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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, 1997 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)
(425) 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
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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
March 6, 1998 was approximately $20,520,557 (1), based upon the last sales
price per share of $4.13 as reported by the NASDAQ National Market.
The number of shares of the registrant's Common Stock outstanding as of March
6, 1998, was 13,065,844.
(1) Excludes value of Common Stock held of record as of March 6, 1998 by
executive officers and directors of the registrant. Includes Common Stock held
of record as of that date by certain depository organizations. Exclusion of
share 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.
INCORPORATED DOCUMENT LOCATION IN FORM 10-K
- - --------------------- -----------------------
1997 Annual Report to Shareholders Part II, Items 5, 6, 7 and 8
Proxy Statement for the 1997 Annual Part III, Items 10, 11 and 12
Meeting of Shareholders
An Index to Exhibits appears at pages 16 and 17 herein
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MULTIPLE ZONES INTERNATIONAL, INC.
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1997
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.
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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 14
Operations
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 14
PART III.
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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.
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Item 14. Exhibits, Financial Statements and Reports on Form 8-K 16
Signatures 19
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PART I.
ITEM 1. BUSINESS
GENERAL
Multiple Zones International, Inc. together with its majority owned
subsidiaries (collectively the "Company") is a leading international direct
marketer of brand name microchip-based hardware, software, accessories and
peripheral products for users of both the PC/Wintel ("PC") and Macintosh
("Mac") operating systems. The Company markets products through its two
flagship catalogs, THE PC ZONE(R) and THE Mac ZONE(R). The Company began
operations in 1988 by advertising in national trade publications. Catalog
circulation commenced with The Mac Zone in 1990, followed by The PC Zone in
1992. International subsidiary operations and licensing activities commenced
in 1992, and outbound telemarketing operations, principally to business
accounts, were added in 1993. The Company distributed over 50 million catalogs
domestically in 1997, with additional circulation by its subsidiaries and
licensees through operations in 24 other countries worldwide. The Company
offers a broad selection of 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 corporate,
governmental and educational accounts.
INDUSTRY BACKGROUND
According to industry data published by Merrin Information Services, Inc. in
May 1997, domestic sales of personal computers and related products were $77.8
billion in 1996 and are projected to increase to $138.2 billion in 2000,
representing a compounded annual growth rate of 15.4%. The direct marketing
channel is expected to be one of the fastest growing segments for the domestic
personal computer and related products industry.
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. Direct marketers enjoy efficiencies in
the form of centralized operations and distribution and also the ability to
offer a broad 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.
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, as
consumer familiarity with microcomputer products grows. Products are becoming
increasingly user-friendly, and manufacturers recognize the cost-effectiveness
of the catalog channel. As the industry continues to evolve, the Company
believes that first-time buyers may largely utilize retail channels that
provide the opportunity to "touch and feel" the products, but that a growing
number of computer-literate consumers will increasingly rely on the convenience
and other advantages of the direct marketing channel. Included in the direct
marketing channel are those manufactures of hardware and software that sell
directly to the end customer. The manufacturer direct producers are having a
increased impact on the direct marketing channel, but catalog resellers have an
advantage based on the large variety of products that they can offer to the
customer. The Company believes the growing acceptance of the direct marketing
channel as a whole, 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 the Annual
Report on Form 10-K contains certain forward-looking statements. Fort his
purpose, any statement contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
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foregoing, the words "believes," "anticipates," "plans," and "expects," and
similar expressions are intended to identify forward-looking statements. There
are 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.
Future Growth. Net sales have grown from $80.5 million for the year ended
December 31, 1993 to $490.0 million for the year ended December 31, 1997. The
Company's business strategy is to pursue additional growth and expand its
customer base. The Company's future success will depend in part on the ability
of the Company to manage and grow effectively in the future. There can be no
assurance that the Company will realize future growth in net sales or will not
experience decreases in net sales. In March of 1998, the Company announced
that it anticipates a shortfall in net sales for the first quarter ended March
31, 1998. The Company has experienced weakness in CPU unit sales and decreased
unit sales prices on peripherals.
Dependence on Sales of Mac Products. The Company is largely dependent on sales
of Mac products manufactured by a broad variety of vendors, including Apple.
Mac products represented 54.4% and 69.8% of the Company's gross sales in 1997
and 1996, respectively. Apple has experienced a decline in sales, as well as a
decline in its share of worldwide and domestic microcomputer markets,
reflecting uncertainties in the Mac marketplace. Additionally, during 1997
Apple has begun selling directly to customers. 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. The Company intends to expand its presence in the PC
market. The Company plans to grow its entire PC customer base while focusing
on growing outbound sales to business, education and corporate accounts. There
can be no assurance that the Company will be successful in increasing sales of
PC products and also reduce its dependence on sales of Mac products.
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 larger
competitors 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 continues its efforts to increase 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.
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 13 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 earnings; potential conflicting claims to its service marks;
export-import regulations; customs matters; foreign collection problems;
military, political transportation risks; and foreign laws and government
regulations. The
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Company's licensees may terminate their agreements with the Company on short
notice. Following termination, most licensees retain rights to their customer
information without an 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 in the future.
Year 2000. The Company is currently working to resolve the potential impact of
the year 2000 on the processing of date-sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures. If the
Company, its customers or vendors are unable to resolve such processing issues
in a timely manner, it could result in a material financial risk. Accordingly,
the Company plans to devote the necessary resources to resolve all significant
year 2000 issues in a timely manner.
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.
Potential Increases in Postage, Shipping and Paper Costs. Postage and shipping
costs, as well as the cost of paper for the Company's catalogs, are significant
expenses in the operation of the Company's business. The Company generally
mails its catalogs through the U.S. Postal Service and ships its products to
customers by overnight delivery. Any future increases in postage, shipping
rates or paper costs could have a material adverse effect on the Company's
business, financial condition or 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 methods of
distribution have attracted increased patronage and other new methods of
distribution may emerge in the future. The 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 35.9% and 25.5% of the Company's total purchases in 1997 and 1996,
respectively. Certain hardware manufacturers limit the number of product units
available to direct marketers such as the Company. In addition, certain
manufacturers and distributors provide the Company with co-op advertising
support and incentives in the form of rebate dollars, 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, in the form of
co-op advertising support, could have a material adverse effect on the
Company's business, financial condition and results of operations.
State Sales or Use 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 shipped to their residents. The United States Supreme Court
recently affirmed its position that it is unconstitutional for a state to
impose sales or use tax collection obligations on an out-of-state mail order
company whose only contacts with the state are limited to the distribution of
catalogs and other advertising materials through the mail and the subsequent
delivery of purchased goods by United States mail or by interstate common
carrier. Howeer, legislation that would expand the ability of states to impose
sales tax collection obligations on direct marketers has been introduced in
Congress on
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many occasions. Due to its presence on various forms of electronic media and
other factors, the Company's contact with various states may exceed the contact
involved in the Supreme Court case. The Company cannot predict the level of
contact that is sufficient to permit a state to impose a sales tax collection
obligation on the Company. If legislation is passed to overturn the Supreme
Court decision, the requirement 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 could have a material adverse
effect on the Company's business, financial condition or 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 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 1999. Any limitation or interruption of the service being provided by
Airborne Logistics could have a material adverse effect on the Company's
business, financial and results of operations.
Rapid Technological Change and Inventory Obsolescence. The microcomputer
industry is characterized by rapid technological change and frequent
introductions of new products and product enhancements. In order to satisfy
customer demand and obtain greater purchase discounts, the Company may be
required to carry increased inventory levels of certain products, which will
subject it to increased risk of inventory obsolescence. The Company intends to
increase its participation in first-to-market purchase opportunities and
end-of-life-cycle purchase opportunities, both of which will further increase
the risk of inventory obsolescence. Special purchase products are sometimes
acquired without return privileges and there can be no assurance that the
Company will be able to avoid losses related to obsolete inventory. In
addition, some vendors provide the Company with co-op advertising support in
the form of products, for which there may be no return privileges. While the
Company seeks to reduce its inventory exposure through a variety of inventory
control procedures and policies, there can be no assurance that the Company
will be able to avoid losses related to obsolete inventory.
BUSINESS STRATEGY
The Company's business objective is to strengthen its position as a leading
international direct marketer of products for users of PC and Mac
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 1- 800 numbers. The Company's outbound
account managers meet the needs of customers in the business, education and
governmental markets. The Company's Internet sites appeal to the growing World
Wide Web market and provide the Company a way to market a larger number of
products to its customers.
Increased Sales of PC Products. The Company intends to focus on the vast PC
market. 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 corporate, education and governmental
accounts represent a strong growth opportunity for the Company. The Company
intends to increase sales to these accounts by
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expanding its outbound sales team. Additionally, the Company seeks to acquire
new business accounts through targeted catalog mailings.
Internet Commerce. The Company believes that the Internet offers growth
opportunities outside of the current catalog offerings. The Company can
display and offer significantly more products to reach more customers and offer
customers an additional way to purchase from the Company.
Product Breadth and Mix. Through the Company's catalogs, Internet site and
consultative sales force the Company is developing the capability to offer the
customer access to over 45,000 hardware, software, peripheral and accessory
products for users of PC and Mac microcomputers, 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 that are demanded by its customers.
Maintain Low Operating Costs. The Company continually seeks ways to work more
efficiently - the result of which has lowered SG&A expenses from 13.1% of sales
in 1993 to 12.8% in 1997. In 1997, the Company streamlined its catalog
production flow and also its credit approval process for business, education
and government accounts. Both process improvement initiatives are directed at
improving the Company's internal processes to eliminate costs and better serve
the Company's vendor partners and its customers. Maintaining a low cost
structure is a key part of the Company's business strategy.
PRODUCTS AND MERCHANDISING
Through the Company's catalogs, Internet site and consultative sales force the
Company is developing the capability to offer the customer access to over
45,000 hardware, software, peripheral and accessory products for users of PC
and Mac 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
Apple, Compaq, Hewlett-Packard, IBM, and Toshiba.
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, Epson, Hewlett-Packard, Iomega, Logitech, Motorola,
Okidata, Phillips, Quantum, Sony, SyQuest, ViewSonic and UMAX.
Software. The Company sells a wide variety of software packages in the
business and personal productivity, connectivity, utility, 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, Corel, Filemaker Incorporated, IBM, Intuit, Lotus, Macromedia,
Microsoft, Novell, CUC, and Symantec.
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YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
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Microcomputers . . . . . . . . . . 33.8% 31.2% 20.7%
Peripherals and accessories . . . . 48.8 50.6 50.3
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Total hardware . . . . . . . . . 82.6 81.8 71.0
Software . . . . . . . . . . . . . 17.4 18.2 29.0
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Total . . . . . . . . . . 100.0% 100.0% 100.0%
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The Company's merchandising group determines the manufacturers whose products
are featured in its catalogs and negotiates the terms and conditions of product
coverage. In exchange for product coverage and the benefit of having
information about their products available to the Company's customers, most
manufacturers provide the Company with co-op advertising support, which
significantly defrays the expense of catalog production. The merchandising
group is also responsible for developing effective advertising campaigns for
manufacturers, managing catalog design and layout, and coordinating product
procurement and inventory management with the Company's purchasing group. In
addition, the merchandising group works closely with the purchasing group to
capitalize on opportunities to expand the Company's first-to-market, end-of-
life-cycle and private-label product offerings.
The Company is continually trying to increase the number of products which it
is authorized to sell. The Company has been authorized by Apple, Compaq,
Hewlett-Packard, IBM, Motorola and Toshiba to offer all or a portion of their
product lines. 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 has focused on expanding its PC sales. PC sales grew 59.5% during
1997 over 1996. Additionally, PC sales have grown to represent 45.6% of net
sales in 1997, compared to 30.2% and 26.9% of net sales in 1996 and 1995,
respectively. The Company's Mac sales decreased 17.9% in 1997as compared to
1996. Sales of Apple branded products alone constituted 17.1% of gross sales
in 1997, compared to 22.5% of gross sales in 1996 and 22.8% of gross sales in
1995. The Company believes that the percentage of its sales represented by Mac
products is likely to continue to decline over time as a result of increasing
acceptance of the direct marketing channel by PC product manufacturers and
users and the Company's expanded focus on PC product sales. In addition to the
Company's focus on PC products it will continue its efforts to increase sales
to business accounts, which tend to be concentrated more heavily on PC
products.
PURCHASING
The Company acquires products directly from manufacturers such as Apple and IBM
as well as from distributors such as Ingram Micro, Merisel and others.
Purchases of products from distributors increased from 25.5% to 35.9% of the
Company's total product purchases in 1996 and 1997, respectively. Purchases
from Ingram Micro Apple represented 20.9% and 15.2%, respectively, of the
Company's total product purchases in 1997. No other vendor supplied more than
10.0% of the Company's total product purchases in 1997.
The Company seeks to efficiently manage its inventory to achieve high product
availability and fill rates. The Company utilizes sophisticated computerized
systems that permit real-time monitoring of inventory and assist the Company in
managing inventory at appropriate levels. The Company has 30-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 7.5% and 8.0% of
gross sales in 1997 and 1996, respectively. 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 PC ZONE(R) and THE MAC 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 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 PC
ZONE(R) and THE MAC ZONE(R) catalogs published domestically in 1997, 1996 and
1995.
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THE PC ZONE(R) THE MAC ZONE(R)
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1997 1996 1995 1997 1996 1995
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Number of editions .......... 13 12 12 13 12 12
Total circulation ........... 20,000,000 14,000,000 10,500,000 29,000,000 28,000,000 18,500,000
</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. Catalogs may also differ based on the customer
type. The Company believes this highly targeted marketing treatment increases
customer response.
The Company also produces a targeted specialty catalog offering a relatively
narrow but deep product line. The catalog, THE LEARNING ZONE(R), is targeted
at purchasers for primary, secondary and post-secondary educational
institutions. The Company intends to explore opportunities to further pursue
targeted marketing efforts.
Each catalog is printed with full-color photographs, detailed descriptions of
product specifications, benefits and features, as well as pricing and ordering
information. The catalogs are designed and produced in-house by the Company's
staff of 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.
INTERNET COMMERCE
The Company was one of the first participants in the direct marketing channel
to participate in on-line sales of computer products. The Company has built
and maintains one of the largest electronic commerce sites on the Internet
(zones.com). To drive traffic to the Company's Internet sites; it leverages
the catalog circulation by featuring the Internet address throughout the
catalogs, including the cover. The electronic stores provide the company with
a lower-cost, effective way to offer the customers product information and a
convenient way to purchase products. 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 3.0 million customer
and inquirer records, including approximately 1.5 million customers, of which
approximately 573,000 customers have purchased products from the Company during
the last twelve months. 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
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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 December 31, 1997, the Company had a staff of 91
experienced account managers and support staff who pursue sales to corporate,
governmental and educational 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 sales, the Company utilizes catalog mailings, fax broadcast messaging
and other marketing tactics to enhance sales.
Inbound Sales. The Company's staff of over 170 inbound telemarketing
representatives are well-trained and knowledgeable. 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 24 countries worldwide,
more than any other catalog retailer of microcomputer products. The Company's
subsidiaries are located in Austria, Denmark, France, Germany, Great Britain,
India, Mexico, Norway, Sweden, Switzerland and Venezuela. The Company's
licensees are located in 13 other foreign countries. The Company's
international sales were $70.7 million in 1997, $59.2 million in 1996 and $26.3
million in 1995, representing increases of 19.5%, 125.1% and 128.7%,
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 PC ZONE(R) and THE MAC 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
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<PAGE> 12
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.
Some 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. 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 significant resources to the development of
sophisticated management information, telecommunication, catalog production and
other systems, which are employed in virtually all aspects of its business. The
Company's primary computer systems consist of a Hewlett-Packard 3000 Model
987/200, shadowed by a redundant Hewlett-Packard 3000 Model 995 for disaster
recovery, an IBM AS/400, and a widely-used mail order and catalog management
software package. The primary computer systems are used for marketing,
purchasing, inventory management, order processing, product distribution,
accounts receivable, customer service and general accounting functions.
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 1999. 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 December 31, 1997, the Company had 652 employees in its domestic
operations, and over 180 persons were employed by the Company's foreign
subsidiaries. The Company considers its employee relations
12
<PAGE> 13
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.
TRADEMARKS
The Company conducts its business in the United States primarily under the
service marks THE PC ZONE(R) and THE MAC ZONE(R) 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 and approximately 18,000 square feet of space for its return
warehouse facility in Henderson, Nevada. The Company also leases approximately
36,000 square feet of office space in Bellevue, Washington, which has been
sublet. Additionally, the Company operates sales and distribution facilities
in Austria, Denmark, France, Germany, Great Britain, India, Mexico, Norway,
Sweden, Switzerland 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 should not have a material adverse effect upon the
Company's financial position 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 1997 to a vote of
security holders.
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information for this item is incorporated by reference from the Company's
1997 Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
The information for this item is incorporated by reference from the Company's
1997 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
1997 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information for this item is incorporated by reference from the Company's
1997 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, and incorporated by
reference from, the Proxy Statement for the Company's 1998 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 51, 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
NewVector Group, the domestic cellular communications subsidiary of U.S. WEST,
Inc.
Lorne G. Rubis, age 47, has served as the Executive Vice President of Sales
since July of 1997. From 1996 to 1997 Mr. Rubis was the Vice President of
Business Operations for the Los Angeles Kings Hockey Club. From 1992 to 1996,
Mr. Rubis held the position of Vice President, reporting to the Chairman and
CEO, at U.S. WEST, Inc., a Fortune 50 telecommunications/multimedia corporation.
Peter J. Biere, age 41, 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.
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<PAGE> 15
William P. Cortes, age 42, joined Multiple Zones in November of 1997 as the
Senior Vice President of International Operations. Prior to joining Multiple
Zones, Mr. Cortes served as the Executive Director of International Markets for
Metapath Software Corporation and the Executive Director Business Development
for Aerial Communications, Inc., a subsidiary of Telephone and Data Systems,
Inc. From 1986 to 1996, Mr. Cortes held various executive roles at U.S. WEST,
Inc., including Executive Director Marketing, Director New Opportunity
Development and Director Business Development. Mr. Cortes is licensed by the
State of Washington as an Attorney at Law and a Certified Public Accountant.
Mark A. Bradley, age 33, joined Multiple Zones in January of 1998 as the Senior
Vice President of Merchandising. From 1994 to 1998, Mr. Bradley held various
management positions with MicroAge, Inc., most recently serving as Vice
President of Hardware Strategy. Mr. Bradley was a National Account Sales Manager
from 1991 to 1994 at NEC.
Chris G. Hauser, age 47, was appointed Senior Vice President of MIS/Operations
in January of 1998. He joined the company in June of 1996 and served as Vice
President of Operations until his promotion. From 1994 to 1996, Mr. Hauser was
the Director of Distribution for the Fingerhut Companies, Inc.
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 1998 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 1998 Annual Meeting of
Shareholders under the caption "Stock Ownership of Management and Certain Other
Holders."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in, and incorporated by
reference from, the Proxy Statement for the Company's 1998 Annual Meeting of
Shareholders under the caption "Certain Transactions."
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Index to Financial Statements:
The following Consolidated Financial Statements of Multiple Zones
International, Inc. and its subsidiaries, as contained in its 1997
Annual Report to Shareholders, are incorporated by reference in Part
II, Item 8.
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995
Statements of Shareholders' Equity for the years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
Report of Independent Accountants
(a) 2. Index to Financial Statements Schedule:
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 Consolidated Financial Statements and
Notes thereto.
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<PAGE> 16
(a) 3. Exhibits required by Securities and Exchange Commission Regulation
S-K, Item 601:
<TABLE>
<CAPTION>
Number Description
- - ---------- --------------------------------------------------------------------------------------------------------------------
<S> <C>
EXHIBIT NO. 3: ARTICLES OF INCORPORATION AND BYLAWS
3.1 Restated Articles of Incorporation (incorporated by reference from exhibit 3.1 to the Registrant's Registration
Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458))
3.2 Amended and Restated Bylaws, as amended (incorporated by reference from exhibit 3.2 to the Registrant's Registration
Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458))
EXHIBIT NO. 10: MATERIAL CONTRACTS
Compensation Plans and Agreements
10.1 Multiple Zones International, Inc. 1993 Stock Incentive Plan, as amended (incorporated by reference from exhibit 10.1
to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458))
10.2 Stock Option Agreement between the Registrant and Peter J. Biere for stock option granted August 9, 1994 (incorporated
by reference from exhibit 10.2 to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No.
333-04458))
10.3 Form of Stock Option Agreement (used for all other stock options granted to executive officers prior to April 1, 1996)
(incorporated by reference from exhibit 10.3 to the Registrant's Registration Statement on Form S-1 filed on June 5,
1996 (File No. 333-04458))
10.4 Stock Option Agreement dated as of January 5, 1997 between the registrant and John E. DeFeo (incorporated by reference
from exhibit 10.26 to the Registrant's Annual Report on Form 10-K filed on March 25, 1997 (File No. 000-28488))
10.5 Form of Stock Option Agreement (used for all other stock options granted to executive officers after March 31, 1996)
(incorporated by reference from exhibit 10.4 to the Registrant's Registration Statement on Form S-1 filed on June 5,
1996 (File No. 333-04458))
10.6 Form of Stock Option Agreement (used for all stock options granted to outside directors) (incorporated by reference
from exhibit 10.16 to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458))
10.7 Multiple Zones International, Inc. 401(k) Plan (incorporated by reference from exhibit 10.5 to the Registrant's
Registration Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458))
10.8 Multiple Zones International, Inc. Employee Stock Purchase Plan (incorporated by reference from exhibit 10.6 to the
Registrant's Registration Statement on Form S- 1 filed on June 5, 1996 (File No. 333-04458))
10.9 Multiple Zones International, Inc. Management Incentive Plan (incorporated by reference from exhibit 10.7 to the
Registrant's Registration Statement on Form S- 1 filed on June 5, 1996 (File No. 333-04458))
10.10 Form of Indemnification Agreement (entered into with each of Peter J. Biere and the Registrant's outside directors)
(incorporated by reference from exhibit 10.15 to the Registrant's Registration Statement on Form S-1 filed on June 5,
1996 (File No. 333-04458))
10.11 Employment Agreement dated as of January 1, 1996 between the Registrant and Sadrudin J. Kabani (incorporated by
reference from exhibit 10.12 to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No.
