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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 0-28488
MULTIPLE ZONES INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
WASHINGTON 91-1431894
(State of Incorporation) (I.R.S. Employer
Identification Number)
707 SOUTH GRADY WAY
RENTON, WASHINGTON 98055-3233
(Address of Principal Executive Offices) (Zip Code)
(206) 430-3000
(Registrant's Telephone
Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [ X ]
The aggregate market value of the Common Stock held by non-affiliates as of
February 21, 1997 was approximately $38,419,151 (1), based upon the last
sales price per share of $10.13 as reported by the Nasdaq National Market.
The number of shares of the registrant's Common Stock outstanding as of
February 21, 1997, was 12,915,367.
(1) Excludes value of Common Stock held of record as of February 21, 1997 by
executive officers and directors of the registrant. Includes Common Stock
held of record as of that date by certain depository organizations.
Exclusion of shares held by any person should not be construed to indicate
that such person possesses the power, direct or indirect, to direct or
cause the direction of the management or policies of the registrant, or
that such person is controlled by or is under common control with the
registrant.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated into the parts of this Form
10-K designated to the right of the document listed.
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INCORPORATED DOCUMENT LOCATION IN FORM 10-K
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1996 Annual Report to Shareholders Part I, Item 2
Part II, Items 6, 7
and 8
Proxy Statement for the 1997 Annual Meeting Part III, Items 10,
of Shareholders 11, 12 and 13
An Index to Exhibits appears at pages 16 - 18 herein
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MULTIPLE ZONES INTERNATIONAL, INC.
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
PART I.
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10K Page No.
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Item 1. Business 4
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II.
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 14
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 14
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 14
PART III.
Item 10. Directors and Executive Officers of the Registrant 14
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners and Management 15
Item 13. Certain Relationships and Related Transactions 15
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 16
Signatures 19
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PART I.
ITEM 1. BUSINESS
GENERAL
Multiple Zones International, Inc. (herein referred to as the "Company" which
reference shall include its subsidiaries and their assets and operations, unless
the context indicates otherwise) is a leading international direct marketer of
microcomputer hardware, software, peripherals and accessories for users of Mac
Operating System ("Mac") and PC/Wintel ("PC") computers through two flagship
catalogs, THE MAC ZONE(R) and THE PC ZONE(R). The Company began operations in
1988 by advertising in national trade publications. Catalog circulation
commenced with THE MAC ZONE (R) in 1990, followed by THE PC ZONE (R) in 1992.
International subsidiary operations and licensing activities commenced in 1992,
and outbound telemarketing operations, principally to business accounts, were
added in 1993. During 1996, 44 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 business, education and
government accounts.
INDUSTRY BACKGROUND
The market for microcomputer products is served by a variety of distribution
channels. According to industry data published in September 1996, direct
marketing is expected to be one of the fastest growing major distribution
channels, with a domestic market share that is projected to increase from 7.5%
in 1995 to approximately 14% of total domestic microcomputer product sales in
1999. 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 $64 billion in 1995 and are projected to more than double to over $130
billion in 1999, 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. 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
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.
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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 evolves, 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.
RISK FACTORS
The discussion of the Company's business and operations contained in this
Annual Report on Form 10-K contains certain forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes," "anticipates," "plans,"
"expects," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the
Company's actual results to differ materially from those indicated by any such
forward-looking statements, including the "Risk Factors" identified below, or
other factors of which the Company may not yet be aware.
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
Computer, Inc. ("Apple"). Mac products represented 69.8% and 73.1% of the
Company's gross sales in 1996 and 1995, respectively. Apple has recently
experienced a decline in CPU sales, manufacturing and product availability
problems, as well as a decline in its share of worldwide and domestic
microcomputer markets, reflecting uncertainties in the Mac marketplace. Apple
recently announced it second major restructuring in the past 12 months, which
will entail a layoff of approximately 2,700 employees, a reduction in the number
of its product offerings, and other cost-cutting measures. 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.
Competition. The microcomputer products industry is highly competitive. The
Company competes with other national and international direct marketers. The
Company also competes with traditional microcomputer retailers, computer
superstores, consumer electronics and office supply superstores, and product
manufacturers that sell direct to end-users. Some of the Company's competitors
are larger and compete principally on the basis of price and may have lower
costs than the Company. 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.
Price Reductions. The microcomputer 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 gross margins to remain competitive.
In addition, the Company has recently increased its sales of microcomputer
hardware products, for which gross margins are generally lower than those
associated with software products.
Variability of Operating Results. The Company has experienced significant
fluctuations in its operating results from quarter to quarter as a result of
many factors, including general economic conditions, the condition of the
microcomputer products industry, shifts in demand for microcomputer products and
industry announcements of new products or upgrades. There can be no assurance
that the Company will be profitable on a quarterly or annual basis.
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. Any interruption in any of the Company's
systems or telecommunication systems, could have a material adverse effect on
the Company's business, financial condition and results of operations.
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
primarily by overnight delivery services. Any future increases in postage,
shipping rates or paper costs could have a material adverse effect on the
Company's business, financial condition and results of operations.
Changing Methods of Distributions. The market for microcomputer products is
evolving rapidly in terms of product offerings and methods of distribution. New
methods of distribution, such as on-line shopping services and electronic
distribution of software, have emerged. Additionally, some manufacturers sell
their hardware and software product directly to end-users, or to certain
categories of end-users such as corporate accounts. These efforts may intensify
in the future. Any of these methods of distribution may attract increased
patronage and other new methods of distribution may emerge in the future. The
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Company will be required to remain competitive with existing and evolving
distribution channels and methods, and to develop or adopt new methods for
distribution 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.
Reliance on Vendor Relationships. The Company acquires products for resale from
manufacturers, as well as from distributors. Purchases from distributors
constituted 25.5% and 35.5% of the Company's total purchases in 1996 and 1995,
respectively. Certain hardware manufacturers limit the number of product units
available to direct marketers such as the Company. Certain manufacturers and
distributors provide the Company with co-op advertising support and incentives
in the form of rebates, discounts and allowances. 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.
State Excise Tax Uncertainties. The Company currently collects sales taxes or
similar taxes 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. The Unites 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 various states may exceed
the minimum level of contacts allowable under law. The Company cannot predict
the level of contact that is sufficient to permit a state to impose a sales tax
collection obligation on the Company. If the Company were required to collect
sales taxes, the obligation to collect sales taxes or similar taxes on sales
would result in additional administrative expenses for the Company, could result
in increased prices to customers and consequently could have a material adverse
on the Company's business, financial condition and results of operations.
Dependence on Key Personnel. The Company's future success will depend to a
significant extent upon the efforts and abilities of key senior management
personnel. 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.
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.
Any limitation or interruption of the service being provided by Airborne
Logistics could have a material adverse effect on the Company's business,
financial condition and results of operations.
Risks of International Operations. The Company currently operates subsidiaries
in 11 foreign countries and also derives license fees and royalties from catalog
direct marketers in 15 other foreign countries who sell microcomputer products
using the Company's service marks. 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
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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 licensees retain rights to their customer
information without any express contractual restriction preventing future
competition. 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.
Rapid Technological Change and Inventory Obsolescence. The microcomputer
industry is characterized by rapid technological change and frequent
introductions of new products and product enhancements. While the Company seeks
to reduce its inventory exposure through a variety of inventory control
procedures and policies, including vendor price protections and product return
programs, there can be no assurance that the Company will be able to avoid
losses related to obsolete inventory. In order to satisfy customer demand and
obtain greater purchase discounts, the Company may be required to carry
increased inventory levels of certain products.
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:
Direct Marketing. The Company's core competence lies in generating demand for
microcomputer products by utilizing three distinct and complementary direct
marketing vehicles. The flagship catalogs, THE PC ZONE(R) and THE MAC ZONE(R),
are directed at customers who phone the Company's toll free telephone numbers.
The Company's outbound account managers serve the needs of customers in the
business, education and government markets. The Company's Internet sites appeal
to the growing World Wide Web market and enable the Company to offer lower cost
electronic delivery of software.
Product Breadth and Mix. The Company offers over 18,000 products providing its
customers with comprehensive computing solutions. Microcomputer and technology
products are in a constant state of change and improvement. The Company's goal
is to offer the newest and best-selling products its customers demand.
Increased Sales of PC Products. The Company intends to focus on the vast PC
market which has been largely untapped 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. A part of this
strategy involves increased emphasis on outbound telemarketing to business
accounts which predominately purchase PC products.
Expansion of Outbound Sales. Sales to business, education and government
accounts represent a strong growth opportunity for the Company. The Company
intends to increase sales to these accounts by expanding its outbound sales
team. Additionally, the Company seeks to acquire new business accounts through
targeted catalog mailings.
Maintain Low Operating Costs. The Company continually seeks to find ways to work
more efficiently - the result of which has lowered its SG&A expenses from 13.1%
of sales in 1993 to 9.8% in 1996. Maintaining a lower operating cost structure
is a key part of the Company's business strategy.
International Operations. The Company has subsidiaries and licensees located in
26 countries worldwide and is focusing on operational synergies such as common
systems and purchasing to improve sales and profitability in the international
markets.
PRODUCTS AND MERCHANDISING
The Company offers over 18,000 hardware, software, peripheral and accessory
products for users of Mac
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and PC microcomputers from over 1,600 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, Compaq, Hewlett-Packard, IBM, Motorola, NEC, Packard
Bell, Power Computing, Texas Instruments, Toshiba, UMAX 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, Motorola,
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, IBM, Intuit, Lotus, Macromedia, Microsoft, Novell, Sierra
On-Line, Symantec and The Learning Company.
The Company's merchandising group determines the manufacturers whose products
are featured in the Company's 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 following table shows the percentage of the Company's gross sales
attributable to various product categories during 1996, 1995 and 1994.
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YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
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Microcomputers............... 31.2% 20.7% 3.5%
Peripherals and accessories.. 50.6 50.3 49.6
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Total hardware............. 81.8 71.0 53.1
Software..................... 18.2 29.0 46.9
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Total.............. 100.0% 100.0% 100.0%
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The Company continually increases the number of products which it is authorized
to sell. The Company received authorization from Apple, Hewlett-Packard and IBM
to offer all or a portion of their product lines in 1995 and authorization from
Compaq, Toshiba and Motorola in 1996. The availability of these products has
allowed the Company to increase its hardware sales by emphasizing its catalog
coverage of these and other hardware products, particularly desktop, notebook
and laptop microcomputers.
The Company's Mac business was strong during 1996, growing 76.2% over 1995.
Sales of Mac products represented 69.8% of gross sales in 1996, compared to
73.1% and 69.6% of gross sales in 1995 and 1994, respectively. Sales of Apple
branded products alone constituted 22.5% of gross sales in 1996, compared to
22.8% 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
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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.
For the year ended December 31, 1996, no single product accounted for more than
3% of the Company's gross sales.
Certain reclassifications to the 1995 and 1994 category and product mix
percentages have been made to conform to the 1996 presentation.
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. Purchases
of products from distributors decreased from 35.5% to 25.5% of the Company's
total product purchases in 1995 and 1996, respectively. Purchases from Ingram
Micro and Apple represented 13.5% and 20.1%, respectively, of the Company's
total product purchases in 1996. No other vendor supplied more than 10% of the
Company's total product purchases in 1996. 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 computerized systems that
permit monitoring of inventory and assist the Company in managing inventory
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
domestic customer return rate of 8.0% of gross sales in 1996 and 1995. Product
returns are closely monitored to identify trends in product offerings, enhance
customer satisfaction and reduce overall returns.
CATALOGS
The Company markets products primarily through targeted mailings of its flagship
catalogs, THE MAC ZONE(R) and THE PC ZONE(R), 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(R) and THE PC ZONE(R) catalogs
published domestically in 1996, 1995 and 1994.
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THE MAC ZONE(R) THE PC ZONE(R)
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1996 1995 1994 1996 1995 1994
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Number of editions 12 12 11 12 12 7
Total circulation 28,000,000 18,500,000 9,000,000 14,000,000 10,500,000 6,000,000
</TABLE>
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 also produces targeted specialty catalogs offering a relatively
narrow but deep product line, such as THE LEARNING ZONE(R), which is targeted at
purchasers for primary, secondary and post-secondary educational institutions
and THE DEVELOPER'S ZONE(TM), which is targeted at application developers and
offers the latest in development tools and technology. The Company intends to
explore opportunities to
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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 54 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 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
(www.zones.com). 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.
DATABASE MARKETING
The Company maintains a proprietary database containing 2.5 million customer and
inquirer records, including approximately 1.2 million customers, of which
approximately 572,000 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. The Company
attracts new customers and prospective customers through advertising in major
trade publications and 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
tracks the buying patterns of its customers in an attempt to anticipate
customers' needs and generate additional product orders. 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 leverages 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.
SALES, TECHNICAL SUPPORT AND CUSTOMER SERVICE
Outbound Sales. At February 28, 1997, the Company had a staff of 78 experienced
account managers and support staff who pursue sales to business, education and
government accounts through outbound telemarketing. These commissioned account
managers develop long-term relationships with business accounts through frequent
telephone contact and by providing individual attention, quality service, and
convenient one-stop shopping. In addition to outbound telemarketing, the Company
utilizes catalog mailings, fax broadcast messaging and other marketing tactics
to enhance sales.
Inbound Sales. The Company's staff of over 150 inbound telemarketing
representatives are well-trained
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and knowledgable. The Company offers toll-free numbers for inbound sales that
are staffed 24 hours a day, seven days a week. Sophisticated systems allow the
Company's representatives to quickly access a customer's record and billing
information and review details of past purchases. For most products sold, 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.
Customer Service/Technical Support. 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. The Company also has a
staff of dedicated technical support personnel who assist customers with the
installation and operation of the products they purchase and are available
toll-free during regular business hours. These personnel also offer customers
support with customized configuration of their microcomputer systems.
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, Sweden and Venezuela. The
Company's licensees are located in 15 other foreign countries. The Company's
international sales were $59.2 million in 1996, $26.3 million in 1995 and $11.5
million in 1994, representing increases of 125.1%, 128.7% and 219.4%,
respectively, over the comparable prior periods.
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(R) and THE PC ZONE(R) 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 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.
SYSTEMS
The Company has committed resources to the development of management
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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.
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.
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.
EMPLOYEES
At February 28, 1997, the Company had 591 employees in its domestic operations,
and over 160 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.
The Company emphasizes the recruiting and training of high quality personnel
and, to the extent possible, promotes people to positions of increased
responsibility from within the Company. Each employee receives training
appropriate to his or her position and a complete new hire orientation. The
training programs include: New Hire Orientation, Sales Training and Management
Development. New telemarketing representatives participate in an eight week
training program to introduce them to the Company's systems and familiarize them
with the available products and services.
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<PAGE> 13
TRADEMARKS
The Company conducts its business in the United States primarily under the
service marks THE MAC ZONE(R) and THE PC ZONE(R), 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.
REGULATORY AND LEGAL MATTERS
In addition to federal, state and local laws applicable to all corporations and
employers in general, 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.
ITEM 2. PROPERTIES
The Company currently leases approximately 132,000 square feet of space for its
corporate headquarters, including its telemarketing operations, in Renton,
Washington. The Company also leases approximately 36,000 square feet of space
which has been sublet for the remainder of the lease. Additionally, the Company
operates sales and distribution facilities in Australia, Austria, Belgium,
Denmark, France, Germany, Great Britain, Mexico, The Netherlands, Sweden and
Venezuela.
ITEM 3. LEGAL PROCEEDINGS
Various claims and actions, considered normal to the Company's business, have
been asserted and are pending against the Company. The Company believes that
such claims and actions in the aggregate should not have a material adverse
effect upon the Company's business, financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of 1996 to a vote of
security holders.
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDER MATTERS
The information for this item is incorporated by reference from the Company's
1996 Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
The information for this item is incorporated by reference from the Company's
1996 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information for this item is incorporated by reference from the Company's
1996 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information for this item is incorporated by reference from the Company's
1996 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements with accountants on accounting and financial
disclosure matters during the periods reported herein.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in part in, and incorporated
by reference from, the Proxy Statement for the Company's 1997 Annual Meeting of
Shareholders under the captions "Proposal No. 1: Election of Directors," and
"Section 16(a) Beneficial Ownership Reporting Compliance."
John E. DeFeo, age 50, has served as the Company's President, Chief Executive
Officer and Vice Chairman of the Board since January 1997. Mr. DeFeo has been
a member of the Company's Board of Directors since April 1996. From 1994 to
1996, Mr. DeFeo was President and Chief Executive Officer of U.S. Airwaves
Inc., an early stage wireless telecommunications company that he founded. From
1985 to 1994, Mr. DeFeo served as President and Chief Executive officer of U.S.
West New Vector Group, the domestic cellular communications subsidiary of U.S.
West, Inc. At U.S. New Vector Group, Mr. DeFeo was responsible for developing
the company's cellular services worldwide, which grew during his tenure to a
one-billion dollar business with over 2,400 employees and 100 strategic
partnerships, serving more than 100 markets in the United States and overseas.
Victor J. Melfi, Jr., age 40, has served as the Company's Executive Vice
President -- Marketing since January 1997. He previously held various positions
with the Company, serving as President and Chief Executive Officer from March
1996 to January 1997; Executive Vice President -- Marketing and Chief Operating
Officer from September 1995 to March 1996; Senior Vice President -- Marketing
from May to September 1995; and Vice President -- Database Marketing from
October 1994 to May 1995. Between 1991 and 1994, Mr. Melfi served as Associate
Director of CIMS Marketing at The Reader's Digest Association, Inc.
Previously, he held positions with the management consulting firm of Booz -
Allen and Hamilton, Xerox Corporation and National Computer, a reseller of
microcomputer products.
Bruce S. Martin, age 38, has served as the Company's Executive Vice President --
Partner Merchandising since January 1997. From March 1996 to January 1997, he
served as Co-President and Chief Operating Officer. Mr. Martin joined the
Company in October 1995, as Executive Vice President -- Merchandising and
Sales. Previously, he worked with Intelligent Electronics, Inc. and Ingram
Micro, both distributors and resellers of microcomputer products. At the
former, he served as Vice President of Merchandising and Operations from 1994
to 1995; and at the latter, he served as Senior Vice President of Worldwide
Purchasing and Products from 1991 to 1994, and as Vice President of Purchasing
from 1986 to 1991.
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.
The executive officers of the Company are elected annually at the meeting of the
Board of Directors held in conjunction with the Annual Meeting of Shareholders.
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<PAGE> 15
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in, and incorporated by
reference from, the Proxy Statement for the Company's 1997 Annual Meeting of
Shareholders under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in, and incorporated by
reference from, the Proxy Statement for the Company's 1997 Annual Meeting of
Shareholders under the caption "Stock Ownership of Management and Certain Other
Holders."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
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<PAGE> 16
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
<S> <C>
(a) 1. Index to Financial Statements:
The following Consolidated Financial Statements of Multiple Zones
International, Inc. and its subsidiaries, as contained in its 1996
Annual Report to Shareholders, are incorporated by reference in Part
II, Item 8:
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994
Statements of Shareholders' Equity for the years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Accountants
(a) 2. Index to Financial Statements Schedule:
Report of Independent Accountants on Financial Statement Schedules
</TABLE>
All other schedules are omitted since the required information is not present or
is not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the Consolidated Financial
Statements and Notes thereto.
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<PAGE> 17
(a) 3.
<TABLE>
<CAPTION>
Number Description
- ----------- ------------------------------------------------------------------
<S> <C>
3.1 Restated Articles of Incorporation*
3.2 Amended and Restated Bylaws, as amended*
4.1 Employee Stock Purchase Plan**
4.2 1993 Stock Incentive Plan***
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 24, 1996 between the Registrant and
Judith A. Roseth*
10.15 Form of Indemnification Agreement (to 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 Agreement for Wholesale Financing date January 15, 1996, as
amended, between the Registrant and Deutsche Financial Services
Corporation*
10.19 Warrant issued to Prudential Securities Incorporated dated October
27, 1995*
10.20 Standard Office Lease-Gross dated October 4, 1993 between the
Registrant and Hewlett-Packard Company*
10.21 Office Lease dated April 1, 1996 between the Registrant and Renton
Talbot Delaware, Inc.*
</TABLE>
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<PAGE> 18
<TABLE>
<S> <C>
10.22 Ingram Micro Resale Agreement dated April 1, 1996 between Ingram
Micro and the Registrant*
10.23 Authorized Apple Catalog Reseller Sales Agreement between the
Registrant and Apple Computer, Inc.*
10.24 Storage and distribution Agreement dated September 28, 1992
between the Registrant and Advanced Logistics Services Corp., as
amended*
10.25 Employment Agreement dated as of January 5, 1997 between the
Registrant and John E. DeFeo
10.26 Stock Option Agreement dated as of January 5, 1997 between the
Registrant and John E. DeFeo
10.27 Business Loan Agreement dated as of December 31, 1996 between the
Registrant and U.S. Bank of Washington, National Association
11.1 Statement regarding Computation of Per Share Earnings
13.1 Portions of 1996 Annual Report to Shareholders
21.1 Subsidiaries of the Registrant*
23.2 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule
</TABLE>
* Incorporated by reference to Exhibits of Registrant's Registration Statement
on Form S-1, Registration No. 333-04458.
