). Landlord shall also have the right to terminate this Lease if there is a Taking of any portion of the Building or Property which would have a material adverse effect on Landlord's ability to profitably operate the remainder of the Building. Tenant shall also have the right to terminate this Lease if there is a Taking of any portion of the Building or Property which would have a material adverse effect on Tenant's ability to profitably operate its business for the Permitted Use in the Premises. The terminating party shall provide written notice of termination to the other party within 45 days after it first receives notice of the Taking. The termination shall be effective on the date the physical taking occurs. If this Lease is not terminated, Base Rent and Tenant's Pro Rata Share shall be appropriately adjusted to account for any reduction in the square footage of the Building or Premises. All compensation awarded for a Taking shall be the property of Landlord. The right to receive compensation or proceeds are expressly waived by Tenant, however, Tenant may file a separate claim for Tenant's Property and Tenant's reasonable relocation expenses, provided the filing of the claim does not diminish the amount of Landlord's award. If only a part of the Premises is subject to a Taking and this Lease is not
terminated, Landlord, with reasonable diligence, will restore the remaining portion of the Premises as nearly as practicable to the condition immediately prior to the Taking.
18. EVENTS OF DEFAULT.
Each of the following occurrences shall be a "DEFAULT": (a) Tenant's
failure to pay any portion of Rent when due, if the failure continues for 3
Business Days after written notice to Tenant ("MONETARY DEFAULT"); (b) Tenant's
failure (other than a Monetary Default) to comply with any term, provision,
condition or covenant of this Lease, if the failure is not cured within 10
Business Days after written notice to Tenant provided, however, if Tenant's
failure to comply cannot reasonably be cured within 10 Business Days, Tenant
shall be allowed additional time (not to exceed 90 days) as is reasonably
necessary to cure the failure so long as Tenant begins the cure within 10
Business Days and diligently pursues the cure to completion; (c) Tenant or any
Guarantor becomes insolvent, makes a transfer in fraud of creditors, makes an
assignment for the benefit of creditors, admits in writing its inability to pay
its debts when due or forfeits or loses its right to conduct business; (d) the
leasehold estate is taken by process or operation of Law (other than by means of
a Taking); (e) in the case of any ground floor or retail Tenant, Tenant does not
take possession of or abandons or vacates all or any portion of the Premises;
(f) Tenant is in default beyond any notice and cure period under any other lease
or agreement with Landlord at the Building or Property; or (g) the occurrence of
a Sunset North Default (as defined in Section VIII.B of EXHIBIT F attached
hereto). If Landlord provides Tenant with notice of Tenant's failure to comply
with any specific provision of this Lease on 3 separate occasions during any
period of 12 consecutive months, Tenant's subsequent violation of such provision
shall, at Landlord's option, be an incurable Default by Tenant. All notices sent
under this Section shall be in satisfaction of, and not in addition to, notice
required by Law.
19. REMEDIES.
19.01 Upon Default, Landlord shall have the right to pursue any one or more of the following remedies:
(a) Terminate this Lease, in which case Tenant shall immediately surrender the Premises to Landlord. If Tenant fails to surrender the Premises, Landlord, in compliance with Law, may enter upon and take possession of the Premises and remove Tenant, Tenant's Property and any party occupying the Premises. Tenant shall pay Landlord, on demand, all past due Rent and other losses and damages Landlord suffers as a result of Tenant's Default, including, without limitation, all Costs of Reletting (defined below) and any deficiency that may arise from reletting or the failure to relet the Premises. "COSTS OF RELETTING" shall include all reasonable costs and expenses incurred by Landlord in reletting or attempting to relet the Premises, including, without limitation, legal fees, brokerage commissions, the cost of alterations and the value of other concessions or allowances granted to a new tenant.
(b) Terminate Tenant's right to possession of the Premises and, in compliance with Law, remove Tenant, Tenant's Property and any parties occupying the Premises. Landlord may (but, except to the extent, if any, required by applicable Law, shall not be obligated to) relet all or any part of the Premises, without notice to Tenant, for such period of time and on such terms and conditions (which may include concessions, free rent and work allowances) as Landlord in its absolute discretion shall determine. Landlord may collect and receive all rents and other income from the reletting. Tenant shall pay Landlord on demand all past due Rent, all Costs of Reletting and any deficiency arising from the reletting or failure to relet the Premises. The re-entry or taking of possession of the Premises shall not be construed as an election by Landlord to terminate this Lease.
19.02 In lieu of calculating damages under Section 19.01, Landlord may elect to receive as damages the sum of (a) all Rent accrued through the date of termination of this Lease or Tenant's right to possession, and (b) an amount equal to the total Rent that Tenant would have been required to pay for the remainder of the Term discounted to present value, minus the then present fair rental value of the Premises for the remainder of the Term, similarly discounted, after deducting all anticipated Costs of Reletting. If Tenant is in Default of any of its non-monetary obligations under the Lease, Landlord shall have the right to perform such obligations. Tenant shall reimburse Landlord for the cost of such performance upon demand together with an administrative charge equal to 10% of the cost of the work performed by Landlord. The repossession or re-entering of all or any part of the Premises shall not relieve Tenant of its liabilities and obligations under this Lease. No right or remedy of Landlord shall be exclusive of any other right or remedy. Each right and remedy shall be cumulative and in addition to any other right and remedy now or subsequently available to Landlord at Law or in equity.
20. LIMITATION OF LIABILITY.
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS LEASE, THE LIABILITY OF LANDLORD (AND OF ANY SUCCESSOR LANDLORD) SHALL BE LIMITED TO THE LESSER OF (A) THE INTEREST OF LANDLORD IN THE PROPERTY, OR (B) THE EQUITY
INTEREST LANDLORD WOULD HAVE IN THE PROPERTY IF THE PROPERTY WERE ENCUMBERED BY THIRD PARTY DEBT IN AN AMOUNT EQUAL TO 70% OF THE VALUE OF THE PROPERTY. TENANT SHALL LOOK SOLELY TO LANDLORD'S INTEREST IN THE PROPERTY FOR THE RECOVERY OF ANY JUDGMENT OR AWARD AGAINST LANDLORD OR ANY LANDLORD RELATED PARTY. NEITHER LANDLORD NOR ANY LANDLORD RELATED PARTY SHALL BE PERSONALLY LIABLE FOR ANY JUDGMENT OR DEFICIENCY, AND IN NO EVENT SHALL LANDLORD OR ANY LANDLORD RELATED PARTY BE LIABLE TO TENANT FOR ANY LOST PROFIT, DAMAGE TO OR LOSS OF BUSINESS OR ANY FORM OF SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGE. BEFORE FILING SUIT FOR AN ALLEGED DEFAULT BY LANDLORD, TENANT SHALL GIVE LANDLORD AND THE MORTGAGEE(S) WHOM TENANT HAS BEEN NOTIFIED HOLD MORTGAGES (DEFINED IN SECTION 23 BELOW), NOTICE AND REASONABLE TIME TO CURE THE ALLEGED DEFAULT. SUCH CURE PERIOD FOR LANDLORD SHALL BE AT LEAST 60 DAYS AFTER WRITTEN NOTICE OF DEFAULT FROM TENANT TO LANDLORD (OR, IF THE DEFAULT CANNOT REASONABLY BE CURED WITHIN SAID 60 DAY PERIOD, SUCH LONGER PERIOD OF TIME AS IS REASONABLY NECESSARY TO CURE SUCH DEFAULT, PROVIDED LANDLORD COMMENCES THE CURE WITHIN SUCH 60 DAY PERIOD AND DILIGENTLY PURSUES SAME), AND, FOR ANY MORTGAGEE, SUCH CURE PERIOD SHALL BE AT LEAST 60 DAYS AFTER THE LATER OF (i) WRITTEN NOTICE OF DEFAULT FROM TENANT TO SUCH MORTGAGEE, OR (ii) EXPIRATION OF THE CURE PERIOD AVAILABLE TO LANDLORD AS PROVIDED ABOVE (OR, IF THE DEFAULT CANNOT REASONABLY BE CURED WITHIN SAID 60 DAY PERIOD, SUCH LONGER PERIOD OF TIME AS IS REASONABLY NECESSARY TO CURE SUCH DEFAULT, PROVIDED MORTGAGEE COMMENCES THE CURE WITHIN SUCH 60 DAY PERIOD AND DILIGENTLY PURSUES SAME). NOTWITHSTANDING THE FOREGOING, IF TENANT AND ANY SUCH MORTGAGEE HAVE AGREED TO A LONGER PERIOD OF TIME IN ANY SEPARATE AGREEMENT BY AND BETWEEN SUCH PARTIES, THE TERMS OF SUCH SEPARATE AGREEMENT SHALL CONTROL AS BETWEEN TENANT AND SUCH MORTGAGEE.
21. RELOCATION. [INTENTIONALLY OMITTED]
22. HOLDING OVER.
If Tenant fails to surrender all or any part of the Premises at the termination of this Lease, occupancy of the Premises after termination shall be that of a tenancy at sufferance. Tenant's occupancy shall be subject to all the terms and provisions of this Lease, and Tenant shall pay an amount (on a per month basis without reduction for partial months during the holdover) equal to 150% of the sum of the Base Rent and Additional Rent due for the period immediately preceding the holdover. No holdover by Tenant or payment by Tenant after the termination of this Lease shall be construed to extend the Term or prevent Landlord from immediate recovery of possession of the Premises by summary proceedings or otherwise. If Landlord is unable to deliver possession of the Premises to a new tenant or to perform improvements for a new tenant as a result of Tenant's holdover and Tenant fails to vacate the Premises within 15 days after notice from Landlord, Tenant shall be liable for all damages that Landlord suffers from the holdover.
23. SUBORDINATION TO MORTGAGES; ESTOPPEL CERTIFICATE.
Tenant accepts this Lease subject and subordinate to any mortgage(s), deed(s) of trust, ground lease(s) or other lien(s) now or subsequently arising upon the Premises, the Building or the Property, and to renewals, modifications, refinancings and extensions thereof (collectively referred to as a "MORTGAGE"). The party having the benefit of a Mortgage shall be referred to as a "MORTGAGEE". This clause shall be self-operative, but upon request from a Mortgagee, Tenant shall execute a commercially reasonable subordination agreement in favor of the Mortgagee provided that such agreement contains commercially reasonable non-disturbance provisions. As an alternative, a Mortgagee shall have the right at any time to subordinate its Mortgage to this Lease. Upon request, Tenant, without charge, shall attorn to any successor to Landlord's interest in this Lease. Landlord and Tenant shall each, within 10 Business Days after receipt of a written request from the other, execute and deliver a commercially reasonable estoppel certificate to those parties as are reasonably requested by the other (including a Mortgagee or prospective purchaser). Without limitation, such estoppel certificate may include a certification as to the status of this Lease, the existence of any defaults and the amount of Rent that is due and payable. Notwithstanding the foregoing, upon written request by Tenant, Landlord will use reasonable efforts to obtain a non-disturbance, subordination and attornment agreement from Landlord's current Mortgagee on such Mortgagee's current standard form of agreement. "REASONABLE EFFORTS" of Landlord shall not require Landlord to pay any fee or other amount to any third party or incur any liability to obtain such agreement, it being agreed that Tenant shall be responsible for any fee or review costs charged by the Mortgagee. Upon request of Landlord, Tenant will execute the current Mortgagee's form of non-disturbance, subordination and attornment agreement (provided that it is in commercially reasonable form) and return the same to Landlord for execution by the Mortgagee. Landlord's failure to obtain a non-disturbance, subordination and attornment agreement for Tenant from the current Mortgagee shall have no effect on the rights, obligations and liabilities of Landlord and Tenant or be considered to be a default by Landlord hereunder.
