<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 5, 1996
REGISTRATION NO. 333-4458
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MULTIPLE ZONES INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
WASHINGTON 5961
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
<CAPTION>
WASHINGTON 91-1431894
<S> <C>
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
15815 S.E. 37TH STREET
BELLEVUE, WASHINGTON 98006-1800
(206) 603-2400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
PETER J. BIERE, SENIOR VICE PRESIDENT -- FINANCE
15815 S.E. 37TH STREET
BELLEVUE, WASHINGTON 98006-1800
(206) 603-2400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES OF COMMUNICATIONS TO:
<TABLE>
<S> <C>
JOHN M. STEEL, ESQ. JOHN F. SEEGAL, ESQ.
FRANK C. WOODRUFF, ESQ. IAIN MICKLE, ESQ.
MICHAEL C. SCHWARTZ, ESQ. SCOTT D. ELLIOTT, ESQ.
GRAHAM & JAMES LLP ORRICK, HERRINGTON & SUTCLIFFE
1001 FOURTH AVENUE PLAZA, SUITE 4500 400 SANSOME STREET
SEATTLE, WASHINGTON 98154 SAN FRANCISCO, CALIFORNIA 94111
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
AS SOON AS POSSIBLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 5, 1996
2,200,000 SHARES
MULTIPLE ZONES INTERNATIONAL, INC.
COMMON STOCK
All of the 2,200,000 shares of Common Stock being offered hereby are being
sold by the Company. Prior to the offering, there has been no public market for
the Common Stock. It is currently estimated that the initial public offering
price will be between $14.00 and $16.00 per share. See "Underwriting" for the
factors to be considered in determining the initial public offering price.
Application has been made for inclusion of the Common Stock on the Nasdaq
National Market under the symbol "MZON."
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING
PRICE DISCOUNTS AND PROCEEDS TO
TO PUBLIC COMMISSIONS(1) COMPANY(2)
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Per Share.......................................... $ $ $
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Total(3)........................................... $ $ $
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</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting offering expenses payable by the Company estimated at
$860,000.
(3) The Company has granted the Underwriters a 30-day option to purchase an
aggregate of up to 330,000 additional shares of Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriting."
------------------------
The shares of Common Stock are offered by the Underwriters subject to prior
sale when, as and if delivered to and accepted by them, and subject to the right
of the Underwriters to withdraw, cancel or modify such offer and to reject
orders in whole or in part. It is expected that delivery of the shares of Common
Stock will be made on or about June , 1996.
LOGO
FURMAN SELZ
The date of this Prospectus is June , 1996
<PAGE> 3
INSIDE FRONT COVER: ONE REPRESENTATIVE CATALOG COVER FOR EACH OF "THE MAC
ZONE" AND "THE PC ZONE," SET ABOVE THE COMPANY'S NAME.
GATEFOLD: MAP OF THE WORLD SHOWING LOCATIONS OF THE COMPANY AND ITS
SUBSIDIARIES AND LICENSEES, SET BELOW THE COMPANY'S NAME AND ABOVE THE TEXT "A
LEADING GLOBAL DIRECT MARKETER OF MICROCOMPUTER PRODUCTS," AND SURROUNDED BY A
FLOAT CHART OF PICTURES OF (1) REPRESENTATIVE SAMPLES OF THE COMPANY'S FLAGSHIP
CATALOGS, STAND-ALONE DIRECT MAIL PIECES AND SPECIALTY CATALOGS; (2)
REPRESENTATIVE SAMPLES OF TRADE PUBLICATIONS IN WHICH THE COMPANY ADVERTISES;
(3) THE COMPANY'S HOME PAGE ON MARKETPLACE-MCI; (4) THE COMPANY'S TELEMARKETING
OPERATIONS CENTER; (5) THE THIRD-PARTY DISTRIBUTION FACILITY UTILIZED BY THE
COMPANY; (6) AN AIRCRAFT OF AN OVERNIGHT EXPRESS DELIVERY COMPANY; (7) MODELS
REPRESENTING USERS OF PRODUCTS SOLD BY THE COMPANY; AND (8) MODEL OF A COMPUTER
REPRESENTING THE COMPANY'S CUSTOMER DATABASE.
INSIDE BACK COVER: COVERS OF REPRESENTATIVE CATALOGS OF ELEVEN OF THE
COMPANY'S SUBSIDIARIES AND LICENSEES, THE NAMES OF THE COUNTRIES WHERE THE
COMPANY'S SUBSIDIARIES AND LICENSEES ARE LOCATED, THE TEXT "ONE COMPANY . . .
GLOBAL MARKETPLACE," AND PICTURES OF TWO REPRESENTATIVE PROMOTIONAL SPREADS IN
THE COMPANY'S CATALOGS AND TWO REPRESENTATIVE ADVERTISEMENTS BY THE COMPANY IN
TRADE PUBLICATIONS.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements, including the Notes thereto,
appearing elsewhere in this Prospectus. See "Risk Factors" for information
prospective investors should consider.
THE COMPANY
Multiple Zones International, Inc. (the "Company") is a leading
international direct marketer of microcomputer hardware, software, peripherals
and accessories for users of Apple Macintosh-compatible ("Mac") and
IBM-compatible ("PC") computers through two flagship catalogs, THE MAC ZONE and
THE PC ZONE. During 1995, over 29 million catalogs were distributed by the
Company domestically, with additional circulation by its subsidiaries and
licensees through operations located in 26 other countries worldwide, more
countries than any other catalog retailer of microcomputer products. The Company
offers a broad selection of over 18,000 microcomputer products at competitive
prices primarily through its distinctive catalogs, as well as through major
trade publications and an outbound telemarketing sales team focused on small and
medium-sized corporate, governmental and educational accounts. The Company
tailors its catalogs and targets specific customers based on individual customer
records in the Company's proprietary database. This targeted marketing, coupled
with the Company's knowledgeable sales assistance and superior customer service,
has produced an established base of satisfied customers. The Company believes
that a substantial portion of its revenues represent sales to repeat customers.
The Company has achieved strong growth in both sales and profitability. Net
sales grew at a compound annual growth rate of 50.9% to $242.6 million in 1995
from $46.8 million in 1991. Principally as a result of increased sales of
microcomputer hardware products, the Company's average order size grew to $336
in the three months ended March 31, 1996 from $201 in 1993. The Company's net
income increased to $3.2 million in 1995 from $468,000 in 1991, and increased to
$2.2 million in the three months ended March 31, 1996 from $234,000 in the
comparable prior period.
According to industry data, direct marketing is expected to be the fastest
growing major distribution channel for microcomputer products, with a domestic
market share that is projected to more than double from its 1994 level to over
15% of total domestic microcomputer product sales in 1998. The Company believes
this projected growth is attributable to consumers' increasing familiarity with
microcomputers, the emergence of component "plug-and-play" compatibility, and
manufacturers' growing recognition of the cost-effectiveness of marketing
microcomputer products through catalogs. Annual domestic sales of microcomputer
products are also projected to more than double from their 1994 level to over
$120 billion in 1998. The Company believes the international market for
microcomputer products should experience similar growth trends, due primarily to
an increasing installed base of microcomputers and expansion by manufacturers
seeking additional markets for their products. As a leading participant in the
direct marketing channel, the Company believes it is well positioned to
capitalize on the anticipated growth of the markets for microcomputer products.
Over the past three years, the Company has made significant investments in
its operating infrastructure to capitalize on its position in this rapidly
growing market. The Company has devoted considerable resources to building a
highly qualified management team to guide its anticipated growth; developing one
of the channel's largest databases of purchasers and prospective purchasers of
microcomputer products; installing sophisticated systems to provide the Company
with real-time access to information on customer purchase histories, inventory
availability, and product specifications, benefits and features; developing
in-house catalog design and production capability; and establishing
international operations.
The Company intends to leverage its operating infrastructure to strengthen
and expand its offerings of PC products to meet increasing customer demand;
increase the circulation of its flagship catalogs; increase the proportion of
the Company's sales to business accounts through its outbound sales team; expand
sales through its international operations; and enhance the Company's presence
on the World Wide Web of the Internet. In addition, the Company will strive to
enhance growth and profitability by expanding the breadth of its product
offerings; increasing inventory depth to improve in-stock positions; increasing
its emphasis on sales of hardware products in order to increase average order
size and gross profit dollars; purchasing more products directly from
manufacturers at more favorable prices; and more aggressively pursuing
first-to-market, end-of-life-cycle and other higher-margin product offerings.
3
<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company........... 2,200,000 shares
Common Stock outstanding after the 12,493,710 shares
offering(1).................................
Use of proceeds............................... Repayment of borrowings, working capital
requirements and other general corporate purposes.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol........ MZON
</TABLE>
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(1) Does not include 1,127,560 shares of Common Stock issuable upon exercise of
stock options and warrants outstanding at May 31, 1996, and an additional
1,062,750 shares of Common Stock reserved for future issuance under the
Company's stock option and employee stock purchase plans. See "Management --
Benefit Plans," "-- Certain Transactions -- Benaroya-Bessemer Financing" and
Notes 10 and 11 of Notes to Consolidated Financial Statements.
------------------------
The Company was incorporated on November 23, 1988 as a Washington
corporation. Unless the context otherwise requires, the term "Company" refers to
Multiple Zones International, Inc. and its direct and indirect subsidiaries. The
Company's principal executive offices are located at 15815 S.E. 37th Street,
Bellevue, Washington 98006-1800 and its telephone number is (206) 603-2400.
THE MAC ZONE(R) and THE PC ZONE(R) are registered service marks of the
Company. All other trademarks or service marks appearing in this Prospectus are
trademarks or registered trademarks of the respective companies that utilize
them.
------------------------
Unless otherwise indicated, all information in this Prospectus: (i) assumes
that the Underwriters' over-allotment option will not be exercised; (ii)
reflects a 50,000-for-9 stock split effected June 7, 1993, a 2-for-1 stock split
effected February 9, 1994, and a 1.5-for-1 stock split effected June 3, 1996;
(iii) reflects the conversion of all outstanding shares of the Company's Series
A Convertible Preferred Stock ("Series A Preferred Stock") into 1,874,999 shares
of Common Stock in October 1995; and (iv) reflects the conversion of all
outstanding shares of the Company's Series B Convertible Preferred Stock
("Series B Preferred Stock"), which were issued in October 1995, into 918,711
shares of Common Stock upon consummation of the offering. This Prospectus
contains forward-looking statements within the meaning of the federal securities
laws. There are many factors that could cause actual events and results to
differ materially from those expressed in or implied by these statements,
including those set forth in "Risk Factors" and elsewhere in this Prospectus.
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................... $46,834 $77,023 $80,515 $113,456 $242,587 $46,228 $100,927
Gross profit................... 7,483 9,868 11,217 15,245 31,550 6,301 13,963
Income (loss) from
operations................... 526 (1,953) 631 834 6,125 543 3,885
Net income (loss)(1)........... $ 468 $(2,065) $ 451 $ 412 $ 3,192 $ 234 $ 2,173
Pro forma earnings per
share(1)..................... $ 0.31 $ 0.02 $ 0.21
Shares used in computation of
pro forma earnings per
share(1)..................... 10,386 10,363 10,380
SELECTED OPERATING DATA(2):
Catalogs distributed........... 6,900,000 8,000,000 15,000,000 29,000,000 8,000,000 9,500,000
Number of shipments(3)......... 395,000 415,000 522,000 859,000 198,000 283,000
Average order size(3).......... $ 211 $ 201 $ 212 $ 273 $ 229 $ 336
Customer and inquirer
database(4).................. 1,626,000 1,908,000 1,711,000 2,023,000
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED(5)
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(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................................... $ 8,498 $ 38,328
Total assets.................................................................. 92,701 110,741
Short-term debt............................................................... 12,970 1,180
Long-term debt, net of current portion........................................ 1,497 1,497
Series B Preferred Stock...................................................... 6,691 --
Total shareholders' equity.................................................... 6,706 43,227
</TABLE>
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(1) During the period from its inception through June 5, 1993, the Company
elected to be treated as an S Corporation for federal income tax purposes
and accordingly made no provision for federal income taxes on income earned,
and derived no federal income tax benefit from any losses incurred, during
that period. See Note 8 of Notes to Consolidated Financial Statements. If
the Company had been subject to federal income taxes for all of 1993 at the
statutory rates in effect for that year, its pro forma net income for 1993
would have been $299,600. The pro forma earnings per share and pro forma
average number of common shares outstanding data are unaudited and assume
that all options and warrants exercisable for Common Stock, and all
securities convertible into Common Stock, issued by the Company since May 3,
1995 were issued and exercised or converted on January 1, 1993.
(2) Selected operating data are unaudited and exclude international operating
data.
(3) Number of shipments is the number of outbound shipments to customers from
the third-party distribution center utilized by the Company. Average order
size is calculated by dividing domestic gross sales by the number of
shipments.
(4) The database includes customer and inquirer records. Customers are people
who have purchased or received products from the Company. Inquirers are
people who have requested a catalog or product information from the Company.
Due to a change in the Company's customer and inquirer database, data for
1992 and 1993 are not comparable to the data for more recent periods and
accordingly have been omitted.
(5) As adjusted to give effect to the: (i) conversion of all outstanding shares
of Series B Preferred Stock upon consummation of the offering; (ii) sale of
the 2,200,000 shares of Common Stock being offered hereby at an assumed
initial public offering price of $15.00 per share less Underwriting
Discounts and Commissions and estimated expenses of the offering; and (iii)
application of the estimated net proceeds of the offering. See "Use of
Proceeds."
5
<PAGE> 7
RISK FACTORS
In evaluating the Company, its business and an investment in the shares of
Common Stock offered hereby, prospective investors should consider the following
risk factors, in addition to the other information in this Prospectus. This
Prospectus contains forward-looking statements within the meaning of the federal
securities laws. There are many factors that could cause actual events and
results to differ materially from those expressed in or implied by these
statements, including those set forth below and elsewhere in this Prospectus.
RISKS ASSOCIATED WITH RAPID GROWTH
Since its formation, the Company has experienced rapid growth in its
customer base and catalog circulation as its net sales increased to $242.6
million in 1995 from $46.8 million in 1991. This growth has placed strains on
the Company's management resources, facilities and equipment. The Company's
business strategy is to pursue additional growth by, among other things,
expanding the circulation of its catalogs; increasing its offerings of PC
products; increasing sales to business accounts through the Company's outbound
sales team; expanding the breadth of its product offerings; increasing inventory
depth; increasing the Company's emphasis on sales of hardware products; more
aggressively pursuing first-to-market, end-of-life-cycle and other similar
product offerings; and increasing international operations. To pursue this
strategy, the Company will be required to increase its capital and operating
expenditures and to retain, motivate and effectively manage its employees. Any
additional growth that may occur can be expected to result in additional demands
on the Company's resources. The Company's future success will depend in part on
its ability to manage growth successfully. Failure by the Company to do so would
have a material adverse effect on its business, financial condition and results
of operations. There can be no assurance that the Company's future growth in
sales and profits, if any, will be at rates comparable to those experienced in
recent periods. See "Business -- Business Strategy" and "-- Growth Strategy."
VARIABILITY OF QUARTERLY RESULTS
The Company has experienced significant fluctuations in its operating
results, and these fluctuations may continue in the future. The Company was only
marginally profitable in 1993 and 1994. The Company's results of operations are
significantly affected by many factors, including seasonal and other
fluctuations in demand for microcomputer products and in profit margins on
products sold, catalog timing and circulation, product availability, and timing
of releases of new and upgraded products. Many of these factors are outside the
control of the Company. The Company's operating results are heavily dependent
upon its ability to predict sales levels, monitor and control associated
expenses, and carefully manage all aspects of its operations, including product
selection and pricing, purchasing and payables practices, inventory management,
and catalog funding, production and circulation. If revenues do not meet
expectations in any given quarter, or if the Company experiences difficulty in
monitoring or controlling associated expenses, operating results may be
materially adversely affected. There can be no assurance that the Company will
be profitable on a quarterly or annual basis. It is possible that in some future
quarter the expectations of public market analysts and investors will exceed the
Company's operating results. In such event, the price of the Common Stock would
likely be materially adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
RELIANCE ON VENDOR SUPPORT AND RELATIONSHIPS
Most product manufacturers provide the Company with co-op advertising
support in exchange for product coverage in the Company's catalogs. This support
significantly defrays the expense of catalog production. The level of co-op
advertising support available to the Company may decline in the future. Such a
decline could increase the Company's selling, general and administrative expense
as a percentage of sales and have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Catalogs."
The Company acquires products for resale from manufacturers as well as from
distributors. Purchases of products from distributors constituted 35.5% and
25.7%, respectively, of the Company's total product purchases in 1995 and the
three months ended March 31, 1996. Purchases from Ingram Micro, Inc. ("Ingram
6
<PAGE> 8
Micro") and from Apple Computer, Inc. ("Apple") represented 23.7% and 19.6%,
respectively, of the Company's total product purchases in 1995, and 15.1% and
27.0%, respectively, of the Company's total product purchases in the three
months ended March 31, 1996. No other vendor supplied more than 10% of the
Company's total product purchases in 1995 or the three months ended March 31,
1996. Certain hardware manufacturers either do not permit the Company to sell
the full line of their products or limit the number of product units available
to direct marketers such as the Company. Most of the Company's product vendors
provide the Company with trade credit, of which the net amount outstanding at
March 31, 1996 was $54.9 million. A number of major manufacturers participate in
flooring arrangements that assist the Company in financing purchases of their
products. Substantially all of the Company's contracts and arrangements with its
vendors are terminable without notice or upon short notice. Termination,
interruption or contraction of the Company's relationships with its vendors
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Purchasing."
DEPENDENCE ON SALES OF MAC PRODUCTS
The Company is largely dependent on sales of Mac products manufactured by a
broad variety of vendors, including Apple. Mac products represented 73.8%, 74.5%
and 73.8% of the Company's gross sales in 1994, 1995 and the three months ended
March 31, 1996, respectively. Following Apple's decision in 1994 to authorize
several direct marketers, including the Company, to sell microcomputers
manufactured by Apple, the Company's sales of Apple products increased
significantly from 2.0% to 23.5% of the Company's gross sales in 1994 and 1995,
respectively, and constituted 22.2% of the Company's gross sales in the three
months ended March 31, 1996. As is customary in the microcomputer products
industry, Apple participates in a flooring arrangement that assists the Company
in financing purchases of its products. Apple recently announced that: (i)
during the three months ended March 31, 1996, it experienced a significant
decline in revenues, number of units shipped and its share of the worldwide and
domestic microcomputer markets; (ii) it had significant overstocked inventory
positions on certain products; (iii) it planned to lay off 2,800 employees; (iv)
it incurred a $740 million operating loss for the three months ended March 31,
1996 as a result of inventory write-downs, restructuring costs, reduced revenues
and a significant decline in gross margin percentage; and (v) it commenced a
recall of certain product models. During 1995, certain Apple microcomputers were
in short supply. The Company's sales of microcomputers and other products
manufactured by Apple may be limited if the Company's reseller agreement with
Apple is curtailed or terminated or if product availability or financing is
otherwise restricted. A further decline in the demand for, or availability of,
Apple or other Mac products would likely have a material adverse effect on the
Company's business, financial condition and results of operations. Although the
Company intends to pursue increased sales of PC products to reduce its
dependence on sales of Mac products, there can be no assurance that it will be
successful in doing so.
COMPETITIVE, PRICING AND ECONOMIC RISKS
The microcomputer products industry is highly competitive. The Company
competes with other national and international direct marketers. The Company
also competes with product manufacturers that sell direct to end-users;
specialty microcomputer retailers; microcomputer and general merchandise
superstores; consumer electronic and office supply stores; and shopping services
on television, the Internet and commercial on-line networks. The Company
competes not only for customers, but also for co-op advertising support from
microcomputer product manufacturers. Some of the Company's competitors are
larger and have substantially greater financial resources, superior operating
results, and larger catalog circulations and customer bases than the Company. In
addition, several direct marketers have recently been acquired by larger
competitors. There can be no assurance that the Company will be able to compete
effectively with existing competitors or any new competitors that may enter the
market, or that the Company's business, financial condition and results of
operations will not be adversely affected by intensified competition.
The microcomputer products industry has experienced intense price
competition. The Company believes that competition may increase in the future
and that it may be required to reduce its profit margins to remain competitive.
Such margin decreases could have a material adverse effect on the Company's
business, financial
7
<PAGE> 9
condition and results of operations. In addition, the Company has recently
increased its sales of microcomputer hardware products, for which profit margins
are generally lower than those associated with software products.
The market for microcomputer products has grown rapidly in recent years. If
the growth of this market or the direct marketing channel were to cease or
decrease, the Company's business, financial condition and results of operations
could be adversely affected. Demand for many of the products carried by the
Company may be subject to economic cycles. A recession could have a material
adverse effect on the Company's sales and profitability. There can be no
assurance that the Company will be able to maintain consistent profit margins or
levels of profitability. See "Business -- Competition."
POTENTIAL DISRUPTION OF BUSINESS
The Company's success is dependent in part on the quality, reliability and
proper utilization of its information, telecommunication, desktop publishing and
other systems, which are used for marketing, catalog design and production,
purchasing, inventory management, order processing, product distribution,
accounts receivable, customer service and general accounting functions. The
Company does not currently have a redundant or back-up telecommunication system.
The Company intends to relocate its corporate headquarters, including its
telemarketing operations, to a larger facility in the summer of 1996. Any
interruption in any of the Company's systems or other disruption in the
Company's business as a result of the relocation of its operations center, power
outages, system failure, the installation of planned enhancements or otherwise,
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Systems" and
"-- Facilities."
ADMINISTRATIVE, FINANCIAL AND OTHER RISKS OF INTERNATIONAL OPERATIONS
The Company currently operates subsidiaries in ten foreign countries and
also derives license fees and royalties from catalog direct marketers located in
16 other foreign countries who sell microcomputer products in numerous foreign
countries using the Company's service marks. International subsidiary operations
accounted for 10.2%, 10.9% and 13.7% of the Company's net sales in 1994, 1995
and the three months ended March 31, 1996, respectively. The Company intends to
expand its international operations and may seek to acquire a controlling
interest in certain of its licensees. The Company's international operations are
subject to the general risks of remote management as well as other risks
associated with the conduct of business in foreign countries, including
economic, legal and regulatory uncertainties; currency fluctuations, which the
Company generally does not attempt to hedge; restrictions on repatriation of
earnings; potential conflicting claims to its service marks; export-import
regulations; customs matters; foreign collection problems; military, political
and transportation risks; and foreign laws and governmental regulation. The
Company's licensees may terminate their agreements with the Company on short
notice. Following termination, most of these licensees would retain rights to
their customer information without any express contractual restriction
preventing future competition. To date, three of the Company's licensees have
terminated their agreements in order to affiliate with a competitor. There can
be no assurance that the Company will be able to retain its licensees or to
replace any licensees it may lose in the future. See "Business -- International
Operations."
CHANGING METHODS OF DISTRIBUTION
The market for microcomputer products is evolving at a rapid rate both in
terms of product offerings and the methods of distribution for those products.
Direct marketing of microcomputer products through catalogs is a relatively new
distribution channel and currently accounts for only a relatively small
percentage of total microcomputer product sales. Some manufacturers sell their
hardware and software products directly to end-users, or to certain categories
of end-users such as corporate accounts; these efforts may intensify in the
future. Some software vendors distribute products through volume site licenses
or directly to end-users' microcomputers through the use of modem
telecommunications. Microcomputer products are also sold through
8
<PAGE> 10
shopping services on the Internet and commercial on-line networks, encrypted
CD-ROM technology, infomercials and television shopping networks. Any or all of
these methods of distribution may attract increased patronage and other new
methods of distribution, such as interactive television, may emerge in the
future. In order to maintain its profitability, the Company will be required to
remain competitive with existing and evolving distribution channels and methods,
and possibly to develop or adopt new methods for distribution of products in the
future. Failure by the Company to do so could have a material adverse effect on
its business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company's performance will depend to a significant extent upon the
efforts and abilities of members of its senior management, particularly: Victor
J. Melfi, Jr., President and Chief Executive Officer; Bruce S. Martin,
Co-President and Chief Operating Officer; Peter J. Biere, Senior Vice
President -- Finance and Chief Financial Officer; and Sadrudin J. Kabani,
Chairman of the Board. Messrs. Melfi and Martin have had a relatively limited
tenure with the Company. The competition for qualified management personnel in
the microcomputer products industry and the direct marketing channel is
extremely intense, and the Company has recently lost several management
employees to a competitor. The loss of the services of one or more of the
Company's senior management could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
success will depend on its ability to hire, train and retain skilled personnel
in all areas of its business. There can be no assurance that the Company will be
able to attract, train and retain sufficient qualified personnel to achieve its
business objectives. See "Business -- Employees" and "Management."
RAPID TECHNOLOGICAL CHANGE AND EXPOSURE TO INVENTORY OBSOLESCENCE
The market for microcomputer products is characterized by rapid
technological change and frequent introduction of new products and product
enhancements. The Company's success depends in part on its ability to identify
and market products that meet the needs of the marketplace. In order to satisfy
customer demand and to obtain greater purchasing discounts, the Company expects
to carry increased inventory levels of certain products in the future, which
will subject it to increased risk of inventory obsolescence. Pursuant to its
business strategy, the Company intends, among other things, to place larger
inventory stocking orders, increase its participation in first-to-market and
end-of-life-cycle purchase opportunities and market more products on a
private-label basis, all of which will further increase the risk of inventory
obsolescence. While the Company seeks to reduce its inventory exposure through a
variety of inventory control procedures and policies, including vendor price
protection and product return programs where available, there can be no
assurance that the Company will be able to avoid losses related to obsolete
inventory. End-of-life-cycle products are typically acquired without return
privileges. In addition, some manufacturers provide the Company with co-op
advertising support in the form of barter products, for which it often has no
return privileges. See "Business -- Business Strategy" and "-- Growth Strategy."
STATE EXCISE TAX UNCERTAINTIES
The Company presently collects retail sales taxes or similar taxes only on
sales to customers in the States of Washington and Ohio. Various states have
sought to require direct marketers to collect sales taxes on sales to their
residents. In addition, legislation that would expand the ability of states to
impose sales tax collection obligations on direct marketers has been introduced
in Congress on numerous occasions. The United States Supreme Court has held that
a state may not impose a sales tax collection obligation on a direct marketer
whose contact with the state is limited to the distribution of catalogs and
other advertising materials and the delivery of purchased products by U.S. mail
or interstate common carrier. Due to its presence on various forms of electronic
media and other factors, the Company's contact with many states may exceed the
contact involved in the Supreme Court case. The Company cannot predict the level
of contact that is sufficient to permit a state to impose on the Company a sales
tax collection obligation. There can be no assurance that the Company will not
incur material liabilities on account of past or future failures to accurately
determine the Company's sales tax collection obligations or other excise tax
liabilities with respect to one or more states. If
9
<PAGE> 11
the Company were required to collect sales tax, the effective cost of the
Company's products to customers in states that imposed a collection obligation
would increase, which could reduce demand for products sold by the Company and
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Regulatory and Legal Matters."
POTENTIAL INCREASES IN POSTAGE, SHIPPING AND PAPER COSTS
Postage and shipping costs, as well as the cost of paper for the Company's
catalogs, are significant expenses in the operation of the Company's business.
The Company generally mails its catalogs through the U.S. Postal Service and
ships its products to customers by overnight delivery and ground delivery
services. The Company generally passes on only a portion of its shipping costs
directly to customers, particularly for back-ordered products. In 1995, postage
rates for mailing the Company's catalogs and overnight rates for delivery of
orders increased. Paper costs have generally increased over the last several
years. Any future increases in postage or shipping rates or in paper costs could
have a material adverse effect on the Company's business, financial condition
and results of operations.
RELIANCE ON OUTSOURCED DISTRIBUTION
Advanced Logistics Services Corp. ("Airborne Logistics") provides and
operates a warehouse and distribution center for the Company in Wilmington, Ohio
under a contract that expires in March 1998. Under the contract, employees of
Airborne Logistics utilize the Company's systems, policies and procedures to
receive, log and warehouse inventory shipments from product vendors, fill and
ship domestic customer orders, and return inventory to product vendors when
requested by the Company. The Company pays a flat rate for each order filled,
which rate is subject to periodic increases over the remainder of 1996. Any
limitation or interruption of the services being provided by Airborne Logistics
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Distribution Center."
CONTROL BY EXISTING SHAREHOLDERS; ANTI-TAKEOVER PROVISIONS
After consummation of the offering, the Company's directors and executive
officers will beneficially own in the aggregate approximately 72% of the
Company's outstanding Common Stock (70% if the Underwriters' over-allotment
option is exercised in full). Certain principal shareholders or their
representatives are directors or executive officers of the Company. As a result
of such ownership, these shareholders, acting as a group, will be able to
control matters requiring approval by the shareholders of the Company, including
the election of directors. The Company is also authorized, without shareholder
approval, to issue preferred stock with such rights, preferences and privileges
as the Board of Directors may determine, including rights that may be senior to
or otherwise adversely affect the Common Stock. In addition, certain provisions
of Washington state law and of the Company's Articles of Incorporation and
Bylaws could make it more difficult for a third party to acquire, or could
discourage a third party from attempting to acquire, control of the Company. Any
or all of these factors could limit or depress the price that certain investors
might be willing to pay in the future for shares of Common Stock. See "Principal
Shareholders" and "Description of Capital Stock."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock will be determined
by negotiations between the Company and the Representatives of the Underwriters,
and may not be indicative of the market price for the Common Stock in the
future. See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. There can be no assurance that an
active trading market for the Common Stock will develop or be sustained after
the offering. If a trading market develops, the market price of the Common Stock
may fluctuate widely as a result of various factors, such as period-to-period
fluctuations in the Company's operating results, sales of Common Stock by
existing shareholders, developments in the microcomputer industry or the methods
of distribution of microcomputer products, competitive factors, regulatory
developments, economic and other external factors, general market conditions,
and market conditions affecting stocks of microcomputer product
10
<PAGE> 12
manufacturers and resellers in particular. The stock market in general, and the
stocks of microcomputer product resellers in particular, have in the past
experienced extreme volatility in trading prices and volumes that has often been
unrelated to operating performance. Such market volatility may have a
significant adverse impact on the market price and marketability of the Common
Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the offering, 12,493,710 shares of Common Stock will
be outstanding (12,823,710 shares if the Underwriters' over-allotment option is
exercised in full), of which the 2,200,000 shares offered hereby (2,530,000
shares if the Underwriters' over-allotment option is exercised in full) will be
freely tradable on the public market without restriction or further registration
under the Securities Act of 1933, as amended (the "Securities Act"), except to
the extent such shares are held by an affiliate of the Company. The remaining
10,293,710 shares of Common Stock were issued and sold by the Company in private
transactions, and public sale thereof is restricted except to the extent they
are registered under the Securities Act or sold in accordance with an exemption
from such registration. The Company and the holders of all of these remaining
shares have entered into agreements with the Underwriters (the "Lock-up
Agreements") not to sell, offer to sell, solicit an offer to buy, contract to
sell, grant any option to purchase, or otherwise transfer or dispose of any
shares of Common Stock, or any securities convertible into or exercisable or
exchangeable for Common Stock, for a period of 180 days after the date of this
Prospectus without the prior written consent of Dain Bosworth Incorporated. Upon
expiration of the 180-day period, 9,374,999 of these remaining 10,293,710 shares
will be eligible for immediate public sale under Rule 144 as currently in effect
and the remaining shares of Common Stock will not be eligible for public sale
until October 1997 unless earlier registered under the Securities Act pursuant
to certain contractual registration rights. At May 31, 1996, options and
warrants for 1,127,560 shares of Common Stock were outstanding, of which options
for 230,250 shares will be exercisable upon consummation of the offering and the
shares issued upon exercise will be potentially eligible for public sale 90 days
after the date of this Prospectus pursuant to Rule 701 under the Securities Act;
of these shares, 200,250 shares are subject to Lock-up Agreements. Sales of
substantial amounts of shares of Common Stock in the public market following the
offering could adversely affect the market price for the Common Stock. See
"Shares Eligible for Future Sale."
DILUTION
Investors in Common Stock in the offering will experience immediate
dilution in the net tangible book value of their shares. Assuming an initial
public offering price of $15.00 per share, dilution to new investors would be
$11.65 per share. Additional dilution will occur upon exercise of outstanding
stock options and warrants. If the Company seeks additional capital in the
future, the issuance of shares or convertible debt to obtain such capital may
lead to further dilution. See "Dilution."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby at an assumed initial public offering price of $15.00 per share,
after deducting estimated Underwriting Discounts and Commissions and estimated
expenses of the offering, are estimated to be $29,830,000 ($34,433,500 if the
Underwriters' over-allotment option is exercised in full).
The Company intends to use the net proceeds to repay all amounts owed under
the Company's primary bank line of credit, which totaled $20.6 million at June
3, 1996, as well as for other working capital requirements and general corporate
purposes. This facility accrues interest at a rate equal to 0.75% above the
bank's prime rate (9% at June 3, 1996) and expires on December 31, 1996. A
portion of the net proceeds may also be used to take advantage of future
acquisition opportunities. The Company has no present understandings, agreements
or commitments with respect to any material acquisition, and there can be no
assurance that any acquisition will occur. Pending the above uses, the net
proceeds will be invested in short-term, liquid investments.
11
<PAGE> 13
CAPITALIZATION
The following table sets forth the short-term obligations and
capitalization of the Company at March 31, 1996, and the short-term obligations
and capitalization of the Company as adjusted to give effect to the: (i)
conversion of all outstanding shares of Series B Preferred Stock upon
consummation of the offering; (ii) sale by the Company of the 2,200,000 shares
of Common Stock offered hereby at an assumed initial public offering price of
$15.00 per share less estimated Underwriting Discounts and Commissions and
estimated expenses of the offering; and (iii) application of the estimated net
proceeds of the offering. See "Use of Proceeds" and Notes 10 and 11 of Notes to
Consolidated Financial Statements. The information set forth below is unaudited
and should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto.
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Bank lines of credit................................................... $12,260 $ 470
Current portion of capital lease obligations........................... 710 710
------- -------
Total short-term debt............................................. 12,970 1,180
======= =======
Long-term debt, net of current portion................................. 1,497 1,497
------- -------
Series B Preferred Stock, no par value, $11.43 per share liquidation
preference:
612,476 shares issued and outstanding; none issued and outstanding as
adjusted(1)....................................................... 6,691 --
------- -------
Shareholders' Equity:
Common Stock, no par value: 45,000,000 shares authorized; 9,374,999
shares issued and outstanding; 12,493,710 shares issued and
outstanding as adjusted(2)........................................ 2,750 39,271
Foreign currency translation adjustment.............................. 25 25
Retained earnings.................................................... 3,931 3,931
------- -------
Total shareholders' equity........................................... 6,706 43,227
------- -------
Total capitalization.............................................. $14,894 $44,724
======= =======
</TABLE>
- ---------------
(1) At March 31, 1996, the Company had 5,000,000 shares of preferred stock
authorized, of which 612,476 shares were designated as Series B Preferred
Stock and 4,387,524 were undesignated.
(2) Does not include 724,810 shares of Common Stock issuable upon exercise of
stock options and warrants outstanding at March 31, 1996, and an additional
565,500 shares of Common Stock reserved for future issuance under the
Company's stock option and employee stock purchase plans. Subsequent to
March 31, 1996, options for an additional 433,500 shares of Common Stock
were granted by the Company, options for 30,750 shares of Common Stock
expired, and the number of shares reserved for issuance under the Company's
stock option plan was increased by 900,000. See "Management -- Benefit
Plans," "-- Certain Transactions -- Benaroya-Bessemer Financing" and Notes
10 and 11 of Notes to Consolidated Financial Statements.
DIVIDEND POLICY
The Company does not anticipate paying any cash dividends or other
distributions on its Common Stock in the foreseeable future. The Company's
primary bank line of credit restricts the payment of cash dividends. It will be
the policy of the Company's Board of Directors for the foreseeable future to
retain any earnings to finance the operations and expansion of the Company's
business.
12
<PAGE> 14
DILUTION
At March 31, 1996, the pro forma net tangible book value of the Company,
assuming all outstanding shares of Series B Preferred Stock had been converted
into Common Stock at that date, was approximately $12.0 million, or $1.17 per
share. Pro forma net tangible book value per share represents the Company's
total tangible assets less total liabilities divided by the number of shares of
Common Stock outstanding.
Net tangible book value dilution per share represents the difference
between the amount per share paid by the purchasers of Common Stock in the
offering and the pro forma net tangible book value per share of Common Stock
immediately after consummation of the offering. After giving effect to the sale
by the Company of the 2,200,000 shares of Common Stock offered hereby, at the
assumed initial public offering price of $15.00 per share, and receipt of the
estimated net proceeds therefrom, the pro forma net tangible book value of the
Company at March 31, 1996 would have been approximately $41.8 million, or $3.35
per share. This represents an immediate increase in net tangible book value of
$2.18 per share to existing shareholders and an immediate dilution of $11.65 per
share to investors in the offering, as illustrated by the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $15.00
Net tangible book value per share at March 31, 1996.............. $ 1.17
Increase per share attributable to investors in the offering..... 2.18
------
Pro forma net tangible book value per share after the offering..... 3.35
------
Dilution in net tangible book value per share to investors in the
offering......................................................... $11.65
======
</TABLE>
The following table summarizes on a pro forma basis at March 31, 1996, for
existing shareholders and investors in the offering, the number of shares of
Common Stock purchased from the Company, the total consideration paid or to be
paid to the Company, assuming an initial public offering price of $15.00 per
share, and the average price paid per share.
<TABLE>
<CAPTION>
SHARES PURCHASED (1) TOTAL CONSIDERATION
---------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders.............. 10,293,710 82.4% $ 9,750,000 22.8% $ 0.95
Investors in the offering.......... 2,200,000 17.6 33,000,000 77.2 $ 15.00
---------- ----- ---------- ---- -
Total.................... 12,493,710 100.0% $42,750,000 100.0%
========== ===== ========== =====
</TABLE>
- ---------------
(1) The table is based on ownership at March 31, 1996, giving effect to the
conversion of all outstanding shares of Series B Preferred Stock into Common
Stock, and assumes no exercise of the Underwriters' over-allotment option.
Exercise of the Underwriters' over-allotment option in full would: (i)
reduce the proportion of shares held by existing shareholders to 80.3% of
the total number of shares of Common Stock outstanding after the offering;
and (ii) increase the number of shares held by investors in the offering to
2,530,000 shares, or 19.7% of such total number of shares.
The above computations assume no exercise of outstanding stock options and
warrants. At May 31, 1996, options and warrants to purchase 1,127,560 shares of
Common Stock were outstanding at a weighted average exercise price of $7.97 per
share. Exercise of such options and warrants will result in further dilution to
new investors. See "Management -- Benefit Plans," "-- Certain
Transactions -- Benaroya-Bessemer Financing" and Notes 10 and 11 of Notes to
Consolidated Financial Statements.
13
<PAGE> 15
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected consolidated financial and operating data should be
read in conjunction with the Company's Consolidated Financial Statements and
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Prospectus. The selected
consolidated financial data for the four years in the period ended December 31,
1995 are derived from the Consolidated Financial Statements of the Company
audited by Coopers & Lybrand L.L.P., independent accountants, and the selected
consolidated financial data for the year ended December 31, 1991 are derived
from the Consolidated Financial Statements of the Company audited by the
Company's prior independent auditors. The selected consolidated financial data
for the three months ended March 31, 1995 and 1996 are derived from unaudited
financial statements prepared by the Company on a basis consistent with the
Company's audited Consolidated Financial Statements and, in the opinion of
management, include all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the results for such periods.
Operating results for the three months ended March 31, 1996 are not necessarily
indicative of the results that may be expected for any other interim period or
for the year ending December 31, 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................ $46,834 $77,023 $80,515 $113,456 $242,587 $46,228 $100,927
Cost of sales........................ 39,351 67,155 69,298 98,211 211,037 39,927 86,964
------- ------- ------- -------- -------- ------- --------
Gross profit......................... 7,483 9,868 11,217 15,245 31,550 6,301 13,963
Selling, general and administrative
expenses........................... 6,957 11,821 10,586 14,411 25,425 5,758 10,078
------- ------- ------- -------- -------- ------- --------
Income (loss) from operations........ 526 (1,953) 631 834 6,125 543 3,885
Other (income) expense:
Interest expense................... 55 193 213 277 1,149 167 504
Other income....................... 3 (62) (44) (78) (132) (27) (85)
Minority interest.................. -- (19) 8 16 69 26 49
------- ------- ------- -------- -------- ------- --------
Income (loss) before income taxes.... 468 (2,065) 454 619 5,039 377 3,417
Provision for income taxes(1)........ -- -- 3 207 1,847 143 1,244
------- ------- ------- -------- -------- ------- --------
Net income (loss)(1)................. $ 468 $(2,065) $ 451 $ 412 $ 3,192 $ 234 $ 2,173
======= ======= ======= ======== ======== ======= ========
Pro forma earnings per share(1)...... $ 0.31 $ 0.02 $ 0.21
======== ======= ========
Shares used in computation of pro
forma earnings per share(1)........ 10,386 10,363 10,380
SELECTED OPERATING DATA(2):
Catalogs distributed................. 6,900,000 8,000,000 15,000,000 29,000,000 8,000,000 9,500,000
Number of shipments(3)............... 395,000 415,000 522,000 859,000 198,000 283,000
Average order size(3)................ $211 $201 $212 $273 $229 $336
Customer and inquirer database(4).... 1,626,000 1,908,000 1,711,000 2,023,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
------- ------- ------- -------- -------- ----------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............ $ 402 $(2,142) $ 217 $ 525 $ 7,750 $ 8,498
Total assets......................... 9,403 12,589 17,681 25,705 79,392 92,701
Short-term debt...................... 1,019 2,007 1,303 3,617 12,757 12,970
Long-term debt, net of current
portion............................ 93 305 732 791 1,665 1,497
Series B Preferred Stock............. -- -- -- -- 6,461 6,691
Total shareholders' equity
(deficit).......................... 901 (1,164) 1,287 1,705 4,736 6,706
</TABLE>
(See footnotes on following page)
14
<PAGE> 16
- ---------------
(1) During the period from its inception through June 5, 1993, the Company
elected to be treated as an S Corporation for federal income tax purposes
and accordingly made no provision for federal income taxes on income earned,
and derived no federal income tax benefit from any losses incurred, during
that period. See Note 8 of Notes to Consolidated Financial Statements. If
the Company had been subject to federal income taxes for all of 1993 at the
statutory rates in effect for that year, its pro forma net income for 1993
would have been $299,600. The pro forma earnings per share and pro forma
average number of common shares outstanding data are unaudited and assume
that all options and warrants exercisable for Common Stock, and all
securities convertible into Common Stock, issued by the Company since May 3,
1995 were issued and exercised or converted on January 1, 1993.
(2) Selected operating data are unaudited and exclude international operating
data.
(3) Number of shipments is the number of outbound shipments to customers from
the third-party distribution center utilized by the Company. Average order
size is calculated by dividing domestic gross sales by the number of
shipments.
(4) The database includes customer and inquirer records. Customers are people
who have purchased or received products from the Company. Inquirers are
people who have requested a catalog or product information from the Company.
Due to a change in the Company's customer and inquirer database, data for
1992 and 1993 are not comparable to the data for more recent periods and
accordingly have been omitted.
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Selected Consolidated Financial and Operating Data and the
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus.
GENERAL
The Company began operations in November 1988, generating customer orders
for Mac products by advertising in national trade publications. Catalog
circulation commenced with THE MAC ZONE in 1990, followed by THE PC ZONE in
1992. International subsidiary operations and licensing activities commenced in
1992, and outbound telemarketing operations, principally to business accounts,
were added in 1993.
The Company's financial resources have historically been concentrated on
establishing an infrastructure capable of supporting sustained profitable
growth. Over the past several years, the Company has focused on adding
management depth; improving the size, quality and responsiveness of its customer
database; investing in scalable information systems; developing its
international operations; increasing inventory levels to support growing
customer demand; strengthening sales of PC products; establishing an outbound
telemarketing force to increase sales to business accounts; and developing
in-house catalog design and production capability. In addition, the Company has
aggressively increased its domestic catalog circulation, which grew to over 29
million catalogs in 1995 from 6.9 million catalogs in 1992.
As a result of the Company's authorization to sell microcomputer products
manufactured by Apple, Hewlett-Packard, IBM and other manufacturers, the
Company's sales of these and other hardware products increased significantly to
78.1% of gross sales in the three months ended March 31, 1996, compared to 70.4%
and 54.7% of gross sales in 1995 and 1994, respectively. The Company's average
order size also increased to $336 in the three months ended March 31, 1996,
compared to $273 in 1995 and $212 in 1994. As average order size increases, more
gross profit dollars are available to cover order processing and other
transaction costs and to offset other factors that tend to adversely affect
gross margin percentage, such as increases in sales of hardware products and
sales to business accounts. The Company now offers a more complete computing
solution, including a broad selection of both hardware and software products,
which it believes has been one of the principal factors responsible for the
recent increases in both net sales and average order size. The Company believes
these increases are also attributable in part to the growing acceptance of the
direct marketing channel by microcomputer product users.
Sales through the Company's foreign subsidiaries accounted for 13.7% of the
Company's net sales in the three months ended March 31, 1996, compared to 10.9%
and 10.2% of net sales in 1995 and 1994, respectively. The Company expects
foreign subsidiary sales to increase as a percentage of net sales due to
increasing foreign demand for microcomputer products, growing acceptance of the
direct marketing channel in foreign markets, and the Company's continued efforts
to expand its foreign business operations. The Company currently has ten foreign
subsidiaries and has license relationships with 16 foreign licensees.
The Company's revenues consist primarily of sales of microcomputer
hardware, software, peripherals and accessories, as well as license fees and
royalties from foreign licensees. Net sales reflect the effects of product
returns. Gross profit consists of net sales less product and freight costs.
Selling, general and administrative ("SG&A") expenses include advertising
expense net of co-op advertising recovery, warehousing, selling commissions,
order processing, telephone and credit card fees, and other costs such as
administrative salaries, depreciation, rent and general overhead expenses. Other
expense represents interest expense net of non-operating income and minority
interests in the Company's foreign subsidiaries.
16
<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected items
from the Company's Consolidated Statements of Operations expressed as a
percentage of net sales.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................ 86.1 86.6 87.0 86.4 86.2
----- ----- ----- ----- -----
Gross profit............................. 13.9 13.4 13.0 13.6 13.8
SG&A expenses............................ 13.1 12.7 10.5 12.4 10.0
----- ----- ----- ----- -----
Income from operations................... 0.8 0.7 2.5 1.2 3.8
Other expense............................ 0.2 0.2 0.4 0.4 0.4
----- ----- ----- ----- -----
Income before income taxes............... 0.6 0.5 2.1 0.8 3.4
Provision for income taxes............... 0.0 0.1 0.8 0.3 1.2
----- ----- ----- ----- -----
Net income............................... 0.6% 0.4% 1.3% 0.5% 2.2%
===== ===== ===== ===== =====
</TABLE>
Comparison of Three-Month Periods Ended March 31, 1996 and 1995
Net Sales. Net sales increased 118.4% to $100.9 million in the three
months ended March 31, 1996 from $46.2 million in the comparable prior period.
The increase resulted primarily from an increase in hardware sales to 78.1% of
gross sales in the three months ended March 31, 1996 from 62.1% in the
comparable prior period. This increase in hardware sales contributed to a 46.7%
increase between periods in average order size to $336 from $229. Also
contributing to the increase in net sales was an increase in orders due
primarily to higher catalog circulation, which grew to 9.5 million in the three
months ended March 31, 1996, an increase of 18.7% over the comparable prior
period. International subsidiary net sales in the three months ended March 31,
1996 were $13.8 million, an increase of 165.4% over the comparable prior period,
primarily resulting from the recent addition of subsidiaries in Austria, Germany
and The Netherlands and sales growth in the Company's operations in Denmark and
Great Britain.
Gross Profit. Gross profit increased to $14.0 million in the three months
ended March 31, 1996 from $6.3 million in the comparable prior period, and
increased between periods to 13.8% from 13.6% of net sales. Gross profit dollars
increased due to higher sales volumes generated by increases in orders and
average order size. The increase in gross margin percentage resulted from
improved recovery of domestic freight costs and growth in higher-margin product
offerings, partially offset by increased sales of hardware products and sales to
business accounts, which generally carry a lower average gross margin
percentage. The Company expects that profit margins will be beneficially
affected by anticipated growth in its first-to-market, end-of-life-cycle and
other higher-margin product offerings, an increase in the proportion of products
purchased directly from manufacturers, and continued leveraging of transaction
costs over higher sales volumes and average order size. However, the Company
also anticipates that continued growth in sales of hardware products and sales
to business accounts will adversely affect its gross margin percentage.
Selling, General and Administrative Expenses. SG&A expenses increased to
$10.1 million in the three months ended March 31, 1996 from $5.8 million in the
comparable prior period, but decreased between periods as a percentage of net
sales to 10.0% from 12.4%. The dollar increase in SG&A expenses was primarily
attributable to an increase in transaction costs associated with higher sales
volumes, as well as to increased administrative salaries, partially offset by a
decrease in net advertising expense. The decline in SG&A expenses as a
percentage of net sales was due primarily to a decrease in net advertising
expense as a percentage of sales, resulting from improved co-op advertising
recovery and growth in sales at a rate outpacing the growth in SG&A expenses.
17
<PAGE> 19
Other Expense. Other expense increased to $468,000 in the three months
ended March 31, 1996 from $166,000 in the comparable prior period, primarily as
a result of higher interest expense related to higher levels of borrowing on the
Company's primary bank line of credit.
Income Taxes. Income tax expense increased in the three months ended March
31, 1996 to $1.2 million from $143,000 in the comparable prior period, due to
the significant increase in profitability between periods.