** Incorporated by reference to the Registrant's Form S-8, Registration No.
333-06961.
*** Incorporated by reference to the Registrant's Form S-8, Registration No.
333-13501.
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<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MULTIPLE ZONES INTERNATIONAL, INC.
Date: March 24, 1997
By: /s/ John E. DeFeo
-------------------------------------
John E. DeFeo, President and
Chief Executive Officer
/s/ Peter J. Biere
--------------------------------------
Peter J.Biere, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Signature Title Date
- --------------------------------- ----- -----
/s/ John H. Bauer
- --------------------------------- Director March 24, 1997
John H. Bauer
/s/ John T. Carleton
- --------------------------------- Director March 24, 1997
John T. Carleton
/s/ John E. DeFeo
- --------------------------------- Director March 24, 1997
John E. DeFeo
/s/ Sadrudin J. Kabani
- --------------------------------- Director March 24, 1997
Sadrudin J. Kabani
/s/ Firoz H. Lalji
- --------------------------------- Director March 24, 1997
Firoz H. Lalji
/s/ Carol L. Miltner
- --------------------------------- Director March 24, 1997
Carol L. Miltner
/s/ Paul E. Monson
- --------------------------------- Director March 24, 1997
Paul E. Monson
/s/ Steve Sarich, Jr.
- --------------------------------- Director March 24, 1997
Steve Sarich, Jr.
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<PAGE> 20
EXHIBITS
20
<PAGE> 1
EXHIBIT 10.25
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into effective
as of January 5, 1997, between MULTIPLE ZONES INTERNATIONAL, INC., a Washington
corporation ("Employer"), and JOHN E. DEFEO ("Employee").
R E C I T A L S
A. Employer is engaged in the business of direct marketing of
microcomputer products (the "Business").
B. Employee is currently a member of Employer's Board of
Directors, and his experience, ability and knowledge are valuable to Employer.
C. Employer desires to hire Employee, and Employee is willing to
become an employee of Employer, upon the terms and conditions set forth in this
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants set forth in
this Agreement, Employer and Employee agree as follows:
.1. EMPLOYMENT. Employee shall become an employee of Employer
upon the terms and conditions set forth in this Agreement. During the term of
this Agreement, Employee agrees to serve as President and Chief Executive
Officer of Employer as well as Vice-Chairman of Employer's Board of Directors
(the "Board"), and to perform such duties as from time to time may reasonably
be assigned to Employee by the Board. The Board shall have the power to direct,
control and supervise (a) the services that Employee is to perform under this
Agreement, (b) the means and manner by which Employee will perform such
services, and (c) the time for performing such services; PROVIDED, HOWEVER,
that the Board shall not impose employment duties or constraints of any kind
that would require Employee to violate any law, statute, ordinance, rule or
regulation now or hereafter in effect.
.2. TERM. The term of this Agreement shall commence as of January
5, 1997, and, subject to earlier termination under the other express provisions
of this Agreement, shall terminate on December 31, 2001; PROVIDED, HOWEVER,
that, if a Change of Control (as defined in Section 9.2) shall occur prior to
the termination of this Agreement, this Agreement shall, subject to earlier
termination under the other express provisions of this Agreement, terminate on
the later of (a) December 31, 2001, or (b) eighteen (18) months following the
effective date of the Change of Control.
.3. PERFORMANCE OF SERVICES. Employee shall diligently and
competently devote substantially all of his business time, attention and
energies to the performance of his duties under this Agreement and shall exert
his best efforts to further the business of Employer, to preserve for the
benefit of Employer the goodwill of Employer's customers and those who have
business
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<PAGE> 2
relationships with Employer, and to comply with all laws, statutes, ordinances,
rules and regulations known to him relating to the services provided by him
under this Agreement; PROVIDED, that Employer agrees that Employee shall be
entitled to fulfill his preexisting commitments to (a) perform consulting
services for third parties and fulfill other commitments for an aggregate of
fifteen (15) days in January, February and March 1997, and (b) serve as an
outside member of the Board of Directors of XYPoint, Inc. and Novacom Inc., and
potentially of Metawave Communications Corporation, Glenayre Inc. or CyberFone.
.4. COMPENSATION
.4.1. Employer shall pay to Employee base compensation at a
rate of Three Hundred Fifty Thousand Dollars ($350,000) for calendar year 1997,
and thereafter at a rate of Four Hundred Thousand Dollars ($400,000) per year,
payable in periodic installments in accordance with Employer's payroll policies
from time to time in effect for personnel at Employee's level. Employer shall
be entitled to deduct from the amounts owed Employee under this Agreement any
amounts that Employer is required by applicable federal, state or local law to
withhold therefrom on account of employment, income or other taxes.
.4.2. Employee shall be entitled to participate in
Employer's Management Incentive Plan, as it may be amended or terminated from
time to time in the sole discretion of the Board.
.4.3. Employer shall, simultaneously with the execution of
this Agreement, grant to Employee an option to purchase up to 643,476 shares of
Employer's Common Stock (which is equal to 5% of the number of shares of
Employer's Common Stock outstanding on the date of this Agreement), in the form
of and on the terms and conditions set forth in that certain Stock Option
Agreement appended hereto as Exhibit A. The Company hereby agrees to include
the approval of the granting of such option on the formal agenda for its next
annual meeting of shareholders, and to exercise its best efforts to obtain
shareholder approval thereof at such meeting. It shall be an express
requirement of the employment relationship created hereunder that, in
accordance with RCW 23B.07.220(4)(d), Employee shall receive irrevocable
proxies from holders of a majority of the Company's outstanding shares,
conveying to him the right to vote their shares in favor of a resolution to
approve the granting of said option.
.4.4. After the end of each calendar year following which
this Agreement remains in effect, the Board or its Compensation Committee shall
review the performance of Employee within sixty (60) days after completion of
Employer's audited financial statements for that year. Based on such review,
the Board or its Compensation Committee shall consider in good faith whether or
not to (a) increase Employee's base compensation (it being understood that the
increase to $400,000 described in Section 4.1 above has been previously so
approved), (b) award Employee performance bonuses in addition to those payable
under the Management Incentive Plan, and/or (c) grant additional stock options
to Employee. The determination of the Board or its Compensation Committee on
these matters shall be final and binding on Employee.
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<PAGE> 3
.5. VACATIONS AND BENEFITS
.5.1. During each calendar year during the term of this
Agreement, Employee shall be entitled to vacation time of not less than four
(4) weeks, during which time Employee's base compensation under Section 4.1
shall be paid in full. Vacation benefits shall accrue and be utilized by
Employee in accordance with Employer's policies from time to time in effect for
personnel at Employee's level.
.5.2. During each calendar year during the term of this
Agreement, Employee shall also be entitled to devote up to five (5) working
days to business and professional education, during which time Employee's base
compensation under Section 4.1 shall continue to be paid in full. Employer
agrees to reimburse Employee for his reasonable costs incurred in this
connection (including, without limitation, the costs of tuition, travel,
lodging and meals), in an amount not to exceed Five Thousand Dollars ($5,000)
in each such calendar year.
.5.3. Employee shall continue to be entitled to the fringe
benefits applicable generally to full-time employees of Employer at Employee's
level, subject to any changes to such benefits that are hereafter adopted by
the Board, and, at all times during the term of this Agreement, such fringe
benefits shall in the aggregate be at least as favorable as the most favorable
fringe benefit package provided to any other employee of Employer. Such fringe
benefits currently include (a) group term life insurance; (b) medical, dental
and vision insurance; (c) six (6) paid holidays per year; and (d) qualified
401(k) retirement plan.
.6. EXPENSES. Employee is authorized to incur reasonable expenses
for promoting the business of Employer, including expenses for automobile,
meals, travel and other similar items, subject to such policies of Employer
relating to business expenses as are from time to time in effect for personnel
at Employee's level. Employer agrees to reimburse Employee for all such
authorized expenses upon the presentation by Employee, from time to time, of an
itemized accounting for such expenditures. Employer further agrees to
reimburse Employee for his annual membership fees in YPO or YPOA, and Columbia
Tower Club, in an aggregate amount not to exceed $5,000.
.7. TERMINATION OF AGREEMENT PRIOR TO END OF TERM
.7.1. Employer shall have the right to terminate this
Agreement for "cause," which for purposes of this Agreement shall be limited to
(a) repeated refusals to carry out directions of the Board with regard to
material matters reasonably consistent with Employee's duties as President and
Chief Executive Officer; (b) knowing violation of a state or federal law
involving the commission of a crime against Employer or a felony; (c) misuse of
alcohol or controlled substances, misrepresentation, deception, fraud or
dishonesty materially injurious to Employer; and (d) any act or omission in
willful disregard of the interests of Employer that substantially impairs
Employer's goodwill, business or reputation and that, if susceptible of being
cured, is not cured by Employee within thirty (30) days following receipt from
Employer of a written demand detailing with reasonable specifity the act or
omission of which Employer complains. A failure by Employee, because of
illness or other incapacity, to render the services contemplated by this
Agreement shall not constitute cause.
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<PAGE> 4
.7.2. Employer shall have the right to terminate this
Agreement if Employee fails, because of illness or other incapacity, to render
the services contemplated by this Agreement for a period of one hundred twenty
(120) consecutive days or any series of shorter periods aggregating one hundred
fifty (150) days in any consecutive period of twelve (12) months.
.7.3. Employer shall have the right to terminate this
Agreement at any other time, without "cause," for any other reason or for no
reason.
.7.4. In order to terminate this Agreement under Section
7.1, 7.2 or 7.3, Employer shall deliver a written notice to Employee that
specifies Employer's election to terminate this Agreement, the provision of
this Agreement providing Employer the right to terminate, and the effective
date of termination, which shall not be earlier than the date of delivery of
the notice.
.7.5. Employee shall have the right to terminate this
Agreement, effective upon delivering written notice thereof to Employer, upon
the occurrence of a material breach of this Agreement by Employer that is not
cured within thirty (30) days after Employee delivers to Employer a written
demand to cure such breach.
.7.6. Employee shall have the right to terminate this
Agreement at any time for any reason or for no reason, upon giving Employer not
less than ninety (90) days' advance written notice thereof.
.7.7. This Agreement shall automatically terminate upon the
death of Employee.
.8. EFFECT OF TERMINATION
.8.1. If Employer terminates this Agreement under Section
7.3, or if Employee terminates this Agreement for Good Reason (as defined in
Section 9.3) within eighteen (18) months following a Change of Control or
pursuant to Section 7.5, Employer shall continue to pay Employee base
compensation under Section 4.1, calculated at the rate in effect on the
effective date of termination and paid at the times the compensation would have
been paid if Employee had remained employed by Employer, for a period of twelve
(12) months following the effective date of termination. If Employee is
determined by a court of competent jurisdiction to have violated the provisions
of Section 17 or 18, the obligation of Employer to continue such payments of
base compensation shall terminate and Employee shall be obligated to promptly
repay to Employer all such payments made after the date of such violation.
.8.2. If this Agreement terminates at the end of the term
provided for in Section 2 or for any other reason, Employer shall promptly make
a cash payment to Employee in lieu of accrued but unused vacation calculated
based on his rate of base compensation in effect on the effective date of
termination.
.8.3. If this Agreement terminates at the end of the term
provided for in Section 2 or for any other reason, then (a) the employment of
Employee shall terminate upon the effective date of termination; and (b) except
as expressly provided in this Section 8 or in Section 10 through
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Section 21 or as otherwise required by applicable law (i) neither party shall
thereafter have any further rights, duties or obligations under this Agreement,
but each party shall remain liable and responsible to the other for all
obligations and duties hereunder relating to any period prior to the effective
date of termination; and (ii) no salary, compensation, severance benefits or
other amounts shall be paid to Employee, under this Agreement or otherwise,
with respect to any period subsequent to the effective date of such
termination, or with respect to the employment of Employee by Employer, whether
before or after the execution of this Agreement.
.9. CHANGE OF CONTROL
.9.1. If this Agreement is terminated by Employer, other
than pursuant to Section 7.1 or Section 7.2, within a period of eighteen (18)
months following a Change in Control, or if Employee terminates this Agreement
for Good Reason during such period, then, in addition to continuation of
payments of base compensation and any payment in lieu of accrued vacation to
which Employee is entitled under Section 8, the parties agree that (a) all
options or other rights to acquire Common Stock or other equity securities of
Employer or any successor corporation then held by Employee shall immediately
and automatically vest and become exercisable in full as to all such Common
Stock and other equity securities subject thereto, (b) all restrictions with
respect to outstanding shares of such Common Stock and other equity securities
under any plans, agreements or other documents evidencing the options and other
rights or pursuant to which the options and other rights were granted (other
than restrictions on transfer under federal and applicable state securities
laws), including but not limited to contractual restrictions on transfer,
rights of repurchase or first refusal in favor of Employer or any successor
corporation and restrictions on certificates for such Common Stock and other
equity securities (other than restrictions on certificates designed to ensure
compliance with federal and applicable state securities laws) shall
automatically terminate, and (c) such options and other rights shall remain
exercisable until a period of eighteen (18) months has elapsed following the
Change of Control or until the respective dates provided for exercise of such
options and other rights under any plans, agreements and other documents by
which they are evidenced, whichever is later, notwithstanding any term or
provision to the contrary in any plans, agreements or other documents
evidencing the options and other rights or pursuant to which the options and
other rights were granted.
.9.2. For purposes of this Agreement, "Change of Control"
shall be limited to:
(a) Any of the following transactions consummated
with the approval, recommendation or authorization of the Board:
(1) any merger, consolidation, statutory or
contractual share exchange, or other transaction to which the Employer
or any of its affiliates or shareholders is a party if, immediately
following the transaction, the persons who held Common Stock (or
securities convertible into Common Stock) immediately prior to the
transaction hold less than a majority of the combined Common Equity
(as defined in Exhibit A attached hereto) of Employer (or if, pursuant
to the transaction, shares of Common Stock are changed or converted
into or exchanged for, in whole or part,
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securities of another corporation or entity, the combined Common
Equity of that corporation or entity);
(2) any liquidation or dissolution of
Employer; and
(3) any sale, lease, exchange or other
transfer not in the ordinary course of business (in one transaction or
a series or related transactions) of all, or substantially all, of the
assets of Employer; or
(b) Any transaction (or series of related
transactions), consummated without the approval, recommendation or
authorization of the Board, in which any person, corporation or other
entity (including any "person" as defined in Section 13(d)(3) or
Section 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange
Act")) purchases any Common Stock (or securities convertible into
Common Stock), pursuant to a tender offer or a request or invitation
for tenders (as those terms are defined in Section 14(d)(1) of the
Exchange Act) or otherwise, and thereafter is the "beneficial owner"
(as that term is defined in Rule 13d-3 under the Exchange Act) of
securities of Employer representing at least fifty percent (50%) of
the combined Common Equity of Employer.
.9.3. For purposes of this Agreement, "Good Reason" shall
be limited to the happening within a period of eighteen (18) months following a
Change in Control of one of the following without Employee's express written
consent:
(a) A material reduction in the level of Employee's
responsibilities for Employer in comparison to the level thereof at
the time of the Change of Control;
(b) The assignment to Employee of a job title that
is not of comparable prestige and status within the industry as
Employee's job title at the time of the Change of Control;
(c) The assignment to Employee of any duties
inconsistent with Employee's position with Employer at the time of the
Change of Control, other than pursuant to Employee's promotion by
Employer;
(d) A material reduction in Employee's salary level;
(e) A material reduction in the overall level of
employee benefits or perquisites available to Employee at the time of
the Change of Control or Employee's right to participate therein,
unless such reduction is nondiscriminatory as to Employee;
(f) Employer's requiring Employee to be based
anywhere more than fifty (50) miles from the business location to
which Employee normally reported for work at the time of the Change of
Control, other than for required travel in connection with the
business of Employer not significantly greater than Employee's
business travel obligations at the time of the Change of Control; or
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(g) Any of the foregoing events and conditions
occurring prior to the Change of Control which Employee reasonably
demonstrates was at the request of a third party or otherwise arose in
connection with or in anticipation of the Change of Control.
.10. INDEMNIFICATION
.10.1. SCOPE. Employer agrees to hold harmless and
indemnify Employee to the fullest extent permitted by law against any Damages
(as defined in Section 10.4) incurred by Employee with respect to any
Proceeding (as defined in Section 10.5) to which Employee is or is threatened
to be made a party or witness, notwithstanding that such indemnification is not
specifically authorized by this Agreement, Employer's Articles of Incorporation
("Articles") or Bylaws, the Washington Business Corporation Act (the "Statute")
or otherwise. Such right to indemnification shall be without regard to the
limitations in RCW 23B.08.510 through 23B.08.550; PROVIDED, HOWEVER, that
Employee shall have no right to indemnification on account of (a) acts or
omissions of Employee finally adjudged to be intentional misconduct or a
knowing violation of law; (b) conduct of Employee finally adjudged to be in
violation of RCW 23B.08.310; or (c) any transaction with respect to which it is
finally adjudged that Employee personally received a benefit in money, property
or services to which Employee was not legally entitled. In the event of any
change, after the date of this Agreement, in any applicable law, statute or
rule regarding the right of a Washington corporation to indemnify a member of
its board of directors or an officer, such changes, to the extent that they
would expand Employee's rights hereunder, shall be within the scope of
Employee's rights and Employer's obligations hereunder, and, to the extent that
they would narrow Employee's rights hereunder, shall be excluded from this
Agreement; PROVIDED, HOWEVER, that any change that is required by applicable
laws, statutes or rules to be applied to this Agreement shall be so applied
regardless of whether the effect of such change is to narrow Employee's rights
hereunder.
.10.2. PROCEEDINGS RELATING TO FAILURE TO DISCHARGE DUTIES.
The indemnification and other rights and benefits provided to Employee by this
Agreement shall apply fully with respect to any Proceeding in which it is
claimed or adjudicated that Employee is liable to Employer by reason of having
failed to discharge the duties of Employee's office, which claims and
liabilities are hereby released; PROVIDED, HOWEVER, that the foregoing
indemnification and release obligations of Employer shall have no application
with respect to claims and liabilities by or to Employer to the extent that
they are based upon or arise out of Employee's actions or omissions described
in clauses (a), (b) or (c) of Section 10.1. Nothing in this Agreement shall
limit the right of Employer to terminate this Agreement on account of acts or
omissions of Employee that constitute cause under Section 7.1, regardless of
whether or not Employee is released by this Section 10.2 from liability to
Employer on account thereof.
.10.3. NONEXCLUSIVITY. The indemnification provided by this
Agreement shall not be deemed exclusive of any rights to which Employee may be
entitled under Employer's Articles or Bylaws, any vote of shareholders or
disinterested directors, the Statute or otherwise, whether as to actions or
omissions by Employee in Employee's official capacity or otherwise.
.10.4. INCLUDED COVERAGE. If Employee is made a party (or
is threatened to be made a party) to, or is otherwise involved (including, but
not limited to, as a witness) in any
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Proceeding, Employer shall hold harmless and indemnify Employee from and
against any and all losses, claims, damages and liabilities incurred in
connection with such Proceeding, including but not limited to attorneys' fees,
judgments, fines, ERISA excise taxes or penalties, amounts paid in settlement
and other expenses (collectively, "Damages").
.10.5. DEFINITION OF PROCEEDING. For purposes of this
Agreement, "Proceeding" shall mean any actual, pending, threatened or completed
action, suit, claim or proceeding (whether civil, criminal, administrative or
investigative and whether formal or informal) in which Employee is, has been or
becomes involved by reason of the fact that Employee is or has been an officer,
director, employee or agent of Employer or that, being or having been such an
officer, director, employee or agent, Employee is or was serving at the request
of Employer as an officer, director, employee, trustee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise
(collectively, a "Related Company"), including but not limited to service with
respect to any employee benefit plan, whether the basis of such action, suit,
claim or proceeding is alleged action or omission by Employee in an official
capacity as an officer, director, employee, trustee or agent or in any other
capacity while serving as an officer, director, employee, trustee or agent;
PROVIDED, HOWEVER, that "Proceeding" shall not include any action, suit, claim
or proceeding instituted by or at the direction of Employee unless such action,
suit, claim or proceeding is or was authorized by the Board.
.10.6. NOTIFICATION. Promptly after receipt by Employee of
notice of the commencement of any Proceeding, Employee will, if a claim in
respect thereof is to be made against Employer under this Agreement, notify
Employer of the commencement thereof (which notice shall be in the form of
Exhibit B hereto); PROVIDED, HOWEVER, that failure to so notify Employer will
relieve Employer from any liability that it may otherwise have to Employee
under this Agreement only if and to the extent that such failure can be shown
to have prejudiced Employer's ability to defend the Proceeding.