333-04458))
10.12 Employment Agreement dated as of April 1, 1996 between the Registrant and Sadrudin J. Kabani (incorporated by
reference from exhibit 10.13 to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No.
333-04458))
</TABLE>
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<TABLE>
<S> <C>
10.13 Employment Agreement dated as of July 14, 1997 between the Registrant and Lorne G. Rubis
10.14 Consulting Agreement between the Registrant and Carol L. Miltner (incorporated by reference from exhibit 10.17 to the
Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458))
Other Material Contracts
10.15 Warrant issued to Prudential Securities Incorporated dated October 27, 1995 (incorporated by reference from exhibit
10.21 to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458))
10.16 Standard Office Lease-Gross dated October 4, 1993 between the Registrant and Hewlett-Packard Company (incorporated by
reference from exhibit 10.23 to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No.
333-04458))
10.17 Office Lease dated April 1, 1996 between the Registrant and Renton Talbot Delaware, Inc. (incorporated by reference
from exhibit 10.24 to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458))
10.18 Industrial Real Estate Lease dated April 10, 1997 between the Registrant and Pacific Industrial Park LLC
10.19 Ingram Micro Resale Agreement dated April 1, 1996 between Ingram Micro and the Registrant (incorporated by reference
from exhibit 10.25 to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458))
10.20 Authorized Apple Catalog Reseller Sales Agreement between the Apple Computer, Inc. and the Registrant (incorporated by
reference from exhibit 10.26 to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No.
333-04458))
10.21 Storage and distribution Agreement dated September 28, 1992 between the Registrant and Advanced Logistics Services
Corp., as amended (incorporated by reference from exhibit 10.27 to the Registrant's Registration Statement on Form S-1
filed on June 5, 1996 (File No. 333-04458))
10.22 Amendment to Storage and Distribution Agreement dated December 30, 1997, between the Registrant and Advanced Logistics
Services Corp.
10.23 Agreement for Wholesale Financing date January 15, 1996, as amended, between the Registrant and Deutsche Financial
Services Corporation (incorporated by reference from exhibit 10.19 to the Registrant's Registration Statement on Form
S-1 filed on June 5, 1996 (File No. 333-04458))
10.24 Amendment to Agreement for wholesale financing dated April 23, 1997, between the Registrant and Deutsche Financial
Services Corporation.
10.25 Business Loan Agreement dated April 24, 1997, between the Registrant and U.S. Bank of Washington, National
Association.
EXHIBIT NO. 13: ANNUAL REPORT TO SHAREHOLDERS
13.1 Portions of 1997 Annual Report to Shareholders
EXHIBIT NO. 21: SUBSIDIARIES OF THE REGISTRANT
21.1 Subsidiaries of the Registrant (incorporated by reference from exhibit 21.1 to the Registrant's Registration Statement
on Form S-1 filed on June 5, 1996 (File No. 333-04458))
EXHIBIT NO. 23: CONSENTS OF EXPERTS AND COUNSELS
23.1 Consent of Coopers & Lybrand L.L.P.
EXHIBIT NO. 27: FINANCIAL DATA SCHEDULE
27.1 Financial Data Schedule (December 31, 1997)
27.2 (Restated December 31, 1995 through December 31, 1996)
27.3 (Restated January 1, 1997 through September 30, 1997)
</TABLE>
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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 27, 1998
By: /s/ JOHN E. DEFEO
--------------------------------------
John E. DeFeo, 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.
<TABLE>
<CAPTION>
Signature Title Date
- - -------------------------------- ---------- --------------
<S> <C> <C>
/s/ JOHN H. BAUER
- - -------------------------------- Director March 27, 1998
John H. Bauer
/s/ JOHN T. CARLETON
- - -------------------------------- Director March 27, 1998
John T. Carleton
/s/ SADRUDIN J. KABANI
- - -------------------------------- Director March 27, 1998
Sadrudin J. Kabani
/s/ FIROZ H. LALJI
- - -------------------------------- Director March 27, 1998
Firoz H. Lalji
/s/ CAROL L. MILTNER
- - -------------------------------- Director March 27, 1998
Carol L. Miltner
/s/ PAUL E. MONSON
- - -------------------------------- Director March 27, 1998
Paul E. Monson
</TABLE>
18
<PAGE> 1
[MULTIPLE ZONES INTERNATIONAL LETTERHEAD]
Lorne G. Rubis July 14, 1997
95A - 17th Street
Hermosa Beach, CA 90254
RE: Revised Employment Offer
Dear Mr. Rubis,
I am pleased to offer you the position of Executive Vice President of Sales for
Multiple Zones International, Inc. (the "Company"), reporting to Mr. John
DeFeo, President/CEO/COO. This offer is made for employment at will beginning
July 14, 1997, on the following terms:
COMPENSATION
A salary of $9,375.00 per pay period (24 per year). You will also be eligible
for the Company's incentive bonus plan at the executive level -- 35 percent of
your base salary. As with all company incentive plans, this is subject to
change at management's discretion.
In addition, you will receive 100,000 stock options under the Company's 1993
Stock Incentive Plan, as amended. The stock options will vest in equal
increments over a four-year period, at a rate of 25 percent per year. You also
will have an annual stock option grant opportunity equal to 40 percent of your
base salary as of January 1st of such year. Annual grants are subject to
approval by the Board of Directors during the Board Meeting, generally in
April, that precedes the Annual Meeting of Shareholders. Stock options are
generally granted at an exercise price equal to the closing price of the
Company's stock on the effective date of the grant, typically the date of Board
approval. Annual stock option grants are subject to a two-year equal
installment vesting, and represent the long-term incentive component of your
compensation.
A $25,000 signing bonus will also be paid to you at the onset of your
employment with the Company, but is contingent upon a commitment of 12 months
continuous employment. Should you decide for any reason to terminate your
employment prior to that time, other than change of control as defined on pages
two & three of this letter, these funds must be repaid in full.
BENEFITS
The Company will provide you with medical, dental, vision and prescription
insurance coverage in accordance with the Company insurance plan. There is
optional coverage for spouses and immediate family members, but the cost of
this additional coverage will be your responsibility. Your eligibility for
benefits would begin on the first of the month following employment (i.e.,
August 1, 1997).
VACATION
You will accrue three weeks of paid vacation annually during your first two
years with the Company, and four weeks annually after two years of service.
<PAGE> 2
LORNE RUBIS
Offer Letter -- Page Two
RELOCATION
The Company will provide you with up to $25,000 for expense reimbursement to
assist you in your relocation to the Puget Sound area. These funds can be used
for travel, transport of household goods, closing costs, interim living
expenses, house hunting trips and other ordinary moving expenses. These funds
may be subject to personal income tax as advised by our accounting firm, Coopers
& Lybrand LLP. You should plan on working directly with me to coordinate use of
these funds, submitting receipts for an expense reimbursement or gaining
pre-approval of expenses that you would like the Company to pay directly. Per
our discussions, should your expenses related to this move go beyond the
relocation amount we are offering, any additional reimbursement for your
relocation will be subject to John DeFeo's approval as an exception, and should
not be considered as a guarantee.
SEPARATION
As an employee at will, the Company has the right to terminate your employment
at any time, with or without "Cause." For present purposes, Cause will include
(a) repeated refusals to carry out directions of the Board with regard to
material matters reasonably consistent with your duties as Executive Vice
President of Sales; (b) knowing violation of a state or federal law
constituting a felony or involving the commission of a crime against the
Company; (c) misuse of alcohol or controlled substances, misrepresentation,
deception, fraud or dishonesty materially injurious to the Company; and (d) any
act or omission in willful disregard of the Company's interests that
substantially impairs its goodwill, business or reputation.
Should the Company terminate your employment for Cause, then no salary,
compensation, severance benefits or other amounts shall be paid to you with
respect to any period subsequent to the effective date of such termination, or
otherwise with respect to your employment by the Company. In the event, however,
that the Company terminates your employment without Cause, or you terminate your
employment with the Company for "Good Reason" (as defined below) within 12
months following a "Change of Control" (also defined below), the Company will
provide you with severance pay equal to your base salary paid monthly for up to
12 months or until you secure other employment, whichever occurs first. If such
termination (without Cause or for "Good Reason" as defined below) occurs within
the first 4 years of your employment, the Company will provide you with an
additional relocation reimbursement allowance of up to $25,000.00. Your medical
benefits would continue under the Company plan throughout the term of your
monthly severance payments. If you secure other employment within three months
of your last day with the Company, in addition to the monthly severance payments
during such period, you will receive an additional payment equal to two months
of base salary. The Company will also provide you with two year's accelerated
vesting on all stock options held as of the date of separation. You will have a
period of 1 year from date of separation to exercise these options, reduced to
90 days if you elect to go to work for one of our competitors. Please note that
exercising the options after 90 days from the date of separation will result in
the options being treated as non-qualified rather than incentive stock options.
Under tax law, non-qualified stock options are generally taxed as ordinary
income, while incentive stock options are generally treated as capital gains.
You will additionally receive a cash payment in lieu of any accrued but unused
vacation calculated based on the rate of base compensation in effect on the
effective date of such termination.
<PAGE> 3
Lorne Rubis
Offer Letter - Page Three
For purposes of this Employment Offer, the term "Change of Control" is limited
to the following: (a) Any sale or exchange of Common Stock of the Company, any
sale or exchange of assets of the Company (other than in the ordinary course of
business), or any merger, statutory share exchange or other similar
transaction, as a result of which, together with all other similar transactions
that have occurred during the period of eighteen (18) months ending on the date
of the transaction, there has been during that period a transfer of ownership
or control of more than seventy-five percent (75%) of the Company's stock,
voting power, assets or business; or (b) The acquisition by any person or
entity or any group of persons or entities acting in concert of the ownership
of, or the power to vote, more than fifty percent (50%) of the outstanding
voting securities of the Company (for which purpose, securities which are
convertible into voting securities will be deemed voting securities).
The term "Good Reason," for present purposes, is limited to the occurrence
within the 12-month period following a Change in Control of any one of the
following events without your consent: (a) A material reduction in the scope of
your responsibilities for the Company immediately prior to the Change in
Control and the assignment to you of any duties inconsistent with your position
as Executive Vice President of Sales; (b) A material reduction in the overall
level of employee benefits available to you immediately prior to the Change in
Control, or your right to participate therein, unless such reduction is
nondiscriminatory as to you; or (c) The Company's requiring you to be based
anywhere more than fifty (50) miles from the Company's principal business
location at the time of the Change of Control other than for required travel in
connection with the business of the Company not significantly greater than your
business travel obligations at the time of the Change of Control.
***
It is my understanding that the foregoing terms and conditions of your
employment represent our entire agreement and supersede all prior discussions
regarding your employment with Multiple Zones International, Inc. Any questions
regarding this offer of employment or Company benefits may be directed to me at
(425) 430-3674. A second copy is included for your records. Please indicate
your acceptance by signing and returning the signed original to my office.
Thank you very much -- we are very glad to have you joining the MZI Team!
Sincerely,
/s/ ANNETTE GREGORICH
- - ----------------------------------------
Annette Gregorich
Sr. Director of Human Resources
Multiple Zones International, Inc.
Encl./Benefits
Accepted: /s/ LORNE G. RUBIS Date: 7/14/97
----------------------------------- --------------------
Lorne G. Rubis
<PAGE> 1
INDUSTRIAL REAL ESTATE LEASE
(Single-Tenant Facility)
Table of Contents
<TABLE>
<S> <C> <C>
ARTICLE ONE: BASIC TERMS Page 1
ARTICLE TWO: LEASE TERM Page 1
ARTICLE THREE: BASE RENT Page 2
ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT Page 2
ARTICLE FIVE: USE OF PROPERTY Page 6
ARTICLE SIX: CONDITION OF PROPERTY; Page 7
MAINTENANCE, REPAIRS AND ALTERATIONS
ARTICLE SEVEN: DAMAGE OR DESTRUCTION Page 8
ARTICLE EIGHT: CONDEMNATION Page 9
ARTICLE NINE: ASSIGNMENT AND SUBLETTING Page 9
ARTICLE TEN: DEFAULTS: REMEDIES Page 10
ARTICLE ELEVEN: PROTECTION OF LENDERS Page 11
ARTICLE TWELVE: LEGAL COSTS Page 12
ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS Page 12
ARTICLE FOURTEEN: BROKERS Page 14
ARTICLE FIFTEEN: TOXIC AND HAZARDOUS SUBSTANCES Page 14
ARTICLE SIXTEEN: RULES AND REGULATIONS Page 15
EXHIBIT A: NET RENTABLE AREA
EXHIBIT B: NOTICE OF LEASE TERM DATES
EXHIBIT C: RULES AND REGULATIONS
EXHIBIT D: RIGHT OF FIRST REFUSAL ON CONTIGUOUS SPACE
CONSTRUCTION OF IMPROVEMENTS RIDER
ENVIRONMENTAL INDEMNIFICATION RIDER
</TABLE>
<PAGE> 2
INDUSTRIAL REAL ESTATE LEASE
(Single Tenant Facility)
ARTICLE ONE: BASIC TERMS
This Article One contains the Basic Terms of this Lease between the Landlord
and Tenant named below. Other Articles, Sections and Paragraphs of the Lease
referred to in this Article One explain and define the Basic Terms and are to
be read in conjunction with the Basic Terms.
Section 1.01. DATE OF LEASE: April 10, 1997
Section 1.02. LANDLORD: Pacific Industrial Park, LLC, a Delaware
limited liability company
Address of Landlord: 1095 E. Twain Ave., 2nd Floor, Las Vegas, NV 89109 attn:
Jim Stockhausen
Section 1.03. TENANT: Multiple Zones International, Inc., a
Washington corporation
Address of Tenant: 707 S. Grady Way, Renton, WA. 98005, phone (206) 430-3000.
Section 1.04. PROPERTY: The demised premises (the "Property") is
commonly referred to as 170 Gallagher Crest Dr., Henderson, NV, 89014 (the
"Building"), as further described on Exhibit A attached hereto and incorporated
herein by reference, "Net Rentable Area" of the Property (as described on
Exhibit A) is approximately 18,720 square feet.
Section 1.05. LEASE TERM: 60 months, beginning on May 1, 1997 or such
other date as specified in this Lease, and ending on April 30, 2002.
Section 1.06. RENT AND OTHER CHARGES PAYABLE BY TENANT:
a. BASE RENT: six thousand five hundred fifty-two dollars and no
cents ($6,552.00) per month for the first 12 months, as provided in Section
3.01, and shall be increased every 12 months after the Commencement Date,
either (i) in accordance with the increase in the United States Department of
Labor, Bureau of Labor Statistics, U.S. All Cities Average, Consumer Price
Index for Urban Wage Earners and Clerical Workers (for all items 1982 - 1984 =
100) [the "Index"], as provided in Section 3.02.
(b) OTHER PERIODIC PAYMENTS: Tenant shall be responsible for
payment of certain charges directly such as taxes (See Section 4.02), utilities
(See Section 4.03), and insurance (See Section 4.04). In addition, Tenant shall
be responsible for payment of Tenant's Proportionate Share of Common Area Costs
(See Section 1.07 and Section 4.05).
Section 1.07. TENANT'S PROPORTIONATE SHARE: (See Section 4.05) 7.95%
Section 1.08. INITIAL SECURITY DEPOSIT: (See Section 3.03 and Paragraph
13.03(c)) six thousand five hundred fifty-two dollars and no cents ($6,552.00).
Section 1.09. TENANT'S GUARANTEE: (If none, so state) None.
Section 1.10. PERMITTED USES: (See Section 5.01)_______________________
_______________________________________________________________________________
Section 1.11. VEHICLE PARKING SPACES ALLOCATED TO TENANT: (See Section
4.05) twenty-five (25)
Section 1.12. BROKERS: (See Article Fourteen) Lee & Associates
Section 1.13. RIDERS: The following Riders are attached to and made a
part of this lease: CONSTRUCTION OF IMPROVEMENTS RIDER, ENVIRONMENTAL
INDEMNIFICATION RIDER
ARTICLE TWO: LEASE TERM
Section 2.01. LEASE OF PROPERTY FOR LEASE TERM. Landlord leases the
Property to Tenant and Tenant leases the Property from Landlord for the Lease
Term. The Lease Term is for the period stated in Section 1.05 above and shall
begin and end on the dates specified in Section 1.05 above, unless the
beginning or end of the Lease Term is changed under any provision of this
Lease. The "Commencement Date" shall be the date specified in Section 1.05
above for the beginning of the Lease Term, unless advanced or delayed under any
provision of this Lease. At such time as the Commencement Date shall have been
established, Landlord and Tenant shall execute Exhibit B attached hereto and
incorporated herein by reference as a confirmation of said date.
Section 2.02. DELAY IN COMMENCEMENT. Landlord shall not be liable to
Tenant if Landlord does not deliver possession of the Property to Tenant on the
first date specified in Section 1.05 above. Landlord's non-delivery of the
Property to Tenant on that date shall not affect this Lease or the obligations
of Tenant under this Lease. However, unless provided otherwise in the Lease,
the Commencement Date shall be delayed until possession of the Property is
delivered to Tenant but in no event than the later of: (a) June 15, 1997 or (b)
sixty
<PAGE> 3
(60) days after approval by both Landlord and Tenant of the Final Plans as
defined in the Construction of Improvements Rider attached hereto, unless
agreed to otherwise in a written agreement between Landlord and Tenant. The
Lease Term shall be extended for a period equal to the delay in delivery of
possession of the Property to Tenant, plus the number of days necessary to end
the Lease Term on the last day of a month. If delivery of possession of the
Property to Tenant is delayed, Landlord and Tenant shall, upon such delivery,
execute Exhibit B as confirmation of the Commencement Date.
Section 2.03. EARLY OCCUPANCY. If Tenant occupies the Property prior to
the Commencement Date with Landlord's permission, Tenant's occupancy of the
Property shall be subject to all of the provisions of this Lease, including,
without limitation, all insurance requirements. Early occupancy of the Property
shall not advance the expiration date of this Lease. Tenant shall pay Base Rent
and all other charges specified in this Lease for the early occupancy period.
Section 2.04. HOLDING OVER. Tenant shall vacate the Property upon the
expiration or earlier termination of this Lease. Tenant shall reimburse
Landlord for and indemnify Landlord against all damages incurred by Landlord
from any delay by Tenant in vacating the Property; including, without
limitation, any claim made by any succeeding tenant based on or resulting from
such failure to surrender. If Tenant does not vacate the Property upon the
expiration or earlier termination of the Lease and Landlord thereafter accepts
rent from Tenant, Tenant's occupancy of the Property shall be a "month-
to-month" tenancy, subject to all of the terms of this Lease applicable to a
month-to-month tenancy, except that the Base Rent then in effect shall be one
hundred ten percent (110%) of the rent and all other charges due for the last
month of the Lease Term. This provision shall not give Tenant any right to
continue occupancy following expiration of this Lease except with the written
consent of Landlord.
ARTICLE THREE: BASE RENT
Section 3.01. TIME AND MANNER OF PAYMENT. Upon execution of this Lease,
Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph
1.06(a) above together with an estimate of Additional Rent (as hereinafter
defined) for the first full month of the Lease Term. The Base Rent shall be
appropriately prorated for any fractional month on the basis of a thirty (30)
day month. On the first day of the second month of the Lease Term and each
month thereafter, Tenant shall pay Landlord the Base Rate, in advance, without
offset, deduction or prior demand. The Base Rent shall be payable at Landlord's
address or at such other place as Landlord may designate in writing.
Section 3.02. COST OF LIVING INCREASES. The Base Rent shall be increased
at the times specified in Paragraph 1.06(a) above, in proportion to the
increase in the Index which has occurred between the month three (3) months
prior to the first month of the Lease Term and the month three (3) months prior
to the month in which the rent is to be increased. Landlord shall notify Tenant
of each increase by delivering a written statement setting forth in Indices for
the appropriate months, the percentage increase between those two Indices, and
the new amount of the Base Rent. The Base Rent shall not be reduced from the
last previous adjusted Base Rent by reason of any decrease in the Index. Tenant
shall pay the new Base Rent from its effective date until the next periodic
increase. Landlord's notice may be given after the effective date of the
increase since the Index for the appropriate month may be unavailable on the
effective date. In such event, Tenant shall pay Landlord the necessary rental
adjustment for the months elapsed between the effective date of the increase
and Landlord's notice of such increase within ten (10) days after Landlord's
notice. If the format or components of the Index are materially changed after
the Date of Lease, Landlord shall substitute an index which is published by the
Bureau of Labor Statistics or similar agency and which is most early equivalent
to the Index in effect on the Date of Lease. Landlord shall notify Tenant of
the substituted index, which shall be used to calculate the increase in the
Base Rent.
Section 3.03. SECURITY DEPOSIT INCREASES. Each time the Base Rent is
increased, Tenant shall deposit additional funds with Landlord sufficient to
increase the Security Deposit to an amount which bears the same relationship to
the adjusted Base Rent as the initial Security Deposit bore to the initial Base
Rent.
Section 3.04. TERMINATION; ADVANCE PAYMENTS. Upon termination of this
Lease under Article Seven (Damage or Destruction), Article Eight (Condemnation)
or any other termination not resulting from Tenant's default, and after Tenant
has vacated the Property in the manner required by this Lease, an equitable
adjustment shall be made concerning advance rent, any other advance payments
made by Tenant to Landlord, and accrued real property taxes, and Landlord shall
refund any unused portion of the Security Deposit to Tenant or Tenant's
successor within forty-five (45) days of such termination.
ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT
Section 4.01. ADDITIONAL RENT AND DEFINITIONS.
(a) ADDITIONAL RENT. All charges payable by Tenant other than Base
Rent are called "Additional Rent." Unless this Lease provides otherwise, all
Additional Rent shall be paid with the next monthly installment of Base Rent.
The term "rent" shall mean Base Rent and Additional Rent.
(b) DEFINITIONS. The Property is part of a multi-tenant
industrial/commercial real property development of Landlord (the "Project").
The Project includes the land, the buildings and all other improvements
located thereon, and the Common Areas (as hereinafter defined). As used in this
Lease, "Common Areas" shall
<PAGE> 4
mean all areas within the Project which are available for the common use
of tenants of the Project and which are not leased or held for the
exclusive use of Tenant or other tenants, including, but not limited to,
parking areas, driveways, sidewalks, loading areas, access roads,
corridors, landscaping and planted areas. Landlord may from time to time
change the size, location, nature and use of any of the Common Areas,
including converting common Areas into leasable areas, constructing
additional parking facilities (including parking structures) and other
improvements in the Common Areas, and increasing or decreasing Common area
land and/or facilities. Tenant acknowledges that such activities may
result in occasional inconvenience to Tenant from time to time. Such
activities and changes shall be expressly permitted if they do not
materially affect Tenant's use of the Property.