Notwithstanding the foregoing in this Section 23 to the contrary, as a
condition precedent to the future subordination of this Lease to a future
Mortgage, Landlord shall be required to provide Tenant with a non-disturbance,
subordination, and attornment agreement in favor of Tenant from any Mortgagee
who comes into existence after the Commencement Date. Such non-disturbance,
subordination, and attornment agreement in favor of Tenant shall provide that,
so long as Tenant is paying the Rent due under the Lease and is not otherwise in
default under the Lease beyond any applicable cure period, its right to
possession and the other terms of the Lease shall remain in full force and
effect. Such non-disturbance, subordination, and attornment agreement may
include other commercially reasonable provisions in favor of the Mortgagee,
including, without limitation, additional time on behalf of the Mortgagee to
cure defaults of the Landlord and provide that (a) neither Mortgagee nor any
successor-in-interest shall be bound by (i) any payment of the Base Rent,
Additional Rent, or other sum due under this Lease for more than 1 month in
advance or (ii) any amendment or modification of the Lease made without the
express written consent of Mortgagee or any successor-in-interest; (b) neither
Mortgagee nor any successor-in-interest will be liable for (i) any act or
omission or warranties of any prior landlord (including Landlord), (ii) the
breach of any warranties or obligations relating to construction of improvements
on the Property or any tenant finish work performed or to have been performed by
any prior landlord (including Landlord), or (iii) the return of any security
deposit, except to the extent such deposits have been received by Mortgagee; and
(c) neither Mortgagee nor any successor-in-interest shall be subject to any
offsets or defenses which Tenant might have against any prior landlord
(including Landlord).
24. NOTICE.
All demands, approvals, consents or notices (collectively referred to
as a "NOTICE") shall be in writing and delivered by hand or sent by registered
or certified mail with return receipt requested or sent by overnight or same day
courier service at the party's respective Notice Address(es) set forth in
Section 1. Each notice shall be deemed to have been received on the earlier to
occur of actual delivery or the date on which delivery is refused, or, if Tenant
has vacated the Premises or any other Notice Address of Tenant without providing
a new Notice Address, on the date on which delivery is actually attempted.
Either party may, at any time, change its Notice Address (other than to a post
office box address) by giving the other party written notice of the new address.
25. SURRENDER OF PREMISES.
At the termination of this Lease or Tenant's right of possession, Tenant shall remove Tenant's Property from the Premises, and quit and surrender the Premises to Landlord, broom clean, and in good order, condition and repair, ordinary wear and tear and damage which Landlord is obligated to repair hereunder excepted. If Tenant fails to remove any of Tenant's Property within 2 days after termination of this Lease or Tenant's right to possession, Landlord, at Tenant's sole cost and expense, shall be entitled (but not obligated) to remove and store Tenant's Property. Landlord shall not be responsible for the value, preservation or safekeeping of Tenant's Property. Tenant shall pay Landlord, upon demand, the expenses and storage charges incurred. If Tenant fails to remove Tenant's Property from the Premises or storage, within 30 days after notice, Landlord may deem all or any part of Tenant's Property to be abandoned and title to Tenant's Property shall vest in Landlord.
26. MISCELLANEOUS.
26.01 This Lease shall be interpreted and enforced in accordance with the Laws of the state or commonwealth in which the Building is located and Landlord and Tenant hereby irrevocably consent to the jurisdiction and proper venue of such state or commonwealth. If any term or provision of this Lease shall to any extent be void or unenforceable, the remainder of this Lease shall not be affected. If there is more than one Tenant or if Tenant is comprised of more than one party or entity, the obligations imposed upon Tenant shall be joint and several obligations of all the parties and entities, and requests or demands from any one person or entity comprising Tenant shall be deemed to have been made by all such persons or entities. Notices to any one person or entity shall be deemed to have been given to all persons and entities. Each of Landlord and Tenant represents and warrants to the other that each individual executing this Lease on behalf of such party is authorized to do so on behalf of such party and that such party is not, and the entities or individuals constituting such party or which may own or control such party or which may be owned or controlled by such party are not, among the individuals or entities identified on any list compiled pursuant to Executive Order 13224 for the purpose of identifying suspected terrorists.
26.02 If either party institutes a suit against the other for violation of or to enforce any covenant, term or condition of this Lease, the prevailing party shall be entitled to all of its costs and expenses, including, without limitation, reasonable attorneys' fees. Landlord and Tenant hereby waive any right to trial by jury in any proceeding based upon a breach of this Lease. Either party's failure to declare a default immediately upon its occurrence, or delay in taking action for a default, shall not constitute a waiver of the default, nor shall it constitute an estoppel.
26.03 Whenever a period of time is prescribed for the taking of an action by Landlord or Tenant (other than the delivery of any Security Deposit or Letter of Credit or the payment of Rent), the period of time for the performance of such action shall be extended by the number of days that the performance is actually delayed due to strikes, acts of God, shortages of labor or materials, war, terrorist acts, civil disturbances and other causes beyond the reasonable control of the performing party ("FORCE MAJEURE").
26.04 Landlord shall have the right to transfer and assign, in whole or
in part, all of its rights and obligations under this Lease and in the Building
and Property. Upon transfer Landlord shall be released from, and Tenant agrees
to look solely to the successor in interest of Landlord for the performance of:
(a) any further obligations hereunder relating to the handling of any Security
Deposit or Letter of Credit, provided that such Security Deposit or Letter of
Credit has actually been transferred to such successor in interest, or (b) any
further obligations hereunder not described in the preceding clause (a),
provided in each case that any successor pursuant to a voluntary, third party
transfer (but not as part of an involuntary transfer resulting from a
foreclosure or deed in lieu thereof) shall have assumed in writing Landlord's
obligations under this Lease.
26.05 Landlord has delivered a copy of this Lease to Tenant for Tenant's review only and the delivery of it does not constitute an offer to Tenant or an option.
(a) Tenant represents that it has dealt directly with and only with the Broker as a broker in connection with this Lease. Tenant shall indemnify and hold Landlord and the Landlord Related Parties harmless from all claims of any other brokers claiming to have represented Tenant in connection with this Lease. Landlord agrees to indemnify and hold Tenant and the Tenant Related Parties harmless from all claims of any brokers claiming to have represented Landlord in connection with this Lease. Landlord agrees to pay a brokerage commission to the Broker in accordance with the terms of a separate written commission agreement to be entered into between Landlord and the Broker, provided that in no event shall Landlord be obligated to pay a commission to the Broker in connection with any extension of the Term or in connection with any additional space that is leased by Tenant pursuant to the terms of this Lease except as may be specifically provided otherwise in such written agreement or future written agreement between Landlord and the Broker.
(b) Agency Disclosure. At the signing of this Lease, Landlord's leasing agents, Susan J. Murphy and Don Matt, of Equity Office Properties Management Corp. represented (X) Landlord, (___) Tenant, or (___) both Landlord and Tenant. At the signing of this Lease, Tenant was not represented by any leasing agent. Each party signing this document confirms that the prior oral and/or written disclosure of agency was provided to such party in this transaction, as required by RCW 18.86.030(1)(g).
(c) Landlord and Tenant, by their execution of this Lease, each acknowledge and agree that they have timely received a pamphlet on the law of real estate agency as required under RCW 18.86.030(1)(f).
26.06 Time is of the essence with respect to Tenant's exercise of any expansion, renewal or extension rights granted to Tenant. The expiration of the Term, whether by lapse of time, termination or otherwise, shall not relieve either party of any obligations which accrued prior to or which may continue to accrue after the expiration or termination of this Lease.
26.07 Tenant may peacefully have, hold and enjoy the Premises, subject to the terms of this Lease, provided Tenant pays the Rent and fully performs all of its covenants and agreements. This covenant shall be binding upon Landlord and its successors only during its or their respective periods of ownership of the Building.
26.08 This Lease does not grant any rights to light or air over or about the Building. Landlord excepts and reserves exclusively to itself any and all rights not specifically granted to Tenant under this Lease. This Lease constitutes the entire agreement between the parties and supersedes all prior agreements and understandings related to the Premises, including all lease proposals, letters of intent and other documents. Neither party is relying upon any warranty, statement or representation not contained in this Lease. This Lease may be modified only by a written agreement signed by an authorized representative of Landlord and Tenant.
Landlord and Tenant have executed this Lease as of the day and year first above written.
LANDLORD:
WA-110 ATRIUM PLACE, L.L.C.,
A DELAWARE LIMITED LIABILITY COMPANY
By: Equity Office Management, L.L.C., a
Delaware limited liability company, its
non-member manager
By: __________________________
M. PATRICK CALLAHAN
SENIOR VICE PRESIDENT - SEATTLE REGION
TENANT:
BSQUARE CORPORATION, A WASHINGTON CORPORATION
By: _____________________________
Name: _____________________________
Title: _____________________________
Tenant's Tax ID Number (SSN or FEIN):
91-1650880
LANDLORD ACKNOWLEDGMENTS
STATE OF Washington)
COUNTY OF King )ss:
I, the undersigned, a Notary Public, in and for the County and State aforesaid, do hereby certify that M. Patrick Callahan, personally known to me to be the Senior Vice President - Seattle Region of Equity Office Management, L.L.C., a Delaware limited liability company, and personally known to me to be the same person whose name is subscribed to the foregoing instrument, appeared before me this day in person and acknowledged that as such officer of said entity being authorized so to do, (s)he executed the foregoing instrument on behalf of said entity, by subscribing the name of such entity by himself/herself as such officer, as a free and voluntary act, and as the free and voluntary act and deed of said entity under the foregoing instrument for the uses and purposes therein set forth.
GIVEN under my hand and official seal this ____ day of ______________________, 200__.