.10.7. DETERMINATION OF ENTITLEMENT. If a determination of
Employee's entitlement to indemnification is required pursuant to RCW
23B.08.550 or a successor statute or pursuant to other applicable law, the
appropriate decision maker shall make such determination; PROVIDED, HOWEVER,
that (a) Employee shall initially be presumed in all cases to be entitled to
indemnification, and (b) unless Employer shall deliver to Employee written
notice of a determination that Employee may not be entitled to indemnification
within twenty (20) days after Employer's receipt of Employee's notice pursuant
to Section 10.6, Employee shall conclusively be deemed to be entitled to such
indemnification and Employer hereby agrees not to assert otherwise. Employee
may establish a conclusive presumption of any fact necessary to such a
determination by delivering to Employer a declaration made under penalty of
perjury that such fact is true.
.10.8. SURVIVAL. The indemnification and release provided
under this Agreement shall apply to any and all Proceedings, notwithstanding
that Employee has ceased to be an officer, director, employee, trustee or agent
of Employer or a Related Company or that this Agreement has terminated.
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.11. EXPENSE ADVANCES
.11.1. GENERALLY. The right to indemnification conferred by
Section 10 shall include the right to have Employer pay Employee's attorneys'
fees and other expenses in any Proceeding as such expenses are incurred and in
advance of such Proceeding's final disposition (such right is referred to
hereinafter as an "Expense Advance").
.11.2. CONDITIONS TO EXPENSE ADVANCE. Employer's obligation
to provide an Expense Advance is subject to the following conditions:
(a) UNDERTAKING. If the Proceeding arose in
connection with Employee's service as an officer and/or director of Employer
(and not in any other capacity in which Employee rendered service, including
but not limited to service to any Related Company), then Employee hereby
undertakes and agrees, in accordance with RCW 23B.08.530, to repay all Expense
Advances if and to the extent that it shall ultimately be determined, by a
final decision not subject to appeal rendered by a court having proper
jurisdiction, that Employee is not entitled to be indemnified for such Expense
Advance under this Agreement or otherwise.
(b) COOPERATION. Employee shall give Employer
such information and cooperation as Employer may reasonably request.
(c) AFFIRMATION. If required under applicable
law, Employee shall furnish a written affirmation of Employee's good faith
belief that Employee has met all applicable standards of conduct.
.12. PROCEDURES FOR ENFORCEMENT
.12.1. ENFORCEMENT. If a claim for indemnification made by
Employee hereunder is not paid in full within thirty (30) days, or a claim for
an Expense Advance made by Employee hereunder is not paid in full within
fifteen (15) days, after written notice of such claim is delivered to Employer,
Employee may, but need not, at any time thereafter bring suit against Employer
to recover the unpaid amount of the claim (an "Enforcement Action").
.12.2. PRESUMPTIONS IN ENFORCEMENT ACTION. In any
Enforcement Action the following presumptions (and limitations on presumptions)
shall apply:
(a) Employer shall conclusively be presumed to
have entered into this Agreement and assumed the obligations imposed hereunder
in order to induce Employee to serve or to continue to serve as an officer and
director of Employer;
(b) Neither (i) the failure of Employer
(including but not limited to the Board, independent or special legal counsel
or Employer's shareholders) to make a determination prior to the commencement
of the Enforcement Action that indemnification of Employee is proper in the
circumstances nor (ii) an actual determination by Employer, the Board,
independent or special legal counsel or Employer's shareholders that Employee
is not entitled to indemnification
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shall be a defense to the Enforcement Action or create a presumption that
Employee is not entitled to indemnification hereunder; and
(c) If Employee is or was serving as an officer,
director, employee, trustee or agent of a corporation of which a majority of
the shares entitled to vote in the election of its directors is held by
Employer or in an executive or management capacity in a partnership, joint
venture, trust or other enterprise of which Employer or a wholly-owned
subsidiary of Employer is a general partner or has a majority ownership, then
such corporation, partnership, joint venture, trust or enterprise shall
conclusively be deemed a Related Company and Employee shall conclusively be
deemed to be serving such Related Company at the request of Employer.
.12.3. ATTORNEYS' FEES AND EXPENSES FOR ENFORCEMENT ACTION.
If Employee is required to bring an Enforcement Action, Employer shall hold
harmless and indemnify Employee against all of Employee's attorneys' fees and
expenses in bringing and pursuing the Enforcement Action (including but not
limited to attorneys' fees at any stage, and on appeal); PROVIDED, HOWEVER,
that Employer shall not be required to provide such indemnification for such
fees and expenses if a court of competent jurisdiction determines in a judgment
from which there is no appeal that any of the material assertions made by
Employee in such Enforcement Action were not made in good faith or were
frivolous.
.13. DEFENSE OF CLAIM. With respect to any Proceeding as to which
Employee has provided notice to Employer pursuant to Section 10.6:
.13.1. Employer may participate therein at its own expense.
.13.2. Employer, jointly with any other indemnifying party
similarly notified, may assume the defense thereof, with counsel reasonably
satisfactory to Employee. After notice from Employer to Employee of its
election to so assume the defense thereof, Employer shall not be liable to
Employee under this Agreement for any legal fees or other expenses (other than
reasonable costs of investigation) subsequently incurred by Employee in
connection with the defense thereof unless (a) the employment of counsel by
Employee or the incurring of such expenses has been authorized by Employer, (b)
Employee shall have reasonably concluded that there may be a conflict of
interest between Employer and Employee in the conduct of the defense of such
Proceeding, or (c) Employer shall not in fact have employed counsel to assume
the defense of such Proceeding, in each of which cases the legal fees and other
expenses of Employee shall be at the expense of Employer. Employer shall not be
entitled to assume the defense of a Proceeding brought by or on behalf of
Employer or as to which Employee shall have reached the conclusion described in
clause (b) above.
.13.3. Employer shall not be liable for any amounts paid in
settlement of any Proceeding effected without its written consent.
.13.4. Employer shall not settle any Proceeding in any
manner which would impose any penalty or limitation on Employee without
Employee's written consent.
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.13.5. Neither Employer nor Employee will unreasonably
withhold its or his consent to any proposed settlement of any Proceeding.
.14. MAINTENANCE OF D&O INSURANCE
.14.1. Subject to Section 14.3 below, during the period (the
"Coverage Period") beginning as soon as practicable following the date of this
Agreement and ending not less than four (4) years following the time Employee
is no longer serving as either an officer or director of Employer or any
Related Company or, if later, such time as Employee shall no longer be
reasonably subject to any possible Proceeding, Employer shall maintain a
directors' and officers' liability insurance policy ("D&O Insurance") in full
force and effect, providing in all respects coverage at least comparable to and
in similar amounts as that obtained by other comparable companies.
.14.2. Under all policies of D&O Insurance, Employee shall
during the Coverage Period be named as an insured in such a manner as to
provide Employee the same rights and benefits, subject to the same limitations,
as are accorded to Employer's officers or directors most favorably insured by
such policy, and each insurer under a policy of D&O Insurance shall be required
to provide Employee written notice at least thirty (30) days prior to the
effective date of termination of the policy.
.14.3. Employer shall have no obligation to obtain or
maintain D&O Insurance if the Board determines in good faith that such
insurance is not reasonably available, the premium costs for such insurance are
disproportionate to the amount of coverage provided, or the coverage provided
by such insurance is so limited by exclusions as to provide an insufficient
benefit.
.14.4. It is the intention of the parties in entering into
this Agreement that the insurers under the D&O Insurance, if any, shall be
obligated ultimately to pay any claims by Employee which are covered by D&O
Insurance, and nothing herein shall be deemed to diminish or otherwise restrict
Employer's or Employee's right to proceed or collect against any insurers under
D&O Insurance or to give such insurers any rights against Employer or Employee
under or with respect to this Agreement, including but not limited to any right
to be subrogated to Employer's or Employee's rights hereunder, unless otherwise
expressly agreed to by Employer and Employee in writing. The obligation of such
insurers to Employer and Employee shall not be deemed reduced or impaired in
any respect by virtue of the provisions of this Agreement.
.14.5. Employer shall be subrogated to Employee's rights
under D&O Insurance with respect to claims for Damages and Expense Advances
that have been paid to Employee under this Agreement.
.15. LIMITATIONS ON INDEMNIFICATION; MUTUAL ACKNOWLEDGMENT
.15.1. LIMITATION ON INDEMNITY. No indemnification pursuant
to this Agreement shall be provided by Employer:
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(a) On account of any suit in which a final,
unappealable judgment is rendered against Employee for an accounting of profits
made from the purchase or sale by Employee of securities of Employer in
violation of the provisions of Section 16(b) of the Securities Exchange Act of
1934 and amendments thereto; or
(b) For Damages or Expense Advances that have
been paid directly to Employee by an insurance carrier under a policy of D&O
Insurance or other insurance maintained by Employer.
.15.2. MUTUAL ACKNOWLEDGMENT. Employer and Employee
acknowledge that, in certain instances, federal law or public policy may
override applicable state law and prohibit Employer from indemnifying Employee
under this Agreement or otherwise. For example, Employer and Employee
acknowledge that the Securities and Exchange Commission (the "SEC") has taken
the position that indemnification is not permissible for liabilities arising
under certain federal securities laws, and federal legislation prohibits
indemnification for certain ERISA violations. Furthermore, Employee
understands and acknowledges that Employer has undertaken or may be required in
the future to undertake with the SEC to submit for judicial determination the
issue of Employer's power to indemnify Employee in certain circumstances.
.16. SEVERABILITY. Nothing in Section 10 through Section 15 is
intended to require or shall be construed as requiring Employer to take or fail
to take any action in violation of applicable law. Employer's inability to
perform its obligations under this Agreement pursuant to court order shall not
constitute a breach of this Agreement. The provisions of Section 10 through
Section 15 shall be severable, as provided in Section 23.6. If a court of
competent jurisdiction should decline to enforce any of the provisions of
Section 10 through Section 15, Employer and Employee agree that such provisions
shall be deemed to be reformed to provide Employee indemnification by Employer
to the maximum extent permitted by the other portions of Section 10 through
Section 15 that are not unenforceable.
.17. CONFIDENTIALITY
.17.1. Employee agrees to treat all Proprietary Information
(as that term is defined in Section 17.4) as confidential and as proprietary to
Employer. Except to the extent necessary in connection with the discharge of
his duties as an employee of Employer, Employee agrees not to directly or
indirectly disclose to or discuss with anyone, use, reproduce or publish any
Proprietary Information, either during or within a period of two (2) years
after the end of his employment by Employer, unless Employee first secures the
written permission of Employer.
.17.2. Promptly following the end of his employment by
Employer, Employee agrees to deliver to Employer all originals, and copies in
the control or possession of Employee, of any and all writings, records,
journals, data or other objects or documents that describe, depict, contain or
record any Proprietary Information. All such items shall be sufficiently
identified, and accompanied with sufficient explanation, to render such items
useful to Employer in the conduct of its business.
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.17.3. The restrictions in Section 17.1 shall not apply to
Proprietary Information--
(a) that becomes part of the public domain
through no act, omission or fault of Employee; or
(b) that is in the possession of Employee at the
time of disclosure by Employer, as shown by Employee's files and
records prior to disclosure; or
(c) that Employee is legally required to disclose
by statute or regulation or in connection with any litigation,
arbitration or other legal proceeding, including pursuant to a
subpoena or similar document, PROVIDED, HOWEVER, that Employee shall
use his best efforts to immediately notify Employer as soon as
Employee becomes aware of the need for such disclosure; or
(d) that has been independently developed by
Employee.
.17.4. As used in this Section 17, the term "Proprietary
Information" shall mean any and all information, not publicly known, that
relates to the business activities of Employer and that has been or is
hereafter disclosed, or otherwise has become or hereafter becomes known, to
Employee during the term of or in connection with his employment by Employer,
whether before or after the execution of this Agreement.
.18. NONCOMPETITION; NONSOLICITATION. Employee will perform
services which have a unique value to Employer and which, if used in
competition with Employer, could cause serious and irreparable harm to
Employer. Employee will develop goodwill for Employer through personal contact
with customers, suppliers, licensees and others who have business relationships
with Employer. This goodwill, which is a proprietary asset of Employer, may
follow Employee after his employment with Employer terminates. Accordingly,
Employee agrees that for a period of two (2) years following the effective date
of termination of Employee's employment with Employer for any reason, other
than a termination of this Agreement by Employee for Good Reason within
eighteen (18) months following a Change of Control or a termination of this
Agreement by Employee pursuant to Section 7.5, Employee will not, unless he
secures the prior written permission of Employer, directly or indirectly:
(a) be employed by, act as the agent for, or consult with
or otherwise perform services for a Competitor (as defined below);
(b) own any equity interest in, manage or participate in
the management (as an officer, director, partner, member or otherwise)
of, or be connected in any other manner with, a Competitor; PROVIDED,
HOWEVER, that nothing in this Agreement shall restrict Employee from
owning less than one percent (1%) of the equity interests of any
publicly held entity; or
(c) induce or attempt to induce any employee, officer,
director, agent, independent contractor, consultant, customer,
supplier or other service provider
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of Employer or any of its subsidiaries or licensees to terminate its
relationship with, or cease providing services or products to, or
purchasing products from, Employer or any of its subsidiaries or
licensees.
For purposes of this Agreement, the term "Competitor" means any individual or
entity that is directly or indirectly engaged, or is known to Employee to be
preparing to engage, in direct marketing of microcomputer products or in any
other business which is competitive with any business in which Employer is
engaged, or is known to Employee to be preparing to engage, at the time
Employee's employment with Employer terminates. Employee acknowledges and
agrees that due to the nature of the Business, there is no geographical
limitation on the restrictions set forth in this Section 18. Employer and
Employee agree and stipulate that, in light of all of the facts and
circumstances of the relationship that exists and is expected to exist between
Employer and Employee, the covenants not to compete in this Section 18
(including but not limited to the scope of the restricted activities and the
duration and lack of geographic extent of such restrictions) are fair and
reasonably necessary for the protection of the goodwill and other protectable
interests of Employer. If a court of competent jurisdiction should decline to
enforce any of the provisions of this Section 18, Employer and Employee agree
that such provisions shall be deemed to be reformed to restrict Employee's
ability to compete with Employer to the maximum extent, in time, scope of
activities, and geography, that the court shall find enforceable.
.19. NONDISPARAGEMENT. Upon termination of Employee's employment
relationship hereunder, Employer and Employee agree that, unless otherwise
legally required to do so, they will each at all times thereafter refrain from
discussing the circumstances relating to such termination and from disparaging,
or describing in a negative light, the performance, capabilities, services,
business practices, or ethics of the other (or of the officers, directors or
controlling shareholders of the other).
.20. RIGHT TO INJUNCTION/COSTS OF ENFORCEMENT. Employee
acknowledges that Employer will suffer immediate and irreparable harm that will
not be compensable by damages alone in the event Employee repudiates or
breaches Section 17, 18 or 19 or threatens or attempts to do so. In the event
of any such breach or any threatened or attempted breach, Employee agrees that
Employer, in addition to and not in limitation of any other rights, remedies or
damages available to it at law or in equity, shall be entitled to obtain
temporary, preliminary and permanent injunctions to prevent or restrain any
such breach, and Employer shall not be required to post a bond as a condition
for the granting of such relief.
.21. SECURITIES LAW MATTERS.
.21.1. Employer agrees to include the shares of Common Stock
that are subject to issuance under the attached Stock Option Agreement in a SEC
registration filed by Employer promptly (and in any event no later than ninety
(90) days) after the date of this Agreement.
.21.2. With respect to future public offerings of Employer's
Common Stock registered under the Securities Act of 1933, whether or not
Employee is participating as a selling shareholder in such offering, Employee
agrees to execute and abide by a "market stand-off" agreement with the
managing underwriter(s) of such offering, under which Employee will agree
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that any shares of Employer's Common Stock held by him (other than shares being
sold in such registered offering) shall not (except to the extent permitted by
and in accordance with the procedures prescribed in such stand-off agreement)
be sold, transferred or otherwise disposed of pursuant to SEC Rule 144 or
Section 4(1) of the Securities Act of 1933 during the period beginning on the
effective date of such registered offering and ending on the earlier of (i) the
termination of such stand-off agreement in accordance with its terms or (ii)
six months after the closing date of such registered offering; PROVIDED, that
Employee shall be obligated to execute and abide by such a stand-off agreement
only if and to the extent that (i) the managing underwriter(s) of such offering
expressly so request, and (ii) in connection with such registered offering, all
of Employer's executive officers, directors and principal shareholders have
also executed stand-off agreements containing substantially the same terms and
restrictions.
.22. NOTICES. To be effective, any notice hereunder shall be in
writing, delivered in person, via facsimile machine (with confirmation copy
mailed by certified or registered mail, postage prepaid), sent by documented
overnight delivery service, or mailed by certified or registered mail, postage
prepaid, to the appropriate party at the addresses set forth below, or to such
other address as the parties may hereinafter designate. All such notices and
other written communications shall be effective (a) if delivered, upon
delivery, (b) if by facsimile machine, upon transmission with confirmation of
receipt by the receiving party's facsimile terminal, (c) if sent by documented
overnight delivery service, on the date delivered or (d) if mailed, three (3)
days after mailing --
If to Employer, to:
Multiple Zones International, Inc.
707 South Grady Way
Renton, Washington 98055-3233
Attn: General Counsel
If to Employee, to:
John E. DeFeo
10900 NE 4th Street, Suite 2300
Bellevue, WA 98004
.23. MISCELLANEOUS.
.23.1. This Agreement shall be binding upon and inure to
the benefit of Employer, its successors and assigns. This Agreement shall be
binding upon Employee and his heirs, personal and legal representatives, and
guardians, and shall inure to the benefit of Employee. Neither this Agreement
nor any part hereof or interest herein shall be assignable by Employee.
.23.2. The terms and provisions of this Agreement may only
be modified or supplemented by a written instrument duly executed by each party
hereto.
.23.3. This Agreement shall be governed by and enforced and
construed in accordance with the laws of the State of Washington.
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.23.4. The prevailing party in any action to enforce its
rights under this Agreement shall recover from the other party its reasonable
attorneys' fees and costs, including any fees and costs incurred upon appeal.
.23.5. This Agreement, together with the Exhibits hereto,
sets forth the entire, integrated understanding and agreement of the parties
hereto with respect to the subject matter hereof and supersedes all prior or
contemporaneous agreements or understandings, written or oral, between Employer
and Employee, including, without being limited to, all existing agreements
between Employer and Employee pertaining to the performance of consulting
services for Employer on a fee basis (it being understood that outstanding
invoices for consulting services heretofore rendered are not hereby
terminated).
.23.6. If any provision of this Agreement, on its face or as
applied to any person or circumstance, is or becomes unenforceable to any
extent and is not reformed pursuant to this Agreement, the remainder of this
Agreement and the application of the provision to any other person,
circumstance or extent, shall not be affected, and this Agreement shall
continue in force.
.23.7. Each of the parties hereto shall have the right to
waive compliance in a particular circumstance with a covenant set forth in this
Agreement, but no such waiver shall operate as a waiver of compliance with such
covenant in any other circumstance or as a waiver of compliance with any other
covenant set forth in this Agreement. In any event, no such waiver shall be
deemed effective unless it is in writing and signed by the party so waiving.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement effective as of the day and year first set forth above.
"Employer" MULTIPLE ZONES
INTERNATIONAL, INC.
By _____________________________
Sadrudin J. Kabani, Chairman
"Employee"
______________________________
John E. DeFeo
16
<PAGE> 17
EXHIBIT B
(TO EMPLOYMENT AGREEMENT)
NOTICE OF CLAIM
1. Notice is hereby given pursuant to Section 10.6 of the
Employment Agreement (the "Agreement") dated as of January 5, 1997, between
MULTIPLE ZONES INTERNATIONAL, INC., a Washington corporation (the "Company"),
and the undersigned, of the commencement of a Proceeding, as defined in the
Agreement.
2. The undersigned hereby requests indemnification with respect
to the Proceeding by the Company under the terms of the Agreement.
3. [Add brief description of the Proceeding.]
DATED: ___________________, 199___.
_____________________________________
John E. DeFeo
<PAGE> 1
EXHIBIT 10.26
EXHIBIT A
THE SECURITIES OFFERED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED OR QUALIFIED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY
STATE, AND ANY SALE OF SUCH SECURITIES IS SUBJECT TO COMPLIANCE WITH, OR THE
AVAILABILITY OF EXEMPTIONS FROM COMPLIANCE WITH, THE REGISTRATION AND
QUALIFICATION REQUIREMENTS OF SUCH ACT AND ANY APPLICABLE STATE SECURITIES
LAWS. THIS INSTRUMENT DOES NOT CONSTITUTE AN OFFER OR SOLICITATION TO ANY
PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION MAY NOT LAWFULLY BE
MADE. TRANSFER OF THIS INSTRUMENT AND THE SECURITIES OFFERED HEREBY IS
RESTRICTED AS PROVIDED IN SECTIONS 7, 8 AND 9 BELOW.