Section 4.02 TAXES.
(a) PAYMENT. Tenant shall be liable for and shall pay at least
ten (10) days before delinquency (and, upon demand by Landlord, Tenant
shall furnish Landlord with satisfactory evidence of the payment thereof)
all impositions (as hereinafter defined) and all taxes and assessments of
whatsoever kind or nature, and penalties and interest thereon, if any,
levied against the Property, Tenant's personal property and any other
personal property of whatsoever kind and to whomsoever belonging situated
or installed in or upon the Property, whether or not affixed to the
realty. If Tenant fails to pay such sums when due, Landlord may pay the
taxes and charges and Tenant shall reimburse Landlord for the amount of
such payment, plus interest as set forth in Section 4.07, as Additional
Rent. in lieu of Tenant paying Impositions, taxes and charges directly to
the proper authority, Landlord, at its option, may notify Tenant of
Landlord's choice to pay all Impositions, taxes and charges directly and
Tenant shall pay such amounts to Landlord with ten (10) days after
receipt of Landlord's written statement of the amounts due. If the
Property is not separately assessed, Tenant's share of Impositions payable
by Tenant under paragraph 4.02(a) shall be determined from assessor's
worksheets or other reasonably available information. Landlord shall make
a reasonable determination of Tenants proportionate share of Impositions
and Tenant shall pay such share to Landlord within ten (10) days after
receipt of Landlord's written statement.
(b) IMPOSITIONS. For the purposes of this Section 4.02,
"Impositions" means:
(i) Any real estate taxes, assessments or other charges
assessed against the Property and related structures and parking
facilities and the land on which they are located.
(ii) All personal property taxes on personal property used
in connection with the Property and related structures.
(iii) Any and all environmental levies or charges now in
force affecting the Property or any portion thereof, or which may
hereafter become effective, including, but not limited to, parking taxes,
levies, or charges, employer parking regulations, and any other parking
or vehicular regulations, levies, or charges imposed by any municipal,
state or federal agency or authority.
(iv) Any other taxes levied or assessed in addition to or in
lieu of such real or personal property taxes.
(c) EXCLUSION. Notwithstanding anything to the contrary
contained in this Section 4.02, Tenant shall not be liable for any of the
following taxes and assessments:
(i) Personal property, fixture or equipment taxes assessed
against the property used by Landlord in operating, managing or leasing
the Project;
(ii) Inheritance tax, estate taxes, gift taxes, income
taxes, transfer taxes and excess profit taxes.
(d) SUBSTITUTED TAXES. If any time during the term of this Lease,
under the laws of the United States, Nevada or any political subdivision
thereof, a tax or excise on rents or other tax (except income tax),
however described, is levied or assessed by the United States, Nevada or
said political subdivision against Landlord on account of any rent
reserved or space leased under this Lease, all such tax or excise on
rents or other taxes shall be paid by Tenant. Whenever Landlord shall
receive any statement or bill for any such tax or shall otherwise be
required to make any payment on account thereof, Tenant shall pay the
amount due hereunder within ten (10) days after demand therefor
accompanied by delivery to Tenant of a copy of such tax statement, if any.
(e) RIGHT TO CONTEST. Tenant shall have the right to contest any
taxes the payment of which, in whole or in part, is the obligation of
Tenant hereunder. Said right to contest shall not excuse Tenant of its
obligation to pay such taxes as herein provided. However, in the event
that the effect of such contest is to extend or postpone the date on which
such taxes are delinquent, Tenant may, instead of payment, deposit with
Landlord the amount of such claimed tax payable by Tenant, together with
interest and penalties thereon. Pending resolutions of such contest, and
within a reasonable time, deliver to Landlord either (a) evidence
satisfactory to Landlord that such claim of taxability has been withdrawn
or defeated, in which event such deposit shall be returned to Tenant to
the extent it exceeds any monies then payable by Tenant or (b) an
instruction that such claim of taxability has not been defeated and that
such deposit be applied towards payment of Tenant's obligations therefor.
Such deposit shall not relieve Tenant of the obligation to make any
additional payments for which Tenant would otherwise be responsible
hereunder. Tenant shall indemnify, save and hold Landlord, the Building,
the Project and the Property free, clear and harmless from any and all
liability, loss, costs, charges, penalties, obligations, liens, expenses,
reasonable attorneys' fees, litigation, judgments, damages, claims and
demands of any
3
<PAGE> 5
kind whatsoever in connection with, arising out of, or by reason of any contest
of taxes pursuant to this Paragraph 4.02(c).
Section 4.03. UTILITIES. Tenant shall pay, directly to the appropriate
supplier, the cost of all natural gas, electricity, heat, light, power, sewer
service, telephone, water, refuse disposal and other utilities and services
supplied to the Property. However, if any services or utilities are jointly
metered with other property within the Project, Landlord shall make a
reasonable determination of Tenant's proportionate share of the cost of such
utilities and services and Tenant shall pay such share to Landlord within ten
(10) days after receipt of Landlord's written statement. Landlord shall not be
responsible or liable for the quality, quantity, impairment, interruption,
stoppage, or other interference with service involving water, waste disposal,
sewer, heat, gas, electricity, telephone or other service, except to the extent
of Landlord's negligence or willful misconduct.
Section 4.04. INSURANCE PREMIUMS.
(a) LIABILITY INSURANCE. During the Lease Term, Tenant shall maintain a
policy of commercial general liability insurance, at Tenant's expense, insuring
Landlord and Tenant against liability arising out of the ownership, use,
occupancy or maintenance of the Property. The initial amount of such insurance
shall be at least $2,000,000 combined single limit bodily injury, personal
injury, death and property damage per occurrence, and shall be subject to
periodic increase based upon inflation, increased liability awards,
recommendation of professional insurance advisers, and other relevant factors.
However, the amount of such insurance shall not limit Tenant's liability nor
relieve Tenant of any obligation hereunder. The policy shall contain
cross-liability endorsements, if applicable, and shall insure Tenant's
performance of the indemnity provisions of Paragraphs 5.04(a), (b) and (c).
Tenant shall, at Tenant's expense, maintain such other liability insurance as
Tenant deems necessary to protect Tenant, including, without limitation,
workers compensation insurance in the manner required by law. If Tenant fails
to maintain such policy, Landlord may elect to maintain such insurance at
Tenant's expense. Tenant shall have the right to provide such commercial
general liability insurance coverage pursuant to blanket policies obtained by
Tenant, provided that such blanket policies expressly afford coverage to the
Property, Landlord and Tenant, as required under this Section 4.04.
(b) HAZARD AND RENTAL INCOME INSURANCE. During the Lease Term, Landlord
shall maintain policies of insurance at Tenant's expense, covering loss of or
damage to the Property in the full amount of its replacement value. Such
policies shall provide protection against all perils including within the
classification of fire, extended coverage, vandalism, malicious mischief,
special extended perils (all risk), sprinkler leakage, earthquake sprinkler
leakage, and inflation guard endorsement, and any other perils (except flood and
earthquake, unless required by Landlord or any lender holding a security
interest in the Property) which landlord deems necessary. Landlord may, but is
not obligated to, obtain insurance coverage for Tenant's fixtures, equipment or
building improvements installed by Tenant in or on the Property. Tenant shall,
at Tenant's expense, maintain such primary or additional insurance on its
fixtures, equipment and building improvements as Tenant deems necessary to
protect its interest. During the Lease Term, Landlord shall also maintain a
rental income insurance policy at Tenant's expense, with loss payable to
Landlord and mortgagee in an amount equal to one year's Base Rent, estimated
real property taxes and insurance premiums. Tenant shall not do or permit to be
done anything which invalidates any such insurance policies.
(c) PAYMENT OF PREMIUMS; INSURANCE POLICIES. Tenant shall pay all
premiums for the insurance policies covering the Property described in
Paragraphs 4.04(a) and (b) within thirty (30) days after receipt by Tenant of a
copy of the premium statement or other evidence of the amount due. If the
insurance policies maintained by Landlord cover improvements or real property
other than the Property, Landlord shall also deliver to Tenant a statement of
the amount of the premiums applicable to the Property showing, in reasonable
detail, how such amount was computed. If the Lease Term expires before the
expiration of the insurance policy period, Tenant's liability for insurance
premiums shall be prorated on an annual basis. All insurance shall be
maintained with companies holding a "General Policyholder's Rating" of A-VI or
better, as set forth in the most current issue of "Best Insurance Guide." Tenant
shall be liable for the payment of any deductible amount under Landlord's
insurance policies.
(d) USE. Tenant shall not use or occupy, or permit the Property to be
used or occupied in a manner which will increase the rates of insurance for the
Property of the Project, which will make void or voidable any insurance then in
force with respect thereto, which would constitute a defense to any action
thereon, or will make it impossible to obtain any insurance with respect
thereto. If by reason of the failure of Tenant to comply herewith, any
insurance rates for the Property or the Project become higher than they
otherwise would be, Tenant shall reimburse Landlord, on the first day of the
calendar month next succeeding notice by Landlord to Tenant of said increase,
for that part of all insurance premiums thereafter paid by Landlord which shall
have been charged because of such failure of Tenant. Any policy of insurance
maintained by Tenant insuring against any risk in, upon, about or in any way
connected with the Property or Tenant's use thereof shall, to the extent
reasonably obtainable, contain an express waiver of any and all rights of
subrogation thereunder whatsoever against Landlord, its officers, agents and
employees.
(c) ADDITIONAL INSUREDS. Tenant and Landlord shall be named as insureds
(and at Landlord's option, any other persons, firms or corporations who have an
insurable interest designated by Landlord shall be additionally named
insured(s) under each such policy of insurance which shall provide that
Landlord, although named as an insured, shall nevertheless be entitled to
recovery thereunder for any loss suffered by it, its agents, servants and
employees by reason of Tenant's negligence or the negligence of its subtenant
or assignee.
4
<PAGE> 6
(f) CANCELLATION. Every policy required pursuant to this Section 4.04
shall provide that it will not be canceled or modified except after thirty (30)
days' prior written notice to Landlord and any lender of Landlord requesting
such notice, and that it shall not be invalidated by any act or neglect of
Landlord or Tenant, nor by occupation of the Property for purposes more
hazardous than permitted by such policy, nor by any foreclosure or other
proceedings relating to the Property, nor by change in title to the Property or
Landlord's interest therein.
(g) EVIDENCE OF INSURANCE. Tenant shall deliver to Landlord and any
lender of Landlord requiring the same original policies or certificates of
insurers, satisfactory to Landlord and such lender, if any, evidencing the
existence of all insurance which is required to be maintained by Tenant
hereunder, fully paid, such delivery to be made (i) promptly after the
execution and delivery hereof and (ii) within thirty (30) days prior to the
expiration of any then current policies. Tenant shall not obtain or carry
separate insurance concurrent in form or contributing in the event of loss with
that required by this Section 4.04 unless Landlord is a named insured therein
(and, at Landlord's option, any other persons, firms or corporations designated
by Landlord shall be additionally named insureds). Tenant shall immediately
notify Landlord whenever any such separate insurance is obtained and shall
deliver to Landlord and any lender of Landlord the policies or certificates
evidencing the same.
(h) WAIVER OF SUBROGATION. Notwithstanding anything to the contrary in
this Lease, Landlord and Tenant, for themselves and their respective insurers,
agree to and do hereby release each other of and from any and all claims,
demands, actions, and causes of action that each may have or claim to have
against the other for loss or damage to the property of the other, both real
and personal, notwithstanding that any such loss or damage may be due to or
result from the negligence of either party hereto or their respective employees
or agents.
Section 4.04.1 LANDLORD'S LIABILITY INSURANCE. During the term of this
Lease, Landlord shall insure the Property against damage with general
liability insurance in the amount of $2,000,000. Landlord may, but shall not
be obligated to, obtain and carry other form or forms of insurance as it or
Landlord's lenders may determine advisable.
Section 4.06. COMMON AREAS; USE AND COSTS.
(a) PAYMENT. Throughout the term hereof, Tenant will pay to Landlord
monthly in advance in addition to the Base Rent, as further Additional Rent, a
pro rata portion of the Common Area Costs incurred by Landlord during each
calendar year occurring during the term of this Lease. Tenant's pro rata
portion of said amount shall equal the percentage which the number of net
rentable square feet of the Property bears to the total number of net rentable
square feet of the buildings in the Project ("Tenant's Proportionate Share").
(b) INCLUDED COSTS. "Common Area Costs" shall include all costs and
expenses of every kind or nature incurred by Landlord directly in the
management, operation, maintenance and repair of the Project and related Common
Areas in a manner reasonable and appropriate and for the best interest of the
entire Project and that are generally passed on to tenants in first class
projects in the Las Vegas metropolitan area under lease provisions similar to
this Section 4.05, as determined and expended in accordance with generally
accepted accounting principles. Without otherwise limiting the generality of the
foregoing, there shall be included in such costs and expenses, all Impositions
(as hereinbefore defined) applicable solely to Common Areas, premiums with
respect to public liability, property damage, workmen's compensation, fire and
other insurance carried on or with respect to the Project and related Common
Area structures, payroll taxes, unemployment taxes, social security taxes,
cleaning of any facilities, landscaping, signs, lighting, janitorial services of
Common Areas, management fees consistent with other first class projects in the
Las Vegas metropolitan area, reasonable legal and accounting expenses,
supervising of attendants and employment of other personnel used in such
operations, maintenance and repairs, fuel, energy and utilities (not separately
metered by Tenant), providing for security and fire protection services, alarm
systems and equipment, materials and supplies, painting, striping, removing of
rubbish or debris, depreciation or rentals of machinery and equipment, costs of
replacement of paving, curbs and walkways, drainage, repair and maintenance of
parking and other common areas, roof repairs.
(c) PAYMENT. The Additional Rent provided to be paid in this Section 4.05
shall be estimated in advance by Landlord annually and one-twelfth (1/12) of
such estimate shall be paid in advance by Tenant on the first day of each month
without further demand or any deduction or set-off whatever. Within ninety (90)
days after each calendar year, Landlord shall notify Tenant of Tenant's
proportionate share of Additional Rent and Tenant shall pay to Landlord on
demand the amount, if any, equal to the difference between the amount due for
such year pursuant to this Section 4.06 and the amount previously paid
hereunder. Should the estimated payments have exceeded the actual amount due,
said excess shall be held by Landlord and applied to the next monthly payment
of Additional Rent provided to be paid under this Section 4.06, and, if
necessary, each monthly payment thereafter until fully exhausted. Tenant shall
not be entitled to receive interest on any Additional Rent paid hereunder. No
delay by Landlord in submitting any statement shall constitute a waiver of
Landlord's right to submit such statement and/or receive any Additional Rent
pursuant hereto. The Additional Rent due hereunder shall be prorated for the
calendar year in which this Lease terminates. Said amount shall be calculated
and paid as herein provided even though said calculation may not occur until
after the end of the term hereof.
(d) EXCLUDED COSTS. There shall not be included in Common Area Costs the
payments (such as salaries or fees) to Landlord's executive personnel; costs
for items that, by standard accounting practice, should be capitalized, unless
these costs reduce operating expenses and are amortized over the reasonable
life of the capital
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<PAGE> 7
item in accordance with generally accepted accounting principles and the yearly
amortization does not exceed the actual costs reduction for the relevant year,
depreciation or interest; taxes on Landlord's business (such as income, excess
profits, franchise, capital stock, estate, inheritance); leasing commissions;
legal fees not directly relating to the operation and maintenance of the entire
Project such as landlord and tenant issues; costs to correct original
construction defects; expenses paid directly by a tenant for any reason (such as
excessive utility use); costs for improving any tenant's space; any repair or
work necessitated by condemnation, fire, or other casualty; service or benefits
or both provided to some tenants, but not to Tenant; and any costs, fines, and
the like due to Landlord's violation of any government rule or authority.
(c) AUDIT. Tenant shall have the right, upon 15 days' written notice to
Landlord, to audit, at Tenant's expense, Landlord's books and records as they
relate to the Common Area Costs. Should said Common Area Costs be five percent
(5%) higher than said Common Area Costs as determined by the audit, Landlord
shall be obligated to pay the cost of said audit.
(f) PARKING. In addition to any parking facilities included as a part of
the Property, Tenant, its employees and business invitees shall have the
nonexclusive right, in common with Landlord and all others to whom Landlord has
granted or may hereafter grant rights, to use Common Areas in the Project
(including but not limited to, the parking lot, walkways and sidewalks) as are
designated from time to time by Landlord, subject to such rules and regulations
as Landlord may from time to time impose, including the designation of specific
areas in which cars operated by Tenant, its employes and business invitees must
be parked. Tenant shall be entitled to use the vehicle parking spaces in the
Project allocated to Tenant in Section 1.11 of the Lease without paying any
Additional Rent. Tenant's parking shall not be reserved and shall be limited to
vehicles no larger than standard size automobiles or pickup utility vehicles.
Tenant shall not cause large trucks or other large vehicles to be parked within
the Project except in designated areas and spaces or on the adjacent public
streets. Temporary parking of large delivery vehicles in the Project may be
permitted by the rules and regulations established by Landlord. Vehicles shall
be parked only in striped parking spaces and not in driveways, loading areas or
other locations not specifically designated for parking. If Tenant parks more
vehicles in the parking area than the number set forth in Section 1.11 of the
Lease, such conduct shall be a material breach of the Lease. In addition to
Landlord's other remedies under the Lease, Tenant shall pay a reasonable daily
charge for each such additional vehicle. Landlord may at any time close any
Common Area to make repairs or changes (provided the closure does not
unreasonably impede access to the Leased Property by customers and employees of
Tenant), to prevent the acquisition of public rights in such areas, or to
discourage noncustomer parking. Landlord may do such other acts in and to the
Common Areas as in its judgment may be desirable, including, but not limited to,
the conversion of portions thereof to other uses. Tenant shall not at any time
interfere with the right of Landlord, other tenants, its and their agents,
employees, servants, contractors, subtenants, licensees, customers and business
invitees to use any part of the parking lot or other Common Areas. Landlord
assumes no responsibility to police the use of said parking areas and Landlord
shall not be liable for the use thereof by Landlord's other tenants or their
agents, employees, servants, contractors, subtenants, licensees, customers
and/or business invitees or by any other person or persons, entity or entities
whomsoever.
Section 4.06. LATE CHARGES. Tenant's failure to pay rent promptly may
cause Landlord to incur unanticipated costs. The exact amount of such costs are
impractical or extremely difficult to ascertain. Such costs may include but are
not limited to, processing and accounting charges and late charges which may be
imposed on Landlord by any ground lease, mortgage or trust deed encumbering the
Property. Therefore, if Landlord does not receive any rent payment within ten
(10) days after it becomes due, Tenant shall pay Landlord a late charge equal to
five percent (5%) of the overdue amount. The parties agree that such late charge
represents a fair and reasonable estimate of the costs Landlord will incur by
reason of such late payment.
Section 4.07. INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by Tenant
to Landlord which is not paid when due shall bear interest at the rate of twelve
percent (12%) per annum from the due date of such amount. However, interest
shall not be payable on late charges to be paid by Tenant under this Lease. The
payment of interest on such amounts shall not excuse or cure any default by
Tenant under this Lease. If the interest rate specified in this Lease is higher
than the rate permitted by law, the interest rate is hereby decreased to the
maximum legal interest rate permitted by law.
ARTICLE FIVE: USE OF PROPERTY
Section 5.01. PERMITTED USES. Tenant may use the Property only for the
Permitted Uses set forth in Section 1.10 above.
Section 5.02. MANNER OF USE. Tenant shall not cause or permit the
Property to be used in any way which constitutes a violation of any law,
ordinance, or governmental regulation or order, which annoys or interferes with
the rights of tenants of the development of which the Property is part, or which
constitutes a nuisance or waste. Tenant shall obtain and pay for all permits,
including a Certificate of Occupancy, required for Tenant's occupancy of the
Property and shall promptly take all substantial and non-substantial actions
necessary to comply with all applicable statutes, ordinances, rules,
regulations, orders and requirements regulating the use by Tenant of the
Property, including the Occupational Safety and Health Act.
Section 5.03. SIGNS AND AUCTIONS. Tenant shall not place any signs on the
Property without Landlord's prior written consent. Tenant shall not conduct or
permit any auctions or sheriff's sales at the Property.
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Section 5.04. INDEMNIFICATION. Tenant and Landlord shall each indemnify,
defend and hold the other party, its respective agents, partners, mortgagees and
master ground lessors harmless from any and all claims arising from the other
party's use of the Property, Building or Common Areas, or from any act, omission
or negligence of the other party, or that of its respective agents, employees,
sublessees, contractors, invitees or licensees in or about the Property,
Building or Common Areas. Tenant shall not be obligated to indemnify Landlord
for the portion of any claim or liability caused by or arising from the act,
omission or negligence of any party other than Tenant, or its agents, employees,
sublessees, contractors, invitees or licensees. Landlord shall not be obligated
to indemnify Tenant for the portion of any claim or liability caused by or
arising from the act, omission or negligence of any party other than Landlord,
or its agents, employees, sublessees, contractors, invitees or licensees. Each
party also shall indemnify, defend and hold the other party harmless from all
costs, attorneys' fees, expenses and liability incurred in connection with any
claim or proceeding for which they are responsible under this Section 5.04.
Section 5.05. LANDLORD'S ACCESS. Landlord or its agents and employees may
enter the Property at all reasonable times to show the Property to potential
buyers, investors or tenants or other parties, inspect the property, make
repairs or replacements, or for any other purpose Landlord deems necessary.
Landlord shall give Tenant not less than 24 hour advance notice of such entry,
except in the case of an emergency. Landlord may place customary "For Sale" or
"For Lease" signs on the Property.
Section 5.06. QUIET POSSESSION. If Tenant pays the rent and complies with
all other terms of this lease, Tenant may occupy and enjoy the Property for the
full Lease Term, subject to the provisions of this Lease.
Section 5.07. FORKLIFT RESTRICTION. Asphaltic cement cannot withstand
non-inflatable forklift tires. In the event the asphalt is damaged by Tenant's
use of a forklift with non-inflatable tires, it will be Tenant's obligation to
repair the damaged asphaltic cement at Tenant's sole expense.
ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS
Section 6.01. EXISTING CONDITIONS. Except as set forth in any rider
requiring Landlord to perform work on the Property prior to the Commencement
Date, Tenant accepts the Property in its condition as of the execution of the
Lease, subject to all recorded matters, laws, ordinances, and governmental
regulations and orders. Tenant acknowledges that neither Landlord nor any agent
of Landlord has made any representation as to the condition of the Property or
the suitability of the Property for Tenant's intended use. Without limiting the
foregoing, Tenant agrees to abide by and conform to any laws, regulations,
ordinances, covenants, conditions and restrictions or reciprocal easement
agreements relating to the Property described as follows: the Declaration of
Protective Covenants, Conditions and Restrictions, Gibson Business park, Phase
One, Clark County, Nevada dated September 6, 1989 recorded in the Official
Records of Clark County, Nevada, (i) as relates to Tenant's use of the Property,
and (ii) any and all laws, regulations and ordinances relating to Tenant's use
of the Property as more fully set forth in Section 5.02 and Exhibit C hereto.
Tenant acknowledges receipt of such documents, if any.
Section 6.02. EXEMPTION OF LANDLORD FROM LIABILITY. Landlord shall not be
liable for any damage or injury to the person, business (or any loss of income
therefrom), goods, wares, merchandise or other property of Tenant, Tenant's
employees, invitees, customers or any other person in or about the Property,
whether such damage or injury is caused by or results from (a) fire, steam,
electricity, water, gas or rain; (b) the breakage, leakage, obstruction or other
defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or
lighting fixtures or any other cause; (c) conditions arising in or about the
Property or upon other portions of any building of which the Property is a part,
or from other sources or places; or (d) any act or omission of any other tenant
of the Project. Landlord shall not be liable for any such damage or injury even
though the cause of or the means of repairing such damage or injury are not
accessible to Tenant. The provisions of this Section 6.02 shall not, however,
exempt Landlord from liability for Landlord's negligence or willful misconduct.
Section 6.03. TENANT'S OBLIGATIONS
(a) Except as provided for elsewhere herein, Tenant shall keep the Property
in good order, condition and repair during the Lease Term, including, but
without limitation, all structural, non-structural, interior and exterior
portions thereof, the exterior and interior portion of all doors, windows, plate
glass, all plumbing and sewage facilities within the Property (including
maintaining free flow up to the main sewer line); interior fixtures, sprinkler
system, walls, floors and ceilings in the Property; and any work performed by or
on behalf of Tenant hereunder. Tenant shall also maintain a preventive
maintenance contract, at Tenant's expense, providing for the regular inspection
and maintenance of the heating and air conditioning system by a licensed heating
and air conditioning contractor. However, if Tenant does not perform its
obligation under this Section 6.03(a) for a period in excess of ninety (90)
days, Landlord shall have the right, upon written notice to Tenant, to undertake
the responsibility for preventive maintenance of the heating and air
conditioning system, at Tenant's expense. Tenant shall promptly replace any
portion of the Property or system or equipment in the Property which cannot be
fully repaired, regardless of whether the benefit of such replacement extends
beyond the Lease Term. It is the intention of Landlord and Tenant that, at all
times during the Lease Term, Tenant shall maintain the Property in an
attractive, first-class and fully operative condition.
(b) All of Tenant's obligations to maintain and repair shall be
accomplished at Tenant's sole expense. If Tenant fails to maintain and repair
the Property, Landlord may, on ten (10) days' prior notice (except that no
notice shall be required in case of emergency) enter the Property and perform
such repair and maintenance on
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behalf of Tenant. In such case, Tenant shall reimburse Landlord for all costs so
incurred immediately upon demand.
Section 6.04. LANDLORD'S OBLIGATIONS. Subject to the provisions of Article
Seven (Damage or Destruction) and Article Eight (Condemnation), and except to
the extent of Landlord's negligence or willful misconduct, Landlord shall have
absolutely no responsibility to repair, maintain or replace any portion of the
Property at any time. Tenant waives the benefit of any present or future law
which might give Tenant the right to repair the Property at Landlord's expense
or to terminate the Lease due to the condition of the Property.
Section 6.05. ALTERATIONS, ADDITIONS, AND IMPROVEMENTS.
(a) Tenant shall not make any alterations, additions, or improvements to
the Property without Landlord's prior written consent. Landlord may require
Tenant to provide demolition and/or lien and completion bonds in form and amount
satisfactory to Landlord. Tenant shall promptly remove any alterations,
additions, or improvements constructed in violation of this Paragraph 6.05(a)
upon Landlord's written request. All alterations, additions, and improvements
will be accomplished in a good and workmanlike manner, in conformity with all
applicable laws and regulations, and by a contractor approved by Landlord. Upon
completion of any such work, Tenant shall provide Landlord with "as built"
plans, copies of all construction contracts, and proof of payment for all labor
and materials.
(b) Tenant shall pay when due all claims for labor and material furnished
to the Property. Tenant shall give Landlord at least fifteen (15) days' prior
written notice of the commencement of any work on the Property. Landlord may
elect to record and post notices of non-responsibility on the Property. If
Tenant shall, in good faith, contest the validity of any mechanics lien, claim
or demand, then Tenant shall, at its sole expense, defend and protect itself,
Landlord and the Property against the same and shall pay and satisfy any such
adverse judgment that may be rendered thereon before the enforcement thereof
against the Landlord or the Property. In addition, Landlord may require Tenant
to pay Landlord's attorneys' fees and costs in participating in such action if
Landlord shall decide it is in its best interest to do so.
Section 6.06. CONDITION UPON TERMINATION. Upon the termination of the
Lease, Tenant shall surrender the Property to Landlord, broom clean and in the
same condition as received except for ordinary wear and tear which Tenant was
not otherwise obligated to remedy under any provision of this Lease. However,
Tenant shall not be obligated to repair any damage which Landlord is required to
repair under Article Seven (Damage or Destruction). In addition, Landlord may
require Tenant to remove any alterations, additions or improvements (whether or
not made with Landlord's consent) prior to the termination of the Lease and to
restore the Property to its prior condition, all at Tenant's expense. All
alterations, additions and improvements which Landlord has not required Tenant
to remove shall become Landlord's property and shall be surrendered to Landlord
upon the termination of the Lease, except that Tenant may remove any of Tenant's
machinery or equipment which can be removed without material damage to the
Property. Tenant shall repair, at Tenant's expense, any damage to the Property
caused by the removal of any such machinery or equipment. In no event, however,
shall Tenant remove any of the following materials or equipment without
Landlord's prior written consent: any power wiring or power panels; lighting or
lighting fixtures; wall coverings; drapes, blinds or other window coverings;
carpets or other floor coverings; heaters, air conditioners or any other heating
or air conditioning equipment; fencing or security gates; or other similar
building operating equipment and decorations.
ARTICLE SEVEN: DAMAGE OR DESTRUCTION
Section 7.01. PARTIAL DAMAGE TO PROPERTY. Tenant shall notify Landlord in
writing immediately upon the occurrence of any damage to the Property. If the
Property is only partially damaged and, subject to the rights of any mortgagee
in such insurance proceeds, if the proceeds received by Landlord from the
insurance policies described in Paragraph 4.04(b) are sufficient to pay for the
necessary repairs, this Lease shall remain in effect and Landlord shall commence
the repair of the damage within ninety (90) days after the date of such partial
destruction. Landlord may elect to repair any damage to Tenant's fixtures,
equipment, or improvements. If the insurance proceeds received by Landlord are
not sufficient to pay the entire cost of repair, or if the damage was due to a
cause not covered by the insurance policies which Landlord maintains under
Paragraph 4.04(b), Landlord may elect either to (a) commence the repair of the
damage within ninety (90) days, in which case this Lease shall remain in full
force and effect, or (b) move Tenant to another comparable space within the
Project, provided that Landlord pays for all of Tenant's costs associated with
said move, or (c) terminate this Lease as of the date the damage occurred.
Landlord shall notify Tenant within thirty (30) days after receipt of notice of
the occurrence of the damage, whether Landlord elects to repair the damage or
terminate the Lease. If the damage was due to an act or omission of Tenant, the
difference between the actual cost of repair and any insurance proceeds received
by Landlord. If Landlord elects to terminate the Lease, Tenant may elect to
continue this Lease in full force and effect, in which case Tenant shall repair
any damage to the Property and any building in which the Property is located.
Tenant shall pay the cost of such repairs, except that, upon satisfactory
completion of such repairs, Landlord shall deliver to Tenant any insurance
proceeds received by Landlord for the damage repaired by Tenant. Tenant shall
give Landlord written notice of such election within ten (10) days after
receiving Landlord's termination notice. If the damage to the Property occurs
during the last six (6) months of the Lease Term, Landlord may elect to
terminate this Lease as of the date the damage occurred regardless of the
sufficiency of any insurance proceeds. In such event, Landlord shall not be
obligated to repair or restore the
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Property and Tenant shall have no right to continue this Lease. Landlord shall
notify Tenant of its election within thirty (30) days after receipt of notice
of the occurrence of the damage.
Section 7.02. TOTAL OR SUBSTANTIAL DESTRUCTION. If the Property is totally
or substantially destroyed by any cause whatsoever, this Lease shall terminate
as of the date the destruction occurred regardless of whether Landlord receives
any insurance proceeds.
Section 7.03. TEMPORARY REDUCTION OF RENT. If the Property is destroyed or
damaged and Landlord or Tenant repairs or restores the Property pursuant to the
provisions of this Article Seven, any rent payable during the period of such
damage, repair and/or restoration shall be reduced according to the degree, if
any, to which Tenant's use of the Property is impaired. However, the reduction
shall not exceed the sum of one year's payment of Base Rent and Additional
Rent. Except for such possible reduction in Base Rent and Additional Rent,
Tenant shall not be entitled to any compensation, reduction, or reimbursement
from Landlord as a result of any damage, destruction, repair, or restoration of
or to the Property, unless such damage or destruction was caused by Landlord's
negligence or willful misconduct.
Section 7.04. WAIVER. Tenant waives the protection of any statute, code or
judicial decision which grants a tenant the right to terminate a lease in the
event of the substantial destruction of the leased property. Tenant agrees that
the provisions of Section 7.02 above shall govern the rights and obligations of
Landlord and Tenant in the event of any substantial or total destruction to the
Property.
ARTICLE EIGHT: CONDEMNATION
If, in the opinion of Landlord, the whole or any part of the Property or
the Building is taken or condemned (including, without limitation, a sale in
lieu of condemnation) which renders the Property untenantable or inaccessible
for use by Tenant for the purposes stated in this Lease ("Substantial Taking"),
then the term of this Lease shall cease and terminate from the date on which
possession of the part is so taken or condemned; the full amount of any
resulting condemnation award shall be paid to Landlord, and Base Rent and
Additional Rent shall be adjusted as of the date of such Substantial Taking.
However, if such taking or condemnation does not result in a Substantial
Taking, then, subject to rights of any mortgagee in the condemnation award,
Landlord shall repair any damage caused by such taking with reasonable
promptness and dispatch and shall allow Tenant an abatement or reduction in
Base Rent and Additional Rent hereunder for such time and for such portion of
the Premises which is untenantable, and this Lease shall not be otherwise
affected. Landlord reserves to itself, and Tenant assigns to Landlord, all
rights to damages accruing on account of any taking or condemnation by or by
reason of any act of any public or quasi-public authority for which damages are
payable. Tenant agrees to execute such instruments of assignments as may be
required by Landlord, to join with Landlord in any petition for the recovery of
damages if requested by Landlord, and to turn over to Landlord any such damages
that may be recovered in any such proceeding. Landlord does not reserve to
itself, and Tenant does not assign to Landlord, any damages payable for trade
fixtures installed by Tenant at its own cost and expense and which are not part
of the realty.
ARTICLE NINE: ASSIGNMENT AND SUBLETTING
Section 9.01. LANDLORD'S CONSENT REQUIRED. No portion of the Property or
of Tenant's interest in this Lease may be acquired by any other person or
entity, whether by assignment, mortgage, sublease, transfer operation of law,
or act of Tenant, without Landlord's prior written consent, except as provided
in Section 9.02 below. Landlord shall grant or withhold its consent as provided
in Section 9.04 below. Any attempted transfer without consent shall be void and
shall constitute a non-curable breach of this Lease. If Tenant is a
partnership, any cumulative transfer of more than 20% of the partnership
interests shall require Landlord's consent. If Tenant is a corporation, any
change in a controlling interest of the voting stock of the corporation shall
require Landlord's consent.
Section 9.02. TENANT AFFILIATE. Upon Landlord's consent, which will not be
unreasonably withheld, Tenant may assign this Lease or sublease the Property to
any corporation which Landlord determines controls, is controlled by or is
under common control with Tenant, or to any corporation resulting from the
merger of or consolidation with Tenant ("Tenant's Affiliate"). For the purposes
of this Section 9.02, the following shall not be considered an assignment,
sublease or other transfer; (a) any transfer of stock from Tenant to an
affiliate or subsidiary corporation as a result of any merger, consolidation,
or reorganization (except through bankruptcy) of Tenant or Tenant's parent
corporation; or (b) any purchase or sale of currently outstanding capital stock
of Tenant whether in a private placement of stock, the over-the-counter market
or in a national stock exchange, or otherwise; or (c) any issuance of capital
stock in an offering registered with the Securities and Exchange Commission
pursuant to the Securities Act of 1933, as amended. In such case, any Tenant's
Affiliate shall assume in writing all of Tenant's obligations under this Lease.
Section 9.03. NO RELEASE OF TENANT. No transfer permitted by this Article
Nine, whether with or without Landlord's consent(1), shall release Tenant or
change Tenant's primary liability to pay the rent and to perform all other
obligations of Tenant under this Lease. Landlord's acceptance of rent from any
other person is not a waiver of any provision of this Article Nine. Consent to
one transfer is not a consent to any subsequent
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transfer. If Tenant's transferee defaults under this Lease, Landlord may
proceed directly against Tenant without pursuing remedies against the
transferee. Landlord may consent to subsequent assignments or modifications of
this Lease by Tenant's transferee, without notifying Tenant or obtaining its
consent. Such action shall not relieve Tenant's liability under this Lease.
Section 9.04. LANDLORD'S ELECTION. Tenant's request for consent to any
transfer described in Section 9.01 above shall be accompanied by a written
statement setting forth the details of the proposed transfer, including the
name, business and financial condition of the prospective transferee, financial
details of the proposed transfer (e.g., the term of and rent and security
deposit payable under any assignment or sublease), and any other information
Landlord deems relevant, except as provided under Section 9.02. Landlord shall
have the right (a) to withhold consent, if reasonable; (b) to grant consent; or
(c) if the transfer is a sublease of the Property or an assignment of this
Lease, to terminate this Lease as of the effective date of such sublease or
assignment, in which case Landlord may elect to enter into a direct lease with
the proposed assignee or subtenant.
Section 9.05. NO MERGER. No Merger shall result from Tenant's sublease
of the Property under this Article Nine. Tenant's surrender of this Lease or
the termination of this Lease in any other manner. In any such event.
Landlord may terminate any of all subtenancies or succeed to the interest of
Tenant or sublandlord thereunder.
ARTICLE TEN: DEFAULTS; REMEDIES
Section 10.01. COVENANTS AND CONDITIONS. Tenant's performance of each of
Tenant's obligations under this Lease is a condition as well as a covenant.
Tenant's right to continue in possession of the Property is conditioned upon
such performance. Time is of the essence in the performance of all covenants
and conditions.
Section 10.02. DEFAULTS. Tenant shall be in material default under this
Lease:
(a) If Tenant abandons the Property or if Tenant's vacation of the
Property results in the cancellation of any insurance described in Section 4.04;
(b) If Tenant fails to pay rent or any other charge required to be paid by
Tenant, as and when due and fails to cure the same within ten (10) days after
the receipt of written notice of Tenant's failure to pay rent or any other
charge, provided however, Landlord shall not be obligated to provide Tenant
with written notice if Tenant fails to pay rent, when due, more than three (3)
times in any Lease year.
(c) If Tenant fails to perform any of Tenant's non-monetary obligations
under this Lease for a period of thirty (30) days after receipt of written
notice from Landlord; provided that if more than thirty (30) days are required
to complete such performance, Tenant shall not be in default if Tenant
commences such performance within the thirty (30) day period and thereafter
diligently pursues its completion. However, Landlord shall not be required to
give such notice if Tenant's failure to perform constitutes a non-curable breach
of this Lease. The notice required by this Paragraph is intended to satisfy
any and all notice requirements imposed by law on Landlord and is not in
addition to any such requirement.
(d) (i) If Tenant or any guarantor hereunder, or any general partner of
Tenant if Tenant is a partnership makes a general assignment or general
arrangement for the benefit of creditors; (ii) if a petition for adjudication
of bankruptcy or for reorganization or rearrangement is filed by or against
Tenant or any guarantor hereunder, or any general partner of Tenant if Tenant is
a partnership and is not dismissed within thirty (30) days; (iii) if a trustee
or receiver is appointed to take possession of substantially all of Tenant's
assets located at the Property or of Tenant's interest in this Lease and
possession is not restored to Tenant within thirty (30) days; or (iv) is
substantially all of Tenant's assets located at the Property or of Tenant's
interest in this Lease is subjected to attachment, execution or other judicial
seizure which is not discharged within thirty (30) days. If a court of
competent jurisdiction determines that any of the acts described in this
subparagraph (d) is not a default under this Lease, and a trustee is appointed
to take possession (or if Tenant remains a debtor in possession) and such
trustee or Tenant transfers Tenant's interest hereunder, then Landlord shall
receive as Additional Rent, the difference between the rent (or any other
consideration) paid in connection with such assignment or sublease and the rent
payable by Tenant hereunder.
Section 10.03. REMEDIES. On the occurrence of any material default by
Tenant, Landlord may, at any time thereafter, with or without notice or demand
and without limiting Landlord in the exercise of any right or remedy which
Landlord may have:
(a) Terminate Tenant's right to possession of the Property by any lawful
means, in which case this Lease shall terminate and Tenant shall immediately
surrender possession of the Property to Landlord. In such event, Landlord
shall be entitled to recover from Tenant all damages incurred by Landlord by
reason of Tenant's default, including (i) the worth at the time of the award of
the unpaid Base Rent. Additional Rent and other charges which had been earned
at the time of the termination; (iii) the worth at the time of the award of the
amount by which the unpaid Base Rent. Additional Rent and other charges which
would have been earned after termination until the time of the award exceeds
the amount of such rental loss that Tenant proves could have been reasonably
avoided; (iii) the worth at the time of the award of the amount by which the
unpaid Base Rent, Additional Rent and other charges which would have been paid
for the balance of the Lease Term after the time award exceeds the amount of
such rental loss that Tenant proves could have been reasonably avoided; and (iv)
any other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant's failure to perform its
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obligations under the Lease or which in the ordinary course of things would be
likely to result therefrom, including, but not limited to, any costs or expenses
incurred by Landlord in maintaining or preserving the Property after such
default, the cost of recovering possessions of the Property, expenses of
reletting, including necessary renovation or alteration of the Property,
Landlord's reasonable attorneys' fees incurred in connection therewith, and any
real estate commission paid or payable. As used in subparts (i) and (ii) above,
the "worth at the time of the award" is computed by allowing interest on unpaid
amounts at the rate of fifteen percent (15%) per annum, or such lesser amount as
may then be the maximum lawful rate. As used in subpart (iii) above, the "worth
at the time of the award" is computed by discounting such amount at the discount
rate of the Federal Reserve Bank of San Francisco at the time of the award, plus
1%. If Tenant shall have abandoned the Property, Landlord shall have the option
of (i) retaking possession of the Property and recovering from Tenant the amount
specified in this Paragraph 10.03(a), or (ii) proceeding under Paragraph
10.03(b);
(b) Maintain Tenant's right to possession, in which case this Lease shall
continue in effect whether or not Tenant shall have abandoned the Property. In
such event, Landlord shall be entitled to enforce all of Landlord's rights and
remedies under this Lease, including the right to recover the rent as it becomes
due hereunder;
(c) Pursue any other remedy now or hereafter available to Landlord under
the laws or judicial decisions of the state in which the Property is located.
Section 10.04. ABANDONMENT REMEDY. Tenant covenants to occupy the Property
throughout the term hereof.
Section 10.05. RIGHT TO CURE AND CUMULATIVE REMEDIES. If Tenant fails to
perform any affirmative duty or obligation of the Tenant under this Lease
within thirty (30) days after written notice to Tenant (or in case of an
emergency, without notice), Landlord may, at its option (but without obligation
to do so), perform such duty or obligation on Tenant's behalf. The costs and
expenses of any such performance by Landlord shall be due and payable by Tenant
to Landlord upon invoice therefor. Landlord's exercise of any right or remedy
shall not prevent it from exercising any other right or remedy.
ARTICLE ELEVEN: PROTECTION OF LENDERS
Section 11.01. SUBORDINATION. Landlord and any ground lessor, beneficiary
of a trust deed or mortgagee shall have the right to subordinate this Lease to
any ground lease, deed of trust or mortgage encumbering the Property, any
advances made on the security thereof and any renewals, modifications,
consolidations, replacements or extensions thereof, whenever made or recorded.
However, Tenant's right to quiet possession of the Property during the Lease
Term shall not be disturbed if Tenant is not in default under this Lease. If
any ground lessor, beneficiary or mortgagee elects to have this Lease prior to
the lien of its ground lease, deed of trust or mortgage and gives written
notice thereof to Tenant, this Lease shall be deemed prior to such ground
lease, deed of trust or mortgage whether this Lease is dated prior or
subsequent to the date of said ground lease, deed of trust or mortgage or the
date of recording thereof.
Section 11.02. ATTORNMENT. If Landlord's interest in the Property is
acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or
purchaser at a foreclosure sale, the rights of Tenant hereunder shall survive,
but Tenant shall have no claim against such mortgagee or other holder arising
from Landlord's acts, omissions, representations or warranties given or
occurring prior to such mortgagee's or other holder's acquisition of the
Property, and Tenant shall attorn to the transferee of or successor to
Landlord's interest in the Property and recognize such transferee or successor
as Landlord under this Lease. Tenant waives the protection of any statute or
rule of law which gives or purports to give Tenant any right to terminate this
Lease or surrender possession of the Property upon the transfer of Landlord's
interest.