Net Income. As a result of the above factors, net income increased to $2.2
million in the three months ended March 31, 1996 from $234,000 in the comparable
prior period.
Comparison of Years Ended December 31, 1995 and 1994
Net Sales. Net sales increased 113.7% to $242.6 million in 1995 from
$113.5 million in 1994. The increase resulted primarily from an increase in
orders due primarily to higher catalog circulation, which grew 93.3% to 29
million in 1995 from 15 million in 1994. The increase in net sales was also due
in part to an increase in hardware sales to 70.4% of gross sales in 1995 from
54.7% in 1994, which contributed to a 28.8% increase in average order size to
$273 in 1995 from $212 in 1994. International subsidiary net sales in 1995 were
$26.3 million, an increase of 128.7% over 1994, primarily resulting from sales
growth in the Company's operations in Denmark, Great Britain and France and the
addition of a subsidiary in The Netherlands in mid-1995.
Gross Profit. Gross profit increased to $31.6 million in 1995 from $15.2
million in 1994, but decreased to 13.0% of net sales in 1995 from 13.4% in 1994.
Gross profit dollars increased due to higher sales volumes generated by
increases in orders and average order size. The decline in gross margin
percentage reflects the increased proportion of sales of hardware products,
partially offset by improved recovery of domestic freight costs in 1995.
Selling, General and Administrative Expenses. SG&A expenses increased to
$25.4 million in 1995 from $14.4 million in 1994, but decreased as a percentage
of net sales to 10.5% in 1995 from 12.7% in 1994. The dollar increase in SG&A
expenses was primarily attributable to an increase in transaction costs
associated with higher sales volumes, as well as to increased administrative
salaries. The decline in SG&A expenses as a percentage of net sales was due
primarily to a decrease in net advertising expense as a percentage of sales,
resulting from improved co-op advertising recovery and growth in sales at a rate
outpacing the growth in SG&A expenses.
Other Expense. Other expense increased to $1.1 million in 1995 from
$215,000 in 1994, primarily as a result of higher interest expense related to
higher levels of borrowing on the Company's primary bank line of credit.
Income Taxes. Income tax expense increased in 1995 to $1.8 million from
$207,000 in 1994, due to the significant increase in profitability during 1995.
Net Income. As a result of the above factors, net income increased to $3.2
million in 1995 from $412,000 in 1994.
Comparison of Years Ended December 31, 1994 and 1993
Net Sales. Net sales increased 41.0% to $113.5 million in 1994 from $80.5
million in 1993. The increase resulted primarily from an increase in orders due
to higher catalog circulation and expanded product offerings, although the rate
of growth was adversely impacted in part due to the Company's curtailment of
trade publication advertising in 1994. Catalog circulation grew to 15 million in
1994, an increase of 87.5% over 1993. Most of the increase in circulation
occurred in the last half of 1994. Also contributing to the increase in net
sales was an increase in sales to business accounts as a proportion of sales due
in part to outbound telemarketing operations, which commenced in early 1993.
International subsidiary sales in 1994 grew to $11.5 million, an increase of
219.4% over their 1993 level, primarily due to the addition of subsidiary
operations in Great Britain and Denmark in late 1993 and mid-1994, respectively.
18
<PAGE> 20
Gross Profit. Gross profit increased to $15.2 million in 1994 from $11.2
million in 1993, but decreased to 13.4% of net sales in 1994 from 13.9% in 1993.
Gross profit dollars increased primarily due to higher sales volumes generated
by the increase in orders and to an increase in average order size resulting
primarily from increased levels of hardware sales. The decline in gross margin
percentage was primarily attributable to an increase in sales to business
accounts.
Selling, General and Administrative Expenses. SG&A expenses increased to
$14.4 million in 1994 from $10.6 million in 1993, but decreased as a percentage
of net sales to 12.7% in 1994 from 13.1% in 1993. The dollar increase in SG&A
expenses was primarily attributable to an increase in transaction costs
associated with higher sales volumes and an increase in net advertising expense
due to increased catalog circulation. The decline in SG&A expenses as a
percentage of net sales was due primarily to growth in sales at a rate outpacing
the growth in SG&A expenses.
Other Expense. Other expense increased to $215,000 in 1994 from $177,000
in 1993. This increase is primarily as a result of higher interest expense
related to higher levels of borrowing on the Company's primary bank line of
credit.
Income Taxes. Income tax expense increased in 1994 to $207,000 from $3,000
in 1993, due to the June 1993 termination of the Company's S Corporation tax
status. In 1993, the Company reported a tax benefit of approximately $89,000
associated with this change in tax status.
Net Income. As a result of the above factors, net income decreased to
$412,000 in 1994 from $451,000 in 1993.
QUARTERLY RESULTS
The following tables present the Company's unaudited quarterly consolidated
results of operations, in dollars and as a percentage of net sales, for the nine
quarters ended March 31, 1996. This information has been prepared by the Company
on a basis consistent with the Company's audited Consolidated Financial
Statements and, in the opinion of management, includes all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the results for such periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------------------
1994 1995 1996
------------------------------------------ ------------------------------------------ --------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31
-------- ------- -------- ------- -------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. $22,576 $21,401 $ 27,756 $41,723 $46,228 $50,815 $ 58,677 $86,867 $100,927
Cost of sales.............. 19,481 18,386 23,869 36,475 39,927 44,295 50,904 75,911 86,964
------- ------- ------- ------- ------- ------- ------- ------- --------
Gross profit............... 3,095 3,015 3,887 5,248 6,301 6,520 7,773 10,956 13,963
SG&A expenses.............. 3,043 2,782 3,812 4,774 5,758 5,220 6,326 8,121 10,078
------- ------- ------- ------- ------- ------- ------- ------- --------
Income from operations..... 52 233 75 474 543 1,300 1,447 2,835 3,885
Other expense.............. 10 70 88 47 166 287 276 357 468
------- ------- ------- ------- ------- ------- ------- ------- --------
Income (loss) before income
taxes.................... 42 163 (13) 427 377 1,013 1,171 2,478 3,417
Provision (benefit) for
income taxes............. 14 55 (4) 142 143 383 444 877 1,244
------- ------- ------- ------- ------- ------- ------- ------- --------
Net income (loss).......... $ 28 $ 108 $ (9) $ 285 $ 234 $ 630 $ 727 $ 1,601 $ 2,173
======= ======= ======= ======= ======= ======= ======= ======= ========
Pro forma earnings per
share.................... $ 0.02 $ 0.06 $ 0.07 $ 0.15 $ 0.21
======= ======= ======= ======= ========
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------------------
1994 1995 1996
------------------------------------------ ------------------------------------------ --------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31
-------- ------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.............. 86.3 85.9 86.0 87.4 86.4 87.2 86.8 87.4 86.2
----- ----- ----- ----- ----- ----- ----- ----- -----
Gross profit............... 13.7 14.1 14.0 12.6 13.6 12.8 13.2 12.6 13.8
SG&A expenses.............. 13.5 13.0 13.7 11.4 12.4 10.2 10.7 9.3 10.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Income from operations..... 0.2 1.1 0.3 1.2 1.2 2.6 2.5 3.3 3.8
Other expense.............. 0.1 0.3 0.3 0.2 0.4 0.6 0.5 0.4 0.4
----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before income
taxes.................... 0.1 0.8 (0.0) 1.0 0.8 2.0 2.0 2.9 3.4
Provision (benefit) for
income taxes............. 0.1 0.3 (0.0) 0.3 0.3 0.8 0.8 1.1 1.2
----- ----- ----- ----- ----- ----- ----- ----- -----
Net income (loss).......... 0.0% 0.5% (0.0)% 0.7% 0.5% 1.2% 1.2% 1.8% 2.2%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
The Company has historically experienced fluctuations in its gross margin
percentage due primarily to variability in sales of hardware products as a
percentage of gross sales, price fluctuations resulting from new product
introductions, changes in the proportion of products purchased directly from
manufacturers rather than distributors, and other general conditions in
technology markets. Results of operations for any quarter are not necessarily
indicative of the results that may be expected for any future period. There can
be no assurance that the Company will not experience significant variations in
its future results of operations. See "Risk Factors -- Variability of Quarterly
Results."
SEASONALITY AND TRENDS
The Company believes that certain seasonal factors cause sales of
microcomputer software and hardware products through the direct marketing
channel to be somewhat stronger in the fourth and first calendar quarters than
in the second and third quarters. The fourth quarter tends to be stronger as
manufacturers make year-end introductions of new products and increase related
marketing activities, and as corporate purchasing activities increase at the end
of budgetary cycles. Sales in the first quarter typically benefit from the
fourth quarter sales as customers add peripherals and additional memory
products.
The market for microcomputer products is characterized by rapid change and
frequent introductions of new products and product enhancements. These changes
result in frequent price fluctuations. Typically, prices of microcomputers
initially increase with improvements in features, such as processing speed and
storage capacity, and subsequently decrease as manufacturers pass on savings
from lower-cost components and reduce their inventories of older models.
Pursuant to its business strategy, the Company intends, among other things,
to place larger inventory stocking orders, increase its participation in
first-to-market and end-of-life-cycle purchase opportunities and market more
products on a private-label basis, all of which increase the risk of inventory
obsolescence. To reduce this risk, the Company has agreements with many vendors
containing provisions whereby vendors supply price protection and product return
privileges, subject to some limitations. End-of-life-cycle products are
typically acquired without return privileges.
The Company receives co-op advertising support from product manufacturers,
which significantly defrays catalog production and distribution costs. Growth in
sales has led to increased manufacturer support for the Company's catalog
marketing efforts and, coupled with improved controls over catalog costs and
recovery efforts, has resulted in a reduction of net advertising expense as a
percentage of sales. Advertising expense net of co-op advertising recovery
represented 0.7%, 2.3% and 2.3% of net sales for 1995, 1994 and 1993,
respectively. See "Risk Factors -- Reliance on Vendor Support and Relationships"
and "-- Rapid Technological Change and Exposure to Inventory Obsolescence."
The Company does not believe that inflation has had a material impact on
its results of operations. However, there can be no assurance that inflation
will not have such an effect in future periods.
20
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
The Company had total assets of $92.7 million at March 31, 1996, of which
$85.3 million were current assets. At March 31, 1996 and December 31, 1995 and
1994, the Company had cash and cash equivalents of $1.0 million, $1.2 million
and $514,000, respectively, and working capital of $8.5 million, $7.8 million
and $525,000, respectively. Net cash used in operating activities was $2.1
million, $14.4 million and $4.4 million in the three months ended March 31, 1996
and in 1995 and 1994, respectively. Cash outflows in these periods were
primarily due to higher accounts receivable resulting from growing sales to
business accounts, and to investment in increased inventories necessary to
support rapidly growing sales. In the three months ended March 31, 1996 and in
1995 and 1994, accounts receivable increased by $7.4 million, $12.5 million and
$3.1 million, respectively, and inventories increased by $5.8 million, $28.2
million and $3.9 million, respectively. At March 31, 1996, inventories included
$8.1 million of inventory in transit.
Cash outlays for capital expenditures were $433,000, $1.4 million and
$538,000 in the three months ended March 31, 1996 and in 1995 and 1994,
respectively. In addition, the Company incurred capital lease obligations during
1995 and 1994 of $1.8 million and $405,000, respectively (none was incurred in
the three months ended March 31, 1996). These expenditures were primarily for
information and telecommunication system enhancements, furniture and equipment,
and leasehold improvements. The Company estimates that its annualized capital
expenditures in 1996 will approximate $6.0 million, as it continues to make
other investments in its infrastructure to support its anticipated growth,
including the relocation of its corporate headquarters and telemarketing
operations to a larger facility. See "Use of Proceeds" and "Business --
Facilities."
The Company's primary sources of financing have been vendor credit lines,
bank lines of credit and equity provided by its shareholders, including a $7.0
million investment by the holders of the Series B Preferred Stock completed in
October 1995. The level of borrowings under the Company's bank lines of credit
increased to $12.3 million at March 31, 1996, compared to $12.0 million and $3.3
million at December 31, 1995 and 1994, respectively. The Company intends to
repay its primary bank line of credit and finance its working capital and
capital expenditure requirements with the net proceeds of the offering, together
with vendor credit lines, operating cash flow and additional borrowings on its
bank lines of credit. See "Use of Proceeds."
The Company has a revolving line of credit of $25.0 million from a
commercial bank collateralized by inventories and accounts receivable. This
facility is scheduled to expire on December 31, 1996. At March 31, 1996, there
were borrowings outstanding under the facility of $11.8 million accruing
interest at a rate equal to 0.75% above the bank's prime rate (9% at March 31,
1996), in addition to $2.8 million of unused letters of credit. The facility
contains certain restrictive covenants related to leverage, current ratios,
capital expenditures and subsidiary investments. At June 3, 1996, there were
$20.6 million in borrowings outstanding under the facility.
The net amount of vendor credit outstanding at March 31, 1996 was $54.9
million. A portion of this vendor credit was drawn from a $25.0 million
inventory financing facility between the Company and a commercial lender, which
provides financing for, and is collateralized by, inventory purchased from
certain participating vendors. The terms of each advance under the facility are
determined at the time inventory is purchased. Typically, no interest is charged
to the Company for the first 45 days an advance is outstanding, after which
interest accrues at an agreed rate for that particular advance. The facility is
terminable at will by either party, subject to certain advance notice
requirements. Outstanding advances under the facility totalled $16.4 million at
March 31, 1996, of which $8.1 million was related to inventory in transit. The
facility contains various restrictive covenants relating to profitability,
tangible net worth, leverage, dispositions and use of collateral, other asset
dispositions, and merger and consolidation of the Company.
The Company anticipates that the net proceeds of the offering, together
with vendor credit lines, operating cash flow, available cash and cash
equivalents, and bank lines of credit will provide it with sufficient funds to
finance its operations through at least the next twelve months. However, if
working capital or other capital requirements are greater than currently
anticipated, the Company could be required to seek additional funds through
sales of equity, debt or convertible securities or increased credit facilities.
There can be no assurance that additional financing will be available or that,
if available, the financing will be on terms favorable to the Company and its
shareholders.
21
<PAGE> 23
BUSINESS
GENERAL
The Company is a leading international direct marketer of microcomputer
hardware, software, peripherals and accessories for users of Mac and PC
computers through two flagship catalogs, THE MAC ZONE and THE PC ZONE. During
1995, over 29 million catalogs were distributed by the Company domestically,
with additional circulation by its subsidiaries and licensees through operations
located in 26 other countries worldwide, more countries than any other catalog
retailer of microcomputer products. The Company offers a broad selection of over
18,000 microcomputer products at competitive prices primarily through its
distinctive catalogs, as well as through major trade publications and an
outbound telemarketing sales team focused on small and medium-sized corporate,
governmental and educational accounts. The Company tailors its catalogs and
targets specific customers based on individual customer records in its
proprietary database. This targeted marketing, coupled with the Company's
knowledgeable sales assistance and superior customer service, has produced an
established base of satisfied customers. The Company believes that a substantial
portion of its revenues represent sales to repeat customers.
The Company has achieved strong growth in both sales and profitability. Net
sales grew at a compound annual growth rate of 50.9% to $242.6 million in 1995
from $46.8 million in 1991. Principally as a result of increased sales of
microcomputer hardware products, the Company's average order size grew to $336
in the three months ended March 31, 1996 from $201 in 1993. The Company's net
income increased to $3.2 million in 1995 from $468,000 in 1991, and increased to
$2.2 million in the three months ended March 31, 1996 from $234,000 in the
comparable prior period.
INDUSTRY BACKGROUND
The market for microcomputer products is served by a variety of
distribution channels. According to industry data published in May 1995, direct
marketing is expected to be the fastest growing major distribution channel, with
a domestic market share that is projected to more than double from its 1994
level to over 15% of total domestic microcomputer product sales in 1998. The
Company believes that many individuals and businesses, increasingly familiar
with microcomputers, have become more receptive to catalog marketing and now
make their purchase decisions based primarily on product selection and
availability, convenience and price. At the same time, intense competition for
market share has forced microcomputer product manufacturers to seek new channels
through which to distribute their products. Direct marketers enjoy efficiencies
in the form of centralized operations and distribution and are able to offer
broader product selection and purchasing convenience. The Company believes
direct marketing efficiencies not only better satisfy many segments of the
customer market but also provide a cost-effective marketing vehicle for product
manufacturers.
Domestic sales of microcomputer hardware, software, peripherals and
accessories exceeded $56 billion in 1994, representing a 32.9% compound annual
growth rate since 1992. Annual domestic sales of microcomputer products are
projected to more than double from their 1994 level to over $120 billion in
1998, according to industry data. The Company believes that sales of
microcomputer products are increasing as a result of a number of factors,
including improved affordability and performance of microcomputer products;
growing user familiarity with microcomputers; rapid technological advances and
resulting short product life cycles; the proliferation of microcomputer
products; and the emergence of industry standards, component "plug-and-play"
compatibility, and higher performance operating systems such as Microsoft
Windows 95. The Company believes that the international market for microcomputer
products should experience similar growth trends, due primarily to an increasing
installed base of microcomputers and expansion by manufacturers seeking
additional markets for their products.
The direct marketing channel is currently dominated by a small number of
companies that commenced operations prior to 1990. New entrants into the channel
must overcome a number of significant barriers to entry, including the time and
resources required to build a customer database of sufficient size, quality and
responsiveness for cost-effective circulation; the significant investment
required to develop the information and operating infrastructure required for a
direct catalog marketer; the advantages enjoyed by larger established
22
<PAGE> 24
competitors in terms of purchasing and operating efficiencies; the established
relationships of manufacturers who may be reluctant to allocate co-op
advertising funds to additional participants; and the difficulty of identifying
and recruiting management personnel with significant relevant experience.
The direct marketing channel has historically served a significant share of
the market for Mac products, but a relatively small share of the market for PC
products. However, sales of PC products through this channel are increasing
dramatically, as consumer familiarity with microcomputer products grows,
products are becoming increasingly user-friendly, and manufacturers recognize
the cost-effectiveness of the catalog channel. As the industry continues to
evolve, the Company believes that first-time buyers may largely utilize retail
channels that provide the opportunity to "touch and feel" the products, but that
a growing number of computer-literate consumers will increasingly rely on the
convenience and other advantages of the direct marketing channel. The Company
believes the growing acceptance of this channel, particularly for PC products,
presents a significant opportunity for increased sales by direct marketers.
BUSINESS STRATEGY
The Company's business objective is to strengthen its position as a leading
international direct marketer of products for users of Mac and PC
microcomputers. The central elements of the Company's business strategy include:
Targeted Direct Marketing. The Company's core competence lies in
generating demand for microcomputer products by utilizing the Company's database
marketing capabilities to distribute its catalogs to a targeted base of
computer-literate customers who have demonstrated an acceptance of the direct
marketing channel. The Company circulates its catalogs to selected names from
the Company's database of 2.0 million domestic customers and inquirers, as well
as to prospective customers on mailing lists obtained from list brokers and
other sources. The Company believes that by selectively targeting its catalogs
to specific groups of customers with known product affinities and purchasing
characteristics, the Company will be able to increase order rates from customers
and enhance the effectiveness of its catalogs and their desirability as a
marketing channel for product manufacturers. The Company personalizes its
catalogs, often with individual messages based on individual customer records.
In addition to its flagship catalogs, THE MAC ZONE and THE PC ZONE, the Company
occasionally produces targeted specialty catalogs offering relatively narrow but
deep product selection, such as THE HOME COMPUTER CATALOG, which is focused on
home computing needs, and THE LEARNING ZONE, which is targeted at purchasers for
primary, secondary and post-secondary educational institutions. The Company also
produces stand-alone direct mail pieces for specialized offerings, such as
product upgrades, and occasionally creates specialty catalogs based on vendor
and end-user needs. The Company intends to explore opportunities to further
pursue these targeted marketing efforts.
Development of Product Breadth and Mix. The Company has significantly
broadened its product offerings over the past 18 months, increasing the number
of products offered to over 18,000. The Company plans to continue to broaden its
product selection, which it believes should enable it to offer more
comprehensive computing solutions and to increase customer satisfaction. The
Company also intends to continue to increase its emphasis on microcomputers,
printers, monitors, memory, mass storage, networking, communications and other
hardware products, particularly in the PC category, which it believes should
result in a higher average order size. In addition, the Company plans to
merchandise a broader selection of private-label products such as mass storage
devices, modems and other peripherals.
Improved Purchasing Opportunities. The Company intends to focus on
opportunities to offer higher-margin products, which it believes will be more
readily available in view of the additional financial strength provided by the
offering. The Company intends to obtain larger allocations of constrained
products, which often are available only if purchased in significant quantities;
expand inventory positions of end-of-life-cycle products, which typically must
be purchased in large quantities and which can be offered at attractive price
points to end users; pursue first-to-market product offerings; and purchase more
products directly from manufacturers at more favorable prices than are available
through distributors. The Company believes that these purchasing opportunities
will have a continued beneficial effect on its gross profit margins, and that
improved product availability is likely to enhance customer satisfaction and
retention as well as expansion of
23
<PAGE> 25
its customer base. The Company believes the additional financial strength
provided by the offering will enable it to more effectively satisfy its
customers' current excess demand for selected products.
Continued Development of Infrastructure. The Company expects to further
develop its infrastructure to support effective management of its anticipated
growth. The Company continues to devote significant resources to develop and
maintain sophisticated information, telecommunication, catalog production and
other systems essential for the successful operation of its domestic and
international businesses. These systems afford the Company's management,
telemarketing, customer service and technical support personnel real-time access
to information on customer purchase histories, inventory availability, and
detailed descriptions of product specifications, benefits and features. The
Company intends to make increased use of prospect lists and marketing data,
which enable it to improve the size, quality and responsiveness of its customer
database. The Company is currently building a new site on the World Wide Web of
the Internet in order to more aggressively pursue on-line marketing
opportunities.
GROWTH STRATEGY
The Company is pursuing a number of initiatives designed to promote future
growth. The Company believes the additional financial strength provided by the
offering should permit it to more aggressively pursue these initiatives, which
include the following:
Increased Sales of PC Products. The Company believes that sales of PC
products represent its greatest opportunity for future growth, in view of the
tremendous size of the PC microcomputer market and the relatively small but
growing share of that market currently served by the direct marketing channel.
The Company believes that the percentage of PC products sold through this
channel is increasing steadily, reflecting the importance of convenience and
broad product selection and availability to a growing number of PC consumers and
the growing acceptance of the channel by PC product manufacturers. The Company
intends to aggressively pursue increased sales of PC hardware and software
products through expanded merchandising of PC products through THE PC ZONE
catalog to offer a better mix of high-demand and high average order size
products; increased offerings of a broad range of name-brand products of major
manufacturers; increased circulation of THE PC ZONE catalog; increased
advertising in PC trade publications; and increased emphasis on outbound
telemarketing to business accounts, which predominantly purchase PC products.
Improved Catalog Effectiveness. The Company plans to feature a broader
variety of products in its flagship catalogs, THE MAC ZONE and THE PC ZONE,
including first-to-market, end-of-life-cycle, private-label and other
higher-margin product offerings. The circulation of these catalogs grew to over
9.5 million in the three months ended March 31, 1996 from 8.0 million in the
comparable prior period, and the Company intends to seek to further increase
sales and acquire new customers by continuing to expand the circulation of these
catalogs in 1996. The Company also expects to attract new catalog customers by
increasing its advertising in microcomputer trade publications.
Expansion of Outbound Sales. The Company believes that sales to small and
medium-sized corporate, governmental and educational accounts represent another
strong growth opportunity for the Company, particularly with respect to PC
products. Through frequent telephone contact and a commitment to individual
attention and superior service, the Company's outbound sales team seeks to build
long-term relationships with these business accounts. The Company intends to
increase sales to these accounts by expanding its outbound sales team and
committing additional capital to finance the growth of this segment of its
business. In addition, the Company will seek to acquire new business accounts
through targeted catalog mailings. The Company has developed a customized site
on the Internet that allows major accounts to electronically determine product
pricing and availability and to place orders.
International Growth. The Company intends to expand sales through its
existing operations in international markets, which it believes have lower
microcomputer product penetration and are likely to experience more rapid growth
than the domestic market. The Company has subsidiaries and licensees located in
26 countries worldwide, more than any other catalog retailer of microcomputer
products. The Company's international sales (including sales through its
subsidiaries and royalties from licensees) were $15.2 million in
24
<PAGE> 26
the three months ended March 31, 1996, $29.7 million in 1995 and $14.1 million
in 1994, representing increases of 157.6%, 110.6% and 161.1%, respectively, over
the comparable prior periods. The Company intends to pursue purchasing, systems
and other operating efficiencies across its international operations. Due to its
extensive international operations, the Company believes that it is well
positioned to benefit from the anticipated growth in international microcomputer
product sales. In addition, the Company believes that its network of
subsidiaries and licensees is increasingly attractive to manufacturers seeking
global distribution of their products.
Participation in Emerging Marketing Channels. The Company believes the
direct marketing channel for microcomputer products will continue to evolve, and
will in the future involve the increasing use of alternative vehicles such as
on-line shopping and software delivery, interactive television, and encrypted
CD-ROM software delivery. The Company was one of the first participants in the
direct marketing channel to participate in on-line sales of computer products
and currently maintains sites on the Internet at CompuServe and marketplaceMCI.
The Company plans to continue exploring alternative direct marketing vehicles in
order to remain strategically positioned as distribution channels evolve. While
the Company believes that printed catalogs will remain an important tool in the
direct marketing of microcomputer products, it also believes that its strengths
in database marketing and order fulfillment should enable it to respond
effectively to new and emerging direct marketing vehicles.
PRODUCTS
The Company offers over 18,000 hardware, software, peripheral and accessory
products for users of Mac and PC microcomputers from over 1,900 manufacturers.
The Company is also authorized to sell volume site licenses for products of
Microsoft, Lotus and Novell.
Microcomputers. The Company offers a large selection of desktop, laptop
and notebook personal microcomputer systems from leading manufacturers such as
Acer, Apple, AST Research, Canon, Hewlett-Packard, IBM, NEC, Packard Bell, Power
Computing, Texas Instruments, Toshiba and Zenith.
Peripherals and Accessories. The Company also sells peripherals and
components such as printers, monitors, keyboards, memory, fax and other add-on
circuit boards, networking and communications products, mass storage devices,
modems and scanners, as well as various accessories and supplies such as toner
cartridges, diskettes and connectors. Brands offered by the Company include
3Com, Apple, Canon, CTX, Epson, Global Village, Hewlett-Packard, Iomega,
Logitech, Okidata, Phillips, Quantum, Sony, SyQuest, U.S. Robotics and
ViewSonic.
Software. The Company sells a wide variety of software packages in the
business and personal productivity, connectivity, utility and language,
educational and entertainment categories. The Company offers products from
larger, well-known manufacturers as well as numerous specialty products from new
and emerging software development companies. Brands offered by the Company
include Adobe, Claris, Corel, Edmark, IBM, Intuit, Lotus, Macromedia, Microsoft,
Novell, Sierra On-Line, Symantec and The Learning Company.
The following table shows the percentage of the Company's gross sales
attributable to various product categories during 1994, 1995 and the three
months ended March 31, 1996.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995 MARCH 31, 1996
----------------- ----------------- ------------------
<S> <C> <C> <C>
Microcomputers.................... 2.3% 18.5% 26.5%
Peripherals and accessories....... 52.4 51.9 51.6
----- ----- -----
Total hardware.................. 54.7 70.4 78.1
Software.......................... 45.3 29.6 21.9
----- ----- -----
Total................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
In 1995, the Company received authorization from Apple, Hewlett-Packard,
IBM and a number of other major manufacturers to offer all or a portion of their
product lines. The availability of these new product lines
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<PAGE> 27
permitted the Company to pursue its strategy of emphasizing hardware sales by
gradually increasing its catalog coverage of these and other hardware products,
particularly desktop, notebook and laptop microcomputers. Microcomputers
comprised a significantly larger percentage of the Company's gross sales in both
1995 and the three months ended March 31, 1996, compared to 1994, as reflected
in the above table.
Sales of Apple and other Mac products represented 73.8% of gross sales in
the three months ended March 31, 1996, compared to 74.5% and 73.8% of gross
sales in 1995 and 1994, respectively. Sales of Apple products alone constituted
22.2% of gross sales in the three months ended March 31, 1996, compared to 23.5%
of gross sales in 1995 and 2.0% of gross sales in 1994, due primarily to sales
of Apple microcomputers. The Company believes that the percentage of its sales
represented by Mac products is likely to decline gradually over time as a result
of increasing acceptance of the direct marketing channel by PC product
manufacturers and users, the Company's expanded focus on PC product sales, and
its efforts to increase sales to business accounts, which tend to be
concentrated more heavily on PC products. See "Risk Factors -- Reliance on
Vendor Support and Relationships" and "-- Dependence on Sales of Mac Products."
PURCHASING
The Company acquires products directly from manufacturers such as Apple and
IBM as well as from distributors such as Ingram Micro, Merisel and others.
Subsequent to its October 1995 private placement, the Company intensified its
efforts to purchase more hardware products directly from manufacturers and
succeeded in establishing direct purchasing arrangements with Hewlett-Packard,
Kingston, Power Computing and a number of other hardware product manufacturers.
As a result of this success, purchases of products from distributors decreased
from 35.5% to 25.7% of the Company's total product purchases in 1995 and the
three months ended March 31, 1996, respectively. Purchases from Ingram Micro and
Apple represented 23.7% and 19.6%, respectively, of the Company's total product
purchases in 1995. No other vendor supplied more than 10% of the Company's total
product purchases in 1995. The Company intends to continue to purchase more
products directly from manufacturers and pursue other purchasing opportunities
that it believes will have a beneficial effect on its profit margins.
The Company seeks to efficiently manage its inventory to achieve high
product availability and fill rates. The Company utilizes sophisticated
computerized systems that permit real-time monitoring of inventory and assist
the Company in managing inventory at appropriate levels. The Company has 90-day
return privileges on most of its product purchases, and has agreements with many
of its vendors providing price protection should a vendor subsequently lower its
price. The Company had a customer return rate of 8.0% and 8.5% of gross sales in
1995 and the three months ended March 31, 1996, respectively. Product returns
are closely monitored to identify trends in product offerings, enhance customer
satisfaction and reduce overall returns. See "Risk Factors -- Rapid
Technological Change and Exposure to Inventory Obsolescence."
CATALOGS
The Company markets products primarily through targeted mailings of its
flagship catalogs, THE MAC ZONE and THE PC ZONE, each of which has been
published monthly since January 1995. Customers receive frequent catalog
mailings that vary depending on their purchase activity. A catalog is also
included with each order shipped. Catalogs are also mailed periodically to
potential customers in the Company's proprietary database and to prospects
obtained from list brokers and other sources. The following table provides
information regarding the number of editions and total circulation of THE MAC
ZONE and THE PC ZONE catalogs published domestically in 1993, 1994 and 1995.
<TABLE>
<CAPTION>
THE MAC ZONE THE PC ZONE
--------------------------------- ---------------------------------
1993 1994 1995 1993 1994 1995
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Number of editions...... 8 11 12 6 7 12
Total circulation....... 6,000,000 9,000,000 18,500,000 2,000,000 6,000,000 10,500,000
</TABLE>
The Company intends to continue to publish monthly editions of THE MAC ZONE
and THE PC ZONE in 1996. The Company plans to feature a broader variety of
products in its flagship catalogs, including first-to-
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<PAGE> 28
market, end-of-life-cycle, private-label and other higher-margin product
offerings. The circulation of these catalogs grew to over 9.5 million in the
three months ended March 31, 1996 from 8.0 million in the comparable prior
period, and the Company intends to seek to further increase sales and acquire
new customers by continuing to expand the circulation of these catalogs in 1996.
The Company also expects to attract new catalog customers by increasing its
advertising in microcomputer trade publications.
Each edition of the catalogs is typically produced with several cover
versions, which highlight different products of particular interest to specific
customer segments, such as graphics or entertainment products, based on data in
individual customer records. Within each version, the Company further
personalizes certain catalogs with an ink-jetted cover message, also based on
individual customer data, such as "Mary, it's time to upgrade your Adobe Photo
Shop -- See Page 28." Catalogs may also differ based on the customer type. The
Company believes this highly targeted marketing treatment increases customer
response.
The Company has produced targeted specialty catalogs offering a relatively
narrow but deep product line, such as THE HOME COMPUTER CATALOG, which is
focused on home computing needs, and THE LEARNING ZONE, which is targeted at
purchasers for primary, secondary and post-secondary educational institutions.
The Company intends to explore opportunities to further pursue targeted
marketing efforts.
Each catalog is printed with full-color photographs, detailed descriptions
of product specifications, benefits and features, as well as pricing and
ordering information. The catalogs are designed and produced in-house by the
Company's staff of over 40 designers and production artists using a
sophisticated computer-based catalog production system. The Company believes
that in-house preparation of the catalogs streamlines the production process,
provides for greater flexibility and creativity in catalog production, and
results in significant cost savings. The Company also produces direct mail
pieces for highly targeted promotions of specific products, such as software
upgrades, to relevant customers. The Company's catalogs and direct mail pieces
are printed and distributed commercially.
The Company's merchandising group determines the manufacturers whose
products are featured in its catalogs and negotiates the terms and conditions of
product coverage. In exchange for product coverage and the benefit of having
information about their products available to the Company's customers, most
manufacturers provide the Company with co-op advertising support, which
significantly defrays the expense of catalog production. The merchandising group
is also responsible for developing effective advertising campaigns for
manufacturers, managing catalog design and layout, and coordinating product
procurement and inventory management with the Company's purchasing group. In
addition, the merchandising group works closely with the purchasing group to
capitalize on opportunities to expand the Company's first-to-market, end-
of-life-cycle and private-label product offerings.
The Company continuously attempts to attract new catalog customers and
generate orders through multi-page advertisements placed in microcomputer trade
publications such as Mac World, Mac User, PC Magazine, PC World, PC Computing
and Computer Shopper. The Company plans to increase trade publication
advertising during 1996, with most of the increase directed to PC publications
in an effort to increase the Company's sales of PC products and its PC customer
base.
The Company believes the direct marketing channel for microcomputer
products will continue to evolve, and will in the future involve the increasing
use of alternative vehicles such as on-line shopping and software delivery,
interactive television, and encrypted CD-ROM software delivery. The Company was
one of the first participants in the direct marketing channel to participate in
on-line sales of computer products and currently maintains sites on the Internet
at CompuServe (Go MZ) and marketplaceMCI (http://www.internetmci.com/
marketplace/mzone). The Company plans to continue exploring alternative direct
marketing vehicles in order to remain strategically positioned as distribution
channels evolve. While the Company believes that printed catalogs will remain an
important tool in the direct marketing of microcomputer products, it also
believes that its strengths in database marketing and order fulfillment should
enable it to respond effectively to new and emerging direct marketing vehicles.
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<PAGE> 29
DATABASE MARKETING
The Company maintains a proprietary database containing 2.0 million
customer and inquirer records, including approximately 895,000 customers, of
which approximately 450,000 customers have purchased products from the Company
during the last twelve months. The Company believes that a substantial portion
of its revenues represent sales to repeat customers, which it attributes in part
to its ability to effectively target its catalog to computer-literate customers
who have demonstrated an acceptance of the direct marketing channel. As a result
of its database marketing capabilities, the Company is increasingly sought as a
direct marketer by microcomputer product manufacturers. The Company tracks the
buying patterns of its customers in an attempt to anticipate customers' needs
and generate additional product orders. The Company attracts new customers and
prospective customers through advertising in major trade publications. The
Company also attracts new customers through selective mailing of catalogs to
names on mailing lists obtained from list brokers, product manufacturers, trade
magazine publishers and other sources.
The Company periodically analyzes and updates its database and other
available information in order to enhance customer response and order rates. The
Company also strives to improve the size, quality and responsiveness of its
database through the use of sophisticated modeling techniques. The Company
believes that by selectively targeting its catalogs to specific groups of
customers with known product affinities and purchasing characteristics, the
Company will be able to increase order rates from customers and enhance the
effectiveness of its catalogs and their desirability as a marketing channel for
product manufacturers. The Company seeks to leverage its database marketing
capabilities by providing key product manufacturers with marketing research such
as price sensitivity tests, list response analyses, and database marketing
consulting services. The Company believes these efforts assist it in promoting
and preserving positive relationships with these manufacturers. As an example,
the Company participated in a price elasticity test, providing strategic pricing
data to Microsoft's Consumer Division.
SALES, TECHNICAL SUPPORT AND CUSTOMER SERVICE
The Company strives to optimize customer satisfaction and retention through
knowledgeable sales assistance, exceptional technical support and superior
customer service. The Company's sophisticated systems permit its representatives
to quickly access a customer's record and billing information and review details
of past purchases. For most products sold by the Company, the systems also
contain an extensive on-line database of information on product specifications,
benefits and features; compatibility of related products; and system
requirements for software programs. In addition, the systems automatically
prompt telemarketing representatives to offer customers the latest upgrades and
complementary software and peripherals for products previously purchased from
the Company.
New telemarketing representatives participate in an intensive training
program to introduce them to the Company's systems and familiarize them with
available products and services. Training for specific product lines and
continuing technical education are conducted on an ongoing basis and include
manufacturer-sponsored training programs for telemarketing representatives. The
Company regularly monitors calls for quality assurance purposes.
The Company offers toll-free numbers for sales that are staffed 24 hours a
day, seven days a week. Customer service and technical support are also
available toll-free during regular business hours. The Company's staff of
dedicated technical support personnel assist customers with the installation and
operation of the products they purchase. These personnel also offer customers
support with customized configuration of their microcomputer systems. The
Company's customer service representatives respond to questions regarding order
status and related matters as well as assist customers with product returns.
Most vendors offer an unconditional 30-day return policy on their products.
OUTBOUND SALES
At March 31, 1996, the Company had a staff of 34 experienced account
managers who pursue sales to small and medium-sized corporate, governmental and
educational accounts through outbound telemarketing. Each of these commissioned
account managers seeks to develop long-term personal relationships with
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<PAGE> 30
business accounts in a particular geographic region through frequent telephone
contact and by providing the accounts with individual attention, quality
service, and the convenience of one-stop shopping for many of their
microcomputer product needs. In addition to outbound telemarketing, the Company
utilizes catalog mailings, fax broadcast messaging and other marketing tactics
to enhance sales to these accounts. As a service to qualified business accounts,
account managers will facilitate the leasing of products through third-party
leasing companies. The Company believes that sales to business accounts are an
attractive growth opportunity, because they tend to place more frequent orders
that are generally larger than those of other customers. As average order size
increases, more gross profit dollars are available to cover order processing and
other transaction costs and to offset other factors that tend to adversely
affect gross margin percentage.
The Company intends to increase its sales to business accounts. The Company
believes that its product offerings will be more attractive as it secures larger
inventory positions in the products most commonly requested by these accounts,
such as desktop, notebook and laptop microcomputers; networking, desktop
publishing and graphics products; and a wide range of printers and other
peripherals, particularly PC products. The Company also intends to intensify its
sales efforts to these accounts by hiring additional experienced account
managers, developing targeted business catalogs for specific applications, and
committing additional capital to finance the growth of this segment of its
business.
INTERNATIONAL OPERATIONS
The Company has subsidiaries and licensees located in 26 countries
worldwide, more than any other catalog retailer of microcomputer products. The
Company's subsidiaries are located in Australia, Austria, Belgium, Denmark,
France, Germany, Great Britain, Mexico, The Netherlands and Switzerland. The
Company's licensees are located in 16 other foreign countries. The Company's
international sales (including sales through its subsidiaries and royalties from
licensees) were $15.2 million in the three months ended March 31, 1996, $29.7
million in 1995 and $14.1 million in 1994, representing increases of 157.6%,
110.6% and 161.1%, respectively, over the comparable prior periods.
The Company believes there is strong established name recognition in many
international markets for its service marks, THE MAC ZONE and THE PC ZONE. The
Company believes it is well positioned to benefit from the anticipated growth in
international microcomputer product sales and to pursue opportunities for
purchasing, systems and other operating efficiencies across its international
operations.
The Company's international strategy generally has been to enter a country
through a relationship with a local entrepreneur with industry experience who
can provide local knowledge for the business operations. Depending on the size
of the potential market and other factors, the Company may establish a license
arrangement with the entrepreneur or form a subsidiary in which the entrepreneur
has a minority interest. Both types of relationships have the advantage of
providing significant incentives to the local entrepreneurs, which the Company
believes is of critical importance to the success of the local ventures. With a
license arrangement, the Company may at some point seek to convert the licensee
to a controlled subsidiary, depending on the development of the market and the
business. Such a conversion typically provides the operation with greater access
to capital and management, enabling it to increase product selection and
availability, as well as catalog circulation.
The catalogs of the Company's subsidiaries and licensees are published
under THE MAC ZONE and THE PC ZONE service marks, but are designed and produced
locally in the native language, which allows them to be customized both in
presentation and product mix to suit local needs. The Company's headquarters
provides ongoing support in database marketing, catalog design, establishing
relationships with product manufacturers, and product merchandising. The
international catalogs attract manufacturers seeking broad international
exposure for marketing of their microcomputer hardware, software and peripheral
products. The Company believes that a number of microcomputer product
manufacturers utilize the operations of the Company and its licensees as their
primary channel for international distribution.
All of the minority shareholders of the Company's subsidiaries have the
right to require the Company to purchase their shares at a price calculated by a
pre-determined formula based on performance of the business. The Company also
has an option to purchase the minority interest in a number of its subsidiaries.
Typically, a
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<PAGE> 31
licensee will pay a one-time license fee plus a percentage royalty on ongoing
sales revenues. Many of the licensees have granted the Company a right of first
refusal in the event of any proposed sale of their business. See "Risk
Factors -- Administrative, Financial and Other Risks of International
Operations."
SYSTEMS
The Company has committed significant resources to the development of
sophisticated management information, telecommunication, catalog production and
other systems, which are employed in virtually all aspects of its business. The
Company's primary computer system consists of a Hewlett-Packard 3000 Model
987/200, shadowed by a redundant Hewlett-Packard 3000 Model 995 for disaster
recovery, and utilizes a widely-used mail order and catalog management software
package. The primary computer system is used for marketing, purchasing,
inventory management, order processing, product distribution, accounts
receivable, customer service and general accounting functions. The Company's
primary computer system interfaces with an automated telephone call distribution
system, which routes calls to the Company's telemarketing representatives. The
technical architecture of most of the Company's systems is modular, which the
Company believes will facilitate system expansion to the extent required by its
anticipated growth. The Company believes that its systems have enabled it to
enhance customer service, maintain efficient controls and receive timely access
to essential management information. Although the Company continuously evaluates
routine system enhancements, it believes that its systems will be adequate for
the foreseeable future. See "Risk Factors -- Potential Disruption of Business."
DISTRIBUTION CENTER
Airborne Logistics provides and operates a full-service warehouse and
distribution center for the Company at the Airborne Commerce Park in Wilmington,
Ohio under a contract that expires in March 1998. Employees of Airborne
Logistics utilize the Company's systems, policies and procedures to receive, log
and warehouse inventory shipments from product vendors, fill and ship domestic
customer orders, and return inventory to product vendors when requested by the
Company. The Company pays a flat rate for each order filled, which rate is
subject to periodic increases over the remainder of 1996. See "Risk
Factors -- Reliance on Outsourced Distribution."
Domestic orders received by the Company are electronically transmitted on a
dedicated data line to its computer equipment at the Airborne Logistics
distribution center, where a packing slip is printed out for order fulfillment
and inventory availability is automatically updated on all of the Company's
information systems. All inventory items are bar coded and located in
computer-designated areas that are easily identified on the packing slip. All
items are checked with bar code scanners prior to final packing, which helps to
ensure that orders are filled correctly. Orders accepted by 1:00 a.m. Eastern
Time can generally be delivered overnight via Airborne Express. Upon request,
orders may also be shipped for Saturday delivery or by ground service or other
overnight delivery services.
COMPETITION
The microcomputer products industry is highly competitive. The Company
competes with other national and international direct marketers, including Micro
Warehouse, Inc., CDW Computer Centers, Inc., Insight Enterprises, Inc. and
Creative Computers, Inc. The Company also competes with product manufacturers
that sell direct to end-users; specialty microcomputer retailers; microcomputer
and general merchandise superstores; consumer electronic and office supply
stores; and shopping services on television, the Internet and commercial on-line
networks. Additional competition may arise if other new methods of distribution,
such as interactive television, emerge in the future. The Company competes not
only for customers, but also for co-op advertising support from microcomputer
product manufacturers. The Company believes that product selection, availability
and price are the three most important competitive factors. Some of the
Company's competitors are larger and have substantially greater financial
resources, superior operating results, and larger catalog circulations and
customer bases than the Company. In addition, several direct marketers have
recently been acquired by larger competitors. See "Risk Factors -- Reliance on
Vendor Support and Relationships" and "-- Competitive, Pricing and Economic
Risks."
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<PAGE> 32
EMPLOYEES
At March 31, 1996, the Company had 460 domestic employees, and over 100
persons were employed by the Company's foreign subsidiaries. The Company
considers its employee relations to be good. The Company has never had a work
stoppage and no employees are represented by a labor organization. As a result
of its growth, the Company has added a significant number of employees and has
expended considerable efforts in training these new employees. See "Risk
Factors -- Dependence on Key Personnel."
TRADEMARKS
The Company conducts its business in the United States primarily under the
service marks THE MAC ZONE and THE PC ZONE, which are registered with the United
States Patent and Trademark Office. These registrations have an indefinite term,
so long as the service marks are used in connection with the Company's business
activities. The Company intends to obtain service mark protection for these and
related marks, to the extent available, in the foreign countries where the
Company does or expects to do business and where it has or expects to have
licensees. The Company believes its service marks have significant value and are
an important factor in the marketing of its products. The Company intends to
take appropriate steps to protect and renew its service mark registrations.
FACILITIES
The Company currently leases approximately 41,000 square feet of space for
its corporate headquarters, including its telemarketing operations, in Bellevue,
Washington. The Company recently signed a lease for approximately 132,000 square
feet of space in Renton, Washington, to which it expects to relocate in the
summer of 1996. Following the relocation, the Company plans to sublet its
current facilities until the expiration of the lease in June 1999, although
there can be no assurance that it will be able to do so. The Company also
operates sales and distribution facilities in Australia, Austria, Belgium,
Denmark, France, Germany, Great Britain, Mexico, The Netherlands and
Switzerland. See "Risk Factors -- Potential Disruption of Business" and Note 9
of Notes to Consolidated Financial Statements.
REGULATORY AND LEGAL MATTERS
The direct marketing business as conducted by the Company is subject to the
Federal Trade Commission's Merchandise Mail Order Rule and related regulations.
The Company is also subject to laws and regulations relating to
truth-in-advertising and other fair trade practices. The Company has implemented
programs and systems to promote ongoing compliance with these laws and
regulations.
The Company is not a party to any material pending legal proceedings.
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<PAGE> 33
MANAGEMENT
The members of the Board of Directors, executive officers and other key
employees of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
--------------------------------------- --- ---------------------------------------
<S> <C> <C>
Victor J. Melfi, Jr.................... 39 President, Chief Executive Officer and
Director
Bruce S. Martin........................ 37 Co-President and Chief Operating
Officer
Sadrudin J. Kabani(1).................. 51 Chairman of the Board
Peter J. Biere......................... 39 Senior Vice President -- Finance and
Chief Financial Officer
Judith A. Roseth....................... 49 Senior Vice President -- Sales
John H. Bauer(2)....................... 55 Director
John T. Carleton(2).................... 51 Director
John E. DeFeo(1)....................... 49 Director
Firoz H. Lalji(2)...................... 49 Director
Carol L. Miltner(2).................... 53 Director
Paul E. Monson(1)...................... 50 Director
Steve Sarich, Jr.(1)................... 75 Director
Ramona A. Agin......................... 36 Vice President -- Academic Division
Phillip M. Arcidiacono................. 40 Vice President -- Purchasing
Timothy J. Carroll..................... 44 Vice President -- Investor Relations
John J. Convery........................ 48 Vice President -- Corporate, Education
and Governmental Sales
Robert L. Hines, Jr.................... 36 General Counsel and Secretary
Bruce W. Koenigsberg................... 42 Vice President -- PC Merchandising
Mark C. Maliwauki...................... 32 Vice President -- International
Business Development
David R. McCauley...................... 33 Vice President -- Telesales
Thomas G. Minthorn..................... 47 Vice President -- Advertising
Scott A. Reedy......................... 32 Vice President -- Mac Merchandising
Glynda J. Smith........................ 37 Vice President -- Database Marketing
Marc J. Williams....................... 41 Vice President -- New Business
Development
</TABLE>
- ---------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
EXECUTIVE OFFICERS AND DIRECTORS
Victor J. Melfi, Jr. was appointed President and Chief Executive Officer
and elected to the Company's Board of Directors in March 1996. He previously
held various positions with the Company, serving as Executive Vice
President -- Marketing and Chief Operating Officer from September 1995 to March
1996, Senior Vice President -- Marketing from May 1995 to September 1995 and
Vice President -- Database Marketing from October 1994 to May 1995. From 1991 to
1994, Mr. Melfi was the Associate Director of CIMS Marketing at The Reader's
Digest Association, Inc., with responsibility for re-engineering its database
marketing selection process, which included development of a visual selection
language used to segment the database, develop quantitative models and select
names for mailings. From 1988 to 1991, he was an associate in the
Strategy/Marketing Department at the management consulting firm of Booz - Allen
and Hamilton in New York, with a focus on publishing, technology industries and
consumer marketing. Mr. Melfi began his career as an applications developer and
technology product manager in positions with Xerox Corporation and National
Computer, a reseller of microcomputer products.