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (this "Agreement") is entered into,
effective as of January 5, 1997 (the "Grant Date"), by MULTIPLE ZONES
INTERNATIONAL, INC., a Washington corporation (the "Company"), and JOHN E.
DEFEO (the "Holder").
R E C I T A L S
A. The Company has agreed to enter into an Employment Agreement with
Holder, dated January 5, 1997 (the "Employment Agreement"), which provides for
the grant of certain stock purchase options to Holder on the terms and
conditions set forth herein.
B. The execution of this Stock Option Agreement is an inducement
essential to Holder's entering into the Employment Agreement.
NOW, THEREFORE, the Company and the Holder covenant and agree as
follows:
1. GRANT OF OPTION; EXERCISABILITY CONDITIONS.
(a) Subject to the terms set forth below, the Company hereby
grants to the Holder a stock option (the "Option") to acquire from the Company
Six Hundred Forty-Three Thousand Four Hundred Seventy-Six (643,476) shares of
the Common Stock of the Company, no par value (the "Common Stock") (which is
equal to 5% of the number of shares of Common Stock outstanding on the Grant
Date), at the price of Ten Dollars and Fifty Cents ($10.50) per share (the
"Option Price"). To the maximum extent permitted under applicable laws and
regulations, it is intended that this Option be an "incentive stock option," as
that term is defined in Section 422 of the Internal Revenue Code of 1986, as
amended, and that this Agreement constitute a "plan" thereunder.
(b) The Option shall be exercisable by Holder only to the
extent that both of the following conditions are satisfied: (i) the grant of
the Option shall have been formally approved by the Company's shareholders; and
(ii) the shares being purchased upon exercise shall have vested in accordance
with Section 2 below. The Company hereby agrees to include the approval of the
Option on the formal agenda for its next annual meeting of shareholders, and to
exercise its best efforts to obtain shareholder approval thereof at such
meeting. Holder has received irrevocable proxies from holders of a majority of
the Common Equity conveying to him the right to vote their shares in favor of a
resolution to approve the granting of this Option.
<PAGE> 2
2. VESTING. Subject to earlier termination under the terms and
conditions set forth in this Agreement, and subject to accelerated vesting
under the circumstances described in Section 2(b) below, the Option shall vest
and become exercisable as follows: (i) twenty percent (20%) of the shares
initially subject hereto shall vest and become exercisable on the Grant Date;
(ii) an additional twenty percent (20%) of the shares initially subject hereto
shall vest and become exercisable on the second anniversary of the Grant Date;
(iii) an additional twenty percent (20%) of the shares initially subject hereto
shall vest and become exercisable when the Current Market Price (as defined
below) of the Company's Common Stock first equals or exceeds (x) Twenty-Five
Dollars ($25.00), if such occurs during 1997, or (y) Thirty Dollars ($30.00),
if such occurs after 1997; (iv) an additional twenty percent (20%) of the
shares initially subject hereto shall vest and become exercisable when the
Current Market Price of the Company's Common Stock first equals or exceeds
Sixty-Five Dollars ($65.00); and (v) an additional twenty percent (20%) of the
shares initially subject hereto shall vest and become exercisable when the
Current Market Price of the Company's Common Stock first equals or exceeds One
Hundred Dollars ($100.00); PROVIDED, that shares subject to vesting pursuant to
clauses (iii), (iv) and (v) above shall vest in any event on December 31, 2001,
irrespective of whether or not the conditions specified in any of such clauses
have been met, unless this Option shall have terminated earlier pursuant to the
terms and conditions set forth in this Agreement. In each instance described
in clauses (i) through (v) above, the number of shares vesting shall be rounded
down to the nearest whole number if such percentage is not a whole number, and
fractional shares eliminated by such rounding shall be added to the last such
clause to vest. If the Holder's employment arrangement with the Company
terminates for any reason, including death or Disability, the Option will not
vest further following such termination (it being understood that vesting may
occur as a result of certain events at the time of such a termination as
described in Section 2(b) below). The Board may, at any time before complete
termination of the Option, elect to accelerate the time or times at which such
Option may be exercised, in whole or in part.
(a) CURRENT MARKET PRICE As used in this Agreement, the term "Current
Market Price" shall mean the average, over all trading days within the
three-month period ending on the day preceding the day as of which the
determination is made, of the last sales price (or, if no last sales price is
reported, the average of the high bid and low asked prices) for a share of
Common Stock on each such trading day, as reported by the principal exchange on
which the Common Stock is listed, or, if the Common Stock is publicly traded
but not listed on an exchange, as reported by The Nasdaq Stock Market, or, if
such prices or quotations are not reported by The Nasdaq Stock Market, as
reported by any other available source of prices or quotations selected in good
faith by the Company's Board of Directors (the "Board"). The dollar amounts
specified in clauses (iii), (iv) and (v) above shall be subject to equitable
adjustment to reflect the effects of any stock dividends, stock splits, reverse
splits or combinations, or other recapitalizations or reclassifications or
other similar actions affecting the Company's outstanding shares of Common
Stock.
(b) ACCELERATED VESTING Irrespective of the provisions affecting
vesting and exercisability of this Option as set forth in the first paragraph
of this Section 2 (but still subject to the requirement of Section 1(b)(i)
above), the shares subject hereto shall be subject to accelerated vesting and
exercisability in the following circumstances:
(i) Death or Disability. Upon the death or Disability of the
Holder, this Option shall become fully vested and exercisable for all of
the shares subject hereto.
-2-
<PAGE> 3
(ii) Control Purchase. Effective upon a Control Purchase, if
the Holder is in the employ of the Company at that time, this Option
shall become fully vested and exercisable for all of the shares subject
hereto.
(iii) Approved Transaction. The following provisions shall apply
if an Approved Transaction occurs:
(A) The Company shall provide the Holder with notice of
the pendency of the approved Transaction at least fifteen (15) days
prior to the expected date of consummation thereof (the date on which
the Approved Transaction is consummated being referred to as the
"Transaction Date").
(B) Effective immediately prior to the Transaction Date,
if at that time the Holder is in the employ of the Company, this Option
shall become fully vested and exercisable for all shares subject hereto.
Following notice of the Approved Transaction, any exercise of this
Option may be contingent upon consummation of the Approved Transaction
if so elected by the Holder in the notice of exercise, and shall be
contingent upon such consummation with respect to any portion of this
Option that will only become vested and exercisable immediately prior to
such consummation.
(C) Upon consummation of the Approved Transaction, this
Option shall terminate.
(D) Section 2(b)(iii)(B) and Section 2(b)(iii)(C) shall
not apply if the Board determines, in its sole discretion, that the
Company or another party to the Approved Transaction has made equitable
and appropriate provision for continuation of this Option, or for
replacement of this Option with a new award on terms which are, as
nearly as practicable, the financial equivalent of this Option (taking
into account the consideration that holders of Common Stock will receive
in the Approved Transaction). An equitable and appropriate replacement
of this Option shall include, but not be limited to, the making of a
cash payment to the Holder, in cancellation of this Option, of such
amount as the Board determines, in its sole discretion, represents the
value that this Option would then have if it were fully vested and
exercisable and free of restrictions.
(iv) Termination After Certain Approved Transactions. If, in
connection with an Approved Transaction in which the Company or another
party to the Approved Transaction makes equitable and appropriate
provision, in the manner contemplated by Section 2(b)(iii)(D), for
continuation of this Option, or for replacement of this Option with one
or more new options (each Option so continued or replaced being refereed
to as a "Continuing Option"), then, if the Company terminates the
employment of the Holder of a Continuing Option without Cause within a
period of eighteen (18) months following the Transaction Date, or if the
Holder voluntarily terminates his employment with the Company for Good
Reason during such period, then (A) all Continuing Options held by the
Holder shall become fully vested and exercisable for all of the shares
subject thereto; (B) all restrictions under this Agreement with respect
to Common Stock issued pursuant to the exercise of any such Continuing
Option (other than restrictions on transfer under federal and applicable
state securities laws), including but not limited to contractual
restrictions on transfer, rights of repurchase or first refusal in favor
of the Company and restrictions on certificates for the Common Stock
(other than restrictions on certificates designed to promote compliance
with federal and applicable state securities laws), shall automatically
terminate; and (C) each such Continuing Option shall remain exercisable
until a period of eighteen (18) months has
-3-
<PAGE> 4
elapsed following the Transaction Date or until the date on which the
Continuing Option would have expired if the employment of the Holder had
not terminated, whichever occurs first. For purposes of this Section
2(b)(iv), the term "Company" shall include another party to the Approved
Transaction.
(v) Certain Definitions. As used in this Agreement, the
following terms have the following meanings:
(A) "Approved Transaction" means any of the following
transactions consummated with the approval, recommendation or
authorization of the Board:
(I) any merger, consolidation,
statutory or contractual share exchange, or other transaction to which
the Company or any of its Affiliates or shareholders is a party if,
immediately following the transaction, the persons who held Common Stock
(or securities convertible into Common Stock) immediately prior to the
transaction hold less than a majority of the combined Common Equity of
the Company (or if, pursuant to the transaction, shares of Common Stock
are changed or converted into or exchanged for, in whole or part,
securities of another corporation or entity, the combined Common Equity
of that corporation or entity);
(II) any liquidation or dissolution of
the Company; and
(III) any sale, lease, exchange or
other transfer not in the ordinary course of business (in one
transaction or a series of related transaction) of all, or substantially
all, of the assets of the Company.
(B) "Cause" means, in connection with the Company's
termination of the employment of the Holder: (I) repeated failures to
carry out directions of the Board with regard to material matters
reasonably consistent with the Holder's duties; (II) knowing violation
of a state or federal law involving the commission of a crime against
the Company or a felony; (III) misuse of alcohol or controlled
substances; (IV) any misrepresentation, deception, fraud or dishonesty
that is materially injurious to the Company; and (V) any act or omission
in willful disregard of the interests of the Company that substantially
impairs the Company's goodwill, business or reputation.
(C) "Common Equity" means the capital stock of a
corporation (or corresponding securities of a noncorporate entity)
ordinarily, and apart from rights accruing under special circumstances,
having the right to vote in an election for directors (or for members of
the governing body of the noncorporate entity).
(D) "Control Purchase" means any transaction (or series of
related transactions), consummated without the approval, recommendation
or authorization of the Board, in which any person, corporation or other
entity (including any "person" as defined in Section 13(d)(3) or Section
14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act"))
purchases any Common Stock (or securities convertible into Common
Stock), pursuant to a tender offer or a request or invitation for
tenders (as those terms are defined in Section 14(d)(1) of the Exchange
Act) or otherwise, and thereafter is the "beneficial owner" (as that
term is defined in Rule 13d-3 under the Exchange Act) of securities of
the Company representing at least fifty percent (50%) of the combined
Common Equity of the Company. Without limiting the generality of the
preceding sentence, the Board shall have the authority to determine in
its sole discretion that a transaction (or series of related
transactions) is not a Control Purchase, even though literally included
within the foregoing definition, if the transaction (or series of
related transactions)
-4-
<PAGE> 5
does not have the effect of significantly changing or influencing the
control of the Company on a permanent basis.
(E) "Disability" refers to the circumstances described
in Section 7.2 of the Employment Agreement.
(F) "Good Reason" means, with respect to the Holder, the
occurrence in connection with an Approved Transaction, without the
Holder's express written consent, of one of the following events or
conditions:
(a) A material reduction in the level of the
Holder's responsibilities for the Company in comparison to the level
thereof at the time of the Approved Transaction;
(b) The assignment to the Holder of a job title
that is not of comparable prestige and status within the industry as the
Holder's job title at the time of the Approved Transaction;
(c) The assignment to the Holder of any duties
inconsistent with the Holder's position with the Company at the time of
the Approved Transaction, other than pursuant to the Holder's promotion
by the Company;
(d) A material reduction in the Holder's salary
level;
(e) A material reduction in the overall level of
employee benefits or perquisites available to the Holder at the time of
the Approved Transaction, or the Holder's right to participate therein,
unless such reduction is nondiscriminatory as to the Holder;
(f) The Company's requiring the Holder to be
based anywhere more than fifty (50) miles from the business location to
which the Holder normally reported for work at the time of the Approved
Transaction, other than for required travel in connection with the
business of the Company not significantly greater than the Holder's
business travel obligations at the time of the Approved Transaction; or
(g) Any of the foregoing events and conditions
occurring prior to the Approved Transaction which the Holder reasonably
demonstrates was at the request of a third party or otherwise arose in
connection with or in anticipation of the Approved Transaction.
3. TERMINATION OF THE OPTION.
(a) Unless earlier terminated in accordance with the provisions
of this Agreement, the Option will terminate on June 30, 2002.
(b) If the employment arrangement between the Holder and the
Company terminates for any reason, the Option shall automatically terminate as
to any shares of Common Stock subject thereto that have not either vested
previously or vested as a result of such termination of employment (the shares
of Common Stock as to which the Option does not terminate being referred to as
the "Subject Shares"). Following such termination, the Option will, subject to
earlier termination pursuant to this Section 3, remain in effect as to the
Subject Shares for a period of ninety (90) days following such termination, or,
if such termination is on account of death or Disability, for a period of one
(1) year following such termination, at the end of which period, to the extent
it has not been exercised, the Option will terminate. The foregoing
notwithstanding, however, if the Holder's employment is terminated for Cause
prior to the complete exercise of this Option, then this Option shall remain in
effect as to the subject shares for a period of only five (5) days following
such termination.
-5-
<PAGE> 6
4. ADJUSTMENTS TO THE OPTION. If the Company subdivides its
outstanding shares of Common Stock into a greater number of shares of Common
Stock (by stock dividend, stock split, reclassification or otherwise) or
combines its outstanding shares of Common Stock into a smaller number of shares
of Common Stock (by reverse stock split, reclassification or otherwise), or if
the Board determines, in its sole discretion, that any stock dividend,
extraordinary cash dividend, reclassification, recapitalization,
reorganization, split-up, spin-off, combination, exchange of shares, warrants
or rights offering to purchase Common Stock, or other similar corporate event
(including mergers or consolidations other than those which constitute Approved
Transactions) affects the Common Stock such that an adjustment is required in
order to preserve the benefits or potential benefits intended to be made
available under this Option, then the Board shall, in its sole discretion and
in such manner as the Board may deem equitable and appropriate, make such
adjustments to any or all of (i) the number and kind of shares subject to this
Option, and (ii) the purchase or exercise price with respect to this Option;
PROVIDED, HOWEVER, that the number of shares subject to this Option shall be
always a whole number. The Board may, if deemed appropriate, provide for a
cash payment to the Holder in connection with any adjustment made pursuant to
this Section 4.
5. EXERCISE OF THE OPTION. In order to exercise the Option, the
Holder must do the following:
(a) deliver to the Company a written notice, in the form
attached hereto, specifying the number of shares of Common Stock for which the
Option is being exercised or converted;
(b) surrender this Agreement to the Company;
(c) tender payment of the aggregate Option Price for the shares
for which the Option is being exercised, which payment may be made (i) in cash
or by check; (ii) if at the time of exercise the Common Stock is registered
pursuant to Section 12 of the Exchange Act, by delivery to the Company on the
exercise date of shares of Common Stock that (x) have a fair market value
(based on the last sales price, or if none is reported the average of the high
bid and low asked prices, for a share of Common Stock on the last trading day
prior to the exercise date, as reported by the exchange, market or other source
specified in Section 2(a) above) equal to the aggregate Option Price payable,
and (y) have been held by the Holder for at least six (6) months prior to the
date of exercise; or (iii) by such other means as the Board, in its sole
discretion, shall permit at the time of exercise; PROVIDED, that as an
alternative to exercising the Option in the foregoing manner, to the extent the
Holder would otherwise be entitled to exercise the Option, the Holder may,
without having to pay the Option Price in cash or by check, instead require the
Company to convert the Option, in whole in part, at any time and from time to
time prior to its termination, into that number of shares of Common Stock equal
to the quotient obtained by dividing ((A-B) x C) by (A), where: (i) A equals
the fair market value of one share of Common Stock (determined as specified in
clause (x) of this paragraph); (ii) B equals the per share Option Price; and
(iii) C equals the number of shares of Common Stock subject to purchase upon
exercise of the Option which Holder is surrendering pursuant to an executed
conversion notice in the form attached hereto.
(d) pay, or make arrangements satisfactory to the Board for
payment to the Company of, all federal, state and local taxes, if any, required
to be withheld by the Company in connection with the exercise or conversion of
the Option; and
(e) execute and deliver to the Company any other documents
reasonably required from time to time by the Board in order to promote
compliance with the 1933 Act, applicable state securities laws, or any other
applicable law, rule or regulation.
-6-
<PAGE> 7
6. DELIVERY OF SHARE CERTIFICATE. As soon as practicable after the
Option has been duly exercised, the Company will deliver to the Holder a
certificate for the shares of Common Stock for which the Option was exercised.
Unless the Option has expired or been exercised in full, the Company and the
Holder agree to execute a new Stock Option Agreement, covering the remaining
shares of Common Stock that may be acquired upon exercise of the Option, which
will be identical to this Agreement except as to the number of shares of Common
Stock subject thereto. In lieu of replacing this Agreement in such manner, the
Company may affix to this Agreement an appropriate notation indicating the
number of shares for which the Option was exercised and return this Agreement
to the Holder.
7. NONTRANSFERABILITY. The Option is not transferable other than by
will or the laws of descent and distribution, and the Option may be exercised
during the lifetime of the Holder only by the Holder or his or her court
appointed legal representative.
8. WARRANTIES AND REPRESENTATIONS OF THE HOLDER. By executing this
Agreement, the Holder accepts the Option and represents and warrants to the
Company and covenants and agrees with the Company as follows:
(a) The Holder agrees to comply with and be bound by all of the
provisions of this Agreement.
(b) The Holder recognizes, agrees and acknowledges that no
registration statement under the 1933 Act, or under any state securities laws,
has been filed with respect to the Option or any shares of Common Stock that
may be acquired upon exercise of the Option. Pursuant to Section 21.1 of the
Employment Agreement, the Company has agreed to include the shares of Common
Stock that may be acquired upon exercise of the Option in a SEC registration to
be filed by the Company promptly (and in any event no later than ninety (90)
days) after the Grant Date.
(c) The Holder warrants and represents that the Option and any
shares of Common Stock acquired upon exercise of the Option will be acquired
and held by the Holder for the Holder's own account, for investment purposes
only, and not with a view towards the distribution or public offering thereof
nor with any present intention of reselling or distributing the same at any
particular future time.
(d) The Holder agrees not to sell, transfer or otherwise
dispose of any shares of Common Stock that may be acquired upon exercise of the
Option unless (i) there is an effective registration statement under the 1933
Act covering the proposed disposition and compliance with governing state
securities laws, (ii) the Holder delivers to the Company, at the Holder's
expense, a "no-action" letter or similar interpretative opinion, satisfactory
in form and substance to the Company, from the staff of each appropriate
securities agency, to the effect that such shares may be disposed of by the
Holder in the manner proposed, or (iii) the Holder delivers to the Company, at
the Holder's expense, a legal opinion, satisfactory in form and substance to
the Company, of legal counsel designated by the Holder and satisfactory to the
Company, to the effect that the proposed disposition is exempt from
registration under the 1933 Act and governing state securities laws.
(e) The Holder acknowledges and consents to the appearance of a
restrictive legend, referring to the transfer and other restrictions imposed
hereby, on each certificate representing shares of Common Stock issued upon
exercise of the Option.
(f) The Holder agrees not to sell, transfer or otherwise
dispose of the Option or any shares of Common Stock acquired upon exercise of
the Option, except as specifically permitted by this Agreement and any
applicable securities laws.
-7-
<PAGE> 8
9. NO RIGHT TO EMPLOYMENT. Nothing contained in this Agreement
shall confer or be construed to confer on the Holder any right to continue in
the employ or service of the Company or interfere in any way with the right of
the Company to terminate the Company's employment with the Holder at any time,
with or without cause (subject, however, to the provisions of any written
employment agreement between the Holder and the Company).
10. RIGHTS AS SHAREHOLDER. The Holder will have no rights as a
shareholder of the Company on account of the Option or on account of shares of
Common Stock which are to be acquired upon exercise of the Option (but with
respect to which no certificates have been delivered to the Holder).
11. TAX WITHHOLDING. The Holder agrees to pay, or make arrangements
satisfactory to the Board for payment to the Company of, all federal, state and
local income, employment and other taxes, if any, required to be withheld by
the Company in connection with the exercise of the Option or any sale, transfer
or other disposition of any shares of Common Stock acquired upon exercise of
the Option. If the Holder fails to do so, then the Holder hereby authorizes the
Company to deduct all or any portion of such taxes from any payment of any kind
otherwise due to the Holder.
12. FURTHER ASSURANCES. The Holder agrees to from time to time
execute such additional documents as the Company may reasonably require in
order to effectuate the purposes of the Plan and this Agreement.
13. BINDING EFFECT. This Agreement shall be binding upon the Holder
and his or her heirs, successors and assigns.