Section 11.03. SIGNING OF DOCUMENTS. Tenant shall sign and deliver any
instrument or documents necessary or appropriate to evidence any such
attornment or subordination or agreement to do so, provided Tenant receives a
reasonable Non-Disturbance Agreement, agreeable to both Landlord and Tenant.
Such subordination and attornment documents may contain such provisions as are
customarily required by any ground lessor, beneficiary under a deed of trust or
mortgagee. If Tenant fails to do so within thirty (30) days after written
request, Tenant hereby makes, constitutes and irrevocably appoints Landlord, or
any transferee or successor of Landlord, the attorney-in-fact of Tenant to
execute and deliver any such instrument or document.
Section 11.04. ESTOPPEL CERTIFICATES.
(a) Upon the written request of Landlord or any ground lessor,
beneficiary of a trust deed or mortgagee, Tenant shall execute, acknowledge and
deliver to Landlord a written statement certifying: (i) that none of the terms
or provisions of this Lease have been changed (or if they have been changed,
stating how they have been changed); (ii) that this Lease has not been canceled
or terminated; (iii) that the last date of payment of the Base Rent and other
charges and the time period covered by such payment; (iv) that Landlord is not
in default under this Lease (or, if Landlord is claimed to be in default,
stating why); and (v) such other matters as may be reasonably required by
Landlord or the holder of a mortgage, deed of trust or lien to which the
Property is or becomes subject. Tenant shall deliver such statement to Landlord
within ten (10) days after Landlord's request.
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Any such statement by Tenant may be given by Landlord to any prospective
purchaser or encumbrancer of the Property. Such purchase or encumbrancer may
rely conclusively upon such statement as true and correct.
(b) If Tenant does not deliver such statement to Landlord within such ten
(10) day period, Tenant hereby makes, constitutes and irrevocably appoints
Landlord, or any transferee or successor of Landlord, the attorney-in-fact of
Tenant to execute such statement on behalf of Tenant. Tenant's failure to
timely provide such statement shall not be deemed cured by Landlord's delivery
of same.
Section 11.05. TENANT'S FINANCIAL CONDITION. Within fifteen (15) days
after written request from Landlord, Tenant shall deliver to Landlord such
financial statements as are reasonably required by Landlord to verify the net
worth of Tenant, or any assignee, subtenant, or guarantor of Tenant. In
addition, Tenant shall deliver to any lender designated by Landlord any
financial statements required by such lender to facilitate the financing or
refinancing of the Property. Tenant represents and warrants to Landlord that
each such financial statement is a true and accurate statement as of the date
of such statement. All financial statements shall be confidential and shall be
used only for the purposes set forth herein.
ARTICLE TWELVE: LEGAL COSTS
Section 12.01. LEGAL PROCEEDINGS. Tenant shall reimburse Landlord, upon
demand, for any costs or expenses incurred by Landlord in connection with any
breach or default of Tenant under this Lease. Such costs shall include
reasonable legal fees and costs incurred for the negotiation of a settlement,
enforcement of rights or otherwise. Furthermore, if any action for breach of or
to enforce the provisions of this Lease is commenced, the court in such action
shall award to the party in whose favor a judgment is entered, a reasonable sum
as attorneys' fees and costs. Such attorneys' fees and costs shall be paid by
the losing party in such action. Tenant shall also indemnify Landlord against
and hold Landlord harmless from all costs, expenses, demands and liability
incurred by Landlord if Landlord becomes or is made a party to any claim or
action (a) or by any third party against Tenant, or by or against any person
holding any interest under or using the Property by license of or agreement
with Tenant; (b) for foreclosure of any lien for labor or material furnished to
or for Tenant or such other person; (c) otherwise arising out of or resulting
from any act or transaction of Tenant or such other person; or (d) necessary to
protect Landlord's interest under this Lease in a bankruptcy proceeding, or
other proceeding under Title 11 of the United States Code, as amended. Tenant
shall defend Landlord against any such claim or action at Tenant's expense with
counsel reasonably acceptable to Landlord or, at Landlord's election. Tenant
shall reimburse Landlord for any legal fees or costs incurred by Landlord in
any such claim or action.
Section 12.02 LANDLORD'S CONSENT. Tenant shall pay Landlord's reasonable
attorneys' fees incurred in connection with Tenant's request for Landlord's
consent under Article Nine (Assessment and Subletting), or in connection with
any other act which Tenant proposes to do and which requires Landlord's
consent, but not to exceed five hundred dollars ($500).
ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS
Section 13.01. NON-DISCRIMINATION. Tenant promises, and it is a condition
to the continuance of this Lease, that there will be no discrimination against,
or segregation of, any person or groups of persons on the basis of race, color,
sex, creed, national origin or ancestry in the leasing, subleasing,
transferring, occupancy, tenure or use of the Property or any portion thereof.
Section 13.02. LANDLORD'S LIABILITY; CERTAIN DUTIES.
(a) As used in this Lease, the term "Landlord" means only the current
owner or owners of the fee title to the Property or the leasehold estate under
a ground lease of the Property at the time in question. Each Landlord is
obligated to perform the obligations of Landlord under this Lease only during
the time such Landlord owns such interest or title. Any Landlord who transfers
its title or interest is relieved of all liability with respect to the
obligations of Landlord under this Lease to be performed on or after the date
of transfer. However, each Landlord shall deliver to its transferee all funds
previously paid by Tenant if such funds have not yet been applied under the
terms of this Lease.
(b) Tenant shall give written notice of any failure by Landlord to perform
any of its obligations under this Lease to Landlord and to any ground lessor,
mortgagee or beneficiary under any deed of trust encumbering the Property whose
name and address have been furnishing to Tenant in writing. Such ground lessor,
mortgagee or beneficiary of a deed of trust shall have thirty (30) days from
the expiration of Landlord's cure period from which to cure Landlord's default,
but is under no obligation to do so. Landlord shall not be in default under
this Lease unless Landlord (or such ground lessor, mortgagee or beneficiary)
fails to cure such non-performance within thirty (30) days after receipt of
Tenant's written notice. However, if such non-performance reasonably requires
more than thirty (30) days to cure, Landlord, ground lessor, mortgagee or
beneficiary under any deed of trust shall not be in default if such cure is
commended within such thirty (30) day period and thereafter diligently pursued
to completion. Ground lessor, mortgagee or beneficiary of a deed of trust shall
be allowed such additional time period as needed to complete a foreclosure or
acquisition of the Property.
(c) Upon the execution of this Lease, Tenant shall deposit with Landlord a
cash Security Deposit in the amount set forth in Section 1.08 above. Landlord
may apply all or part of the Security Deposit to any unpaid rent or other
charges due from Tenant or to cure any other defaults of Tenant. If Landlord
uses any part of the
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Security Deposit, Tenant shall restore the Security Deposit to its full amount
within ten (10) days after Landlord's written request. Tenant's failure to do so
shall be a material default under this Lease. No interest shall be paid on the
Security Deposit. Landlord shall not be required to keep the Security Deposit
separate from its other accounts and no trust relationship is created with
respect to the Security Deposit.
Section 13.03. SEVERABILITY. A determination by a court of competent
jurisdiction that any provision of this Lease or any part thereof is illegal or
unenforceable shall not cancel or invalidate the remainder of such provision or
this Lease, which shall remain in full force and effect.
Section 13.04. INTERPRETATION. The captions of the Articles or Sections of
this Lease are to assist the parties in reading this Lease and are not a part of
the terms or provisions of this Lease. Whenever required by the context of this
Lease, the singular shall include the plural and the plural shall include the
singular. The masculine, feminine and neuter genders shall each include the
other. In any provision relating to the conduct, acts or omissions of Tenant,
the term "Tenant" shall include Tenant's agents, employees, contractors,
invitees, successors or others using the Property with Tenant's expressed or
implied permission.
Section 13.05. INCORPORATION OF PRIOR AGREEMENTS, MODIFICATIONS. This Lease
is the only agreement between the parties pertaining to the lease of the
Property and no other agreements are effective. All amendments to this Lease
shall be in writing and signed by all parties. Any other attempted amendment
shall be void.
Section 13.06. NOTICES. All notices required or permitted under this Lease
shall be in writing and shall be personally delivered or sent by certified mail,
return receipt requested, postage prepaid. Notices to Tenant shall be delivered
to the address specified in Section 1.03 above, except that upon Tenant's taking
possession of the Property, the Property shall be Tenant's address for notice
purposes. Notices to Landlord shall be delivered to the address specified in
Section 1.02 above. All notices shall be effective upon delivery or attempted
delivery in accordance with this Section 13.06. Either party may change its
notice address upon written notice to the other party.
Section 13.07. WAIVERS. All waivers must be in writing and signed by the
waiving party. Landlord's failure to enforce any provision of this Lease or its
acceptance of rent shall not be a waiver and shall not prevent Landlord from
enforcing that provision or any other provision of this Lease in the future. No
statement on a payment check from Tenant or in a letter accompanying a payment
check shall be binding on Landlord. Landlord may, with or without notice to
Tenant, negotiate such check without being bound to the conditions of such
statement.
Section 13.08. NO RECORDATION. This Lease or a memorandum thereof may not
be recorded without prior written consent from Landlord.
Section 13.09. BINDING EFFECT; CHOICE OF LAW. This Lease binds any party
who legally acquires any rights or interest in this Lease from Landlord or
Tenant. However, Landlord shall have no obligation to Tenant's successor unless
the rights or interests of Tenant's successor are acquired in accordance with
the terms of this Lease. The laws of the state in which the Property is located
shall govern this Lease.
Section 13.10. CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY. If Tenant is a
corporation, each person signing this Lease on behalf of Tenant represents and
warrants that he has full authority to do so and that this Lease binds the
corporation. Within thirty (30) days after request by Landlord, Tenant shall
deliver to Landlord a certified copy of a resolution of Tenant's Board of
Directors authorizing the execution of this Lease or other evidence of such
authority reasonably acceptable to Landlord. If Tenant is a partnership, each
person signing this Lease for Tenant represents and warrants that he is a
general partner of the partnership, that he has full authority to sign for the
partnership and that this Lease binds the partnership and all general partners
of the partnership. Tenant shall give written notice to Landlord of any general
partner's withdrawal or addition. Within thirty (30) days after request by
Landlord, Tenant shall deliver to Landlord a copy of Tenant's recorded statement
of partnership or certificate of limited partnership.
Section 13.11. JOINT AND SEVERAL LIABILITY. All parties signing this Lease
as Tenant shall be jointly and severally liable for all obligations of Tenant.
Section 13.12. FORCE MAJEURE. If Landlord cannot perform any of its
obligations due to events beyond Landlord's control, the time provided for
performing such obligations shall be extended by a period of time equal to the
duration of such events. Events beyond Landlord's control include, but are not
limited to, acts of God, war, civil commotion, labor disputes, strikes, fire,
flood or other casualty, shortages of labor or material, government regulation
or restriction and weather conditions.
Section 3.13. EXECUTION OF LEASE. This Lease may be executed in
counterparts, and, when all counterpart documents are executed, the counterparts
shall constitute a single binding instrument. The delivery of this Lease by
Landlord to Tenant shall not be deemed to be an offer and shall not be binding
upon either party until executed and delivered by both parties.
Section 13.14. LIMITATION OF LIABILITY. The obligations of Landlord under
this Lease do not constitute personal obligations of the individual partners,
trustees, directors, officers or shareholders of Landlord, and Tenant shall not
seek recourse against the individual partners, trustees, directors, officers or
shareholders of Landlord or
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any of their personal assets for satisfaction of any liability arising out of
this Lease. Tenant's sole remedy shall be recourse against Landlord's interest
in the Property or the Project of which the Property is a part.
Section 13.15. CONSENTS. Whenever the consent is either party is required
hereunder such consent shall not be unreasonably withheld.
Section 13.16. MODIFICATION FOR LENDER. If, in connection with obtaining
construction, interim or permanent financing for the Project or the Property,
the lender requests reasonable modifications to this Lease as a condition to
such financing, Tenant will not unreasonably withhold, delay or defer its
consent thereto, provided that such modifications do not materially increase the
obligations of Tenant hereunder or materially adversely affect the leasehold
interest hereby created or Tenant's rights hereunder.
Section 13.17. BUILDING PLANNING.
ARTICLE FOURTEEN: BROKERS
The parties recognized that the brokers who negotiated this Lease are the
brokers whose names are stated in Section 1.12 hereof and agree that Landlord
shall be solely responsible for the payment of brokerage commissions to said
brokers, and that Tenant shall have no responsibility therefore. Tenant shall
indemnify and hold Landlord free and harmless against any claims, damages,
costs, expenses, or liability of any nature arising from claims by any other
person or real estate broker claiming a fee through dealings with Tenant arising
out of this Lease.
ARTICLE FIFTEEN: TOXIC AND HAZARDOUS SUBSTANCES, HAZARDOUS
MATERIALS, REGULATED SUBSTANCES AND HAZARDOUS WASTE
Section 15.01. DEFINITION. As used in this Section, the term "Hazardous
Waste" means:
(a) Those substances, chemicals and mixtures defined as "hazardous
substances," "hazardous materials," "toxic substances," "imminently hazardous
chemical substance or mixture," "pesticide," "heavy metal," "hazardous air
pollutant," "toxic pollutant," "solid waste," "hazardous waste," "medical
waste," or "radioactive waste" in the Toxic Substance Control Act, 15 U.S.C.
Section 2601 et. seq., as now or hereafter amended, the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, 42 U.S.C.
Section 9601 et. seq., as now or hereafter amended, the Resource Conservation
and Recovery Act of 1976, 42 U.S.C. Section 6901 et. seq., as now or hereafter
amended, the Federal Hazardous Substances Act, 15 U.S.C. Section 1261 et. seq.,
as now or hereafter amended, the Federal Water Pollution Control Act, 33 U.S.C.
Section 1251 et. seq., as now or hereafter amended, the Clean Air Act, 42 U.S.C.
Section 7401 et. seq., as now or hereafter amended, the Federal Insecticide,
Fungicide, and Rodenticide Act, 7 U.S.C. Section 136 et. seq., as now or
hereafter amended, the Emergency Planning and Community Right to Know Act of
1986, 42 U.S.C. Section 11001 et. seq., as now or hereafter amended, the
Occupational Safety and Health Act of 1970, 29 U.S.C. Section 651 et. seq., as
now or hereafter amended, and the rules, orders and regulations now in effect or
promulgated and effective hereafter pursuant to each respective law listed
above;
(b) Those substances defined as "hazardous waste," "radioactive waste,"
"solid waste," "toxic waste," "pollutant," "hazardous material," "regulated
substance," "hazardous substance," "highly hazardous substance," "extremely
hazardous substance," "petroleum," "asbestos," or "asbestos containing material"
in Nev. Rev. Stat. ch. 459, Nev. Rev. Stat. ch. 445, Nev. Rev. Stat. ch. 590,
Nev. Rev. Stat. Sections 618.750 - 618.850, inclusive, Nev. Rev. Stat. Section
477.045, as now or hereafter amended, or in the rules, orders and regulations
now existing or hereafter promulgated pursuant thereto, or in the Uniform Fire
Code as adopted by and now or hereafter in effect in the State of Nevada;
(c) Those substances listed in the United States Department of
Transportation table (49 CFR Section 172.101 and amendments thereto) or by the
Environmental Protection Agency (or any successor agency) as hazardous
substances (40 CFR Part 302 and amendments thereto); and
(d) Such other substances, mixtures, materials and waste which are
regulated under applicable local, state or federal law, or which are classified
as hazardous or toxic under federal, state or local laws or regulations (all
laws, rules and regulations referenced in paragraphs (a), (b), (c) and (d) are
collectively referred to as "Environmental Laws").
Section 15.02. TENANT'S COVENANTS. Tenant does not intend to and Tenant
will not, nor will Tenant allow any other person (including partnerships,
corporations and joint ventures), during the term of this Lease, manufacture,
process, store, distribute, use, discharge or dispose any Hazardous Waste in,
under or on the Property, the Common Areas, or any property adjacent thereto.
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(a) Tenant shall notify Landlord promptly in the event of any spill or
release of Hazardous Waste into, on or onto the Property regardless of the
source of spill or release, whenever Tenant knows or suspects that such a
release occurred.
(b) Tenant will not be involved in operations at or near the Property
which could lead to the imposition on the Tenant or the Landlord of liability
or the creation of a lien on the Property under the Environmental Laws.
(c) Tenant shall, upon twenty-four (24) hour prior notice by Landlord,
permit Landlord or Landlord's agent access to the Property to conduct an
environmental site assessment with respect to the Property.
Section 15.03. INDEMNITY. Tenant for itself and its successors and
assigns undertakes to protect, indemnify, save and defend Landlord, its agents,
employees, directors, officers, shareholders, affiliates, consultants,
independent contractors, successors and assigns (collectively the
"Indemnitees") harmless from any and all liability, loss, damage and expense,
including attorneys' fees, claims, suits and judgments that Landlord or any
other Indemnitee, whether as Landlord or otherwise, may suffer as a result of,
or with respect to:
(a) Any Environmental Law, including the assertion of any lien
thereunder and any suit brought or judgment rendered regardless of whether the
action was commenced by a citizen (as authorized under the Environmental Laws)
or by a government agency;
(b) Any spill or release of or the presence of any Hazardous Waste
affecting the Property whether or not the same originates or emanates from the
Property or any contiguous real estate, including any loss of value of the
Property as a result of a spill or release of or the presence of any Hazardous
Waste;
(c) Any other matter affecting the Property within the jurisdiction of
the United States Environmental Protection Agency, the Nevada State
Environmental Commission, the Nevada Department of Conservation and Natural
Resources, or the Nevada Department of Commerce, including costs of
investigations, remedial action, or other response costs whether such costs are
incurred by the United States Government, the State of Nevada, or any
Indemnitee;
(d) Liability for clean-up costs, fines, damages or penalties incurred
pursuant to the provisions of any applicable Environmental Law; and
(e) Liability for personal injury or property damage arising under any
statutory or common-law tort theory, including, without limitation, damages
assessed for the maintenance of a public or private nuisance, or for the
carrying of an abnormally dangerous activity, and response costs.
This indemnification by Tenant of Landlord shall survive the termination of the
Lease.
Section 15.04. REMEDIAL ACTS. In the event of any spill or release of
or the presence of any Hazardous Waste affecting the Property, whether or not
the same originates or emanates from the Property or any contiguous real
estate, and/or if Tenant shall fail to comply with any of the requirements of
any Environmental Law, Landlord may, without notice to Tenant, at its election,
but without obligation so to do, gives such notices and/or cause such work to
be performed at the Property and/or take any and all other actions as Landlord
shall deem necessary or advisable in order to remedy said spill or release of
Hazardous Waste or cure said failure of compliance and any amounts paid as a
result thereof, together with interest at the rate of fifteen percent (15%) per
annum, from the date of payment by Landlord, shall be immediately due and
payable by Tenant to Landlord.
Section 15.05. SETTLEMENT. Landlord upon giving Tenant ten (10) days
prior notice, shall have the right in good faith to pay, settle or compromise,
or litigate any claim, demand, loss, liability, cost, charge, suit, order,
judgment or adjudication under the belief that it is liable therefor, whether
liable or not, without the consent or approval of Tenant unless Tenant within
said ten (10) day period shall protest in writing and simultaneously with such
protest deposit with Landlord collateral satisfactory to Landlord sufficient to
pay and satisfy any penalty and/or interest which may accrue as a result of
such protest and any judgment or judgments as may result, together with
attorney's fees and expenses, including, but not limited to, environmental
consultants.
Section 15.06. NO LANDLORD REPRESENTATION OR WARRANTY. Landlord makes
no representations or warranty of any kind or nature with respect to the
presence of Hazardous Waste in, on, under or about the Property.
ARTICLE SIXTEEN: RULES AND REGULATIONS
Tenant shall faithfully observe and comply with the "Rules and
Regulations", a copy of which is attached hereto and marked Exhibit "C", and
all reasonable and nondiscriminatory modifications thereof and additions
thereto from time to time put into effect by Landlord. Landlord shall not be
responsible to Tenant for the violation or nonperformance by any other tenant
or occupant of the Project of any of said Rules and Regulations.
ADDITIONAL PROVISIONS MAY BE SET FORTH IN A RIDER OR RIDERS ATTACHED HERETO OR
IN THE BLANK SPACE BELOW. IF NO ADDITIONAL PROVISIONS ARE INSERTED, PLEASE DRAW
A LINE THROUGH THE SPACE BELOW.
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Landlord and Tenant have signed this Lease at the place and on the dates
specified adjacent to their signatures below and have initialed all Riders
which are attached to or incorporated by reference in this Lease.
Signed on APRIL 10, 1997 PACIFIC INDUSTRIAL PARK L.L.C.,
a Delaware limited liability company
at Las Vegas, Nevada
By: Pacific Industrial Park Partnership,
a Nevada limited partnership
Its: member
By: Pacific Properties and development
Corporation, a
Its: general partner
By: /s/ JAMES A. HERNQUIST
-------------------------------------
James A. Hernquist
Its: Executive Vice President
"LANDLORD"
Signed on April 3, 1997 MULTIPLE ZONES INTERNATIONAL, INC.
at Renton, Washington a Washington corporation
By: [SIG]
------------------------------------
Its: VP Operations
By:
------------------------------------
Its:
-----------------------------------
"TENANT"
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EXHIBIT A
NET RENTABLE AREA
The term "Net Rentable Area" shall mean the entire area included within
the Property, being the area bounded by the outside surface of any exterior
wall, (concrete, glass or other) of the Building, the inside surface of any
interior demising wall and the inside surface of any common area within the
Building.
Landlord and Tenant hereby agree that the Net Rentable Area of the demised
premises is 18,720 square feet.
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EXHIBIT B
NOTICE OF LEASE TERM DATES
Re: Industrial Real Estate Lease dated April 10, 1997, between Pacific
Industrial Park LLC, a Delaware limited liability company, Landlord, and
Multiple Zones International, Inc., a Washington corporation, Tenant.
In accordance with the Lease, we wish to advise and/or confirm as follows:
1. That the Property has been accepted as of ______________ by the
Tenant as being substantially complete in accordance with the Lease,
and that there is no deficiency in construction.
2. That the Tenant has possession of the Property and acknowledges that
under the provisions of the Lease, the term of the Lease commenced as
of May 1, 1997 for a term of 60 months, ending on April 30, 2002.
3. That in accordance with the Lease, rental commenced to accrue on
May 1, 1997.