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<PAGE> 34
Bruce S. Martin was appointed Co-President and Chief Operating Officer in
March 1996. He joined the Company as Executive Vice President -- Merchandising
and Sales in October 1995. From 1994 to 1995, he was Senior Vice President of
Merchandising and Operations at Intelligent Electronics, Inc., a distributor and
reseller of microcomputer products, with responsibility for marketing,
purchasing and administrative operations. Previously, he held various positions
with Ingram Micro, serving as Senior Vice President of Worldwide Purchasing and
Products from 1991 to 1994, with responsibility for purchasing, product
strategies and vendor relations, and as Vice President of Purchasing from 1986
to 1991.
Sadrudin J. Kabani, founder of the Company, has been Chairman of the Board
since its inception in 1988. From 1988 to March 1996, he also served as
President and Chief Executive Officer of the Company.
Peter J. Biere was appointed Senior Vice President -- Finance and Chief
Financial Officer in October 1995. He joined the Company as Controller in 1993
and served as Vice President -- Finance, Controller and Treasurer from 1994
until his promotion. From 1989 to 1992, he held various management and finance
positions with Plum Creek Timber Company, L.P., whose general partner was
Burlington Resources Inc., a natural resource company.
Judith A. Roseth has served as Senior Vice President -- Sales since April
1996. From 1991 to 1996, she was the sole proprietor of Roseth-Harrel Consulting
& Training, a consulting and training company specializing in the development
and training of sales organizations for clients in the microcomputer products
industry. From 1988 to 1991, Ms. Roseth was Vice President -- National Major
Accounts Division for Merisel, Inc., an international distributor and reseller
of microcomputer products. From 1985 to 1988, she was National Director of Sales
and Major Accounts for Ingram Micro.
John H. Bauer has served as director of the Company since March 1996. Since
1994, Mr. Bauer has been Executive Vice President of Nintendo of America Inc., a
manufacturer and distributor of video games and products. From 1979 to 1994, he
served as Managing Partner of the Northwest Group and the Seattle office of
Coopers & Lybrand, a public accounting and consulting firm.
John T. Carleton has served as a director of the Company since November
1995, as a designee of the holders of the Series B Preferred Stock. Since
October 1995, he has been a Senior Vice President of Benaroya Capital Company,
L.L.C. ("Benaroya"), a private investment company. From 1993 to 1995, he was a
Senior Vice President of GE Capital Equity Capital Group, Inc., a private equity
investor, and from 1987 to 1993 was Vice President -- Acquisitions of the
Dyson-Kissner-Moran Corporation, a private investment company. Mr. Carleton also
serves as a director of Redhook Ale Brewery, Incorporated.
John E. DeFeo has served as a director of the Company since April 1996.
Since 1994, he has been President and Chief Executive Officer of U.S. Airwaves
Inc., an early stage wireless telecommunications company. From 1985 to 1994, Mr.
DeFeo was President and Chief Executive Officer of U.S. West New Vector Group,
the domestic cellular communications subsidiary of U.S. West, Inc.
Firoz H. Lalji has served as a director of the Company since 1990. Since
1981, Mr. Lalji has been President and Chief Executive Officer of Kits Cameras,
Inc. ("Kits Cameras"), which operates over 125 camera specialty stores in eight
western states. In addition, since 1985, he has been President and Chief
Executive Officer of Fana Group of companies, which owns real estate and hotels
in the United States and Canada.
Carol L. Miltner has served as a director of the Company since 1995. Since
1991, she has been President of Motivation by Miltner, which provides management
consulting and motivation seminars for many companies in the microcomputer
products industry, including InaCom, Kingston Technologies, Comp USA and Tech
Data. From 1993 to 1995, she was Executive Vice President of Sales and Marketing
at AmeriQuest Technologies, a computer products distributor that is now a U.S.
subsidiary of Computer 2000. From 1989 to 1991, she was Senior Vice President of
Sales of Merisel, Inc. From 1985 to 1989, she was Vice President of Sales and
then Senior Vice President of Sales of Ingram Micro. From 1973 to 1985, Ms.
Miltner held sales and management positions with IBM, Xerox and Apple. Ms.
Miltner also serves as a director of Q Logic Corporation.
33
<PAGE> 35
Paul E. Monson has served as a director of the Company since 1993. Since
1991, he has been Chairman of the Board, President and Chief Executive Officer
of Back Technologies Inc., which manufactures and markets back therapy
equipment. He has also served since 1984 as Chairman of the Board of Pacific
Regency Care Management, an operator of long-term health care facilities.
Steve Sarich, Jr. has served as a director of the Company since 1993. He
has served as President of several companies, including 321 Investment Company,
Arctic Ventures and C.S.S. Management Company. He is a director of Cyclo(3)pss
Corporation, a developer of ozone technology for medical sterilization units and
textile washing systems, Wall Data, Incorporated, a developer of connectivity
software, and Omega Environmental, Inc., an environment remediation company.
Directors of the Company serve one-year terms or until their successors
have been elected and qualified. Officers are elected annually and serve at the
discretion of the Board of Directors, subject to the terms of any employment
agreements with the Company.
The Board of Directors has a standing Audit Committee and Compensation
Committee. The Audit Committee, currently composed of Ms. Miltner and Messrs.
Bauer, Carleton and Lalji, reviews the Company's internal accounting procedures
and consults with and reviews the services provided by the Company's independent
accountants. The Compensation Committee, currently composed of Messrs. DeFeo,
Kabani, Monson and Sarich, reviews and makes recommendations to the full Board
of Directors with respect to the compensation and benefits to be provided to the
Company's officers and directors and general policy matters relating to employee
compensation and benefits.
Mr. Kabani is a member of the Ismaili faith. In January 1989, due to his
leadership position in his local religious community, Mr. Kabani was entrusted
with approximately $1.1 million of cash tithes contributed by members of his
faith, and was requested to deliver them to Ismaili officials in Canada. Upon
being questioned as to the origin of the funds by U.S. Customs officers, Mr.
Kabani made false statements designed to conceal their religious nature.
Although he did so in keeping with his faith's long-standing traditions of
anonymity, Mr. Kabani pled guilty in January 1990 to the felony of making a
false statement to a U.S. Customs official, and was sentenced to two-years'
probation (including three months of work release) and a $5,000 fine. The
Company's Board of Directors has examined the facts surrounding this incident
and has concluded that it has no bearing on Mr. Kabani's business integrity or
his fitness to serve as an officer and director of the Company.
OTHER KEY EMPLOYEES
Ramona A. Agin joined the Company as Vice President -- Academic Division in
January 1996. From 1995 to January 1996, Ms. Agin was Northwest Regional Sales
Manager of Mindscape, an entertainment software developer. From 1988 to 1995,
she held various positions at Ingram Micro, serving most recently as Director of
Purchasing for the Consumer Markets Division.
Phillip M. Arcidiacono joined the Company as Vice President -- Purchasing
in July 1995. From 1992 to 1995, he held various positions with Ingram Micro,
serving most recently as the Purchasing Manager for its major vendor group. From
1991 to 1992, Mr. Arcidiacono served as Director of Sales and Marketing for Kent
Marsh Ltd., a developer of security software.
Timothy J. Carroll joined the Company as Vice President -- Investor
Relations in March 1996. From 1989 to 1996, he served as Vice President of
Public Reporting and Investor Relations of The Hillhaven Corporation, a
diversified healthcare provider. From 1981 to 1989, Mr. Carroll was Senior Vice
President and Treasurer of Shoreline Savings Bank, a financial institution.
John J. Convery was promoted to Vice President -- Corporate, Education and
Governmental Sales in April 1996. He joined the Company as Director of Business,
Education and Government in July 1995. From 1992 to 1995, Mr. Convery was
Western Regional Manager Sales for MicroWarehouse, Inc., a direct marketer of
microcomputer products. From 1986 to 1992, Mr. Convery was Mid-West Regional
Sales Manager for the Information Systems Division of BASF Corporation, a
manufacturer of computer media products.
34
<PAGE> 36
Robert L. Hines, Jr. has served as General Counsel and Secretary since
joining the Company in 1995. From 1990 to 1995, he served as General Counsel for
Gary Merlino Construction Co., a general contractor and real estate developer.
From 1986 to 1990, he was an attorney at the law firm of Bogle & Gates in
Seattle.
Bruce W. Koenigsberg has served as Vice President -- PC Merchandising since
1994. From 1979 to 1994, he held various positions with Fretter, Inc., a
consumer electronics retailer, serving most recently as a Senior Merchandising
Manager.
Mark C. Maliwauki was promoted to Vice President -- International Business
Development in 1995. He joined the Company as Director of International Business
in March 1994. From 1989 to 1993, he served in various positions, including
Director of Marketing at Telemart, a microcomputer product mail-order company.
David R. McCauley was promoted to Vice President -- Telesales in April
1996. From 1993 to April 1996, he served initially as the Company's Telesales
Manager and recently as Director of Telesales. From 1989 to 1993, Mr. McCauley
held various positions with The Kern County Museum.
Thomas G. Minthorn has served as Vice President -- Advertising since 1995.
From 1993 to 1995, he served as the Company's Vice President -- Creative
Services. From 1988 to 1993, he held various positions with Manus Direct, a
direct response marketing agency, first as Vice President and most recently as
Senior Vice President.
Scott A. Reedy has served as Vice President -- Mac Merchandising since
joining the Company in March 1995. From 1994 to 1995, he was the Director of
Hardware Product Marketing at AmeriQuest Technologies. From 1990 to 1994, he
held various positions with Ingram Micro, serving most recently as the Senior
Marketing Manager for its Mac Division.
Glynda J. Smith joined the Company as Vice President -- Database Marketing
in January 1996. From 1991 to 1995, she held various positions with Institute
for International Research, a producer of business seminars and conferences in
London, England, serving most recently as International Marketing Consultant.
From 1990 to 1991, Ms. Smith was Marketing Controller for Colleagues Direct
Marketing, a direct marketing agency.
Marc J. Williams has served as Vice President -- New Business Development
since April 1995. He joined the Company as Vice President -- Merchandising and
New Business Development in 1992. From 1990 to 1992, he was Vice President of
Product Procurement for MicroWarehouse, Inc.
DIRECTOR COMPENSATION
All directors of the Company are reimbursed for out-of-pocket expenses
incurred in connection with attendance at meetings of the Board of Directors.
Outside directors receive a fee of $1,000 for each meeting attended. Ms. Miltner
also receives a quarterly retainer of $2,500. Ms. Miltner was granted an option
to acquire 7,500 shares of Common Stock at a price of $4.00 per share, and Mr.
Bauer was granted an option to acquire 7,500 shares at a price of $6.67 per
share, upon joining the Board of Directors in June 1995 and March 1996,
respectively. Each of these options has a term of ten years and vests 25% for
each full year of service on the Board of Directors. The Company intends to
enter into agreements with all directors to indemnify them against certain
claims and liabilities arising out of their service as directors and to advance
expenses to defend claims subject to indemnification.
35
<PAGE> 37
EXECUTIVE COMPENSATION
Compensation Summary. The following table sets forth information regarding
compensation earned during 1995 by all of the Company's executive officers
employed by the Company during that year (the "named executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
------------------------ UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($)(1) BONUS($) OPTIONS(#) COMPENSATION($)(2)
- ----------------------------------------- ------------ -------- ------------ ------------------
<S> <C> <C> <C> <C>
Victor J. Melfi, Jr...................... $120,481 $130,000 67,500 --
President and Chief Executive Officer
Bruce S. Martin(3)....................... 21,269 -- 90,000 --
Co-President and Chief Operating
Officer
Sadrudin J. Kabani....................... 250,000 -- -- $200
Chairman of the Board
Peter J. Biere........................... 93,474 10,000 15,000 200
Senior Vice President -- Finance and
Chief Financial Officer
</TABLE>
- ---------------
(1) The current annual base salaries for Messrs. Melfi, Martin, Kabani and Biere
are $250,000, $240,000, $300,000 and $130,000, respectively. See
"-- Employment Agreements."
(2) Amounts shown represent matching contributions under the Company's 401(k)
Plan.
(3) Mr. Martin commenced employment with the Company in October 1995.
Option Grants. The following table shows information concerning stock
options granted to the named executive officers in 1995.
OPTION GRANTS IN 1995
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
INDIVIDUAL GRANTS AT ASSUMED ANNUAL
------------------------------------------------------------ RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(3)
OPTIONS EMPLOYEES PRICE EXPIRATION ---------------------
NAME GRANTED(#)(1) IN 1995 ($/SHARE)(2) DATE 5%($) 10%($)
- ----------------------- ------------- ------------- ------------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Victor J. Melfi, Jr.... 15,000 4.6% $ 4.00 2/14/05 $ 37,734 $ 95,625
52,500 16.0 5.33 10/11/05 175,980 445,969
Bruce S. Martin........ 90,000 27.6 5.33 10/22/05 301,681 764,518
Sadrudin J. Kabani..... -- -- -- -- -- --
Peter J. Biere......... 15,000 4.6 4.00 2/14/05 37,734 95,625
</TABLE>
- ---------------
(1) All of the options granted in 1995 were 10-year incentive stock options, the
vesting of which accrues at the rate of 20% per year from their respective
dates of grant, subject to a condition that no actual vesting will occur
until six months after the consummation of the offering. Vesting of certain
of these options was accelerated following their grant. See "-- Employment
Agreements."
(2) The exercise price of each option was the estimated fair value of the Common
Stock on the date of grant.
(3) Based upon the estimated fair value of the Common Stock on the date of grant
and assumed appreciation over the term of the options at the respective
annual rates of stock appreciation shown. Potential gains are net of the
exercise price but before taxes associated with the exercise. The 5% and 10%
assumed annual rates of compounded stock appreciation are mandated by the
rules of the Securities and Exchange Commission and do not represent the
Company's estimate or projection of the future price of the Common Stock.
Actual gains, if any, on stock option exercises are dependent on the future
financial
36
<PAGE> 38
performance of the Company and overall market conditions. The actual value
realized may be greater or less than the potential realizable value set
forth in the table.
Year-End Option Values. The following table sets forth certain information
regarding the number and value of unexercised options held by the named
executive officers at December 31, 1995.
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
YEAR-END(#)(1) AT FISCAL YEAR-END($)(2)
------------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Victor J. Melfi, Jr...................... -- 90,000 -- $ 1,002,750
Bruce S. Martin.......................... -- 90,000 -- 870,300
Sadrudin J. Kabani....................... -- -- -- --
Peter J. Biere........................... -- 30,000 -- 385,050
</TABLE>
- ---------------
(1) Does not include options granted in 1996. See "-- Employment Agreements."
(2) Represents the value of the shares of Common Stock subject to outstanding
options, based on an assumed value of $15.00 per share, less the aggregate
option exercise price.
Compensation Committee Interlocks and Insider Participation
John E. DeFeo, Sadrudin J. Kabani, Paul E. Monson and Steve Sarich, Jr.
currently serve as members of the Compensation Committee of the Board of
Directors.
Messrs. Kabani, Lalji, Monson and Sarich have guaranteed a portion of the
Company's revolving line of credit with U.S. Bank of Washington, National
Association. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
In June 1993, the Company sold 625,000 shares of Series A Preferred Stock
at a price of $3.20 per share, of which Mr. Sarich and Paul E. and Teryl L.
Monson purchased 312,500 and 168,750 shares, respectively. Each share of Series
A Preferred Stock converted into three shares of Common Stock in October 1995
and all material contractual covenants of the Company in connection with that
financing terminated. See "Principal Shareholders," "Shares Eligible for Future
Sale" and Note 11 of Notes to Consolidated Financial Statements.
EMPLOYMENT AGREEMENTS
Effective in April 1996, the Company entered into employment agreements
with Messrs. Melfi, Martin and Kabani under which they are entitled to annual
base salaries of $250,000, $240,000 and $300,000, respectively. The term of each
agreement ends on December 31, 1998, unless certain events, such as a change in
control of the Company, occur after July 1, 1997, in which case the termination
date will be 18 months following such event. In addition, if the employment of
one of these executive officers is terminated by the Company without cause prior
to the end of the term, or if the executive officer resigns following a change
in control due to a material reduction in his responsibilities or certain other
reasons amounting to constructive termination by the Company, the executive
officer is entitled to continue to receive his base salary for a period of two
years following the termination. Each executive officer has also agreed not to
compete with the Company for a period of two years following termination of the
agreement for any reason other than constructive termination by the Company
following a change in control.
In addition, the Company accelerated the vesting of options to acquire
43,500, 18,750 and 30,000 shares of Common Stock held by Messrs. Melfi, Martin
and Biere, respectively. In addition, the Company granted Messrs. Melfi, Martin
and Biere, additional options to acquire 225,000, 120,000 and 75,000 shares of
Common Stock, respectively, at a price of $12.67 per share, which vested 20%
upon grant and will vest an additional 20% on each anniversary of the date of
grant.
37
<PAGE> 39
The Company intends to enter into agreements with all of its executive
officers to indemnify them against certain claims and liabilities arising out of
their service as officers, to advance expenses to defend claims subject to
indemnification, and to release them from certain liabilities to the Company
that would otherwise arise out of such service.
BENEFIT PLANS
Stock Options. The Company's 1993 Stock Incentive Plan (the "Plan")
permits options to purchase up to an aggregate of 1,650,000 shares of Common
Stock to be granted to employees of and consultants to the Company. The Plan is
administered by the Compensation Committee, which generally has the authority to
select individuals who are to receive options and to specify the terms and
conditions of each option so granted, including the number of shares covered by
the option, the type of option (incentive stock option or nonqualified option),
the exercise price (which, in the case of an incentive stock option, must be at
least 100% of the fair market value of the Common Stock), vesting provisions,
and the overall option term. At May 31, 1996, options to purchase an aggregate
of 1,037,250 shares of Common Stock were outstanding under the Plan, in addition
to options to purchase 45,000 shares of Common Stock granted outside of the
Plan.
Management Incentive Plan. The Company has authorized a Management
Incentive Plan (the "MIP") that covers all officers and division directors and
certain managers. Under the MIP, participants are eligible to receive a bonus
based on Company performance in 1996 and, in the case of participants other than
executive officers, individual performance goals. The maximum potential bonus
under the MIP for executive officers is 150% of base salary.
401(k) Plan. The Company maintains a 401(k) plan that covers all employees
who satisfy certain eligibility requirements relating to minimum age, length of
service and hours worked. Under the profit sharing portion of the plan, the
Company may make an annual contribution for the benefit of eligible employees in
an amount determined by the Board of Directors. Under the 401(k) portion of the
plan, eligible employees may make pre-tax elective contributions of up to 10% of
their compensation, subject to maximum limits on contributions prescribed by
law. The Company currently matches 10% of the first $2,000 of each participant's
annual contributions.
Employee Stock Purchase Plan. The Company has adopted an Employee Stock
Purchase Plan (the "ESPP"), which becomes effective on the date of this
Prospectus. The ESPP is intended to qualify for favorable tax treatment under
Section 423 of the Internal Revenue Code of 1986. Under the ESPP, 450,000 shares
of Common Stock are reserved for issuance to eligible non-officer employees of
the Company, who may elect to apply up to 10% of their compensation to the
purchase of such shares. The ESPP is administered on the basis of purchase
periods corresponding to calendar quarters (except for the initial purchase
period, which will begin on the date of this Prospectus and end on September 30,
1996). The purchase price for shares sold to participants is 85% of the fair
market value of the Common Stock on either the first day or the last day of the
purchase period, whichever is lower. Employees of the Company's subsidiaries are
not eligible to participate in the ESPP.
CERTAIN TRANSACTIONS
Benaroya-Bessemer Financing. In October 1995, the Company sold 612,476
shares of Series B Preferred Stock at a price of $11.43 per share to Benaroya,
Bessemer Venture Partners III, L.P. ("Bessemer"), John T. Carleton and twelve
other investors. Benaroya, Bessemer and Mr. Carleton purchased 311,050, 245,518
and 34,561 shares, respectively. All shares of Series B Preferred Stock will
automatically convert into 918,711 shares of Common Stock upon consummation of
the offering. Prudential Securities Incorporated served as placement agent in
this financing and received cash compensation and a warrant to purchase up to
45,310 shares of Common Stock at $7.62 per share. The Company has granted
certain registration rights for the shares of Common Stock issuable upon
conversion of the Series B Preferred Stock and exercise of the warrant. The
holders of the Series B Preferred Stock have designated John T. Carleton, a
Senior Vice President of Benaroya, to serve as a director of the Company. In
addition, Benaroya and Bessemer will have, for three years following the
offering, the right to designate an observer at meetings of the Board of
38
<PAGE> 40
Directors. The holders of the Series B Preferred Stock hold preemptive rights to
maintain their percentage ownership interest in the Company in the event of
certain issuances of its capital stock, which rights were waived in connection
with the issuance of the shares offered hereby. The preemptive rights and all
material contractual covenants of the Company in connection with that financing,
other than the registration rights and observer rights, will terminate upon
consummation of the offering. See "Shares Eligible for Future Sale --
Outstanding Registration Rights" and Note 10 of Notes to Consolidated Financial
Statements.
Related-Party Transactions. In 1992, the Company advanced $125,000 to
Sadrudin J. Kabani, which was forgiven by the Company as part of his 1994
compensation package.
In October 1993, the Company produced and distributed a catalog in which it
tested the feasibility of selling photographic equipment via inbound
telemarketing. In connection with this test, the Company purchased from Kits
Cameras, a company controlled by Mr. Lalji, approximately $192,000 of
photographic equipment for resale, of which $43,000 was paid for and the balance
was returned. In addition, during 1995, the Company sold approximately $216,000
of microcomputer products to Kits Cameras.
During 1993, 1994 and 1995, the Company purchased approximately $2.0
million, $3.5 million and $882,000, respectively, of memory modules from LLB
Habitat, a business owned by Mr. Kabani's wife, at prices that the Company
believes were equivalent to or better than those available in arm's-length
transactions. The Company discontinued purchases from LLB Habitat in April 1995.
In consideration for certain consulting services to be provided over a
twelve-month period commencing in February 1996, the Company has agreed to pay
Carol L. Miltner $54,000 plus expenses.
The Company has adopted a policy prohibiting transactions with its
directors, officers or controlling shareholders or their affiliates other than
those that result from competitive bidding or that a majority of the Company's
disinterested directors conclude are expected to benefit the Company and are on
terms no less favorable to the Company than could be obtained in arm's-length
transactions with unaffiliated third parties. See "Executive
Compensation -- Compensation Committee Interlocks and Insider Participation."
39
<PAGE> 41
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of May 31, 1996, and as adjusted to reflect the
sale of shares of Common Stock offered hereby, for (i) each person known to the
Company to own beneficially more than 5% of the Common Stock, (ii) each of the
Company's directors, (iii) each of the Company's named executive officers, and
(iv) all of the Company's executive officers and directors as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OUTSTANDING SHARES
OF SHARES ---------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
------------------------------------------------------- ------------ -------- --------
<S> <C> <C> <C>
Sadrudin J. Kabani(2).................................. 3,750,000 36.4% 30.0%
Almas S. Kabani
Firoz H. Lalji(2)...................................... 3,750,000 36.4 30.0
Najma Lalji
Steve Sarich, Jr.(2)................................... 937,500 9.1 7.5
Paul E. Monson......................................... 451,875 4.4 3.6
Teryl L. Monson
John H. Bauer.......................................... -- -- --
John T. Carleton(3).................................... 51,841 * *
Victor J. Melfi, Jr.(4)................................ 88,500 * *
Peter J. Biere (5)..................................... 45,000 * *
Bruce S. Martin (6).................................... 42,750 * *
John E. DeFeo.......................................... -- -- --
Carol L. Miltner....................................... -- -- --
All directors and executive officers
as a group (12 persons)(7)........................... 9,117,466 87.1 72.0
</TABLE>
- ---------------
* Less than 1%.
(1) Shares subject to an option are not deemed outstanding for purposes of
computing the percentage ownership of any person other than the person
holding the option. Shares shown for Messrs. Melfi, Biere and Martin
represent shares subject to options exercisable within 60 days after May 31,
1996.
(2) The address for each of these shareholders is 15815 S.E. 37th Street,
Bellevue, Washington 98006-1800.
(3) Mr. Carleton serves as a director by designation of holders of the Series B
Preferred Stock. See "Management -- Certain Transactions."
(4) Excludes 271,500 shares subject to options that become exercisable more than
60 days after May 31, 1996.
(5) Excludes 60,000 shares subject to options that become exercisable more than
60 days after May 31, 1996.
(6) Excludes 212,000 shares subject to options that become exercisable more than
60 days after May 31, 1996.
(7) Includes 176,250 shares subject to options exercisable within 60 days of May
31, 1996.
40
<PAGE> 42
DESCRIPTION OF CAPITAL STOCK
Upon completion of the offering, the authorized capital stock of the
Company will consist of 45,000,000 shares of Common Stock and 5,000,000 shares
of Preferred Stock.
COMMON STOCK
As of May 31, 1996, 10,293,710 shares of Common Stock were outstanding,
held of record by 29 shareholders. Holders of Common Stock are entitled to one
vote per share on all matters submitted to a vote of the shareholders. Holders
of Common Stock will not have the right to cumulate votes with respect to
elections of directors. Accordingly, holders of a majority of the shares of
Common Stock voting in any election of directors will have the ability to elect
all of the directors standing for election. All directors hold office until the
next annual meeting of shareholders and until their successors have been duly
elected and qualified. Directors may be removed only for cause and only by the
holders of a majority of the outstanding shares of Common Stock.
Holders of Common Stock are entitled to receive ratably such dividends, if
any, as may be declared by the Board of Directors out of legally available
funds, subject to any preferences that may be afforded to any outstanding
preferred stock. In the event of a liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
outstanding preferred stock. Holders of Common Stock have no preemptive,
subscription, redemption or conversion rights. All of the outstanding shares of
Common Stock are, and all shares of Common Stock to be outstanding upon
consummation of the offering will be, when issued and paid for, fully paid and
nonassessable. The Company's Articles of Incorporation and Bylaws provide for
release and indemnification of the Company's directors and officers as to
certain liabilities arising from their actions in such capacities to the fullest
extent permitted by law.
PREFERRED STOCK
The Board of Directors has the authority to issue 5,000,000 shares of
preferred stock in one or more series and to fix the relative rights,
preferences and privileges thereof, including dividend rights, conversion
rights, voting rights, redemption terms, liquidation preferences and number of
shares constituting any series, without any further vote or action by the
Company's shareholders. The market price for the Common Stock, and the voting
and other rights of the holders thereof, may be adversely affected by the
rights, preferences and privileges accorded to any preferred stock issued by the
Company. Issuances of preferred stock in certain circumstances may have the
effect of delaying, deferring or preventing a change in control of the Company,
or discouraging bids for the Company's Common Stock at a premium over the market
price. Upon consummation of the offering, the Company will have no shares of
preferred stock outstanding. The Company has no present plans to issue any
preferred stock.
CERTAIN VOTING AND OTHER MATTERS
Under the Washington Business Corporation Act (the "Act"), shareholder
approval is required in order for the Company to participate in certain mergers
and share exchanges or to sell substantially all of its assets. Within certain
limits, the Act permits a corporation's articles of incorporation to specify the
level of shareholder approval required for such transactions. The Company's
Articles of Incorporation generally require any such transaction to be approved
by the holders of a majority of the outstanding shares of Common Stock. However,
unless approved by a majority of the directors who are currently members of the
Board of Directors or who are subsequently nominated for election to the Board
of Directors by a majority of the current directors, such transaction must be
approved by a two-thirds vote of each outstanding series or class of stock
voting as a separate class.
Under the Company's Articles of Incorporation, special meetings of the
shareholders may be called only by the Board of Directors, the Chairman of the
Board or the President, or the holders of at least 25% of the outstanding shares
of Common Stock. Amendments to the Articles of Incorporation must generally be
approved by the Board of Directors and the holders of a majority of the
outstanding shares of Common Stock.
41
<PAGE> 43
However, unless approved by a majority of the directors who are currently
members of the Board of Directors or who are subsequently nominated for election
to the Board of Directors by a majority of the current directors, amendments
relating to requirements for calling a special meeting of shareholders, election
and removal of directors and approval of certain significant transactions must
be approved by a two-thirds vote of each outstanding series or class of stock
voting as a separate class.
The Company's Bylaws provide that shareholders seeking to bring business
before, or to nominate directors at, any meeting of shareholders must provide
timely notice thereof in writing. To be timely, a shareholder's notice must be
delivered to, or mailed and received at, the principal executive office of the
Company not less than 70 days prior to the date of the meeting, or the tenth day
after notice of the meeting is first given to shareholders, whichever is later.
The Bylaws also contain specific requirements for the form of a shareholder's
notice. These provisions may preclude some shareholders from bringing matters
before the shareholders or from making nominations for directors. The Bylaws may
be amended or repealed by the Board of Directors or by the majority of the
holders of the outstanding shares of Common Stock.
Holders of shares of preferred or other capital stock hereafter issued by
the Company may also be entitled to vote in connection with the matters
described above, and separate approval may be required to the extent of any
class voting rights accorded to the holders of such other stock. It is possible
that the provisions of the Company's Articles of Incorporation and Bylaws
described above may have the effect of delaying, deterring or preventing a
change in control of the Company.
ANTITAKEOVER RESTRICTIONS
Washington law contains certain provisions that may have the effect of
delaying, deferring or preventing a hostile takeover or change of control of the
Company. Chapter 23B.19 of the Act prohibits the Company, with certain
exceptions, from engaging in certain significant business transactions with an
"acquiring person" (defined as a person who acquires 10% or more of the
Company's voting securities without the prior approval of the Company's Board of
Directors) for a period of five years after such acquisition. The prohibited
transactions include, among others, a merger with, disposition of assets to, or
issuance or redemption of stock to or from, the acquiring person, or otherwise
allowing the acquiring person to receive any disproportionate benefit as a
shareholder. These statutory and organic provisions may have the effect of
delaying, deferring or preventing a change in control of the Company.
LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS OF THE COMPANY
As permitted by Section 23B.08.320 of the Act, Article VI, Section 6.6 of
the Company's Articles eliminates in certain circumstances the personal
liability of the Company's directors to the Company or its shareholders for
monetary damages resulting from their conduct as an officer or director. This
provision does not eliminate the liability of directors for (i) acts or
omissions that involve intentional misconduct or a knowing violation of law,
(ii) improper declarations of dividends, or (iii) transactions from which a
director received an improper personal benefit.
The Company's Bylaws require the Company to indemnify its directors and
officers to the fullest extent permitted by Washington law, including under
circumstances in which indemnification is otherwise discretionary. The Company
intends to obtain officers' and directors' liability insurance for members of
its Board of Directors and key employees.
The Company intends to enter into agreements with all of its directors and
executive officers to indemnify them against certain claims and liabilities
arising out of their service as directors and officers and to advance expenses
to defend claims subject to indemnification.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services L.L.C.
42
<PAGE> 44
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, 12,493,710 shares of Common Stock will be
outstanding (12,823,710 shares if the Underwriters' over-allotment option is
exercised in full), of which the 2,200,000 shares offered hereby (2,530,000
shares if the Underwriters' over-allotment option is exercised in full) will be
freely tradable on the public market without restriction or further registration
under the Securities Act, except to the extent such shares are held by an
affiliate of the Company. The remaining 10,293,710 shares of Common Stock were
issued and sold by the Company in private transactions, and public sale thereof
is restricted except to the extent they are registered under the Securities Act
or sold in accordance with an exemption from such registration. The Company and
the holders of all of these remaining shares have entered into Lock-up
Agreements with the Underwriters not to sell, offer to sell, solicit an offer to
buy, contract to sell, grant any option to purchase, or otherwise transfer or
dispose of any shares of Common Stock, or any securities convertible into or
exercisable or exchangeable for Common Stock, for a period of 180 days after the
date of this Prospectus without the prior written consent of Dain Bosworth
Incorporated. Upon expiration of the 180-day period, 9,374,999 of these
remaining 10,293,710 shares will be eligible for immediate public sale under
Rule 144 as currently in effect and the remaining shares of Common Stock will
not be eligible for public sale until October 1997 unless earlier registered
under the Securities Act pursuant to certain contractual registration rights. At
May 31, 1996, options and warrants for 1,127,560 shares of Common Stock were
outstanding, of which options for 230,250 shares will be exercisable upon
consummation of the offering and the shares issued upon exercise will be
potentially eligible for public sale 90 days after the date of this Prospectus
pursuant to Rule 701 under the Securities Act; of these shares, 200,250 shares
are subject to Lock-up Agreements.
In general, Rule 144 as currently in effect provides that any person who
has beneficially owned shares for at least two years, including an "affiliate"
(as defined in Rule 144), is generally entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of 1% of the shares
of Common Stock then outstanding or the reported average weekly trading volume
of the Common Stock during the four calendar weeks immediately preceding the
date on which notice of the sale is sent to the Securities and Exchange
Commission (the "SEC"). Sales under Rule 144 are subject to certain manner of
sale restrictions, notice requirements and availability of current public
information concerning the Company. A person who is not an affiliate of the
Company, and who has not been an affiliate within three months prior to the
sale, generally may sell shares without regard to the limitations of Rule 144
provided that the person has held such shares for a period of at least three
years. The SEC has proposed to reduce the two-year and three-year holding
periods under Rule 144 to one and two years, respectively. Adoption of such
proposal would have a material effect on the timing of when certain shares of
Common Stock become eligible for resale.
Any employee, director or officer of, or consultant to, the Company holding
shares purchased pursuant to a written compensatory plan or contract (including
options) entered into prior to the offering is entitled to rely on the resale
provisions of Rule 701, which permit nonaffiliates to sell such shares without
having to comply with the public information, holding period, volume limitation
or notice requirements of Rule 144 and permit affiliates to sell their Rule 701
shares without having to comply with the holding period restrictions of Rule
144, in each case commencing 90 days after the date of this Prospectus.
Prior to the offering, there has been no public market for the Common Stock
of the Company and no prediction can be made of the effect, if any, that the
sale or availability for sale of shares of Common Stock will have on the market
price of the Common Stock. Nevertheless, sales of substantial amounts of such
shares in the public market could adversely affect the market price of the
Common Stock.
OUTSTANDING REGISTRATION RIGHTS
Pursuant to a registration rights agreement with the Company, holders of
612,476 shares of Series B Preferred Stock that will convert into 918,711 of
shares of Common Stock upon consummation of the offering and the holder of a
warrant to purchase 45,310 shares of Common Stock (the shares of Common Stock
issuable upon such conversion and exercise will be referred to as the
"Registrable Shares"), have certain rights with respect to the registration of
the Registrable Shares under the Securities Act. Under the terms of the
43
<PAGE> 45
agreement, if the Company proposes to register any of its securities under the
Securities Act for its own account or for the account of others, such holders
are entitled to include Registrable Shares therein, subject to any limitation by
the underwriters in the offering on the number of shares included in such
registration. In addition, holders of not less than 33% of the Registrable
Shares may require the Company, on not more than two occasions, to file a
registration statement under the Securities Act at the Company's expense with
respect to any Registrable Shares they desire to include in such registration,
provided that the anticipated aggregate price of the shares to be registered
exceeds $5,000,000. Also, any holder of Registrable Shares who holds 1 1/2% or
more of the Company's outstanding Common Stock may require the Company, not more
than twice in any twelve-month period, to file a registration statement on Form
S-3, at the expense of the holder, for a public offering of Registrable Shares.
The Company is required to use its best efforts to effect all such
registrations, subject to certain conditions and limitations.
44
<PAGE> 46
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, for which Dain Bosworth Incorporated and Furman Selz
LLC are acting as representatives (the "Representatives"), have severally agreed
to purchase from the Company the shares of Common Stock offered hereby. Each
Underwriter will purchase the number of shares set forth opposite its name
below, and will purchase such shares at the price to public, less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
--------------------------------------------------------------------- ----------------
<S> <C>
Dain Bosworth Incorporated...........................................
Furman Selz LLC......................................................
-------
Total...................................................... 2,200,000
=======
</TABLE>
The Underwriting Agreement provides that the Underwriters' obligations are
subject to conditions precedent and that the Underwriters are committed to
purchase all shares of Common Stock offered hereby (other than those covered by
the over-allotment option described below) if the Underwriters purchase any
shares. The Representatives have advised the Company that the several
Underwriters may offer the shares of Common Stock directly to the public at the
price to public set forth on the cover page of this Prospectus and to certain
dealers at the price to public less a concession not exceeding $ per share.
The Underwriters may allow, and such dealers may reallow, a concession not
exceeding $ per share to other dealers. After the shares of Common Stock are
released for sale to the public, the Representatives may change the initial
price to public and other selling terms.
The Company has granted to the Underwriters an option, exercisable for 30
days after the date of this Prospectus, to purchase up to an aggregate of
330,000 additional shares of Common Stock, at the same price per share as the
initial shares. The Underwriters may purchase these shares solely to cover
over-allotments, if any, in connection with the sale of Common Stock offered
hereby. If the Underwriters exercise the over-allotment option, the Underwriters
will purchase additional shares in approximately the same proportion as those in
the above table.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
The Company and all of its officers, directors and shareholders have agreed
not to sell, offer to sell, solicit an offer to buy, contract to sell, grant an
option to purchase, or otherwise transfer or dispose of any shares of Common
Stock, or any securities convertible into or exercisable or exchangeable for
Common Stock, for a period of 180 days after the date of this Prospectus without
the prior written consent of Dain Bosworth Incorporated.
Prior to the offering, there has been no public market for the Common
Stock. The initial price to public will be determined by agreement between the
Company and the Representatives. In determining the initial price to public, the
Company and the Representatives will consider, among other things, the history
of and prospects for the industry in which the Company operates, past and
present operations and earnings of the Company and the trend of such earnings,
the qualifications of the Company's management, the general condition of the
securities markets at the time of the offering and the market prices for other
publicly traded companies.
45
<PAGE> 47
LEGAL MATTERS
The validity of the Common Stock being offered hereby will be passed upon
for the Company by Graham & James LLP, Seattle, Washington. John M. Steel, a
principal of this firm, holds an option to acquire 7,500 shares of Common Stock
for $1,275. Certain legal matters in connection with the offering will be passed
upon for the Underwriters by Orrick, Herrington & Sutcliffe, San Francisco,
California.
EXPERTS
The consolidated balance sheets at December 31, 1994 and 1995 and the
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1995 included in this
Prospectus and in the Registration Statement have been included herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company intends to furnish to its shareholders of record annual reports
containing financial statements audited and reported upon by independent public
accountants and quarterly reports containing unaudited financial information for
each of the first three quarters of each fiscal year.
The Company has filed with the SEC a Registration Statement (the
"Registration Statement") on Form S-1 under the Securities Act with respect to
the Common Stock offered hereby. This Prospectus, which constitutes part of the
Registration Statement, omits certain of the information contained in the
Registration Statement and the exhibits thereto on file with the SEC pursuant to
the Securities Act and the rules and regulations of the SEC thereunder.
Statements contained in this Prospectus concerning the provisions or contents of
any contract or other document referred to in this Prospectus are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. The
Registration Statement, including exhibits and schedules thereto, may be
inspected and copied at the Public Reference Section maintained by the SEC at
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the SEC's
regional offices at 7 World Trade Center, Suite 1300, New York, New York 10048,
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661, and copies may be obtained at the prescribed rates from the Public
Reference Section of the SEC at its principal office in Washington, D.C.
46
<PAGE> 48
MULTIPLE ZONES INTERNATIONAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Coopers & Lybrand L.L.P., Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995, and March 31, 1996...... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1993, 1994 and
1995, and the Three Months Ended March 31, 1995 and 1996............................ F-4
Statements of Shareholders' Equity for the Years Ended December 31, 1993, 1994 and
1995, and the Three Months Ended March 31, 1996..................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and
1995, and the Three Months Ended March 31, 1995 and 1996............................ F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 49
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Multiple Zones International, Inc.
Bellevue, Washington
We have audited the accompanying consolidated balance sheets of Multiple
Zones International, Inc. and Subsidiaries as of December 31, 1994 and 1995, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Multiple Zones
International, Inc. and Subsidiaries as of December 31, 1994 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Seattle, Washington
June 3, 1996
F-2
<PAGE> 50
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
----------- ----------- MARCH 31,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 513,789 $ 1,214,581 $ 994,123
Receivables, net........................................... 8,263,197 23,111,478 31,096,859
Inventories, net........................................... 13,140,813 42,030,676 47,822,422
Prepaids................................................... 1,185,942 6,292,209 4,382,947
Deferred income taxes...................................... 362,687 695,060 961,732
----------- ----------- -----------
Total current assets............................... 23,466,428 73,344,004 85,258,083
Property and equipment, net.................................. 2,162,540 4,518,555 4,651,154
Other assets................................................. 76,050 1,529,605 2,792,243
----------- ----------- -----------
Total assets....................................... $25,705,018 $79,392,164 $92,701,480
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank lines of credit....................................... $ 3,277,080 $12,034,890 $12,260,275
Accounts payable........................................... 16,371,709 46,594,671 54,943,943
Accrued liabilities and other.............................. 2,690,765 5,155,322 7,053,674
Current portion of capital lease obligations............... 340,168 722,558 709,618
Income taxes payable....................................... 261,809 1,086,223 1,792,711
----------- ----------- -----------
Total current liabilities.......................... 22,941,531 65,593,664 76,760,221
Capital lease obligations, net of current portion............ 791,481 1,664,553 1,496,879
Deferred income taxes........................................ 189,520 295,482 257,239
Other........................................................ 401,940 505,995
----------- ----------- -----------
Total liabilities.................................. 23,922,532 67,955,639 79,020,334
----------- ----------- -----------
Minority interest............................................ 77,246 239,415 284,882
----------- ----------- -----------
Commitments and contingencies
Series B Redeemable Convertible Preferred Stock, no par
value, $11.43 per share liquidation preference, 612,476
shares authorized, issued and outstanding at December 31,
1995 and March 31, 1996.................................... 6,461,096 6,690,727
----------- ----------- -----------
Shareholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized:
Series A Convertible Preferred Stock, no par value,
$3.20 per share liquidation preference; 625,000 shares
authorized,
issued and outstanding................................ 2,000,000
Common stock, no par value, 45,000,000 shares authorized;
issued and outstanding 9,374,999 shares at March 31,
1996 and December 31, 1995 and 7,500,000 shares at
December 31, 1994, respectively......................... 750,000 2,750,000 2,750,000
Retained earnings (deficit)................................ (1,050,713) 1,987,736 3,931,166
Foreign currency translation adjustment.................... 5,953 (1,722) 24,371
----------- ----------- -----------
Total shareholders' equity......................... 1,705,240 4,736,014 6,705,537
----------- ----------- -----------
Total liabilities and shareholders' equity......... $25,705,018 $79,392,164 $92,701,480
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 51
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------- --------------------------
1993 1994 1995 1995 1996
----------- ------------ ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales..................... $80,515,472 $113,455,563 $242,586,898 $46,228,186 $100,927,034
Cost of sales................. 69,298,000 98,210,972 211,036,693 39,926,899 86,963,556
----------- ------------ ------------ ----------- ------------
Gross profit................ 11,217,472 15,244,591 31,550,205 6,301,287 13,963,478
Selling, general and
administrative expenses..... 10,586,785 14,410,275 25,425,306 5,758,204 10,077,954
----------- ------------ ------------ ----------- ------------
Income from operations...... 630,687 834,316 6,124,899 543,083 3,885,524
----------- ------------ ------------ ----------- ------------
Other (income) expense:
Interest expense............ 213,423 276,744 1,148,939 166,717 504,027
Other income................ (44,475) (77,514) (132,246) (26,619) (85,318)
Minority interest........... 7,800 16,154 69,569 26,308 49,511
----------- ------------ ------------ ----------- ------------
176,748 215,384 1,086,262 166,406 468,220
----------- ------------ ------------ ----------- ------------
Income before income taxes.... 453,939 618,932 5,038,637 376,677 3,417,304
Provision for income taxes.... 2,618 206,779 1,847,100 143,070 1,244,243
----------- ------------ ------------ ----------- ------------
Net income............... $ 451,321 $ 412,153 $ 3,191,537 $ 233,607 $ 2,173,061
=========== ============ ============ =========== ============
Pro forma earnings per share
(unaudited)................. $ 0.31 $ 0.02 $ 0.21
============ =========== ============
Shares used in computation of
pro forma earnings per share
(unaudited)................. 10,386,161 10,363,075 10,379,610
============ =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 52
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOREIGN
PREFERRED STOCK COMMON STOCK RETAINED CURRENCY
---------------------- ---------------------- EARNINGS TRANSLATION
SHARES AMOUNT SHARES AMOUNT (DEFICIT) ADJUSTMENT TOTAL
-------- ----------- --------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993........... $ 7,500,000 $ 750,000 $(1,914,187) $ $(1,164,187)
Issuance of Series A Convertible
Preferred Stock.................. 625,000 2,000,000 2,000,000
Net income......................... 451,321 451,321
-------- ---------- --------- ---------- ----------- ------- -----------
Balance, December 31, 1993......... 625,000 2,000,000 7,500,000 750,000 (1,462,866) 1,287,134
Net income......................... 412,153 412,153
Translation adjustment............. 5,953 5,953
-------- ---------- --------- ---------- ----------- ------- -----------
Balance, December 31, 1994......... 625,000 2,000,000 7,500,000 750,000 (1,050,713) 5,953 1,705,240
Conversion of Series A Convertible
Preferred Stock to common
stock............................ (625,000) (2,000,000) 1,874,999 2,000,000
Accretion of Series B Redeemable
Convertible Preferred Stock...... (153,088) (153,088)
Net income......................... 3,191,537 3,191,537
Translation adjustment............. (7,675) (7,675)
-------- ---------- --------- ---------- ----------- ------- -----------
Balance, December 31, 1995......... 9,374,999 2,750,000 1,987,736 (1,722) 4,736,014
Accretion of Series B Redeemable
Convertible Preferred Stock
(unaudited)...................... (229,631) (229,631)
Net income (unaudited)............. 2,173,061 2,173,061
Translation adjustment
(unaudited)...................... 26,093 26,093
-------- ---------- --------- ---------- ----------- ------- -----------
Balance, March 31, 1996
(unaudited)...................... $ 9,374,999 $2,750,000 $ 3,931,166 $24,371 $ 6,705,537
======== ========== ========= ========== =========== ======= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 53
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
----------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.................................. $ 451,321 $ 412,153 $ 3,191,537 $ 233,607 $ 2,173,061
Adjustments to reconcile net income to net
cash used in operating activities:
Allowance for doubtful accounts and
returns................................. (5,529) 235,964 177,647 (93,991) 379,461
Inventory valuation allowance............. 138,000 62,000 300,000 (48,473) 356,702
Depreciation and amortization............. 426,864 650,844 1,000,646 203,336 343,201
Deferred income taxes..................... (35,032) (138,135) (226,411) 189,804 (304,915)
Minority interest......................... 7,800 16,154 69,569 26,308 49,511
Foreign currency translation adjustment... (5,953) (7,675) (19,227) 26,093
Changes in assets and liabilities:
Accounts receivable..................... (1,633,826) (3,117,109) (12,464,835) (3,396,147) (7,433,607)
Inventory............................... (2,411,936) (3,940,469) (28,217,690) (3,228,198) (5,781,017)
Prepaids and other assets............... (80,637) (751,611) (5,689,140) (1,541,620) 1,224,908
Accounts payable........................ 1,505,311 236,068 24,267,853 3,539,821 5,527,071
Accrued liabilities..................... 487,052 1,705,133 2,400,818 (496,718) 716,605
Income taxes payable.................... 37,650 224,159 802,283 (134,411) 621,604
----------- ------------ ------------ ------------ ------------
Net cash used in operating
activities.......................... (1,112,962) (4,410,802) (14,395,398) (4,765,909) (2,101,322)
----------- ------------ ------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of property and
equipment................................. 36,523 12,947
Purchases of property and equipment......... (314,671) (538,188) (1,397,289) (304,063) (433,017)
Repayment of loan to shareholder............ 125,000
Acquisitions of subsidiaries................ (689,720)
----------- ------------ ------------ ------------ ------------
Net cash used in investing
activities.......................... (314,671) (376,665) (2,074,062) (304,063) (433,017)
----------- ------------ ------------ ------------ ------------
Cash flows from financing activities:
Borrowings under line of credit agreement... 8,575,000 25,745,800 65,408,357 12,905,374 29,205,385
Payments under line of credit agreement..... (9,430,000) (23,488,720) (56,665,000) (10,255,000) (28,980,000)
Net change in book overdrafts............... 685,529 3,017,362 2,754,389 2,358,745 2,165,055
Payments on capital leases.................. (176,914) (288,802) (548,868) (119,450) (180,614)
Proceeds from sale of preferred stock....... 2,000,000 7,000,000
Preferred stock issuance costs.............. (691,992)
Other....................................... (69,800) 21,171 (86,634) (189,500) 104,055
----------- ------------ ------------ ------------ ------------
Net cash provided by financing
activities.......................... 1,583,815 5,006,811 17,170,252 4,700,169 2,313,881
----------- ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents................................. 156,182 219,344 700,792 (369,803) (220,458)
Cash and cash equivalents at beginning of
period...................................... 138,263 294,445 513,789 513,789 1,214,581
----------- ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period.... $ 294,445 $ 513,789 $ 1,214,581 $ 143,986 $ 994,123
=========== ============ ============ ============ ============
Supplemental cash flow information:
Cash paid during the period for interest.... $ 213,422 $ 239,470 $ 1,111,213 $ 203,991 $ 473,004
=========== ============ ============ ============ ============
Cash paid for income taxes.................. $ 100,000 $ 1,251,382 $ 315,000 $ 996,952
============ ============ ============ ============
Noncash investing and financing activity:
Capital leases to finance purchases of
equipment............................... $ 769,032 $ 405,304 $ 1,804,330 $ 593,961
=========== ============ ============ ============
Investment in subsidiary.................. $ 500,000
============
Accretion of Series B Redeemable
Convertible Preferred Stock............. $ 153,088 $ 229,631
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 54
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for the three months ended March 31, 1995 and 1996 is unaudited)
1. DESCRIPTION OF BUSINESS:
Multiple Zones International, Inc. and its majority owned subsidiaries
(collectively the "Company") are international direct marketers of microcomputer
hardware, software, peripherals and accessories for users of Apple
Macintosh-compatible ("Mac") and IBM-compatible ("PC") personal computers. The
Company has licensed its trade name to independent licensees which operate in a
number of countries world-wide.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and of its majority owned subsidiaries. Intercompany transactions
and balances have been eliminated in consolidation.