14. ENTIRE AGREEMENT; MODIFICATIONS. This Agreement constitutes the
entire agreement and understanding between the Company and the Holder regarding
the subject matter hereof. No modification of the Option or this Agreement, or
waiver of any provision of this Agreement, shall be valid unless in writing and
duly executed by the Company and the Holder. The failure of any party to
enforce any of that party's rights against the other party for breach of any of
the terms of this Agreement shall not be construed as a waiver of such rights
as to any continued or subsequent breach.
15. GOVERNING LAW. This Agreement shall be governed by the laws of
the State of Washington.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
"Company" MULTIPLE ZONES
INTERNATIONAL, INC.
By ____________________________
Sadrudin J. Kabani, Chairman
"Holder"
________________________________
JOHN E. DEFEO
-8-
<PAGE> 9
FORM OF EXERCISE OR CONVERSION OF OPTION
(ATTACHMENT TO STOCK OPTION AGREEMENT)
To: MULTIPLE ZONES INTERNATIONAL, INC.
[address] _____________________________________
_______________________________________________
_______________________________________________
The undersigned holds Option Number _________ (the "Option"),
represented by a Stock Option Agreement dated effective as of January ___, 1997
(the "Agreement"), granted to the undersigned. The undersigned hereby exercises
the Option and elects to [check one box]:
[ ] Purchase _________________ shares (the "Shares") of Common Stock
of Multiple Zones International, Inc. (the "Company"), pursuant
to the Option. This notice is accompanied by full payment of the
Option Price for the Shares in cash or by check or in another
manner permitted by Section 5(c) of the Agreement.
[ ] Surrender the right to purchase ___________________ shares of the
Company's Common Stock upon exercise of the Option and convert
the same into _______________ Shares pursuant to the proviso to
Section 5(c) of the Agreement.
The undersigned has also paid, or made arrangements satisfactory to the
Company's Board of Directors for payment of, all federal, state and local
taxes, if any, required to be withheld by the Company in connection with the
exercise or conversion of the Option.
The undersigned warrants and represents that the undersigned is
acquiring and will hold the Shares for the undersigned's own account, for
investment purposes only, and not with a view towards the distribution or
public offering of the Shares nor with any present intention of reselling or
distributing the Shares at any particular future time. The undersigned consents
to the appearance of a restrictive legend, as required by the Agreement, on the
certificate for the Shares. The undersigned agrees not to sell, transfer or
otherwise dispose of the Shares except as specifically permitted by the
Agreement and any applicable securities laws.
Date: ________________, 199__.
_______________________________________
John E. DeFeo
<PAGE> 1
EXHIBIT 10.27
VERN ASBBRENNER
Vice President
Washington Corporate Banking
10800 Northeast 8th Street, Suite 1000
Bellevue, Washington 98004
206-450-5922
206-450-5989 Fax
December 24, 1996
Peter Biere, SVP Finance
MULTIPLE ZONES INTERNATIONAL, INC.
707 South Grady Way
Renton, Washington 98055-3233
Dear Peter:
It is a pleasure to confirm the commitment of U.S. Bank of Washington, National
Association, to provide financing to Multiple Zones International, Inc. The
terms and conditions of this commitment are outlined below.
BORROWER: Multiple Zones International, Inc. (MZII)
LENDER: U.S. Bank of Washington, N.A. (USBW)
AMOUNT: $30,000,000 ($5,000,000 sub limit for standby letters
of credit).
FEES: 1/8 % upfront fee.
PRICING: USBW Prime Rate or 1, 2, 3 or 6 month IBOR + 175
basis points. 360 day basis, payable monthly. If
letter of credit is drawn against, the loan rate is
same as line of credit.
PREPAYMENTS: N/A.
STRUCTURE: Line of credit to expire 6/30/98
REPAYMENT: Interest monthly, principal at maturity.
USE OF PROCEEDS: General working capital purposes to pay current bills
and obtain purchase discounts.
<PAGE> 2
MULTIPLE ZONES INTERNATIONAL, INC.
DECEMBER 24, 1996
PAGE 2
COLLATERAL: Line to be secured by accounts receivable and
inventory. Advances not to exceed 80% of eligible
accounts receivable and 50% of inventory up to
$15,000,000 maximum. Borrowing formula to include
standby letters of credit. Borrowing certificates
to be supplied monthly; certificates to include
total inventory less amount pledged to other
lenders.
CONDITIONS
PRECEDENT: a) Legal opinions (as appropriate).
b) Execution of a Credit Agreement and other
documents, including resolutions, security
agreements, notes and any other forms deemed
necessary.
COVENANTS: The usual and including, but not limited to:
a) Reporting requirements to include quarterly 10Q
financial reports within 45 days of the end of
each quarter; annual audited statement within
120 days of the end of the year; accounts
receivable and accounts payable agings by the
15th of the following month; and other such
information as may be reasonably requested by
the Bank.
b) MZI will provide satisfactory casualty insurance
on inventory with the Bank named as loss payee.
c) Working capital shall be maintained at a minimum
of $30,000,000 until 12/31/97 when it increases
to $45,000,000.
d) Maintain tangible net worth at a minimum of
$46,000,000 until 12/31/97 when it increases to
$60,000,000.
e) MZI to maintain a debt to worth ratio of 2.5:1.
f) MZI shall not acquire or merge with any other
entity without the Bank's written consent.
g) MZI shall not make any major management changes
without Bank approval.
MISCELLANEOUS: a) MZI agrees to pay all costs, including legal fees
incurred in preparation of Credit Agreement and
other documentation.
b) Washington law to apply.
<PAGE> 3
MULTIPLE ZONES INTERNATIONAL, INC.
DECEMBER 24, 1996
PAGE 3
In the event of any inconsistencies between the provisions of the Loan
Agreement and any of the other Loan Documents, the Loan Agreement shall
govern. In the event of any inconsistencies between the provisions of this
letter and the accompanying Business Loan Agreement, this letter shall
govern.
Thank you for giving us the opportunity to assist you with this financing.
Please call me if you have any questions.
"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."
Sincerely,
Vern Ashbrenner
Vice President
VEA/slc
Accepted by:
By:__________________________________________
Peter Biere, SVP Finance Date
<PAGE> 4
DISBURSEMENT REQUEST AND AUTHORIZATION
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL Loan Date Maturity Loan No. Call Collateral Account Officer Initials
$30,000,000.00 12-31-1996 06-30-1998 391-208 365 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. LENDER: U.S. BANK OF WASHINGTON, NATIONAL
ASSOCIATION
707 SOUTH GRADY WAY EAST KING COUNTY CORPORATE BANKING
RENTON, WA 98055 10800 NE 8TH STREET, SUITE 1000
BELLEVUE, WA 98004
</TABLE>
================================================================================
LOAN TYPE. This is a Variable Rate (at 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), Revolving Line of Credit Loan to
a Corporation for $30,000,000.00 due on June 30, 1998. This is a secured
renewal loan.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for:
[ ] Personal, Family, or Household Purposes or Personal
Investment.
[X] Business (Including Real Estate Investment).
SPECIFIC PURPOSE. The specific purpose of this loan is: Working Capital.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will
be disbursed until all of Lender's conditions for making the loan have been
satisfied. Please disburse the loan proceeds of $30,000,000.00 as follows:
UNDISBURSED FUNDS: $30,000,000.00
--------------
NOTE PRINCIPAL: $30,000,000.00
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
PREPAID FINANCE CHARGES PAID IN CASH: $37,500.00
$37,500.00 Loan Fees
--------------
TOTAL CHARGES PAID IN CASH: $37,500.00
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.
TAX IDENTIFICATION CERTIFICATION. The tax identification number for
Borrower is 91-1431894. I certify under penalties of perjury the above tax
identification information is correct.
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.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO LENDER THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT
AND THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN BORROWER'S FINANCIAL
CONDITION AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO
LENDER. THIS AUTHORIZATION IS DATED DECEMBER 31, 1996.
BORROWER:
MULTIPLE ZONES INTERNATIONAL, INC.
BY: ____________________________________________
TITLE: _________________________________________
Variable Rate. Line of Credit. LASER PRO, Reg. U.S. Pat.
&T.M. Off., Ver. 3.22b (c) 1996 CFI ProServices, Inc. All rights reserved.
[WA-120 MZII.LN C3.OVL]
<PAGE> 5
ALTERNATIVE RATE OPTIONS
PROMISSORY NOTE
(PRIME RATE, IBOR)
$30,000,000.00 Date: December 31, 1996
Multiple Zones International, Inc. ("Borrower")
U.S. BANK OF WASHINGTON, NATIONAL ASSOCIATION ("Lender")
1. TYPE OF CREDIT. This note is given to evidence Borrower's obligation to
repay all sums which Lender may from time to time advance to Borrower
("Advances") under a:
[ ] single disbursement loan. Amounts loaned to Borrower hereunder will be
disbursed in a single Advance in the amount shown in Section 2.
[X] revolving line of credit. No Advances shall be made which create a
maximum amount outstanding at any one time which exceeds the maximum amount
shown in Section 2. However, Advances hereunder may be borrowed, repaid and
reborrowed, and the aggregate Advances loaned hereunder from time to time may
exceed such maximum amount.
[ ] non-revolving line of credit. Each Advance made form time to time
hereunder shall reduce the maximum amount available shown in Section 2.
Advances loaned hereunder which are repaid may not be reborrowed.
2. PRINCIPAL BALANCE. The unpaid principal balance of all Advances
outstanding under this note ("Principal Balance") at one time shall not exceed
$30,000,000.00.
3. PROMISE TO PAY. For value received Borrower promises to pay to Lender or
order at 1420 Fifth Ave., Seattle, WA 98101, the Principal Balance of this
note, with interest thereon at the rate(s) specified in Sections 4 and 11
below.
4. INTEREST RATE. The interest rate on the Principal Balance outstanding may
vary from time to time pursuant to the provisions of this note. Subject to the
provisions of this note, Borrower shall have the option from time to time of
choosing to pay interest at the rate or rates and for the applicable periods of
time based on the rate options provided herein; provided, however, that once
Borrower notifies Lender of the rate option chosen in accordance with the
provisions of this note, such notice shall constitute Borrower's irrevocable
request of an Advance hereunder at the rate option specified in such notice.
The rate options are the Prime Borrowing Rate and the IBOR Borrowing Rate, each
as defined herein.
(a) The Prime Borrowing Rate.
(i) The Prime Borrowing Rate is a per annum rate equal to Lender's prime rate
plus 0.00% per annum.
(ii) Whenever Borrower desires to use the Prime Borrowing Rate option, Borrower
shall give Lender notice orally or in writing in accordance with Section 15 of
this note, which notice shall specify the requested disbursement date and
principal amount of the Advance, and that Borrower has chosen the Prime
Borrowing Rate option.
(iii) Prepayments of all or any part of the Principal Balance bearing interest
at the Prime Borrowing Rate may be made at any time without penalty. Upon
prepayment of any such principal amount, Borrower also must pay all accrued
interest thereon to the date of prepayment.
(iv) Subject to Section 11 of this note, interest shall accrue on the unpaid
Principal Balance at the Prime Borrowing Rate unless and except to the extent
that the IBOR Borrowing Rate is in effect.
(b) The IBOR Borrowing Rate.
(i) The following terms shall have the following meanings:
"Business Day" means any day other than a Saturday, Sunday, or other day that
commercial banks in Portland, Oregon or New York City are authorized or
required by law to close.
"IBOR Amount" means each principal amount for which Borrower chooses to have
the IBOR Borrowing Rate apply for any specified IBOR Interest Period.
"IBOR Interest Period" means as to any IBOR Amount, a period of 1, 2, 3, or 6
months commencing on the date the IBOR Borrowing Rate becomes applicable
thereto; provided, however, that: (A) no IBOR Interest Period shall be selected
which would extend beyond June 30, 1998; (B) no IBOR Interest Period shall
extend beyound the date of any pricipal payment required under Section 6 of
this note, unless the sum of the principal amounts bearing interest at the
Prime Borrowing Rate, plus IBOR Amounts with IBOR Interest Periods ending on or
before the scheduled date of such principal payment, plus principal amounts
remaining unborrowed under a line of credit, equals or exceeds the amount of
such principal payment; (C) any IBOR Interest Period which would otherwise
expire on a day which is not a Business Day, shall be extended to the next
succeeding Business Day, unless the result of such extension would be to extend
such IBOR Interest Period into another calendar month, in which event the IBOR
Interest Period shall end on the immediately preceding Business Day; and (D)
any IBOR Interest Period that begins on the last Business Day of a calendar
month (or on a day for which there is no numericaly corrresponding day in the
calendar month at the end of such IBOR Interest Period) shall end on the last
Business Day of a calendar month.
(ii) The IBOR Borrowing Rate is Lender's IBOR Rate plus 1.75% per annum.
Lender's IBOR Rate for any IBOR Interest Period is the rate per annum (computed
on the basis of a 360-day year and the actual number of days elapsed) equal to
the arithmetic average (rounded upward to the nearest 1/16 of 1%) of the rates
per annum determined by Lender as of the times specified in Section 4(b)(iii)
on the date two (2) Business Days prior to the first day of such IBOR Interest
Period as the rates offered to Lender by three Eurodollar money market dealers
in such Eurodollar market as may be selected by Lender for U.S. dollar deposits
to be delivered on the first day of such IBOR Interest Period for the number
of months therein; provided, however, that Lender's IBOR Rate shall be adjusted
to take into account the maximum reserves required to be maintained for
Eurocurrency liabilities by banks during each such IBOR Interest Period as
specified in Regulation D of the Board of Governors of the Federal Reserve
System or any successor regulation.
(iii) Borrower may obtain IBOR Borrowing Rate quotes from Lender between 8:00
a.m. and 12:00 noon (Portland, Oregon time) on any Business Day. Any IBOR
Borrowing Rate quoted (A) before 10:00 a.m. shall be based on Lender's IBOR
Rate determined as of approximately 8:00 a.m. on such day, and Borrower may
request an Advance at such rate only by giving Lender notice in accordance with
Section 4(b)(iv) before 10:00 a.m. on such day; and (B) between 10:00 a.m. and
12:00 noon shall be based on Lender's IBOR Rate determined as of approximately
10:00 a.m. on such day, and Borrower may request an Advance at such rate only
by giving Lender notice in accordance with Section 4(b)(iv) not later than
12:00 noon on such day.
(iv) Whenever Borrower desires to use the IBOR Borrowing Rate option, Borrower
shall give Lender irrevocable notice (either in writing or orally and promptly
confirmed in writing) between 8:00 a.m. and 12:00 noon (Portland, Oregon time)
two (2) Business Days in advance of the desired effective date of such rate.
Any oral notice shall be given by, and any written notice or confirmation of
any oral notice shall be signed by, the person(s) authorized in Section 15 of
this note, and shall specify the requested effective date of the rate, IBOR
Interest Period and IBOR Amount, and whether Borrower is requesting a new
Advance at the IBOR Borrowing Rate under a line of credit, conversion of any
portion of the Principal Balance bearing interest at the Prime Borrowing Rate
to an IBOR Amount, or a new IBOR Interest Period for an outstanding IBOR
Amount. Notwithstanding any other term of this note, Borrower may elect the
IBOR Borrowing Rate in the minimum principal amount of $1,000,000.00 and in
integral multiples of $500,000.00; provided, however, that no more than four
separate IBOR Interest Periods may be in effect at any one time.
(v) Borrower may not repay all or any part of any IBOR Amount(s).
LHH95141.doc 12-30-1996
Page 1 of 4
<PAGE> 6
(vi) If at any time Lender's IBOR Rate is unascertainable or unavailable to
Lender or if IBOR Rate loans become unlawful, the option to select the IBOR
Borrowing Rate shall terminate immediately. If the IBOR Borrowing Rate is then
in effect, (A) it shall terminate automatically with respect to all IBOR
Amounts (i) on the last day of each then applicable IBOR Interest Period, if
Lender may lawfully continue to maintain such loans, or (ii) immediately if
Lender may not lawfully continue to maintain such loans through such day, and
(B) subject to Section 11, the Prime Borrowing Rate automatically shall become
effective as to such amounts upon such termination.
(vii) If at any time after the date hereof (A) any revision in or adoption of
any applicable law, rule, or regulation or in the interpretation or
administration thereof (i) shall subject Lender or its Eurodollar lending
office to any tax, duty, or other charge, or change the basis of taxation of
payments to Lender with respect to any loans bearing interest based on Lender's
IBOR Rate, or (ii) shall impose or modify any reserve, insurance, special
deposit, or similar requirements against assets of, deposits with or for the
account of, or credit extended by Lender or its Eurodollar lending office, or
impose on Lender or its Eurodollar lending office any other condition affecting
any such loans, and (B) the result of any of the foregoing is (i) the increase
the cost to Lender of making or maintaining any such loans or (ii) to reduce
the amount of any sum receivable under this note by Lender or its Eurodollar
lending office, Borrower shall pay Lender within 15 days after demand by Lender
such additional amount as will compensate Lender for such increased cost or
reduction. The determination hereunder by Lender of such additional amount
shall be conclusive in the absence of manifest error. If Lender demands
compensation under this Section 4(b)(vii), Borrower may upon three (3) Business
Days' notice to Lender pay the accrued interest on all IBOR Amounts, together
with any additional amounts payable under Section 4(b)(viii). Subject to
Section 11, upon Borrower's paying such accrued interest and additional costs,
the Prime Borrowing Rate immediately shall be effective with respect to the
unpaid principal balance of such IBOR Amounts.
(viii) Upon any termination of any IBOR Borrowing Rate (including but not
limited to conversion to another rate) or payment of all or any portion of any
IBOR Amount on a date other than the last day of the then applicable IBOR
Interest Period, including without limitation (A) acceleration under Section 11
or (B) repayment in response to a notice under Section 4(b)(vii), Borrower
shall pay to Lender on demand such amount as Lender reasonably determines
(determined as though 100% of the applicable IBOR Amount had been funded in the
applicable Eurodollar market) is equivalent to all direct or indirect losses,
expenses, liabilities, or reductions in yield to Lender resulting therefrom,
whether incurred in connection with liquidation or reemployment of funds or
otherwise.
(ix) If Borrower chooses the IBOR Borrowing Rate, Borrower shall pay interest
based on such rate, plus any other applicable taxes or charges hereunder, even
though Lender may have obtained the funds loaned to Borrower from sources other
than the applicable Eurodollar market. Lender's determination of the IBOR
Borrowing Rate and any such taxes or charges shall be conclusive in the absence
of manifest error.
(x) Notwithstanding any other term of this note, Borrower may not select the
IBOR Borrowing Rate if an event of default thereunder has occurred and is
continuing.
(xi) Nothing contained in this note, including without limitation the
determination of any IBOR Interest Period or Lender's quotation of any IBOR
Borrowing Rate, shall be construed to prejudice Lender's right, if any, to
decline to make any requested Advance or to require payment on demand.
5. COMPUTATION OF INTEREST. All interest under Section 4 and Section 11 will
be computed at the applicable rate based on a 360-day year and applied to the
actual number of days elapsed.
6. PAYMENT SCHEDULE.
(a) Principal. Principal shall be paid:
[ ] on demand.
[X] on demand, or if no demand, on June 30, 1998.
[ ] on _________.
[ ] subject to Section 7, in installments of
____ each, plus accrued interest
____ each including accrued interest
beginning on and on the same day of each thereafter until
and payable when the entire Principal Balance plus interest
thereon shall be due
[ ] (Other):
(b) Interest.
(i) Interest on all amounts bearing interest at the Prime Borrowing Rate
shall be paid:
[X] on the 31st day of January, 1997 and on the same day of each month
thereafter prior to maturity and at maturity.
[ ] at maturity.
[ ] at the time each principal installment is due and at maturity.
[ ] (Other):
(ii) Interest on all IBOR Borrowing Rate Amounts shall be paid:
[ ] on the last day of the applicable IBOR Interest Period, and if such IBOR
Interest Period is longer than three months, on the last day of each three
month period occurring during such IBOR Interest Period, and at
maturity.
[X] on the 31st day of January, 1997, and on the same day of each month
thereafter prior to maturity and at maturity.
[ ] at maturity.
[ ] at the time each principal installment is due and at maturity.
[ ] (Other):
7. CHANGE IN PAYMENT AMOUNT. If the interest rate on this note is subject to
change in accordance with Section 4, the holder of this note may, from time to
time, in holder's sole discretion, increase or decrease the amount of each of
the installments remaining unpaid at the time of each change in rate to an
amount holder in its sole discretion deems necessary to continue amortizing the
Principal Balance at the same rate established by the installment amounts
specified in Section 6(a), whether or not a "balloon" payment may also be due
upon maturity of this note. Holder shall notify the undersigned of each such
change in writing. Whether or not the installment amount is increased under
this Section 7, Borrower understands that, as a result of increases in the rate
of interest in accordance with Section 4, the final payment due, whether or not
a "balloon" payment, shall include the entire Principal Balance and interest
thereon then outstanding, any may be substantially more than the installment
specified in Section 6.