My Commission Expires: ________________
TENANT ACKNOWLEDGMENTS
STATE OF ___________________)
COUNTY OF __________________)ss:
On this the _____ day of __________________, 200__, before me a Notary
Public duly authorized in and for the said County in the State aforesaid to take
acknowledgments personally appeared _________________________________________.
known to me to be ________________________ President of BSQUARE CORPORATION, a
Washington corporation, one of the parties described in the foregoing
instrument, and acknowledged that as such officer, being authorized so to do,
(s)he executed the foregoing instrument on behalf of said corporation by
subscribing the name of such corporation by himself/herself as such officer and
caused the corporate seal of said corporation to be affixed thereto, as a free
and voluntary act, and as the free and voluntary act of said corporation, for
the uses and purposes therein set forth.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
My Commission Expires: ______________
EXHIBIT A-1
OUTLINE AND LOCATION OF PREMISES
EXHIBIT A-2
LEGAL DESCRIPTION
THE LAND REFERRED TO HEREIN IS SITUATED IN THE STATE OF WASHINGTON, COUNTY OF KING, AND IS DESCRIBED AS FOLLOWS:
PARCEL 1 :
THAT PORTION OF THE SOUTHWEST QUARTER OF THE NORTHEAST QUARTER OF SECTION 32, TOWNSHIP 25 NORTH, RANGE 5 EAST W.M., IN KING COUNTY, WASHINGTON, DESCRIBED AS FOLLOWS:
BEGINNING AT THE INTERSECTION OF THE EAST MARGIN OF 110TH AVENUE NORTHEAST, AS NOW ESTABLISHED WITH A LINE PARALLEL TO AND 277.5 FEET NORTH OF, WHEN MEASURED AT RIGHT ANGLES TO THE EAST-WEST CENTERLINE OF SAID SECTION 32;
THENCE EASTERLY ALONG SAID PARALLEL LINE TO A POINT IN A LINE PARALLEL TO AND
476.8 FEET WEST OF, WHEN MEASURED AT RIGHT ANGLES, TO THE EAST LINE OF SAID
SUBDIVISION;
THENCE NORTHERLY ALONG SAID PARALLEL LINE TO A POINT IN A LINE PARALLEL TO AND
577.5 FEET NORTH OF, WHEN MEASURED AT RIGHT ANGLES TO, THE SAID CENTER LINE OF
SAID SECTION;
THENCE WESTERLY ALONG SAID PARALLEL LINE, 14.09 FEET TO A POINT IN A LINE PARALLEL TO AND 162.00 FEET WEST OF, WHEN MEASURED AT RIGHT ANGLES TO, THE EAST LINE OF THE WEST THREE QUARTERS OF THE SOUTH HALF OF SAID SUBDIVISION; THENCE NORTHERLY ALONG SAID PARALLEL LINE TO THE SOUTH MARGIN OF NORTHEAST SECOND STREET AS NOW ESTABLISHED;
THENCE WESTERLY ALON SAID SOUTH MARGIN OF NORTHEAST SECOND STREET TO THE SAID EAST MARGIN OF 110TH AVENUE NORTHEAST;
THENCE SOUTHERLY ALONG SAID EAST MARGIN TO THE POINT OF BEGINNING.
PARCEL 2 :
A PERPETUAL AIR SPACE EASEMENT AS CONVEYED BY DOCUMENT RECORDED NOVEMBER 23, 1981 AS RECORDING NO. 8111230037 OVER AND ACROSS THE FOLLOWING DESCRIBED PROPERTY:
THAT PORTION OF THE SOUTHWEST QUARTER OF THE NORTHEAST QUARTER OF SECTION 32, TOWNSHIP 25 NORTH, RANGE 5 EAST W.M., IN KING COUNTY, WASHINGTON, DESCRIBED AS FOLLOWS:
BEGINNING AT THE INTERSECTION OF THE EAST MARGIN OF 110TH AVENUE NORTHEAST, AS NOW ESTABLISHED WITH A LINE PARALLEL TO AND 277.5 FEET NORTH OF, WHEN MEASURED AT RIGHT ANGLES TO THE EAST-WEST CENTERLINE OF SAID SECTION 32;
THENCE EASTERLY ALONG SAID PARALLEL LINE TO A POINT IN A LINE PARALLEL TO AND
476.8 FEET WEST OF, WHEN MEASURED AT RIGHT ANGLES, TO THE EAST LINE OF SAID
SUBDIVISION;
THENCE NORTHERLY ALONG SAID PARALLEL LINE TO A POINT IN A LINE PARALLEL TO AND
577.5 FEET NORTH OF, WHEN MEASURED AT RIGHT ANGLES TO, THE SAID CENTER LINE OF
SAID SECTION TO THE TRUE POINT OF BEGINNING OF THIS DESCRIPTION;
THENCE WESTERLY ALONG SAID PARALLEL LINE, 14.09 FEET TO A POINT IN A LINE PARALLEL TO AND 162.00 FEET WEST OF, WHEN MEASURED AT RIGHT ANGLES TO, THE EAST LINE OF THE WEST THREE QUARTERS OF THE SOUTH HALF OF SAID SUBDIVISION;
NORTHERLY ALONG SAID PARALLEL LINE TO THE SOUTH MARGIN OF NORTHEAST SECOND STREET AS NOW ESTABLISHED;
THENCE EASTERLY ALONG SAID SOUTH MARGIN OF NORTHEAST SECOND STREET 14.09 FEET;
THENCE SOUTHERLY ALONG A LINE PARALLEL TO THE EAST LINE OF THE WEST THREE QUARTERS OF THE SOUTH HALF OF SAID SUBDIVISION TO THE TRUE POINT OF BEGINNING.
BOTH SITUATE IN THE COUNTY OF KING, SATE OF WASHINGTON
EXHIBIT B
EXPENSES AND TAXES
This Exhibit is attached to and made a part of the Lease by and between WA-110
ATRIUM PLACE, L.L.C., A DELAWARE LIMITED LIABILITY COMPANY ("Landlord") and
BSQUARE CORPORATION, A WASHINGTON CORPORATION ("Tenant") for space in the
Building located at 110 110th Avenue NE, Bellevue, Washington, and commonly
known as 110 Atrium Place.
1. PAYMENTS.
1.01 Tenant shall pay Tenant's Pro Rata Share of the total amount of Expenses and Taxes for each calendar year during the Term. Landlord shall provide Tenant with a good faith estimate of the total amount of Expenses and Taxes for each calendar year during the Term. On or before the first day of each month, Tenant shall pay to Landlord a monthly installment equal to one-twelfth of Tenant's Pro Rata Share of Landlord's estimate of the total amount of Expenses and Taxes. If Landlord determines that its good faith estimate was incorrect by a material amount, Landlord may provide Tenant with a revised estimate. After its receipt of the revised estimate, Tenant's monthly payments shall be based upon the revised estimate. If Landlord does not provide Tenant with an estimate of the total amount of Expenses and Taxes at least 5 days before January 1 of a calendar year, Tenant shall continue to pay monthly installments based on the previous year's estimate until Landlord provides Tenant with the new estimate. Upon delivery of the new estimate, an adjustment shall be made for any month for which Tenant paid monthly installments based on the previous year's estimate. Tenant shall pay Landlord the amount of any underpayment within 30 days after receipt of the new estimate. Any overpayment shall be refunded to Tenant within 30 days or credited against the next due future installment(s) of Additional Rent.
1.02 As soon as is practical following the end of each calendar year, Landlord shall furnish Tenant with a statement of the actual amount of Tenant's Pro Rata Share of Expenses and Taxes for the prior calendar year. Landlord shall use reasonable efforts to furnish the statement of actual Expenses on or before June 1 of the calendar year immediately following the calendar year to which the statement applies. If the estimated amount of Expenses and Taxes for the prior calendar year is more than the actual amount of Expenses and Taxes for the prior calendar year, Landlord shall apply any overpayment by Tenant against Additional Rent due or next becoming due, provided if the Term expires before the determination of the overpayment, Landlord shall refund any overpayment to Tenant after first deducting the amount of Rent due and unpaid. If the estimated amount of Expenses and Taxes for the prior calendar year is less than the actual amount of Expenses and Taxes for such prior year, Tenant shall pay Landlord, within 30 days after its receipt of the statement of Expenses and Taxes, any underpayment for the prior calendar year. In no event shall Landlord be entitled to reimbursement from tenants for Expenses and Taxes in excess of 100% of the costs actually paid or incurred by Landlord in any applicable calendar year.
2. EXPENSES.
2.01 "EXPENSES" means all costs and expenses incurred by Landlord in
each calendar year in connection with operating, maintaining, repairing, and
managing the Building and the Property. Expenses include, without limitation:
(a) all labor and labor related costs, including wages, salaries, bonuses,
taxes, insurance, uniforms, training, retirement plans, pension plans and other
employee benefits, for employees at or below the level of general manager
(provided that if any employee performs services in connection with the Building
and other buildings, costs associated with such employee may be proportionately
included in Expenses based on the percentage of time such employee spends in
connection with the operation, maintenance, repair and management of the
Building); (b) management fees (not to exceed, on an annual basis, an amount
equal to 4% of the gross receipts for the Building); (c) the cost of equipping,
staffing and operating an on-site and/or off-site management office for the
Building, provided if the management office services one or more other buildings
or properties, the shared costs and expenses of equipping, staffing and
operating such management office(s) shall be equitably prorated and apportioned
between the Building and the other buildings or properties; (d) accounting
costs; (e) the cost of services; (f) rental and purchase cost of parts,
supplies, tools and equipment; (g) insurance premiums and deductibles; (h)
electricity, gas and other utility costs (excluding such costs for such
utilities (i) which are provided to individual tenant premises in excess of
Building-standard amounts, or (ii) which are not provided to individual tenant
premises and for which Landlord is reimbursed by tenants); and (i) the amortized
cost of capital improvements (as distinguished from replacement parts or
components installed in the ordinary course of business) which are: (1)
performed primarily to reduce current or future
operating expense costs or otherwise improve the operating efficiency of the
Property (not to exceed the savings achieved) or upgrade Building security; or
(2) required to comply with any Laws that are enacted, or first interpreted to
apply to the Property, after the date of this Lease (except to the extent such
compliance is required solely because one or more tenants of the Building use
their respective premises for purposes other than general office use or a use
reasonably incident thereto). The cost of capital improvements shall be
amortized by Landlord over the lesser of the Payback Period (defined below) or
the useful life of the capital improvement as reasonably determined by Landlord.
The amortized cost of capital improvements may, at Landlord's option, include
actual or imputed interest at the rate that Landlord would reasonably be
required to pay to finance the cost of the capital improvement. "PAYBACK PERIOD"
means the reasonably estimated period of time that it takes for the cost savings
resulting from a capital improvement to equal the total cost of the capital
improvement. Landlord, by itself or through an affiliate, shall have the right
to directly perform, provide and be compensated for any services under this
Lease. If Landlord incurs Expenses for the Building or Property together with
one or more other buildings or properties, whether pursuant to a reciprocal
easement agreement, common area agreement or otherwise, the shared costs and
expenses shall be equitably prorated and apportioned between the Building and
Property and the other buildings or properties.
2.02 Expenses shall not include: the cost of capital improvements (except as set forth above); depreciation; principal payments of mortgage and other non-operating debts of Landlord; the cost of repairs or other work to the extent Landlord is reimbursed by insurance or condemnation proceeds; costs in connection with leasing space in the Building, including brokerage commissions; lease concessions, rental abatements and construction allowances granted to specific tenants; costs incurred in connection with the sale, financing or refinancing of the Building; fines, interest and penalties incurred due to the late payment of Taxes or Expenses; organizational expenses associated with the creation and operation of the entity which constitutes Landlord; or any penalties or damages that Landlord pays to Tenant under this Lease or to other tenants in the Building under their respective leases.
The following items are also excluded from Expenses:
(a) Sums (other than management fees, it being agreed that the management fees included in Expenses are as described above) paid to Landlord or subsidiaries or other affiliates of Landlord for services on or to the Property, Building and/or Premises, but only to the extent that the costs of such services exceed the competitive cost for such services rendered by persons or entities of similar skill, competence and experience.
(b) Any fines, penalties or interest resulting from the negligence or willful misconduct of the Landlord or its agents, contractors, or employees.
(c) Advertising and promotional expenditures.
(d) Landlord's charitable and political contributions.
(e) Any ground lease rental.
(f) Attorney's fees and other expenses incurred in connection with negotiations or disputes with prospective tenants or tenants or other occupants of the Building.
(g) The cost or expense of any services or benefits provided generally to other tenants in the Building and not provided or available to Tenant.
(h) All costs of purchasing or leasing major sculptures, paintings or other major works or objects of art (as opposed to decorations purchased or leased by Landlord for display in the Common Areas of the Building).