AGREED AND ACCEPTED
Signed on April 10, 1997 PACIFIC INDUSTRIAL PARK L.L.C., a Delaware limited
liability company
at Las Vegas, NV.
By: Pacific Industrial Park Partnership, a Nevada
limited partnership
Its: member
By: Pacific Properties and Development
Corporation, a
Its: general partner
By: /s/ JAMES A. HERNQUIST
-----------------------------------------
James A. Hernquist
Its: Executive Vice President
"LANDLORD"
"TENANT"
MULTIPLE ZONES INTERNATIONAL, INC.
By: [SIG]
------------------------------
Its: VP Operations
------------------------------
Date: April 3, 1997
------------------------------
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EXHIBIT C
RULES & REGULATIONS
and
CC&Rs
1. No sign, placard, picture, aerial display, balloons, advertisement,
name or notice shall be installed or displayed on any part of the Property or
project (or within public rights-of-ways adjacent to the Project through the use
of truck signs, sign trailers, or similar items) without the prior written
consent of the Landlord. Landlord shall have the right to remove, at Tenant's
expense and without notice, any sign installed or displayed in violation of this
rule. All approved signs or lettering on doors, walls and service areas of the
Property shall be printed, painted, affixed or inscribed at the expense of
Tenant by a person chosen by Landlord.
2. If Landlord reasonably objects in writing to any curtains, blinds,
shades, screens or hanging plants or other similar objects, attached to or used
in connection with any window or door of the Property, Tenant shall immediately
discontinue such use. No awning shall be permitted on any part of the Property.
Tenant shall not place anything against or near glass partitions or doors or
windows which may appear unsightly from outside the Property.
3. Tenant shall not obstruct any sidewalks, halls, passages, exits,
entrances, elevators, escalators or stairways of the Property. The Common Areas
of the Project are not for the general public, and Landlord shall in all cases
retain the right to control and prevent access thereto of all persons whose
presence in the judgment of Landlord would be prejudicial to the safety,
character, reputation and interests of the Project and its tenants; provided
that nothing herein contained shall be constructed to prevent such access to
persons with whom any tenant normally deals in the ordinary course of its
business, unless such persons are engaged in illegal activities. No tenant and
no employee or invitee shall go upon the roof of the Property except as part of
maintenance or repair work required or permitted to be done by Tenant.
4. Landlord will furnish Tenant, free of charge, with two keys to each
door lock in the Property. Landlord may charge a reasonable fee for any
additional keys. Tenant shall not make or have made additional keys, and Tenant
shall not alter any lock or install a new additional lock or bolt on any door of
the Property. Tenant, upon the termination of its tenancy, shall deliver to
Landlord the keys of all doors which have been furnished to Tenant, and in the
event of loss of any keys so furnished, shall pay Landlord therefor.
5. If Tenant requires telegraphic, telephonic, burglar alarm or similar
services, it shall first obtain, and comply with, Landlord's reasonable
instructions in their installation.
6. Tenant shall not place a load upon any floor of the Property which
exceeds the load per square foot which such floor was designed to carry and
which is allowed by law. Heavy objects shall, if reasonably considered necessary
by Landlord, stand on such platforms as determined by Landlord to be necessary
to properly distribute the weight. Business machines and mechanical equipment
belonging to Tenant, which cause noise or vibration that may be transmitted to
the structure of the Property or to any space therein to such a degree as to be
reasonably objectionable to Landlord, shall be placed and maintained by Tenant,
at Tenant's expense, on vibration eliminators or other devices sufficient to
eliminate noise or vibration. The persons employed to move such equipment in or
out of the Property must be reasonably acceptable to Landlord. Landlord will not
be responsible for loss of, or damage to, any such equipment or other property
from any cause, and all damage done to the Property by maintaining or moving
such equipment or other property shall be repaired at the expense of Tenant.
7. Tenant shall not use or keep in the Property any kerosene, gasoline or
inflammable or combustible fluid or material other than those limited quantities
necessary for the operation or maintenance of its equipment. Tenant shall not
use or permit to be used in the Property any foul or noxious gas or substance,
or permit or allow the Property to be occupied or used in a manner offensive or
objectionable to Landlord or other occupants of the Project by reason of noise,
odors or vibrations, nor shall Tenant bring into or keep in or about the
Property any birds or animals, but nothing herein shall prevent or limit
Tenant's use of the Property per Section 1.10, Section 5.01 and Section 5.02.
8. Tenant shall not use any method of heating or air conditioning other
than that designed for the Property without the written consent of Landlord.
9. Tenant shall not waste electricity, water or air-conditioning and
agrees to cooperate fully with Landlord to assure the most effective operation
of the Property's heating and air-conditioning and to comply with any
governmental energy-saving rules, law or regulations of which the Tenant has
actual notice, and shall refrain from attempting to adjust controls other than
room thermostats installed for Tenant's use. Tenant shall keep corridor doors
closed and shall close window coverings at the end of each business day.
10. Landlord reserves the right, exercisable without liability to Tenant,
to change the name and street address of the Property.
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11. Tenant shall close and lock the doors of the Property, including
any roll-up doors in any service areas, before Tenant and its employees leave
the Property. Tenant shall be responsible for any damage or injuries sustained
by other tenants or occupants of the Project or by Landlord for noncompliance
with this rule.
12. The toilet rooms, toilets, urinals, wash bowls and other apparatus
shall not be used for any purpose other than that for which they were
constructed and no foreign or hazardous substance of any kind whatsoever shall
be thrown therein. The expense of any breakage, stoppage or damage resulting
from the violation of this rule shall be borne by the tenant who, or whose
employees or invitees, shall have caused same.
13. Tenant shall not sell, or permit for sale, of newspapers,
magazines, periodicals, theater tickets or any other goods or merchandise to
the general public in or on the Property. Tenant shall not make any
room-to-room solicitations of business from other tenants in the Project.
Tenant shall not use the Property for any business activity other than that
specifically provided for in Tenant's lease.
14. Tenant shall not install any radio or television antenna, satellite
dish, microwave receiver, cellular telephone transmitter or receive,
loudspeaker or other device on the roof or exteriors walls of the Property.
Tenant shall not interfere with radio or television broadcasting or reception
from or in the Project or elsewhere.
15. Tenant shall not mark, drive nails, screw or drill into the
partitions, woodwork or plaster or in any way deface the Property or any part
thereof. Landlord reserves the right to direct electricians as to where and how
telephone and telecommunications wires are to be introduced to the Property.
Tenant shall not cut or bore holes for wires. Tenant shall not affix any floor
covering to the floor of the Property in any manner except as reasonable
approved by Landlord. Tenant shall repair any damage resulting from
noncompliance with this rule at its own expense.
16. Tenant shall not install, maintain or operate upon the Property any
vending machines without the written consent of Landlord, which shall not be
unreasonably withheld.
17. Canvassing, soliciting and distribution of handbills or any other
written material, and peddling in the Project are prohibited, and each tenant
shall cooperate to prevent same.
18. Landlord reserves the right to exclude or expel from the Project
any person who, in Landlord's judgment, is intoxicated or under the influence
of liquor or drugs or who is in violation of any of the Rules and Regulations
of the Property or the Project.
19. Tenant shall store all its trash and garbage within the Property or
within trash receptacles in the Common Areas nearest the Property. Tenant
shall not place in any trash box or receptacle any material which cannot be
disposed of in the ordinary and customary manner of trash and garbage disposal.
All garbage and refuse disposal shall be made in accordance with directions
issued from time to time by Landlord. Tenant shall be responsible for any
additional charges or expenses arising from the failure to abide by this rule.
20. The Property shall not be used for the storage of merchandise held
for sale to the general public, or for manufacturing of any kind except as
specifically authorized in Tenant's lease, nor shall the Property be used for
lodging or any improper or immoral purpose. No cooking shall be done or
permitted by any tenant on the Property, except that use by Tenant of Insurance
Services Office or Underwriters' Laboratory approved microwave and other
equipment for heating meals and brewing coffee, tea, hot chocolate and similar
beverages shall be permitted, provided that such equipment and use is in
accordance with all applicable federal, state, county and city laws, codes,
ordinances, rules and regulations.
21. Without the written consent of Landlord, which shall not be
unreasonably withheld, Tenant shall not use the name, picture or representation
of the Property in connection with or in promoting or advertising the business
of Tenant except as Tenant's address. Landlord shall have the right to prohibit
any advertising by Tenant which, in Landlord's opinion, tends to impair the
reputation of the Project or its desirability as a location for offices, and
upon written notice from Landlord, Tenant shall refrain from or discontinue such
advertising.
22. Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations established by any governmental agency or reasonably
established by Landlord.
23. Tenant assumes any and all responsibility for protecting its
property from theft, robbery and pilferage, which includes keeping doors locked
and other means of entry to the Property closed.
24. Landlord reserves the right to modify and/or adopt such other
reasonable and nondiscriminatory rules and regulations for the parking areas as
it deems necessary for the operation of the parking area. Landlord may refuse to
permit any person who violates the rules to park in the parking area, and any
violation of the rules shall subject the car to removal.
25. Cars must be parked entirely within the stall lines. All
directional signs and arrows must be observed. The speed limit shall be 5 miles
per hour. Parking is prohibited: (a) in areas not striped for parking, (b) in
aisles, (c) where "no parking" signs are posted, (d) on ramps, (e) in
cross-hatched areas, (f) in any manner which will interfere with loading or
turning areas of loading dock areas, and (g) in such other areas as may be
designated by Landlord as reserved for the exclusive use of others. Washing,
waxing, cleaning or servicing of any
20
<PAGE> 22
vehicle by anyone is prohibited. Tenant shall acquaint all persons to whom
Tenant assigns parking spaces of these Rules and Regulations.
26. Except as otherwise set forth in the lease, at all times during the
term of this Lease, at Tenant's sole cost and expense, Tenant shall cause the
Property, and all Tenant alterations and improvements in the Property, Tenant's
use and occupancy of the Property, and Tenant's performance of its obligations
under this Lease, to comply with the requirements of Title III of the Americans
with Disabilities Act of 1990, and all regulations promulgated thereunder,
together with all amendments, revisions or modifications thereto now or
hereafter adopted or in effect in connection therewith.
27. Tenant shall not park its vehicles in any parking areas designated
by Landlord as areas for parking by visitors to the Project. Tenant shall not
leave vehicles, trailers, containers, or truck-tractors in the Property or
Project parking areas, Common Areas, or on adjacent streets overnight except in
connection with business trips or overnight working, nor park any vehicles in
the Property parking areas other than automobiles, motorcycles, motor driven or
non-motor driven bicycles or four-wheeled trucks.
28. Landlord may waive any one or more of these Rules and Regulations
for the benefit of Tenant or any other tenant, but no such waiver by Landlord
shall be construed as a permanent waiver of such Rules and Regulations in favor
of Tenant or any other tenant, nor prevent Landlord from thereafter enforcing
any such Rules and Regulations against any or all of the tenants of the Project.
29. Landlord reserves the right to monitor and control all entrances to
the Project during hours Landlord may deem advisable for the adequate protection
of the Property and the Project. Use of the Project and Property before 8:00
o'clock A.M. or after 6:00 o'clock P.M. and on Saturdays, Sundays and state and
federal holidays shall be subject to such reasonable, non-discriminatory rules
and regulations as Landlord may from time to time prescribe. Tenant, its
employees, agents or associates, or other persons entering or leaving the
Project at any such time, may be required to sign a Project register, and the
watchman or Landlord's agent in charge shall have the right to refuse admittance
to any person into the Project without a pass or other satisfactory
identification showing right of access at such time. Landlord assumes no
responsibility and shall not be liable for any damage resulting from the
admission or refusal to admit any authorized or unauthorized person to the
Project. In case of invasion, mob, riot, public excitement or other commotion,
Landlord reserves the right to prevent access to the Project during the
continuance of the same by closing the doors, or otherwise.
30. These Rules and Regulations are in addition to, and shall not be
construed to in any way modify or amend,in whole or part, the terms, covenants,
agreements and conditions of any lease of premises in the Project.
31. Landlord reserves the right to make such other reasonable and
nondiscriminatory Rules and Regulations as, in its judgment, may from time to
time be needed for safety and security, for care and cleanliness of the Project
and for the preservation of good order therein. Tenant agrees to abide by all
such rules and Regulations hereinabove stated and any additional rules and
regulations which are adopted.
32. Tenant shall be responsible for the observance of all of the
foregoing rules by Tenant's employees, agents, clients, customers and guests.
21
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EXHIBIT D
RIGHT OF FIRST REFUSAL ON CONTIGUOUS SPACE
As of the Date of this Lease, there are two (2) tenant spaces, each
approximately 18,720 square feet, immediately contiguous to the Demised
Premises which are vacant and available for lease for the first time since
completion of this Building 3, 160 Mary Crest RD, Henderson, NV. ("Contiguous
Space"). During the term of this Lease only, this additional space will be
offered to Multiple Zones International, Inc., a Washington corporation,
("TENANT") under these terms:
1. Notice of Leasing. If at any time during the term of this Lease, Lessor
negotiates an offer to lease from a third party ("Third Party") the Contiguous
Space, under terms acceptable to Lessor, Lessor shall give written notice to
TENANT identifying the Contiguous Space and specifying the terms and conditions
upon which Lessor is willing to lease the Contiguous Space (collectively, the
"Acceptable Lease Terms"). This notice shall constitute an irrevocable offer on
the part of Lessor (subject to conditions described in Paragraph 4 below) to
lease the Contiguous Space to TENANT upon the Acceptable Lease Terms, and
Lessor and TENANT shall have a period of fifteen (15) days after Lessor's
delivery of the notice within which to negotiate and agree upon the terms and
conditions for the lease of the Contiguous Space to (the "Lease Negotiation
Period").
2. Acceptance of Lease. If TENANT is interested in negotiating the lease of the
Contiguous Space with Lessor, TENANT shall gave Lessor written notice of such
interest within forty-eight (48) hours after TENANT's receipt of Lessor's
notice (the "Lease Response Period"), and Lessor and TENANT shall proceed to
negotiate TENANT's lease of the Contiguous Space and the terms and conditions
of a such a lease during the Lease Negotiation Period. Should the parties reach
agreement on the terms and conditions of a lease of the Contiguous Space within
the Lease Negotiation Period, the parties shall, within fifteen (15) days after
reaching such agreement, execute a written lease agreement in substantially the
same form as the Lease to which this Exhibit D is attached, but containing the
terms and conditions agreed to by Lessor and TENANT. Failure on the part of
TENANT either to deliver such notice within the Lease Response Period or to
accept Lessor's offer to lease the Contiguous Space within the Lease
Negotiation Period shall constitute TENANT's rejection of Lessor's offer to
lease the Contigous Space.
3. Rejection of Lease. If (a) TENANT informs Lessor within the Lease Response
Period that TENANT does not desire to negotiate the lease of the Contiguous
Space, or (b) after commencing negotiation, Lessor and TENANT do not execute a
mutually-acceptable lease agreement for the Contiguous Space within the Lease
Negotiation Period, or (c) TENANT otherwise rejects Lessor's offer to lease he
Contiguous Space, then in any such event this right to first offer shall
terminate for that specific Contiguous Space, provided Landlord enters into a
lease with the Third Party within ninety (90) days after the end of the Lease
Negotiation Period. Upon such termination of this Right of First Offer, Lessor
shall be free to enter into a lease with that specific Third Party for all or
any portion of the Contiguous Space upon any terms whatsoever, including
without limitation terms less favorable to Lessor than the Acceptable Lease
Terms, without first offering to lease such Contiguous Space to TENANT. If
Landlord fails to enter into a lease with that specific Third Party with said
ninety (90) day period, TENANT's rights under this Exhibit D shall continue in
full force and effect.
4. Conditions to Exercise. The effectiveness of TENANT's right of first offer
to lease any Contiguous Space, as set forth in this Exhibit F, is in each
instance conditioned on the following: (a) TENANT is not in monetary or other
default under the terms of the Lease to which this Exhibit F is attached and
(b) Total Shareholder's Equity of TENANT is not less than $10,000,000. If these
conditions are not satisfied, then TENANT's acceptance of Lessor's offer to
lease the Contiguous Space under this Exhibit D shall be null and void with
respect to that Contiguous Space and Lessor shall be free to enter into a lease
with a third party of parties for all or any portion of the Contiguous Space
upon any terms whatsoever, including without limitation terms less favorable to
Lessor than the Acceptable Lease Terms.
5. Effect of Transfer by Lessor. If at any time Lessor sells, exchanges,
disposes of, or otherwise transfers all or any portion of the Property which
contains Building 3, 160 Mary Crest RD, Henderson, NV. to a third party or
third parties, then effective upon the date of such sale, exchange,
disposition, or other transfer, the provisions of this Exhibit F shall cease to
be of any force or effect with respect to the portion of the Property thus
sold, exchanged, disposed of or otherwise transferred.
6. Rights Personal. This right of first offer is personal to TENANT and not
transferable or assignable.
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H. LANDLORD COVENANTS. Landlord covenants that, to the best of its
actual knowledge, the Work will be designed to conform with applicable building
codes and requirements of appropriate governmental agencies. The appropriate
governmental agencies are responsible for inspecting the work and issuing
approvals, permits and certificates of occupancy if the Work is deemed by those
responsible agencies to conform to the appropriate laws, regulations and
requirements.
Landlord covenants that, to be best of its ability and actual knowledge, the
Work will be constructed within the requirements pertaining to the health,
safety or welfare of Landlord's employees or the public applicable at the time
the Work is performed
1. NOTIFICATION OF COMPLETION OF WORK. Landlord shall give Tenant
notice ten (10) days prior as to when that the Work will be complete.
Completion of the Work is defined in Paragraph C of this Rider. Tenant shall be
available to inspect the Work within two (2) days after that scheduled
completion date. Tenant and Landlord's representative shall inspect the Work
together. At that time, Tenant shall notify Landlord, in writing, of any
deficiency of the Work compared to the Final Plans, as defined in this
Construction of Improvements by Landlord Lease Rider. Any deficiency will be
corrected by Landlord within ten (10) days following such written notice from
Tenant. Landlord shall notify Tenant when the deficiency has been corrected and
Tenant and Landlord's representative shall reinspect the Work together.
If the Work is not completed within seventy-five (75) days of written approval
by both Tenant and Landlord of the Final Plans (as defined in this Rider),
Tenant may terminate this Lease without any liability to either Tenant or
Landlord and all monies paid or advanced to Landlord shall be refunded to
Tenant.
23
<PAGE> 25
CONSTRUCTION OF IMPROVEMENTS BY LANDLORD LEASE RIDER
This Rider is attached to and made part of that certain Industrial Real
Estate lease dated April 10, 1997, between Pacific Industrial Park LLC, as
Landlord, and Multiple Zones International, Inc., as Tenant, covering the
Property commonly known as 170 Gallagher Crest Drive, Henderson, NV (the
"Lease"). The terms used in this Rider shall have the same definitions as set
forth in the Lease. The provisions of this Rider shall prevail over any
inconsistent or conflicting provisions of the Lease.
A. DESCRIPTION OF IMPROVEMENTS. Landlord shall, at Landlord's expense,
construct certain improvements on or about the Property (the "Work") in
accordance with certain plans and specifications attached hereto as Exhibit "1"
and incorporated herein by this reference. Tenant hereby approves the plans and
specifications attached hereto as Exhibit "1."
B. PRELIMINARY PLANS/FINAL PLANS. If the plans and specifications
attached hereto are agreed upon as final plans and specifications, (a) initial
here, Landlord _______ and Tenant _________, (b) such final plans and
specifications are hereinafter referred to as the "Final Plans," and (c) the
remainder of this Paragraph shall be inoperative. If the plans and
specifications attached hereto are preliminary plans, Landlord shall prepare
final working drawings and outlined specifications for the Work and submit such
plans and specifications to Tenant for its approval. Tenant shall approve or
disapprove such drawings and specifications within five (5) days after receipt
from Landlord. Tenant shall have the right to disapprove such drawings and
specifications only if they materially differ from the plans and specifications,
attached hereto. If Tenant disapproves such drawings and specifications,
Landlord and Tenant shall promptly meet in an attempt to resolve any dispute
regarding such drawings and specifications. If the parties are unable to agree
upon the final working drawings and specifications for the work on or before
_______________, Landlord may, at Landlord's option, either (1) terminate this
Lease upon seven (7) days' prior written notice to Tenant, in which case neither
Landlord nor Tenant shall have further liability to the other,or (2) submit the
matter to conclusive and binding arbitration at the cost of Tenant in accordance
with the Commercial Arbitration Rules of the American Arbitration Association.
Final working drawings and specifications prepared in accordance with this
Paragraph B and approved by Landlord and Tenant are hereinafter referred to as
the "Final Plans."
C. COMPLETION OF THE WORK. Landlord shall use its best efforts to
complete the Work described in the Final Plans prior to the scheduled
Commencement Date set forth in Section 1.05 of the Lease.
For the purposes of this Paragraph C, the Work shall be conclusively deemed
to be substantially completed when all Work described in the Final Plans is
completed, except for minor items of work (e.g., "pick-up work") which can be
completed with only minor interference with Tenant's conduct of business on the
Property.
D. CHANGES. Landlord's obligation to prepare the Property for Tenant's
occupancy is limited to the completion of the Work set forth in the plans and
specifications attached hereto as Exhibit "1". Landlord shall not be required to
furnish, construct or install any items not shown thereon. If Tenant requests
any change, addition or alteration ("Changes") in such plans and specifications
or in the construction of the Work, Landlord shall promptly give Tenant an
estimate of the cost of such Changes and the resulting delay in the delivery of
the Property to Tenant. Within three (3) days after receipt of such estimate,
Tenant shall give Landlord written notice whether Tenant elects to proceed with
such Changes. If Tenant notifies Landlord in writing that Tenant elects to
proceed with such Changes and if Landlord approves such Changes, Landlord shall,
at Tenant's expense, promptly make such Changes. If Tenant fails to notify
Landlord of its election within the three (3) day period, Landlord may either
(1) make such Changes at Tenant's expense or (2) complete the Work without
making such Changes. Tenant shall pay or reimburse Landlord for the costs of
such Changes within fifteen (15) days after billing. Any delay caused by
Tenant's request for any Changes or from the construction of any Changes shall
not, in any event, delay the Commencement Date, which shall occur on the date it
would have occurred but for such Changes. The Work shall be the property of
Landlord and shall remain upon and be surrendered with the Property upon the
expiration of the Lease Term.