8. ALTERNATE PAYMENT DATE. Notwithstanding any other term of this note, if in
any month there is no day on which a scheduled payment would otherwise be due
(e.g. February 31), such payment shall be paid on the last banking day of the
month.
9. PAYMENT BY AUTOMATIC CHARGE.
[X] Please automatically deduct the amount of all principal and interest
payments form account number 3197-000833. 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 the 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 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 agreement. Lender may cancel the automatic deduction at any time in its
discretion.
Provided, however, if no account number is entered above, Borrower does not
want to make payments by automatic charge.
LHH95141.doc 12-30-1996
Page 2 of 4
<PAGE> 7
10. LENDER'S PRIME RATE. Lender's prime rate 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. When Lender's prime rate is applicable under Section 4(a) or 11(b),
the interest rate hereunder shall be adjusted without notice effective on the
day Lender's prime rate changes, but in no even t shall the rate of interest be
higher than allowed by law.
11. DEFAULT
(a) Without prejudice to any right of Lender to require payment on demand or
to decline to make any requested Advance, each of the following shall be an
event of default: (i) Borrower fails to make any payment when due. (ii)
Borrower fails to perform or comply with any term, covenant or obligation in
this note or any agreement related to this note, or in any other agreement or
loan Borrower has with Lender. (iii) 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 related documents. (iv)
Any representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect (v) 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. (vi) 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. (vii) Any of the
events described in this default section occurs with respect to any guarantor
of this note or any guaranty of Borrower's indebtedness to Lender ceases to be,
or is asserted not to be, in full force and effect. (viii) Lender in good
faith deems itself insecure. If this note is payable on demand, the inclusion
of specific events of default shall not prejudice Lender's right to require
payment on demand or to decline to make any requested Advance.
(b) Without prejudice to any right of Lender to require payment on demand,
upon the occurrence of an event of default, Lender may declare the entire
unpaid Principal Balance on this note and all accrued unpaid interest
immediately due and payable, without notice. Upon default, including failure
to pay upon final maturity, Lender at its option, may also, if permitted under
applicable law, increase the interest rate on this note to a rate equal to the
Prime Borrowing Rate plus 5%. The interest rate will not exceed the maximum
rate permitted by applicable law. In addition, if any payment of principal or
interest is 15 or more days past due, Borrower will be charged a late charge of
5% of the delinquent payment.
12. EVIDENCE OF PRINCIPAL BALANCE; PAYMENT ON DEMAND. Holder's records
shall, at any time, be conclusive evidence of the unpaid Principal Balance and
interest owing on this note. Notwithstanding any other provisions of this
note, in the event holder makes Advances hereunder which result in an unpaid
Principal Balance on this note which at any time exceeds the maximum amount
specified in Section 2, Borrower agrees that all such Advances, with interest,
shall be payable on demand.
13. LINE OF CREDIT PROVISIONS. If the type of credit indicated in Section 1
is a revolving line of credit or a non-revolving line of credit Borrower agrees
that Lender is under no obligation and has not committed to make any Advances
hereunder. Each Advance hereunder shall be made at the sole option of Lender.
14. DEMAND NOTE. If this note is payable on demand, Borrower acknowledges and
agrees that (a) Lender is entitled to demand Borrower's immediate payment in
full of all amounts owing hereunder and (b) neither anything to the contrary
contained herein or in any other loan documents (including but not limited to,
provisions relating to defaults, rights of cure, default rate of interest,
installment payments, late charges, periodic review of Borrower's financial
condition, and covenants) nor any act of Lender pursuant to any such provisions
shall limit or impair Lender's right or ability to require Borrower's payment
in full of all amounts owing hereunder immediately upon Lender's demand.
15. REQUESTS FOR ADVANCES.
(a) Any Advance may be made or interest rate option selected upon the request
of Borrower (if an individual), any of the undersigned (if Borrower consists of
more than one individual), any person or persons authorized in subsection (b)
of this Section 15, and any person or persons otherwise authorized to execute
and deliver promissory notes to Lender on behalf of Borrower.
(b) Borrower hereby authorizes any one of the following individuals to request
Advances and to select interest rate options: Peter Biere and Sadru Kabani,
unless Lender is otherwise instructed in writing.
(c) All Advances made pursuant to this Section 15 shall be disbursed by
deposit directly to Borrower's account number 3197-000833 at the Bellevue Way
branch of Lender, or by cashier's check issued to Borrower.
(d) Borrower agrees that Lender shall have no obligation to verify the
identity of any person making any request pursuant to Section 15 , and Borrower
assumes all risks of the validity and authorization of such requests. In
consideration of Lender agreeing, at its sole discretion, to make Advances upon
such requests, Borrower promises to pay holder, in accordance with the
provisions of this note, the Principal Balance together with interest thereon
and other sums due hereunder, although any Advances may have been requested by
a person or persons not authorized to do so.
16. PERIODIC REVIEW. Lender will review Borrower's credit accommodations
periodically. At the time of the review, Borrower will furnish Lender with any
additional information regarding Borrower's financial condition and business
operations that Lender requests. This information may include but is not
limited to, financial statements, tax returns, lists of assets and liabilities,
agings of receivables and payable, inventory schedules, budgets and forecasts.
If upon review, Lender, in its sole discretion, determines that there has been
a material adverse change in Borrower's financial condition, Borrower will be
in default. Upon default, Lender shall have all rights specified herein.
17. NOTICES. Any notice hereunder may be given by ordinary mail, postage paid
and addressed to Borrower at the last known address of Borrower as shown on
holder's records. If borrower consists of more than one person, notification
of any of said persons shall be complete notification of all. Notice may be
given either before or reasonably soon after the effective date of the change.
18. ATTORNEY FEES. Whether or not litigation or arbitration is commenced,
Borrower promises to pay all costs of collecting overdue amounts. Without
limiting the foregoing, in the event that holder consults an attorney regarding
the enforcement of any of its rights under this note or any document securing
the same, or if this note is placed in the hands of an attorney for collection
or if suit or litigation is brought to enforce this note or any document
securing the same, Borrower promises to pay all costs thereof including such
additional sums as the court or arbitrator(s) may adjudge reasonable as
attorney fees, including without limitation, costs and attorney fees incurred
in any appellate court, in any proceeding under the bankruptcy code, or in any
receivership and post-judgment attorney fees incurred in enforcing any
judgment.
19. WAIVERS; CONSENT. Each party hereto, whether maker, co-maker, guarantor
or otherwise, waives diligence, demand, presentment for payment, notice of
non-payment, protest and notice of protest and waives all defenses based on
suretyship or impairment of collateral. Without notice to Borrower and without
diminishing or affecting Lender's rights or Borrower's obligations hereunder,
Lender may deal in any manner with any person who at any time is liable for, or
provides any real or personal property collateral for, any indebtedness of
Borrower to Lender, including the indebtedness evidenced by this note. Without
limiting the foregoing, Lender may, in its sole discretion: (a) make secured
or unsecured loans to Borrower and agree to any number of waivers,
modifications, extensions and renewals of any length of such loans, including
the loan evidenced by this note; (b) impair, release (with or without
substitution of new collateral), fail to perfect a security interest in, fail
to preserve the value of, fail to dispose of in accordance with applicable law,
any collateral provided by any person; (c) sue, fail to sue, agree not to sue,
release, and settle or compromise with, any person.
20. JOINT AND SEVERAL LIABILITY. All undertakings of the undersigned
Borrowers are joint and several and are binding upon any marital community of
which any of the undersigned are members. Holder's rights and remedies under
this note shall be cumulative.
21. ARBITRATION.
(a) Either Lender or Borrower may require that all disputes, claims,
counterclaims and defenses, including those based on or arising from any
alleged tort
LHH95141.doc 12-30-1996
Page 3 of 4
<PAGE> 8
("Claims") relating in any way to this note or any transaction of which this
note is a part (the "Loan"), be settled by binding arbitration in accordance
with the Commercial Arbitration Rules of the American Arbitration Association
and Title 9 of the U.S. Code. All Claims will be subject to the statutes of
limitation applicable if they were litigated. This provision is void if the
Loan, at the time of the proposed submission to arbitration, is secured by real
property located outside of Oregon or Washington, or if the effect of the
arbitration procedure (as opposed to any Claims of Borrower) would be to
materially impair Lender's ability to realize on any collateral securing the
Loan.
(b) If arbitration occurs and each party's Claim is less than $100,000, one
neutral arbitrator will decide all issues; if any party's Claim is $100,000 or
more, three neutral arbitrators will decide all issues. All arbitrators will
be active California State Bar members in good standing. All arbitration
hearings will be help in King County, Washington. In addition to all other
powers, the arbitrator(s) shall have the exclusive right to determine all
issues of arbitrability. Judgment on any arbitration award may be entered in
any court with jurisdiction.
(c) If either party institutes any judicial proceeding relating to the Loan,
such action shall not be a waiver of the right to submit any Claim to
arbitration. In addition, each has the right before, during and after any
arbitration to exercise any number of the following remedies, in any order or
concurrently: (i) setoff; (ii) self-help repossession; (iii) judicial or
non-judicial foreclosure against real or personal property collateral; and (iv)
provisional remedies, including injunction, appointment of receiver,
attachment, claim and delivery and replevin.
22. GOVERNING LAW.
This note shall be governed by and construed and enforced in accordance with
the laws of the State of Washington without regard to conflicts of law
principles; provided, however, that to the extent that Lender has greater
rights or remedies under Federal law, this provision shall not be deemed to
deprive Lender of such rights and remedies as may be available under Federal
law.
EACH OF THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS
DOCUMENT.
MULTIPLE ZONES INTERNATIONAL, INC.
Borrower Name (Corporation, Partnership or other Entity)
<TABLE>
<S> <C>
- ------------------------------------------ -------------------------------
By: Peter Biere Signature of Individual Borrower
Title: SVP Finance, CFO
- ------------------------------------------ -------------------------------
By Signature of Individual Borrower
Title
- ------------------------------------------ -------------------------------
By Signature of Individual Borrower
Title
- ------------------------------------------ -------------------------------
By Signature of Individual Borrower
Title
</TABLE>
For valuable consideration, Lender agrees to the terms of the arbitration
provision set forth in this note.
Lender Name: U.S. Bank of Washington, National Association
By:
------------------------------------------------------
Title:
--------------------------------------------------
Date:
---------------------------------------------------
LHH95141.doc 12-30-1996
Page 4 of 4
<PAGE> 9
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL ACCOUNT OFFICER INITIALS
$30,000,000 12-31-1996 06-30-1998 391-208 365 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> <C>
BORROWER: MULTIPLE ZONES INTERNATIONAL, INC. LENDER: U.S. BANK OF WASHINGTON, NATIONAL ASSOCIATION
707 SOUTH GRADY WAY EAST KING COUNTY CORPORATE BANKING
RENTON, WA 98055 10800 NE 8TH STREET, SUITE 1000
BELLEVUE, WA 98004
</TABLE>
THIS 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 ACCOMMODATION, INCLUDING THOSE WHICH MAY BE DESCRIBED ON ANY
EXHIBIT OR SCHEDULE ATTACHED TO THIS AGREEMENT. ALL SUCH LOANS AND FINANCIAL
ACCOMMODATION, 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 SOLD JUDGEMENT 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 DECEMBER 31, 1996, and shall
continue thereafter until all Indebtedness of Borrower to Lender has been
performed in full and the parities 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 Loan Agreement, as this Loan
Agreement may be amended or modified from time to time, together with all
exhibits and schedules attached to this Loan Agreement from time to time.
ACCOUNT. The word "Account" means a trade account, account receivable, or
other right to payment for goods sold or services rendered owing to Borrower
(or to a third party grantor acceptable to Lender).
ACCOUNT DEBTOR. The words "Account Debtor" mean the person or entity obligated
upon an Account.
ADVANCE. The word "Advance" means a disbursement of Loan funds under this
Agreement.
BORROWER. The word "Borrower" means MULTIPLE ZONES INTERNATIONAL, INC.. The
word "Borrower" also includes, as applicable, all subsidiaries and affiliates
or Borrower as provided below in the paragraph titles "Subsidiaries and
Affiliates."
BORROWING BASE. The words "Borrowing Base" mean, as determined by Lender from
time to time, the lesser of (a) $30,000,000.00; or (b) the sum of (i) 80.000%
of the aggregate amount of Eligible Accounts (not to exceed in corresponding
Loan amount based on Eligible Accounts $30,000,000), plus (ii) 50.000% of the
aggregate amount of Eligible Inventory (not to exceed in corresponding Loan
amount based on Eligible Inventory up to $15,000,000).
BUSINESS DAY. The words "Business Day" mean a day on which commercial banks
are open for business in the State of Washington.
CERCLA. The "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. The word "Collateral" includes without limitation
all collateral described below in the section titled "COLLATERAL."
DEBT. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
ELIGIBLE ACCOUNTS. The words "Eligible Accounts" mean, at any time, all of
Borrower's Accounts which contain selling terms and conditions acceptable to
Lender. The net amount of any Eligible Account against which Borrower may
borrow shall exclude all returns, discounts, credit, and offsets of any nature.
Unless otherwise agreed to by Lender in writing, Eligible Accounts do not
include:
(a) Accounts with respect to which the Account Debtor is an officer, an
employee or agent of Borrower.
(b) Accounts with respect to which the Account Debtor is a subsidiary of, or
affiliated with or related to Borrower or its shareholders, officers, or
directors.
(c) Accounts with respect to which goods are placed on consignment, guaranteed
sale, or other terms by reason of which the payment by the Account Debtor may
be conditional.
(d) Accounts with respect to which Borrower is or may become liable to the
Account Debtor for goods sold or services rendered by the Account Debtor to
Borrower.
(e) Accounts which are subject to dispute, counterclaim, or setoff.
(f) Accounts with respect to which the goods have not been shipped or
delivered, or the services have not been rendered, to the Account Debtor.
(g) Accounts with respect to which Lender, in its sold discretion, deems the
creditworthiness or financial condition of the Account Debtor to be
unsatisfactory.
(h) Accounts of any account Debtor who has filed or has had filed against it a
petition in bankruptcy or an application for relief under any provision of any
state of federal bankruptcy, insolvency, or debtor-in-relief acts; or who had
had appointed a trustee, custodian, or receiver for the assets of such Account
Debtor; or who had made an assignment for the benefit of creditors or has
become insolvent or fails generally to pay its debts (including its payrolls)
as such debts become due.
(i) Accounts which have not been paid in full within 90 DAYS from the invoice
date.
(j) That portion of the Accounts of any single Account Debtor which exceeds
25.000% of all of Borrower's Accounts.
(k) Datings; Progress Billings; Cash Sales; Service Charges.
ELIGIBLE INVENTORY. The words "Eligible Inventory" mean, at any time, all of
Borrower's Inventory as defined below except:
(a) Inventory which is not owned by Borrower free and clear of all security
interests, liens, encumbrances, and claims of third parties.
(b) Inventory which Lender, in its sole discretion, deems to be obsolete,
unsalable, damaged, defective, or unfit for further processing.
(c) Inventory floored by other lenders.
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 titles
"EVENTS OF DEFAULT."
EXPIRATION DATE. The words "Expiration Date" mean the date of termination of
Lender's commitment to lend under this Agreement.
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.
<PAGE> 10
12-31-1996 LOAN AGREEMENT Page 2
INDEBTEDNESS. The word "Indebtedness" means and includes without limitation
all Loans, together with all other obligations, debts and liabilities of
Borrower to Lender or anyone 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.
INVENTORY. The word "Inventory" means all of Borrower's raw materials, work in
process, finished goods, merchandise, parts and supplies, of every kind and
description, and goods held for sale or lease or furnished under contracts of
service in which Borrower now has or hereafter acquires any right, whether held
by Borrower or others, and all documents of title, warehouse receipts, bills of
lading, and all other documents of every type covering all or any part of the
foregoing. Inventory includes inventory temporarily out of Borrower's custody
or possession and all returns on Accounts.
LENDER. The word "Lender" means U.S. BANK OF WASHINGTON, NATIONAL ASSOCIATION,
its successors and assigns.
LINE OF CREDIT. The words "Line of Credit" mean the credit facility described
in the Section titles "LINE OF CREDIT" below.
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 owned 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 titles "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.
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.
LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time
from the date of this Agreement to the Expiration Date, provided the aggregate
amount of such Advances outstanding at any time does not exceed the Borrowing
Base. Within the foregoing limits, Borrower may borrow, partially or wholly
prepay, and reborrow under this Agreement as follows.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make any Advance
to or for the account of Borrower under this Agreement is subject to the
following conditions precedent, with all documents, instruments, opinions,
reports, and other items required under this Agreement to be in form and
substance satisfactory to Lender:
(a) Lender shall have received evidence that this Agreement and all Related
Documents have been duly authorized, executed, and delivered by Borrower to
Lender.
(b) Lender shall have received such opinions of counsel, supplemental
opinions, and documents as Lender may request.
(c) The security interests in the Collateral shall have been duly authorized,
created, and perfected with first lien priority and shall be in full force and
effect.
(d) All Guaranties required by Lender for the Line of Credit shall have been
executed by each Guarantor, delivered to Lender, and be in full force and
effect.
(e) Lender, at its option and for its sole benefit, shall have conducted an
audit of Borrower's Accounts, Inventory, books, records, and operations, and
Lender shall be satisfied as to their condition.
(f) Borrower shall have paid to Lender all fees , costs, and expenses
specified in this Agreement and the Related Documents as are then due and
payable.
(g) There shall not exist at the time of any Advance a condition which would
constitute an Event of Default under this Agreement, and Borrower shall have
delivered to Lender the compliance certificate called for in the paragraph
below titles "Compliance Certificate."
MAKING LOAN ADVANCES. Advances under the Line of Credit may be requested
either orally or in writing by authorized persons. Lender may, but need not,
require that all oral requests be confirmed in writing. Each Advance shall be
conclusively deemed to have been made at the request of and for the benefit of
Borrower (a) when credited to any deposit account of Borrower maintained with
Lender or (b) when advanced in accordance with the instruction s of an
authorized person. Lender, at its option, may set a cutoff time, after which
all requests for Advances will be treated as having been requested on the next
succeeding Business Day.
MANDATORY LOAN REPAYMENTS. If at any time the aggregate principal amount of
the outstanding Advances shall exceed the applicable Borrowing Base, Borrower,
immediately upon written or oral notice from Lender, shall pay to Lender an
amount equal to the difference between the outstanding principal balance of the
Advances and the Borrowing Base. On the Expiration Date, Borrower shall pay to
Lender in full the aggregate unpaid principal amount of all advances then
outstanding and all accrued unpaid interest, together will all other applicable
fees, costs and charges, if any, not yet paid.
LOAN ACCOUNT. Lender shall maintain on its books a record of account in which
Lender shall make entries for each advance and such other debits and credits as
shall be appropriate in connection with the credit facility. Lender shall
provide Borrower with periodic statements of Borrower's account, which
statements shall be considered to be correct and conclusively binding on
Borrower unless Borrower notifies Lender to the contrary within thirty (30)
days after Borrower's receipt of any such statement which Borrower deems to be
incorrect.
COLLATERAL. To secure payment of the Line of Credit and performance of all
other Loans, obligations and duties owed by Borrower to Lender, Borrower (and
others, if required) shall grant to Lender Security Interests in such property
and assets as Lender may require (the "Collateral"), including without
limitation Borrower's present and future Accounts, general intangibles, and
Inventory. Lender's Security Interests in the Collateral shall be continuing
liens and shall include the proceeds and products of the Collateral, including
without limitation the proceeds of any insurance. With respect to the
Collateral, Borrower agrees and represents and warrants to Lender:
PERFECTION OF SECURITY INTERESTS. Borrower agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's Security Interests in the Collateral. Upon
request of Lender, Borrower will deliver to lender any and all of the documents
evidencing or constituting the Collateral, and Borrower will note Lender's
Interest upon any and all chattel paper if not delivered to Lender for
possession by Lender. Contemporaneous with the execution of this Agreement,
Borrower will execute one or more UCC financing statements and any similar
statements as may be required by applicable law, and will file such financing
statements and all such similar statements in the appropriate location or
locations. Borrower hereby appoints Lender as its irrevocable attorney-in-fact
for the purpose of executing any documents necessary to perfect or to continue
any Security Interest. Lender may at any time, and without further
authorization from Borrower, file a carbon, photograph, facsimile, or other
reproduction of any financing statement
<PAGE> 11
12-31-1996 LOAN AGREEMENT Page 3
for use as a financing statement. Borrower will reimburse Lender for all
expenses for the perfection, termination, and the continuation of the
perfection of Lender's security interest in the Collateral. Borrower promptly
will notify Lender of any change in Borrower's name including any change to the
assumed business names of Borrower. Borrower also promptly will notify Lender
of any change in Borrower's Social Security Number or Employer Identification
Number. Borrower further agrees to notify Lender in writing prior to any
change in address or location of Borrower's principal governance office or
should Borrower merge or consolidate with any other entity.