(i) Any expenses for which Landlord has received actual reimbursement (other than through Expenses).
(j) Costs incurred by Landlord in connection with the correction of defects in design and original construction of the Building or Property.
(k) Expenses for the replacement of any item covered under warranty, unless Landlord has not received payment under such warranty and it would not be fiscally prudent to pursue legal action to collect on such warranty.
(l) Fines or penalties incurred as a result of violation by Landlord of any applicable Laws.
(m) Costs, including permit, license and inspection costs, incurred with respect to the installation of tenant improvements for tenants in the Building or incurred in renovating or otherwise improving, decorating, painting or redecorating vacant space for tenants or other occupants of the Building, except in connection with Landlord's performance of general maintenance and repair services provided to tenants of the Building in general.
(n) Landlord's general corporate overhead and general administrative expenses.
(o) Rental costs and related expenses incurred in leasing air conditioning systems, elevators or other equipment ordinarily considered to be capital in nature, except to the extent such costs and expenses: (i) are incurred in making repairs or keeping permanent systems in operation while repairs are being made, (ii) relate to equipment that is not affixed to the Building and is used in providing janitorial or similar services, or (iii) is an Expense under clause (i) of the second sentence of Section 2.01 above.
(p) Costs arising from the presence or removal of hazardous materials (including, without limitation, asbestos) in or about the Building or Property, except to the extent such removal is related to the general maintenance and repair of the Building or Property.
2.03 If the Building is not at least 95% occupied during any calendar year or if Landlord is not supplying services to at least 95% of the total Rentable Square Footage of the Building at any time during a calendar year, those Expenses which vary with Building occupancy shall, at Landlord's option, be determined as if the Building had been 95% occupied and Landlord had been supplying services to 95% of the Rentable Square Footage of the Building during that calendar year. Notwithstanding the foregoing, Landlord may calculate the extrapolation of Expenses under this Section based on 100% occupancy and service so long as such percentage is used consistently for each year of the Term. The extrapolation of Expenses under this Section shall be performed in accordance with the methodology specified by the Building Owners and Managers Association.
3. "TAXES" shall mean: (a) all real property taxes and other assessments on the Building and/or Property, including, but not limited to, gross receipts taxes, assessments for special improvement districts and building improvement districts, governmental charges, fees and assessments for police, fire, traffic mitigation or other governmental service of purported benefit to the Property, taxes and assessments levied in substitution or supplementation in whole or in part of any such taxes and assessments and the Property's share of any real estate taxes and assessments under any reciprocal easement agreement, common area agreement or similar agreement as to the Property; (b) all personal property taxes for property that is owned by Landlord and used in connection with the operation, maintenance and repair of the Property; and (c) all costs and fees incurred in connection with seeking reductions in any tax liabilities described in (a) and (b), including, without limitation, any reasonable costs incurred by Landlord for compliance, review and appeal of tax liabilities. Without limitation, Taxes shall not include any income, capital levy, transfer, capital stock, gift, estate or inheritance tax. If a change in Taxes is obtained for any year of the Term during which Tenant paid Tenant's Pro Rata Share of any Taxes, then Taxes for that year will be retroactively adjusted and Landlord shall provide Tenant with a credit, if any, based on the adjustment. Tenant shall pay Landlord the amount of Tenant's Pro Rata Share of any such increase in the Taxes within 30 days after Tenant's receipt of a statement from Landlord.
4. AUDIT RIGHTS. Tenant, within 365 days after receiving Landlord's statement of Expenses, may give Landlord written notice ("REVIEW NOTICE") that Tenant intends to review Landlord's records of the Expenses for that calendar year to which the statement applies. Within a reasonable time after receipt of the Review Notice, Landlord shall make all pertinent records available for inspection that are reasonably necessary for Tenant to conduct its review. If any records are maintained at a location other than the management office for the Building, Tenant may either inspect the records at such other location or pay for the reasonable cost of copying and shipping the records. If Tenant retains an agent to review Landlord's records, the agent must be with a CPA firm licensed to do business in the state or commonwealth where the Property is located. Tenant shall be solely responsible for all costs, expenses and fees incurred for the audit; provided, however, that if Landlord and Tenant determine that Expenses for the calendar year were less than stated by more than 5%, Landlord, within 30 days after its receipt of paid invoices therefor from Tenant, shall reimburse Tenant for any reasonable amounts paid by Tenant to third parties in connection with such review by Tenant. Within 90 days after the records are made available to Tenant, Tenant shall have the right to give Landlord written notice (an "OBJECTION NOTICE") stating in reasonable detail any objection to Landlord's
statement of Expenses for that year. If Tenant fails to give Landlord an Objection Notice within the 90 day period or fails to provide Landlord with a Review Notice within the 365 day period described above, Tenant shall be deemed to have approved Landlord's statement of Expenses and shall be barred from raising any claims regarding the Expenses for that year. The records obtained by Tenant shall be treated as confidential. In no event shall Tenant be permitted to examine Landlord's records or to dispute any statement of Expenses unless Tenant has paid and continues to pay all Rent when due. If Landlord and Tenant determine that Expenses for the calendar year are less than reported, Landlord shall provide Tenant with a credit against the next installment of Rent (or if the Term has expired, a refund within 30 days) in the amount of the overpayment by Tenant. Likewise, if Landlord and Tenant determine that Expenses for the calendar year are greater than reported, Tenant shall pay Landlord the amount of any underpayment within 30 days.
EXHIBIT C
WORK LETTER
[INTENTIONALLY OMITTED]
EXHIBIT D
COMMENCEMENT LETTER
(EXAMPLE)
Date ______________________
Tenant ______________________
Address ______________________
______________________
______________________
Re: Commencement Letter with respect to that certain Lease (the "Lease")
dated as of the _____ day of __________, _____, by and between
__________________________________, as Landlord, and
__________________________________, as Tenant, for ________ rentable
square feet on the ________ floor of the Building located at
_____________________________________.
Dear __________________:
In accordance with Section 3.02 of the Lease, Tenant accepts possession
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of the Premises and confirms that the Commencement Date (as defined in the Lease) is ________________________.
Please acknowledge your acceptance of possession and agreement to the terms set forth above by signing all 3 counterparts of this Commencement Letter in the space provided and returning 2 fully executed counterparts to my attention.
Sincerely,
___________________________________
Authorized Signatory
Agreed and Accepted:
Tenant: ______________________
By: ______________________
Name: ______________________
Title: ______________________
Date: ______________________
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EXHIBIT E
BUILDING RULES AND REGULATIONS
The following rules and regulations shall apply, where applicable, to the Premises, the Building, the parking facilities (if any), the Property and the appurtenances. In the event of a conflict between the following rules and regulations and the remainder of the terms of the Lease, the remainder of the terms of the Lease shall control. Capitalized terms have the same meaning as defined in the Lease.
1. Sidewalks, doorways, vestibules, halls, stairways and other similar areas shall not be obstructed by Tenant or used by Tenant for any purpose other than ingress and egress to and from the Premises. No rubbish, litter, trash, or material shall be placed, emptied, or thrown in those areas. At no time shall Tenant permit Tenant's employees to loiter in Common Areas or elsewhere about the Building or Property.
2. Plumbing fixtures and appliances shall be used only for the purposes for which designed and no sweepings, rubbish, rags or other unsuitable material shall be thrown or placed in the fixtures or appliances. Damage resulting to fixtures or appliances by Tenant, its agents, employees or invitees shall be paid for by Tenant and Landlord shall not be responsible for the damage.
3. No signs, advertisements or notices shall be painted or affixed to windows, doors or other parts of the Building, except those of such color, size, style and in such places as are first approved in writing by Landlord. All tenant identification and suite numbers at the entrance to the Premises shall be installed by Landlord using the standard graphics for the Building. Except in connection with the hanging of lightweight pictures and wall decorations, no nails, hooks or screws shall be inserted into any part of the Premises or Building except by the Building maintenance personnel without Landlord's prior approval, which approval shall not be unreasonably withheld.
4. Landlord may provide and maintain in the first floor (main lobby) of the Building an alphabetical directory board or other directory device listing tenants and no other directory shall be permitted unless previously consented to by Landlord in writing.
5. Tenant shall not place any lock(s) on any door in the Premises or Building without Landlord's prior written consent, which consent shall not be unreasonably withheld, and Landlord shall have the right at all times to retain and use keys or other access codes or devices to all locks within and into the Premises. A reasonable number of keys to the locks on the entry doors in the Premises shall be furnished by Landlord to Tenant at Tenant's cost and Tenant shall not make any duplicate keys. All keys shall be returned to Landlord at the expiration or early termination of the Lease.
6. All contractors, contractor's representatives and installation technicians performing work in the Building shall be subject to Landlord's prior approval, which approval shall not be unreasonably withheld, conditioned or delayed, and shall be required to comply with Landlord's standard rules, regulations, policies and procedures, which may be revised from time to time.
7. Movement in or out of the Building of furniture or office equipment, or dispatch or receipt by Tenant of merchandise or materials requiring the use of elevators, stairways, lobby areas or loading dock areas, shall be restricted to hours reasonably designated by Landlord. Tenant shall obtain Landlord's prior approval by providing a detailed listing of the activity, which approval shall not be unreasonably withheld. If approved by Landlord, the activity shall be under the supervision of Landlord and performed in the manner required by Landlord. Tenant shall assume all risk for damage to articles moved and injury to any persons resulting from the activity. If equipment, property, or personnel of Landlord or of any other party is damaged or injured as a result of or in connection with the activity, Tenant shall be solely liable for any resulting damage, loss or injury.
8. Landlord shall have the right to approve the weight, size, or location of heavy equipment or articles in and about the Premises, which approval shall not be unreasonably withheld. Damage to the Building by the installation, maintenance, operation, existence or removal of Tenant's Property shall be repaired at Tenant's sole expense.
9. Corridor doors, when not in use, shall be kept closed.
10. Tenant shall not: (1) make or permit any improper, objectionable or unpleasant noises or odors in the Building, or otherwise interfere in any way with other tenants or persons having business with them; (2) solicit business or distribute or cause to be distributed, in any portion of the Building, handbills, promotional materials or other advertising; or (3) conduct or permit other activities in the Building that might, in Landlord's sole reasonable opinion, constitute a nuisance.
11. No animals, except those assisting handicapped persons, shall be brought into the Building or kept in or about the Premises.
12. No inflammable, explosive or dangerous fluids or substances shall be used or kept by Tenant in the Premises, Building or about the Property, except for those substances as are typically found in similar premises used for general office purposes and are being stored, used and disposed of by Tenant in commercially reasonable quantities, in a safe manner, and in accordance with all applicable Laws. Except for those substances as (i) are typically (a) found in similar premises and (b) used for general office purposes or for the routine maintenance of laboratory equipment typically used in the testing of computers and intelligent computing devices (including hardware, software and wired or wireless embedded smart devices), and (ii) are being stored, used and disposed of by Tenant in commercially reasonable quantities, in a safe manner, and in accordance with all applicable Laws, Tenant shall not, without Landlord's prior written consent, use, store, install, spill, remove, release or dispose of, within or about the Premises or any other portion of the Property, any asbestos-containing materials or any solid, liquid or gaseous material now or subsequently considered toxic or hazardous under the provisions of 42 U.S.C. Section 9601 et seq. or any other applicable environmental Law which may now or later be in effect. Tenant shall comply with all Laws pertaining to and governing the use of these materials by Tenant and shall remain solely liable for the costs of abatement and removal.