Interim Financial Information
The consolidated financial statements and related notes thereto for the
three months ended March 31, 1995 and 1996 are unaudited and have been prepared
on the same basis as the audited financial statements included herein. In the
opinion of management, such unaudited financial statements include all
adjustments necessary to present fairly the information set forth therein. These
adjustments are solely of a normal, recurring nature. The results of operations
for such interim periods are not necessarily indicative of results for the full
year.
Cash Equivalents
Cash equivalents are all highly liquid investments with initial maturities
of three months or less.
Concentration of Credit Risk
Cash balances subject to credit risk consist of cash balances held in one
financial institution in the United States and cash balances held in foreign
financial institutions. The Company has not experienced any losses associated
with cash balances and believes that there is minimal risk associated with the
cash balances. Concentration of credit risk with respect to trade receivables is
limited due to the Company's diverse customer base. The Company closely monitors
extensions of credit but does not require collateral, and has not experienced
significant credit losses.
Inventories
Inventories consist primarily of computer software and hardware.
Inventories are valued at the lower of first-in, first-out (FIFO) cost or
market. Balances at December 31, 1994 and 1995 and March 31, 1996 are net of
allowances of approximately $300,000, $600,000 and $957,000, respectively.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is based on the
straight-line method over the estimated useful lives of the related assets,
generally 3 to 10 years. Amortization of capital leases is based on the
straight-line method over the estimated useful lives of the related assets or
lease life, whichever is shorter, generally 3 to 10 years. Expenditures for
maintenance and repairs are charged to expense as incurred, while additions,
renewals and betterments are capitalized. Gains or losses from sales or
retirements are included in other income and expense.
F-7
<PAGE> 55
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information for the three months ended March 31, 1995 and 1996 is unaudited)
Income Taxes
Deferred income taxes are provided based on the estimated future tax
effects of temporary differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
that are expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation allowance is
recorded for deferred tax assets when it is more likely than not that such
deferred tax assets will not be realized.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Foreign Currency Translation
Assets and liabilities of the Company's foreign subsidiaries are translated
into U.S. dollars at the exchange rate in effect at the balance sheet date and
revenues and expenses are translated at weighted average rates during the
period. The resulting translation adjustment is reflected as a separate
component of shareholders' equity on the balance sheet.
Computation of Earnings Per Share
Historical Earnings Per Share
Historical earnings per share is computed using the weighted average number
of common and dilutive common equivalent shares outstanding during the period.
Dilutive common equivalent shares consist of stock options and warrants. Fully
diluted earnings per share assumes the conversion of the Series B Redeemable
Convertible Preferred Stock ("Series B Preferred Stock"). For those periods
prior to the offering date, pursuant to the Securities and Exchange Commission
Staff Accounting Bulletins, common and common equivalents shares issued at
prices below the public offering price during the 12 months immediately
preceding the offering date have been included in the calculation as if they
were outstanding for all periods presented. The calculation uses the treasury
stock method in determining the resulting incremental weighted average
equivalent shares outstanding.
F-8
<PAGE> 56
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information for the three months ended March 31, 1995 and 1996 is unaudited)
The following table presents historical earnings per share and shares used
in the computations:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------- -------------------------
1993 1994 1995 1995 1996
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Primary earnings per share....... $ 0.05 $ 0.04 $ 0.31 $ 0.02 $ 0.20
======= ======= ======= ======= =======
Shares used in computation of
primary earnings per share..... 9,067,814 9,884,386 9,934,159 9,911,068 9,927,603
======= ======= ======= ======= =======
Fully diluted earnings per
share.......................... $ 0.05 $ 0.04 $ 0.31 $ 0.02 $ 0.21
======= ======= ======= ======= =======
Shares used in computation of
fully diluted earnings per
share.......................... 9,519,821 10,336,393 10,386,161 10,363,075 10,379,610
======= ======= ======= ======= =======
</TABLE>
Pro Forma Earnings Per Share
The calculation of pro forma earnings per share as reflected on the
accompanying consolidated statements of operations includes the effect of all
outstanding convertible redeemable preferred stock and stock options and
warrants. The accretion related to the preferred stock carrying value is not
deducted from income in the calculation of pro forma earnings per share.
Pursuant to the rules of the Securities and Exchange Commission, common and
common equivalent shares issued during the twelve months immediately preceding
the initial filing of the Company's registration statement on Form S-1 related
to the initial public offering of its common stock have been included in the
calculation of the weighted average common and common equivalent shares
outstanding. The calculation uses the treasury stock method in determining the
resulting incremental weighted average equivalent shares outstanding.
Revenue Recognition
Revenue on product sales is recognized at the time of shipment. The Company
generally allows its customers to return products within 30 days of purchase. An
allowance for product returns is established based on experience.
License Fees and Royalties
The Company records revenues from license fees in net sales when licenses
are granted. Royalty income from licensees is recorded in net sales based on a
percentage of the licensees' gross sales in the period sales are made.
Catalog Costs and Revenues
The Company produces and distributes catalogs at various intervals
throughout the year. Costs to produce and distribute individual catalogs,
including paper, printing, postage, production and design costs, are capitalized
and amortized to selling expense during the period in which the catalogs are
generating substantial sales (generally one month). At December 31, 1995 and
March 31, 1996, $3,753,666 and $2,020,873, respectively, of capitalized
advertising costs were included with prepaids. The Company receives market
development revenues and cooperative advertising revenues from most vendors who
have placed advertisements in the Company's catalogs. These revenues are
recognized as a reduction of selling expense in the same period in which the
corresponding catalog cost is recognized as selling expense. Advertising expense
net of
co-op advertising recovery is included in selling, general and administrative
expenses and totaled $1,774,783 for the year ended December 31, 1995.
F-9
<PAGE> 57
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information for the three months ended March 31, 1995 and 1996 is unaudited)
The Company adopted Statement of Position 93-7 "Reporting on Advertising
Costs" (SOP 93-7) effective January 1, 1995. Management believes that if SOP
93-7 had been adopted in prior years, it would not have had a material impact on
the Company's financial position or results of operations.
The Company provides advertising in its catalogs in exchange for products
or services to be received from its vendors. These transactions are reported at
the estimated fair market value of the advertising provided by the Company which
approximates the value of products or services received in exchange. Barter
revenues are recorded when the catalogs are published and receivables are
recorded for the products or services to be received. Barter expenses are
recorded when the products or services are used.
Dependence on Sales of Mac Products
The Company is largely dependent on sales of Mac products manufactured by a
broad variety of vendors, including Apple. A decline in the demand for, or
availability of, Apple or other Mac products would likely have a material
adverse effect on the Company's business, financial condition and results of
operations. Although the Company intends to pursue increased sales of PC
products to reduce its dependence on sales of Mac products, there can be no
assurance that the Company will be successful in doing so.
Reclassifications
Certain reclassifications have been made to the 1993, 1994 and 1995
financial statements to conform to the March 31, 1996 presentation. Such
reclassifications had no effect on net income.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS:
For certain financial instruments, including cash, cash equivalents and
bank lines of credit, the carrying value approximates fair value.
Management considers the fair value of the Series B Preferred Stock to
approximate its carrying value.
4. RECEIVABLES:
Receivables consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1994 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
Trade........................................ $6,478,240 $16,204,425 $22,351,527
Co-op advertising............................ 777,267 3,194,886 2,839,380
Licensees.................................... 261,123 665,522 646,100
Returns, rebates and other................... 1,175,349 3,653,074 6,245,742
---------- ----------- -----------
8,691,979 23,717,907 32,082,749
Less allowances.............................. (428,782) (606,429) (985,890)
---------- ----------- -----------
$8,263,197 $23,111,478 $31,096,859
========== =========== ===========
</TABLE>
F-10
<PAGE> 58
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information for the three months ended March 31, 1995 and 1996 is unaudited)
5. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- MARCH 31,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Equipment................................... $ 1,638,464 $ 2,351,015 $ 2,844,153
Computer hardware and software under capital
leases.................................... 1,750,720 3,621,598 3,621,598
Computer software........................... 213,558 773,300 752,832
Furniture and fixtures...................... 136,628 265,884 268,875
Leasehold improvements...................... 39,472 155,975 155,975
------------ ------------ ------------
3,778,842 7,167,772 7,643,433
Less accumulated depreciation and
amortization.............................. (1,616,302) (2,649,217) (2,992,279)
------------ ------------ ------------
Property and equipment, net....... $ 2,162,540 $ 4,518,555 $ 4,651,154
============ ============ ============
</TABLE>
Included in accumulated depreciation and amortization is accumulated
amortization associated with capital leases at December 31, 1994 and 1995 and
March 31, 1996 of $685,547, $1,246,279 and $1,403,301, respectively.
6. BANK LINES OF CREDIT:
At December 31, 1995, the Company had a $20.0 million bank line of credit
expiring June 14, 1996 (in May 1996, the line of credit was increased to $25.0
million and its expiration date was extended to December 31, 1996). Interest is
charged at the prime lending rate plus 3/4% (9 1/4% at December 31, 1995). At
December 31, 1995 and March 31, 1996, $11,575,000 and $11,790,000, respectively,
was borrowed on the line. The line is collateralized by the Company's accounts
receivable and inventories, and a portion is guaranteed by certain of the
Company's shareholders.
The line of credit agreement contains certain covenants and restrictions
requiring, among other things, a minimum tangible net worth, limitations on
capital expenditures and certain other financial ratios and restrictions. At
December 31, 1995, the Company was not in compliance with one of these
covenants. The covenant was modified in April 1996, and the bank has waived
violation of the covenant through the expiration date of the line of credit. At
March 31, 1996, the Company would have been in compliance with the modified
covenant.
Bank lines of credit also included $459,890 and $470,275 of borrowings by
the Company's foreign subsidiaries at December 31, 1995 and March 31, 1996,
respectively.
At December 31, 1994, the Company had $3,275,000 outstanding under a
$7,000,000 line of credit which bore interest at the prime lending rate plus
3/4% (8 3/4% at December 31, 1994). Bank lines of credit at December 31, 1994
also included $2,080 of borrowings by the Company's foreign subsidiaries.
The lines of credit are used by the Company under its cash management
system to cover checks presented for payment in excess of cash balances. As of
December 31, 1994 and 1995 and March 31, 1996, the Company had book overdrafts
of $3,473,925, $6,228,314 and $8,572,753, respectively, which are included with
accounts payable.
F-11
<PAGE> 59
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information for the three months ended March 31, 1995 and 1996 is unaudited)
7. TRADE CREDIT ARRANGEMENT:
In 1996, the Company entered into security agreements with Deutsche
Financial Services ("Deutsche") to facilitate the purchase of inventory from
various suppliers under certain terms and conditions. The agreement allows a
collateralized position in inventory financed by Deutsche up to an aggregate of
$25.0 million. At March 31, 1996, accounts payable included $16.4 million owed
to Deutsche, of which $8.1 million was for inventory in transit. Amounts
purchased under these agreements generally require payment within a period of 45
days, and no interest is charged. Interest will accrue on amounts not paid by
the end of this period at variable rates.
8. INCOME TAXES:
As of June 5, 1993, the Company terminated its S Corporation status. As an
S Corporation, a portion of 1993 earnings and losses were reported on the
personal tax returns of the shareholders. If the Company had been subject to
federal income taxes for all of 1993 at the statutory rates in effect for that
year, its pro forma income tax expense and net income for 1993 would have been
$154,339 and $299,600, respectively.
The income tax provision consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
-------- --------- ----------
<S> <C> <C> <C>
Current.......................................... $ 37,650 $ 344,914 $2,073,511
Deferred......................................... 54,365 (138,135) (226,411)
Change in tax status............................. (89,397)
-------- --------- ----------
$ 2,618 $ 206,779 $1,847,100
======== ========= ==========
</TABLE>
The components of deferred taxes were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
--------- ---------
<S> <C> <C>
Assets:
Allowance for doubtful accounts............................ $ 145,786 $ 192,699
Inventory allowances....................................... 102,000 204,000
Deferred advertising revenue............................... 170,000 10,700
Inventory capitalization................................... 19,005 58,152
Accrued liabilities and other.............................. 68,360 263,509
--------- ---------
Total.............................................. $ 505,151 $ 729,060
--------- ---------
Liabilities:
Deferred catalog costs..................................... $(142,464) $
Property and equipment depreciation........................ (94,771) (185,891)
Other...................................................... (94,749) (143,591)
--------- ---------
$(331,984) $(329,482)
--------- ---------
Net deferred tax asset..................................... $ 173,167 $ 399,578
========= =========
</TABLE>
F-12
<PAGE> 60
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information for the three months ended March 31, 1995 and 1996 is unaudited)
The net deferred tax asset is recognized in the accompanying balance sheet
as follows:
<TABLE>
<S> <C> <C>
Current deferred tax asset................................. $ 362,687 $ 695,060
Non-current deferred income tax liability.................. (189,520) (295,482)
--------- ---------
Net deferred tax asset....................................... $ 173,167 $ 399,578
========= =========
</TABLE>
Although realization is not assured, management believes it is more likely
than not that all of the net deferred asset will be realized through future
taxable income or taxable loss carrybacks.
A reconciliation of the effective income tax rate on income before taxes
with the federal statutory rate follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
----- ---- ----
<S> <C> <C> <C>
Statutory rate................................................ 34.0% 34.0% 34.0%
Change in tax status:
Effect of earnings attributable to S corporation
shareholders............................................. (15.0)
Effect of establishment of deferred taxes................... (19.7)
State income tax (net of federal income tax benefit).......... 1.5
Other......................................................... 1.3 (0.6) 1.2
----- ---- ----
Effective tax rate............................................ 0.6% 33.4% 36.7%
===== ==== ====
</TABLE>
9. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company leases its office and returns warehouse space under
noncancelable operating leases which expire through June 30, 1999. Under the
terms of the leases, the Company is responsible for its share of taxes,
insurance and common area charges. At December 31, 1995, future minimum payments
under operating leases were as follows:
<TABLE>
<S> <C>
1996............................................................. $ 568,762
1997............................................................. 428,512
1998............................................................. 412,662
1999............................................................. 208,497
----------
Total.................................................. $1,618,433
==========
</TABLE>
Rental expense totaled $411,373, $472,796 and $607,973 for the years ended
December 31, 1993, 1994 and 1995, respectively.
F-13
<PAGE> 61
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information for the three months ended March 31, 1995 and 1996 is unaudited)
Obligations Under Capital Leases
The Company leases equipment and software under long-term capital leases.
Future lease payments as of December 31, 1995 were as follows:
<TABLE>
<S> <C>
1996..................................................................... $ 912,737
1997..................................................................... 792,107
1998..................................................................... 629,574
1999..................................................................... 423,368
2000..................................................................... 49,542
----------
Total future minimum lease payments...................................... 2,807,328
Less amount representing interest........................................ (420,217)
----------
Present value of net minimum lease payments.............................. 2,387,111
Less current portion..................................................... (722,558)
----------
Noncurrent portion....................................................... $1,664,553
==========
</TABLE>
Distribution Center
The Company has contracted with a freight company to provide and operate
its primary distribution center under a contract which expires March 31, 1998.
Under this contract, the Company pays a flat rate for each order filled.
Letters of Credit
The Company had unused letters of credit totaling $2,800,000 at March 31,
1996.
10. SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK:
On October 27, 1995, the Company completed a sale of 612,476 shares of
Series B Preferred Stock for $7,000,000. Each share of Series B Preferred Stock
is entitled to a cumulative annual dividend of $1.142902 per share, payable only
to the extent that dividends are declared to common shareholders. Rights to
accrued but unpaid dividends terminate upon conversion of the Series B Preferred
Stock. Voluntary and involuntary liquidation value of each preferred share is
$11.42902 plus accrued and unpaid dividends. Offering costs related to the sale
were $691,992. In connection with the offering, the Company also issued a
warrant for the purchase of 45,310 shares of common stock exercisable at
$7.61935 per share. At the option of the holder and automatically upon an
underwritten public offering with an aggregate offering price of not less than
$20 million based upon a preoffering Company valuation of at least $100 million,
the shares convert at a rate of three shares of common for two shares of Series
B Preferred Stock. If an underwritten public offering is not completed by
December 31, 1998, the holders of the Series B Preferred Stock have the option
to require the Company to redeem the Series B Preferred Stock at a price equal
to the greater of the fair market value of the Series B Preferred Stock at
December 31, 1998 or $11.42902 per share, as adjusted for stock splits or other
recapitalization events, plus accrued and unpaid dividends payable to holders of
Series B Preferred Stock.
The difference between the issuance price, net of offering costs, of the
Series B Preferred Stock and the redemption value is being accreted periodically
through the redemption date by a charge to retained earnings. The carrying value
of the Series B Preferred Stock has also been increased for accrued but unpaid
dividends.
F-14
<PAGE> 62
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information for the three months ended March 31, 1995 and 1996 is unaudited)
11. SHAREHOLDERS' EQUITY:
Common Stock
In June 1993, the Company increased the number of authorized shares of
common stock to 25,000,000 and declared a common stock split which had the
effect of increasing the shares issued and outstanding to 2,500,000. In February
1994, the Company declared a common stock split which had the effect of
increasing the shares issued and outstanding to 5,000,000. On January 2, 1996,
the number of authorized shares of common stock was increased to 45,000,000. On
June 3, 1996, the Company declared a common stock split which had the effect of
increasing the shares issued and outstanding to 9,374,999. All share amounts
have been restated to give effect to these stock splits.
Preferred Stock
The Company has 5,000,000 shares of preferred stock authorized. During
1993, the Company issued 625,000 shares of Series A Convertible Preferred Stock
("Series A Preferred Stock") for $2,000,000. The shares have no par value and
have full voting rights. In October 1995, all shares of Series A Convertible
Preferred Stock were converted at a rate of two shares of common stock for one
share of preferred stock. This conversion had the effect of increasing the
common shares issued and outstanding to 9,374,999.
Stock Options
In 1993, the Company adopted a Stock Incentive Plan (the "Plan") whereby
the Company may issue incentive or nonqualified stock options, restricted
shares, stock units or stock appreciation rights to employees. Stock options are
granted solely at the discretion of the Board of Directors and are issued at a
price equal to the estimated fair market value of the stock at the date of
grant. The term of each option granted is for such period as determined by the
Board of Directors, but not more than ten years from date of grant. Options may
generally be exercised upon the earlier of the seventh anniversary of the date
of grant, six months after an initial public offering, or upon a greater than
75% change in control of the Company. Grants are nontransferable, and shares
acquired upon exercise of options may be subject to repurchase at the option of
the Company under certain conditions. The maximum number of shares to be granted
under the Plan was 750,000 at December 31, 1995 and was increased to 1,650,000
in April 1996.
In addition to options granted under the Plan, the Company has granted
options to outside consultants. Options granted to these individuals for a total
of 37,500 shares were outstanding at December 31, 1995 at option prices of
$0.17 - $5.33 per share.
F-15
<PAGE> 63
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information for the three months ended March 31, 1995 and 1996 is unaudited)
Stock option activity for 1993, 1994 and 1995 and the three months ended
March 31, 1996 is summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
-----------------------------
NUMBER OPTION
OF SHARES PRICE RANGE
--------- ---------------
<S> <C> <C>
Balance, January 1, 1993
Granted.................................................. 159,000 $0.17
Canceled................................................. (7,500) 0.17
------- --------------
Balance, December 31, 1993................................. 151,500 0.17
Granted.................................................. 37,500 0.33
Canceled................................................. (67,500) 0.17
------- --------------
Balance, December 31, 1994................................. 121,500 0.17 - 0.33
Granted.................................................. 335,250 4.00 - 5.33
Canceled................................................. (750) 4.00
------- --------------
Balance, December 31, 1995................................. 456,000 0.17 - 5.43
Granted.................................................. 265,500 5.33 - 6.67
Canceled................................................. (42,000) 0.17 - 4.00
------- --------------
Balance, March 31, 1996.................................... 679,500 $0.17 - $6.67
======= ==============
</TABLE>
No options were exercisable during 1993, 1994 or 1995. At December 31,
1995, options for 373,500 shares of common stock were available for grant. At
March 31, 1996, options for 69,000 shares were exercisable upon completion of an
underwritten public offering.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (the "Statement"). The Statement encourages, but does not require,
accounting for stock compensation awards granted to employees based on their
fair value at the date the awards are granted. Companies may elect to continue
to apply current accounting requirements for employee stock compensation awards,
which generally will result in no compensation cost for most fixed stock option
plans, such as the Plan. The expense measurement provisions of the Statement
apply to all equity instruments issued for goods and services provided by
persons other than employees. All companies are required to comply with the
disclosure requirements of the Statement. The Company will adopt the Statement
in the year ending December 31, 1996. The Company expects to continue accounting
for employee stock compensation awards using current accounting requirements.
Employee Stock Purchase Plan
In December 1995, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan") which will be effective upon the completion of an underwritten
public offering. Under the terms of the Purchase Plan, employees other than
officers and employees of the Company's subsidiaries may purchase a total of up
to 450,000 shares of common stock. The purchase price per share is 85% of the
lower of the market value per share of common stock determined as of the
beginning or end of the quarterly purchase period specified in the Purchase
Plan.
12. DEFERRED INCOME 401(K) PLAN:
During 1994, the Company began offering a deferred income 401(k) plan to
substantially all full time employees with a minimum of one year of service.
Participants may make tax-deferred contributions of up to
F-16
<PAGE> 64
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information for the three months ended March 31, 1995 and 1996 is unaudited)
10% of annual compensation subject to certain limitations specified by the
Internal Revenue Code. The Company recognized expense, related to the Company
match, of approximately $10,200 and $24,700 for the years ended December 31,
1994 and 1995, respectively.
13. RELATED PARTY TRANSACTIONS:
Related party transactions for 1993, 1994 and 1995 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Sales to licensees............................. $1,178,867 $1,340,836 $1,274,142
Sales to affiliates............................ 18,608 20,355 87,564
Purchases from affiliates...................... 2,150,663 3,510,200 881,857
Amounts payable to affiliates.................. 30,817 291,134 20,986
Accounts receivable from affiliates............ 17,258
</TABLE>
14. ACQUISITIONS:
During the year ended December 31, 1995, $689,720 was expended relating to
acquisitions of additional businesses, which includes amounts related to an
acquisition completed in January 1996.
Certain of the purchase agreements relating to the Company's acquisitions
allow the minority owners to sell their remaining interests to the Company at
the end of three years. The purchase price for the remaining interests is based
on a multiple of the subsidiaries' net income during the three year period.
15. OPERATIONS BY GEOGRAPHIC AREA:
The Company operates primarily in one industry segment, the distribution of
computer hardware and software. Information about the Company's operations in
different geographic areas for 1994 and 1995 is presented below. International
operations in 1993 were nominal. International activities are principally
concentrated in Europe. Corporate assets consist of cash held by the
international subsidiaries.
F-17
<PAGE> 65
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(Information for the three months ended March 31, 1995 and 1996 is unaudited)
A summary of the Company's operations by geographic area follows:
<TABLE>
<CAPTION>
UNITED STATES INTERNATIONAL ELIMINATIONS TOTAL
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Net sales...................... $ 101,920,063 $ 11,535,500 $ $113,455,563
Income from operations......... 787,808 46,508 834,316
Identifiable assets............ $ 25,572,490 $ 3,150,940 $ (3,532,201) $ 25,191,229
Corporate assets............... 513,789
------------
Total assets......... $ 25,705,018
============
YEAR ENDED DECEMBER 31, 1995
Net sales...................... $ 216,261,197 $ 26,325,701 $ $242,586,898
Income from operations......... 5,575,361 549,538 6,124,899
Identifiable assets............ $ 71,358,809 $ 8,734,995 $ (1,916,221) $ 78,177,583
Corporate assets............... 1,214,581
------------
Total assets......... $ 79,392,164
============
</TABLE>
F-18
<PAGE> 66
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 11
Capitalization........................ 12
Dividend Policy....................... 12
Dilution.............................. 13
Selected Consolidated Financial and
Operating Data...................... 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 22
Management............................ 32
Principal Shareholders................ 40
Description of Capital Stock.......... 41
Shares Eligible for Future Sale....... 43
Underwriting.......................... 45
Legal Matters......................... 46
Experts............................... 46
Additional Information................ 46
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------------
UNTIL JULY , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,200,000 SHARES
MULTIPLE ZONES
INTERNATIONAL, INC.
COMMON STOCK
-----------------
PROSPECTUS
-----------------
LOGO
FURMAN SELZ
JUNE , 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 67
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION*
<TABLE>
<S> <C>
Registration Fee -- Securities and Exchange Commission.................... $ 13,959
NASD Filing Fee........................................................... 4,548
Nasdaq National Market Listing Fee........................................ 48,734
Accountants' Fees and Expenses............................................ 250,000
Blue Sky Fees and Expenses................................................ 12,000
Printing and Engraving Expenses........................................... 80,000
Legal Fees and Expenses................................................... 350,000
Miscellaneous Expenses.................................................... 100,759
--------
Total........................................................... $860,000
========
</TABLE>
- ---------------
* All expenses other than the Securities and Exchange Commission Registration
Fee, the NASD Filing Fee and the Nasdaq National Market Fee are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act authorize a court to award, or a corporation's board of
directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). Article VI, Section 6.5.1, of the Registrant's Restated
Articles of Incorporation (Exhibit 3.1 hereto) and Article X of the Registrant's
Restated Bylaws (Exhibit 3.2 hereto) provide for indemnification of the
Registrant's directors, officers, employees and agents to the maximum extent
permitted by Washington law. The Company intends to enter into agreements with
all of its executive officers and all outside directors to indemnify them
against certain claims and liabilities arising out of their service as officers
and directors, as applicable, and to advance expenses to defend claims subject
to indemnification. The directors and officers of the Registrant also may be
indemnified against liability they may incur for serving in that capacity
pursuant to a liability insurance policy maintained by the Company for such
purpose. The Company intends to obtain directors' and officers' liability
insurance effective upon consummation of the offering with an aggregate coverage
limit of $5,000,000.
Section 23B.08.320 of the Washington Business Corporation Act authorizes a
corporation to limit a director's liability to the corporation or its
shareholders for monetary damages for acts or omissions as a director, except in
certain circumstances involving intentional misconduct, self-dealing or illegal
corporate loans or distributions, or any transaction from which the director
personally receives a benefit in money, property or services to which the
director is not legally entitled. Article VI, Section 6.6, of the Registrant's
Restated Articles of Incorporation contains provisions implementing, to the
fullest extent permitted by Washington law, such limitations on a director's
liability to the Registrant and its shareholders. In addition, the Company has
agreed to release the directors from certain liabilities to the Company that
would otherwise arise out of their service as directors.
Reference is made to the Registrant's Restated Articles of Incorporation,
filed as Exhibit 3.1 to this Registration Statement, and the Registrant's
Bylaws, filed as Exhibit 3.2 to this Registration Statement.
Reference is also made to Section 7 of the form of Underwriting Agreement
filed as Exhibit 1.1 to this Registration Statement for certain provisions
regarding the indemnification of officers and directors of the Registrant by the
Underwriters.
II-1
<PAGE> 68
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 1993, the Registrant has not issued any unregistered
securities other than the following:
(1) An aggregate of 625,000 shares of Series A Preferred Stock issued
in July 1993 to four investors. The aggregate consideration received for
such shares was $2,000,000.
(2) An aggregate of 612,476 shares of Series B Preferred Stock issued
in October 1995 to 15 investors. The aggregate consideration received for
such shares was $7,000,000.
No underwriters were engaged in connection with these sales, which were
made in reliance upon the exemption from registration set forth in Section 4(2)
of the Securities Act, relating to sales by an issuer not involving a public
offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ --------------------------------------------------------------------------------
<C> <S>
1.1 Proposed Form of Underwriting Agreement
3.1 Restated Articles of Incorporation*
3.2 Amended and Restated Bylaws, as amended*
4.1 Specimen Stock Certificate
5.1 Opinion of Graham & James LLP
10.1 Multiple Zones International, Inc. 1993 Stock Incentive Plan, as amended*
10.2 Stock Option Agreement between the Registrant and Peter J. Biere for stock
option granted August 9, 1994*
10.3 Form of Stock Option Agreement (used for all other stock options granted to
executive officers prior to April 1, 1996)*
10.4 Form of Stock Option Agreement (used for all stock options granted to executive
officers after March 31, 1996)*
10.5 Multiple Zones International, Inc. 401(k) Plan*
10.6 Multiple Zones International, Inc. Employee Stock Purchase Plan*
10.7 Multiple Zones International, Inc. Management Incentive Plan
10.8 Employment letter dated October 13, 1994, as amended December 19, 1994, between
the Registrant and Victor J. Melfi, Jr.*
10.9 Employment Agreement dated as of April 1, 1996 between the Registrant and Victor
J. Melfi, Jr.*
10.10 Employment letter dated October 10, 1995 between the Registrant and Bruce S.
Martin*
10.11 Employment Agreement dated as of April 1, 1996 between the Registrant and Bruce
S. Martin*
10.12 Employment Agreement dated as of January 1, 1996 between the Registrant and
Sadrudin J. Kabani*
10.13 Employment Agreement dated as of April 1, 1996 between the Registrant and
Sadrudin J. Kabani*
10.14 Employment letter dated March 25, 1996 between the Registrant and Judith A.
Roseth*
10.15 Form of Indemnification Agreement (to be entered into with each of Peter J.
Biere, Judith A. Roseth and the Registrant's outside directors)*
10.16 Form of Stock Option Agreement (used for all stock options granted to outside
directors)*
10.17 Consulting Agreement between the Registrant and Carol L. Miltner*
10.18 Business Loan Agreement dated as of December 5, 1995, between the Registrant and
U.S. Bank of Washington, National Association, as amended*
10.19 Agreement for Wholesale Financing dated January 15, 1996, as amended, between
the Registrant and Deutsche Financial Services Corporation*
</TABLE>
II-2
<PAGE> 69
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ --------------------------------------------------------------------------------
<C> <S>
10.20 Multiple Zones International, Inc. Series B Preferred Stock Purchase Agreement
dated October 27, 1995, between the Registrant, Sadrudin J. Kabani, Firoz H.
Lalji and holders of the Series B Preferred Stock, as amended*
10.21 Warrant issued to Prudential Securities Incorporated dated October 27, 1995*
10.22 Multiple Zones International, Inc. Registration Rights Agreement dated as of
October 27, 1995, by and among the Registrant, Prudential Securities
Incorporated and holders of the Series B Preferred Stock*
10.23 Standard Office Lease-Gross dated October 4, 1993 between the Registrant and
Hewlett-Packard Company***
10.24 Office Lease dated April 1, 1996 between the Registrant and Renton Talbot
Delaware, Inc.**
10.25 Ingram Micro Resale Agreement dated April 1, 1996 between Ingram Micro and the
Registrant**
10.26 Authorized Apple Catalog Reseller Sales Agreement between the Registrant and
Apple Computer, Inc.**
10.27 Storage and Distribution Agreement dated September 28, 1992 between the
Registrant and Advanced Logistics Services Corp., as amended**
10.28 Business Loan Agreement dated as of May 13, 1996 between the Registrant and U.S.
Bank of Washington, National Association
10.29 $20.0 million Promissory Note dated May 13, 1996 in favor of U.S. Bank of
Washington, National Association
10.30 $5.0 million Promissory Note dated May 13, 1996 in favor of U.S. Bank of
Washington, National Association
11.1 Statement re Computation of Per Share Earnings
21.1 Subsidiaries of the Registrant*
23.1 Consent of Graham & James LLP (included in Exhibit 5.1)
23.2 Consent of Coopers & Lybrand L.L.P.
24.1 Power of Attorney*
</TABLE>
- ---------------
* Previously filed
** Confidential treatment requested; previously filed
*** Confidential treatment requested
(b) Financial Statement Schedules
None.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14 above, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
II-3
<PAGE> 70
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be a part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 71
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Seattle, State of Washington, on June 4, 1996.
MULTIPLE ZONES INTERNATIONAL, INC.
By /s/ VICTOR J. MELFI, JR.
------------------------------------
Victor J. Melfi, Jr.
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed on June 4, 1996 by the following
persons in the capacities indicated below.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------ ------------------------------------------
<C> <S>
/s/ VICTOR J. MELFI, President and Chief Executive Officer
JR. (Principal Executive Officer) and
- ------------------------------------------ Director
Victor J. Melfi, Jr.
/s/ PETER J. Senior Vice President -- Finance and Chief
BIERE Financial Officer (Principal Financial
- ------------------------------------------ and Accounting Officer)
Peter J. Biere
SADRUDIN J. KABANI* Chairman of the Board
- ------------------------------------------
Sadrudin J. Kabani
JOHN H. BAUER* Director
- ------------------------------------------
John H. Bauer
JOHN T. CARLETON* Director
- ------------------------------------------
John T. Carleton
JOHN E. DEFEO* Director
- ------------------------------------------
John E. DeFeo
FIROZ H. LALJI* Director
- ------------------------------------------
Firoz H. Lalji
CAROL L. MILTNER* Director
- ------------------------------------------
Carol L. Miltner
PAUL E. MONSON* Director
- ------------------------------------------
Paul E. Monson
STEVE SARICH, JR.* Director
- ------------------------------------------
Steve Sarich, Jr.
*By: /s/ PETER J.
BIERE
- ------------------------------------------
Peter J. Biere
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 72
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------------------------------------------------------------------- ------------
<C> <C> <S> <C>
1.1 -- Proposed Form of Underwriting Agreement................................
4.1 -- Specimen Stock Certificate.............................................
5.1 -- Opinion of Graham & James LLP..........................................
10.7 -- Multiple Zones International, Inc. Management Incentive Plan...........
10.23 -- Standard Office Lease -- Gross dated October 4, 1993 between the
Registrant and Hewlett-Packard Company.................................
10.28 -- Business Loan Agreement dated as of May 13, 1996 between the Registrant
and U.S. Bank of Washington, National Association......................
10.29 -- $20.0 million Promissory Note dated May 13, 1996 in favor of U.S. Bank
of Washington, National Association....................................
10.30 -- $5.0 million Promissory Note dated May 13, 1996 in favor of U.S. Bank
of Washington, National Association....................................
11.1 -- Statement re Computation of Per Share Earnings.........................
23.1 -- Consent of Graham & James LLP (included in Exhibit 5.1)................
23.2 -- Consent of Coopers & Lybrand L.L.P.....................................
</TABLE>
<PAGE> 1
EXHIBIT 1.1
Proof of June 5, 1996
2,200,000 Shares*
MULTIPLE ZONES INTERNATIONAL, INC.
COMMON STOCK
NO PAR VALUE
UNDERWRITING AGREEMENT
June ___, 1996
Dain Bosworth Incorporated
Furman Selz LLC
As Representatives of the several Underwriters
c/o Dain Bosworth Incorporated
Dain Bosworth Plaza
60 South Sixth Street
Minneapolis, Minnesota 55402
Ladies and Gentlemen:
Multiple Zones International, Inc., a Washington corporation (the
"Company"), proposes, subject to the terms and conditions stated herein, to
issue and sell to the several Underwriters named in Schedule A hereto (the
"Underwriters"), for which you are acting as representatives (the
"Representatives"), an aggregate of 2,200,000 shares (the "Firm Shares") of
Common Stock, no par value, of the Company (the "Common Stock"), and, at the
election of the Underwriters, up to 330,000 additional shares of Common Stock
(the "Option Shares"). The Firm Shares and the Option Shares are herein
collectively called the "Shares."
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (File No. 333-4458) and a
related preliminary prospectus for the registration of the Shares under the
Securities Act of 1933, as amended (the "Act"). The term Registration Statement
as used in this Agreement shall mean such registration statement, including all
exhibits and financial statements, all information omitted therefrom in reliance
upon Rule 430A and contained in the Prospectus referred to below, in the form in
which it became effective, and any registration statement filed pursuant to Rule
462(b) of the rules and regulations of the Commission with respect to the Shares
(a "Rule 462(b) registration statement"), and, in the event of any amendment
thereto after the effective date of such registration statement (the "Effective
Date"), shall also mean (from and after the effectiveness of such amendment)
such registration statement as so amended
_______________
* Plus up to 330,000 shares of Common Stock to cover over-allotments, if any.
<PAGE> 2
(including any Rule 462(b) registration statement). The term Prospectus as used
in this Agreement shall mean the prospectus relating to the Shares first filed
with the Commission pursuant to Rule 424(b) and Rule 430A (or if no such filing
is required, as included in the Registration Statement) and, in the event of any
supplement or amendment to such prospectus after the Effective Date, shall also
mean (from and after the filing with the Commission of such supplement or the
effectiveness of such amendment) such prospectus as so supplemented or amended.
The term Preliminary Prospectus as used in this Agreement shall mean each
preliminary prospectus included in such registration statement prior to the time
it becomes effective. Copies of the Registration Statement, including all
exhibits and schedules thereto, any amendments thereto and all Preliminary
Prospectuses have been delivered to you.
The Company hereby confirms its agreements with respect to the purchase
of the Shares by the Underwriters as follows:
1. Representations and Warranties of the Company
(a) The Company represents and warrants to, and agrees with, each of
the Underwriters that
(i) The Registration Statement has been declared effective under
the Act, and no post-effective amendment to the Registration Statement
has been filed as of the date of this Agreement. No stop order
suspending the effectiveness of the Registration Statement has been
issued and no proceeding for that purpose has been instituted or
threatened by the Commission.
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material
respects to the requirements of the Act and the rules and regulations
of the Commission promulgated thereunder (except for the absence of
share information in the initial Preliminary Prospectus), and did not
contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; provided, however, the Company makes no
representation or warranty as to information contained in or omitted in
reliance upon, and in conformity with, written information furnished to
the Company by or on behalf of any Underwriter through the
Representatives expressly for use in the preparation thereof.
(iii) The Registration Statement conforms, and the Prospectus and
any amendments or supplements thereto will conform, in all material
respects to the requirements of the Act and the rules and regulations
thereunder. Neither the Registration Statement nor any amendment
thereto, and neither the Prospectus nor any supplement thereto,
contains or will contain, as the case
2
<PAGE> 3
may be, any untrue statement of a material fact or omits or will omit
to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under
which they were made, not misleading; provided, however, that the
Company makes no representation or warranty as to information contained
in or omitted from the Registration Statement or the Prospectus, or any
such amendment or supplement, in reliance upon, and in conformity with,
written information furnished to the Company by or on behalf of any
Underwriter through the Representatives, expressly for use in the
preparation thereof.
(iv) The Company has been duly organized, is validly existing as a
corporation in good standing under the laws of the State of Washington,
has the corporate power and authority to own or lease its properties
and conduct its business as described in the Prospectus, and is duly
qualified to transact business in all jurisdictions in which the
conduct of its business or its ownership or leasing of property
requires such qualification and the failure so to qualify would have a
material adverse effect on the business or condition, financial or
otherwise, of the Company and its subsidiaries, taken as a whole.
(v) Each subsidiary of the Company has been duly incorporated, is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, has the corporate power and
authority to own or lease it properties and conduct its business as
described in the Prospectus, and is duly qualified to transact business
in all jurisdictions in which the conduct of its business or its
ownership or leasing of property requires such qualification and the
failure so to qualify would have a material adverse effect on the
business or condition, financial or otherwise, of the Company and its
subsidiaries, taken as a whole. All outstanding shares of capital stock
of each of the subsidiaries of the Company have been duly authorized
and validly issued, and are fully paid and the Company owns, directly
or indirectly, at least 75% of the outstanding capital stock of each
subsidiary free and clear of all liens, encumbrances and security
interests. Except as described in the Prospectus, no options, warrants
or other rights to purchase, agreements or other obligations to issue,
or other rights to convert any obligations into, shares of capital
stock or ownership interests in any of the subsidiaries of the Company
are outstanding.
(vi) The outstanding shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid and
nonassessable. All offers and sales by the Company of outstanding
shares of capital stock and other securities of the Company, prior to
the date hereof, were made in compliance with the Act and all
applicable state securities or blue sky laws. The Shares to be issued
and sold by the Company to the Underwriters pursuant to this Agreement
have been duly authorized and, when issued and paid for as
3
<PAGE> 4
contemplated herein, will be validly issued, fully paid and
nonassessable. Except as otherwise stated in the Prospectus, there are
no preemptive rights or other rights to subscribe for or to purchase,
or any restriction upon the voting or transfer of, any shares of
capital stock of the Company pursuant to the Company's Articles of
Incorporation, Bylaws or any agreement or other instrument to which the
Company is a party or by which the Company is bound. Neither the filing
of the Registration Statement nor the offering or the sale of the
Shares as contemplated by this Agreement gives rise to any rights for,
or relating to, the registration of any shares of capital stock or
other securities of the Company, except such rights which have been
validly waived or satisfied. Except as described in the Prospectus,
there are no outstanding options, warrants, agreements, contracts or
other rights to purchase or acquire from the Company any shares of its
capital stock. The Company has the authorized and outstanding capital
stock as set forth under the heading "Capitalization" in the
Prospectus. The outstanding capital stock of the Company, including the
Shares, conforms, and the Shares to be issued by the Company to the
Underwriters will conform, to the description thereof contained in the
Prospectus.
(vii) The financial statements, together with the related notes and
schedules as set forth in the Registration Statement and Prospectus,
present fairly the consolidated financial position, results of
operations and changes in financial position of the Company and its
subsidiaries on the basis stated in the Registration Statement at the
indicated dates and for the indicated periods. Such financial
statements have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods
involved, and all adjustments necessary for a fair presentation of
results for such periods have been made, except as otherwise stated
therein. The summary and selected financial and statistical data
included in the Registration Statement present fairly the information
shown therein on the basis stated in the Registration Statement and
have been compiled on a basis consistent with the financial statements
presented therein.
(viii) There is no action or proceeding pending or, to the
knowledge of the Company, threatened or contemplated against the
Company or any of its subsidiaries before any court or administrative
or regulatory agency which, if determined adversely to the Company or
any of its subsidiaries, would individually or in the aggregate, result
in a material adverse change in the business or condition (financial or
otherwise), results of operations, shareholders' equity or prospects of
the Company and its subsidiaries, taken as a whole, except as set forth
in the Registration Statement.
(ix) The Company has good and marketable title to all properties
and assets reflected as owned in the financial statements hereinabove
described (or
4
<PAGE> 5
described as owned in the Prospectus), in each case free and clear of
all liens, encumbrances and defects, except such as are described in
the Prospectus or do not materially affect the value of such properties
and assets and do not materially interfere with the use made and
proposed to be made of such properties and assets by the Company and
its subsidiaries; and any real property and buildings held under lease
by the Company and its subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made
of such property and buildings by the Company and its subsidiaries.
(x) Since the respective dates as of which information is given in
the Registration Statement, as it may be amended or supplemented, (A)
there has not been any material adverse change, or any development
involving a prospective material adverse change, in or affecting the
condition, financial or otherwise, of the Company and its subsidiaries,
taken as a whole, or the business affairs, management, financial
position, shareholders' equity or results of operations of the Company
and its subsidiaries, taken as a whole, whether or not occurring in the
ordinary course of business, (B) there has not been any transaction not
in the ordinary course of business entered into by the Company or any
of its subsidiaries which is material to the Company and its
subsidiaries, taken as a whole, other than transactions described or
contemplated in the Registration Statement, (C) the Company and its
subsidiaries have not incurred any material liabilities or obligations,
which are not in the ordinary course of business or which could result
in a material reduction in the future earnings of the Company and its
subsidiaries (other than any increase in borrowings under credit
facilities described in the Registration Statement), (D) the Company
and its subsidiaries have not sustained any material loss or
interference with their respective businesses or properties from fire,
flood, windstorm, accident or other calamity, whether or not covered by
insurance, (E) there has not been any change in the capital stock of
the Company (other than upon the exercise of options and warrants
described in the Registration Statement), or any material increase in
the short-term or long-term debt (including capitalized lease
obligations) of the Company and its subsidiaries, taken as a whole
(other than any increase in borrowings under credit facilities
described in the Registration Statement), (F) there has not been any
declaration or payment of any dividends or any distributions of any
kind with respect to the capital stock of the Company, other than any
dividends or distributions described or contemplated in the
Registration Statement, or (G) there has not been any issuance of
warrants, options, convertible securities or other rights to purchase
or acquire capital stock of the Company.
(xi) Neither the Company nor, to the best of the Company's
knowledge, any of its subsidiaries is in violation of, or in default
under, its Articles of Incorporation or Bylaws, or any statute,
5
<PAGE> 6
or any rule, regulation (including, without limitation, the Federal
Trade Commission's Merchandise Mail Order Rule and related
regulations), order, judgment, decree or authorization of any court or
governmental or administrative agency or body having jurisdiction over
the Company or any of its subsidiaries or any of their properties, or
any indenture, mortgage, deed of trust, loan agreement, lease,
franchise, license or other agreement or instrument to which the
Company or any of its subsidiaries is a party or by which it or any of
them are bound or to which any property or assets of the Company or any
of its subsidiaries is subject, which violation or default would have a
material adverse effect on the business, condition (financial or
otherwise), results of operations, shareholders' equity or prospects of
the Company and its subsidiaries, taken as a whole.
(xii) The issuance and sale of the Shares by the Company and the
compliance by the Company with all of the provisions of this Agreement
and the consummation of the transactions contemplated herein will not
violate any provision of the Articles of Incorporation or Bylaws of the
Company or any of its subsidiaries or any statute or any order,
judgment, decree, rule, regulation or authorization of any court or
governmental or administrative agency or body having jurisdiction over
the Company or any of its subsidiaries or any of their properties, and
will not conflict with, result in a breach or violation of, or
constitute, either by itself or upon notice or passage of time or both,
a default under any material indenture, mortgage, deed of trust, loan
agreement, lease, franchise, license or other agreement or instrument
to which the Company or any of its subsidiaries is a party or by which
the Company or any of its subsidiaries is bound or to which any
property or assets of the Company or any of its subsidiaries is
subject. No approval, consent, order, authorization, designation,
declaration or filing by or with any court or governmental agency or
body is required for the execution and delivery by the Company of this
Agreement and the consummation of the transactions herein contemplated,
except as may be required under the Act or any state securities or blue
sky laws.
(xiii) The Company and each of its subsidiaries hold and are
operating in compliance with all licenses, approvals, certificates and
permits from governmental and regulatory authorities, foreign and
domestic, which are necessary to the conduct of their business as
described in the Prospectus, except where the failure to hold such
license, approval, certificate or permit, or to be in compliance
therewith, would not have a material adverse effect on the business,
condition (financial or otherwise), results of operations, shareholders
equity or prospects of the Company and its subsidiaries, taken as a
whole.
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<PAGE> 7
(xiv) The Company has the power and authority to enter into this
Agreement and to authorize, issue and sell the Shares it will sell
hereunder as contemplated hereby. This Agreement has been duly and
validly authorized, executed and delivered by the Company.
(xv) Coopers & Lybrand L.L.P., which has certified certain of the
financial statements filed with the Commission as part of the
Registration Statement, are independent public accountants as required
by the Act and the rules and regulations thereunder.
(xvi) The Company has not taken and will not take, directly or
indirectly, any action designed to, or which has constituted, or which
might reasonably be expected to cause or result in, stabilization or
manipulation of the price of the Common Stock.
(xvii) The Company's registration statement pursuant to Section
12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), has been declared effective by the Commission; and the Shares
have been approved for designation upon notice of issuance on the
Nasdaq National Market under the symbol "MZON."
(xviii) The Company has obtained and delivered to the
Representatives written agreements of each of its directors, executive
officers and shareholders that no such person or entity will sell,
offer to sell, solicit an offer to buy, contract to sell, grant any
option to purchase, or otherwise transfer or dispose of, any shares of
Common Stock, or any securities convertible into or exchangeable for
Common Stock, for a period of 180 days after the date of the
Prospectus, directly or indirectly, by such holder otherwise than
hereunder or with the prior written consent of Dain Bosworth
Incorporated.
(xix) The Company has not distributed and will not distribute any
prospectus or other offering material in connection with the offering
and sale of the Shares other than any Preliminary Prospectus or the
Prospectus or other materials permitted by the Act to be distributed by
the Company.
(xx) The Company is in compliance with all provisions of Florida
Statutes Section 517.075 (Chapter 92-198, laws of Florida). The Company
does not do any business, directly or indirectly, with the government
of Cuba or with any person or entity located in Cuba.
(xxi) The Company and its subsidiaries have filed all federal,
state, local and foreign tax returns or reports required to be filed,
and have paid in full all taxes indicated by said returns or reports
and all assessments received by it or any of them to the extent that
such taxes have become due and
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<PAGE> 8
payable, except where the Company and its subsidiaries are contesting
in good faith such taxes and assessments.
(xxii) The Company and each of its subsidiaries own or license all
patents, patent applications, trademarks, service marks, trade names,
trademark registrations, service mark registrations, copyrights,
licenses, inventions, trade secrets and other similar rights necessary
for the conduct of their business as described in the Prospectus. The
Company has no knowledge of any infringement by the Company or its
subsidiaries of any patents, patent applications, trademarks, service
marks, trade names, trademark registrations, service mark
registrations, copyrights, licenses, inventions, trade secrets or other
similar rights of others, and, except for claims communicated in
writing to the Representatives, neither the Company nor any of its
subsidiaries has received any notice or claim of conflict with the
asserted rights of others with respect to any of the foregoing.
(xxiii) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (A)
transactions are executed in accordance with management's general or
specific authorization; (B) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for
assets; (C) access to records is permitted only in accordance with
management's general or specific authorization; and (D) the recorded
accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to
any differences.