Collateral Records. Borrower does now, and at all times hereafter shall, keep
correct and accurate records of the Collateral, all of which records shall be
available to Lender or Lender's representative upon demand for inspection and
copying at any reasonable time. With respect to the Accounts, Borrower agrees
to keep and maintain such records as Lender may require, including without
limitation information concerning Eligible Accounts and Account balances and
agings. With respect to the Inventory, Borrower agrees to keep and maintain
such records as Lender may require, including without limitation information
concerning Eligible Inventory and records itemizing and describing the kind,
type, quality, and quantity of Inventory, Borrower's Inventory costs and
selling prices, and the daily withdrawals and additions to Inventory. The
following is an accurate and complete list of all locations at which Borrower
keeps or maintains business records concerning Borrower's Accounts and
Inventory: Wilmington, Ohio; Airborne Stock Exchange, subsidiary of Airborne
Freight.
COLLATERAL SCHEDULES. Concurrently with the execution and delivery of this
Agreement, Borrower shall execute and deliver to Lender schedules of Accounts
and Inventory and Eligible Accounts and Eligible Inventory, in form and
substance satisfactory to the Lender. Thereafter Borrower shall execute and
deliver to Lender such supplemental schedules of Eligible Accounts and Eligible
Inventory and such other matters and information relating to the Accounts and
Inventory as Lender may request. Supplemental schedules shall be delivered
according to the following schedule: Borrower agrees to submit to Lender
monthly Accounts Payable aging and Accounts Receivable aging within twenty (20)
days after the last day of each month. The format of aging will be ninety (90)
days from the invoice date. In addition, Borrower agrees to submit to Lender
within twenty (20) days after the last day of each month Borrowers Certificate,
and within forty-five (45) days after the end of each fiscal quarter Borrower's
Quarterly Financial Statement, to include gross amount of Inventory less
Inventory pledged to other lenders to determine eligible Inventory. (Note:
The method of calculating inventory unit price for borrowing purposes will be
the Lower of Cost or Market [LCOM].).
REPRESENTATIONS AND WARRANTIES CONCERNING ACCOUNTS. With respect to the
Accounts, Borrower represents and warrants o Lender: (a) Each Account
represented by Borrower to be an Eligible Account for purposes of this
Agreement conforms to the requirements of the definition of an Eligible
Account; (b) All Account information listed on schedules delivered to Lender
will be true and correct, subject to immaterial variance; and (c) Lender, its
assigns, or agents shall have the right at any time and at Borrower's expense
to inspect, examine, and audit Borrower's records and to confirm with Account
Debtors the accuracy of such Accounts.
REPRESENTATIONS AND WARRANTIES CONCERNING INVENTORY. With respect to the
Inventory, Borrower represents and warrants to Lender: (a) All Inventory
represented by Borrower to be Eligible Inventory for purposes of this
Agreement conforms to the requirements of the definition of Eligible Inventory;
(b) All Inventory values listed on schedules delivered to Lender will be true
and correct, subject to immaterial variance; (c) The value of the Inventory
will be determined on a consistent accounting basis; (d) Except as agreed to
the contrary by Lender in writing, all Eligible Inventory is now and at all
time hereafter will be in Borrower's physical possession and shall not be held
by others on consignment, sale on approval, or sale or return; (e) Except as
reflected in the Inventory schedules delivered to Lender, all Eligible
Inventory is now and at all times hereafter will be of good and merchantable
quality, free from defects; (f) Eligible Inventory is not now and will not at
any time hereafter be stored with a bailee, warehouseman, or similar party
without Lender's prior written consent, and, in such event, Borrower will
concurrently at the time of bailment cause any such bailee, warehouseman, or
similar party to issue and deliver to Lender, in form acceptable to Lender,
warehouse receipts in Lender's name evidencing the storage of Inventory; and
(g) Lender, its assigns, or agents shall have the right at any time and at
Borrower's expense to inspect and examine the Inventory and to check and test
the same as to quality, quantity, value, and condition.
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 no 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 staement, 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 for Permitted Liens, 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 of 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 use 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 will 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 test
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 a 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 investigation 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.
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
any 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.
<PAGE> 12
12-31-1996 LOAN AGREEMENT Page 4
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 707 SOUTH GRADY WAY, RENTON, WA 98055. 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 or 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 that forty five (45) days after the end of
each fiscal quarter, 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:
TANGIBLE NET WORTH. Maintain a minimum Tangible Net Worth of not less than
$60,000,000.00
NET WORTH RATIO. Maintain a ratio of Total Liabilities to Tangible Net Worth
of less than 2.50 to 1.00.
WORKING CAPITAL. Maintain Working Capital in excess of $45,000,000.00. 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 lease 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.
OTHER AGREEMENTS. Comply with all terms and conditions of all other
agreements, whether now or hereafter 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
(NOT REQUIRED) 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
will 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.
<PAGE> 13
12-31-1996 LOAN AGREEMENT Page 5
Additional Assurances. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing statement,
instrument, 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 ADDIONAL 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 the 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 CONVANTS. Borrower convents and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent
of Lender:
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 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
difference that these in which Borrower is presently engaged, (b) cease
operation, liquidate, merge, transfer, acquire or consolidate with any other
entity, change ownership, change its name, dissolve or transfer or sell
Collateral out 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 and
shares of stock of Borrower, or (d) purchase or retire any of Borrower's
outstanding shares or alter or amend Borrower's capital structure.
LOAN, 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
of 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.
STATUTE OF FRAUDS DISCLOSURE. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN
MONEY, EXTEND CREDIT, OR FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT
ENFORCEABLE UNDER WASHINGTON LAW.
DEBTOR NAME AND ADDRESS LIST. Borrower agrees to submit to Lender monthly a
complete debtor name and address list.
COLLATERAL AUDITS. Borrower agrees to submit to one (1) collateral audit per
year, to be performed by Lender's internal staff of Lender- approved external
examiners. Direct verifications shall be required. Borrower agrees to pay
all Lender's expenses incurred in connection with each collateral audit.
COMPLIANCE TESTING. Borrower's compliance with the covenants contained in this
Agreement with be tested on a quarterly basis.
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 Koegh 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.
EVENT OF DEFAULT. Each of the following shall constitute and 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 effect 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
included 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.
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
obligations 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 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 on 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.
<PAGE> 14
12-31-1996 LOAN AGREEMENT Page 6
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 an 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 sales 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. Judgement 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,
leaches, and similar doctrines which would otherwise be applicable in an action
brought by a party shall be applicable in an arbitration proceeding, and the
commencement of any arbitration proceeding shall be deemed the commencement of
an action for these purposes. The Federal Arbitration Act shall apply 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 interests 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' fee, 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-judgement collection
services. Borrower also will pay any court costs, in addition to all other
sums provided by law.
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 parities, 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 Borrower. For notice purposes, Borrower will keep Lender
informed at all times 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.
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 is 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 LOAN AGREEMENT,
AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF DECEMBER 31,
1996.
BORROWER:
MULTIPLE ZONES INTERNATIONAL, INC.
By:________________________________________________
Title:_____________________________________________
LENDER:
U.S. BANK OF WASHINGTON, NATIONAL ASSOCATION
By:________________________________________________
Authorized Officer
LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.22b (c) 1996 CFI ProServices,
Inc. All rights reserved. [WA-C40 F3.22 Multiple Zones International, Inc.LN
C3.ovl]
<PAGE> 1
Exhibit 11.1
Multiple Zones International, Inc.
Computation of Earnings Per Share
<TABLE>
<CAPTION>
For the year ended
------------------------------
December 31, December 31,
1996 1995
----------- ------------
<S> <C> <C>
Net income $10,874,288 $3,191,537
Adjustment to net income for accretion of
Series B Convertible Preferred Stock (459,262) (153,088)
----------- ----------
Net income applicable to common stock
equivalents 10,415,026 $3,038,449
=========== ==========
Shares used in calculating primary earnings
per share:
Weighted average common shares
outstanding 11,103,618 9,374,999
Net effect of stock options and warrants
granted during the 12 months prior to the
public offering calculated using the treasury
stock method and treated as outstanding
for the entire period 399,122 266,268
Weighted average stock options
outstanding issued prior to 12 months
before this offering calculated using the
treasury stock method 130,945 166,945
Weighted average stock options
outstanding issued after the public
offering calculating using the treasury
stock method 4,429 0
----------- ----------
Total shares 11,638,114 9,808,212
=========== ==========
Primary earnings per share $0.89 $0.31
=========== ==========
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
For the year ended
-----------------------------
December 31, December 31,
1996 1995
----------- ------------
<S> <C> <C>
Net income $10,874,288 $3,191,537
Shares used in calculating fully diluted earnings
per share:
Weighted average common shares
outstanding 11,103,618 9,374,999
Net effect of stock options and warrants
granted during the 12 months prior to the
public offering calculated using the treasury
stock method and treated as outstanding
for the entire period 399,122 266,268
Weighted average Series B Convertible
Preferred stock issued during the 12 months
prior to the public offering calculated using
the treasury stock method and treated as
outstanding for the entire period 232,699 335,330
Weighted average stock options
outstanding issued prior to 12 months
before this offering calculated using the
treasury stock method 130,945 166,945
Weighted average stock options
outstanding issued after the public
offering calculating using the treasury
stock method 4,429 --
----------- ----------
Total shares 11,870,813 10,143,542
=========== ==========
Fully diluted earnings per share $0.92 $0.31
=========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 13.1
ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1996
21
<PAGE> 2
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(in thousands, except per share and selected operating data)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales..................................... $ 457,007 $ 242,587 $ 113,456 $ 80,515 $ 77,023
Costs of sales................................ 393,998 211,037 98,211 69,298 67,155
----------- ----------- ----------- ---------- ----------
Gross profit.................................. 63,009 31,550 15,245 11,217 9,868
Selling, general and administrative
expenses................................... 44,613 25,425 14,411 10,586 11,821
----------- ----------- ----------- ---------- ----------
Income (loss) from operations................. 18,396 6,125 834 631 (1,953)
Other (income) expense:
Interest expense........................... 1,500 1,149 277 213 193
Other income............................... (298) (132) (78) (44) (62)
Minority interest.......................... 195 69 16 8 (19)
----------- ----------- ----------- ---------- ----------
Income (loss) before income taxes............. 16,999 5,039 619 454 (2,065)
----------- ----------- ----------- ---------- ----------
Provision for income taxes(1)................. 6,125 1,847 207 3
----------- ----------- ----------- ---------- ----------
Net income (loss)(1).......................... $ 10,874 $ 3,192 $ 412 $ 451 $ (2,065)
=========== =========== =========== ========== ==========
Fully diluted earnings per share(1)........... $ 0.92 $ 0.31 $ 0.04
=========== =========== ===========
Shares used in computation of fully diluted
earnings per share(1)...................... 11,871 10,144 10,099
=========== =========== ===========
SELECTED OPERATING DATA(2):
Catalogs distributed.......................... 44,000,000 29,000,000 15,000,000 8,000,000 6,900,000
Number of shipments(3)........................ 1,229,000 859,000 522,000 415,000 395,000
Average order size(3)......................... $ 352 $ 273 $ 212 $ 201 $ 211
Customer and inquirer database(4)............. 2,504,000 1,908,000 1,626,000
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)..................... $ 39,809 $ 7,750 $ 525 $ 217 $ (2,142)
Total assets.................................. 149,801 79,392 25,705 17,681 12,589
Short-term debt............................... 3,138 12,757 3,617 1,303 2,007
Long-term debt, net of current portion........ 1,748 1,665 791 732 305
Series B preferred stock...................... 6,461
Total Shareholders' equity (deficit).......... 49,469 4,736 1,705 1,287 (1,164)
</TABLE>
(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. 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.
(2) Selected operating data exclude international operations.
(3) Number of shipments is the number of domestic 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 domestic 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.
22
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition and
results of operations contains certain forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects" and similar
expressions are intended to identify forward-looking statements. There are a
number of important factors that could cause the Company's actual results to
differ materially from those indicated by any such forward-looking statements.
These factors include, without limitation, those set forth under the caption
"Risk Factors" of the Company's Annual Report on Form 10-K.
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 included in this Annual Report.
GENERAL
The Company began operations in November 1988, generating customer orders for
Macintosh operating system ("Mac") products by advertising in national trade
publications. Catalog circulation commenced with THE MAC ZONE(R) in 1990,
followed by THE PC ZONE(R) in 1992. International subsidiary operations and
licensing activities commenced in 1992, and outbound telemarketing operations,
principally to business accounts, were added in 1993.
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 product offerings to support growing customer demand;
strengthening sales of PC/Wintel ("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 44
million catalogs in 1996 from 6.9 million catalogs in 1992. The Company has
also developed Internet sites with over 10,000 products available for sale.
The Company now offers complete computing solutions, a primary factor
underlying growth in average order size and sales, particularly to business
accounts. As a result of the Company's authorization to sell microcomputer
products by Apple, Hewlett-Packard, IBM and other manufacturers, the Company's
sales of these and other hardware products increased to 81.8% of gross sales in
1996, compared 71.0% and 53.1% of gross sales in 1995 and 1994, respectively.
The increase in hardware sales, along with increased sales to business
accounts, led to continued growth in average order size to $352 in 1996, up
from $273 in 1995 and $212 in 1994.
Gross margin percentage increased to 13.8% in 1996, compared to 13.0% in 1995
and 13.4% in 1994. The increase in the gross margin percentage was primarily
the result of improved recovery of domestic freight costs, improved sales mix
of higher margin products, such as memory, as well as from increased purchases
directly from manufacturers which typically provide a lower cost than
distributors. These improvements during 1996 offset factors which tend to
lower gross margin percentage, such as increased industry price competition and
the Company's increased sales to business accounts.
Sales by the Company's foreign subsidiaries accounted for 12.9% of the
Company's net sales in 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 11
23
<PAGE> 4
foreign subsidiaries and has license relationships with 15 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.
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>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0%
Cost of sales 86.2 87.0 86.6
-------- -------- --------
Gross profit 13.8 13.0 13.4
SG&A expenses 9.8 10.5 12.7
-------- -------- --------
Income from operations 4.0 2.5 0.7
Other expense 0.3 0.4 0.2
-------- -------- --------
Income before income taxes 3.7 2.1 0.5
Provision for income taxes 1.3 0.8 0.1
-------- -------- --------
Net income 2.4% 1.3% 0.4%
======== ======== ========
</TABLE>
Comparison of Years Ended December 31, 1996 and 1995
Net Sales. Net sales increased 88.4% to $457.0 million in 1996 from $242.6
million in 1995. The increase resulted primarily from an increase in orders due
primarily to higher catalog circulation, which grew 51.7% to 44 million in 1996
from 29 million in 1995. The increase in net sales was also due in part to an
increase in hardware sales to 81.8% of gross sales in 1996 from 71.0% in 1995,
which contributed to a 28.9% increase in average order size to $352 in 1996
from $273 in 1995. International subsidiary net sales in 1996 were $59.2
million, an increase of 125.1% over 1995, primarily resulting from sales growth
in the Company's operations in Denmark and France and the addition of
subsidiaries in Germany, Mexico, Australia and Belgium.
Gross Profit. Gross profit increased to $63.0 million in 1996 from $31.6
million in 1995, and increased to 13.8% of net sales in 1996 from 13.0% in
1995. 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 enhanced recovery of domestic freight costs, improved
mix of higher-margin product offerings and increased purchases directly from
manufacturers. Partially offsetting the increase in gross margin percentage
was an increase in sales to business accounts, which generally carry a lower
average gross margin percentage.
Selling, General and Administrative Expenses. SG&A expenses increased to $44.6
million in 1996 from $25.4 million in 1995, but decreased as a percentage of
net sales to 9.8% in 1996 from 10.5% in 1995. 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 resulted
primarily from improved co-op advertising recovery and the leveraging of SG&A
expenses over a larger sales base.
24
<PAGE> 5
Other Expense. Other expense increased to $1.4 million in 1996 from $1.1
million in 1995, primarily as a result of higher interest expense related to
higher levels of borrowing on the Company's primary bank line of credit during
first and second quarters of 1996.
Income Taxes. Income tax expense increased in 1996 to $6.1 million from $1.8
million in 1995, due to the significant increase in profitability during 1996.
Net Income. As a result of the above factors, net income increased to $10.9
million or 2.4% of net sales in 1996 from $3.2 million or 1.3% of net sales in
1995.
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 71.0% of gross sales in 1995 from 53.1% 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 the leveraging of SG&A
expenses over a larger sales base.
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 or 1.3% of net sales in 1995 from $412,000 or 0.4% of net sales in
1994.
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. Sales during the fourth quarter tend 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
25
<PAGE> 6
products.
The Company has historically experienced fluctuations in its gross margin
percentage and average order size 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. Average order size declines sequentially to
$326 in the fourth quarter of 1996 from $368 in the third quarter of 1996, due
primarily to lower average selling prices on certain key hardware products,
particularly microprocessors and memory. In addition, the gross margin
percentage declined sequentially to 13.4% in the fourth quarter of 1996 from
14.2% in the third quarter of 1996, due primarily to lower selling prices for
memory, an increased percentage mix of PC products, the Company's increased
focus on sales to business accounts, as well as intense industry price
competition.
The Company intends to continue to invest in increasing sales to business
accounts. As sales to business accounts increase, the gross margin percentage
is likely to decline. Further decline in average order size or gross margin
percentage could have a material adverse effect on the Company's future results
of operations.
The Company's Mac business was strong during 1996. However, the Company has
experienced a decline in the growth of Mac products. Sales of Mac products
grew 76.2% in 1996 compared to 122.9% in 1995. In addition, sales of Mac
products grew 28.8% in the fourth quarter of 1996 compared to a growth rate of
140.4% in the fourth quarter of 1995. Mac product sales represented 69.8% of
gross sales in 1996 compared to 73.1% in 1995. The Company believes that the
percentage of its sales represented by Mac products is likely to decline 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 effort to increase sales to business accounts which tend to be
concentrated more heavily on PC products. Apple has recently experienced a
decline in CPU sales, reflecting uncertainties in the Mac marketplace, as well
as manufacturing and product availability problems. Further decline in the
demand for, or availability of, Apple or other Mac products could have a
material adverse effect on the Company's future results of operations.
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 0.4%, 0.7% and 2.3% of net sales for 1996, 1995 and 1994
respectively.
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.
26
<PAGE> 7
LIQUIDITY AND CAPITAL RESOURCES
On July 2, 1996, the Company completed an initial public offering of its Common
Stock resulting in net proceeds to the Company of $27.2 million. The Company
paid off bank debts totaling $20.8 million by using funds generated by its
initial public offering. The remaining proceeds were used to finance ongoing
working capital requirements.
The Company had total assets of $149.8 million at December 31, 1996, of which
$136.8 million were current assets. At December 31, 1996 and 1995, the Company
had cash and cash equivalents of $976,000 and $1.2 million respectively, and
working capital of $39.8 million and $7.8 million, respectively. Net cash used
in operating activities was $10.3 million, $14.4 million and $4.4 million in
1996, 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 1996, 1995 and 1994, accounts receivable increased by
$26.7 million, $12.5 million and $3.1 million, respectively, and inventories
increased by $35.3 million, $28.2 million and $3.9 million, respectively. The
increase in inventory is mainly due to strategic buy-ins at year end to obtain
favorable pricing and constrained product.
Cash outlays for capital expenditures were $5.7 million, $1.4 million and
$538,000 in 1996, 1995 and 1994, respectively. In addition, the Company
incurred capital lease obligations during 1996, 1995 and 1994 of $1.1 million,
$1.8 million and $405,000, respectively. These expenditures were primarily for
information and telecommunication system enhancements, furniture and equipment,
and leasehold improvements.
The Company has a revolving line of credit of $30.0 million from a commercial
bank collateralized by inventories and accounts receivable expiring June 30,
1998. At December 31, 1996, there were borrowings outstanding under the
facility of $2.0 million accruing interest at the bank's prime rate (8.25% at
December 31, 1996), in addition to $2.5 million of unused letters of credit.
The facility contains certain restrictive covenants related to leverage,
current ratios and subsidiary investments.
The net amount of vendor credit outstanding at December 31, 1996 was $83.8
million. A portion of this vendor credit was drawn from a $35.0 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. Outstanding advances under the
facility totaled $24.1 million at December 31, 1996. 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 believes that its existing available cash and cash equivalents,
operating cash flow and existing credit facilities will be sufficient to
satisfy its operating cash needs for at least the next 12 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.