13. Tenant shall not use or occupy the Premises in any manner or for any purpose which might injure the reputation or impair the present or future value of the Premises or the Building. Tenant shall not use, or permit any part of the Premises to be used for lodging, sleeping or for any illegal purpose.
14. Tenant shall not take any action which would cause a work stoppage, picketing, labor disruption or dispute or interfere with Landlord's or any other tenant's or occupant's business or with the rights and privileges of any person lawfully in the Building ("LABOR DISRUPTION"). Tenant shall take the actions necessary to resolve the Labor Disruption, and shall have pickets removed and, at the request of Landlord, immediately terminate any work in the Premises that gave rise to the Labor Disruption, until Landlord gives its written consent for the work to resume. Tenant shall have no claim for damages against Landlord or any of the Landlord Related Parties nor shall the Commencement Date of the Term be extended as a result of the above actions.
15. Tenant shall not install, operate or maintain in the Premises or in any other area of the Building, electrical equipment that would overload the electrical system beyond its capacity for proper, efficient and safe operation as determined solely by Landlord. Tenant shall not furnish cooling or heating to the Premises, including, without limitation, the use of electric or gas heating devices, without Landlord's prior written consent. Tenant shall not use more than its proportionate share of telephone lines and other telecommunication facilities available to service the Building.
16. Tenant shall not operate or permit to be operated a coin or token operated vending machine or similar device (including, without limitation, telephones, lockers, toilets, scales, amusement devices and machines for sale of beverages, foods, candy, cigarettes and other goods), except for machines for the exclusive use of Tenant's employees and invitees.
17. Bicycles and other vehicles are not permitted inside the Building or on the walkways outside the Building, except in areas designated by Landlord.
18. Landlord may from time to time adopt systems and procedures for the security and safety of the Building and Property, its occupants, entry, use and contents. Tenant, its agents, employees, contractors, guests and invitees shall comply with Landlord's systems and procedures.
19. Landlord shall have the right to prohibit the use of the name of the Building or any other publicity by Tenant that in Landlord's sole opinion may impair the reputation of the Building or its desirability. Upon written notice from Landlord, Tenant shall refrain from and discontinue such publicity immediately.
20. Neither Tenant nor its agents, employees, contractors, guests or invitees shall smoke or permit smoking in the Common Areas, unless a portion of the Common Areas have been declared a designated smoking area by Landlord, nor shall the above parties allow smoke from the Premises to emanate into the Common Areas or any other part of the Building. Landlord shall have the right to designate the Building (including the Premises) as a non-smoking building.
21. Landlord shall have the right to designate and approve standard window coverings for the Premises and to establish rules to assure that the Building presents a uniform exterior appearance. Tenant shall ensure, to the extent reasonably practicable, that window coverings are closed on windows in the Premises while they are exposed to the direct rays of the sun.
22. Deliveries to and from the Premises shall be made only at the times in the areas and through the entrances and exits reasonably designated by Landlord. Tenant shall not make deliveries to or from the Premises in a manner that might interfere with the use by any other tenant of its premises or of the Common Areas, any pedestrian use, or any use which is inconsistent with good business practice.
23. The work of cleaning personnel shall not be hindered by Tenant after 5:30 P.M., and cleaning work may be done at any time when the offices are vacant. Windows, doors and fixtures may be cleaned at any time. Tenant shall provide adequate waste and rubbish receptacles to prevent unreasonable hardship to the cleaning service.
EXHIBIT F
ADDITIONAL PROVISIONS
This Exhibit is attached to and made a part of the Lease by and between
WA-110 ATRIUM PLACE, L.L.C., A DELAWARE LIMITED LIABILITY COMPANY ("Landlord")
and BSQUARE CORPORATION, A WASHINGTON CORPORATION ("Tenant"), for space in the
Building located at 110 110th Avenue NE, Bellevue, Washington, and commonly
known as 110 Atrium Place.
I. LETTER OF CREDIT.
A. GENERAL PROVISIONS. On or before July 1, 2004, Tenant shall deliver to Landlord, as collateral for the full performance by Tenant of all of its obligations under this Lease and for all losses and damages Landlord may suffer as a result of Tenant's failure to comply with one or more provisions of this Lease, a standby, unconditional, irrevocable, transferable letter of credit (the "LETTER OF CREDIT") substantially in the form of attached as EXHIBIT G hereto and containing the terms required herein, in the face amount of $1,200,000.00 (the "LETTER OF CREDIT AMOUNT"), naming Landlord as beneficiary, issued (or confirmed) by a financial institution acceptable to Landlord in Landlord's sole reasonable discretion, permitting multiple and partial draws thereon, and otherwise in form acceptable to Landlord in its sole discretion. Subject to Section 1.F below, Tenant shall cause the Letter of Credit to be continuously maintained in effect (whether through replacement, renewal or extension) in the Letter of Credit Amount through the date (the "FINAL LC EXPIRATION DATE") that is 45 days after the scheduled expiration date of the Term or any renewal Term. If the Letter of Credit held by Landlord expires earlier than the Final LC Expiration Date (whether by reason of a stated expiration date or a notice of termination or non-renewal given by the issuing bank), Tenant shall deliver a new Letter of Credit or certificate of renewal or extension to Landlord not later than 60 days prior to the expiration date of the Letter of Credit then held by Landlord. Any renewal or replacement Letter of Credit shall comply with all of the provisions of this Section I, shall be irrevocable, transferable and shall remain in effect (or be automatically renewable) through the Final LC Expiration Date upon the same terms as the expiring Letter of Credit or such other terms as may be acceptable to Landlord in its sole discretion.
B. DRAWINGS UNDER LETTER OF CREDIT. Upon Tenant's failure to comply with one or more provisions of this Lease, Landlord may, without prejudice to any other remedy provided in this Lease or by law, draw on the Letter of Credit and use all or part of the proceeds to (i) satisfy any amounts due to Landlord from Tenant, and (ii) satisfy any other damage, injury, expense or liability caused by Tenant's failure to so comply. In addition, if Tenant fails to furnish such renewal or replacement at least 45 days prior to the stated expiration date of the Letter of Credit then held by Landlord, Landlord may draw upon such Letter of Credit and hold the proceeds thereof (and such proceeds need not be segregated) in accordance with the terms of this Section I.
C. USE OF PROCEEDS BY LANDLORD. The proceeds of the Letter of Credit shall constitute Landlord's sole and separate property (and not Tenant's property or the property of Tenant's bankruptcy estate) and Landlord may immediately upon any draw (and without notice to Tenant) apply or offset the proceeds of the Letter of Credit: (i) against any Rent payable by Tenant under this Lease that is not paid when due; (ii) against all losses and damages that Landlord has suffered or that Landlord reasonably estimates that it may suffer as a result of Tenant's failure to comply with one or more provisions of this Lease; and (iii) against any amount (including attorneys' fees and costs) that Landlord may spend or become obligated to spend by reason of Tenant's default. Provided Tenant has performed all of its obligations under this Lease, Landlord agrees to pay to Tenant within 45 days after the Final LC Expiration Date the amount of any proceeds of the Letter of Credit received by Landlord and not applied as allowed above; provided, that if prior to the Final LC Expiration Date a voluntary petition is filed by Tenant or any Guarantor, or an involuntary petition is filed against Tenant or any Guarantor by any of Tenant's or Guarantor's creditors, under the Federal Bankruptcy Code, then Landlord shall not be obligated to make such payment in the amount of the unused Letter of Credit proceeds until either all preference issues relating to payments under this Lease have been resolved in
such bankruptcy or reorganization case or such bankruptcy or reorganization case has been dismissed, in each case pursuant to a final court order not subject to appeal or any stay pending appeal.
D. ADDITIONAL COVENANTS OF TENANT. If, as result of any application or use by Landlord of all or any part of the Letter of Credit, the amount of the Letter of Credit shall be less than the Letter of Credit Amount, Tenant shall, within five Business Days thereafter, provide Landlord with additional letter(s) of credit in an amount equal to the deficiency (or a replacement letter of credit in the total Letter of Credit Amount), and any such additional (or replacement) letter of credit shall comply with all of the provisions of this Section I, and if Tenant fails to comply with the foregoing, notwithstanding anything to the contrary contained in this Lease, the same shall constitute an uncurable Default by Tenant. Tenant further covenants and warrants that it will neither assign nor encumber the Letter of Credit or any part thereof and that neither Landlord nor its successors or assigns will be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance.
E. NATURE OF LETTER OF CREDIT. Landlord and Tenant (1) acknowledge and agree that in no event or circumstance shall the Letter of Credit or any renewal thereof or substitute therefor or any proceeds thereof (including the LC Proceeds Account) be deemed to be or treated as a "security deposit" under any Law applicable to security deposits in the commercial context ("SECURITY DEPOSIT LAWS"), (2) acknowledge and agree that the Letter of Credit (including any renewal thereof or substitute therefor or any proceeds thereof) is not intended to serve as a security deposit, and the Security Deposit Laws shall have no applicability or relevancy thereto, and (3) waive any and all rights, duties and obligations either party may now or, in the future, will have relating to or arising from the Security Deposit Laws.
F. REDUCTION IN LETTER OF CREDIT AMOUNT. Tenant may reduce the Letter of Credit Amount by $150,000 on January 1, 2007 and each anniversary thereof (each, a "REDUCTION DATE") provided that (a) no Default has occurred or continued to exist under the Lease at any time within 2 years before such Reduction Date; and (b) in no event shall the Letter of Credit Amount be reduced to an amount less than $875,000.00. Any reduction in the Letter of Credit Amount shall be accomplished by Tenant providing Landlord with a substitute letter of credit in the reduced amount.
II. RENEWAL OPTION.
A. Grant of Option; Conditions. Tenant shall have the right to extend the Term (the "RENEWAL OPTION") for one additional period of five (5) years commencing on the day following the Termination Date of the initial Term and ending on the fifth 5th anniversary of the Termination Date (the "RENEWAL TERM"), if:
1. Landlord receives notice of exercise ("INITIAL RENEWAL NOTICE") not less than 12 full calendar months prior to the expiration of the initial Term and not more than 15 full calendar months prior to the expiration of the initial Term; and
2. Tenant is not in default under the Lease beyond any applicable cure periods at the time that Tenant delivers its Initial Renewal Notice or at the time Tenant delivers its Binding Notice (as defined below); and
3. No part of the Premises is sublet (other than
pursuant to a Permitted Transfer, as defined in
Section 11 of the Lease) at the time that Tenant
delivers its Initial Renewal Notice or at the time
Tenant delivers its Binding Notice; and
4. The Lease has not been assigned (other than pursuant to a Permitted Transfer) prior to the date that Tenant delivers its Initial Renewal Notice or prior to the date Tenant delivers its Binding Notice.
B. Terms Applicable to Premises During Renewal Term.
1. The initial Base Rent rate per rentable square foot for the Premises
during the Renewal Term shall equal the Prevailing Market (hereinafter defined) rate per rentable square foot for the Premises. Base Rent during the Renewal Term shall increase, if at all, in accordance with the increases assumed in the determination of Prevailing Market rate. Base Rent attributable to the Premises shall be payable in monthly installments in accordance with the terms and conditions of Section 4 of the Lease.