(xxiv) Other than as contemplated by this Agreement, the Company
has not incurred any liability for any finder's or broker's fee or
agent's commission in connection with the execution and delivery of
this Agreement or the consummation of the transactions contemplated
hereby.
(b) Any certificate signed by any officer of the Company and delivered
to the Representatives or counsel to the Underwriters shall be deemed to be
a representation and warranty of the Company to each Underwriter as to the
matters covered thereby.
2. Purchase, Sale and Delivery of Shares. On the basis of the
representations, warranties and covenants contained herein, and subject to the
terms and conditions herein set forth, the Company agrees to sell to each
Underwriter and each Underwriter agrees, severally and not jointly, to purchase
from the Company, at a price of $______ per share, the number of Firm Shares set
forth opposite the name of each Underwriter in Schedule A hereto, subject to
adjustments in accordance with Section 8 hereof.
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<PAGE> 9
In addition, on the basis of the representations, warranties and
covenants herein contained and subject to the terms and conditions herein set
forth, the Company hereby grants to the several Underwriters an option to
purchase at their election up to 330,000 Option Shares at the same price per
share as set forth for the Firm Shares in the paragraph above, for the sole
purpose of covering overallotments in the sale of the Firm Shares. The option
granted hereby may be exercised in whole or in part, but only once, and at any
time upon written notice given within 30 days after the date of this Agreement,
by you, as Representatives of the several Underwriters, to the Company setting
forth the number of Option Shares as to which the several Underwriters are
exercising the option and the time and date at which certificates are to be
delivered. If any Option Shares are purchased, each Underwriter agrees,
severally and not jointly, to purchase that portion of the number of Option
Shares as to which such election shall have been exercised (subject to
adjustment to eliminate fractional shares) determined by multiplying such number
of Option Shares by a fraction the numerator of which is the maximum number of
Option Shares which such Underwriter is entitled to purchase as set forth
opposite the name of such Underwriter in Schedule A hereto and the denominator
of which is the maximum number of Option Shares which all of the Underwriters
are entitled to purchase hereunder. The time and date at which certificates for
Option Shares are to be delivered shall be determined by the Representatives but
shall not be earlier than two or later than ten full business days after the
exercise of such option, and shall not in any event be prior to the Closing
Date. If the date of exercise of the option is three or more full days before
the Closing Date, the notice of exercise shall set the Closing Date as the
Option Closing Date.
Certificates in definitive form for the Shares to be purchased by each
Underwriter hereunder, and in such denominations and registered in such names as
Dain Bosworth Incorporated may request upon at least forty-eight hours' prior
notice to the Company, shall be delivered by or on behalf of the Company to you
for the account of such Underwriter at such time and place as shall hereafter be
designated by the Representatives, against payment by such Underwriter or on its
behalf of the purchase price therefor by certified or official bank check or
checks, payable to the order of the Company in next day funds. The time and date
of such delivery and payment shall be, with respect to the Firm Shares, 7:00
a.m. Seattle time, at the offices of Graham & James LLP, on June ___, 1996, or
such other time and date as you and the Company may agree upon in writing, such
time and date being herein referred to as the "Closing Date," and, with respect
to the Option Shares, at the time and on the date specified by you in the
written notice given by you of the Underwriters' election to purchase the Option
Shares, or such other time and date as you and the Company may agree upon in
writing, such time and date being referred to herein as the "Option Closing
Date." Such certificates will be made available for checking and packaging at
least twenty-four hours prior to the Closing Date or the Option Closing Date, as
the case may be, at a location as may be designated by you.
3. Offering by Underwriters. It is understood that the several
Underwriters propose to make a public offering of the Firm Shares as soon as the
Representatives deem it advisable to do so. The Firm Shares are to be initially
offered to the
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<PAGE> 10
public at the initial public offering price set forth in the Prospectus. The
Representatives may from time to time thereafter change the public offering
price and other selling terms. To the extent, if at all, that any Option Shares
are purchased pursuant to Section 2 hereof, the Underwriters will offer such
Option Shares to the public on the foregoing terms.
It is understood that ___________ Firm Shares will initially be
reserved by the several Underwriters for offer and sale upon the terms and
conditions set forth in the Prospectus to employees and persons having business
relationships with the Company and its subsidiaries who have heretofore
delivered to you offers or indications of interest to purchase Firm Shares in
form satisfactory to you, and that any allocation of such Firm Shares among such
persons will be made in accordance with timely directions received by you from
the Company, provided that under no circumstances will you or any Underwriter be
liable to the Company or any such person for any action taken or omitted in good
faith in connection with such offering to employees and persons having business
relationships with the Company and its subsidiaries. It is further understood
that any of such Firm Shares which are not purchased by such persons will be
offered by the Underwriters to the public upon the terms and conditions set
forth in the Prospectus.
4. Covenants of the Company. The Company covenants and agrees with the
several Underwriters that:
(a) The Company will prepare and timely file with the Commission under
Rule 424(b) under the Act a Prospectus containing information previously
omitted at the time of effectiveness of the Registration Statement in
reliance on Rule 430A under the Act, and will not file any amendment to the
Registration Statement or supplement to the Prospectus of which the
Representatives shall not previously have been advised and furnished with a
copy and as to which the Representatives shall have objected in writing
promptly after reasonable notice thereof or which is not in compliance with
the Act or the rules and regulations thereunder.
(b) The Company will advise the Representatives promptly of any request
of the Commission for amendment of the Registration Statement or for any
supplement to the Prospectus or for any additional information, or of the
issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement or the use of the Prospectus, of the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, or of the institution or threatening of any proceedings for
that purpose, and the Company will use its best efforts to prevent the
issuance of any such stop order preventing or suspending the use of the
Prospectus or suspending such qualification and to obtain as soon as
possible the lifting thereof, if issued.
(c) The Company will endeavor to qualify the Shares for sale under the
securities laws of such jurisdictions as the Representatives may reasonably
have designated in writing and will, or will cause counsel to, make such
applications, file
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<PAGE> 11
such documents, and furnish such information as may be reasonably requested
by the Representatives, provided that the Company shall not be required to
qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction where it is not now so qualified or required to
file such a consent. The Company will, from time to time, prepare and file
such statements, reports and other documents as are or may be required to
continue such qualifications in effect for so long a period as the
Representatives may reasonably request for distribution of the Shares.
(d) The Company will furnish the Underwriters with as many copies of
any Preliminary Prospectus as the Representatives may reasonably request
and, during the period when delivery of a prospectus is required under the
Act, the Company will furnish the Underwriters with as many copies of the
Prospectus in final form, or as thereafter amended or supplemented, as the
Representatives may, from time to time, reasonably request. The Company
will deliver to the Representatives, at or before the Closing Date, three
signed copies of the Registration Statement and all amendments thereto,
including all exhibits filed therewith, and will deliver to the
Representatives such number of copies of the Registration Statement,
without exhibits, and of all amendments thereto, as the Representatives may
reasonably request.
(e) If, during the period in which a prospectus is required by law to
be delivered by an Underwriter or dealer, any event shall occur as a result
of which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in light of the
circumstances existing at the time the Prospectus is delivered to a
purchaser, not misleading, or if for any other reason it shall be necessary
at any time to amend or supplement the Prospectus to comply with any law,
the Company promptly will prepare and file with the Commission an
appropriate amendment to the Registration Statement or supplement to the
Prospectus so that the Prospectus as so amended or supplemented will not
include an untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein in light of
the circumstances existing when it is so delivered, not misleading, or so
that the Prospectus will comply with law. In case any Underwriter is
required to deliver a prospectus in connection with sales of any Shares at
any time nine months or more after the effective date of the Registration
Statement, upon the request of the Representatives but at the expense of
such Underwriter, the Company will prepare and deliver to such Underwriter
as many copies as the Representatives may request of an amended or
supplemented Prospectus complying with Section 10(a)(3) of the Act.
(f) The Company will make generally available to its security holders,
as soon as it is practicable to do so, but in any event not later than 18
months after the effective date of the Registration Statement, an earnings
statement (which need not be audited) in reasonable detail, covering a
period of at least 12 consecutive months
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<PAGE> 12
beginning after the effective date of the Registration Statement, which
earnings statement shall satisfy the requirements of Section 11(a) of the
Act and Rule 158 thereunder and will advise you in writing when such
statement has been so made available.
(g) The Company will, for such period up to five years from the Closing
Date, deliver to the Representatives copies of its annual report and copies
of all other documents, reports and information furnished by the Company to
its security holders or filed with any securities exchange pursuant to the
requirements of such exchange or with the Commission pursuant to the Act or
the Exchange Act. The Company will deliver to the Representatives similar
reports with respect to significant subsidiaries, as that term is defined
in the rules and regulations under the Act, which are not consolidated in
the Company's financial statements.
(h) No offering, sale or other disposition of any Common Stock or other
capital stock of the Company, or warrants, options, convertible securities
or other rights to acquire such Common Stock or other capital stock (other
than pursuant to employee stock option or stock purchase plans, outstanding
options or warrants or on the conversion of convertible securities
outstanding on the date of this Agreement) will be made for a period of 180
days after the date of this Agreement, directly or indirectly, by the
Company otherwise than hereunder or with the prior written consent of the
Representatives.
(i) The Company will apply the net proceeds from the sale of the Shares
to be sold by it hereunder substantially in accordance with the purposes
set forth under "Use of Proceeds" in the Prospectus.
(j) The Company will use its best efforts to maintain the designation
of the Common Stock on the Nasdaq National Market.
(k) The Company will file with the Commission such reports on Form SR
as may be required pursuant to Rule 463 under the Act.
5. Costs and Expenses. The Company will pay (directly or by
reimbursement) all costs, expenses and fees incident to the performance of the
obligations of the Company under this Agreement, including, without limiting the
generality of the foregoing, the following: accounting fees of the Company; the
fees and disbursements of counsel for the Company; the cost of preparing,
printing and filing of the Registration Statement, Preliminary Prospectuses and
the Prospectus and any amendments and supplements thereto and the printing,
mailing and delivery to the Underwriters and dealers of copies thereof and of
this Agreement, the Agreement Among Underwriters, any Selected Dealers
Agreement, the Underwriters' Selling Memorandum, the Invitation Letter, the Blue
Sky Memorandum and any supplements or amendments thereto (excluding, except as
provided below, fees and expenses of counsel to the Underwriters); the filing
fees of the
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<PAGE> 13
Commission; the filing fees and expenses (including legal fees and disbursements
of counsel for the Underwriters not in excess of $5,000) incident to securing
any required review by the NASD of the terms of the sale of the Shares; listing
fees, if any, transfer taxes and the expenses, including the fees and
disbursements of counsel for the Underwriters not in excess of $12,000 incurred
in connection with the qualification of the Shares under state securities or
Blue Sky laws; the fees and expenses incurred in connection with the designation
of the Shares on the Nasdaq National Market; the costs of preparing stock
certificates; the costs and fees of any registrar or transfer agent and all
other costs and expenses incident to the performance of its obligations
hereunder which are not otherwise specifically provided for in this Section 5.
In addition, the Company will pay all travel and lodging expenses incurred by
management of the Company in connection with any informational "road show"
meetings held in connection with the offering and will also pay for the
preparation of all materials used in connection with such meetings. The Company
shall not, however, be required to pay for any of the Underwriters' expenses
(other than those related to qualification of the Shares under state securities
or Blue Sky laws and those incident to securing any required review by the NASD
of the terms of the sale of the shares) except that, if this Agreement shall not
be consummated because the conditions in Section 6 hereof are not satisfied, or
because this Agreement is terminated by the Representatives pursuant to Section
10(b) hereof, or by reason of any failure, refusal or inability on the part of
the Company to perform any undertaking or satisfy any condition of this
Agreement or to comply with any of the terms hereof on its part to be performed,
unless such failure to satisfy said condition or to comply with said terms shall
be due to the default or omission of any Underwriter, then the Company shall
promptly upon request by the Representatives reimburse the several Underwriters
for all out-of-pocket accountable expenses, including fees and disbursements of
counsel, incurred in connection with investigating, marketing and proposing to
market the Shares or in contemplation of performing their obligations hereunder;
but the Company shall not in any event be liable to any of the several
Underwriters for damages on account of loss of anticipated profits from the sale
by them of the Shares.
6. Conditions of Obligations of the Underwriters. The several
obligations of the Underwriters to purchase the Firm Shares on the Closing Date
and the Option Shares, if any, on the Option Closing Date, are subject to the
condition that all representations and warranties of the Company contained
herein are true and correct, at and as of the Closing Date or the Option Closing
Date, as the case may be, the condition that the Company shall have performed
all of its covenants and obligations hereunder and to the following additional
conditions:
(a) The Prospectus shall have been filed with the Commission pursuant
to Rule 424(b) within the applicable time period prescribed for such filing
by the rules and regulations under the Act and in accordance with Section
4(a) hereof; no stop order suspending the effectiveness of the Registration
Statement, as amended from time to time, or any part thereof shall have
been issued and no proceedings for that purpose shall have been initiated
or threatened by the Commission; and all requests
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<PAGE> 14
for additional information on the part of the Commission shall have been
complied with to the reasonable satisfaction of the Representatives.
(b) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Graham & James LLP,
counsel for the Company, dated the Closing Date or the Option Closing Date,
as the case may be, addressed to the Underwriters, to the effect that:
(i) The Company has been duly organized and is validly existing as
a corporation in good standing under the laws of the State of
Washington, with corporate power and authority to own or lease its
properties and conduct its business as described in the Prospectus.
(ii) The Company has authorized and outstanding capital stock as
described under the caption "Capitalization" in the Prospectus. The
outstanding shares of the Company's capital stock have been duly
authorized and validly issued and are fully paid and nonassessable. The
form of certificate for the Shares is in due and proper form and
complies with all applicable statutory requirements. The Shares to be
issued and sold by the Company pursuant to this Agreement have been
duly authorized and, when issued and paid for as contemplated herein,
will be validly issued, fully paid and nonassessable. Except as
described in the Prospectus, no preemptive or, to the knowledge of such
counsel, other similar subscription rights of shareholders of the
Company, or of holders of warrants, options, convertible securities or
other rights to acquire shares of capital stock of the Company, exist
with respect to any of the Shares or the issue and sale thereof. To the
knowledge of such counsel, no rights to register outstanding shares of
the Company's capital stock or shares issuable upon the exercise of
outstanding warrants, options, convertible securities or other rights
to acquire shares of such capital stock exist which have not been
validly exercised or waived with respect to the Registration Statement.
The capital stock of the Company, including the Shares, conforms in all
material respects to the description thereof contained in the
Prospectus.
(iii) The Registration Statement has become effective under the Act
and, to the knowledge of such counsel, no stop order proceedings with
respect thereto have been instituted or are pending or threatened by
the Commission.
(iv) The Registration Statement, the Prospectus and each amendment
or supplement thereto comply as to form in all material respects with
the requirements of the Act and the rules and regulations thereunder
(except that such counsel need express no opinion as to the financial
statements and related schedules included therein).
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<PAGE> 15
(v) The statements (A) in the Prospectus under the captions
"Business - Trademarks," "Business Regulatory and Legal Matters,"
"Management - Employment Agreements," "Management - Benefit Plans,"
"Management Certain Transactions," "Description of Capital Stock" and
"Shares Eligible for Future Sale" and (B) in the Registration Statement
in Item 15 insofar as such statements constitute a summary of matters
of law, are accurate summaries and fairly present the information
called for with respect to such matters.
(vi) Such counsel does not know of any contracts, agreements,
documents or instruments required to be filed as exhibits to the
Registration Statement or described in the Registration Statement or
the Prospectus which are not so filed or described as required; and
insofar as any statements in the Registration Statement or the
Prospectus constitute summaries of any contract, agreement, document or
instrument to which the Company is a party, such statements are
accurate summaries and fairly present the information called for with
respect to such matters.
(vii) Such counsel knows of no legal or governmental proceeding,
pending or threatened, before any court or administrative body or
regulatory agency, to which the Company or any of its subsidiaries is a
party or to which any of the properties of the Company or any of its
subsidiaries is subject that are required to be described in the
Registration Statement or Prospectus and are not so described, or
statutes or regulations that are required to be described in the
Registration Statement or the Prospectus that are not so described.
(viii) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will
not conflict with or result in a violation of or default under the
charter or bylaws of the Company, or under any statute, permit,
judgment, decree, order, rule or regulation known to such counsel of
any court or governmental agency or body having jurisdiction over the
Company or any of its properties, or under any lease, contract,
indenture, mortgage, loan agreement or other agreement or other
instrument or obligation known to such counsel to which the Company is
a party or by which the Company is bound or to which any property or
assets of the Company is subject, except such agreements, instruments
or obligations with respect to which valid consents or waivers have
been obtained by the Company.
(ix) The Company has the corporate power and authority to enter
into this Agreement and to authorize, issue and sell the Shares as
contemplated hereby. This Agreement has been duly and validly
authorized, executed and delivered by the Company.
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<PAGE> 16
(x) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or
other governmental body is necessary in connection with the execution
and delivery of this Agreement and the consummation of the transactions
herein contemplated (other than as may be required by state securities
and blue sky laws, as to which such counsel need express no opinion)
except such as have been obtained or made, specifying the same.
(xi) The Company is not, and immediately upon completion of the
sale of Shares contemplated hereby will not be, required to register as
an "investment company" under the Investment Company Act of 1940, as
amended.
(xii) Such counsel has no reason to believe that, as of its
effective date, the Registration Statement or any further amendment
thereto made by the Company prior to the Closing Date or the Option
Closing Date, as the case may be (other than the financial statements
and related schedules therein, as to which such counsel need express no
opinion), contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or that, as of its date, the
Prospectus or any further amendment or supplement thereto made by the
Company prior to the Closing Date or the Option Closing Date, as the
case may be (other than the financial statements and related schedules
therein, as to which such counsel need express no opinion), contained
an untrue statement of a material fact or omitted to state a material
fact necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading or that, as of
the Closing Date or the Option Closing Date, as the case may be, either
the Registration Statement or the Prospectus or any further amendment
or supplement thereto made by the Company prior to the Closing Date or
the Option Closing Date, as the case may be (other than the financial
statements and related schedules therein, as to which such counsel need
express no opinion), contains an untrue statement of a material fact or
omits to state a material fact necessary to make the statements
therein, in light of the circumstances in which they were made, not
misleading; and they do not know of any amendment to the Registration
Statement required to be filed.
(c) The Representatives shall have received from Orrick, Herrington &
Sutcliffe, counsel for the Underwriters, an opinion dated the Closing Date
or the Option Closing Date, as the case may be, with respect to the
incorporation of the Company, the validity of the Shares, the Registration
Statement, the Prospectus, and other related matters as the Representatives
may reasonably request, and such counsel shall have received such papers
and information as they may reasonably request to enable them to pass upon
such matters.
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<PAGE> 17
(d) The Representatives shall have received on each of the date hereof,
the Closing Date and the Option Closing Date, as the case may be, a signed
letter, dated as of the date hereof, the Closing Date or the Option Closing
Date, as the case may be, in form and substance satisfactory to the
Representatives, from Coopers & Lybrand L.L.P., to the effect that they are
independent public accountants with respect to the Company and its
subsidiaries within the meaning of the Act and the related rules and
regulations and containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters with
respect to the financial statements and certain financial information
contained in the Registration Statement and the Prospectus.
(e) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date or the Option Closing Date, as the case may be,
there shall not have been any change or any development involving a
prospective change, in or affecting the general affairs, management,
financial position, shareholders' equity or results of operations of the
Company and its subsidiaries taken as a whole and, otherwise than as set
forth or contemplated in the Prospectus, the effect of which, in your
judgment, is material and adverse to the Company and makes it impracticable
or inadvisable to proceed with the public offering or the delivery of the
Shares being delivered at the Closing Date or the Option Closing Date, as
the case may be, on the terms and in the manner contemplated in the
Prospectus.
(f) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates of
the chief executive officer and the chief financial officer of the Company
to the effect that, as of the Closing Date or the Option Closing Date, as
the case may be, each of them severally represents as follows:
(i) The Prospectus was filed with the Commission pursuant to Rule
424(b) within the applicable period prescribed for such filing by the
rules and regulations under the Act and in accordance with Section 4 of
this Agreement; no stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for such
purpose have been initiated or are, to his knowledge, threatened by the
Commission.
(ii) The representations and warranties of the Company set forth in
Section 1 of this Agreement are true and correct at and as of the
Closing Date or the Option Closing Date, as the case may be, and the
Company has performed all of its obligations under this Agreement to be
performed at or prior to the Closing Date or the Option Closing Date,
as the case may be.
(g) The Company shall have furnished to the Representatives such
further certificates and documents as the Representatives may reasonably
have requested.
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The opinions and certificates mentioned in this Agreement shall be
deemed to be in compliance with the provisions hereof only if they are in all
material respects reasonably satisfactory to the Representatives and to Orrick,
Herrington & Sutcliffe, counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6
shall not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters hereunder may be terminated by
the Representatives by notifying the Company of such termination in writing or
by telegram at or prior to the Closing Date or the Option Closing Date, as the
case may be. In such event, the Company and the Underwriters shall not be under
any obligation to each other (except to the extent provided in Sections 5 and 7
hereof).
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless each Underwriter,
each officer and director thereof, and each person, if any, who controls
any Underwriter within the meaning of the Act, against any losses, claims,
damages or liabilities to which such Underwriter or such persons may become
subject under the Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions or proceedings in respect thereof) arise out of
or are based upon (i) any untrue statement or alleged untrue statement of
any material fact contained in the Registration Statement (including any
Rule 462(b) registration statement), any Preliminary Prospectus or the
Prospectus, including any amendments or supplements thereto or (ii) the
omission or alleged omission to state therein a material fact required to
be stated therein, or necessary to make the statements therein not
misleading in light of the circumstances under which they were made, and
will reimburse each Underwriter and each such controlling person for any
legal or other expenses reasonably incurred by such Underwriter or such
controlling person in connection with investigating or defending any such
action or claim as such expenses are incurred; provided, however, that the
Company shall not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement, or omission or alleged omission,
made in the Registration Statement, any Preliminary Prospectus or the
Prospectus, including any amendments or supplements thereto, in reliance
upon and in conformity with written information furnished to the Company by
any Underwriter through the Representatives specifically for use therein.
18
<PAGE> 19
(b) Each Underwriter agrees to indemnify and hold harmless the Company,
each of its directors, each of its officers who has signed the
Registration Statement and each person, if any, who controls the Company
within the meaning of the Act, against any losses, claims, damages or
liabilities to which the Company or any such director, officer or
controlling person may become subject under the Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions or proceedings
in respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement (including any Rule 462(b) registration statement), any
Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto, or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances under which they were made, and will reimburse any legal or
other expenses reasonably incurred by the Company or any such director,
officer or controlling person in connection with investigating or defending
any such action or claim as such expenses are incurred; provided, however,
that each Underwriter will be liable in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission has been made in the Registration Statement,
any Preliminary Prospectus, the Prospectus or any such amendment or
supplement in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through the Representatives
specifically for use therein.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity or
contribution may be sought pursuant to this Section 7, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the
19
<PAGE> 20
"indemnifying party") in writing. No indemnification provided for in
Section 7(a) or (b) or contribution provided for in Section 7(d) shall
be available with respect to a proceeding to any party who shall fail to
give notice of such proceeding as provided in this Section 7(c) if the
party to whom notice was not given was unaware of the proceeding to which
such notice would have related and was prejudiced by the failure to give
such notice, but the failure to give such notice shall not relieve the
indemnifying party or parties from any liability which it or they may have
to the indemnified party otherwise than on account of the provisions of
Section 7(a), (b) or (c). In case any such proceeding shall be brought
against any indemnified party and it shall notify the indemnifying party of
the commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel reasonably satisfactory to such indemnified party and shall
pay as incurred the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the
right to retain its own counsel at its own expense. Notwithstanding the
foregoing, the indemnifying party shall pay promptly as incurred the
reasonable fees and expenses of the counsel retained by the indemnified
party in the event (i) the indemnifying party and the indemnified party
shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties)
include both the indemnifying party and the indemnified party and the
indemnified party shall have reasonably concluded that there may be a
conflict between the positions of the indemnifying party and the
indemnified party in conducting the defense of any such action or that
there may be legal defenses available to it or other indemnified parties
which are different from or additional to those available to the
indemnifying party. It is understood that the indemnifying party shall not,
in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the fees and expenses of more than one separate
firm at any time for all such indemnified parties. Such firm shall be
designated in writing by the Representatives and shall be reasonably
satisfactory to the Company in the case of parties indemnified pursuant to
Section 7(a) and shall be designated in writing by the Company and shall be
reasonably satisfactory to the Representatives in the case of parties
indemnified pursuant to Section 7(b). The indemnifying party shall
not be liable for any settlement of any proceeding effected without its
written consent.
(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
Section 7(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to
therein, then each indemnifying party shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) in
such
20
<PAGE> 21
proportion as is appropriate to reflect the relative benefits received by
the Company on the one hand and the Underwriters on the other from the
offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law, then
each indemnifying party shall contribute to such amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect not
only such relative benefits but also the relative fault of the Company on
the one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by
the Company on the one hand and the Underwriters on the other shall be
deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company bears to the
total underwriting discounts and commissions received by the Underwriters,
in each case as set forth in the table on the cover page of the Prospectus.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to
information supplied by the Company on the one hand or the Underwriters on
the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission. The Company and the Underwriters agree that it would not be just
and equitable if contributions pursuant to this Section 7(d) were
determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which
does not take account of the equitable considerations referred to above in
this Section 7(d). The amount paid or payable by an indemnified party as a
result of the losses, claims, damages or liabilities (or actions or
proceedings in respect thereto) referred to above in this Section 7(d)
shall be deemed to include any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any
such action or claim. Notwithstanding the provisions of this Section 7(d),
no Underwriter shall be required to contribute any amount in excess of the
underwriting discounts and commissions applicable to the Shares purchased
by such Underwriter; and no person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this Section 7(d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) The obligations of the Company under this Section 7 shall be in
addition to any liability which the Company may otherwise have, and the
obligations of the Underwriters under this Section 7 shall be in addition
to any liability which the Underwriters may otherwise have.
21
<PAGE> 22
8. Default by Underwriters. If on the Closing Date or the Option
Closing Date, as the case may be, any Underwriter shall fail to purchase and pay
for the portion of the Shares which such Underwriter has agreed to purchase and
pay for on such date (otherwise than by reason of any default on the part of the
Company), you, as Representatives of the Underwriters, shall use your best
efforts to procure within 24 hours thereafter one or more of the other
Underwriters, or any others, to purchase from the Company such amounts as may be
agreed upon, and upon the terms set forth herein, of the Firm Shares or Option
Shares, as the case may be, which the defaulting Underwriter or Underwriters
failed to purchase. If during such 24 hours you, as Representatives, shall not
have procured such other Underwriters, or any others, to purchase the Firm
Shares or Option Shares, as the case may be, agreed to be purchased by the
defaulting Underwriter or Underwriters, then (a) if the aggregate number of
Shares with respect to which such default shall occur does not exceed 10% of the
Firm Shares or Option Shares, as the case may be, covered hereby, the other
Underwriters shall be obligated, severally, in proportion to the respective
numbers of Firm Shares or Option Shares, as the case may be, which they are
obligated to purchase hereunder, to purchase the Firm Shares or Option Shares,
as the case may be, which such defaulting Underwriter or Underwriters failed to
purchase, or (b) if the aggregate number of shares of Firm Shares or Option
Shares, as the case may be, with respect to which such default shall occur
exceeds 10% of the Firm Shares or Option Shares, as the case may be, covered
hereby, the Company or you as the Representatives of the Underwriters will have
the right, by written notice given within the next 24-hour period to the parties
to this Agreement, to terminate this Agreement without liability on the part of
the non-defaulting Underwriters or of the Company except for expenses to be
borne by the Company and the Underwriters as provided in Section 5 hereof and
the indemnity and contribution agreements in Section 7 hereof. In the event of a
default by any Underwriter or Underwriters, as set forth in this Section 8, the
Closing Date or Option Closing Date, as the case may be, may be postponed for
such period, not exceeding seven days, as you, as Representatives, may determine
in order that the required changes in the Registration Statement or in the
Prospectus or in any other documents or arrangements may be effected. The term
"Underwriter" includes any person substituted for a defaulting Underwriter.
Nothing in this Section 8 shall relieve any defaulting Underwriter from
liability in respect of any default of such Underwriter under this Agreement.
9. Notices. All communications hereunder shall be in writing and,
except as otherwise provided herein, will be mailed, delivered or telegraphed
and confirmed as follows: if to the Underwriters, to Dain Bosworth Incorporated,
1201 3rd Avenue, Suite 2500, Seattle, Washington 98101, Attention: James
Bromley, with copies to John F. Seegal, Esq., Orrick, Herrington & Sutcliffe,
400 Sansome Street, San Francisco, California 94111; and if to the Company, to
Multiple Zones International, Inc., 15815 S.E. 37th Street, Bellevue, Washington
98006, Attention: Victor J. Melfi, Jr., Chief Executive Officer, with copies to
John M. Steel, Esq., Graham & James LLP, 1001 Fourth Avenue Plaza, Suite 4500,
Seattle, Washington 98154.
22
<PAGE> 23
10. Termination. This Agreement may be terminated by you by notice to
the Company as follows:
(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters or (ii) 4:00 p.m.,
Minneapolis time, on the first business day following the later of the date
on which the Registration Statement becomes effective or the date of this
Agreement;
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given
in the Registration Statement and the Prospectus, any material adverse
change in or affecting the condition, financial or otherwise, of the
Company and its subsidiaries taken as a whole or the business affairs,
management, financial position, shareholders' equity or results of
operations of the Company and its subsidiaries taken as a whole, whether or
not arising in the ordinary course of business, (ii) any outbreak or
escalation of hostilities or declaration of war or national emergency after
the date hereof or other national or international calamity or crisis or
change in economic or political conditions if the effect of such outbreak,
escalation, declaration, emergency, calamity, crisis or change on the
financial markets of the United States would, in your judgment, make the
offering or delivery of the Shares impracticable or inadvisable, (iii)
suspension of trading in securities on the New York Stock Exchange or the
American Stock Exchange or limitation on prices (other than limitations on
hours or numbers of days of trading) for securities on either such
Exchange, or a halt or suspension of trading in securities generally which
are quoted on the Nasdaq National Market System, or (iv) declaration of a
banking moratorium by either federal or New York State authorities; or
(c) as provided in Sections 6 and 8 of this Agreement.
This Agreement also may be terminated by you, by notice to the Company,
as to any obligation of the Underwriters to purchase the Option Shares, upon the
occurrence at any time prior to the Option Closing Date of any of the events
described in subparagraph (b) above or as provided in Sections 6 and 8 of this
Agreement.
11. Written Information. For all purposes under this Agreement
(including, without limitation, Sections 1, 2 and 7 hereof), the Company
understands and agrees with each of the Underwriters that the following
constitutes the only written information furnished to the Company by or through
the Representatives specifically for use in preparation of the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto: (i) the per share "Price to Public" and per share
"Underwriting Discounts and Commissions" set forth on the cover page of the
Prospectus, (ii) the information relating to stabilization set forth in the last
paragraph on page two of the Preliminary Prospectus and the Prospectus, and
(iii) the information set forth in the first,
23
<PAGE> 24
second and fifth paragraphs (including the syndicate information) under the
caption "Underwriting" in the Preliminary Prospectus and the Prospectus.
12. Successors. This Agreement has been and is made solely for the
benefit of and shall be binding upon the Underwriters, the Company and their
respective successors, executors, administrators, heirs and assigns, and the
officers, directors and controlling persons referred to herein, and no other
person will have any right or obligation hereunder. The term "successors" shall
not include any purchaser of the Shares merely because of such purchase.
13. Miscellaneous. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or its directors and officers and (c) delivery of and payment for
the Shares under this Agreement.
Each provision of this Agreement shall be interpreted in such a manner
as to be effective and valid under applicable law, but if any provision of this
Agreement is held to be invalid, illegal or unenforceable under any applicable
law or rule in any jurisdiction, such provision will be ineffective only to the
extent of such invalidity, illegality or unenforceability in such jurisdiction
or any provision hereof in any other jurisdiction.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Minnesota.
24
<PAGE> 25
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms.
Very truly yours,
MULTIPLE ZONES INTERNATIONAL, INC.
By:_____________________________________________
Victor J. Melfi, Jr.
Chief Executive Officer
The foregoing Underwriting
Agreement is hereby confirmed
and accepted as of the date
first above written.
DAIN BOSWORTH INCORPORATED
FURMAN SELZ LLC
As Representatives of the several Underwriters
By Dain Bosworth Incorporated
By: _____________________________________________
Its: ____________________________________________
25
<PAGE> 26
SCHEDULE A
SCHEDULE OF UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm Maximum Number
Underwriter Shares to be Purchased of Option Shares
- ----------- ---------------------- ----------------
<S> <C> <C>
Dain Bosworth Incorporated .........
Furman Selz LLC.....................
Total...................... 2,200,000 330,000
========= =======
</TABLE>
A-1
<PAGE> 1
EXHIBIT 4.1
SPECIMEN STOCK CERTIFICATE
[MULTIPLE ZONES LOGO]
[NUMBER] [SHARES]
Multiple Zones
I N T E R N A T I O N A L
INCORPORATED UNDER THE LAWS SEE REVERSE FOR DEFINITIONS AND A
OF THE STATE OF WASHINGTON STATEMENT AS TO THE RIGHTS, PREFERENCES
AND LIMITATIONS OF SHARES
THIS CERTIFIES THAT CUSIP 624906 10 3
IS THE RECORD HOLDER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
- ------===============MULTIPLE ZONES INTERNATIONAL, INC.==================-------
transferable only on the books of the Corporation by the holder hereof in
person or by duly authorized attorney upon surrender of this certificate
properly endorsed. This certificate is not valid until countersigned by the
Transfer Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated
/s/ SIG ILLEGIBLE /s/ SIG ILLEGIBLE
SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
[SEAL]
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE> 2
The Corporation will furnish to any shareholder upon written request
and without charge a summary of the designations, relative rights, preferences,
and limitations applicable to each class of stock which the Corporation is
authorized to issue, and the variations in rights, preferences, and limitations
of the shares of each series of each such class of stock insofar as the same
may have been fixed and determined, and the authority of the Board of Directors
to determine variations for future series.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT -- ____________ Custodian ___________
(Cust) (Minor)
under Uniform Gifts to Minors
Act ______________________________
Shares
UNIF TRF MIN ACT -- __________ Custodian (minor age____)
(Cust)
___________ under Uniform Transfers
(Minor)
to Minors Act ____________________
(Shares)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED ________________________ hereby sell, assign and transfer
unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
______________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated ___________________________
X___________________________________________
X___________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By_______________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION (BANK,
STOCKBROKER, SAVINGS AND LOAN ASSOCIATION
OR CREDIT UNION) WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM, PURSUANT TO S.E.C. RULE 17????.
_____________________________________________
AMERICAN BANK NOTE COMPANY MAY 26, 1996
3504 ATLANTIC AVENUE
SUITE 12
LONG BEACH, CA 90807 044118bk
(310) 989-2383
(FAX) (310) 426-7450 REV 1
_____________________________________________
<PAGE> 1
EXHIBIT 5.1
[LETTERHEAD]
June 4, 1996
Multiple Zones International, Inc.
15815 S.E. 37th Street
Bellevue, Washington 98006-1800
RE: 2,530,000 SHARES OF COMMON STOCK OF
MULTIPLE ZONES INTERNATIONAL, INC.
Ladies and Gentlemen:
This opinion is furnished in connection with a Registration Statement on Form
S-1 (Registration No. 333-4458), as amended (the "Registration Statement"), of
Multiple Zones International, Inc., a Washington corporation (the "Company"),
under which 2,200,000 shares of Common Stock of the Company (the "Common
Stock"), together with up to an additional 330,000 shares of Common Stock to
cover over-allotments, are being registered by the Company for sale under the
Securities Act of 1933, as amended (all of such shares will be referred to as
the "Shares").
As counsel for the Company, we are familiar with the Company's Restated
Articles of Incorporation, as amended, the Company's Amended and Restated
Bylaws, as amended, and the records of the corporate proceedings of the
Company, and we have assisted in the preparation of the Registration Statement,
including the Prospectus contained therein.
Based on the foregoing, we are of the opinion that, when (a) the Registration
Statement shall have been declared effective by order of the Securities and
Exchange Commission, (b) the Shares shall have been offered and sold in the
manner referred to in the Registration Statement, (c) certificates for the
Shares shall have been duly issued by the Company and registered by its
registrar, and (d) the Company shall have received the consideration required
for the Shares as contemplated by the Registration Statement, the Shares will
be validly issued, fully paid and nonassessable.
We note that a member of our firm is an Assistant Secretary of the Company and
beneficially owns 7,500 shares of Common Stock.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the inclusion in the Prospectus contained therein
of the reference to our firm under the heading "Legal Matters." In giving such
consent, we do not admit that we are in the category of persons whose consent
is required under Section 7 of the Securities Act of 1933, as amended.
Very truly yours,
Frank C. Woodruff
- ------------------------------------
Frank C. Woodruff
of
GRAHAM & JAMES LLP/RIDDELL WILLIAMS P.S.
KCG:lkj
<PAGE> 1
Exhibit 10.7
MULTIPLE ZONES INTERNATIONAL, INC.
MANAGEMENT INCENTIVE PLAN
MULTIPLE ZONES INTERNATIONAL, INC., a Washington corporation (the
"Company"), hereby establishes and sets forth the terms of the MULTIPLE ZONES
INTERNATIONAL, INC. MANAGEMENT INCENTIVE PLAN (the "Plan"), which for reference
purposes will be dated January 1, 1996.
1. PURPOSE OF PLAN. The purpose of the Plan is to enable the
Company to attract, retain and motivate key management employees of the highest
caliber.
2. DEFINITIONS. Capitalized terms used in the Plan shall have
the following meanings (whether used in the singular or plural):
"Board" means the Board of Directors of the Company as
constituted from time to time during the term of the Plan.
"Committee" means the Compensation Committee of the Board as
constituted from time to time during the term of the Plan.
"Participant" is defined in Section 3.
"Plan Year" means each calendar year during the term of the
Plan.
3. PARTICIPANTS. The individuals entitled to participate in the
Plan (the "Participants") are (a) each officer of the Company; (b) the
Company's controller and each other employee of the Company at the director
level; (c) each other employee of the Company at the manager level; and (d)
each other employee of the Company that the Committee may from time to time
designate for participation in the Plan during a Plan Year. An individual in
one of the foregoing categories who is first employed by the Company following
the first day of a Plan Year shall be a Participant only if first employed
prior to September 30 of the Plan Year (in which case payments to the
individual under the Plan shall be subject to the last sentence of each of
Section 5.3 and Section 5.4).
4. PERFORMANCE CRITERIA; BONUSES. For each Plan Year during the
term of the Plan, the Committee shall establish and communicate to the
Participants for that Plan Year specific goals for financial performance by the
Company. The Committee may also, in its discretion, establish individual
performance goals for one or more Participants or provide that bonuses under
the Plan will vary depending on the Committee's evaluation of overall
individual performance by those Participants. The Committee shall also specify
the specific bonuses to which Participants will be entitled if the performance
criteria are achieved. Bonus amounts shall be a specific percentage of the base
salaries of the Participants and may vary from Participant to Participant or
based on the extent to which the performance criteria are achieved.
5. DETERMINATION OF ACHIEVEMENT OF PERFORMANCE CRITERIA.
5.1 Achievement of performance criteria will be
determined quarterly for each calendar quarter of each Plan Year. The Committee
shall establish such procedures as it deems necessary to determine quarterly
achievement of financial performance goals for the Company as well as any
applicable individual performance criteria. Unless otherwise determined by the
Committee, achievement of financial performance goals for the Company shall be
based on year-to-date financial performance.
5.2 Achievement of financial performance goals for the
Company will be determined based on the financial statements of the Company
prepared for financial accounting purposes. The final determination of the
extent to which such financial performance goals have been achieved will be
made at such time as the Board approves such financial statements.
5.3 If performance criteria for a Participant are
achieved for a calendar quarter, the Company shall pay the Participant a bonus
equal to (a) one-half ( 1/2), times (b) the specific bonus percentage
applicable to the level of performance achieved, times (c) the Participant's
quarterly rate of base salary (computed based on the rate of salary in effect
at the end of the calendar quarter). The bonus shall be paid within fifteen
(15) days following the Board's approval of the financial statements for the
calendar quarter. A Participant will be entitled to a bonus for a calendar
quarter only if he or she was employed by the Company during the entire
calendar quarter.
<PAGE> 2
5.4 Following the end of each Plan Year, the Committee
will determine any final bonuses due under the Plan. If performance criteria
for a Participant are achieved for the Plan Year, the Company shall pay the
Participant a final bonus equal to (a) the specific bonus percentage applicable
to the level of performance achieved, times (b) the Participant's annual rate
of base salary (computed based on the rate of salary in effect at the end of
the Plan Year), which shall be reduced by the amount of any quarterly bonuses
paid to the Participant with respect to the Plan Year under Section 5.3. The
final bonus shall be paid within fifteen (15) days following completion of the
audit, and the Board's approval, of the Company's financial statements for the
Plan Year. If a Participant was not employed by the Company for an entire Plan
Year, any final bonus otherwise payable under this Section 5.4 shall be
prorated based on the number of full calendar quarters that he or she was
employed by the Company during the Plan Year.
5.5 A Participant will be entitled to a quarterly or
final bonus payment only if he or she is employed by the Company at the time
the Board approves the quarterly or annual financial statements, as the case
may be, on the basis of which achievement of financial performance goals for
the Company was determined.
6. ADMINISTRATION OF THE PLAN.
6.1 The Plan will be administered by the Committee. A
majority of the members of the Committee will constitute a quorum. All actions
of the Committee will require the affirmative vote of members who constitute a
majority of the quorum.
6.2 The Committee shall have the authority (a) to
administer the Plan in accordance with its express terms; (b) to resolve all
questions arising in connection with the administration, interpretation, and
application of the Plan; (c) to correct any defect, supply any information and
reconcile any inconsistency in such manner and to such extent as shall be
deemed necessary or advisable to carry out the purpose of the Plan; (d) to
prescribe, amend and rescind rules and regulations relating to the
administration of the Plan; and (e) to make all other determinations necessary
or advisable for administration of the Plan. All determinations on all matters
referred to in this Section 6.2, and on all other matters where the Committee
is granted authority under the Plan to exercise discretion or make
determinations, shall be made by the Committee, in its sole and absolute
discretion, and shall, in the absence of bad faith, be final, conclusive and
binding upon the Participants and all other persons having any interest in the
Plan. The Committee will have all powers necessary or appropriate to accomplish
its duties under the Plan.
7. NONTRANSFERABILITY. No Participant or other person shall have
any right to sell, assign, pledge or otherwise transfer any rights that the
Participant or the other person may have under the Plan, and any attempt to do
so shall be void.
8. TERM OF PLAN; AMENDMENT AND TERMINATION.
8.1 The initial term of the Plan will be the Plan Year
ending December 31, 1996. The Plan will continue from Plan Year to Plan Year
thereafter until terminated by the Board.
8.2 The Board may at any time terminate the Plan or amend
its terms; PROVIDED, HOWEVER, that termination or amendment of the Plan shall
not alter or impair any rights or obligations with respect to any bonuses for a
Plan Year based on performance criteria that have already been communicated to
Participants.
9. MISCELLANEOUS PROVISIONS.
9.1 Nothing contained in the Plan shall obligate the
Company to employ a Participant for any period, nor shall the Plan interfere in
any way with the right of the Company to reduce a Participant's compensation.
9.2 Subject to Section 7, the provisions of the Plan
shall inure to the benefit of and be binding upon each Participant and his or
her heirs, successors and assigns.
9.3 Where the context so requires, references in the Plan
to the singular shall include the plural, and vice versa, and references to a
particular gender shall include either or both additional genders.
9.4 The Plan shall be construed, administered and
enforced in accordance with the laws of the United States, to the extent
applicable, as well as the laws of the State of Washington.
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EXHIBIT 10.23
STANDARD OFFICE LEASE - GROSS
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. Basic Lease Provisions. ("Basic Lease Provisions")
1.1 Parties: This Lease, dated for reference purposes only,
October 4, 1993, is made by and between Hewlett-Packard Company (herein called
"Lessor") and Multiple Zones International Inc., doing business under the name
of ______________________________ (herein called "Lessee").
1.2 Premises: Suite Number(s) ____________________ floors,
consisting of approximately 40,883 square feet, more or less, as defined in
paragraph 2 and as shown on Exhibit "A" hereto (the "Premises").
1.3 Building: Commonly described as being located at 15815 SE 37th
Street, in the City of Bellevue, County of King, State of Washington, as more
particularly described in Exhibit _____ hereto, and as defined in paragraph 2.
1.4 Use: General office, subject to paragraph 6.
1.5 Term: Five (5) years commencing July 1, 1994 ("Commencement
Date") and ending June 30, 1999, as defined in paragraph 3.
1.6 Base Rent: See paragraph 1 of Addendum per month, payable on
the 5th day of each month, per paragraph 4.1.
1.8 Rent Paid Upon Execution: None.
1.9 Security Deposit: Twenty-five thousand and no/100 dollars
($25,000.00).
1.10 Lessee's Share of Operating Expense Increase: 42% as defined
in paragraph 4.2.
2. Premises, Parking and Common Areas.
2.1 Premises: The Premises are a portion of a building, herein
sometimes referred to as the "Building" identified in paragraph 1.3 of the Basic
Lease Provisions. "Building" shall include adjacent parking structures used in
connection therewith. The Premises, the Building, the Common Areas, the land
upon which the same are located, along with all other buildings and improvements
thereon or thereunder, are herein collectively referred to as the "Office
Building Project."
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Lessor hereby leases to Lessee and Lessee leases from Lessor for the term, at
the rental, and upon all of the conditions set forth herein, the real property
referred to in the Basic Lease Provisions, paragraph 1.2, as the "Premises,"
including rights to the Common Areas as hereinafter specified. See Paragraph 2
of the Addendum.
2.2 Vehicle Parking: So long as Lessee is not in default, and
subject to the rules and regulations attached hereto, and as established by
Lessor from time to time, Lessee shall be entitled to use of 50% of the parking
area in the Office Building Project without charge.
2.3 Common Areas - Definition. The term "Common Areas" is defined
as all areas and facilities outside the Premises and within the exterior
boundary line of the Office Building Project that are provided and designated by
the Lessor from time to time for the general non-exclusive use of Lessor, Lessee
and of other lessees of the Office Building Project and their respective
employees, suppliers, shippers, customers and invitees, including but not
limited to common entrances, lobbies, corridors, stairways and stairwells,
public restrooms, elevators, escalators, parking areas to the extent not
otherwise prohibited by this Lease, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, ramps, driveways, land-scaped areas and
decorative walls.
2.4 Common Areas - Rules and Regulations. Lessee agrees to abide
by and conform to the rules and regulations attached hereto as Exhibit B with
respect to the Office Building Project and Common Areas, and to cause its
employees, suppliers, shippers, customers, and invitees to so abide and conform.
Lessor or such other person(s) as Lessor may appoint shall have the exclusive
control and management of the Common Areas and shall have the right, from time
to time, to modify, amend and enforce said rules and regulations. Lessor shall
not be responsible to Lessee for the non-compliance with said rules and
regulations by other lessees, their agents, employees and invitees of the Office
Building Project.
2.5 Common Areas - Changes. Lessor shall have the right, in
Lessor's sole discretion, from time to time:
(a) To make changes to the Building interior and exterior
and Common Areas, including, without limitation, changes in the location, size,
shape, number, and appearance thereof, including but not limited to the lobbies,
windows, stairways, air shafts, elevators, escalators, restrooms, driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, decorative walls, landscaped areas and walkways;
provided, however, Lessor shall at all times provide the parking facilities
required by applicable law;
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(b) To close temporarily any of the Common Areas for
maintenance purposes so long as reasonable access to the Premises remains
available;
(c) To designate other land and improvements outside the
boundaries of the Office Building Project to be a part of the Common Areas,
provided that such other land and improvements have a reasonable and functional
relationship to the Office Building Project;
(d) To add additional buildings and improvements to the
Common Areas;
(e) To use the Common Areas while engaged in making
additional improvements, repairs or alterations to the Office Building Project,
or any portion thereof;
(f) To do and perform such other acts and make such other
changes in, to or with respect to the Common Areas and Office Building Project
as Lessor may, in the exercise of sound business judgment deem to be
appropriate.
3. Term.
3.1 Term. The term and Commencement Date of this Lease shall be as
specified in paragraph 1.5 of the Basic Lease Provisions.
3.2 Delay in Possession. Notwithstanding said Commencement Date,
if for any reason Lessor cannot deliver possession of the Premises to Lessee on
said date and subject to paragraph 3.2.2. Lessor shall not be subject to any
liability therefor, nor shall such failure affect the validity of this Lease or
the obligations of Lessee hereunder or extend the term hereof; but, in such
case, Lessee shall not be obligated to pay rent to perform any other obligation
of Lessee under the terms of this Lease, except as may be otherwise provided in
this Lease, until possession of the Premises is tendered to Lessee, as
hereinafter defined; provided, however, that if Lessor shall not have delivered
possession of the Premises within sixty (60) days following said Commencement
Date, as the same may be extended under the terms of a Work Letter executed by
Lessor and Lessee, Lessee may, at Lessee's option, by notice in writing to
Lessor within ten (10) days thereafter, cancel this Lease, in which event the
parties shall be discharged from all obligations hereunder; provided however,
that as to Lessee's obligations, Lessee first reimburses Lessor for all costs
incurred for Non-Standard Improvements and, as to Lessor's obligations, Lessor
shall return any money previously deposited by Lessee (less any offsets due
Lessor for Non-Standard Improvements); and provided further, that if such
written notice by Lessee is not received by Lessor within said
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ten (10) day period, Lessee's right to cancel this Lease hereunder shall
terminate and be of no further force or effect.