E. TENANT'S WORK. All work not within the scope of the Work, such as
the furnishing and installing of furniture, trade fixtures, telephone equipment
and office equipment shall be furnished
Initials ____________ Landlord
____________ Tenant
<PAGE> 26
and installed by Tenant at Tenant's sole cost and expense. Tenant shall adopt a
schedule which is consistent with the schedule of Landlord's contractors and
conduct its work in such a manner as to maintain harmonious labor relations and
not interfere with or delay the Work of Landlord's contractors. All work and
labor to be performed by Tenant shall: (a) be subject to the administrative
supervision of Landlord; (b) be carried out in a good and workmanlike manner;
(c) comply with all governmental rules, regulations, statutes and directives;
(d) not commence until proof of insurance reasonably required by Landlord is
provided; and (e) not adversely affect the proper functioning of any of the
mechanical, electrical, sanitary and other service systems or installations of
the Property or the Project which the Property is a part.
F. BUILDING PERMIT. If for any reason Landlord is not able to obtain a
building permit for the Work based solely upon the Final Plans, or upon such
modifications thereto as are agreed to by Tenant and Landlord, then this Lease
shall be null and void and of no further force and effect. In either event,
Landlord shall forthwith return any sums paid to Landlord by Tenant and
Landlord and Tenant shall have no further obligations to or claims against the
other arising from this Lease.
G. DELAYS. In the event that Landlord is delayed in completing the Work as
a result of: (a) delays in the delivery of non-building standard materials,
finishes or installations requested by Tenant; (b) changes to the Final Plans
requested by Tenant after approval thereof; (c) the carrying out of work on the
Property by Tenant or its contractors; or (d) any other types of delays caused
by Tenant, then, in such event, the Work shall be deemed to be substantially
completed upon the date Landlord would have completed the Work in the absence
of such delays as determined by Landlord's architect or contractor, and, if not
already commenced, the Lease Term shall commence.
H. LANDLORD COVENANTS. Landlord covenants that, to the best of its actual
knowledge, the Work will be designed to conform with applicable building codes
and requirements of appropriate governmental agencies. The appropriate
governmental agencies are responsible for inspecting the work and issuing
approvals, permits and certificates of occupancy if the Work is deemed by those
responsible agencies to conform to the appropriate laws, regulations and
requirements.
Landlord covenants that, to the best of its ability and actual knowledge, the
Work will be constructed within the requirements pertaining to the health,
safety or welfare of Landlord's employees or the public applicable at the time
the Work is performed.
I. NOTIFICATION OF COMPLETION OF WORK. Landlord shall give Tenant notice
ten (10) days prior as to when that the Work will be complete. Completion of
the Work is defined in Paragraph C of this Rider. Tenant shall be available to
inspect the Work within two (2) days after that scheduled completion date.
Tenant and Landlord's representative shall inspect the Work together. At that
time, Tenant shall notify Landlord, in writing, of any deficiency of the Work
compared to the Final Plans, as defined in this Construction of Improvements
by Landlord Lease Rider. Any deficiency will be corrected by Landlord with ten
(10) days following such written notice from Tenant. Landlord shall notify
Tenant when the deficiency has been corrected and Tenant and Landlord's
representative shall reinspect the Work together.
If the Work is not completed within seventy-five (75) days of written approval
by both Tenant and Landlord of the Final Plans (as defined in this Rider),
Tenant may terminate this Lease without any liability to either Tenant or
Landlord and all monies paid or advanced to Landlord shall be refunded to
Tenant.
Initials Landlord
-----------
Tenant
-----------
2
<PAGE> 27
[FLOOR PLAN]
<PAGE> 28
[ENLARGED FLOOR PLAN]
<PAGE> 29
ENVIRONMENTAL INDEMNIFICATION RIDER
This Rider is attached to and made part of that certain lease dated April
10, 1997 between PACIFIC INDUSTRIAL PARK, L.L.C., as Landlord, and MULTIPLE
ZONES INTERNATIONAL, INC., as Tenant, covering the Property commonly known as
170 GALLAGHER CREST, HENDERSON, NV (the "Lease"). Terms with initial capital
letters herein, but not otherwise defined herein, shall have the same meaning as
set forth in the Lease. The provisions of this Rider shall prevail over any
inconsistent or conflicting provisions of the Lease.
SECTION 1.01. DEFINITIONS. "Hazardous Substance" means:
(a) Those substances, chemicals and mixtures defined as "hazardous
substances," "hazardous materials," "toxic substances," "imminently hazardous
chemical substance or mixture," "pesticide," "heavy metal," "hazardous air
pollutant," "toxic pollutant," "solid waste," "hazardous waste," "medical
waste," or "radioactive waste" in the Toxic Substance Control Act, 15 U.S.C.
Section 2601 et. seq., as now or hereafter amended, the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, 42 U.S.C.
Section 9601 et. seq., as now or hereafter amended ("CERCLA"), the Resource
Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901 et. seq., as now
or hereafter amended, the Federal Hazardous Substances Act, 15 U.S.C. Section
1261 et. seq., as now or hereafter amended, the Federal Water Pollution Control
Act, 33 U.S.C. Section 1251 et. seq., as now or hereafter amended, the Clean Air
Act, 42 U.S.C. Section 7401 et. seq., as now or hereafter amended, the Federal
Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. Section 136 et. seq., as
now or hereafter amended, the Emergency Planning and Community Right to Know Act
of 1986, 42 U.S.C. Section 11001 et. seq., as now or hereafter amended
("EPCRKA"), the Occupational Safety and Health Act of 1970, 29 U.S.C. Section
651 et. seq., as now or hereafter amended, and the rules, orders and regulations
now in effect or promulgated and effective hereafter pursuant to each respective
law listed above;
(b) Those substances defined as "hazardous waste," "radioactive waste,"
"solid waste," "toxic waste," "pollutant," "hazardous material," "regulated
substance," "hazardous substance," "highly hazardous substance," "extremely
hazardous substance," "petroleum," "asbestos," or "asbestos containing material"
in Nev. Rev. Stat. ch. 459, Nev. Stat. Ch. 444, Nev. Rev. Stat. ch. 445, Nev.
Rev. ch. 590, Nev. Rev. Stat. Sections 618.750 - 618.850, inclusive, Nev. Rev.
Stat. Section 477.045, as now or hereafter amended, or in the rules, orders and
regulations now existing or hereafter promulgated pursuant thereto, or in the
Uniform Fire Code as adopted by and now or hereafter in effect in the State of
Nevada;
(c) Those substances listed in the United States Department of
Transportation table (49 CFR Section 172.101 and amendments thereto) or by the
Environmental Protection Agency (or any successor agency) as hazardous
substances (40 CFR Part 302 and amendments thereto); and
(d) Such other substances, materials and wastes which are regulated under
applicable local, state or federal law, or which are classified as hazardous or
toxic under federal, state or local laws or regulations.
SECTION 1.02. "Environmental Laws" means the collective laws, rules,
orders and regulations described in paragraph 1.01.
SECTION 2.01. Tenant's Business Activity. Tenant is in the business of
manufacturing, processing and/or distributing Computer Products.
SECTION 2.02. Tenant has informed Landlord that in the normal conduct of
Tenant's business the following Hazardous Substance or Hazardous Substances will
be placed, stored, used, processed, manufactured, treated, distributed, released
or disposed in, on or from the Property:
(a) NONE. Tenant estimates the quantity on the premises at any one time to
be an amount less than ___________________.
(b) ____________________________. Tenant estimates the quantity on the
premises at any one time to be an amount less than ___________________.
(c) ____________________________. Tenant estimates the quantity on the
premises at any one time to be an amount less than ___________________.
Initials _____ Landlord
_____ Tenant
<PAGE> 30
If additional Hazardous Substances are to be listed, see Exhibit 1 attached
hereto and incorporated herein.
SECTION 2.03. The use, possession, processing, manufacturing, distribution,
disposal, and/or release of the Hazardous Substances listed under paragraph 2.02
are regulated pursuant to the Environmental Laws.
SECTION 2.04. Landlord has consented to Tenant's business activity being
conducted on the Property involving Hazardous Substances, which consent is
expressly limited to the substances disclosed above, subject to each and every
covenant of Tenant stated herein.
SECTION 3.01. Tenant's Covenants. Tenant shall comply strictly and in all
respects with the requirements of the Environmental Laws and shall notify the
Landlord promptly in the event of any spill of any Hazardous Substance upon the
Property, and shall promptly forward to the Landlord copies of all orders,
notices, permits, applications or other communications and reports in connection
with any such spill or any other matters relating to Environmental Laws, as they
may affect the Property. Tenant shall be fully responsible, at its own expense,
for the proper control, use, handling, storage, distribution and disposal of any
and all Hazardous Substances related to Tenant's business being conducted on the
Property.
SECTION 3.02. Tenant has provided or will provide to Landlord prior to
execution of the Lease copies of each and every license, identification number,
permit, or approval that Tenant is required to possess for the conduct of its
business under the Environmental Laws. If any identification number, license,
permit, or approval is renewed, modified, amended, or reissued during the term
of this Lease, Tenant will promptly deliver a copy of the same to Landlord.
Tenant shall provide Landlord with a copy of any and all inspection reports
received by Tenant resulting from, or related to, an inspection of the Property
conducted by any federal, state or local authority.
SECTION 3.03. Tenant shall not change the quantity nor the type of
Hazardous Substances described herein without the prior written consent of the
Landlord.
SECTION 3.04. Tenant will not hereafter cause or suffer to occur, a spill,
release, discharge or disposal of any Hazardous Substances at, upon, under or
within the Property, any portion thereof, or any contiguous real estate. Tenant
shall not permit the discharge of any Hazardous Substance into the sanitary or
storm sewer or water system serving the property or the surrounding area, or
into any municipal or other governmental water system or storm and/or sanitary
sewer system in violation of any Environmental Law.
SECTION 3.05. Tenant shall provide Landlord annually on each anniversary
date of the Lease a written certification, also signed by the manager of
operations of Tenant at the Property, certifying that:
(a) Tenant's business has been conducted in full compliance with the
Environmental Laws;
(b) All Hazardous Substances related to Tenant's business are disclosed in
the Lease or said certificate;
(c) The method and frequency of off-site disposal of Hazardous Substances
from the Property, as described in the certificate, are in compliance with the
Environmental Laws.
SECTION 3.06. Tenant, promptly upon the written request of Landlord from
time to time, shall provide the Landlord or the Landlord's agent with access to
the property to conduct an environmental site assessment or prepare an
environmental audit report with respect to the Property. In connection with such
assessment Tenant shall permit Landlord or Landlord's agents to inspect, sample,
and test the Property and to inspect and copy Tenant's records relating, to the
use, generation, storage, processing, release and disposal of Hazardous
Substances at the Property. Tenant acknowledges that the results of such an
inspection may be used by Landlord, at Landlord's sole election, to determine
Tenant's compliance with the covenants contained herein.
SECTION 3.07. If a spill, release, discharge or accident involving one or
more Hazardous Substances occurs at, under, in or on the Property, Tenant will
immediately respond to such event taking prudent emergency action in compliance
with the Environmental Laws. Tenant shall notify
2
Initials _______ Landlord
_______ Tenant
<PAGE> 31
Landlord of any such event as soon as reasonably practicable after the
occurrence of such event by telephone (and promptly confirm such oral notice
in writing) giving complete information regarding the type, amount and location
of the Hazardous Substance or Hazardous Substances involved in such event.
Within fifteen (15) days of the occurrence of the event Tenant shall submit a
written remedial action plan, including the location for off-site disposal, to
Landlord. Any remedial action plan shall be in full compliance with the
Environmental Laws.
SECTION 3.08. Upon Landlord's reasonable request, Tenant shall provide
Landlord with a copy of an Emergency Response Plan, which shall be kept current
at all times, relating to the Hazardous Substances connected with Tenant's
business. If Tenant is required to file an Emergency Response Plan pursuant to
EPCRKA, Tenant shall provide Landlord with a copy of such report concurrently
with filing the report with the respective government agencies.
SECTION 3.09. Tenant will not modify or remodel the Property, install or
construct any tanks, vessels, sumps, clarifiers or any other similar structures
(collectively "Tanks") above or below ground to store, mix, process,
manufacture or dispose Hazardous Substances without the prior written consent
of Landlord. Any request submitted to Landlord by Tenant for the installation
or construction of such Tanks must be submitted together with copies of all
permits, licenses or approvals required under the Environmental Laws in
connection with the installation or construction of such Tanks, and copies of
the plans and specifications of each such Tank.
SECTION 3.10. Tenant for itself and its successors and assigns undertakes
to protect, indemnify, save and defend Landlord, its agents, employees,
directors, officers, shareholders, affiliates, consultants, independent
contractors, successors and assigns (collectively referred to as "Indemnitees")
harmless from any and all liability, loss, damage and expense, including
attorneys' fees, claims, suits and judgments that Landlord or any other
Indemnitee, whether as Landlord, owner of the Property or otherwise, may suffer
as a result of, or with respect to:
(a) The deposit, storage, disposal, burial, dumping, injecting, spilling,
leaking or other placement or release in, under or on the Property of a
Hazardous Substance, including, but not limited to, asbestos;
(b) Any Environmental Law, including the assertion of any lien thereunder;
(c) Any spill of or the presence of any Hazardous Substance affecting the
Property whether or not the same originates or emanates from the Property or
any contiguous real estate, including any loss of value of the Property as a
result of a spill of or the presence of any Hazardous Substance;
(d) Any other matter affecting the Property within the jurisdiction of the
United States Environmental Protection Agency or the Nevada State Environmental
Commission or the Nevada Department of Conservation and Natural Resources or
the Nevada Department of Commerce; and
(e) The presence in, on or under, or the release, escape, seepage,
leakage, discharge, or migration to, at or from, the Property of any Hazardous
Substance, where any such liability relates to any condition arising on, at or
under the Property, whether such condition arose prior to, during, or after the
term of the Lease, whether such condition was known or unknown to Tenant,
whether or not such condition is disclosed in any report to Landlord and
whether or not such condition worsens after the date hereof.
SECTION 3.11. Tenant's liability hereunder shall, without however limiting
the indemnity provided in Section 3.10 hereof, extend to and include:
(a) All costs, expenses and attorneys' fees incurred or sustained by any
Indemnitee in making any investigation on account of any claim, demand, loss,
liability, cost, charge, suit, order, judgment or adjudication, in prosecuting
or defending any action brought in connection therewith, in obtaining or
seeking to obtain a release therefrom and in enforcing any of the agreements
herein contained;
(b) Liability for costs of removal or remedial action incurred by the
United States Government or the State of Nevada, or response costs incurred by
any other person, or damages from injury to, destruction of, or loss of natural
resources, including, without limitation, the reasonable costs of assessing
such injury, destruction or loss, incurred pursuant to CERCLA;
Initials Landlord
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Tenant
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3
<PAGE> 32
(c) Liability for clean-up costs, fines, damages or penalties incurred
pursuant to the provisions of any applicable Environmental Law;
(d) Liability for costs and expenses of abatement, correction or clean-up,
fines, damages, response costs or penalties which arise from the provisions of
any other statute, state or federal; and
(e) Liability for personal injury or property damage arising under any
statutory or common-law tort theory, including, without limitation, damages
assessed for the maintenance of a public or private nuisance, or for the
carrying on of an abnormally dangerous activity, and response costs.
SECTION 3.12. In the event of any spill of or the presence of any Hazardous
Substance affecting the Property, whether or not the same originates or emanates
from the Property or any contiguous real estate, and/or if Tenant shall fail to
comply with any of the requirements of any Environmental Law, Landlord may,
without notice to Tenant, at its election, but without the obligation so to do,
give such notices and/or cause such work to be performed at the Property and/or
take any and all other actions as Landlord shall deem necessary or advisable in
order to remedy said spill of Hazardous Substance or cure said failure of
compliance and any amounts paid as a result thereof, together with interest
thereon at the rate of fifteen percent (15%) per annum, from the date of payment
by Landlord, shall be immediately due and payable by Tenant to Landlord.
SECTION 3.13. Landlord, upon giving Tenant ten (10) days prior notice,
shall have the right in good faith to pay, settle or compromise, or litigate any
claim, demand, loss, liability, cost, charge, suit, order, judgment or
adjudication under the belief that it is liable therefor, whether liable or not,
without the consent or approval of Tenant unless Tenant within said ten (10) day
period shall protest in writing and simultaneously with such protest deposit
with Landlord collateral satisfactory to Landlord sufficient to pay and satisfy
any penalty or interest which may accrue as a result of such protest and any
judgment or judgments as may result, together with attorneys' fees and expenses.
SECTION 3.14. Tenant shall, at Landlord's election, post an environmental
reclamation bond with Landlord, payable to Landlord, in the amount of
___________. Tenant shall keep such bond in effect during the term of this
Lease. Should the nature of Tenant's business change increasing the quantity or
variety of Hazardous Substances at the Property, Tenant agrees that it will post
a new bond in the reasonable amount as determined by Landlord upon notice by
Landlord that a bond increase is required.
SECTION 4.01. GENERAL CONDITIONS. No delay or omission of Landlord in
exercising any right or power shall be construed as a waiver of any default or
as an acquiescence therein, nor shall any single or partial exercise thereof
preclude any further exercise thereof. Landlord may, at its option, waive any of
its rights hereunder and any such waiver shall not be deemed a waiver of
Landlord's other rights hereunder. No waiver of any default shall be construed
to be a waiver of or acquiescence in or consent to any preceding or subsequent
default.
SECTION 4.02. Any and all notices and demands required or desired to be
given hereunder shall be given in the form and delivered in the manner as
provided in Section 13.06 of the Lease.
SECTION 4.03. In addition to the instruments and documents mentioned or
referred to herein, Tenant will, at its own cost and expense, supply Landlord
with such other instruments, documents, information and data as may, in
Landlord's opinion, be reasonably necessary for the purposes hereof, all of
which shall be in form and content acceptable to Landlord.
SECTION 4.04. The provisions in this Rider shall inure to the benefit of
Landlord, its successors and assigns and bind Tenant, its heirs, executors,
administrators, successors and assigns, and no other person or persons shall
have any rights or remedies under or by reason of this Rider.
SECTION 4.05. The provisions of this Rider are not intended to supersede
the provisions of the Lease but shall be construed as supplemental thereto.
SECTION 4.06. Tenant's representations, warranties and covenants herein
shall survive the expiration, termination or abandonment of the Lease relating
to the Property.
4
Initials _______ Landlord
_______ Tenant
<PAGE> 33
SECTION 4.07. The various rights, options, elections and remedies of
Landlord hereunder shall be cumulative and no one of them shall be construed as
exclusive of any other, or of any right, option, election or remedy provided in
any other agreement or by law.
Landlord and Tenant have signed this Rider at the place and on the dates
specified adjacent to their signatures below and have initialed all Exhibits
which are attached hereto and incorporated by reference in this Rider.
Signed on 4/10, 1997 LANDLORD
at Las Vegas, NV PACIFIC INDUSTRIAL PARK LLC
PACIFIC PROPERTIES
By: [SIG]
-----------------------
Its: Exec VP
----------------------
By:
-----------------------
Its:
----------------------
Signed on April 3, 1997 TENANT
at Renton, WA MULTIPLE ZONE INTERNATIONAL, INC.
By: [SIG]
-----------------------
Its: VP OPERATIONS
----------------------
By:
-----------------------
Its:
----------------------
5
Initials _______ Landlord
_______ Tenant
<PAGE> 1
THIRD AMENDMENT
TO
STORAGE AND DISTRIBUTION AGREEMENT
THIS THIRD AMENDMENT TO STORAGE AND DISTRIBUTION AGREEMENT is entered
into this 30th day of December 1997 by and between AIRBORNE LOGISTICS SERVICES,
a division of ABX Air, Inc. ("ALS") and MULTIPLE ZONES INTERNATIONAL, INC., a
Washington corporation ("MZI").
RECITALS
A. MZI and Airborne Freight Corporation ("Airborne") entered into that
certain Storage and Distribution Agreement dated September 28, 1992 (the
"Primary Agreement").
B. Airborne assigned all of its interest in and to the Agreement to ALS
(the "Assignment").
C. The term of the Primary Agreement was extended pursuant to that certain
Letter Agreement dated May 23, 1995 (the "Extension"). The Primary
Agreement was later amended by that certain First Amendment to Storage
and Distribution Agreement dated December 22, 1995 (the "First
Amendment"). The Primary Agreement was additionally amended by that
certain Second Amendment to Storage and Distribution Agreement dated
October 3, 1996 (the "Second Amendment"). The Primary Agreement, as
amended, was further amended pursuant to that certain Letter Agreement
dated October 10, 1997 (the "Second Extension"). The Primary Agreement,
the Assignment, the Extension, the First Amendment, the Second
Amendment, and the Second Extension, are referred to collectively herein
as the "Agreement."
D. The parties have agreed to modify the charges for services under the
Agreement and extend the Term of the Agreement, all in accordance with
this Amendment.
NOW THEREFORE, the parties agree to amend the Agreement as follows:
1. Except as specifically amended herein, the Agreement shall remain in
full force and effect.
2. For the term of this Third Amendment (4/1/98 - 3/31/99), the provisions
of the first paragraph of subparagraph 2.a and paragraph 3 of the First
Amendment are hereby superseded and replaced in their entirety by
Amendment 3, Schedule 1 ("Rates and Charges"), Schedule 1A
("Definitions"), Schedule 1B ("Terms and Conditions"), and Exhibit 1
("Revised Receiving, Inventory Control and Shipping Estimates") all of
which are attached hereto.
Third Amendment to Storage and Distribution
12/29/97 - Page 1
<PAGE> 2
3. PACKAGING CHARGES
A packaging charge of $.28 will be applied to each package
shipped. This charge will be applied in addition to all order
handling fees as well as all large order handling fees. In the
event of a price change by the manufacturer or delivery company,
the change in price (increase or decrease) will be passed on to
MZI. Any request for packaging not used in the current operation
may be priced separately.
4. STORAGE CHARGES
A $6.25 per sq. ft. per year charge will be assessed with a
minimum requirement of 84,480 sq. ft. The space will be in
building 10 and includes storage, processing and the required
common area to operate the MZI fulfillment operation. The charges
will be billed on a weekly basis in the fixed amount of $10,154.