2. Tenant shall pay Additional Rent (i.e. Taxes and Expenses) for the Premises during the Renewal Term in accordance with the provisions of Exhibit B to the Lease, and the manner and method in which Tenant reimburses Landlord for Tenant's share of Taxes and Expenses and the Base Year, if any, applicable to such matter, shall be some of the factors considered in determining the Prevailing Market rate for the Renewal Term.
C. Initial Procedure for Determining Prevailing Market. Within 30
days after receipt of Tenant's Initial Renewal Notice,
Landlord shall advise Tenant of the applicable Base Rent rate
for the Premises for the Renewal Term. Tenant, within 15 days
after the date on which Landlord advises Tenant of the
applicable Base Rent rate for the Renewal Term, shall either
(i) give Landlord final binding written notice ("BINDING
NOTICE") of Tenant's exercise of its Renewal Option, or (ii)
if Tenant disagrees with Landlord's determination, provide
Landlord with written notice of rejection (the "REJECTION
NOTICE"). If Tenant fails to provide Landlord with either a
Binding Notice or Rejection Notice within such 15 day period,
Tenant's Renewal Option shall be null and void and of no
further force and effect. If Tenant provides Landlord with a
Binding Notice, Landlord and Tenant shall enter into the
Renewal Amendment (as defined below) upon the terms and
conditions set forth herein. If Tenant provides Landlord with
a Rejection Notice, Landlord and Tenant shall work together in
good faith to agree upon the Prevailing Market rate for the
Premises during the Renewal Term. When Landlord and Tenant
have agreed upon the Prevailing Market rate for the Premises,
such agreement shall be reflected in a written agreement
between Landlord and Tenant, whether in a letter or otherwise,
and Landlord and Tenant shall enter into the Renewal Amendment
in accordance with the terms and conditions hereof.
Notwithstanding the foregoing, if Landlord and Tenant are
unable to agree upon the Prevailing Market rate for the
Premises within 30 days after the date Tenant provides
Landlord with the Rejection Notice, Tenant, by written notice
to Landlord (the "ARBITRATION NOTICE") within 5 Business Days
after the expiration of such 30-day period, shall have the
right to have the Prevailing Market rate determined in
accordance with the arbitration procedures described in
Section D below. If Landlord and Tenant are unable to agree
upon the Prevailing Market rate for the Premises within such
30-day period and Tenant fails to timely exercise its right to
arbitrate, Tenant's Renewal Option shall be deemed to be null
and void and of no further force and effect.
D. Arbitration Procedure.
1. If Tenant provides Landlord with an Arbitration Notice, Landlord and Tenant, within 5 Business Days after the date of the Arbitration Notice, shall each simultaneously submit to the other, in a sealed envelope, its good faith estimate of the Prevailing Market rate for the Premises during the Renewal Term (collectively referred to as the "ESTIMATES"). If the higher of such Estimates is not more than 105% of the lower of such Estimates, then Prevailing Market rate shall be the average of the two Estimates. If the Prevailing Market rate is not resolved by the exchange of Estimates, then, within 7 days after the exchange of Estimates, Landlord and Tenant shall each select an appraiser to determine which of the two Estimates most closely reflects the Prevailing Market rate for the Premises during the Renewal Term. Each appraiser so selected shall be certified as an MAI appraiser or as an ASA appraiser and shall have had at least 5 years experience within the previous 10 years as a real estate appraiser working in the central business district of Bellevue, Washington, with working knowledge of current rental rates and practices. For purposes hereof, an "MAI" appraiser means an individual who holds an MAI designation conferred by, and is an independent member of, the American Institute of Real Estate Appraisers (or its successor organization, or in the event there is no successor
organization, the organization and designation most similar), and an "ASA" appraiser means an individual who holds the Senior Member designation conferred by, and is an independent member of, the American Society of Appraisers (or its successor organization, or, in the event there is no successor organization, the organization and designation most similar).
2. Upon selection, Landlord's and Tenant's appraisers shall work together in good faith to agree upon which of the two Estimates most closely reflects the Prevailing Market rate for the Premises. The Estimate chosen by such appraisers shall be binding on both Landlord and Tenant as the Base Rent rate for the Premises during the Renewal Term. If either Landlord or Tenant fails to appoint an appraiser within the 7 day period referred to above, the appraiser appointed by the other party shall be the sole appraiser for the purposes hereof. If the two appraisers cannot agree upon which of the two Estimates most closely reflects the Prevailing Market within 20 days after their appointment, then, within 10 days after the expiration of such 20 day period, the two appraisers shall select a third appraiser meeting the aforementioned criteria. Once the third appraiser (i.e. arbitrator) has been selected as provided for above, then, as soon thereafter as practicable but in any case within 14 days, the arbitrator shall make his determination of which of the two Estimates most closely reflects the Prevailing Market rate and such Estimate shall be binding on both Landlord and Tenant as the Base Rent rate for the Premises. If the arbitrator believes that expert advice would materially assist him, he may retain one or more qualified persons to provide such expert advice. The parties shall share equally in the costs of the arbitrator and of any experts retained by the arbitrator. Any fees of any appraiser, counsel or experts engaged directly by Landlord or Tenant, however, shall be borne by the party retaining such appraiser, counsel or expert.
3. If the Prevailing Market rate has not been determined by the commencement date of the Renewal Term, Tenant shall pay Base Rent upon the terms and conditions in effect during the last month of the initial Term for the Premises until such time as the Prevailing Market rate has been determined. Upon such determination, the Base Rent for the Premises shall be retroactively adjusted to the commencement of the Renewal Term for the Premises. If such adjustment results in an underpayment of Base Rent by Tenant, Tenant shall pay Landlord the amount of such underpayment within 30 days after the determination thereof. If such adjustment results in an overpayment of Base Rent by Tenant, Landlord shall credit such overpayment against the next installment of Base Rent due under the Lease and, to the extent necessary, any subsequent installments, until the entire amount of such overpayment has been credited against Base Rent.
E. Renewal Amendment. If Tenant is entitled to and properly exercises its Renewal Option, Landlord shall prepare an amendment (the "RENEWAL AMENDMENT") to reflect changes in the Base Rent, Term, Termination Date and other appropriate terms. The Renewal Amendment shall be sent to Tenant within a reasonable time after Landlord's receipt of the Binding Notice or other written agreement by Landlord and Tenant regarding the Prevailing Market rate, and Tenant shall execute and return the Renewal Amendment to Landlord within 15 Business Days after Tenant's receipt of same, but, upon final determination of the Prevailing Market rate applicable during the Renewal Term as described herein, an otherwise valid exercise of the Renewal Option shall be fully effective whether or not the Renewal Amendment is executed.
F. Definition of Prevailing Market. For purposes of this Renewal Option, "PREVAILING MARKET" shall mean the arms length fair market annual rental rate per rentable square foot under renewal leases and amendments entered into on or about the date on which the Prevailing Market is being determined hereunder for space comparable to the Premises in the Building and office buildings comparable to the Building in the central business district of Bellevue, Washington. The determination of Prevailing Market shall take into account any material economic differences between the terms of this Lease and any
comparison lease or amendment, such as rent abatements, construction costs and other concessions and the manner, if any, in which the landlord under any such lease is reimbursed for operating expenses and taxes. The determination of Prevailing Market shall also take into consideration any reasonably anticipated changes in the Prevailing Market rate from the time such Prevailing Market rate is being determined and the time such Prevailing Market rate will become effective under this Lease.
III. PARKING.
A. During the initial Term, Landlord shall lease to Tenant, or cause the operator (the "BUILDING FACILITY OPERATOR") of the garage servicing the Building (the "BUILDING FACILITY") to lease to Tenant, and Tenant shall lease from Landlord or the Building Facility Operator, a maximum of 130 unreserved parking spaces in the Building Facility (the "BUILDING FACILITY SPACES") for the use of Tenant and its employees. In addition, at Tenant's written request and subject to availability from time to time as determined by Landlord in its sole and absolute discretion, Landlord shall lease to Tenant, or cause its affiliate or the operator of the applicable parking facility (the "SUPPLEMENTAL FACILITY OPERATOR", and together with the Building Facility Operator, each, individually, an "OPERATOR") to lease to Tenant, and Tenant shall lease from Landlord or such affiliate or such Supplemental Facility Operator, on a month-to-month basis, a maximum of 43 unreserved parking space in another parking facility (the "SUPPLEMENTAL FACILITY", and together with the Building Facility, each, a "PARKING FACILITY") owned or operated by Landlord or an affiliate of Landlord located within four (4) city blocks from the Building Facility (together with the Building Facility Spaces, collectively, the "SPACES") for the use of Tenant and its employees. During the period beginning on the Commencement Date and ending August 31, 2006, the Spaces shall be leased at the rate of $0.00 per Space, per month. During the period beginning September 1, 2006 and ending August 31, 2009, the Spaces shall be leased at the rate of $50.00 per Space, per month, plus applicable tax thereon. During the period beginning September 1, 2009 and ending August 31, 2014, the Spaces shall be leased at the then current standard rate for parking in the applicable Parking Facility, plus applicable tax thereon, as such rate may be thereafter adjusted from time-to-time to reflect the then current rate for parking in the applicable Parking Facility. If requested by Landlord with respect to any Space(s), Tenant shall execute and deliver to Landlord the standard parking agreement used by Landlord or Landlord's affiliate or the applicable Operator (the "PARKING AGREEMENT") in the applicable Parking Facility for such Space(s).
B. No deductions or allowances shall be made for days when Tenant or any of its employees does not utilize a Parking Facility or for Tenant utilizing less than all of the Spaces. Tenant shall not have the right to lease or otherwise use more than the number of unreserved Spaces set forth above.
C. Except for particular spaces and areas designated by Landlord or Landlord's affiliate or any Operator for reserved parking, all parking in each Parking Facility shall be on an unreserved, first-come, first-served basis.
D. Neither Landlord nor Landlord's affiliate nor any Operator shall be responsible for money, jewelry, automobiles or other personal property lost in or stolen from any Parking Facility regardless of whether such loss or theft occurs when such Parking Facility or other areas therein are locked or otherwise secured. Except as caused by the negligence or willful misconduct of Landlord and without limiting the terms of the preceding sentence, Landlord shall not be liable for any loss, injury or damage to persons using any Parking Facility or automobiles or other property therein, it being agreed that, to the fullest extent permitted by law, the use of the Spaces shall be at the sole risk of Tenant and its employees.
E. Landlord or its affiliate or the applicable Operator shall have the right from time to time to designate the location of the Spaces and to promulgate reasonable rules and regulations regarding any Parking Facility, the Spaces and the use thereof, including, but not limited to, rules and regulations controlling the flow of traffic to and from various parking areas, the angle and direction of parking and the like. Tenant shall comply with and cause its employees to comply with all such rules and regulations, all reasonable additions and amendments thereto, and the terms and provisions of any Parking Agreement.
F. Tenant shall not store or permit its employees to store any automobiles in any Parking Facility without the prior written consent of Landlord. Except for emergency repairs, Tenant and its employees shall not perform any work on any automobiles while located in any Parking Facility or on the Property. If it is necessary for Tenant or its employees to leave an automobile in any Parking Facility overnight, Tenant shall provide Landlord with prior notice thereof designating the license plate number and model of such automobile.
G. Landlord or its affiliate or the applicable Operator shall have the right to temporarily close any Parking Facility or certain areas therein in order to perform necessary repairs, maintenance and improvements to such Parking Facility. Tenant shall not pay for any Spaces that Tenant is unable to use during any such closure.