27
<PAGE> 8
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 976,464 $ 1,214,581
Receivables, net 49,974,983 23,111,478
Inventories, net 77,501,216 42,030,676
Prepaids 7,148,161 6,292,209
Deferred income taxes 1,216,228 695,060
-------------- --------------
Total current assets 136,817,052 73,344,004
Property and equipment, net 9,758,647 4,518,555
Other assets 3,225,314 1,529,605
-------------- --------------
Total assets $ 149,801,013 $ 79,392,164
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank lines of credit $ 2,203,697 $ 12,034,890
Accounts payable 83,847,781 46,594,671
Accrued liabilities and other 9,227,483 5,155,322
Current portion of capital lease obligations 934,172 722,558
Income taxes payable 794,776 1,086,223
-------------- --------------
Total current liabilities 97,007,909 65,593,664
Capital lease obligations, net of current portion 1,748,227 1,664,553
Deferred income taxes 249,506 295,482
Other 857,838 401,940
-------------- --------------
Total liabilities 99,863,480 67,955,639
-------------- --------------
Minority interest 468,741 239,415
-------------- --------------
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 6,461,096
-------------- --------------
Shareholders' equity:
Common stock, no par value, 45,000,000 shares authorized;
issued and outstanding 12,876,616 shares at December 31,
1996 and 9,374,999 shares at December 31, 1995 36,987,825 2,750,000
Retained earnings 12,563,859 1,987,736
Foreign currency translation adjustment (82,892) (1,722)
-------------- --------------
Total shareholders' equity 49,468,792 4,736,014
-------------- --------------
Total liabilities and shareholders' equity $ 149,801,013 $ 79,392,164
============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
28
<PAGE> 9
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Net sales $ 457,006,975 $ 242,586,898 $ 113,455,563
Cost of sales 393,997,580 211,036,693 98,210,972
-------------- -------------- --------------
Gross profit 63,009,395 31,550,205 15,244,591
Selling, general and
administrative expenses 44,613,132 25,425,306 14,410,275
-------------- -------------- --------------
Income from operations 18,396,263 6,124,899 834,316
-------------- -------------- --------------
Other (income) expense:
Interest expense 1,499,624 1,148,939 276,744
Other income (297,353) (132,246) (77,514)
Minority interest 195,297 69,569 16,154
-------------- -------------- --------------
1,397,568 1,086,262 215,384
-------------- -------------- --------------
Income before income taxes 16,998,695 5,038,637 618,932
Provision for income taxes 6,124,407 1,847,100 206,779
-------------- -------------- --------------
Net income $ 10,874,288 $ 3,191,537 $ 412,153
============== ============== ==============
Net income attributable to primary
earnings per share $ 10,415,026 $ 3,038,449 $ 412,153
-------------- -------------- --------------
Primary earning per share $ 0.89 $ 0.31 $ 0.04
-------------- -------------- --------------
Shares used in computation of primary
earnings per share 11,638,114 9,808,212 9,763,277
-------------- -------------- --------------
Fully diluted earnings per share $ 0.92 $ 0.31 $ 0.04
-------------- -------------- --------------
Shares used in computation of fully
diluted earnings per share 11,870,813 10,143,542 10,098,608
-------------- -------------- --------------
</TABLE>
The accompanying notes on an integral part of the consolidated financial
statements.
29
<PAGE> 10
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Foreign
Retained Currency
Preferred Stock Common Stock Earnings Translation
Shares Amount Shares Amount (Deficit Adjustment Total
-------- ----------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 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 (459,262) (459,262)
Issuance of common stock 2,537,106 27,302,787 27,302,787
Conversion of Series B Redeemable
Convertible Preferred Stock 918,711 6,920,358 6,920,358
Exercise of stock options 45,800 14,680 14,680
Net income 10,874,288 10,874,288
Tax effect of stock options 161,097 161,097
exercised
Translation adjustment (81,170) (81,170)
-------- ----------- ---------- ----------- ----------- -------- -----------
Balance, December 31, 1996 12,876,616 $36,987,825 $12,563,859 $(82,892) $49,468,792
======== =========== ========== =========== =========== ======== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
30
<PAGE> 11
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 10,874,288 $ 3,191,537 $ 412,153
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 1,650,912 1,000,646 650,844
Allowance for inventory and receivables 669,176 477,647 297,964
Deferred income taxes (567,144) (226,411) (138,135)
Minority interest 229,326 69,569 16,154
Tax effect of stock options exercised 161,097
Changes in assets and liabilities excluding effect of acquisitions:
Accounts receivable (26,733,956) (12,464,835) (3,117,109)
Inventory (35,251,742) (28,217,690) (3,940,469)
Prepaids and other assets (1,967,845) (5,689,140) (751,611)
Accounts payable 37,039,010 24,267,853 236,068
Accrued liabilities 3,924,574 2,400,818 1,705,133
Income taxes payable (371,187) 802,283 224,159
-------------- -------------- --------------
Net cash used in operating activities (10,343,491) (14,387,723) (4,404,849)
Cash flows from investing activities:
Purchases of property and equipment (5,724,964) (1,397,289) (538,188)
Acquisitions of subsidiaries (479,399) (689,720)
Other 12,947 161,523
-------------- -------------- --------------
Net cash used in investing activities (6,204,363) (2,074,062) (376,665)
Cash flows from financing activities:
Payments under line of credit agreement (110,918,580) (56,665,000) (23,488,720)
Borrowings under line of credit agreement 100,997,372 65,408,357 25,745,800
Net change in book overdrafts (260,341) 2,754,389 3,017,362
Payments on capital leases (768,607) (548,868) (288,802)
Net proceeds from sale of common stock 27,317,467
Net proceeds from sale of preferred stock 6,308,008
Other 12,032 (86,634) 21,171
-------------- -------------- --------------
Net cash provided by financing activities 16,379,343 17,170,252 5,006,811
Effect of exchange rate on cash and cash equivalents (69,606) (7,675) (5,953)
Net increase (decrease) in cash and cash equivalents (238,117) 700,792 219,344
Cash and cash equivalents at beginning of period 1,214,581 513,789 294,445
-------------- -------------- --------------
Cash and cash equivalents at end of period $ 976,464 $ 1,214,581 $ 513,789
============== ============== ==============
Supplemental cash flow information:
Cash paid during the period for interest $ 1,499,624 $ 1,111,213 $ 239,470
Cash paid for income taxes $ 6,795,806 $ 1,251,382 $ 100,000
Noncash investing and financing activity:
Capital leases to finance purchases of equipment $ 1,063,895 $ 1,804,330 $ 405,304
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
31
<PAGE> 12
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Macintosh operating system ("Mac") and PC/Wintel ("PC") computers. The Company
has licensed its trade name to independent licensees that operate in a number
of countries worldwide.
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.
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, 1996 and 1995 are net of allowances of approximately $700,000
and $600,000 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.
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.
32
<PAGE> 13
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.
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
Earnings per share is computed using the weighted average number of common and
dilutive common equivalents outstanding during the period. Dilutive common
equivalents consist of stock options and warrants. The accretion relating to
the Series B Redeemable Convertible Preferred Stock ("Series B Preferred
Stock") prior to the conversion to common stock is deducted from income only in
the calculation of primary earnings per share. For the years ended December
31, 1995 and 1994, fully diluted earnings per share assumes the conversion of
Series B Preferred Stock to common stock. For the year ended December 31,
1996, fully diluted earnings per share is computed using the weighted average
effect of the conversion of Series B Preferred Stock to common stock. Common
and common equivalent shares issued at prices below the public offering price
during the 12 months 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.
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, 1996 and 1995
$4,013,432 and $3,753,666, respectively, of capitalized advertising costs were
included with prepaids. The Company receives market
33
<PAGE> 14
development funds 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 $2,026,361 and $1,774,783 for the years
ended December 31, 1996 and 1995, respectively.
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 1995 and 1994 financial
statements, category mix percentages and product mix percentages to conform to
the 1996 presentations.
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.
4. RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
----------------------------
<S> <C> <C>
Trade $ 31,112,707 $ 16,204,425
Co-op Advertising 5,896,046 3,194,886
Licensees 690,111 665,522
Returns, rebates and other 13,423,497 3,653,074
------------ ------------
51,122,361 23,717,907
Less allowances (1,147,378) (606,429)
------------ ------------
$ 49,974,983 $ 23,111,478
============ ============
</TABLE>
34
<PAGE> 15
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Equipment $ 3,535,676 $ 2,351,015
Computer hardware and software under
capital leases 6,470,765 3,621,598
Computer software 498,941 773,300
Furniture and fixtures 721,231 265,884
Leasehold improvements 2,836,203 155,975
------------ ------------
14,062,816 7,167,772
Less accumulated depreciation and
amortization (4,304,169) (2,649,217)
------------ ------------
Property and equipment, net $ 9,758,647 $ 4,518,555
============ ============
</TABLE>
Included in accumulated depreciation and amortization is accumulated
amortization associated with capital leases at December 31, 1996 and 1995 of
$2,081,820 and $1,246,279, respectively.
6. BANK LINES OF CREDIT
At December 31, 1996, the Company had a $30.0 million bank line of credit
expiring June 30, 1998. Interest is charged at the prime lending rate (8.25%
at December 31, 1996). At December 31, 1996 and 1995, $2,000,000 and
$11,575,000, respectively, was borrowed on the line. The line is collateralized
by the Company's accounts receivable and inventories.
The line of credit agreement contains certain covenants and restrictions
requiring, among other things, a minimum tangible net worth and certain other
financial ratios and restrictions.
Bank lines of credit also included $203,697 and $459,890 of borrowings by the
Company's foreign subsidiaries at December 31, 1996 and 1995, respectively.
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, 1996 and 1995 the Company had book overdrafts of $5,967,973 and
$6,228,314, respectively, which are included with accounts payable.
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
$35.0 million. At December 31, 1996, accounts payable included $24.1 million
owed to Deutsche. 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
The income tax provision consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Current $ 6,691,551 $ 2,073,511 $ 344,914
Deferred (567,144) (226,411) (138,135)
------------ ------------ ------------
Total $ 6,124,407 $ 1,847,100 $ 206,779
============ ============ ============
</TABLE>
35
<PAGE> 16
The components of deferred taxes were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Assets:
Allowance for doubtful accounts $ 422,235 $ 192,699
Inventory allowances 253,389 204,000
Deferred advertising revenue 10,700
Inventory capitalization 99,364 58,152
Accrued liabilities and other 629,842 263,509
----------- -----------
Total $ 1,404,830 $ 729,060
----------- -----------
Liabilities:
Property and equipment depreciation $ (312,680) $ (185,891)
Other (125,428) (143,591)
----------- -----------
$ (438,108) $ (329,482)
----------- -----------
Net deferred tax asset $ 966,722 $ 399,578
=========== ===========
The net deferred tax asset is recognized in the accompanying balance sheet as follows:
Current deferred tax asset $ 1,216,228 $ 695,060
Non-current deferred income tax liability (249,506) (295,482)
----------- -----------
Net deferred tax asset $ 966,722 $ 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,
-----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Statutory rate 35.0% 34.0% 34.0%
State income tax (net of federal income tax benefit) 1.4 1.5
Other (0.4) 1.2 (0.6)
-------- -------- --------
Effective tax rate 36.0% 36.7% 33.4%
======== ======== ========
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its office and returns warehouse space under noncancelable
operating leases which expire through 2003. Under the terms of certain leases,
the Company is responsible for its share of taxes, insurance and common area
charges. At December 31, 1996, future minimum payments under operating leases
were as follows:
<TABLE>
<S> <C>
1997 $ 499,366
1998 1,289,989
1999 1,834,800
2000 1,811,352
2001 and thereafter 4,453,212
----------
Total $9,888,719
==========
</TABLE>
Rental expense totaled $1,532,329, $607,973 and $472,796 for the years ended
December 31, 1996, 1995 and 1994, respectively.
36
<PAGE> 17
Obligations Under Capital Leases
The Company leases equipment and software under long-term capital leases.
Future lease payments as of December 31, 1996 were as follows:
<TABLE>
<S> <C>
1997 $1,133,815
1998 991,644
1999 685,215
2000 159,385
2001 74,105
----------
Total future minimum lease payments 3,044,164
Less amount representing interest (361,765)
----------
Present value of net minimum lease payments 2,682,399
Less current portion (934,172)
----------
Noncurrent portion $1,748,227
==========
</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 $2,536,149 at December 31,
1996.
Acquisitions
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.
Legal Proceedings
Various claims and actions, considered normal to the Company's business, have
been asserted and are pending against the Company. The Company believes that
such claims and actions should not have a material adverse effect upon the
Company's financial position or results of operations.
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 $1.14 per share, payable only to
the extent that dividends are declared to common shareholders. Voluntary and
involuntary liquidation value of each preferred share is $11.43 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 $7.62 per share. Upon
consummation of the initial public offering all outstanding shares of Series B
Preferred Stock converted to 918,711 shares of common stock.
Prior to the conversion of the Series B Preferred Stock to Common Stock the
difference between the issuance price, net of offering costs, of the Series B
Preferred Stock and the redemption value was accreted periodically by a charge
to retained earnings. The carrying value of the Series B Preferred Stock was
also increased for accrued but unpaid dividends.
37
<PAGE> 18
11. SHAREHOLDERS' EQUITY
Common Stock
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.
On July 2, 1996, the Company issued 2,200,000 shares of Common Stock at $12.00
per share in an initial public offering. On July 12, 1996, an additional
330,000 shares were issued pursuant to the underwriters' over-allotment option.
The proceeds to the Company were $27,237,473, net of the underwriting discount
and other direct expenses of $3,122,527. Upon consummation of the offering,
all outstanding shares of Series B Preferred Stock converted to 918,711 shares
of Common Stock.
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 key employees. As of December 31,
1996, only stock options have been granted under the plan. Stock options are
granted solely at the discretion of the Board of Directors and are generally
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 based on a vesting schedule determined by
the Board of Directors, and the plan provides for acceleration of outstanding
options under certain conditions, including certain changes 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
1,650,000 at December 31, 1996.
In addition to options granted under the Plan, the Company has granted options
to the Board of Directors. Options outstanding to these individuals at December
31, 1996, were 32,981 shares at option prices of $0.17 - $25.88 per share.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
stock option plans. Had compensation cost for the Company's stock option plans
been determined based on the fair value at the grant date of the awards in 1996
and 1995 consistent with the provisions of SFAS No. 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Net earnings - as reported $ 10,874,288 $ 3,191,537
============ ============
Net earnings - pro forma $ 10,199,607 $ 3,084,250
============ ============
Fully diluted earnings per share - as reported $ 0.92 $ 0.31
============ ============
Fully diluted earnings per share - pro forma $ 0.86 $ 0.30
============ ============
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995: expected volatility of 66%;
risk-free interest rate of 6.5% and 6.0%; and expected lives of 4 years.
38
<PAGE> 19
Information regarding the stock option plans is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Weighted-
Average
Options Exercise Price
- --------------------------------------------------------------------------------
<S> <C> <C>
Outstanding, January 1, 1994 151,500 $ 0.17
Granted 37,500 0.33
Cancelled (67,500) 0.17
---------- ----------
Outstanding, December 31, 1994 121,500 0.22
Granted 335,250 4.65
Cancelled (750) 4.00
---------- ----------
Outstanding, December 31, 1995 456,000 3.48
Granted 789,500 11.66
Exercised (45,800) 0.32
Cancelled (104,940) 3.77
Outstanding, December 31, 1996 1,094,760 $ 9.21
========== ==========
- --------------------------------------------------------------------------------
1996 option price range for exercised shares $ 0.17-$ 4.00
1996 weighted-average fair value of options granted
during the year $ 5.62
- --------------------------------------------------------------------------------
</TABLE>
The following tables summarize information about fixed-price stock options
outstanding at December 31, 1996.
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Options Outstanding
- --------------------------------------------------------------------------------
Weighted-
Number average Weighted-
Range of outstanding remaining average
exercise prices at 12/31/96 contractual years exercise price
- --------------------------------------------------------------------------------
$ 0.17 - $ 6.67 574,750 8.76 $ 5.18
$ 12.00 - $ 17.75 480,250 9.35 12.72
$ 20.00 - $ 25.88 39,760 9.81 25.03
- ---------------------- ----------------------- ------------------ --------------
$ 0.17 - $ 25.88 1,094,760 9.05 $ 9.21
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Options Exercisable
- --------------------------------------------------------------------------------
Range of Number Weighted-average
exercise prices at 12/31/96 exercise price
- --------------------------------------------------------------------------------
<S> <C> <C>
$ 0.17 - $ 6.67 128,575 $ 2.97
$ 12.00 - $ 17.75 84,000 12.67
$ 20.00 - $ 25.88
- --------------------------------------------------------------------------------
$ 0.17 - $ 25.88 212,575 $ 6.08
================================================================================
</TABLE>
Employee Stock Purchase Plan
In December 1995, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan") which was effective upon the completion of the 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.
39
<PAGE> 20
12. DEFERRED INCOME 401(K) PLAN
The Company offers a deferred income 401(k) plan to substantially all full time
employees with a minimum of six months of service. Participants may make
tax-deferred contributions of up to 10% of annual compensation subject to
certain limitations specified by the Internal Revenue Code.
13. RELATED PARTY TRANSACTIONS
Related party transactions for 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Sales to licensees $ 2,586,000 $ 1,274,142 $ 1,340,836
Sales to affiliates 87,564 20,355
Purchases from affiliates 881,857 3,510,200
Accounts Payable to affiliates 20,986 291,134
Accounts receivable from affiliates 17,258
</TABLE>
14. 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 1996, 1995 and 1994 is presented below.
International activities are principally concentrated in Europe. Corporate
assets consist of cash held by the international subsidiaries.
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, 1996
Net sales $397,852,756 $59,154,219 $ $457,006,975
Income from operations 16,971,945 1,424,318 18,396,263
Identifiable assets 137,915,667 16,033,268 (5,124,386) $148,824,549
Corporate assets 976,464
-------------
Total assets $ 149,801,013
=============
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
=============
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
=============
</TABLE>
40
<PAGE> 21
15. SELECTED QUARTERLY FINANCIAL DATE (UNAUDITED)
The following information is for the years ended December 31, 1996 and 1995:
(in thousands, except per share data)
<TABLE>
<CAPTION>
First Second Third Fourth
DECEMBER 31, 1996 Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $100,927 $111,411 $109,396 $135,273
Cost of sales 86,964 95,980 93,875 117,179
---------- ---------- ---------- ----------
Gross profit 13,963 15,431 15,521 18,094
SG&A expenses 10,078 11,044 10,436 13,055
---------- ---------- ---------- ----------
Income from operations 3,885 4,387 5,085 5,039
Other expense 468 518 157 254
---------- ---------- ---------- ----------
Income before income taxes 3,417 3,869 4,928 4,785
Provision for income taxes 1,244 1,427 1,726 1,728
---------- ---------- ---------- ----------
Net income $ 2,173 $ 2,442 $ 3,202 $ 3,057
========== ========== ========== ==========
Fully diluted earnings per share $ 0.21 $ 0.24 $ 0.24 $ 0.23
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
DECEMBER 31, 1995 Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 46,228 $ 50,815 $ 58,677 $ 86,867
Cost of sales 39,927 44,295 50,904 75,911
---------- ---------- ---------- ----------
Gross profit 6,301 6,520 7,773 10,956
SG&A expenses 5,758 5,220 6,326 8,121
---------- ---------- ---------- ----------
Income from operations 543 1,300 1,447 2,835
Other expense 166 287 276 357
---------- ---------- ---------- ----------
Income before income taxes 377 1,013 1,171 2,478
Provision for income taxes 143 383 444 877
---------- ---------- ---------- ----------
Net income $ 234 $ 630 $ 727 $ 1,601
========== ========== ========== ==========
Fully diluted earnings per share $ 0.02 $ 0.06 $ 0.07 $ 0.16
========== ========== ========== ==========
</TABLE>
41
<PAGE> 22
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Multiple Zones International, Inc.
Renton, Washington
We have audited the accompanying consolidated balance sheets of Multiple Zones
International, Inc. and Subsidiaries as of December 31, 1996 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, 1996. 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, 1996 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, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Seattle, Washington
January 29, 1997, except for Note 11
for which the date is February 24, 1997
43
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statement of Multiple Zones International, Inc. on Form S-8 (File No. 333-06961
and File No. 333-13501) of our report dated January 29, 1997, on our audits of
the consolidated financial statements of Multiple Zones International, Inc. as
of December 31, 1996 and 1995, and for the years ended December 31, 1996, 1995
and 1994, which report is incorporated by reference in this Form 10-K.
/s/ Coopers & Lybrand L.L.P.
----------------------------
Coopers & Lybrand L.L.P.
Seattle, Washington
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 976,464
<SECURITIES> 0
<RECEIVABLES> 49,974,983
<ALLOWANCES> 0
<INVENTORY> 77,501,216
<CURRENT-ASSETS> 136,817,052
<PP&E> 9,758,647
<DEPRECIATION> 0
<TOTAL-ASSETS> 149,801,013
<CURRENT-LIABILITIES> 97,007,909
<BONDS> 0
0
0
<COMMON> 36,987,825
<OTHER-SE> 12,480,967
<TOTAL-LIABILITY-AND-EQUITY> 149,801,013
<SALES> 457,006,975
<TOTAL-REVENUES> 457,006,975
<CGS> 393,997,580
<TOTAL-COSTS> 44,613,132
<OTHER-EXPENSES> 1,397,568
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 16,998,695
<INCOME-TAX> 6,124,407
<INCOME-CONTINUING> 10,874,288
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,874,288
<EPS-PRIMARY> 0.89
<EPS-DILUTED> 0.92
</TABLE>