3.2.1 Possession Tendered___Defined. Possession of the
Premises shall be deemed tendered to Lessee ("Tender of Possession") when (1)
the improvements to be provided by Lessor under this Lease are substantially
completed, (2) the Building utilities are ready for use in the Premises, (3)
Lessee has reasonable access to the Premises, and (4) ten (10) days shall have
expired following advance written notice to Lessee of the occurrence of the
matters described in (1), (2) and (3), above of this paragraph 3.2.1.
3.2.2 Delays Caused by Lessee. There shall be no abatement of
rent, and the sixty (60) day period following the Commencement Date before which
Lessee's right to cancel this Lease accrues under paragraph 3.2, shall be deemed
extended to the extent of any delays caused by acts or omissions of Lessee,
Lessee's agents, employees and contractors.
3.3 Early Possession. If Lessee occupies the Premises prior to
said Commencement Date, such occupancy shall be subject to all provisions of
this Lease, such occupancy shall not change the termination date, and Lessee
shall pay rent for such occupancy.
3.4 Uncertain Commencement. In the event commencement of the Lease
term is defined as the completion of the improvements, Lessee and Lessor shall
execute an amendment to this Lease establishing the date of Tender of Possession
(as defined in paragraph 3.2.1) or the actual taking of possession by Lessee,
whichever first occurs, as the Commencement Date.
4. Rent.
4.1 Base Rent. Subject to adjustment as hereinafter provided in
paragraph 4.3, and except as may be otherwise expressly provided in this Lease,
Lessee shall pay to Lessor the Base Rent for the Premises set forth in paragraph
1.6 of the Basic Lease Provisions, without offset or deduction. Rent for any
period during the term hereof which is for less than one month shall be prorated
based upon the actual number of days of the calendar month involved. Rent shall
be payable in lawful money of the United States to Lessor at the address stated
herein or to such other persons or at such other places as Lessor may designate
in writing.
4.2 Operating Expense Increase. Lessee shall pay to Lessor during
the term hereof, in addition to the Base Rent, Lessee's Share, as hereinafter
defined, of the amount by which all Operating Expenses, as hereinafter defined,
for each Comparison Year exceeds the amount of all Operating Expenses for the
Base Year,
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such excess being hereinafter referred to as the "Operating Expense Increase,"
in accordance with the following provisions:
(a) "Lessee's Share" is defined for purposes of this
Lease, as the percentage set forth in paragraph 1.10 of the Basic Lease
Provisions, which percentage has been determined by dividing the approximate
square footage of the Premises by the total approximate square footage of the
rentable space contained in the Office Building Project. It is understood and
agreed that the square footage figures set forth in the Basic Lease Provisions
are approximations which Lessor and Lessee agree are reasonable and shall not be
subject to revision except in connection with an actual change in the size of
the Premises or a change in the space available for lease in the Office Building
Project.
(b) "Base Year" is defined as the 12-month period
following the Lease Commencement Date, based on 100% occupancy.
(c) "Comparison Year" is defined as each calendar year
during the term of this Lease subsequent to the Base Year; provided, however,
Lessee shall have no obligation to pay a share of the Operating Expense Increase
applicable to the first twelve (12) months of the Lease Term (other than such as
are mandated by a governmental authority, as to which governmental mandated
expenses Lessee shall pay Lessee's Share, notwithstanding they occur during the
first twelve (12) months). Lessee's Share of the Operating Expense Increase for
the first and last Comparison Years of the Lease Term shall be prorated
according to that portion of such Comparison Year as to which Lessee is
responsible for a share of such increase.
(d) "Operating Expenses" is defined, for purposes of this
Lease, to include all costs, if any, incurred by Lessor in the exercise of its
reasonable discretion for:
(i) The operation, repair, maintenance, and
replacement, in neat, clean, safe, good order and condition, of the Office
Building Project, including but not limited to, the following:
(aa) The Common Areas, including their
surfaces, coverings, decorative items, carpets, drapes and window coverings, and
including parking areas, loading and unloading areas, trash areas, roadways,
sidewalks, walkways, stairways, parkways, driveways, landscaped areas, striping,
bumpers, irrigation systems, Common Area lighting facilities, building exteriors
and roofs, fences and gates;
(bb) All heating, air conditioning,
plumbing, electrical systems, life safety equipment, telecommunication and other
equipment used in
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common by or for the benefit of, lessees or occupants of the Office Building
Project, including elevators and escalators, tenant directories, fire detection
systems including sprinkler system maintenance and repair.
(ii) Trash disposal, janitorial and security
services;
(iii) Any other service to be provided by Lessor
that is elsewhere in this Lease stated to be an "Operating Expense";
(iv) The cost of the premiums for the liability
and property insurance policies to be maintained by Lessor under paragraph 8
hereof;
(v) The amount of the real property taxes to be
paid by Lessor under paragraph 10.1 hereof;
(vi) The cost of water, sewer, gas, electricity,
and other publicly mandated services to the Office Building Project;
(vii) Labor, salaries and applicable fringe
benefits and costs, materials, supplies and tools, used in maintaining and/or
cleaning the Office Building Project and accounting and a management fee
attributable to the operation of the Office Building Project;
(viii) Replacing and/or adding improvements
mandated by any governmental agency and any repairs or removals necessitated
thereby amortized over its useful life according to Federal income tax
regulations or guidelines for depreciation thereof (including interest on the
unamortized balance as is then reasonable in the judgment of Lessor's
accountants);
(e) Operating Expenses shall not include the costs of
replacements of equipment or improvements that have a useful life for Federal
income tax purposes in excess of five (5) years unless it is of the type
described in paragraph 4.2(d)(viii), in which case their cost shall be included
as above provided.
(f) Operating Expenses shall not include any expenses
paid by any lessee directly to third parties, or as to which Lessor is otherwise
reimbursed by any third party, other tenant, or by insurance proceeds.
(g) Lessee's Share of Operating Expense Increase shall be
payable by Lessee within ten (10) days after a reasonably detailed statement of
actual expenses is presented to Lessee by Lessor. At Lessor's option, however,
an amount may be estimated by Lessor from time to time in advance of Lessee's
Share of the Operating Expense Increase for any Comparison Year, and the same
shall be payable monthly or quarterly, as Lessor shall designate, during each
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Comparison Year of the Lease Term, on the same day as the Base Rent is due
hereunder. In the event that Lessee pays Lessor's estimate of Lessee's Share of
Operating Expense Increase as aforesaid, Lessor shall deliver to Lessee within
sixty (60) days after the expiration of each Comparison Year a reasonably
detailed statement showing Lessee's Share of the actual Operating Expense
Increase incurred during such year. If Lessee's payments under this paragraph
4.2(g) during said Comparison Year exceed Lessee's Share as indicated on said
statement, Lessee shall be entitled to credit the amount of such overpayment
against base rent next falling due. If Lessee's payments under this paragraph
during said Comparison Year were less than Lessee's Share as indicated on said
statement, Lessee shall pay to Lessor the amount of the deficiency within ten
(10) days after delivery by Lessor to Lessee of said statement. Lessor and
Lessee shall forthwith adjust between them by cash payment any balance
determined to exist with respect to that portion of the last Comparison Year for
which Lessee is responsible as to Operating Expense Increases, notwithstanding
that the Lease Term may have terminated before the end of such Comparison Year.
5. Security Deposit. Lessee shall deposit with Lessor upon execution
hereof the security deposit set forth in paragraph 1.9 of the Basic Lease
Provisions as security for Lessee's faithful performance of Lessee's obligations
hereunder. If Lessee fails to pay rent or other charges due hereunder, or
otherwise defaults with respect to any provision of this Lease, Lessor may use,
apply or retain all or any portion of said deposit for the payment of any rent
or other charge in default for the payment of any other sum to which Lessor may
become obligated by reason of Lessee's default, or to compensate Lessor for any
loss or damage which Lessor may suffer thereby if Lessor so uses or applies all
or any portion of said deposit. Lessee shall within ten (10) days after written
demand therefor deposit cash with Lessor in an amount sufficient to restore said
deposit to the full amount then required of Lessee. Lessor shall not be required
to keep said security deposit separate from its general accounts. If Lessee
performs all of Lessee's obligations hereunder, said deposit, or so much thereof
as has not heretofore been applied by Lessor, shall be returned, without payment
of interest or other increment for its use, to Lessee (or, at Lessor's option,
to the last assignee, if any, of Lessee's interest hereunder) at the expiration
of the term hereof, and after Lessee has vacated the Premises. No trust
relationship is created herein between Lessor and Lessee with respect to said
Security Deposit.
6. Use.
6.1 Use. The Premises shall be used and occupied only for the purpose
set forth in paragraph 1.4 of the Basic Lease Provisions or any other use which
is reasonably comparable to that use and for no other purpose.
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6.2 Compliance With Law.
(a) Lessor warrants to Lessee that the Premises, in the
state existing on that date that the Lease Term commences, but without regard to
alterations or improvements made by Lessee or the use for which Lessee will
occupy the Premises, does not violate any covenants or restrictions of record,
or any applicable building code, regulation or ordinance in effect on such Lease
term Commencement Date. In the event it is determined that this warranty has
been violated, then it shall be the obligation of the Lessor, after written
notice from Lessee, to promptly, at Lessor's sole cost and expense, rectify any
such violation.
(b) Except as provided in paragraph 6.2(a), Lessee shall,
at Lessee's expense, promptly comply with all applicable statutes, ordinances,
rules, regulations, orders, covenants and restrictions of record, and
requirements of any fire insurance underwriters or rating bureaus, now in effect
or which may hereafter come into effect, whether or not they reflect a change in
policy from that now existing, during the term or any part of the term hereof,
relating in any manner to the Premises and the occupation and use by Lessee of
the Premises. Lessee shall conduct its business in a lawful manner and shall not
use or permit the use of the Premises or the Common Areas in any manner that
will tend to create waste or a nuisance or shall tend to disturb other occupants
of the Office Building Project.
6.3 Conditions of Premises.
(a) Lessor shall deliver the Premises to Lessee in a
clean condition on the Lease Commencement Date (unless Lessee is already in
possession) and Lessor warrants to Lessee that the plumbing, lighting, air
conditioning, and heating system in the Premises shall be in good operating
condition. In the event that it is determined that this warranty has been
violated, then it shall be the obligation of Lessor, after receipt of written
notice from Lessee setting forth with specificity the nature of the violation,
to promptly, at Lessor's sole cost, rectify such violation.
(b) Except as otherwise provided in this Lease, Lessee
hereby accepts the premises and the Office Building Project in their condition
existing as of the Lease Commencement Date or the date that Lessee takes
possession of the Premises, whichever is earlier, subject to all applicable
zoning, municipal, county and state laws, ordinances and regulations governing
and regulating the use of the Premises, and any easements, covenants or
restrictions of record, and accepts this Lease subject thereto and to all
matters disclosed thereby and by any exhibits attached hereto. Lessee
acknowledges that it has satisfied itself by its own independent investigation
that the Premises are suitable for its intended use, and that neither Lessor nor
Lessor's agent or agents has made any representation or warranty as to the
present or future suitability of the Premises, Common Areas, or Office Building
Project for the conduct of Lessee's business. Lessor agrees to
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indemnify Lessee from any pre-existing conditions relating to any hazardous
substances.
7. Maintenance, Repairs, Alterations and Common Area Services.
7.1 Lessor's Obligations. Lessor shall keep the Office Building
Project, including the Premises, interior and exterior walls, roof, and common
areas, and the equipment whether used exclusively for the premises or in common
with other premises, in good condition and repair; provided, however, Lessor
shall not be obligated to paint, repair, or replace wall coverings, or to repair
or replace any improvements that are not ordinarily a part of the Building or
are above then Building standards. Except as provided in paragraph 9.5, there
shall be no abatement of rent or liability of Lessee on account of any injury or
interference with Lessee's business with respect to any improvements,
alterations or repairs made by Lessor to the Office Building Project or any part
thereof. Lessee expressly waives the benefits of any statute now or hereafter in
effect which would otherwise afford Lessee the right to make repairs at Lessor's
expense or to terminate this Lease because of Lessor's failure to keep the
Premises in good order, condition and repair.
7.2 Lessee's Obligations.
(a) Notwithstanding Lessor's obligation to keep the
Premises in good condition and repair, Lessee shall be responsible for payment
of the cost thereof to Lessor as additional rent for that portion of the cost of
any maintenance and repair of the premises, or any equipment (wherever located)
that serves only Lessee or the Premises, to the extent such cost is attributable
to causes beyond normal wear and tear. Lessee shall be responsible for the cost
of painting, repairing or replacing wall coverings, and to repair or replace any
Premises improvements that are not ordinarily a part of the Building or that are
above then Building standards. Lessor may, at its option, upon reasonable
notice, elect to have Lessee perform any particular such maintenance or repairs
the cost of which is otherwise Lessee's responsibility hereunder.
(b) On the last day of the term hereof, or on any sooner
termination, Lessee shall surrender the Premises to Lessor in the same condition
as received, ordinary wear and tear excepted, clean and free of debris. Any
damage or deterioration of the Premises shall not be deemed ordinary wear and
tear if the same could have been prevented by good maintenance practices by
Lessee. Lessee shall repair any damage to the Premises occasioned by the
installation or removal of Lessee's trade fixtures, alterations, furnishings and
equipment. Except as otherwise stated in this Lease, Lessee shall leave the air
lines, power panels, electrical distribution systems, lighting fixtures, air
conditioning, window coverings,
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wall coverings, carpets, wall panelling, ceiling and plumbing on the Premises
and in good operating condition.
7.3 Alterations and Additions.
(a) Lessee shall not, without Lessor's prior written
consent make any alterations in excess of $5,000.00 improvements, additions,
Utility Installations or repairs in, on or about the Premises, or the Office
Building Project. As used in this paragraph 7.3, the term "Utility Installation"
shall mean carpeting, window and wall coverings, power panels, electrical
distribution systems, lighting fixtures, air conditioning, and plumbing. At the
expiration of the term, Lessor may require the removal of any or all of said
alterations, improvements, additions or Utility Installations, and the
restoration of the Premises and the Office Building Project to their prior
condition, at Lessee's expense. Should Lessor permit Lessee to make its own
alterations, improvements, additions or Utility Installations, Lessee shall use
only such contractor as has been expressly approved by Lessor, and Lessor may
require Lessee to provide Lessor, at Lessee's sole cost and expense, a lien and
completion bond in an amount equal to one and one-half times the estimated cost
of such improvements, to insure Lessor against any liability for mechanic's and
materialmen's liens and to insure completion of the work. Should Lessee make any
alterations, improvements, additions or Utility Installations without the prior
approval of Lessor, or use a contractor not expressly approved by Lessor, Lessor
may, at any time during the term of this Lease, require that Lessee remove any
part or all of the same.
(b) Any alterations, improvements, additions or Utility
Installations in or about the Premises or the Office Building Project that
Lessee shall desire to make shall be presented to Lessor in written form, with
proposed detailed plans. If Lessor shall give its consent to Lessee's making
such alteration, improvement, addition, or Utility Installation, the consent
shall be deemed conditioned upon Lessee acquiring a permit to do so from the
applicable governmental agencies, furnishing a copy thereof to Lessor prior to
the commencement of the work, and compliance by Lessee with all conditions of
said permit in a prompt and expeditious manner.
(c) Lessee shall pay, when due, all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at or for
use in the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises, the Building or the Office Building
Project, or any interest therein.
(d) Lessee shall give Lessor not less than ten (10) days'
notice prior to the commencement of any work in the Premises by Lessee, and
Lessor shall have the right to post notices of non-responsibility in or on the
Premises or
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the Building as provided by law. If Lessee shall, in good faith, contest the
validity of any such lien, claim or demand, then Lessee shall, at its sole
expense defend itself and Lessor against the same and shall pay and satisfy any
such adverse judgment that may be rendered thereon before the enforcement
thereof against the Lessor or the Premises, the Building or the Office Building
Project, upon the condition that if Lessor shall require, Lessee shall furnish
to Lessor a surety bond satisfactory to Lessor in an amount equal to such
contested lien claim or demand indemnifying Lessor against liability for the
same and holding the Premises, the Building and the Office Building Project free
from the effect of such lien or claim. In addition, Lessor may require Lessee to
pay Lessor's reasonable attorneys' fees and costs in participating in such
action if Lessor shall decide it is to Lessor's best interest so to do.
(e) All alterations, improvements, additions and Utility
Installations (whether or not such Utility Installations constitute trade
fixtures of Lessee), which may be made to the Premises by Lessee, including but
not limited to, floor coverings, panelings, doors, drapes, built-ins, moldings,
sound attenuation, and lighting and telephone or communication systems, conduit,
wiring and outlets, shall be made and done in a good and workmanlike manner and
of good and sufficient quality and materials and shall be the property of Lessor
and remain upon and be surrendered with the Premises at the expiration of the
Lease term, unless Lessor requires their removal pursuant to paragraph 7.3(a).
Provided Lessee is not in default, notwithstanding the provisions of this
paragraph 7.3(e), Lessee's personal property and equipment, other than that
which is affixed to the Premises so that it cannot be removed without material
damage to the Premises or the Building, and other than Utility Installations,
shall remain the property of Lessee and may be removed by Lessee subject to the
provisions of paragraph 7.2.
(f) Lessee shall provide Lessor with as-built plans and
specifications for any alterations, improvements, additions or Utility
Installations.
7.4 Utility Additions. Lessor reserves the right to install new or
additional utility facilities throughout the Office Building Project for the
benefit of Lessor or Lessee, or any other lessee of the Office Building Project,
including, but not by way of limitation, such utilities as plumbing, electrical
systems, communication systems, and fire protection and detection systems, so
long as such installations do not unreasonably interfere with Lessee's use of
the Premises.
8. Insurance; Indemnity.
8.1 Liability Insurance - Lessee. Lessee shall, at Lessee's
expense, obtain and keep in force during the term of this Lease a policy of
Comprehensive General Liability insurance utilizing an Insurance Services Office
standard form with Broad Form General Liability Endorsement (GLO404), or
equivalent, in an amount of not
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less than $1,000,000 per occurrence of bodily injury and property damage
combined or in a greater amount as reasonably determined by Lessor and shall
insure Lessee with Lessor as an additional insured against liability arising out
of the use, occupancy or maintenance of the Premises. Compliance with the above
requirement shall not, however, limit the liability of Lessee hereunder.
8.2 Liability Insurance - Lessor. Lessor shall obtain and keep in
force during the term of this Lease a policy of Combined Single Limit Bodily
Injury and Broad Form Property Damage Insurance, plus coverage against such
other risks Lessor deems advisable from time to time, insuring Lessor, but not
Lessee, against liability arising out of the ownership, use, occupancy or
maintenance of the Office Building Project in an amount not less than
$5,000,000.00 per occurrence.
8.3 Property Insurance - Lessee. Lessee shall, at Lessee's
expense, obtain and keep in force during the term of this lease for the benefit
of Lessee, replacement cost fire and extended coverage insurance, with vandalism
and malicious mischief, sprinkler leakage endorsements, in an amount sufficient
to cover not less than 100% of the full replacement cost, as the same may exist
from time to time, of all of Lessee's personal property, fixtures, equipment and
tenant improvements.
8.4 Property Insurance - Lessor. Lessor shall obtain and keep in
force during the term of this Lease a policy or policies of insurance covering
loss or damage to the Office Building Project improvements, but not Lessee's
personal property, fixtures, equipment or tenant improvements, in the amount of
the full replacement cost thereof, as the same may exist from time to time,
utilizing Insurance Services Office standard form, or equivalent, providing
protection against all perils included within the classification of fire,
extended coverage, vandalism, malicious mischief, plate glass, and such other
perils as Lessor deems advisable or may be required by a lender having a lien on
the Office Building Project. In addition, Lessor shall obtain and keep in force,
during the term of this Lease, a policy of rental value insurance covering a
period of one year, with loss payable to Lessor, which insurance shall also
cover all Operating Expenses for said period. Lessee will not be named in any
such policies carried by Lessor and shall have no right to any proceeds
therefrom. The policies required by these paragraphs 8.2 and 8.4 shall contain
such deductibles as Lessor or the aforesaid lender may determine. In the event
that the Premises shall suffer an insured loss as defined in paragraph 9.1(f)
hereof, the deductible amounts under the applicable insurance policies shall be
deemed an Operating Expense. Lessee shall not do or permit to be done anything
which shall invalidate the insurance policies carried by Lessor. Lessee shall
pay the entirety of any increase in the property insurance premium for the
Office Building Project over what it was immediately prior to the commencement
of the term of this Lease if the increase is specified by Lessor's
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insurance carrier as being caused by the nature of Lessee's occupancy or any act
or omission of Lessee.
8.5 Insurance Policies. Lessee shall deliver to Lessor copies of
liability insurance policies required under paragraph 8.1 or certificates
evidencing the existence and amounts of such insurance within seven (7) days
after the Commencement Date of this Lease. No such policy shall be cancelable or
subject to reduction of coverage or other modification except after thirty (30)
days prior written notice to Lessor. Lessee shall, at least thirty (30) days
prior to the expiration of such policies, furnish Lessor with renewals thereof.
8.6 Waiver of Subrogation. Lessee and Lessor each hereby release
and relieve the other, and waive their entire right of recovery against the
other, or direct or consequential loss or damage arising out of or incident to
the perils covered by property insurance carried by such party, whether due to
the negligence of Lessor or Lessee or their agents, employees, contractors
and/or invitees. If necessary all property insurance policies required under
this Lease shall be endorsed to so provide.
8.7 Indemnity. Lessee shall indemnify and hold harmless Lessor,
unless Lessor is grossly negligent, and its agents, Lessor's master or ground
lessor, partners and lenders, from and against any and all claims for damage to
the person or property of anyone or any entity arising from Lessee's use of the
Office Building Project, or from the conduct of Lessee's business or from any
activity, work or things done, permitted or suffered by Lessee in or about the
Premises or elsewhere and shall further indemnify and hold harmless Lessor from
and against any and all claims, costs and expenses arising from any breach or
default in the performance of any obligation on Lessee's part to be performed
under the terms of this Lease, or arising from any act or omission of Lessee, or
any of Lessee's agents, contractors, employees, or invitees, and from and
against all costs, attorney's fees, expenses and liabilities incurred by Lessor
as the result of any such use, conduct, activity, work, things done, permitted
or suffered, breach, default or negligence, and in dealing reasonably therewith,
including but not limited to the defense or pursuit of any claim or any action
or proceeding involved therein; and in case any action or proceeding be brought
against Lessor by reason of any such matter, Lessee upon notice from Lessor
shall defend the same at Lessee's expense by counsel reasonably satisfactory to
Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not
have first paid any such claim in order to be so indemnified. Lessee, as a
material part of the consideration to Lessor, hereby assumes all risk of damage
to property of Lessee or injury to persons, in, upon or about the Office
Building Project arising from any cause and Lessee hereby waives all claims in
respect thereof against Lessor.
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8.8 Exemption of Lessor from Liability. Provided Lessor is not
grossly negligent, Lessee hereby agrees that Lessor shall not be liable for
injury to Lessee's business or any loss of income therefrom or for loss of or
damage to the goods, wares, merchandise or other property of Lessee, Lessee's
employees, invitees, customers, or any other person in or about the Premises or
the Office Building Project, nor shall Lessor be liable for injury to the person
of Lessee, Lessee's employees, agents or contractors, whether such damage or
injury is caused by or results from theft, fire, steam, electricity, gas, water
or rain, or from the breakage, leakage, obstruction or other defects of pipes,
sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures,
or from any other cause, whether said damage or injury results from conditions
arising upon the Premises or upon other portions of the Office Building Project,
or from other sources or places, or from new construction or the repair,
alteration or improvement of any part of the Office Building Project, or of the
equipment, fixtures or appurtenances applicable thereto, and regardless of
whether the cause of such damage or injury or the means of repairing the same is
inaccessible, Lessor shall not be liable for any damages arising from any act or
neglect of any other lessee, occupant or user of the Office Building Project,
nor from the failure of Lessor to enforce the provisions of any other lease of
any other lessee of the Office Building Project.
8.9 No Representation of Adequate Coverage. Lessor makes no
representation that the limits or forms of coverage of insurance specified in
this paragraph 8 are adequate to cover Lessee's property or obligations under
this Lease.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Damage" shall mean if the Premises are
damaged or destroyed to any extent.
(b) "Premises Building Partial Damage" shall mean if the
Building of which the Premises are a part is damaged or destroyed to the extent
that the cost to repair is less than fifty percent (50%) of the then Replacement
Cost of the Building.
(c) "Premises Building Total Destruction" shall mean if
the Building of which the Premises are a part is damaged or destroyed to the
extent that the cost to repair is fifty percent (50%) or more of the then
Replacement Cost of the Building.
(d) "Office Building Project Buildings" shall mean all of
the buildings on the Office Building Project site.
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(e) "Office Building Project Buildings Total Destruction"
shall mean if the Office Building Project Buildings are damaged or destroyed to
the extent that the cost of repair is fifty percent (50%) or more of the then
Replacement Cost of the Office Building Project Buildings.
(f) "Insured Loss" shall mean damage or destruction which
was caused by an event required to be covered by the insurance described in
paragraph 8. The fact that an Insured Loss has a deductible amount shall not
make the loss an uninsured loss.
(g) "Replacement Cost" shall mean the amount of money
necessary to be spent in order to repair or rebuild the damaged area to the
condition that existed immediately prior to the damage occurring, excluding all
improvements made by lessees, other than those installed by Lessor at Lessee's
expense.
9.2 Premises Damage; Premises Building Partial Damage.
(a) Insured Loss: Subject to the provisions of paragraphs
9.4 and 9.5, if at any time during the term of this Lease there is damage which
is an Insured Loss and which falls into the classification of either Premises
Damage or Premises Building Partial Damage, then Lessor shall, as soon as
reasonably possible and to the extent the required materials and labor are
readily available through usual commercial channels, at Lessor's expense, repair
such damage (but not Lessee's fixtures, equipment or tenant improvements
originally paid for by Lessee) to its condition existing at the time of the
damage, and this Lease shall continue in full force and effect.
(b) Uninsured Loss: Subject to the provisions of
paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is
damage which is not an Insured Loss and which falls within the classification of
Premises Damage or Premises Building Partial Damage, unless caused by a
negligent or willful act of Lessee (in which event Lessee shall make the repairs
at Lessee's expense), which damage prevents Lessee from making any substantial
use of the Premises, Lessor may at Lessor's option either (i) repair such damage
as soon as reasonably possible at Lessor's expense, in which event this Lease
shall continue in full force and effect, or (ii) give written notice to Lessee
within thirty (30) days after the date of the occurrence of such damage of
Lessor's intention to cancel and terminate this Lease as of the date of the
occurrence of such damage, in which event this Lease shall terminate as of the
date of the occurrence of such damage.
9.3 Premises Building Total Destruction; Office Building Project
Total Destruction. Subject to the provisions of paragraphs 9.4 and 9.5, if at
any time during the term of this Lease there is damage, whether or not it is an
Insured Loss,
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which falls into the classifications of either (i) Premises Building Total
Destruction, or (ii) Office Building Project Total Destruction, then Lessor may
at Lessor's option either (i) repair such damage or destruction as soon as
reasonably possible at Lessor's expense (to the extent the required materials
are readily available through usual commercial channels) to its condition
existing at the time of the damage, but not Lessee's fixtures, equipment or
tenant improvements, and this Lease shall continue in full force and effect, or
(ii) give written notice to Lessee within thirty (30) days after the date of
occurrence of such damage of Lessor's intention to cancel and terminate this
Lease, in which case this Lease shall terminate as of the date of the occurrence
of such damage.
9.4 Damage Near End of Term.
(a) Subject to paragraph 9.4(b), if at any time during
the last twelve (12) months of the term of this Lease there is substantial
damage to the Premises, Lessor may at Lessor's option cancel and terminate this
Lease as of the date of occurrence of such damage by giving written notice to
Lessee of Lessor's election to do so within 30 days after the date of occurrence
of such damage.
(b) Notwithstanding paragraph 9.4(a), in the event that
Lessee has an option to extend or renew this Lease, and the time within which
said option may be exercised has not yet expired, Lessee shall exercise such
option, if it is to be exercised at all, no later than twenty (20) days after
the occurrence of an Insured Loss falling within the classification of Premises
Damage during the last twelve (12) months of the term of this Lease. If Lessee
duly exercises such option during said twenty (20) day period, Lessor shall, at
Lessor's expense, repair such damage, but not Lessee's fixtures, equipment or
tenant improvements, as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option
during said twenty (20) day period, then Lessor may at Lessor's option terminate
and cancel this Lease as of the expiration of said twenty (20) day period by
giving written notice to Lessee of lessor's election to do so within ten (10)
days after the expiration of said twenty (20) day period, notwithstanding any
term or provision in the grant of option to the contrary.
9.5 Abatement of Rent; Lessee's Remedies.
(a) In the event Lessor repairs or restores the Building
or Premises pursuant to the provisions of this paragraph 9, and any part of the
Premises are not usable (including loss of use due to loss of access or
essential services), the rent payable hereunder (including Lessee's Share of
Operating Expense Increase) for the period during which such damage, repair or
restoration continues shall be abated, provided (1) the damage was not the
result of the negligence of Lessee, and (2) such abatement shall only be to the
extent the operation and profitability of Lessee's business as operated from the
Premises is adversely affected. Except for
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said abatement of rent, if any, Lessee shall have no claim against Lessor for
any damage suffered by reason of any such damage, destruction, repair or
restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises or the Building under the provisions of this Paragraph 9 and shall not
commence such repair or restoration within ninety (90) days after such
occurrence or sooner if reasonably possible, or if Lessor shall not complete the
restoration and repair within six (6) months after such occurrence, or sooner if
reasonably possible, Lessee may at Lessee's option cancel and terminate this
Lease by giving Lessor written notice of Lessee's election to do so at any time
prior to the commencement or completion, respectively, of such repair or
restoration. In such event this Lease shall terminate as of the date of such
notice.
(c) Lessee agrees to cooperate with Lessor in connection
with any such restoration and repair, including but not limited to the approval
and/or execution of plans and specifications required.
9.6 Termination--Advance Payments. Upon termination of this Lease
pursuant to this paragraph 9, an equitable adjustment shall be made concerning
advance rent and any advance payments made by Lessee to Lessor. Lessor shall, in
addition, return to Lessee so much of Lessee's security deposit as has not
theretofore been applied by Lessor.
9.7 Waiver. Lessor and Lessee waive the provisions of any statute
which relate to termination of leases when leased property is destroyed and
agree that such event shall be governed by the terms of this Lease.
10. Real Property Taxes.
10.1 Payment of Taxes. Lessor shall pay the real property tax, as
defined in paragraph 10.3, applicable to the Office Building Project subject to
reimbursement by Lessee of Lessee's Share of such taxes in accordance with the
provisions of paragraph 4.2, except as otherwise provided in paragraph 10.2
10.2 Additional Improvements. Lessee shall not be responsible for
paying any increase in real property tax specified in the tax assessor's records
and work sheets as being caused by additional improvements placed upon the
Office Building Project by any other lessees or by Lessor for the exclusive
enjoyment of any other lessee. Lessee shall, however, pay to Lessor at the time
that Operating Expenses are payable under paragraph 4.2(c), the entirety of any
increase in real property tax if assessed solely by reason of additional
improvements placed upon the Premises by Lessee or at Lessee's request.
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10.3 Definition of "Real Property Tax". As used herein, the term
"real property tax" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed on the Office Building Project or any
portion thereof by any authority having the direct or indirect power to tax,
including any city, county, state or federal government, or any school,
agricultural, sanitary, fire, street, drainage or other improvement district
thereof, as against any legal or equitable interest of Lessor in the Office
Building project or in any portion thereof, as against Lessor's right to rent or
other income therefrom, and as against Lessor's business of leasing the Office
Building Project. The term "real property tax" shall also include any tax, fee,
levy, assessment or charge (i) in substitution of, partially or totally, any
tax, fee, levy, assessment or charge hereinabove included within the definition
of "real property tax," or (ii) the nature of which was hereinbefore included
within the definition of "real property tax," or (iii) which is imposed for a
service or right not charged prior to June 1, 1978, or, if previously charged,
has been increased since June 1, 1978, or (iv) which is imposed as a result of a
change in ownership, as defined by applicable local statutes for property tax
purposes, of the Office Building Project or which is added to a tax or charge
hereinbefore included within the definition of real property tax by reason of
such change of ownership, or (v) which is imposed by reason of this transaction,
any modifications or changes hereto, or any transfers hereof.
10.4 Joint Assessment. If the improvements or property, the taxes
for which are to be paid separately by Lessee under paragraph 10.2 or 10.5 are
not separately assessed, Lessee's portion of that tax shall be equitably
determined by Lessor from the respective valuations assigned in the assessor;s
work sheets or such other information (which may include the cost of
construction) as may be reasonably available. Lessor's reasonable determination
thereof, in good faith, shall be conclusive.
10.5 Personal Property Taxes.
(a) Lessee shall pay prior to delinquency all taxes
assessed against and levied upon trade fixtures, furnishings, equipment and all
other personal property of Lessee contained in the Premises or elsewhere.
(b) If any of Lessee's said personal property shall be
assessed with Lessor's real property, Lessee shall pay to Lessor the taxes
attributable to Lessee within ten (10) days after receipt of a written statement
setting forth the taxes applicable to Lessee's property.
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11. Utilities.
11.1 Services provided by Lessor. Lessor shall provide heating,
ventilation, air conditioning, and five days per week janitorial service as
reasonably required, reasonable amounts of electricity for normal lighting and
office machines, water for reasonable and normal drinking and lavatory use, and
replacement light bulbs and/or fluorescent tubes and ballasts for standard
overhead fixtures.
11.2 Services Exclusive to Lessee. Lessee shall pay for all water,
gas, heat, light, power, telephone and other utilities and service specially or
exclusively supplied and/or metered exclusively to the Premises or to Lessee,
together with any taxes thereon. If any such services are not separately metered
to the Premises, Lessee shall pay at Lessor's option, either Lessee's Share or a
reasonable proportion to be determined by Lessor of all charges jointly metered
with other premises in the Building.
11.3 Hours of Service. Said services and utilities shall be
provided during generally accepted business days and hours or such other days or
hours as may hereafter be set forth. Utilities and services required at other
times shall be subject to advance request and reimbursement by Lessee to Lessor
of the cost thereof.
11.4 Excess Usage by Lessee. Lessee shall not make connection to
the utilities except by or through existing outlets and shall not install or use
machinery of equipment in or about the Premises that uses excess water, lighting
or power, or suffer or permit any act that causes extra burden upon the
utilities or services, including but not limited to security services, over
standard office usage for the Office Building Project. Lessor shall require
Lessee to reimburse Lessor for any excess expenses or costs that may arise out
of a breach of this subparagraph by Lessee.
11.5 Interruptions. There shall be no abatement of rent and Lessor
shall not be liable in any respect whatsoever for the inadequacy, stoppage,
interruption or discontinuance of any utility or service due to riot, strike,
labor dispute, breakdown, accident, repair or other cause beyond Lessor's
reasonable control or in cooperation with governmental request or directions.
12. Assignment and Subletting.
12.1 Lessor's Consent Required. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or any part of Lessee's interest in the Lease or in the Premises,
without Lessor's prior written consent, which Lessor shall not unreasonably
withhold. Lessor shall respond to Lessee's request for consent hereunder in a
timely manner and any attempted assignment, transfer, mortgage, encumbrance or
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subletting without such consent shall be void, and shall constitute a material
default and breach of this Lease without the need for notice to Lessee under
paragraph 13.1. "Transfer" within the meaning of this paragraph 12 shall include
the transfer or transfers aggregating: (a) if Lessee is a corporation, more than
twenty-five percent (25%) of the voting stock of such corporation, or (b) if
Lessee is a partnership, more than twenty-five percent (25%) of the profit and
loss participation in such partnership.
12.2 Lessee Affiliate. Notwithstanding the provisions of paragraph
12.1 hereof, Lessee may assign or sublet the Premises, or any portion thereof,
without Lessor's consent, to any corporation which controls, is controlled by or
is under common control with Lessee, or to any corporation resulting from the
merger or consolidation with Lessee, or to any person or entity which acquires
all the assets of Lessee as a going concern of the business that is being
conducted on the Premises, all of which are referred to as "Lessee Affiliate";
provided that before such assignment shall be effective, (a) said assignee shall
assume, in full, the obligations of Lessee under this Lease and (b) Lessor shall
be given written notice of such assignment and assumption. Any such assignment
shall not, in any way, affect or limit the liability of Lessee under the terms
of this Lease even if after such assignment or subletting the terms of this
Lease are materially changed or altered without the consent of Lessee, the
consent of whom shall not be necessary.
12.3 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, no assignment or
subletting shall release Lessee of Lessee's obligations hereunder or alter the
primary liability of Lessee to pay the rent and other sums due Lessor hereunder
including Lessee's Share of Operating Expense Increase, and to perform all other
obligations to be performed by Lessee hereunder.
(b) Lessor may accept rent from any person other than
Lessee pending approval or disapproval of such assignment.
(c) Neither a delay in the approval or disapproval of
such assignment or subletting, nor the acceptance of rent, shall constitute a
waiver or estoppel of Lessor's right to exercise its remedies for the breach of
any of the terms or conditions of this paragraph 12 or this Lease.
(d) If Lessee's obligations under this Lease have been
guaranteed by third parties, then an assignment or sublease, and Lessor's
consent thereto shall not be effective unless said guarantors give their written
consent to such sublease and the terms thereof.
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(e) The consent by Lessor to any assignment or subletting
shall not constitute a consent to any subsequent assignment or subletting by
Lessee or to any subsequent or successive assignment or subletting by the
sublessee. However, Lessor may consent to subsequent sublettings and assignments
of the sublease or any amendments or modifications thereto without notifying
Lessee or anyone else liable on the Lease or sublease and without obtaining
their consent and such action shall not relieve such persons from liability
under this Lease or said sublease; however, such persons shall not be
responsible to the extent any such amendment or modification enlarges or
increases the obligations of the Lessee or sublessee under this Lease or such
sublease.
(f) In the event of any default under this Lease, Lessor
may proceed directly against Lessee, any guarantors or any one else responsible
for the performance of this Lease, including the sublessee, without first
exhausting Lessor's remedies against any other person or entity responsible
therefor to Lessor, or any security held by Lessor or Lessee.
(g) Lessor's written consent to any assignment or
subletting of the Premises by Lessee shall not constitute an acknowledgment that
no default then exists under this Lease of the obligations to be performed by
Lessee nor shall such consent be deemed a waiver of any then existing default,
except as may be otherwise stated by Lessor at the time.
(h) The discovery of the fact that any financial
statement relied upon by Lessor in giving its consent to an assignment or
subletting was materially false shall, at Lessor's election, render Lessor's
said consent null and void.
12.4 Additional Terms and Conditions Applicable to Subletting.
Regardless of Lessor's consent, the following terms and conditions shall apply
to any subletting by Lessee of all or any part of the Premises and shall be
deemed included in all subleases under this Lease whether or not expressly
incorporated herein:
(a) Lessee hereby assigns and transfers to Lessor all of
Lessee's interest in all rentals and income arising from any sublease heretofore
or hereafter made by Lessee, and Lessor may collect such rent and income and
apply same toward Lessee's obligations under this Lease; provided however, that
until a default shall occur in the performance of Lessee's obligations under
this Lease, Lessee may receive, collect and enjoy the rents accruing under such
sublease. Lessor shall not, by reason of this or any other assignment of such
sublease to Lessor nor by reason of the collection of the rents from a
sublessee, be deemed liable to the sublessee for any failure of Lessee to
perform and comply with any of Lessee's obligations to such sublessee under such
sublease. Lessee hereby irrevocably authorizes and directs any such sublessee,
upon receipt of a written
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notice from Lessor stating that a default exists in the performance of Lessee's
obligations under this Lease, to pay to Lessor the rents due and to become due
under the sublease. Lessee agrees that such sublessee shall have the right to
rely upon any such statement and request from Lessor, and that such sublessee
shall pay such rents to Lessor without any obligation or right to inquire as to
whether such default exists and notwithstanding any notice from or claim from
Lessee to the contrary. Lessee shall have no right or claim against said
sublessee or Lessor for any such rents so paid by said sublessee to Lessor.
(b) No sublease entered into by Lessee shall be effective
unless and until it has been approved in writing by Lessor. In entering into any
sublease, Lessee shall use only such form of sublessee as is satisfactory to
Lessor, and once approved by Lessor, such sublease shall not be changed or
modified without Lessor's prior written consent. Any sublease shall, by reason
of entering into a sublease under this Lease, be deemed, for the benefit of
Lessor, to have assumed and agreed to conform and comply with each and every
obligation herein to be performed by Lessee other than such obligations as are
contrary to or inconsistent with provisions contained in a sublease to which
Lessor has expressly consented in writing.
(c) In the event Lessee shall default in the performance
of its obligations under this Lease, Lessor at its option and without any
obligation to do so, may require any sublessee to attorn to Lessor, in which
event Lessor shall undertake the obligations of Lessee under such sublease from
the time of the exercise of said option to the termination of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to Lessee or for any other prior defaults of
Lessee under such sublease.
(d) No sublessee shall further assign or sublet all or
any part of the Premises without Lessor's prior written consent.
(e) With respect to any subletting to which Lessor has
consented, Lessor agrees to deliver a copy of any notice of default by Lessee to
the sublessee. Such sublessee shall have the right to cure a default of Lessee
within three (3) days after service of said notice of default upon such
sublessee, and the sublessee shall have a right of reimbursement and offset from
and against Lessee for any such default secured by the sublessee.
12.5 Lessor's Expenses. In the event Lessee shall assign or sublet
the Premises or request the consent of Lessor to any assignment or subletting or
if Lessee shall request the consent of Lessor for any act Lessee proposes to do
then Lessee shall pay Lessor's reasonable costs and expenses incurred in
connection therewith, including attorneys', architects', engineers' or other
consultants' fees. In no event shall these costs exceed $1,500.00.
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12.6 Conditions to Consent. Lessor reserves the right to condition
any approval to assign or sublet upon Lessor's determination that (a) the
proposed assignee or sublessee shall conduct a business on the Premises of a
quality substantially equal to that of Lessee and consistent with the general
character of the other occupants of the Office Building Project and not in
violation of any exclusives or rights then held by other tenants, and (b) the
proposed assignee or sublessee be at least as financially responsible as Lessee
was expected to be at the time of the execution of this Lease or of such
assignment or subletting, whichever is greater.
13. Default; Remedies.
13.1 Default. The occurrence of any one or more of the following
events shall constitute a material default of this Lease by Lessee:
(a) The vacation or abandonment of the Premises by
Lessee. Vacation of the Premises shall include the failure to occupy the
Premises for a continuous period of sixty (60) days or more, whether or not the
rent is paid.
(b) The breach by Lessee of any of the covenants,
conditions or provisions of paragraphs 7.3(a), (b) or (d) (alterations), 12.1
(assignment or subletting), 13.1(a) (vacation or abandonment), 13.1(e)
(insolvency), 13.1(f) (false statement), 16(a) (estoppel certificate), 30(b)
(subordination), 33 (auctions), or 41.1 (easements), all of which are hereby
deemed to be material, non-curable defaults without the necessity of any notice
by Lessor to Lessee thereof.
(c) The failure by Lessee to make any payment of rent or
any other payment required to be made by Lessee hereunder, as and when due,
where such failure shall continue for a period of three (3) days after written
notice thereof from Lessor to Lessee. In the event that Lessor serves Lessee
with a Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer
statutes such Notice to Pay Rent or Quit shall also constitute the notice
required by this subparagraph.
(d) The failure by Lessee to observe or perform any of
the covenants, conditions or provisions of this Lease to be observed or
performed by Lessee other than those referenced in subparagraphs (b) and (c),
above, where such failure shall continue for a period of thirty (30) days after
written notice thereof from Lessor to Lessee; provided, however, that if the
nature of Lessee's noncompliance is such that more than thirty (30) days are
reasonably required for its cure, then Lessee shall not be deemed to be in
default if Lessee commenced such cure within said thirty (30) day period and
thereafter diligently pursues such cure to completion. To the extent permitted
by law, such thirty (30) day notice shall constitute the sole and exclusive
notice required to be given to Lessee under applicable Unlawful Detainer
statutes.
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(e)(i) The making by Lessee of any general arrangement
or general assignment for the benefit of creditors; (ii) Lessee becoming a
"debtor" as defined in 11 U.S.C. Section 101 or any successor statute thereto
unless, in the case of a petition filed against Lessee, the same is dismissed
within sixty (60) days; (iii) the appointment of a trustee or receiver to take
possession of substantially all of Lessee's assets located at the Premises or of
Lessee's interest in this Lease, where possession is not restored to Lessee
within thirty (30) days; or (iv) the attachment, execution or other judicial
seizure of substantially all of Lessee's assets located at the Premises or of
Lessee's interest in this Lease, where such seizure is not discharged within
thirty (30) days. In the event that any provision of this paragraph 13.1(e) is
contrary to any applicable law, such provision shall be of no force or effect.
(f) The discovery by Lessor that any financial statement
given to Lessor by Lessee, or its successor in interest or by any guarantor of
Lessee's obligation hereunder, was materially false.
13.2 Remedies. In the event of any material default or breach of
this Lease by Lessee, Lessor may at any time thereafter, with or without notice
or demand and without limiting Lessor in the exercise of any right or remedy
which Lessor may have by reason of such default:
(a) Terminate Lessee's right to possession of the
Premises by any lawful means, in which case this Lease and the term hereof shall
terminate and Lessee shall immediately surrender possession of the Premises to
Lessor. In such event Lessor shall be entitled to recover from Lessee all
damages incurred by Lessor by reason of Lessee's default including, but not
limited to, the cost of recovering possession of the Premises; expenses of
reletting, including necessary renovation and alteration of the Premises,
reasonable attorneys' fees, and any real estate commission actually paid; the
worth at the time of award by the court having jurisdiction thereof of the
amount by which the unpaid rent for the balance of the term after the time of
such award exceeds the amount of such rental loss for the same period that
Lessee proves could be reasonably avoided; that portion of the leasing
commission paid by Lessor pursuant to paragraph 15 applicable to the unexpired
term of this Lease.
(b) Maintain Lessee's right to possession in which case
this Lease shall continue in effect whether or not Lessee shall have vacated or
abandoned the Premises. In such event Lessor shall be entitled to enforce all of
Lessor's rights and remedies under this Lease, including the right to recover
the rent as it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to
Lessor under the laws or judicial decisions of the state wherein the Premises
are located.
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Unpaid installments of rent and other unpaid monetary obligations of Lessee
under the terms of this Lease shall bear interest from the date due at the
maximum rate then allowable by law.
13.3 Default by Lessor. Lessor shall not be in default unless
Lessor fails to perform obligations required of Lessor within a reasonable time,
but in no event later than thirty (30) days after written notice by Lessee to
Lessor and to the holder of any first mortgage or deed of trust covering the
Premises whose name and address shall have theretofore been furnished to Lessee
in writing, specifying wherein Lessor has failed to perform such obligation;
provided, however, that if the nature of Lessor's obligation is such that more
than thirty (30) days are required for performance then Lessor shall not be in
default if Lessor commences performance within such 30-day period and thereafter
diligently pursues the same to completion.
13.4 Late Charges. Lessee hereby acknowledges that late payment by
Lessee to Lessor of Base Rent, Lessee's Share of Operating Expense Increase or
other sums due hereunder will cause Lessor to incur costs not contemplated by
this Lease, the exact amount of which will be extremely difficult to ascertain.
Such costs include, but are not limited to, processing and accounting charged,
and late charges which may be imposed on Lessor by the terms of any mortgage or
trust deed covering the Office Building Project. Accordingly, if any Installment
of Base Rent, Operating Expense Increase, or any other sum due from Lessee shall
not be received by Lessor or Lessor's designee within ten (10) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to 4% of such overdue amount. The
parties hereby agree that such late charge represents a fair and reasonable
estimate of the costs Lessor will incur by reason of late payment by Lessee.
Acceptance of such late charge by Lessor shall in no event constitute a waiver
of Lessee's default with respect to such overdue amount, nor prevent Lessor from
exercising any of the other rights and remedies granted hereunder.
14. Condemnation. If the Premises or any portion thereof or the Office
Building Project are taken under the power of eminent domain, or sold under the
threat of the exercise of said power (all of which are herein called
"condemnation"), this Lease shall terminate as to the part so taken as of the
date the condemning authority takes title or possession, whichever first occurs;
provided that if so much of the Premises or the Office Building Project are
taken by such condemnation as would substantially and adversely affect the
operation and profitability of Lessee's business conducted from the Premises,
Lessee shall have the option, to be exercised only in writing within thirty (30)
days after Lessor shall have given Lessee written notice of such taking (or in
the absence of such notice, within thirty (30) days after the condemning
authority shall have taken possession), to terminate this Lease as of the date
the condemning authority takes such
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possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the rent and Lessee's Share of Operating
Expense Increase shall be reduced in the proportion that the floor area of the
Premises taken bears to the total floor area of the Premises. Common Areas taken
shall be excluded from the Common Areas usable by Lessee and no reduction of
rent shall occur with respect thereto or by reason thereof. Lessor shall have
the option in its sole discretion to terminate this Lease as of the taking of
possession by the condemning authority, by giving written notice to Lessee of
such election within thirty (30) days after receipt of notice of a taking by
condemnation of any part of the Premises or the Office Building Project. Any
award for the taking of all or any part of the Premises or the Office Building
Project under the power of eminent domain or any payment made under threat of
the exercise of such power shall be the property of Lessor, whether such award
shall be made as compensation for diminution in value of the leasehold or for
the taking of the fee, or as severance damages; provided, however, that Lessee
shall be entitled to any separate award for loss of or damage to Lessee's trade
fixtures, removable personal property and unamortized tenant improvements that
have been paid for by Lessee. For that purpose the cost of such improvements
shall be amortized over the original term of this Lease excluding any options.