H. Tenant shall not assign or sublease any of the Spaces without the consent of Landlord. Landlord shall have the right to terminate the agreement contained in this Section III or in any Parking Agreement with respect to any Spaces that Tenant desires to sublet or assign.
I. Landlord or its affiliate or the applicable Operator may elect to provide parking cards or keys to control access to any Parking Facility. In such event, Tenant shall be provided with one card or key for each Space that Tenant is leasing hereunder, provided that Landlord or its affiliate or the applicable Operator shall have the right to require Tenant or its employees to place a deposit on such access cards or keys and to pay a fee for any lost or damaged cards or keys.
IV. HAZARDOUS MATERIALS. Landlord represents, to its knowledge [based
solely upon that certain Phase I Environmental Site Assessment by ATC Associates
Inc. dated May 7, 2001, that the Premises are free of Hazardous Materials (as
defined below) in amounts and conditions which are in violation of applicable
environmental laws. Tenant shall not use, generate, manufacture, store or
dispose of, on or about the Premises or Property, or transport to or from the
Premises, Building or Property, any Hazardous Materials; provided, however, that
Tenant shall have the right to use, generate and store on the Premises, and
transport to and from the Premises, those Hazardous Materials which are
generally used (a) in the ordinary course in first class office buildings, or
(b) for the routine maintenance of laboratory equipment typically used in the
testing of computers and intelligent computing devices (including hardware,
software and wired or wireless embedded smart devices); provided further,
however, that such use, generation, storage and transportation shall be limited
to commercially reasonable quantities and shall be in compliance with all
applicable federal, state and local laws, regulations and ordinances. As used in
this Lease, "HAZARDOUS MATERIALS" shall mean any material or substance that is
now or hereafter defined or regulated by any statute, regulation, ordinance, or
governmental authority thereunder, as radioactive, toxic, hazardous, or waste,
including but not limited to (i) petroleum and any of its constituents or
byproducts, (ii) radioactive materials, (iii) asbestos in any form or condition,
and (iv) substances or materials regulated by any of the following, as amended
from time to time, and any rules promulgated thereunder: the Comprehensive
Environmental Response Compensation and Liability Act of 1980, 42 U.S.C.
Sections 9601 et seq.; the Resource Conservation and Recovery Act, 42 U.S.C.
Sections 6901, et seq.; the Toxic Substances Control Act, 15 U.S.C. Sections
2601, et seq.; the Clean Water Act, 33 U.S.C. Sections 1251 et seq; the Clean
Air Act, 42 U.S.C. Sections 7401 et seq.
V. EXISTING OFFICE FURNITURE. Landlord and Tenant understand and acknowledge that a portion of the Premises is currently possessed by Landlord (and not by any tenant or other occupant) and that certain office furniture (the "EXISTING OFFICE FURNITURE") is currently located in such portion of the Premises. Between the date hereof and the date on which Tenant takes possession of the Premises, Landlord shall not remove any of the Existing Office Furniture from the Premises. In addition, in consideration of $0.00, Landlord does hereby quitclaim and convey to Tenant, effective as of the date on which Tenant takes possession of any portion of the Premises, any Existing Office Furniture that may be located in such portion of the Premises. Without limiting the foregoing, as of the date of such quitclaim and conveyance of any portion of the Premises, any Existing Office Furniture located in such portion of the Premises shall be deemed part of Tenant's Property. Such quitclaim and conveyance are made without any warranties of title, quality, condition, fitness of use, or merchantability, and Tenant accepts the Existing Office Furniture its "as is" / "where is" condition.
VI. STORAGE. If, at any time during the Term (but not less than 2 months after delivering any prior such notice), Tenant delivers written notice to Landlord requesting the use of any available
storage space in the Building and Landlord determines, in its sole and absolute discretion (but acting in good faith), that such storage space is available, then Landlord and Tenant shall enter into an amendment to the Lease prepared by Landlord pursuant to which Landlord's standard storage provision shall be added to the Lease and, subject to the terms and conditions of such provision, Landlord shall lease such storage space to Tenant for the balance of the Term; provided, however, that in no event shall the rent charged for such storage space exceed $12.00 per rentable square foot.
VII. FINANCIAL STATEMENTS. Within 10 Business Days after Landlord's written request from time to time (but not more frequently than once in any 12-month period), Tenant shall deliver to Landlord copies of its most recent annual financial statements and copies of its quarterly financial statements for the 12-month period ending with the most-recently-ended quarter.
VIII. SUNSET NORTH LEASE.
A. Landlord and Tenant acknowledge that WA-Sunset North Bellevue, L.L.C., a Washington limited liability company ("LANDLORD'S AFFILIATE"), and Tenant are currently parties to that certain Office Lease Agreement dated as of January 15, 1999, as amended (the "SUNSET NORTH LEASE"), relating to certain leased premises in the building located at 3150 139th Avenue S.E., Suite 500, Bellevue, Washington. Notwithstanding anything in the Lease to the contrary, the Lease is contingent upon Landlord's Affiliate and Tenant contemporaneously herewith entering into that certain Fifth Amendment to Office Lease Agreement (the "SUNSET NORTH AMENDMENT"), dated as of even date herewith, pursuant to which Landlord's Affiliate and Tenant shall agree that Tenant's obligation to pay rent for calendar year 2004 under the Sunset North Lease shall be deferred subject to the terms and conditions set forth in such Sunset North Amendment. If Landlord's Affiliate and Tenant fail to enter into such Sunset North Amendment contemporaneously herewith, then either Landlord or Tenant may terminate the Lease by providing written notice thereof to the other party on or before the earlier of (i) the fifth (5th) business day after the date on which the Lease is fully executed and delivered, or (ii) the full execution and delivery of such Sunset North Amendment by Landlord's Affiliate and Tenant, whereupon, notwithstanding anything in the Lease to the contrary, the Lease shall be null and void and of no force or effect.
B. Notwithstanding anything in the Lease to the contrary, any default by Tenant, beyond any applicable notice or cure period, in any obligation to pay any monetary amount under the Sunset North Lease (as amended from time to time), or under any promissory note or other agreement with Landlord's Affiliate entered into by Tenant pursuant to or in connection with the Sunset North Lease (as amended from time to time), shall be referred to in Section 18 of the Lease as a "SUNSET NORTH DEFAULT".
EXHIBIT G
LETTER OF CREDIT FORM
[Name of Financial Institution]
Irrevocable Standby
Letter of Credit
No. ________________________
Issuance Date:______________
Expiration Date:____________
Applicant: BSQUARE CORPORATION
Beneficiary
WA-110 ATRIUM PLACE, L.L.C.,
c/o Equity Office Management, L.L.C.
701 5th Avenue
Suite 4000
Seattle, Washington 98104
Attn: Property Manager, 110 Atrium Place
Ladies/Gentlemen:
We hereby establish our Irrevocable Standby Letter of Credit in your favor for the account of the above referenced Applicant in the amount of One Million Two Hundred Thousand and 00/100 U.S. Dollars ($1,200,00.00) available for payment at sight by your draft drawn on us when accompanied by the following documents:
1. An original copy of this Irrevocable Standby Letter of Credit.
2. Beneficiary's dated statement purportedly signed by an authorized signatory or agent reading: "This draw in the amount of ______________________ U.S. Dollars ($____________) under your Irrevocable Standby Letter of Credit No. ____________________ represents funds due and owing to us pursuant to the terms of that certain lease by and between WA-110 ATRIUM PLACE, L.L.C., a Delaware limited liability company, as landlord, and BSQUARE CORPORATION, a Washington corporation, as tenant, and/or any amendment to the lease or any other agreement between such parties related to the lease."
It is a condition of this Irrevocable Standby Letter of Credit that it will be considered automatically renewed for a one year period upon the expiration date set forth above and upon each anniversary of such date, unless at least 60 days prior to such expiration date or applicable anniversary thereof, we notify you in writing, by certified mail return receipt requested or by recognized overnight courier service, that we elect not to so renew this Irrevocable Standby Letter of Credit. A copy of any such notice shall also be sent, in the same manner, to: Equity Office Properties Trust, 2 North Riverside Plaza, Suite 2100, Chicago, Illinois 60606, Attention: Treasury Department. In addition to the foregoing, we understand and agree that you shall be entitled to draw upon this Irrevocable Standby Letter of Credit in accordance with 1 and 2 above in the event that we elect not to renew this Irrevocable Standby Letter of Credit and, in addition, you provide us with a dated statement purportedly signed by an authorized signatory or agent of Beneficiary stating that the Applicant has failed to provide you with an acceptable substitute irrevocable standby letter of credit in accordance with the terms of the above referenced lease. We further acknowledge and agree that: (a) upon receipt of the documentation required herein, we will honor your draws against this Irrevocable Standby Letter of Credit without inquiry into the accuracy of Beneficiary's signed statement and regardless of whether Applicant disputes the content of such statement; (b) this Irrevocable Standby Letter of Credit shall permit partial draws and, in the event you elect to draw upon less than the full stated amount hereof, the stated amount of this Irrevocable Standby Letter of Credit shall be automatically reduced by the amount of such partial draw; and (c) you shall be entitled to transfer your interest in this Irrevocable Standby Letter of Credit from time to time and more than one time without our approval and without charge. In the event of a transfer, we reserve the right to require reasonable evidence of such transfer as a condition to any draw hereunder.
This Irrevocable Standby Letter of Credit is subject to the Uniform Customs and Practice for Documentary Credits (1993 revision) ICC Publication No. 500.
We hereby engage with you to honor drafts and documents drawn under and in compliance with the terms of this Irrevocable Standby Letter of Credit.
All communications to us with respect to this Irrevocable Standby Letter of Credit must be addressed to our office located at ______________________________________________ to the attention of __________________________________.
Very truly yours,
Exhibit 10.20
December 29, 2003
Scott Mahan
Dear Scott,
BSQUARE CORPORATION is pleased to extend to you an offer for employment as our Chief Financial Officer. This offer is subject to the approval of the Board of Directors of BSQUARE Corporation. You will be paid bi-weekly at a rate equivalent to an annual salary of $160,000. Your job classification is Executive. You will be hired as an exempt employee, so you will not be entitled to overtime. In addition to your base pay, BSQUARE offers you the following signing bonus:
$40,000 signing bonus payable by no later than January 31, 2004. In addition to representing an incentive to join BSQUARE, this amount shall also satisfy any and all amounts that may be owed you for any and all advisory services previously provided to BSQUARE.
BSQUARE CORPORATION also extends the following benefits:
a medical, dental, vision, life and disability plan
a 401(k) retirement plan
10 paid holidays and 15 days of paid time off
Options to purchase 150,000 shares of company stock, subject to approval by
BSQUARE Board of Directors.
Other discretionary benefits
BSQUARE CORPORATION is an established product development and engineering contracting company with a promising outlook. Your meaningful participation will greatly enhance our ability to retain our current contracting obligations and, in the future, will enable BSQUARE CORPORATION to pursue and secure other contracts.
YOUR EMPLOYMENT IS AT-WILL AND ACCORDINGLY, YOU OR BSQUARE CORPORATION MAY TERMINATE THIS EMPLOYMENT RELATIONSHIP AT ANY TIME WITH OR WITHOUT NOTICE OR CAUSE.
If BSQUARE Corporation terminates your employment when neither "cause" nor "long term disability" exists, and provided that you release BSQUARE Corporation and its agents from any and all employment-related claims in a signed, written release satisfactory in form and substance to BSQUARE Corporation, BSQUARE Corporation shall pay you a consideration payment as follows:
Scott Mahan
December 29, 2003
BSQUARE Corporation shall pay to you severance equal to six months of your then annual base salary. If BSQUARE Corporation gives you at least a full month's advance notice of termination, however, the severance payments shall be reduced by one month's salary for each full month of advance termination notice given. These severance payments shall be paid out at the rate of your final base salary on regular payroll days post termination, subject to legally required and any individually agreed upon payroll deductions. During this period, you would not be considered an employee and would therefore receive no Paid Time Off accrual, nor would you be entitled to benefits under BSQUARE's health and welfare plans or retirement savings plan as an active employee. Also during this period, your stock options will continue to vest until the final payment is made. You will have ninety days from the date final payment is made in which to exercise any vested options, and any non-vested options would terminate as of the date final payment is made.
For purposes of the severance provision indicated above, "cause" is defined on attachment A hereto, and "long term disability" is defined in our sponsored Long Term Disability group insurance plan.
This offer is contingent upon compliance with the Immigration Reform and Control
Act of 1986. The Act requires you to establish your identity and employment
eligibility. To do so, on your start date you will be required to complete
Section I of the Employment Eligibility Verification Form, I-9.
Please signify your acceptance of this offer by signing a copy of this letter and the attached Proprietary Rights Agreement and returning both within 5 business days of receipt.
On behalf of BSQUARE CORPORATION, I welcome you aboard. If you have any questions or concerns, please feel free to contact me.
Sincerely, Accepted By: -------------------------------------- ----------------------------------- Brian Crowley Date Scott Mahan Date President and CEO BSQUARE Corporation |
Scott Mahan
December 29, 2003
For purposes of this agreement "cause" means and is limited to dishonesty, fraud, commission of a felony or of a crime involving moral turpitude, destruction or theft of Company property, physical attack to a fellow employee, intoxication at work, use of controlled substances or alcohol to an extent that materially impairs Employee's performance of his or her duties, willful malfeasance or gross negligence in the performance of Employee's duties, violation of law in the course of employment that has a material adverse impact on Company or its employees, Employee's failure or refusal to perform Employee's duties, Employee's failure or refusal to follow reasonable instructions or directions, misconduct materially injurious to Company, neglect of duty, poor job performance, or any material breach of Employee's duties or obligations to Company that results in material harm to Company.
For purposes of this agreement, "neglect of duty" means and is limited to the following circumstances: (i) Employee has, in one or more material respects, failed or refused to perform Employee's job duties in a reasonable and appropriate manner (including failure to follow reasonable directives), (ii) the Board, or a duly appointed representative of the Board, has counseled Employee in writing about the neglect of duty and given Employee a reasonable opportunity to improve, and (iii) Employee's neglect of duty either has continued at a material level after a reasonable opportunity to improve or has reoccurred at a material level within one year after Employee was last counseled.
For purposes of this agreement, "poor job performance" means and is limited to the following circumstances: (i) Employee has, in one or more material respects, failed to perform Employee's job duties in a reasonable and appropriate manner, (ii) the Board, or a duly appointed representative of the Board, has counseled Employee in writing about the performance problems and given Employee a reasonable opportunity to improve, and (iii) Employee's performance problems either have continued at a material level after a reasonable opportunity to improve or the same or similar performance problems have reoccurred at a material level within one year after Employee was last counseled.
Exhibit 10.21
November 7, 2003
Carey E. Butler
Dear Carey,
BSQUARE CORPORATION is pleased to extend to you an offer for employment as our Vice President of Professional Consulting Services. You will be paid bi-weekly at a rate equivalent to an annual salary of $160,000. Your job classification is Executive. You will be hired as an exempt employee, so you will not be entitled to overtime. In addition to your base pay, BSQUARE offers you the following bonus program:
- $40,000 potential bonus for the first six months of work at BSQUARE. $20,000 of this bonus is guaranteed and will be paid after you have been with BSQUARE for 90 days. The other $20,000 potential bonus payout will be subject to your achievement of the objectives that you and Brian Crowley will agree to when you begin working at BSQUARE.
- As of July 1, 2004, you will have a yearly bonus potential of 50% of your base salary, based upon hitting mutually agreed upon performance objectives. Bonus will be paid every six months. 70% of the bonus amount will be based on PES group profitability. 30% of the bonus amount will be based on overall BSQUARE profitability. The bonus program after July 1, 2004 is dependant upon the BSQUARE Board of Directors approval to resume the executive bonus program at BSQUARE.
BSQUARE CORPORATION also extends the following benefits:
- a medical, dental, vision, life and disability plan
- a 401(k) retirement plan
- 10 paid holidays and 15 days of paid time off
- Options to purchase 100,000 shares of company stock, subject to approval by BSQUARE Board of Directors.
- Other discretionary benefits
BSQUARE CORPORATION is an established product development and engineering contracting company with a promising outlook. Your meaningful participation will greatly enhance our ability to retain our current contracting obligations and, in the future, will enable BSQUARE CORPORATION to pursue and secure other contracts.
YOUR EMPLOYMENT IS AT-WILL AND ACCORDINGLY, YOU OR BSQUARE CORPORATION MAY TERMINATE THIS EMPLOYMENT RELATIONSHIP AT ANY TIME WITH OR WITHOUT NOTICE OR CAUSE.
If BSQUARE Corporation terminates your employment when neither cause (as defined in Attachment A to this letter) nor permanent disability exists, and provided that you release BSQUARE Corporation and its agents from any and all claims in a signed, written release satisfactory in form and substance to BSQUARE Corporation, BSQUARE Corporation shall pay you an amount equal to four months of your base salary in severance. Any severance payment shall be paid out at your normal salary rate in a lump sum, and will be subject to normal payroll deductions, subject to and following your execution of the written release.
Carey E. Butler
November 6, 2003
This offer is contingent upon compliance with the Immigration Reform and Control
Act of 1986. The Act requires you to establish your identity and employment
eligibility. To do so, on your start date you will be required to complete
Section I of the Employment Eligibility Verification Form, I-9.
Please signify your acceptance of this offer by signing a copy of this letter and the attached Proprietary Rights Agreement and returning both within 5 business days of receipt.
On behalf of BSQUARE CORPORATION, I hope to welcome you aboard. If you have any questions or concerns, please feel free to contact me.
Able to begin work
Date
Sincerely, Accepted By: ------------------------------------ --------------------------------- Brian Crowley Date Carey E. Butler Date President and CEO BSQUARE Corporation |
ATTACHMENT A
For purposes of this agreement "cause" means and is limited to dishonesty, fraud, commission of a felony or of a crime involving moral turpitude, destruction or theft of Company property, physical attack to a fellow employee, intoxication at work, use of narcotics or alcohol to an extent that materially impairs Employee's performance of his or her duties, willful malfeasance or gross negligence in the performance of Employee's duties, violation of law in the course of employment that has a material adverse impact on Company or its employees, Employee's failure or refusal to perform Employee's duties, Employee's failure or refusal to follow reasonable instructions or directions, misconduct materially injurious to Company, neglect of duty, poor job performance, or any material breach of Employee's duties or obligations to Company that results in material harm to Company.
For purposes of this agreement, "neglect of duty" means and is limited to the following circumstances: (i) Employee has, in one or more material respects, failed or refused to perform Employee's job duties in a reasonable and appropriate manner (including failure to follow reasonable directives), (ii) the President has counseled Employee in writing about the neglect of duty and given Employee a reasonable opportunity to improve, and (iii) Employee's neglect of duty either has continued at a material level after a reasonable opportunity to improve or has reoccurred at a material level within one year after Employee was last counseled.
For purposes of this agreement, "poor job performance" means and is limited to the following circumstances: (i) Employee has, in one or more material respects, failed to perform Employee's job duties in a reasonable and appropriate manner, (ii) the President has counseled Employee in writing about the performance problems and given Employee a reasonable opportunity to improve, and (iii) Employee's performance problems either have continued at a material level after a reasonable opportunity to improve or the same or similar performance problems have reoccurred at a material level within one year after Employee was last counseled.
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
BSQUARE GmbH, a German corporation
BSQUARE K. K., a Japanese corporation
BlueWater Systems, Inc., a Washington corporation
BSQUARE Silicon Valley Corporation, a Washington corporation
Toolcrafts K. K., a Japanese corporation
Embedded Technologies, Inc., a Minnesota corporation
BSQUARE Taiwan Corporation, a Republic of China corporation
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-89333) pertaining to the Amended and Restated Stock Option Plan and 1999 Employee Stock Purchase Plan, the Registration Statement (Form S-8 No. 333-70290) pertaining to the 2000 Nonqualified Stock Option Plan, the Registration Statement (Form S-8 No. 333-44306) pertaining to the Mainbrace 1998 Stock Option Plan, the Registration Statement (Form S-8 No. 333-70210) pertaining to the Amended and Restated Stock Option Plan, the Registration Statement (Form S-8 No. 333-85340) pertaining to the Infogation Corporation 1996 Stock Option Plan; Infogation Corporation 2001 Stock Option/Stock Issuance Plan, and the Registration Statement (Form S-8 No. 333-90848) pertaining to the Amended and Restated Stock Option Plan; 1999 Employee Stock Purchase Plan of BSQUARE Corporation of our report dated January 23, 2004, with respect to the consolidated financial statements and schedule of BSQUARE Corporation included in the Annual Report (Form 10-K) for the year ended December 31, 2003.
/s/ Ernst & Young LLP
Seattle, Washington
March 25, 2004
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EXHIBIT 31.1
CERTIFICATION PURSUANT TO
EXCHANGE ACT RULE 13a-14
I, Brian T. Crowley, President and Chief Executive Officer of BSQUARE Corporation, certify that:
1. I have reviewed this Annual Report on Form 10-K of BSQUARE Corporation;
2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an Annual Report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
Date: March 29, 2004 /s/ Brian T. Crowley
-------------------------------------
Brian T. Crowley
President and Chief Executive Officer
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Exhibit 31.2
CERTIFICATION PURSUANT TO
EXCHANGE ACT RULE 13a-14
I, Scott C. Mahan, Vice President of Finance and Chief Financial Officer of BSQUARE Corporation, certify that:
1. I have reviewed this Annual Report on Form 10-K of BSQUARE Corporation;
2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an Annual Report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation, of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
Date: March 29, 2004 /s/ SCOTT C. MAHAN
-----------------------------------------
Scott C. Mahan
Vice President of Finance and Chief
Financial Officer
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EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Brian T. Crowley, President and Chief Executive Officer, certify that:
1. To my knowledge, this report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. To my knowledge, the information in this report fairly presents, in all material respects, the financial condition and results of operations of BSQUARE Corporation as of December 31, 2003.
Date: March 29, 2004 /s/ BRIAN T. CROWLEY
------------------------------------------
Brian T. Crowley
President and Chief Executive Officer
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EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350
Pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Scott C. Mahan, Vice President of Finance and Chief Financial Officer, certify that:
1. To my knowledge, this report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and
2. To my knowledge, the information in this report fairly presents, in all material respects, the financial condition and results of operations of BSQUARE Corporation as of December 31, 2003.
Date: March 29, 2004 /s/ SCOTT C. MAHAN
------------------------------------------
Scott C. Mahan
Vice President of Finance and Chief
Financial Officer
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