In the event that this Lease is not terminated by reason of such condemnation,
Lessor shall to the extent of severance damages received by Lessor in connection
with such condemnation, repair any damage to the Premises caused by such
condemnation except to the extent that Lessee has been reimbursed therefor by
the condemning authority. Lessee shall pay any amount in excess of such
severance damages required to complete such repair.
15. Broker's Fee.
(a) The brokers involved in this transaction are Colliers Macaulay
Nicolls International as "listing broker" and Kidder Mathews & Segner, Inc. as
"cooperating broker," licensed real estate broker(s). A "cooperating broker" is
defined as any broker other than the listing broker entitled to a share of any
commission arising under this Lease. Upon execution of this Lease by both
parties, Lessor shall pay to said brokers jointly, or in such separate shares as
they may mutually designate in writing, a fee as set forth in a separate
agreement between Lessor and said broker(s), or in the event there is no
separate agreement between Lessor and said broker(s), the sum of $141,249.00,
for brokerage services rendered by said broker(s) to Lessor in this transaction.
(b) Lessor further agrees that (i) if Lessee exercises any Option,
as defined in paragraph 39.1 of this Lease, which is granted to Lessee under
this Lease, or any subsequently granted option which is substantially similar to
an Option granted to Lessee under this Lease, or (ii) if Lessee acquires any
rights to the Premises or other premises described in this Lease which are
substantially
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similar to what Lessee would have acquired had an Option herein granted to
Lessee been exercised, or (iii) if Lessee remains in possession of the Premises
after the expiration of the term of this Lease after having failed to exercise
an Option, or (iv) if said broker(s) are the procuring cause of any other lease
or sale entered into between the parties pertaining to the Premises and/or any
adjacent property in which Lessor has an interest, or (v) if the Base Rent is
increased, whether by agreement or operation of an escalation clause contained
herein, then as to any of said transactions or rent increases, Lessor shall pay
said broker(s) a fee in accordance with the schedule of said broker(s) in effect
at the time of execution of this Lease. Said fee shall be paid at the time such
increased rental is determined.
(c) Lessor agrees to pay said fee not only on behalf of Lessor but
also on behalf of any person, corporation, association, or other entity having
an ownership interest in said real property or any part thereof, when such fee
is due hereunder. Any transferee of Lessor's interest in this Lease, whether
such transfer is by agreement or by operation of law, shall be deemed to have
assumed Lessor's obligation under this paragraph 15. Each listing and
cooperating broker shall be a third party beneficiary of the provisions of this
paragraph 15 to the extent of their interest in any commission arising under
this Lease and may enforce that right directly against Lessor; provided,
however, that all brokers having a right to any part of such total commission
shall be a necessary party to any suit with respect thereto.
(d) Lessee and Lessor each represent and warrant to the other that
neither has had any dealings with any person, firm, broker or finder (other than
the person(s), if any, whose names are set forth in paragraph 15(a), above) in
connection with the negotiation of this Lease and/or the consummation of the
transaction contemplated hereby, and no other broker or other person, firm or
entity is entitled to any commission or finder's fee in connection with said
transaction and Lessee and Lessor do each hereby indemnify and hold the other
harmless from and against any costs, expenses, attorneys' fees or liability for
compensation or charges which may be claimed by any such unnamed broker, finder
or other similar party by reason of any dealings or actions of the indemnifying
party.
16. Estoppel Certificate.
(a) Each party (as "responding party") shall at any time upon not
less than ten (10) days' prior written notice from the other party ("requesting
party") execute, acknowledge and deliver to the requesting party a statement in
writing (i) certifying that this Lease is unmodified and in full force and
effect (or, if modified, stating the nature of such modification and certifying
that this Lease, as so modified, is in full force and effect) and the date to
which the rent and other charges are paid in advance, if any, and (ii)
acknowledging that there are not, to
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the responding party's knowledge, any uncured defaults on the part of the
requesting party, or specifying such defaults if any are claimed. Any such
statement may be conclusively relied upon by any prospective purchaser or
encumbrancer of the Office Building Project or of the business of Lessee.
(b) At the requesting party's option, the failure to deliver such
statement within such time shall be a material default of this Lease by the
party who is to respond, without any further notice to such party, or it shall
be conclusive upon such party that (i) this Lease is in full force and effect,
without modification except as may be represented by the requesting party, (ii)
there are no uncured defaults in the requesting party's performance, and (iii)
if Lessor is the requesting party, not more than one month's rent has been paid
in advance.
(c) If Lessor desires to finance, refinance, or sell the Office
Building Project, or any part thereof, Lessee hereby agrees to deliver to any
lender or purchaser designated by Lessor such financial statements of Lessee as
may be reasonably required by such lender or purchaser. Such statements shall
include the past three (3) years' financial statements of Lessee. All such
financial statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean only
the owner or owners, at the time in question, of the fee title or a lessee's
interest in a ground lease of the Office Building Project, and except as
expressly provided in paragraph 15, in the event of any transfer of such title
or interest, Lessor herein named (and in case of any subsequent transfers then
the grantor) shall be relieved from and after the date of such transfer of all
liability as respects Lessor's obligations thereafter to be performed, provided
that any funds in the hands of Lessor or the then grantor at the time of such
transfer, in which Lessee has an interest, shall be delivered to the grantee.
The obligations contained in this Lease to be performed by Lessor shall, subject
as aforesaid, be binding on Lessor's successors and assigns, only during their
respective periods of ownership.
18. Severability. The invalidity of any provision of this Lease as
determined by a court of competent jurisdiction shall in no way affect the
validity of any other provision hereof.
19. Interest on Past-due Obligations. Except as expressly herein provided,
any amount due to Lessor not paid when due shall bear interest at prime rate
plus 4% from the date due. Payment of such interest shall not excuse or cure any
default by Lessee under this Lease; provided, however, that interest shall not
be payable on late charges incurred by Lessee nor on any amounts upon which late
charges are paid by Lessee.
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20. Time of Essence. Time is of the essence with respect to the obligations
to be performed under this Lease.
21. Additional Rent. All monetary obligations of Lessee to Lessor under the
terms of this Lease, including but not limited to Lessee's Share of Operating
Expense Increase and any other expenses payable by Lessee hereunder shall be
deemed to be rent.
22. Incorporation of Prior Agreements; Amendments. This Lease contains all
agreements of the parties with respect to any matter mentioned herein. No prior
or contemporaneous agreement or understanding pertaining to any such matter
shall be effective. This Lease may be modified in writing only, signed by the
parties in interest at the time of the modification. Except as otherwise stated
in this Lease, Lessee hereby acknowledges that neither the real estate broker
listed in paragraph 15 hereof nor any cooperating broker on this transaction nor
the Lessor or any employee or agents of any of said persons has made any oral or
written warranties or representations to Lessee relative to the condition or use
by Lessee of the Premises or the Office Building Project and Lessee acknowledges
that Lessee assumes all responsibility regarding the Occupational Safety Health
Act, the legal use and adaptability of the Premises and the compliance thereof
with all applicable laws and regulations in effect during the term of this
Lease.
23. Notices. Any notice required or permitted to be given hereunder shall
be in writing and may be given by personal delivery or by certified or
registered mail, and shall be deemed sufficiently given if delivered or
addressed to Lessee or to Lessor at the address noted below or adjacent to the
signature of the respective parties, as the case may be. Mailed notices shall be
deemed given upon actual receipt at the address required, or forty-eight hours
following deposit in the mail, postage prepaid, whichever first occurs. Either
party may by notice to the other specify a different address for notice purposes
except that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for notice purposes. A copy of all notices required
or permitted to be given to Lessor hereunder shall be concurrently transmitted
to such party or parties at such addresses as Lessor may from time to time
hereafter designate by notice to Lessee.
24. Waivers. No waiver by Lessor of any provision hereof shall be deemed a
waiver of any other provision hereof or of any subsequent breach by Lessee of
the same or any other provision. Lessor's consent to, or approval of, any act
shall not be deemed to render unnecessary the obtaining of Lessor's consent to
or approval of any subsequent act by Lessee. The acceptance of rent hereunder by
Lessor shall not be a waiver of any preceding breach by Lessee of any provision
hereof, other than the failure of Lessee to pay the particular rent so accepted,
regardless
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of Lessor's knowledge of such preceding breach at the time of acceptance of such
rent.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a "short form" memorandum of this
Lease for recording purposes.
26. Holding Over. If Lessee, with Lessor's consent, remains in possession
of the Premises or any part thereof after the expiration of the term hereof,
such occupancy shall be a tenancy from month to month upon all the provisions of
this Lease pertaining to the obligations of Lessee, except that the rent payable
shall be one hundred twenty-five (125%) of the rent payable immediately
preceding the termination date of this Lease, and all Options, if any, granted
under the terms of this Lease shall be deemed terminated and be of no further
effect during said month to month tenancy. There shall be no holdover penalty
for up to four months following the Lease expiration date, provided Lessee
enters into good faith negotiations with Lessor, at least 90 days prior to the
Lease expiration date, to extend the Lease term.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. Covenants and Conditions. Each provision of this Lease performable by
Lessee shall be deemed both a covenant and a condition.
29. Binding Effect; Choice of Law. Subject to any provisions hereof
restricting assignment or subletting by Lessee and subject to the provisions of
paragraph 17, this Lease shall bind the parties, their personal representatives,
successors and assigns. This Lease shall be governed by the laws of the State
where the Office Building Project is located and any litigation concerning this
Lease between the parties hereto shall be initiated in the county in which the
Office Building Project is located.
30. Subordination.
(a) This Lease, and any Option or right of first refusal granted
hereby, at Lessor's option, shall be subordinate to any ground lease, mortgage,
deed of trust, or any other hypothecation or security now or hereafter placed
upon the Office Building Project and to any and all advances made on the
security thereof and to all renewals, modifications, consolidations,
replacements and extensions thereof. Notwithstanding such subordination,
Lessee's right to quiet possession of the Premises shall not be disturbed if
Lessee is not in default and so long as Lessee shall pay the rent and observe
and perform all of the provisions of this Lease,
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unless this Lease is otherwise terminated pursuant to its terms. If any
mortgagee, trustee or ground lessor shall elect to have this Lease and any
Options granted hereby prior to the lien of its mortgage, deed of trust or
ground lease, and shall give written notice thereof to Lessee, this Lease and
such Options shall be deemed prior to such mortgage, deed of trust or ground
lease, whether this Lease or such Options are dated prior or subsequent to the
date of said mortgage, deed of trust or ground lease or the date of recording
thereof.
(b) Lessee agrees to execute any documents required to effectuate
an attornment, a subordination, or to make this Lease or any Option granted
herein prior to the lien of any mortgage, deed of trust or ground lease, as the
case may be. Lessee's failure to execute such documents within ten (10) days
after written demand shall constitute a material default by Lessee hereunder
without further notice to Lessee or, at Lessor's option, Lessor shall execute
such documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee does
hereby make, constitute and irrevocably appoint Lessor as Lessee's
attorney-in-fact and in Lessee's name, place and stead, to execute such
documents in accordance with this paragraph 30(b).
31. Attorneys' Fees.
31.1 If either party or the broker(s) named herein bring an action
to enforce the terms hereof or declare rights hereunder, the prevailing party in
any such action, trial or appeal thereon, shall be entitled to his reasonable
attorneys' fees to be paid by the losing party as fixed by the court in the same
or a separate suit, and whether or not such action is pursued to decision or
judgment. The provisions of this paragraph shall inure to the benefit of the
broker named herein who seeks to enforce a right hereunder.
31.2 The attorneys' fee award shall not be computed in accordance
with any court fee schedule, but shall be such as to fully reimburse all
attorneys' fees reasonably incurred in good faith.
31.3 Lessor shall be entitled to reasonable attorneys' fees and all
other costs and expenses incurred in the preparation and service of notice of
default and consultations in connection therewith, whether or not a legal
transaction is subsequently commenced in connection with such default.
32. Lessor's Access.
32.1 Lessor and Lessor's agents shall have the right to enter the
Premises at reasonable times with 24 hours notice, except for emergencies, for
the purpose of inspecting the same, performing any services required of Lessor,
showing the same to prospective purchasers, lenders, or lessees, taking such
safety measures,
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erecting such scaffolding or other necessary structures, making such
alterations, repairs, improvements or additions to the Premises or to the Office
Building Project as Lessor may reasonably deem necessary or desirable and the
erecting, using and maintaining of utilities, services, pipes and conduits
through the Premises and/or other premises as long as there is no material
adverse effect to Lessee's use of the Premises. Lessor may at any time place on
or about the Premises or the Building any ordinary "For Sale" signs and Lessor
may at any time during the last 120 days of the term hereof place on or about
the Premises any ordinary "For Lease" signs.
32.2 All activities of Lessor pursuant to this paragraph shall be
without abatement of rent unless reasonably deemed to unduly interrupt Lessee's
business, nor shall Lessor have any liability to Lessee for the same.
32.3 Lessor shall have the right to retain keys to the Premises to
unlock all doors in or on the Premises other than to files, vaults and safes,
and in the case of emergency to enter the Premises by any reasonably appropriate
means, and any such entry shall not be deemed a forcible or unlawful entry or
detainer of the Premises or an eviction. Lessee waives any charges for damages
or injuries or interference with Lessee's property or business in connection
therewith.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises or the Common Areas
without first having obtained Lessor's prior written consent. Notwithstanding
anything to the contrary in this Lease, Lessor shall not be obligated to
exercise any standard of reasonableness in determining whether to grant such
consent. The holding of any auction on the Premises or Common Areas in violation
of this paragraph shall constitute a material default of this Lease.
34. Signs. Lessee shall not place any sign upon the Premises or the Office
Building Project without Lessor's prior written consent. Under no circumstances
shall Lessee place a sign on any roof of the Office Building Project.
35. Merger. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to Lessor
of any or all of such subtenancies.
36. Consents. Except for paragraphs 33 (auctions) and 34 (signs) hereof,
wherever in this Lease the consent of one party is required to an act of the
other party such consent shall not be unreasonably withheld or delayed.
37. Quiet Possession. Upon Lessee paying the rent for the Premises and
observing and performing all of the covenants, conditions and provisions on
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Lessee's part to be observed and performed hereunder, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease. The individuals executing this Lease on behalf of
Lessor represent and warrant to Lessee that they are fully authorized and
legally capable of executing this Lease on behalf of Lessor and that such
execution is binding upon all parties holding an ownership interest in the
Office Building Project.
38. Options.
38.1 Definition. As used in this paragraph the word "Option" has the
following meaning: (1) the right or option to extend the term of this Lease or
to renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (2) the option of right of first refusal to lease the
Premises or the right of first offer to lease the Premises or the right of first
refusal to lease other space within the Office Building Project or other
property of Lessor or the right of first offer to lease other space within the
Office Building Project or other property of Lessor; (3) the right or option to
purchase the Premises or the Office Building Project, or the right of first
refusal to purchase the Premises or the Office Building Project or the right of
first offer to purchase the Premises or the Office Building Project, or the
right or option to purchase other property of Lessor, or the right of first
refusal to purchase other property of Lessor or the right of first offer to
purchase other property of Lessor.
38.2 Options Personal. Each Option granted to Lessee in this Lease is
personal to the original Lessee and may be exercised only by the original Lessee
while occupying the Premises who does so without the intent of thereafter
assigning this Lease or subletting the Premises or any portion thereof, and may
not be exercised or be assigned, voluntarily or involuntarily, by or to any
person or entity other than Lessee; provided, however, that an Option may be
exercised by or assigned to any Lessee Affiliate as defined in paragraph 12.2 of
this Lease. The Options, if any, herein granted to Lessee are not assignable
separate and apart from this Lease, nor may any Option be separated from this
Lease in any manner, either by reservation or otherwise.
38.3 Multiple Options. In the event that Lessee has any multiple options to
extend or renew this Lease a later option cannot be exercised unless the prior
option to extend or renew this Lease has been so exercised.
38.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary, (i) during
the time commencing from the date Lessor gives to Lessee a notice of default
pursuant to paragraph 13.1(c) or 13.1(d) and continuing until the noncompliance
alleged in
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said notice of default is cured, or (ii) during the period of time commencing on
the day after a monetary obligation to Lessor is due from Lessee and unpaid
(without any necessity for notice thereof to Lessee) and continuing until the
obligation is paid, or (iii) in the event that Lessor has given to Lessee three
or more notices of default under paragraph 13.1(c), or paragraph 13.1(d),
whether or not the defaults are cured, during the 12 month period of time
immediately prior to the time that Lessee attempts to exercise the subject
Option, (iv) if Lessee has committed any non-curable breach, including without
limitation those described in paragraph 13.1(b), or is otherwise in default of
any of the terms, covenants or conditions of this Lease.
(b) The period of time within which an Option may be
exercised shall not be extended or enlarged by reason of Lessee's inability to
exercise an Option because of the provisions of paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an
Option shall terminate and be of no further force or effect, notwithstanding
Lessee's due and timely exercise of the Option, if, after such exercise and
during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary
obligation of Lessee for a period of thirty (30) days after such obligation
becomes due (without any necessity of Lessor to give notice thereof to Lessee),
or (ii) Lessee fails to commence to cure a default specified in paragraph
13.1(d) within thirty (30) days after the date that Lessor gives notice to
Lessee of such default and/or Lessee fails thereafter to diligently prosecute
said cure to completion, or (iii) Lessor gives to Lessee three or more notices
of default under paragraph 13.1(c), or paragraph 13.1(d), whether or not the
defaults are cured, or (iv) if Lessee has committed any non-curable breach,
including without limitation those described in paragraph 13.1(b), or is
otherwise in default of any of the terms, covenants and conditions of this
Lease.
39. Security Measures - Lessor's Reservations.
39.1 Lessee hereby acknowledges that Lessor shall have no
obligation whatsoever to provide guard service or other security measures for
the benefit of the Premises or the Office Building Project. Lessee assumes all
responsibility for the protection of Lessee, its agents, and invitees and the
property of Lessee and of Lessee's agents and invitees from acts of third
parties. Nothing herein contained shall prevent Lessor, at Lessor's sole option,
from providing security protection for the Office Building Project or any part
thereof, in which event the cost thereof shall be included within the definition
of Operating Expenses, as set forth in paragraph 4.2(b).
39.2 Lessor shall have the following rights:
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(a) To change the name, address or title of the Office
Building Project or building in which the Premises are located upon not less
than 90 days prior written notice;
(b) To, at Lessor's expense, provide and install Building
standard graphics on the door of the Premises and such portions of the Common
Areas as Lessor shall reasonably deem appropriate;
(c) To permit any lessee the exclusive right to conduct
any business as long as such exclusive does not conflict with any rights
expressly given herein;
(d) To place such signs, notices or displays as Lessor
reasonably deems necessary or advisable upon the roof, exterior of the buildings
or the Office Building Project or on pole signs in the Common Areas;
39.3 Lessee shall not:
(a) Use a representation (photographic or otherwise) of
the Building or the Office Building Project or their name(s) in connection with
Lessee's business;
(b) Suffer or permit anyone, except in emergency, to go
upon the roof of the Building.
40. Easements.
40.1 Lessor reserves to itself the right, from time to time, to
grant such easements, rights and dedications that Lessor deems necessary or
desirable, and to cause the recordation of Parcel Maps and restrictions, so long
as such easements, rights, dedications, Maps and restrictions do not
unreasonably interfere with the use of the Premises by Lessee. Lessee shall sign
any of the aforementioned documents upon request of Lessor and failure to do so
shall constitute a material default of this Lease by Lessee without the need for
further notice to Lessee.
40.2 The obstruction of Lessee's view, air, or light by any
structure erected in the vicinity of the Building, whether by Lessor or third
parties, shall in no way affect this Lease or impose any liability upon Lessor.
41. Performance Under Protest. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one party to the other under the
provisions hereof, the party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment, and there shall survive the right
on the part of
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said party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said party to pay such sum
or any part thereof, said party shall be entitled to recover such sum or so
much thereof as it was not legally required to pay under the provisions of this
Lease.
42. Authority. If Lessee is a corporation, trust, or general or limited
partnership, Lessee, and each individual executing this Lease on behalf of such
entity represent and warrant that such individual is duly authorized to execute
and deliver this Lease on behalf of said entity. If Lessee is a corporation,
trust or partnership, Lessee shall, within thirty (30) days after execution of
this Lease, deliver to Lessor evidence of such authority satisfactory to Lessor.
43. Conflict. Any conflict between the printed provisions, Exhibits or
Addenda of this Lease and the typewritten or handwritten provisions, if any,
shall be controlled by the typewritten or handwritten provisions.
44. No Offer. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to Lessee to lease.
This Lease shall become binding upon Lessor and Lessee only when fully executed
by both parties.
45. Lender Modification. Lessee agrees to make such reasonable
modifications to this Lease as may be reasonably required by an institutional
lender in connection with the obtaining of normal financing or refinancing of
the Office Building Project.
46. Multiple Parties. If more than one person or entity is named as either
Lessor or Lessee herein, except as otherwise expressly provided herein, the
obligations of the Lessor or Lessee herein shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee,
respectively.
47. Work Letter. This Lease is supplemented by that certain Work Letter of
even date executed by Lessor and Lessee, attached hereto as Exhibit C, and
incorporated herein by this reference.
48. Attachments. Attached hereto are the following documents which
constitute a part of this Lease:
36
<PAGE> 37
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED
AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS
LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND
EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR
SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. NO
REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE
BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE
OR THE TRANSACTION RELATING THERETO; THE PARTIES SHALL RELY
SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE
LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
LESSOR LESSEE
HEWLETT-PACKARD COMPANY MULTIPLE ZONES INTERNATIONAL INC.
By /s/ D. Craig Nordlund By /s/ Peter J. Biere
-------------------------------------- -----------------------------------
D. Craig Nordlund Its Financial Controller
Its Associate General Counsel
and Secretary
Executed at Palo Alto, CA Executed at Redmond, Washington
on 10/15/93 on 10/13/93
Address Address
--------------------------------- ------------------------------
37
<PAGE> 38
CORPORATE
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this 13th day of October, A.D. 1993, before me personally appeared
Peter J. Biere, to me known to be the Financial Controller of Multiple Zones
Intl., Inc., the corporation that executed the within and foregoing instrument,
and acknowledged the same instrument to be the free and voluntary act and deed
of said corporation, for the uses and purposes therein mentioned, and on oath
stated that they were authorized to execute said instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my
official seal, the day and year first above written.
/s/ Mary K. Salopek
----------------------------------------
Notary Public in and for the State of
Washington, residing at Redmond
CORPORATE
STATE OF CALIFORNIA )
)ss.
COUNTY OF SANTA CLARA )
On this 15th day of October, A.D. 1993, before me personally appeared
D. Craig Nordlund, to me known to be the Associate Gen. Counsel and Sec. of
Hewlett-Packard Company, the corporation that executed the within and foregoing
instrument, and acknowledged the same instrument to be the free and voluntary
act and deed of said corporation, for the uses and purposes therein mentioned,
and on oath stated that they were authorized to execute said instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my
official seal, the day and year first above written.
/s/ Sandra M. [illegible]
--------------------------------
Notary Public in and for the State of
California, residing at Mtn. View
38
<PAGE> 39
CORPORATE
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this ____________ day of ____________, A.D. 19__, before me
personally appeared ________________________________, to me known to be the
____________________________ of ________________________________, the
corporation that executed the within and foregoing instrument, and acknowledged
the same instrument to be the free and voluntary act and deed of said
corporation, for the uses and purposes therein mentioned, and on oath stated
that they were authorized to execute said instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my
official seal, the day and year first above written.
--------------------------------------------
Notary Public in and for the State of
Washington, residing at .
--------------------
39
<PAGE> 40
LEASE ADDENDUM
THIS ADDENDUM is made to that lease (the "Lease") dated the 4th day of
October, 1993, by and between Hewlett-Packard Company ("Lessor") and Multiple
Zones International, Inc. ("Lessee").
Lessor and Lessee agree that the Lease is hereby amended to include the
following provisions:
1. Rent and Rent Adjustments
Monthly base rent as set forth in Paragraph 1.6 of the Lease shall be calculated
as follows:
Months 1 and 2: ***
Months 3 through 12: ***
Months 13 through 60: ***
The only other rent increases during the term shall be for increases in
operating expenses as set forth in Paragraph 4.2 of the Lease. There shall be no
Consumer Price Index increases as set forth in Paragraph 4.3 of the Lease.
2. Tenant Improvements.
A. General. At its cost Lessor will provide a demising
wall (finished on both sides) separating the Premises from the space in the
Building to be used by Lessor together with an entrance to the Premises from the
exterior of the Building. In addition Lessor will pay not more than Two Hundred
Thousand Dollars ($200,000) towards the actual cost of the design, engineering
and construction of interior improvements to the Premises (the "Tenant
Improvements") as set forth below.
B. Plans and Specifications. Lessee shall select an
architect licensed in the State of Washington (the "Architect"), and shall
negotiate a fixed fee (the "Fee") with such architect to perform the
architectural services required in connection with the Tenant Improvements.
Lessee shall notify Lessor of the identity of the Architect and the negotiated
fee and Lessor shall have the right to approve such architect and the fee to be
charged, provided, however that such approval cannot be unreasonably withheld.
Preliminary plans and specifications prepared by the Architect shall be
submitted by Lessee to Lessor for Lessor's approval not later than 45 days after
the date hereof,
*** Confidential portions omitted and filed separately with SEC.
1
<PAGE> 41
and Lessor shall approve such preliminary plans and specifications or specify
with particularity its objections thereto within 10 days following receipt
thereof. Failure to approve or disapprove within such 10 days period shall
constitute approval thereof. If Lessor shall reject such preliminary plans and
specifications either partially or totally and they cannot in good faith be
modified within 10 days of such rejection to be acceptable to both Lessor and
Lessee, then this Lease shall terminate and neither party shall thereafter be
obligated to the other party for any reason whatsoever having to do with this
Lease except that Lessee shall be refunded any security deposit and prepaid
rent, and the cost of the preparation of the preliminary plans and
specifications shall be paid by Lessor. When fully approved by both parties, the
preliminary plans and specifications shall be deemed the final plans and
specifications (the "Plans and Specifications") and shall supersede any previous
discussions or agreements regarding the Tenant Improvements.
C. Construction. The Tenant Improvements shall be
constructed in a good and workmanlike manner with good and sufficient materials,
in compliance with a valid building permit and in full accordance with the Plans
and Specifications, and all applicable rules, regulations, laws, and ordinances.
The Tenant Improvements shall be constructed by a duly licensed and bonded
general contractor selected by Lessee (the "Contractor"), subject to Lessor's
reasonable consent. Lessee shall contract directly with the Contractor and shall
provide in that contract that payment shall be either paid by Lessee or by
drafts from Lessor payable jointly to Lessee and Contractor against invoices
approved by Lessee, but that in no event shall Lessor be responsible for any
payments after it has paid out a sum equal to $200,000 less the Fee approved by
Lessor pursuant to paragraph 28 hereinabove. Lessee shall be solely responsible
for any payments in excess of that amount. All plumbing, electrical and
mechanical work shall be done by subcontractors approved by Lessor.
D. Full Cooperation. Lessor shall make the Premises
available to Lessee to begin work on the Tenant Improvements not later than May
1, 1994. Lessor shall cooperate fully with Lessee, the Architect and the
Contractor to secure the permits necessary to construct the Tenant Improvements.
E. Completion. Completion shall mean the date on which a
Certificate of Occupancy ("CO") is issued by the building department or other
agency having responsibility for the issuance thereof. Lessee and the Contractor
shall use their best efforts to achieve Completion of the Tenant Improvements by
the Commencement Date set forth in paragraph 1.5 of the Lease. In the event that
the Tenant Improvements or any portion thereof have not reached Completion by
the Commencement Date, this Lease shall not be invalid, but the Lessee and its
Contractor shall complete the same as soon as possible thereafter and the
Commencement Date shall be postponed accordingly without either party being
2
<PAGE> 42
responsible for damages to the other; provided, however, that Lessee's
obligation to pay rent shall commence upon the earlier of the issuance of the CO
or 30 days after the date set forth in Paragraph 1.5 of the Lease.
F. Liens. Lessee shall take all actions necessary to
keep the property free and clear of all mechanics and materialmen's liens, and
shall indemnify and keep Lessor harmless from and against any claims or liens
which arise from the construction of the Tenant Improvements excepting those
resulting from any failure by Lessor to make any payments as set forth
hereinabove pursuant to the Tenant Improvement Allowance.
3. Right to Terminate.
At any time following the forty-second (42nd) month of the lease term, Lessee
may provide written notice to Lessor (the "Expansion Notice") that it requires
to expand into additional leased space of between 8,000 and 10,000 square feet
(the "Expansion Space"). If Lessor cannot provide such Expansion Space to
Lessee, then Lessee shall have the right to terminate this lease effective six
(6) months after the date Lessee first gave the Expansion Notice to Lessor to
expand. Such right to terminate shall be without penalty or further obligation
by Lessee. Notwithstanding anything contained herein to the contrary, the right
to terminate provided herein is conditioned upon Lessee actually leasing a space
of not less than the area of the leased premises as determined pursuant to
Paragraph 2 of this Addendum to Lease plus the amount of the Expansion Space.
4. Signage.
Lessee may place monument and directional signage on the Property on which the
Building containing the Premises is located. The location, size and contents of
such signage shall be with the reasonable consent of the Lessor.
5. Cafeteria.
During the term of the Lease, Lessee's employees shall have the right to use the
Hewlett-Packard cafeteria pursuant to procedures to be mutually agreed upon by
the parties, including occasional Lessee company meetings. Access to the
cafeteria will be provided in such manner so as not to compromise the security
of Hewlett-Packard nor disturb its operations in the building.
6. Rights of First Option and Refusal.
A. If Lessor intends to offer for lease to the public
additional space within the building, it shall first notify Lessee in writing of
its intent to do so. Such notice shall identify the size and location of such
space and the date on
3
<PAGE> 43
which it will be available. Lessee shall have seven (7) business days in which
to notify Lessor in writing that it desires to lease the space being offered and
if such notice is given, the Lease will be amended to add the additional area to
the Premises effective on the date of occupancy of the additional space, and
rent will be payable on such space at the same rate as is then being paid under
the Lease.
B. If Lessee fails to provide the written notice
required in Paragraph 6(A) hereinabove, then Lessor shall be free to lease the
additional space to others; provided, however, that if the rent which would be
paid by others under any intended lease is less than that then being paid by
Lessee under the Lease, then Lessor shall notify Lessee in writing of such lower
rent and Lessee shall have three (3) business days in which to notify Lessor in
writing that it will lease the additional space at that rent. It if provides
such notice, the Lease will be amended to add the additional space to the
Premises as set forth in Paragraph 6(A) hereinabove but at the lower rent (for
the additional space only). If no such notice is given, then Lessor may
consummate the intended lease transaction with the other party.
Lessor and Lessee have carefully read and reviewed this Lease Addendum and each
term and provision contained herein and, by execution of this Lease Addendum,
show their informed and voluntary consent thereto. The Parties hereby agree that
at the time this Lease Addendum is executed, the terms of this Lease Addendum
are commercially reasonable and together with the underlying Lease effectuate
the intent and purpose of Lessor and Lessee with respect to the Premises.
This Lease Addendum has been prepared for approval by the parties and
their attorneys. No representation or recommendation is made by the
American Industrial Real Estate Association or by any Real Estate
Broker involved in this transaction or by its agents or employees as
to the legal sufficiency, legal effect or tax consequences of this
Lease Addendum, the Lease or the transaction relating thereto; the
parties shall rely solely upon the advice of their own legal counsel
as to the legal and tax consequences of the Lease and this Lease
Addendum.
LESSOR LESSEE
HEWLETT-PACKARD COMPANY MULTIPLE ZONES INTERNATIONAL, INC.
By /s/ D. Craig Nordlund By /s/ Peter J. Biere
------------------------------------ ----------------------------------
D. Craig Nordlund Its Financial Controller
Its Associate General Counsel
and Secretary
4
<PAGE> 44
Executed at Palo Alto, California Executed at Redmond, Washington
on 10/15/93 on 10/13/93
5
<PAGE> 1
EXHIBIT 10.28
BUSINESS LOAN AGREEMENT
<TABLE>
<CAPTION>
PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL ACCOUNT OFFICER INITIALS
- ------------- ---------- ---------- -------- ---- ---------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$5,000,000.00 05-13-1996 12-31-1996 391-174 365 6057628480 39159
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
<TABLE>
<S> <C>
BORROWER: MULTIPLE ZONES INTERNATIONAL, INC.
15815 SE 37TH SUITE B
BELLEVUE, WA 98006
<CAPTION>
BORROWER: MULTIPLE ZONES INTERNATIONAL, INC. LENDER: U.S. BANK OF WASHINGTON NATIONAL ASSOCIATION
BELLEVUE, WA 98006 C/O 1420 5TH AVE.
<CAPTION>
15815 SE 37TH SUITE B EAST KING COUNTY CORPORATE BANKING
</TABLE>
THIS BUSINESS LOAN AGREEMENT between MULTIPLE ZONES INTERNATIONAL, INC.
("Borrower") and U.S. BANK OF WASHINGTON, NATIONAL ASSOCIATION ("Lender") is
made and executed on the following terms and conditions. Borrower has received
prior commercial loans from Lender or has applied to Lender for a commercial
loan or loans and other financial accommodations, including those which may be
described on any exhibit or schedule attached to this Agreement. All such loans
and financial accommodations, together with all future loans and financial
accommodations from Lender to Borrower, are referred to in this Agreement
individually as the "Loan" and collectively as the "Loans." Borrower understands
and agrees that: (a) in granting, renewing, or extending any Loan, Lender is
relying upon Borrower's representations, warranties, and agreements, as set
forth in this Agreement; (b) the granting, renewing, or extending of any Loan by
Lender at all times shall be subject to Lender's sole judgment and discretion;
and (c) all such Loans shall be and shall remain subject to the following terms
and conditions of this Agreement.
TERM. This Agreement shall be effective as of May 13, 1996, and shall continue
thereafter until all indebtedness of Borrower to Lender has been performed in
full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
AGREEMENT. The word "Agreement" means this Business Loan Agreement, as this
Business Loan Agreement may be amended or modified from time to time,
together with all exhibits and schedules attached to this Business Loan
Agreement from time to time.
BORROWER. The word "Borrower" means MULTIPLE ZONES INTERNATIONAL, INC. The
word "Borrower" also includes, as applicable, all subsidiaries and
affiliates of Borrower as provided below in the paragraph titled
"Subsidiaries and Affiliates."
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
CASH FLOW. The words "Cash Flow" mean net income after taxes, and exclusive
of extraordinary gains and income, plus depreciation and amortization.
COLLATERAL. The word "Collateral" means and includes without limitation all
property and assets granted as collateral security for a Loan, whether real
or personal property, whether granted directly or indirectly, whether
granted now or in the future, and whether granted in the form of a security
interest, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien, charge, lien or title retention contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise.
DEBT. The word "Debt"means all of Borrower's liabilities excluding
Subordinated Debt.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
GRANTOR. The word "Grantor" means and includes without limitation each and
all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all Borrowers
granting such a Security Interest.
GUARANTOR. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in connection
with any Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means and includes without limitation
all Loans, together with all other obligations, debts and liabilities of
Borrower to Lender, or any one or more of them, as well as all claims by
Lender against Borrower, or any one or more of them; whether now or
hereafter existing, voluntary or involuntary, due or not due, absolute or
contingent, liquidated or unliquidated; whether Borrower may be liable
individually or jointly with others; whether Borrower may be obligated as a
guarantor, surety, or otherwise; whether recovery upon such indebtedness may
be or hereafter may become barred by any statute of limitations; and whether
such indebtedness may be or hereafter may become otherwise unenforceable.
LENDER. The word "Lender" means U.S. BANK OF WASHINGTON, NATIONAL
ASSOCIATION, its successors and assigns.
LIQUID ASSETS. the words "Liquid Assets"mean Borrower's cash on hand plus
Borrower's readily marketable securities.
LOAN. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to this
Agreement from time to time.
NOTE. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note
or notes therefor.
PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and security
interests securing Indebtedness owed by Borrower to Lender; (b) liens for
taxes, assessments, or similar charges either not yet due or being contested
in good faith; (c) liens of materialmen, mechanics, warehousemen, or
carriers, or other like liens arising in the ordinary course of business and
securing obligations which are not yet delinquent; (d) purchase money liens
or purchase money security interests upon or in any property acquired or
held by Borrower in the ordinary course of business to secure indebtedness
outstanding on the date of this Agreement or permitted to be incurred under
the paragraph of this Agreement titled "Indebtedness and Liens"; (e) liens
and security interests which, as of the date of this Agreement, have been
disclosed to and approved by the Lender in writing; and (f) those liens and
security interests which in the aggregate constitute an immaterial and
insignificant monetary amount with respect to the net value of Borrower's
assets.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
SECURITY AGREEMENT. The words "Security Agreement" mean and include without
limitation any agreements, promises, covenants, arrangements, understandings
or other agreements, whether created by law, contract, or otherwise,
evidencing, governing, representing, or creating a Security Interest.
<PAGE> 2
EXHIBIT 5.1
[LETTERHEAD]
June 4, 1996
Multiple Zones International, Inc.
15815 S.E. 37th Street
Bellevue, Washington 98006-1800
RE: 2,530,000 SHARES OF COMMON STOCK OF
MULTIPLE ZONES INTERNATIONAL, INC.
Ladies and Gentlemen:
This opinion is furnished in connection with a Registration Statement on Form
S-1 (Registration No. 333-4458), as amended (the "Registration Statement"), of
Multiple Zones International, Inc., a Washington corporation (the "Company"),
under which 2,200,000 shares of Common Stock of the Company (the "Common
Stock"), together with up to an additional 330,000 shares of Common Stock to
cover over-allotments, are being registered by the Company for sale under the
Securities Act of 1933, as amended (all of such shares will be referred to as
the "Shares").
As counsel for the Company, we are familiar with the Company's Restated
Articles of Incorporation, as amended, the Company's Amended and Restated
Bylaws, as amended, and the records of the corporate proceedings of the
Company, and we have assisted in the preparation of the Registration Statement,
including the Prospectus contained therein.
Based on the foregoing, we are of the opinion that, when (a) the Registration
Statement shall have been declared effective by order of the Securities and
Exchange Commission, (b) the Shares shall have been offered and sold in the
manner referred to in the Registration Statement, (c) certificates for the
Shares shall have been duly issued by the Company and registered by its
registrar, and (d) the Company shall have received the consideration required
for the Shares as contemplated by the Registration Statement, the Shares will
be validly issued, fully paid and nonassessable.
We note that a member of our firm is an Assistant Secretary of the Company and
beneficially owns 7,500 shares of Common Stock.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the inclusion in the Prospectus contained therein
of the reference to our firm under the heading "Legal Matters." In giving such
consent, we do not admit that we are in the category of persons whose consent
is required under Section 7 of the Securities Act of 1933, as amended.
Very truly yours,
Frank C. Woodruff
- ------------------------------------
Frank C. Woodruff
of
GRAHAM & JAMES LLP/RIDDELL WILLIAMS P.S.
KCG:lkj
<PAGE> 3
Exhibit 10.7
MULTIPLE ZONES INTERNATIONAL, INC.
MANAGEMENT INCENTIVE PLAN
MULTIPLE ZONES INTERNATIONAL, INC., a Washington corporation (the
"Company"), hereby establishes and sets forth the terms of the MULTIPLE ZONES
INTERNATIONAL, INC. MANAGEMENT INCENTIVE PLAN (the "Plan"), which for reference
purposes will be dated January 1, 1996.
1. PURPOSE OF PLAN. The purpose of the Plan is to enable the
Company to attract, retain and motivate key management employees of the highest
caliber.
2. DEFINITIONS. Capitalized terms used in the Plan shall have
the following meanings (whether used in the singular or plural):
"Board" means the Board of Directors of the Company as
constituted from time to time during the term of the Plan.
"Committee" means the Compensation Committee of the Board as
constituted from time to time during the term of the Plan.
"Participant" is defined in Section 3.
"Plan Year" means each calendar year during the term of the
Plan.
3. PARTICIPANTS. The individuals entitled to participate in the
Plan (the "Participants") are (a) each officer of the Company; (b) the
Company's controller and each other employee of the Company at the director
level; (c) each other employee of the Company at the manager level; and (d)
each other employee of the Company that the Committee may from time to time
designate for participation in the Plan during a Plan Year. An individual in
one of the foregoing categories who is first employed by the Company following
the first day of a Plan Year shall be a Participant only if first employed
prior to September 30 of the Plan Year (in which case payments to the
individual under the Plan shall be subject to the last sentence of each of
Section 5.3 and Section 5.4).
4. PERFORMANCE CRITERIA; BONUSES. For each Plan Year during the
term of the Plan, the Committee shall establish and communicate to the
Participants for that Plan Year specific goals for financial performance by the
Company. The Committee may also, in its discretion, establish individual
performance goals for one or more Participants or provide that bonuses under
the Plan will vary depending on the Committee's evaluation of overall
individual performance by those Participants. The Committee shall also specify
the specific bonuses to which Participants will be entitled if the performance
criteria are achieved. Bonus amounts shall be a specific percentage of the base
salaries of the Participants and may vary from Participant to Participant or
based on the extent to which the performance criteria are achieved.
5. DETERMINATION OF ACHIEVEMENT OF PERFORMANCE CRITERIA.
5.1 Achievement of performance criteria will be
determined quarterly for each calendar quarter of each Plan Year. The Committee
shall establish such procedures as it deems necessary to determine quarterly
achievement of financial performance goals for the Company as well as any
applicable individual performance criteria. Unless otherwise determined by the
Committee, achievement of financial performance goals for the Company shall be
based on year-to-date financial performance.
5.2 Achievement of financial performance goals for the
Company will be determined based on the financial statements of the Company
prepared for financial accounting purposes. The final determination of the
extent to which such financial performance goals have been achieved will be
made at such time as the Board approves such financial statements.
5.3 If performance criteria for a Participant are
achieved for a calendar quarter, the Company shall pay the Participant a bonus
equal to (a) one-half ( 1/2), times (b) the specific bonus percentage
applicable to the level of performance achieved, times (c) the Participant's
quarterly rate of base salary (computed based on the rate of salary in effect
at the end of the calendar quarter). The bonus shall be paid within fifteen
(15) days following the Board's approval of the financial statements for the
calendar quarter. A Participant will be entitled to a bonus for a calendar
quarter only if he or she was employed by the Company during the entire
calendar quarter.
<PAGE> 4
5.4 Following the end of each Plan Year, the Committee
will determine any final bonuses due under the Plan. If performance criteria
for a Participant are achieved for the Plan Year, the Company shall pay the
Participant a final bonus equal to (a) the specific bonus percentage applicable
to the level of performance achieved, times (b) the Participant's annual rate
of base salary (computed based on the rate of salary in effect at the end of
the Plan Year), which shall be reduced by the amount of any quarterly bonuses
paid to the Participant with respect to the Plan Year under Section 5.3. The
final bonus shall be paid within fifteen (15) days following completion of the
audit, and the Board's approval, of the Company's financial statements for the
Plan Year. If a Participant was not employed by the Company for an entire Plan
Year, any final bonus otherwise payable under this Section 5.4 shall be
prorated based on the number of full calendar quarters that he or she was
employed by the Company during the Plan Year.
5.5 A Participant will be entitled to a quarterly or
final bonus payment only if he or she is employed by the Company at the time
the Board approves the quarterly or annual financial statements, as the case
may be, on the basis of which achievement of financial performance goals for
the Company was determined.
6. ADMINISTRATION OF THE PLAN.
6.1 The Plan will be administered by the Committee. A
majority of the members of the Committee will constitute a quorum. All actions
of the Committee will require the affirmative vote of members who constitute a
majority of the quorum.
6.2 The Committee shall have the authority (a) to
administer the Plan in accordance with its express terms; (b) to resolve all
questions arising in connection with the administration, interpretation, and
application of the Plan; (c) to correct any defect, supply any information and
reconcile any inconsistency in such manner and to such extent as shall be
deemed necessary or advisable to carry out the purpose of the Plan; (d) to
prescribe, amend and rescind rules and regulations relating to the
administration of the Plan; and (e) to make all other determinations necessary
or advisable for administration of the Plan. All determinations on all matters
referred to in this Section 6.2, and on all other matters where the Committee
is granted authority under the Plan to exercise discretion or make
determinations, shall be made by the Committee, in its sole and absolute
discretion, and shall, in the absence of bad faith, be final, conclusive and
binding upon the Participants and all other persons having any interest in the
Plan. The Committee will have all powers necessary or appropriate to accomplish
its duties under the Plan.
7. NONTRANSFERABILITY. No Participant or other person shall have
any right to sell, assign, pledge or otherwise transfer any rights that the
Participant or the other person may have under the Plan, and any attempt to do
so shall be void.
8. TERM OF PLAN; AMENDMENT AND TERMINATION.
8.1 The initial term of the Plan will be the Plan Year
ending December 31, 1996. The Plan will continue from Plan Year to Plan Year
thereafter until terminated by the Board.
8.2 The Board may at any time terminate the Plan or amend
its terms; PROVIDED, HOWEVER, that termination or amendment of the Plan shall
not alter or impair any rights or obligations with respect to any bonuses for a
Plan Year based on performance criteria that have already been communicated to
Participants.
9. MISCELLANEOUS PROVISIONS.
9.1 Nothing contained in the Plan shall obligate the
Company to employ a Participant for any period, nor shall the Plan interfere in
any way with the right of the Company to reduce a Participant's compensation.
9.2 Subject to Section 7, the provisions of the Plan
shall inure to the benefit of and be binding upon each Participant and his or
her heirs, successors and assigns.
9.3 Where the context so requires, references in the Plan
to the singular shall include the plural, and vice versa, and references to a
particular gender shall include either or both additional genders.
9.4 The Plan shall be construed, administered and
enforced in accordance with the laws of the United States, to the extent
applicable, as well as the laws of the State of Washington.
2
<PAGE> 5
05-13-1996 BUSINESS LOAN AGREEMENT
LOAN NO. 391-174 (CONTINUED) PAGE 2
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SECURITY INTEREST. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment intended as
a security device, or any other security or lien interest whatsoever,
whether created by law, contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
SUBORDINATED DEBT. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written agreement to
indebtedness owed by Borrower to Lender in form and substance acceptable to
Lender.
TANGIBLE NET WORTH. The words "Tangible Net Worth" mean Borrower's total
assets excluding all intangible assets (i.e., goodwill, trademarks, patents,
copyrights, organizational expenses, and similar intangible items, but
including leaseholds and leasehold improvements) less total Debt.
WORKING CAPITAL. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current liabilities.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the Initial
Loan Advance and each subsequent Loan Advance under this Agreement shall be
subject to the fulfillment to Lender's satisfaction of all of the conditions set
forth in this Agreement and in the Related Documents.
LOAN DOCUMENTS. Borrower shall provide to Lender in form satisfactory to
Lender the following documents for the Loan: (a) the Note, (b) Security
Agreements granting to Lender security interests in the Collateral, (c)
Financing Statements perfecting Lender's Security Interests; (d) evidence of
insurance as required below; and (e) any other documents required under this
Agreement or by Lender or its counsel, including without limitation any
guaranties described below.
BORROWER'S AUTHORIZATION. Borrower shall have provided in form and
substance satisfactory to Lender properly certified resolutions, duly
authorizing the execution and delivery of this Agreement, the Note and the
Related Documents, and such other authorizations and other documents and
instruments as Lender or its counsel, in their sole discretion, may require.
PAYMENT OF FEES AND EXPENSES. Borrower shall have paid to Lender all fees,
charges, and other expenses which are then due and payable as specified in
this Agreement or any Related Documents.
REPRESENTATIONS AND WARRANTIES. The representations and warranties set
forth in this Agreement, in the Related Documents, and in any document or
certificate delivered to Lender under this Agreement are true and correct.
NO EVENT OF DEFAULT. There shall not exist at the time of any advance a
condition which would constitute an Event of Default under this Agreement.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
ORGANIZATION. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the state of Borrower's
incorporation and is validly existing and in good standing in all states in
which Borrower is doing business. Borrower has the full power and authority
to own its properties and to transact the businesses in which it is
presently engaged or presently proposes to engage. Borrower also is duly
qualified as a foreign corporation and is in good standing in all states in
which the failure to so qualify would have a material adverse effect on its
businesses or financial condition.
AUTHORIZATION. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower; do not require the consent or approval of any
other person, regulatory authority or governmental body; and do not conflict
with, result in a violation of, or constitute a default under (a) any
provision of its articles of incorporation or organization, or bylaws, or
any agreement or other instrument binding upon Borrower or (b) any law,
governmental regulation, court decree, or order applicable to Borrower.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the date of the statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material contingent
obligations except as disclosed in such financial statements.
LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.
PROPERTIES. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender and as
accepted by Lender, and except for property tax liens for taxes not
presently due and payable, Borrower owns and has good title to all of
Borrower's properties free and clear of all Security Interests, and has not
executed any security documents or financing statements relating to such
properties. All of Borrower's properties are titled in Borrower's legal
name, and Borrower has not used, or filed a financing statement under, any
other name for at least the last five (5) years.
HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA," "SARA," the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or
other applicable state or Federal laws, rules, or regulations adopted
pursuant to any of the foregoing. Except as disclosed to and acknowledged by
Lender in writing, Borrower represents and warrants that: (a) During the
period of Borrower's ownership of the properties, there has been no use,
generation, manufacture, storage, treatment, disposal, release or threatened
release of any hazardous waste or substance by any person on, under, about
or from any of the properties. (b) Borrower has no knowledge of, or reason
to believe that there has been (i) any use, generation, manufacture,
storage, treatment, disposal, release, or threatened release of any
hazardous waste or substance on, under, about or from the properties by any
prior owners or occupants of any of the properties, or (ii) any actual or
threatened litigation or claims of any kind by any person relating to such
matters. (c) Neither Borrower nor any tenant, contractor, agent or other
authorized user of any of the properties shall use, generate, manufacture,
store, treat, dispose of, or release any hazardous waste or substance on,
under, about or from any of the properties; and any such activity shall be
conducted in compliance with all applicable federal, state, and local laws,
regulations, and ordinances, including without limitation those laws,
regulations and ordinances described above. Borrower authorizes Lender and
its agents to enter upon the properties to make such inspections and tests
as Lender may deem appropriate to determine compliance of the properties
with this section of the Agreement. Any inspections or tests made by Lender
shall be at Borrower's expense and for Lender's purposes only and shall not
be construed to create any responsibility or liability on the part of Lender
to Borrower or to any other person. The representations and warranties
contained herein are based on Borrower's due diligence in investigating the
properties for hazardous waste and hazardous substances. Borrower hereby (a)
releases and waives any future claims against Lender for indemnity or
contribution in the event Borrower becomes liable for cleanup or other costs
under any such laws, and (b) agrees to indemnify and hold harmless Lender
against any and all claims, losses, liabilities, damages, penalties, and
expenses which Lender may directly or indirectly sustain or suffer resulting
from a breach of this section of the Agreement or as a consequence of any
use, generation, manufacture, storage, disposal, release or threatened
release occurring prior to Borrower's ownership or interest in the
properties, whether or not the same was or should have been known to
Borrower. The provisions of this section of the Agreement, including the
obligation to indemnify, shall survive the payment of the Indebtedness and
the termination or expiration of this Agreement and shall not be affected by
Lender's acquisition of any interest in any of the properties, whether by
foreclosure or otherwise.
<PAGE> 6
05-13-1996 BUSINESS LOAN AGREEMENT
LOAN NO. 391-174 (CONTINUED) PAGE 3
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- --------------------------------------------------------------------------------
LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which
may materially adversely affect Borrower's financial condition or
properties, other than litigation, claims, or other events, if any, that
have been disclosed to and acknowledged by Lender in writing.
TAXES. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith
in the ordinary course of business and for which adequate reserves have
been provided.
LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or
permitted the filing or attachment of any Security Interests on or
affecting any of the Collateral directly or indirectly securing repayment
of Borrower's Loan and Note, that would be prior or that may in any way be
superior to Lender's Security Interests and rights in and to such
Collateral.
BINDING EFFECT. This Agreement, the Note, all Security Agreements directly
or indirectly securing repayment of Borrower's Loan and Note and all of the
Related Documents are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns, and are legally enforceable in
accordance with their respective terms.
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower
may have any liability complies in all material respects with all
applicable requirements of law and regulations, and (i) no Reportable Event
nor Prohibited Transaction (as defined in ERISA) has occurred with respect
to any such plan, (ii) Borrower has not withdrawn from any such plan or
initiated steps to do so, (iii) no steps have been taken to terminate any
such plan, and (iv) there are no unfunded liabilities other than those
previously disclosed to Lender in writing.
LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business,
or Borrower's Chief executive office, if Borrower has more than one place
of business, is located at 15815 SE 37TH SUITE B, BELLEVUE, WA 98006.
Unless Borrower has designated otherwise in writing this location is also
the office or offices where Borrower keeps its records concerning the
Collateral.
INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be, true and accurate in every material respect on the date as of which
such information is dated or certified, and none of such information is or
will be incomplete by omitting to state any material fact necessary to make
such information not misleading.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and
agrees that Lender, without independent investigation, is relying upon the
above representations and warranties in extending Loan Advances to
Borrower. Borrower further agrees that the foregoing representations and
warranties shall be continuing in nature and shall remain in full force and
effect until such time as Borrower's Indebtedness shall be paid in full, or
until this Agreement shall be terminated in the manner provided above,
whichever is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
LITIGATION. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings or
similar actions affecting Borrower or any Guarantor which could materially
affect the financial condition of Borrower of the financial condition of any
Guarantor.
FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis, and
permit Lender to examine and audit Borrower's books and records at all
reasonable times.
FINANCIAL STATEMENTS. Furnish Lender with, as soon as available, but in no
event later than one hundred twenty (120) days after the end of each fiscal
year, Borrower's balance sheet and income statement for the year ended,
audited by a certified public accountant satisfactory to Lender, and, as
soon as available, but in no event later than thirty (30) days after the end
of each month, Borrower's balance sheet and profit and loss statement for
the period ended, prepared and certified as correct to the best knowledge
and belief by Borrower's chief financial officer or other officer or person
acceptable to Lender. All financial reports required to be provided under
this Agreement shall be prepared in accordance with generally accepted
accounting principles, applied on a consistent basis, and certified by
Borrower as being true and correct.
ADDITIONAL INFORMATION. Furnish such additional information and statements,
lists of assets and liabilities, agings of receivables and payables,
inventory schedules, budgets, forecasts, tax returns, and other reports with
respect to Borrower's financial condition and business operations as Lender
may request from time to time.
FINANCIAL COVENANTS AND RATIOS. Comply with the following covenants and
ratios: Except as provided above, all computations made to determine
compliance with the requirements contained in this paragraph shall be made
in accordance with generally accepted accounting principles, applied on a
consistent basis, and certified by Borrower as being true and correct.
INSURANCE. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon request
of Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without at
least ten (10) days' prior written notice to Lender. Each insurance policy
also shall include an endorsement providing that coverage in favor of Lender
will not be impaired in any way by any act, omission or default of Borrower
or any other person. In connection with all policies covering assets in
which Lender holds or is offered a security interest for the Loans, Borrower
will provide Lender with such loss payable or other endorsements as Lender
may require.
INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the following: (a) the name
of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the
properties insured; (e) the then current property values on the basis of
which insurance has been obtained, and the manner of determining those
values; and (f) the expiration date of the policy. In addition, upon request
of Lender (however not more often than annually), Borrower will have an
independent appraiser satisfactory to Lender determine, as applicable, the
actual cash value or replacement cost of any Collateral. The cost of such
appraisal shall be paid by Borrower.
<PAGE> 7
05-13-1996 BUSINESS LOAN AGREEMENT
LOAN NO. 391-174 (CONTINUED) PAGE 4
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GUARANTIES. Prior to disbursement of any Loan proceeds, furnish executed
guaranties of the Loan in favor of Lender, on Lender's forms, and in the
amounts and by the guarantors named below:
<TABLE>
<CAPTION>
GUARANTORS AMOUNTS
-------------------------------------------------- -------------
<S> <C>
FIROZ LALJI $2,500,000.00
STEVE SARICH $ 625,000.00
PAUL MONSON $ 625,000.00
FIROZ LALJI $4,000,000.00
STEVE SARICH $1,025,000.00
PAUL MONSON $1,025,000.00
SADRU KABANI $4,000,000.00
SADRU KABANI $2,500,000.00
</TABLE>
OTHER AGREEMENTS. Comply with all terms and conditions of all other
agreements, whether now or hereinafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
TAXES, CHARGES AND LIENS. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all assessments,
taxes, governmental charges, levies and liens, of every kind and nature,
imposed upon Borrower or its properties, income, or profits, prior to the
date on which penalties would attach, and all lawful claims that, if unpaid,
might become a lien or charge upon any of Borrower's properties, income, or
profits. Provided however, Borrower will not be required to pay and
discharge any such assessment, tax, charge, levy, lien or claim so long as
(a) the legality of the same shall be contested in good faith by appropriate
proceedings and (b) Borrower shall have established on its books adequate
reserves with respect to such contested assessment, tax, charge, levy, lien,
or claim in accordance with generally accepted accounting practices.
Borrower, upon demand of Lender, will furnish to Lender evidence of payment
of the assessments, taxes, charges, levies, liens and claims and will
authorize the appropriate governmental official to deliver to Lender at any
time a written statement of any assessments, taxes, charges, levies, liens
and claims against Borrower's properties, income, or profits.
PERFORMANCE. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely manner,
and promptly notify Lender if Borrower learns of the occurrence of any event
which constitutes an Event of Default under this Agreement or under any of
the Related Documents.
OPERATIONS. Maintain executive and management personnel with substantially
the same qualifications and experience as the present executive and
management personnel; provide written notice to Lender of any change in
executive and management personnel; conduct its business affairs in a
reasonable and prudent manner and in compliance with all applicable federal,
state and municipal laws, ordinances, rules and regulations respecting its
properties, charters, businesses and operations, including without
limitation, compliance with the Americans With Disabilities Act and with all
minimum funding standards and other requirements of ERISA and other laws
applicable to Borrower's employee benefit plans.
INSPECTION. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and records.
If Borrower now or at any time hereafter maintains any records (including
without limitation computer generated records and computer software programs
for the generation of such records) in the possession of a third party,
Borrower, upon request of Lender, shall notify such party to permit Lender
free access to such records at all reasonable times and to provide Lender
with copies of any records it may request, all at Borrower's expense.
COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender
QUARTERLY and at the time of each disbursement of Loan proceeds with a
certificate executed by Borrower's chief financial officer, or other officer
or person acceptable to Lender, certifying that the representations and
warranties set forth in this Agreement are true and correct as of the date
of the certificate and further certifying that, as of the date of the
certificate, no Event of Default exists under this Agreement.
ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects
with all environmental protection federal, state and local laws, statutes,
regulations and ordinances; not cause or permit to exist, as a result of an
intentional or unintentional action or omission on its part or on the part
of any third party, on property owned and/or occupied by Borrower, any
environmental activity where damage may result to the environment, unless
such environmental activity is pursuant to and in compliance with the
conditions of a permit issued by the appropriate federal, state or local
governmental authorities; shall furnish to Lender promptly and in any event
within thirty (30) days after receipt thereof a copy of any notice, summons,
lien, citation, directive, letter or other communication from any
governmental agency or instrumentality concerning any intentional or
unintentional action or omission on Borrower's part in connection with any
environmental activity whether or not there is damage to the environment
and/or other natural resources.
ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing statements,
instruments, documents and other agreements as Lender or its attorneys may
reasonably request to evidence and secure the Loans and to perfect all
Security Interests.
RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law,
rule, regulation or guideline, or the interpretation or application of any
thereof by any court or administrative or governmental authority (including any
request or policy not having the force of law) shall impose, modify or make
applicable any taxes (except U.S. federal, state or local income or franchise
taxes imposed on Lender), reserve requirements, capital adequacy requirements or
other obligations which would (a) increase the cost to Lender for extending or
maintaining the credit facilities to which this Agreement relates, (b) reduce
the amounts payable to Lender under this Agreement or the Related Documents, or
(c) reduce the rate of return on Lender's capital as a consequence of Lender's
obligations with respect to the credit facilities to which this Agreement
relates, then Borrower agrees to pay Lender such additional amounts as will
compensate Lender therefor, within five (5) days after Lender's written demand
for such payment, which demand shall be accompanied by an explanation of such
imposition or charge and a calculation in reasonable detail of the additional
amounts payable by Borrower, which explanation and calculations shall be
conclusive in the absence of manifest error.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
CAPITAL EXPENDITURES: Make or contract to make capital expenditures,
including leasehold improvements, in any fiscal year in excess of
$6,000,000.00 or incur liability for rentals of property (including both
real and personal property) in an amount which, together with capital
expenditures, shall in any fiscal year exceed such sum.
<PAGE> 8
05-13-1996 BUSINESS LOAN AGREEMENT
LOAN NO. 391-174 (CONTINUED) PAGE 5
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INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume indebtedness for borrowed money,
including capital leases, (b) except as allowed as a Permitted Lien, sell,
transfer, mortgage, assign, pledge, lease, grant a security interest in, or
encumber any of Borrower's assets, or (c) sell with recourse any of
Borrower's accounts, except to Lender.
CONTINUITY OF OPERATIONS. (a) Engage in any business activities
substantially different than those in which Borrower is presently engaged,
(b) cease operations, liquidate, merge, transfer, acquire or consolidate
with any other entity, change ownership, change its name, dissolve or
transfer or sell Collateral out of the ordinary course of business, (c) pay
any dividends on Borrower's stock (other than dividends payable in its
stock), provided, however that notwithstanding the foregoing, but only so
long as no Event of Default has occurred and is continuing or would result
from the payment of dividends, if Borrower is a "Subchapter S Corporation"
(as defined in the Internal Revenue Code of 1986, as amended), Borrower may
pay cash dividends on its stock to its shareholders from time to time in
amounts necessary to enable the shareholders to pay income taxes and make
estimated income tax payments to satisfy their liabilities under federal
and state law which arise solely from their status as Shareholders of a
Subchapter S Corporation because of their ownership of shares of stock of
Borrower, or (d) purchase or retire any of Borrower's outstanding shares or
alter or amend Borrower's capital structure.
LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money
or assets, (b) purchase, create or acquire any interest in any other
enterprise or entity, or (c) incur any obligation as surety or guarantor
other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any
other loan with Lender; or (e) Lender in good faith deems itself insecure, even
though no Event of Default shall have occurred.
ACCESS LAWS. Without limiting the generality of any provision of this agreement
requiring Borrower to comply with applicable laws, rules, and regulations,
Borrower agrees that it will at all times comply with applicable laws relating
to disabled access including, but not limited to, all applicable titles of the
Americans with Disabilities Act of 1990.
STATUTE OF FRAUDS DISCLOSURE. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY,
EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT
ENFORCEABLE UNDER WASHINGTON LAW.
OTHERS. MAX INVESTMENT IN SUBSIDIARIES IN FISCAL YEAR 1996 $2,500,000.00.
TANGIBLE NET WORTH. MINIMUM NET WORTH: JUNE 30, 1996 TO SEPTEMBER 30, 1996
$15,000,000.00. RATIO OF TOTAL LIABILITIES TO TANGIBLE NET WORTH: 6.5 TO 1.00;
MINIMUM NET WORTH: DECEMBER 31, 1996 $18,000,000.00, RATIO OF TOTAL LIABILITIES
TO TANGIBLE NET WORTH: 4.5 TO 1.00.
WORKING CAPITAL. MINIMUM WORKING CAPITAL: JUNE 30, 1996 TO SEPTEMBER 30, 1996,
$8,000,000.00; MINIMUM WORKING CAPITAL: DECEMBER 31, 1996, $10,000,000.00.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on the indebtedness against
any and all such accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due
on the Loans.
OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition contained
in this Agreement or in any of the Related Documents, or failure of Borrower
to comply with or to perform any other term, obligation, covenant or
condition contained in any other agreement between Lender and Borrower.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's or any
Grantor's ability to repay the Loans or perform their respective obligations
under this Agreement or any of the Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at any
time thereafter.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any Security
Agreement to create a valid and perfected Security Interest) at any time and
for any reason.
INSOLVENCY. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any creditor
of any Grantor against any collateral securing the Indebtedness, or by any
governmental agency. This includes a garnishment, attachment, or levy on or
of any of Borrower's deposit accounts with Lender.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes
incompetent, or revokes or disputes the validity of, or liability under, any
Guaranty of the Indebtedness.
CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%)
or more of the common stock of Borrower.
ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
INSECURITY. Lender, in good faith, deems itself insecure.
<PAGE> 9
05-13-1996 BUSINESS LOAN AGREEMENT
LOAN NO. 391-174 (CONTINUED) PAGE 6
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except
where otherwise provided in this Agreement or the Related Documents, all
commitments and obligations of Lender under this Agreement or the Related
Documents or any other agreement immediately will terminate (including any
obligation to make Loan Advances or disbursements), and, at Lender's option, all
Indebtedness immediately will become due and payable, all without notice of any
kind to Borrower, except that in the case of an Event of Default of the type
described in the "Insolvency" subsection above, such acceleration shall be
automatic and not optional. In addition, Lender shall have all the rights and
remedies provided in the Related Documents or available at law, in equity, or
otherwise. Except as may be prohibited by applicable law, all of Lender's rights
and remedies shall be cumulative and may be exercised singularly or
concurrently. Election by Lender to pursue any remedy shall not exclude pursuit
of any other remedy, and an election to make expenditures or to take action to
perform an obligation of Borrower or of any Grantor shall not affect Lender's
right to declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the party
or parties sought to be charged or bound by the alteration or amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by
Lender in the State of Washington. If there is a lawsuit, Borrower agrees
upon Lender's request to submit to the jurisdiction of the courts of King
County, the State of Washington. Subject to the provisions on arbitration,
this Agreement shall be governed by and construed in accordance with the
laws of the State of Washington.
ARBITRATION. Lender and Borrower agree that all disputes, claims and
controversies between them, whether individual, joint, or class in nature,
arising from this Agreement or otherwise, including without limitation
contract and tort disputes, shall be arbitrated pursuant to the Rules of the
American Arbitration Association, upon request of either party. No act to
take or dispose of any Collateral shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. This
includes, without limitation, obtaining injunctive relief or a temporary
restraining order; invoking a power of sale under any deed of trust or
mortgage; obtaining a writ of attachment or imposition of a receiver; or
exercising any rights relating to personal property, including taking or
disposing of such property with or without judicial process pursuant to
Article 9 of the Uniform Commercial Code. Any disputes, claims, or
controversies concerning the lawfulness or reasonableness of any act, or
exercise of any right, concerning any Collateral, including any claim to
rescind, reform, or otherwise modify any agreement relating to the
Collateral, shall also be arbitrated, provided however that no arbitrator
shall have the right or the power to enjoin or restrain any act of any
party. Judgment upon any award rendered by any arbitrator may be entered in
any court having jurisdiction. Nothing in this Agreement shall preclude any
party from seeking equitable relief from a court of competent jurisdiction.
The statute of limitations, estoppel, waiver, laches, and similar doctrine
which would otherwise be applicable in an action brought by a party shall be
applicable in any arbitration proceeding, and the commencement of an
arbitration proceeding shall be deemed the commencement of an action for
these purposes. The Federal Arbitration Act shall apply to the construction,
interpretation, and enforcement of this arbitration provision.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower under
this Agreement shall be joint and several, and all references to Borrower
shall mean each and every Borrower. This means that each of the Borrowers
signing below is responsible for all obligations in this Agreement.
CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation whatsoever,
to any one or more purchasers, or potential purchasers, any information or
knowledge Lender may have about Borrower or about any other matter relating
to the Loan, and Borrower hereby waives any rights to privacy it may have
with respect to such matters. Borrower additionally waives any and all
notices of sale of participation interests, as well as all notices of any
repurchase of such participation interests. Borrower also agrees that the
purchasers of any such participation interests will be considered as the
absolute owners of such interests in the Loans and will have all the rights
granted under the participation agreement or agreements governing the sale
of such participation interests. Borrower further waives all rights of
offset or counterclaim that it may have now or later against Lender or
against any purchaser of such a participation interest and unconditionally
agrees that either Lender or such purchaser may enforce Borrower's
obligation under the Loans irrespective of the failure or insolvency of any
holder of any interest in the Loans. Borrower further agrees that the
purchaser of any such participation interests may enforce its interests
irrespective of any personal claims or defenses that Borrower may have
against Lender.
COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification and
collection of this Agreement or in connection with the Loans made pursuant
to this Agreement. Lender may pay someone else to help collect the Loans and
to enforce this Agreement, and Borrower will pay that amount. This includes,
subject to any limits under applicable law, Lender's attorneys' fees and
Lender's legal expenses, whether or not there is a lawsuit, including
attorneys' fees for bankruptcy proceedings (including efforts to modify or
vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. Borrower also will pay any court costs,
in addition to all other sums provided by laws.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile, and shall be effective when
actually delivered or when deposited with a nationally recognized overnight
courier or deposited in the United States mail, first class, postage
prepaid, addressed to the party to whom the notice is to be given at the
address shown above. Any party may change its address for notices under this
Agreement by giving formal written notice to the other parties, specifying
that the purpose of the notice is to change the party's address. To the
extent permitted by applicable law, if there is more than one Borrower,
notice to any Borrower will constitute notice to all Borrowers. For notice
purposes, Borrower will keep Lender informed at all three of Borrower's
current address(es).
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of this
Agreement in all other respects shall remain valid and enforceable.
SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any
provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower" as
used herein shall include all subsidiaries and affiliates of Borrower.
Notwithstanding the foregoing however, under no circumstances shall this
Agreement be construed to require Lender to make any Loan or other financial
accommodation to any subsidiary or affiliate of Borrower.
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure to
the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
SURVIVAL. All warranties, representations, and covenants made by Borrower
in this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery
to Lender of the Related Documents, regardless of any Investigation made by
Lender or on Lender's behalf.
<PAGE> 10
05-13-1996 BUSINESS LOAN AGREEMENT
LOAN NO. 391-174 (CONTINUED) PAGE 7
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Borrower, or between Lender and any
Grantor, shall constitute a waiver of any of Lender's rights or of any
obligations of Borrower or of any Grantor as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the
granting of such consent by Lender in any instance shall not constitute
continuing consent in subsequent instances where such consent is required,
and in all cases such consent may be granted or withheld in the sole
discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF MAY
13, 1996.
BORROWER:
MULTIPLE ZONES INTERNATIONAL, INC.
X Peter Biere SVP Finance
Authorized Officer
LENDER:
U.S. BANK OF WASHINGTON, NATIONAL ASSOCIATION
By T. E. Ashbrenner SVP Finance
Authorized Officer
<PAGE> 1
EXHIBIT 10.29
PROMISSORY NOTE
<TABLE>
<CAPTION>
PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL ACCOUNT OFFICER INITIALS
- -------------- ---------- -------- -------- ---- ---------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$20,000,000.00 05-13-1996 12-31-96 391-75 365 6057628480 39159
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
<TABLE>
<S> <C>
BORROWER: MULTIPLE ZONES INTERNATIONAL, INC.
15815 SE 37TH SUITE B
BELLEVUE, WA 98006
<CAPTION>
BORROWER: MULTIPLE ZONES INTERNATIONAL, INC. LENDER: U.S. BANK OF WASHINGTON, NATIONAL ASSOCIATION
BELLEVUE, WA 98006 C/O 1420 5TH AVE.
<CAPTION>
15815 SE 37TH SUITE B EAST KING COUNTY CORPORATE BANKING
</TABLE>
PRINCIPAL AMOUNT: $20,000,000.00 INITIAL RATE: 9.000% DATE OF NOTE: MAY 13,
1996
PROMISE TO PAY. MULTIPLE ZONES INTERNATIONAL, INC. ("Borrower") promises to pay
to U.S. BANK OF WASHINGTON, NATIONAL ASSOCIATION ("Lender"), or order, in lawful
money of the United States of America, the principal amount of Twenty Million &
00/100 Dollars ($20,000,000.00) or so much as may be outstanding, together with
interest on the unpaid outstanding principal balance of each advance. Interest
shall be calculated from the date of each advance until repayment of each
advance.
PAYMENT. Borrower will pay this loan on demand, or if no demand is made, in one
payment of all outstanding principal plus all accrued unpaid interest on June
30, 1997. In addition, Borrower will pay regular monthly payments of accrued
unpaid interest beginning May 31, 1996, and all subsequent interest payments are
due on the same day of each month after that. Interest on this Note is computed
on a 365/360 simple interest basis; that is, by applying the ratio of the annual
interest rate over a year of 360 days, multiplied by the outstanding principle
balance, multiplied by the actual number of days the principal balance is
outstanding. Borrower will pay Lender at Lender's address shown above or at such
other place as Lender may designate in writing. Unless otherwise agreed or
required by applicable law, payments will be applied first to accrued unpaid
interest, then to principal, and any remaining amount to any unpaid collection
costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an index which is the LENDER'S PRIME RATE.
THIS IS THE RATE OF INTEREST WHICH LENDER FROM TIME TO TIME ESTABLISHES AS ITS
PRIME RATE AND IS NOT, FOR EXAMPLE, THE LOWEST RATE OF INTEREST WHICH LENDER
COLLECTS FROM ANY BORROWER OR CLASS OF BORROWERS (the "Index"). The interest
rate shall be adjusted without notice effective on the day Bank's prime rate
changes. Lender will tell Borrower the current index rate upon Borrower's
request. Borrower understands that Lender may make loans based on other rates as
well. The interest rate change will not occur more often than each DAY. The
index currently is 8.250% per annum. The interest rate to be applied to the
unpaid principal balance of this Note will be at a rate of 0.750 percentage
points over the Index, resulting in an initial rate of 9.000% per annum. NOTICE:
Under no circumstances will the interest rate on this Note be more than the
maximum rate allowed by applicable law.
PREPAYMENT. Borrower agrees that all loans fees and other prepaid finance
charges are earned fully as of the date of the loan and will not be subject to
refund upon early payment (whether voluntary or as a result of default), except
as otherwise required by law. Except for the foregoing, Borrower may pay without
penalty all or a portion of the amount owed earlier than it is due. Early
payments will not, unless agreed to by Lender in writing, relieve Borrower of
Borrower's obligation to continue to make payments of accrued unpaid interest.
Rather, they will reduce the principal balance due.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries
to take any of Borrower's property on or in which Lender has a lien or security
interest. This includes a garnishment of any of Borrower's accounts with Lender.
(g) Any guarantor dies or any of the other events described in this default
section occurs with respect to any guarantor of this Note. (h) A material
adverse change occurs in Borrower's financial condition, or Lender believes the
prospect of payment or performance of the indebtedness is impaired. (i) Lender
in good faith deems itself insecure.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower may pay that amount. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the variable interest rate on this Note to 5.750
percentage points over the Index. The interest rate will not exceed the maximum
rate permitted by applicable law. Lender may hire or pay someone else to help
collect this Note if Borrower does not pay. Borrower also will pay Lender that
amount. This includes, subject to any limits under applicable law, Lender's
attorneys' fees and Lender's legal expenses whether or not there is a lawsuit,
including attorneys' fees and legal expenses for bankruptcy proceedings
(including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection services. If not
prohibited by applicable law, Borrower also will pay any court costs, in
addition to all other sums provided by law. THIS NOTE HAS BEEN DELIVERED TO
LENDER AND ACCEPTED BY LENDER IN THE STATE OF WASHINGTON. IF THERE IS A LAWSUIT,
BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION IN THE
COURTS OF KING COUNTY, THE STATE OF WASHINGTON. SUBJECT TO THE PROVISIONS ON
ARBITRATION, THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF WASHINGTON.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Note against any and
all such accounts.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note may be requested either orally or in writing by Borrower or by an
authorized person. Lender may, but need not, require that all oral requests be
confirmed in writing. All communications, instructions, or directions by
telephone or otherwise to Lender are to be directed to Lender's office shown
above. The following party or parties are authorized to request advances under
the line of credit until Lender receives from Borrower at Lender's address shown
above written notice of revocation of their authority: SADRU KABANI,
PRESIDENT/C.E.O.; AND PETER BIERE, FINANCIAL CONTROLLER. Borrower agrees to be
liable for all sums either: (a) advanced in accordance with the instructions of
an authorized person or (b) credited to any of Borrower's accounts with Lender.
The unpaid principal balance owing on this Note at any time may be evidenced by
endorsements on this Note or by Lender's internal records, including daily
computer print-outs. Lender will have no obligation to advance funds under this
Note if: (a) Borrower or any guarantor is in default under the terms of the Note
or any agreement that Borrower or any guarantor has with Lender, including any
agreement made in connection with the signing of this Note; (b) Borrower or any
guarantor ceases doing business or is insolvent; (c) any guarantor seeks, claims
or otherwise attempts to limit, modify or revoke such guarantor's guarantee of
the Note or any other loan with Lender; (d) Borrower has applied funds provided
pursuant to this Note for purposes other than those authorized by Lender; or (e)
Lender in good faith deems itself insecure under this Note or any other
agreement between Lender and Borrower.
<PAGE> 2
05-13-1996
LOAN NO. 391-75 PROMISSORY NOTE (CONTINUED) PAGE 2
ARBITRATION. LENDER AND BORROWER AGREE THAT ALL DISPUTES, CLAIMS AND
CONTROVERSIES BETWEEN THEM, WHETHER INDIVIDUAL, JOINT, OR CLASS IN NATURE,
ARISING FROM THIS NOTE OR OTHERWISE, INCLUDING WITHOUT LIMITATION CONTRACT AND
TORT DISPUTES, SHALL BE ARBITRATED PURSUANT TO THE RULES OF THE AMERICAN
ARBITRATION ASSOCIATION, UPON REQUEST OF EITHER PARTY. No act to take or dispose
of any collateral securing this Note shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. This
includes, without limitation, obtaining injunctive relief or a temporary
restraining order; invoking a power of sale under any deed of trust or mortgage;
obtaining a writ of attachment or imposition of a receiver; or exercising any
rights relating to personal property, including taking or disposing of such
property with or without judicial process pursuant to Article 9 of the Uniform
Commercial Code. Any disputes, claims, or controversies concerning the
lawfulness or reasonableness of any act, or exercise of any right, concerning
any collateral securing this Note, including any claim to rescind, reform, or
otherwise modify any agreement relating to the collateral securing this Note,
shall also be arbitrated, provided however that no arbitrator shall have the
right or the power to enjoin or restrain any act of any party. Judgment upon any
award rendered by any arbitrator may be entered in any court having
jurisdiction. Nothing in this Note shall preclude any party from seeking
equitable relief from a court of competent jurisdiction. The statute of
limitations, estoppel, waiver, laches, and similar doctrines which would
otherwise be applicable in an action brought by a party shall be applicable in
any arbitration proceeding, and the commencement of an arbitration proceeding
shall be deemed the commencement of an action for these purposes. The Federal
Arbitration Act shall apply to the construction, interpretation, and enforcement
of this arbitration provision.
PAYMENT BY AUTOMATIC DEDUCTION. Borrower hereby authorizes Lender to
automatically deduct the amount of all principal and/or interest payments on
this Note from Borrower's account number 3197-000833 with Lender or such other
account as Borrower may designate in writing. If there are insufficient funds in
the account to pay the automatic deduction in full, Lender may allow the account
to become overdrawn, or Lender may reverse the automatic deduction. Borrower
will pay all fees on the account which result from the automatic deductions,
including any overdraft/NSF charges. If for any reason Lender does not charge
the account for a payment, or if an automatic payment is reversed, the payment
is still due according to this Note. If the account is a Money Market Account,
the number of withdrawals from that account is limited as set out in the account
agreement. Lender may cancel the automatic deduction at any time in its
discretion.
LATE CHARGE. If a payment is 15 days or more past due, borrower will be charged
a late charge of 5% of the delinquent payment.
STATUTE OF FRAUDS DISCLOSURE. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN
MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT
ENFORCEABLE UNDER WASHINGTON LAW.
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific
default provisions or rights of Lender shall not preclude Lender's right to
declare payment of this Note on its demand. Lender may delay or forgo enforcing
any of its rights or remedies under this Note without losing them. Borrower and
any other person who signs, guarantees or endorses this Note, to the extent
allowed by law, waive presentment, demand for payment, protest and notice of
dishonor. Upon any change in the terms of this Note, and unless otherwise
expressly stated in writing, no party who signs this Note, whether as maker,
guarantor, accommodation maker or endorser, shall be released from liability.
All such parties agree that Lender may renew or extend (repeatedly and for any
length of time) this loan, or release any party or guarantor or collateral; or
impair, fail to realize upon or perfect Lender's security interest in the
collateral; and take any other action deemed necessary by Lender without the
consent of or notice to anyone. All such parties also agree that Lender may
modify this loan without the consent of or notice to anyone other than the party
with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
MULTIPLE ZONES INTERNATIONAL, INC.
X COPY
----------------------------------
AUTHORIZED OFFICER
LENDER:
U.S. BANK OF WASHINGTON, NATIONAL
ASSOCIATION
BY:
---------------------------------
AUTHORIZED OFFICER
<PAGE> 1
EXHIBIT 10.30
PROMISSORY NOTE
<TABLE>
<CAPTION>
PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL ACCOUNT OFFICER INITIALS
- ------------- ---------- -------- -------- ---- ---------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$5,000,000.00 05-13-1996 12-31-96 391-174 365 6057628480 39159
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
<TABLE>
<S> <C>
BORROWER: MULTIPLE ZONES INTERNATIONAL, INC.
15815 SE 37TH SUITE B
BELLEVUE, WA 98006
<CAPTION>
BORROWER: MULTIPLE ZONES INTERNATIONAL, INC. LENDER: U.S. BANK OF WASHINGTON, NATIONAL ASSOCIATION
BELLEVUE, WA 98006 C/O 1420 5TH AVE.
<CAPTION>
15815 SE 37TH SUITE B EAST KING COUNTY CORPORATE BANKING
</TABLE>
PRINCIPAL AMOUNT: $5,000,000.00 INITIAL RATE: 9.000% DATE OF NOTE: MAY 13,
1996
PROMISE TO PAY. MULTIPLE ZONES INTERNATIONAL, INC. ("Borrower") promises to pay
to U.S. BANK OF WASHINGTON, NATIONAL ASSOCIATION ("Lender"), or order, in lawful
money of the United States of America, the principal amount of Five Million &
00/100 Dollars ($5,000,000.00) or so much as may be outstanding, together with
interest on the unpaid outstanding principal balance of each advance. Interest
shall be calculated from the date of each advance until repayment of each
advance.
PAYMENT. Borrower will pay this loan on demand, or if no demand is made, in one
payment of all outstanding principal plus all accrued unpaid interest on
December 31, 1996. In addition, Borrower will pay regular monthly payments of
accrued unpaid interest beginning May 31, 1996, and all subsequent interest
payments are due on the same day of each month after that. Interest on this Note
is computed on a 365/360 simple interest basis; that is, by applying the ratio
of the annual interest rate over a year of 360 days, multiplied by the
outstanding principle balance, multiplied by the actual number of days the
principal balance is outstanding. Borrower will pay Lender at Lender's address
shown above or at such other place as Lender may designate in writing. Unless
otherwise agreed or required by applicable law, payments will be applied first
to accrued unpaid interest, then to principal, and any remaining amount to any
unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on charges in an index which is the LENDER'S PRIME RATE.
THIS IS THE RATE OF INTEREST WHICH LENDER FROM TIME TO TIME ESTABLISHES AS ITS
PRIME RATE AND IS NOT, FOR EXAMPLE, THE LOWEST RATE OF INTEREST WHICH LENDER
COLLECTS FROM ANY BORROWER OR CLASS OF BORROWERS (the "Index"). The interest
rate shall be adjusted without notice effective on the day Bank's prime rate
changes. Lender will tell Borrower the current index rate upon Borrower's
request. Borrower understands that Lender may make loans based on other rates as
well. The interest rate change will not occur more than each DAY. The index
currently is 8.250% per annum. The interest rate to be applied to the unpaid
principal balance of this Note will be at a rate of 0.750 percentage points over
the Index, resulting in an initial rate of 9.000% per annum. NOTICE: Under no
circumstances will the interest rate on this Note be more than the maximum rate
allowed by applicable law.
PREPAYMENT. Borrower agrees that all loans fees and other prepaid finance
charges are earned fully as of the date of the loan and will not be subject to
refund upon early payment (whether voluntary or as a result of default), except
as otherwise required by law. Except for the foregoing, Borrower may pay without
penalty all or a portion of the amount owed earlier than it is due. Early
payments will not, unless agreed to by Lender in writing, relieve Borrower of
Borrower's obligation to continue to make payments of accrued unpaid interest.
Rather, they will reduce the principal balance due.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries
to take any of Borrower's property on or in which Lender has a lien or security
interest. This includes a garnishment of any of Borrower's accounts with Lender.
(g) Any guarantor dies or any of the other events described in this default
section occurs with respect to any guarantor of this Note. (h) A material
adverse change occurs in Borrower's financial condition, or Lender believes the
prospect of payment or performance of the indebtedness is impaired. (i) Lender
in good faith deems itself insecure.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower may pay that amount. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the variable interest rate on this Note to 5.750
percentage points over the Index. The interest rate will not exceed the maximum
rate permitted by applicable law. Lender may hire or pay someone else to help
collect this Note if Borrower does not pay. Borrower also will pay Lender that
amount. This includes, subject to any limits under applicable law, Lender's
attorneys' fees and Lender's legal expenses whether or not there is a lawsuit,
including attorneys' fees and legal expenses for bankruptcy proceedings
(including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection services. If not
prohibited by applicable law, Borrower also will pay any court costs, in
addition to all other sums provided by law. THIS NOTE HAS BEEN DELIVERED TO
LENDER AND ACCEPTED BY LENDER IN THE STATE OF WASHINGTON. IF THERE IS A LAWSUIT,
BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION IN THE
COURTS OF KING COUNTY, THE STATE OF WASHINGTON. SUBJECT TO THE PROVISIONS ON
ARBITRATION, THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF WASHINGTON.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Note against any and
all such accounts.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note may be requested either orally or in writing by Borrower or by an
authorized person. Lender may, but need not, require that all oral requests be
confirmed in writing. All communications, instructions, or directions by
telephone or otherwise to Lender are to be directed to Lender's office shown
above. The following party or parties are authorized to request advances under
the line of credit until Lender receives from Borrower at Lender's address shown
above written notice of revocation of their authority: SADRU KABANI,
PRESIDENT/C.E.O.; AND PETER BIERE, FINANCIAL CONTROLLER. Borrower agrees to be
liable for all sums either: (a) advanced in accordance with the instructions of
an authorized person or (b) credited to any of Borrower's accounts with Lender.
The unpaid principal balance owing on this Note at any time may be evidenced by
endorsements on this Note or by Lender's internal records, including daily
computer print-outs. Lender will have no obligation to advance funds under this
Note if: (a) Borrower or any guarantor is in default under the terms of the Note
or any agreement that Borrower or any guarantor has with Lender, including any
agreement made in connection with the signing of this Note; (b) Borrower or any
guarantor ceases doing business or is insolvent; (c) any guarantor seeks, claims
or otherwise attempts to limit, modify or revoke such guarantor's guarantee of
the Note or any other loan with Lender; (d) Borrower has applied funds provided
pursuant to this Note for purposes other than those authorized by Lender; or (e)
Lender in good faith deems itself insecure under this Note or any other
agreement between Lender and Borrower.
<PAGE> 2
05-13-1996
LOAN NO. 391-174 PROMISSORY NOTE (CONTINUED) PAGE 2
ARBITRATION. LENDER AND BORROWER AGREE THAT ALL DISPUTES, CLAIMS AND
CONTROVERSIES BETWEEN THEM, WHETHER INDIVIDUAL, JOINT, OR CLASS IN NATURE,
ARISING FROM THIS NOTE OR OTHERWISE, INCLUDING WITHOUT LIMITATION CONTRACT AND
TORT DISPUTES, SHALL BE ARBITRATED PURSUANT TO THE RULES OF THE AMERICAN
ARBITRATION ASSOCIATION, UPON REQUEST OF EITHER PARTY. No act to take or dispose
of any collateral securing this Note shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. This
includes, without limitation, obtaining injunctive relief or a temporary
restraining order; invoking a power of sale under any deed of trust or mortgage;
obtaining a writ of attachment or imposition of a receiver; or exercising any
rights relating to personal property, including taking or disposing of such
property with or without judicial process pursuant to Article 9 of the Uniform
Commercial Code. Any disputes, claims, or controversies concerning the
lawfulness or reasonableness of any act, or exercise of any right, concerning
any collateral securing this Note, including any claim to rescind, reform, or
otherwise modify any agreement relating to the collateral securing this Note,
shall also be arbitrated, provided however that no arbitrator shall have the
right or the power to enjoin or restrain any act of any party. Judgment upon any
award rendered by any arbitrator may be entered in any court having
jurisdiction. Nothing in this Note shall preclude any party from seeking
equitable relief from a court of competent jurisdiction. The statute of
limitations, estoppel, waiver, laches, and similar doctrines which would
otherwise be applicable in an action brought by a party shall be applicable in
any arbitration proceeding, and the commencement of an arbitration proceeding
shall be deemed the commencement of an action for these purposes. The Federal
Arbitration Act shall apply to the construction, interpretation, and enforcement
of this arbitration provision.
PAYMENT BY AUTOMATIC DEDUCTION. Borrower hereby authorizes Lender to
automatically deduct the amount of all principal and/or interest payments on
this Note from Borrower's account number 3197-000833 with Lender or such other
account as Borrower may designate in writing. If there are insufficient funds in
the account to pay the automatic deduction in full, Lender may allow the account
to become overdrawn, or Lender may reverse the automatic deduction. Borrower
will pay all fees on the account which result from the automatic deductions,
including any overdraft/NSF charges. If for any reason Lender does not charge
the account for a payment, or if an automatic payment is reversed, the payment
is still due according to this Note. If the account is a Money Market Account,
the number of withdrawals from that account is limited as set out in the account
agreement. Lender may cancel the automatic deduction at any time in its
discretion.
LATE CHARGE. If a payment is 15 days or more past due, borrower will be charged
a late charge of 5% of the delinquent payment.
STATUTE OF FRAUDS DISCLOSURE. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN
MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT
ENFORCEABLE UNDER WASHINGTON LAW.
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific
default provisions or rights of Lender shall not preclude Lender's right to
declare payment of this Note on its demand. Lender may delay or forgo enforcing
any of its rights or remedies under this Note without losing them. Borrower and
any other person who signs, guarantees or endorses this Note, to the extent
allowed by law, waive presentment, demand for payment, protest and notice of
dishonor. Upon any change in the terms of this Note, and unless otherwise
expressly stated in writing, no party who signs this Note, whether as maker,
guarantor, accommodation maker or endorser, shall be released from liability.
All such parties agree that Lender may renew or extend (repeatedly and for any
length of time) this loan, or release any party or guarantor or collateral; or
impair, fail to realize upon or perfect Lender's security interest in the
collateral; and take any other action deemed necessary by Lender without the
consent of or notice to anyone. All such parties also agree that Lender may
modify this loan without the consent of or notice to anyone other than the party
with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
MULTIPLE ZONES INTERNATIONAL, INC.
X COPY
----------------------------------
AUTHORIZED OFFICER
LENDER:
U.S. BANK OF WASHINGTON, NATIONAL
ASSOCIATION
BY:
---------------------------------
AUTHORIZED OFFICER
<PAGE> 1
Exhibit 11.1
MULTIPLE ZONES INTERNATIONAL, INC.
COMPUTATION OF HISTORICAL PRIMARY EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
-----------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31, March 31, March 31,
1993 1994 1995 1995 1996
------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Net income $ 451,321 $ 412,153 $3,191,537 $ 233,607 $2,173,061
Adjustment to net income for accretion
of Series B Redeemable Convertible Preferred
Stock (153,088) (229,631)
----------- ----------- ---------- ---------- ----------
Net income applicable to common stock
equivalents $ 451,321 $ 412,153 $3,038,449 $ 233,607 $1,943,430
=========== =========== ========== ========== ==========
Shares used in calculating primary earnings per share:
Weighted average common shares
outstanding 7,500,000 7,500,000 9,375,000 7,500,000 9,375,000
Weighted average common shares
giving effect to conversion of
Series A Convertible Preferred
Stock to Common Stock 1,094,178 1,875,000 1,875,000
Net effect of stock options and
warrants granted during the 12
months prior to this offering at less
than the offering price, calculated
using the treasury stock method at
the offering price of $15 per
share, and treated as outstanding
for the entire period 387,026 387,026 387,026 387,026 387,026
Weighted average stock options
outstanding issued prior to 12
months before this offering
calculated using the treasury stock
method at the offering price of $15
per share 86,610 122,360 172,128 149,042 165,577
----------- ----------- ---------- ---------- ----------
Total shares 9,067,814 9,884,386 9,934,154 9,911,068 9,927,603
=========== =========== ========== ========== ==========
Primary earnings per share $ 0.05 $ 0.04 $ 0.31 $ 0.02 $ 0.20
=========== =========== ========== ========== ==========
</TABLE>
<PAGE> 2
Exhibit 11.1
MULTIPLE ZONES INTERNATIONAL, INC.
COMPUTATION OF HISTORICAL FULLY DILUTED EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31, March 31, March 31,
1993 1994 1995 1995 1996
------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Net income $ 451,321 $ 412,153 $ 3,191,537 $ 233,607 $ 2,173,061
========== =========== =========== =========== ===========
Shares used in calculating fully diluted earnings
per share:
Weighted average common shares
outstanding 7,500,000 7,500,000 9,375,000 7,500,000 9,375,000
Weighted average common shares
giving effect to conversion of
Series A Convertible Preferred
Stock to Common Stock 1,094,178 1,875,000 1,875,000
Net effect of conversion of Series
B Redeemable Convertible Preferred Stock to Common
Stock, calculated using the treasury stock method
at the offering price of $15 per share,
and treated as outstanding for the entire period 452,007 452,007 452,007 452,007 452,007
Net effect of stock options and
warrants granted during the 12
months prior to this offering at less
than the offering price, calculated
using the treasury stock method at
the offering price of $15 per
share, and treated as outstanding
for the entire period 387,026 387,026 387,026 387,026 387,026
Weighted average stock options
outstanding issued prior to 12
months before this offering
calculated using the treasury stock
method at the offering price of $15
per share 86,610 122,360 172,128 149,042 165,577
---------- ----------- ----------- ----------- -----------
Total shares 9,519,821 10,336,393 10,386,161 10,363,075 10,379,610
========== =========== =========== =========== ===========
Fully diluted earnings per share $ 0.05 $ 0.04 $ 0.31 $ 0.02 $ 0.21
========== =========== =========== =========== ===========
</TABLE>
<PAGE> 3
Exhibit 11.1
MULTIPLE ZONES INTERNATIONAL, INC.
COMPUTATION OF PRO FORMA EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
Year Ended
December 31, March 31, March 31,
1995 1995 1996
------------ ----------- -----------
<S> <C> <C> <C>
Net income $ 3,191,537 $ 233,607 $ 2,173,061
=========== =========== ===========
Shares used in calculating pro forma
earnings per share:
Weighted average common shares
outstanding 9,375,000 7,500,000 9,375,000
Weighted average common shares
giving effect to conversion of
Series A Convertible Preferred Stock
to Common Stock 1,875,000
Net effect of conversion of Series B
Redeemable Convertible Preferred Stock
to Common Stock, calculated using the
treasury stock method at the offering
price of $15 per share, and treated as
outstanding for the entire period 452,007 452,007 452,007
Net effect of stock options and warrants
granted during the 12 months prior
to this offering at less than the offering
price, calculated using the treasury
stock method at the offering price of
$15 per share, and treated as outstanding
for the entire period 387,026 387,026 387,026
Weighted average stock options
outstanding issued prior to 12
months before this offering
calculated using the treasury stock
method at the offering price of $15
per share 172,128 149,042 165,577
----------- ----------- -----------
Total shares 10,386,161 10,363,075 10,379,610
=========== =========== ===========
Pro forma earnings per share $ 0.31 $ 0.02 $ 0.21
=========== =========== ===========
</TABLE>
<PAGE> 4
EXHIBIT 11.1
MULTIPLE ZONES INTERNATIONAL, INC.
COMPUTATION OF HISTORICAL EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED YEAR ENDED YEAR ENDED -----------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1993 1994 1995 1995 1996
------------ ------------ ------------ --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
Net income........................................ $451,321 $412,153 $3,191,537 $233,607 $2,173,061
Adjustment to net income for accretion of Series B
Redeemable Convertible Preferred Stock.......... (153,088) (229,631)
------------ ------------ ------------ --------- ----------
Net income applicable to common stock
equivalents..................................... $451,321 $412,153 $3,038,449 $233,067 $1,943,430
=========== =========== =========== ========= ==========
Shares used in calculating primary earnings per
share:
Weighted average common shares outstanding...... 5,000,000 5,000,000 6,250,000 5,000,000 6,250,000
Weighted average common shares giving effect to
conversion of Series A Preferred Stock to
Common Stock.................................. 729,452 1,250,000 1,250,000
Net effect of stock options and warrants granted
during the 12 months prior to this offering
exercisable at prices less than the offering
price and treated as outstanding for the
entire period................................. 675,707 675,707 675,707 675,707 675,707
Weighted average stock options outstanding
issued prior to 12 months before this
offering...................................... 58,389 82,562 128,632 107,644 125,280
------------ ------------ ------------ --------- ----------
Total shares.............................. 6,463,548 7,008,269 7,054,339 7,033,351 7,050,987
=========== =========== =========== ========= ==========
Primary earnings per share........................ $0.07 $0.06 $0.43 $0.03 $0.28
=========== =========== =========== ========= ==========
FULLY DILUTED EARNINGS PER SHARE:
Net income........................................ $451,321 $412,153 $3,191,537 $233,607 $2,173,061
=========== =========== =========== ========= ==========
Shares used in calculating fully diluted net
income per share:
Weighted average common shares outstanding...... 5,000,000 5,000,000 6,250,000 5,000,000 6,250,000
Weighted average common shares giving effect to
conversion of Series A Preferred Stock to
Common Stock.................................. 729,452 1,250,000 1,250,000
Net effect of conversion of Series B Redeemable
Convertible Preferred Stock to Common Stock
treated as outstanding for the entire
period........................................ 612,476 612,476 612,476 612,476 612,476
Net effect of stock options and warrants granted
during the 12 months prior to this offering
exercisable at prices less than the offering
price treated as outstanding for the entire
period........................................ 675,707 675,707 675,707 675,707 675,707
Weighted average stock options outstanding
issued prior to 12 months before this
offering...................................... 58,389 82,562 128,632 107,644 125,280
------------ ------------ ------------ --------- ----------
Total shares.............................. 7,076,024 7,620,745 7,666,815 7,645,827 7,663,463
=========== =========== =========== ========= ==========
Fully diluted earnings per share.................. $0.06 $0.05 $0.42 $0.03 $0.28
=========== =========== =========== ========= ==========
</TABLE>
2
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to inclusion in this Amendment No. 1 to Registration Statements
on Form S-1 (File No. 333-4458) of our report dated June 3, 1996 on our audits
of the financial statements of Multiple Zones International, Inc. We also
consent to the reference to our firm under the caption "Experts."
Coopers & Lybrand L.L.P.
Seattle, Washington
June 4, 1996