4A. ADDITIONAL STORAGE CHARGES
Additional Storage in building 10 may be rented at a rate
negotiated at the time of the request from MZI. This space is
subject to availability and will be rented in a minimum 2 bay
quantity representing approximately 4,000 square feet (1 bay
represents approximately 2,000 square feet).
5. CONFIGURATIONS
Sales orders requiring configuration work will be separated from
non-configuration orders. These orders require additional
handling, control and labor compared to a nonconfiguration order.
This pricing assumes the configuration process in place at the
time of this agreement remains constant.
6. UPS ORDER FEE
Fee added to all UPS packages for additional handling and labor
requirements. Additional fees may be negotiated between ALS and
MZI if UPS services currently not utilized are required. Current
UPS services utilized include UPS Ground and Ground track.
7. SDS ORDER FEE
Fee added to all Airborne SDS packages for additional handling
and labor requirements.
8. OTHER CARRIER CHARGE
Additional work is required to prepare and fulfill orders not
processed through the SGA manifesting system. Such work may
include, but is not limited to, manual creation of shipping
label(s), preparation of required shipping documentation and
operation of multiple stand alone manifesting systems. At the
request of MZI additional carriers or services may be added in
the future. Any additions may be priced separately depending on
work requirements.
8A. INTERNATIONAL PAPERWORK
Fee for processing of international paperwork. MZI is responsible
for providing ALS accurate and complete information required for
International documentation. This fee is a processing fee only.
This fee does not include any duties, taxes, customs or related
transportation fees, or fees and various tariff charges
applicable to creating or processing such documents such as
Certificates of Origin, Consular Legalization and other similar
extra charge international documents.
9. RETURN TO VENDOR CHARGE (RTV)
Additional charge for preparation of all return to vendor
shipments.
Third Amendment to Storage and Distribution
12/29/97 - Page 4
<PAGE> 3
10. POSTAL MACHINE FEE
Allocation of postal machine lease rate plus rate updates and
supplies. Actual postage charges will be billed to MZI.
11. MANAGEMENT FEE
Weekly fee to cover cost of ALS management of MZI fulfillment
operations. The fee includes such expenses as administration,
management salary, billing costs, customer service, human
resources, supplies, security, employee safety and similar
overhead.
12. SPECIAL PROJECTS
Any task or activity requested by MZI, not included in the listed
item prices. Such activities include, but are not limited to
liquidation's, bulk moves and specified training events. Please
refer to the following schedule for specific labor charges
(travel and associated expenses would be in addition to labor):
a. Planned Projects: Specific times, dates, and requirements
must be agreed upon by MZI and ALS no later than 72 hours
prior to project start time. Regular time rates applicable
to work performed Monday - Saturday 0600 - 1800 only.
Labor (regular time) $ 15.00 hour
Labor (regular overtime) $ 22.50 hour
Labor (Sundays) $ 30.00 hour
b. Unplanned Projects: Projects requested with less than 72
hours notice.
Labor (regular time) $ 18.00 hour
Labor (regular over time)$ 27.00 hour
Labor (Sundays) $ 36.00 hour
c. Holiday rates will be provided upon request. Holidays
are defined by the Airborne Transportation Holiday
Schedule.
d. Normal management hours and responsibilities are included
in Overhead Charges. If additional management involvement
is required to supervise a project it will be billed at a
rate of $ 28.50 / hour. ALS and MZI will mutually agree
that additional management involvement is required prior to
assignment or billing.
13. PHYSICAL INVENTOR CHARGES
All Physical Inventory Counts are billed to MZI in the following
manner:
a. Labor (regular time) S 18.00 hour
Labor (over time) S 27.00 hour
Labor (Sunday) $ 36.00 hour
Labor (Supervisor) $ 28.50 hour
Holiday Pay Available upon request
b. Equipment Actual Cost as Needed
C. Management Fee 10% added to total labor cost
Third Amendment to Storage and Distribution
12/29/97 - Page 5
<PAGE> 4
14. SYSTEMS SUPPORT
ALS provides immediate on-site support of MZI systems when
necessary. This is charged by the hour and billed weekly. There
is a minimum charge of 30 minutes per occurrence.
a. Routine Maintenance: Price $30.00 / hour
Service Calls not requiring response within 30 minutes.
Times Available: 9:00 a.m. - 2:00 a.m. Eastern Standard
Time (M-F)
b. Urgent Support: Price $50.00 / hour
Service call will be made within 30 minutes of request.
Times Available: 9:00 a.m. - 2:00 a.m. Eastern Standard
Time (M-F)
C. Weekends/After Hours/Holiday Support: Price $80.00 /hour
After Hours: (2:01 a.m. - 8:59 a.m., 7 days per week)
Weekends (Saturday 2:01 a.m.- Monday 8:59 a.m.)
Holidays as defined by Airborne Transportation Holiday
Schedule.
15. WILL CALL FEE
There will be a $15.00 fee assessed to all Will Call orders.
This will be applied when a customer requests to pick the order
up at ALS between the 0600 - 2000, Monday-Saturday. Will Call
orders have special handling and staging requirements that
require additional labor and security measures.
16. NEW CAPITAL PURCHASE
If volumes or order characteristics change from the forecast
amounts as shown in exhibit 1, so that additional capital
equipment (non - replacement) is required to effectively run the
MZI operation, ALS may bill MZI the charges for such equipment.
The weekly charges to be billed to MZI will be negotiated between
ALS and MZI prior to the time of purchase.
Third Amendment to Storage and Distribution
12/29/97 - Page 6
<PAGE> 5
IN WITNESS WHEREOF, the parties have executed this Amendment on the date
first written above.
MULTIPLE ZONES INTERNATIONAL, INC. AIRBORNE LOGISTICS SERVICES,
a division of ABX Air, Inc.
By: [SIG] By: [SIG]
------------------------------- -------------------------------
Its: VP OPERATIONS Its: VICE PRESIDENT AND GENERAL MANAGER
------------------------------ ------------------------------
Third Amendment to Storage and Distribution
12/29/97 - Page 8
<PAGE> 1
AMENDMENT TO AGREEMENT FOR WHOLESALE FINANCING
This Amendment is made to that certain Agreement for Wholesale Financing
executed on the 15th day of January, 1996, between MULTIPLE ZONES INTERNATIONAL,
INC. ("Dealer") and DEUTSCHE FINANCIAL SERVICES CORPORATION ("DFS"), as amended
("Agreement").
FOR VALUE RECEIVED, DFS and Dealer agree as follows:
1. Section 3 of the Agreement is hereby restated to read in its entirety
as follows:
"3. GRANT OF SECURITY INTEREST. To secure payment of all of Dealer's
current and future debts to DFS, whether under this Agreement or any
current or future guaranty or other agreement, Dealer grants DFS a
security interest in all of Dealer's inventory and equipment, whether
now owned or hereafter acquired, all discounts, incentive payments,
rebates, credits (other than advertising co-ops), attachments,
accessories, accessions, returns, repossessions, exchanges,
substitutions and replacements thereto, and all proceeds thereof, and
all accounts, contract rights, chattel paper, instruments, reserves and
general intangibles, owned by or due Dealer, now or in the future,
however these may be due Dealer and wherever located, arising from any
of the above described inventory and equipment and all proceeds thereof.
All such assets are collectively referred to herein as the "Collateral."
All of such terms for which meanings are provided in the Uniform
Commercial Code of the applicable state are used herein with such
meanings. All Collateral financed by DFS, and all proceeds thereof, will
be held in trust by Dealer for DFS, with such proceeds being payable in
accordance with Section 9."
2. Section 9 of the Agreement is hereby restated to read in its entirety
as it appears in the original Agreement for Wholesale Financing dated January
15, 1996, without giving effect to Section 2 of that certain Addendum dated
January 15, 1996, which Section 2 is hereby deleted in its entirety.
3. Section 29 Supplemental Inventory Facility is incorporated into the
Agreement as if fully set forth therein to read as follows:
"29. SUPPLEMENTAL INVENTORY FACILITY.
29.1 CREDIT FACILITY. Subject to the terms of this Agreement, DFS agrees
to provide to Dealer a Supplemental Inventory Facility of Twenty Million
and no/100 Dollars ($20,000,000.00). DFS' decision to advance funds will
not be binding until the funds are actually advanced.
29.2 SPECIAL DEFINITIONS. The following terms will have the following
meanings with respect to the Supplemental Inventory Facility:
"Business Day": Any day that is not a Saturday, Sunday or day on
which banks in San Francisco, California, or New York, New York,
are required or permitted to be closed, and on which dealings in
U.S. dollar deposits are carried out in the interbank eurodollar
market.
"Conversion", "Convert" and "Converted": each refer to a
conversion of Supplemental Inventory Loans from either LIBOR
Loans to Prime Rate Loans or vice versa.
<PAGE> 2
"Electronic Transfers": means any electronic transfer by Automated
Clearing House, Federal Wire Funds Transfer or such other electronic
means as DFS may announce from time to time. "Eurocurrency Liabilities':
has the meaning specified in Regulation D of the Board of Governors of
the Federal Reserve System, as in effect from time to time.
"Eurocurrency Reserve Percentage": for any Interest Period for all LIBOR
Loans comprising part of the same borrowing, means the daily average
reserve percentage applicable during each day of such LIBOR Loans under
regulations issued from time to time by the Board of Governors of the
Federal Reserve System (or any successor) for determining the maximum
reserve requirement (including without limitation any emergency,
supplemental or other marginal reserve requirement for a member bank of
the Federal Reserve System in New York City) with respect to liabilities
or assets consisting of or including Eurocurrency Liabilities (or with
respect to any other category of liabilities that includes deposits by
reference to which the interest rate on LIBOR Loans is determined)
having a term equal to such Interest Period.
"Funding Date": shall mean the date designated by Dealer for the making
of a Supplemental Inventory Loan hereunder.
"Interest Period": means, for each LIBOR Loan the period commencing on
the date of such LIBOR Loan or the date of the Conversion of any Prime
Rate Loan into a LIBOR Loan, and ending on the last day of the period
selected by Dealer pursuant to the provisions below and, thereafter,
each subsequent period commencing on the last day of the immediately
preceding Interest Period and ending on the last day of the period
selected by the Dealer requesting a LIBOR Loan pursuant to the
provisions below. The duration of each such Interest Period shall be
one, two, three or six months, as Dealer may, upon notice received by
DFS not later than 11:00 a.m. (San Francisco, California time) on the
third Business Day prior to the first day of such Interest Period,
select; provided that:
(a) whenever the last day of any Interest Period would otherwise
occur on a day other than a Business Day, the last day of such
Interest Period shall be extended to occur on the next
succeeding Business Day; provided that, if such extension would
cause the last day of such Interest Period to occur in the next
following calendar month, the last day of such Interest Period
shall occur on the next-preceding Business Day;
(b) whenever the first day of any Interest Period occurs on a
day of an initial calendar month for which there is no
numerically corresponding day in the calendar month that
succeeds such initial calendar month by the number of months
equal to the number of months in such Interest Period, such
Interest Period shall end on the last Business Day of such
succeeding calendar month; and
(c) no Interest Period may be selected that ends after the term
of this Agreement.
"Inventory": shall mean all of Dealer's presently owned and hereafter
acquired goods which are held for sale or lease.
"LIBOR Loans": shall mean Supplemental Inventory Loans bearing interest
for Interest Periods at a rate determined by reference to the LIBOR Rate
(Reserve Adjusted).
"LIBOR Rate": means, for any Interest Period, an interest rate per
annum, truncated to the nearest one-thousandth of one percent, for
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<PAGE> 3
deposits in U.S. dollars that appears on page 3750 of the Dow Jones
Telerate Service (or any other page that may replace any such page on
such service in the judgment of DFS) at 11:00 a.m. (London time) two
Business Days before the first day of such Interest Period and for a
period equal to such Interest Period.
"LIBOR Rate (Reserve Adjusted)": shall mean, for any LIBOR Loan for any
Interest Period, the rate per annum obtained by dividing the LIBOR Rate
by a percentage equal to 100% minus the Eurocurrency Reserve percentage
for such Interest Period.
"Prime Rate": for purposes of the Supplemental Inventory Facility only,
the rate of interest which Chase Manhattan Bank publicly announces from
to time to time as its prime rate or reference rate; provided, however,
that for purposes of the Supplemental Inventory Facility only, the
interest rate charged to Dealer on Prime Rate Loans will at no time be
computed on a Prime Rate of less than seven percent (7%) per annum. The
Prime Rate will change and take effect for purposes of the Supplemental
Inventory Facility on the day that Chase Manhattan Bank announces any
change in its Prime Rate or reference rate.
"Prime Rate Loans": shall mean Supplemental Inventory Loans bearing
interest at a rate determined by reference to the Prime Rate.
"Supplemental Inventory Facility": a credit facility extended pursuant
to this Section 29.
"Supplemental Inventory Loan": shall mean any advance made to or for the
benefit of Dealer pursuant to the Supplemental Inventory Facility, and
shall consist of LIBOR Loans and Prime Rate Loans.
29.3 LOAN OPTIONS. Each Supplemental Inventory Loan shall be either a Prime Rate
Loan or a LIBOR Loan as shall be selected by Dealer, except as otherwise
provided herein. During any period that any default under this Agreement or any
event which with notice, the passage of time, or both, would constitute a
default, shall occur and be continuing, Dealer shall no longer have the option
of electing LIBOR Loans, and all Supplemental Inventory Loans made during such
period shall be Prime Rate Loans only; it being understood, however, that
nothing herein shall be construed to waive, amend or modify any right or power
of DFS hereunder, including, without limitation, all rights to terminate the
credit facilities hereunder and declare all Obligations immediately due and
payable. No LIBOR Loans shall be made for less than the number of days
designated for the Interest Period of any such Supplemental Inventory Loan, and
in no event less than 30 days prior to the termination of this Agreement. Each
LIBOR Loan shall be in an original principal amount of One Million Dollars
($1,000,000.00), or any whole multiple of One Million Dollars ($1,000,000.00) in
excess thereof. All Supplemental Inventory Loans will be funded and repaid in
currency of the United States.
29.3.1 BORROWING PROCEDURES. The Dealer shall give DFS written notice
(which may be made by facsimile, with the original promptly delivered to
DFS), not later than 11:00 a.m., San Francisco, California time, at
least three (3) Business Days prior to the Funding Date in the instance
of LIBOR Loans, or one (1) Business Day prior to the Funding Date in the
instance of Prime Rate Loans. Each notice shall specify (i) the Funding
Date, (ii) the aggregate amount of the Loans requested, (iii) whether
the Supplemental Inventory Loan shall be a Prime Rate Loan or a LIBOR
Loan, and (iv) with respect to LIBOR Loans, the Interest Period with
respect thereto (subject to the limitations set forth in the definition
of Interest Period). Any notice not specifying the type of Supplemental
Inventory Loan shall be deemed a request for a Prime Rate Loan. In
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<PAGE> 4
the case of any LIBOR Loan, failure to deliver a timely notice shall be
deemed a request for a Prime Rate Loan.
29.3.2 MATURITY OF LOANS. Each LIBOR Loan shall mature on the last day
of the applicable Interest Period, but in no event later than the term
of this Agreement.
29.3.3 CONVERSION AND DESIGNATION OF INTEREST PERIODS.
(i) Dealer may on any Business Day, upon notice given to DFS not
later than 11:00 a.m. (San Francisco, California time) on the third
Business Day prior to the date of the proposed Conversion, Convert all
or any portion of the Supplemental Inventory Loans; provided that:
(1) any conversion of LIBOR Loans into Prime Rate Loans shall be
made only on the last day of an Interest Period for such LIBOR
Loans; any conversion of Prime Rate Loans into LIBOR Loans,
shall be in an amount not less than the minimum amount specified
in Section 29.3;
(2) each Conversion of less than all Supplemental Inventory
Loans comprising part of the same borrowing shall be deemed to
be an additional Supplemental Inventory Loan for purposes of
Section 29.3; and
(3) no Prime Rate Loans may be Converted into LIBOR Loans while
a default under this Agreement or any event which with notice,
the passage of time, or both, would constitute a default, has
occurred and is continuing.
Each such notice of Conversion shall, within the restrictions specified
above, specify (x) the date of such conversion, (y) the Supplemental
Inventory Loans to be Converted and (z) if such conversion is into LIBOR
Loans, the initial Interest Period for such Supplemental Inventory
Loans. Each notice of Conversion shall be irrevocable and binding on
Dealer.
(ii) On the date on which the aggregate unpaid principal amount of LIBOR
Loans shall be reduced, by payment or prepayment or otherwise, to less
than One Million Dollars ($1,000,000.00), such LIBOR Loans shall
automatically Convert into Prime Rate Loans.
(iii) If Dealer shall fail to select the duration of any Interest Period
for any LIBOR Loans in accordance with the provisions contained in the
definition of "Interest Period", DFS will forthwith so notify Dealer,
whereupon each such LIBOR Loan will automatically on the last day of the
then-existing Interest Period therefor Convert into a Prime Rate Loan.
29.3.4 INTEREST; CALCULATION OF CHARGES.
(a) Prime Rate Loans.
(i) Interest. Dealer hereby agrees to pay interest to DFS, on the Daily
Contract Balance (AS defined below) owed under Dealer's Prime Rate Loans
at a per annum rate that is equal to the Prime Rate minus twenty five
one-hundredths of one percent (0.25%) per annum. Interest on Prime Rate
Loans prior to maturity shall be payable monthly and at maturity.
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<PAGE> 5
(ii) Calculation Of Charges. Such interest rate will: (i) be computed
based on a 360 day year; (ii) be calculated with respect to each day by
multiplying the Daily Rate (as defined below) by the Daily Contract
Balance; and (iii) accrue from the date DFS authorizes any Electronic
Transfer or otherwise advances a Prime Rate Loan to or for the benefit
of Dealer, until DFS receives full payment of the principal debt Dealer
owes DFS in good funds in accordance with DFS' payment recognition
policy and DFS applies such payment to Dealer's principal debt in
accordance with the terms of this Agreement.
(iii) Definitions. The "Daily Rate" is the quotient of the applicable
annual rate provided herein divided by 360. The "Daily Contract Balance"
is the amount of outstanding principal debt which Dealer owes DFS on the
Prime Rate Loans at the end of each day (including the amount of all
Electronic Transfers authorized) after DFS has credited payments which
it has received on the Prime Rate Loans.
(b) LIBOR Loans.
(i) Interest. The unpaid principal amount of the LIBOR Loans shall bear
interest prior to maturity at a rate per annum equal to the LIBOR Rate
(Reserve Adjusted) in effect for each Interest Period, plus two percent
(2.0%) per annum. Interest on LIBOR Loans prior to maturity shall be
payable monthly and at maturity.
(ii) Calculation of Charges. Interest on each LIBOR Loan shall be
computed on the basis of a year consisting of 360 days and paid for
actual days elapsed, calculated as to each Interest Period from and
including the first day thereof but excluding the last day thereof.
29.4 SUPPLEMENTAL INVENTORY LOANS. As long as Dealer's credit and financial
condition are satisfactory to DFS, DFS will from time to time loan to Dealer, at
Dealer's request, such amount as DFS, in its sole discretion, may deem
advisable, but in any event not more than (a) the Loan Value (as defined below)
of Dealer's Supplemental Inventory (as defined below), minus (b) the amount of
Dealer's SPP Deficit (as defined below), if any, under Dealer's scheduled
payment inventory floorplan financing program with DFS (the "SPP Program") (a)
minus (b) is referred to as the "Supplemental Inventory Available Credit").
As used in this Section, the term "Supplemental Inventory" means Dealer's
Inventory (a) which is aged less than one hundred fifty (150) days from the date
of invoice; (b) that conforms to the representations and warranties of Sections
4 and 29.7 of this Agreement; (c) that is in Dealer's possession and control and
is at all times subject to DFS' duly perfected first priority security interest;
and (e) that DFS deems, in its sole discretion, to be acceptable for financing
pursuant to this Section.
As used in this Section, the term "Loan Value" means the lesser of (1) sixty
percent (60%) of the Value (as defined below) of the Supplemental Inventory; and
(2) Dealer's maximum Supplemental Inventory Facility from time to time
established by DFS.
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<PAGE> 6
As used in this Section, the term "Value" means the sum of (i) the cost to
Dealer of Dealer's Supplemental Inventory (taking into account any reduction in
such cost due to price protection credits received by Dealer), with respect to
all of Dealer's Supplemental Inventory other than Supplemental Inventory being
financed by DFS under Dealer's SPP Program, plus (ii) the SPP Surplus (as
defined below), if any, with respect to Dealer's Supplemental Inventory which
consists of Inventory being financed by DFS under the SPP Program, all as
determined in accordance with generally accepted accounting principles
consistently applied.
Dealer's "SPP Deficit" shall mean the amount, if any, by which Dealer's total
current outstanding indebtedness to DFS under the SPP Program as of the date of
the Inventory Report (as defined below) exceeds the SPP Inventory Value (as
defined below) as determined by, and as of the date of, the Inventory Report.
Dealer's "SPP Surplus" shall mean the amount, if any, by which the SPP Inventory
Value, as determined by, and as of the date of, the Inventory Report, exceeds
Dealer's total current outstanding indebtedness to DFS under the SPP Program as
of the date of the Inventory Report. Such SPP Deficit or SPP Surplus, as
applicable, will remain in effect for purposes of this Agreement until the
preparation and delivery by Dealer to DFS of a new Inventory Report.
The term "SPP Inventory Value" is defined herein to mean the cost to Dealer, as
determined in accordance with generally accepted accounting principles
consistently applied, of Dealer's Inventory financed by DFS under the SPP
Program (taking into account any reduction in such cost due to price protection
credits received by Dealer), that is aged less than one hundred fifty (150) days
from the date of invoice, that is unsold and in Dealer's possession and control
as of the date of the Inventory Report and to the extent that DFS has a first
priority, fully perfected security interest therein.
29.5 INVENTORY REPORTS. Dealer will deliver to DFS weekly, upon each request for
an advance and as otherwise requested by DFS, an inventory report in such detail
as DFS may request from time to time, which, among other things, separately
specifies the cost of all of Dealer's Inventory financed by DFS under the SPP
Program and the cost of all of Dealer's Inventory not being financed under the
SPP Program (taking into account any reduction in such cost due to price
protection credits received by Dealer), that is unsold and in Dealer's
possession and control as of the date of the Inventory Report (the "Inventory
Report").
29.6 PAYMENTS. If at any time the aggregate amount of outstanding Supplemental
Inventory Loans exceeds the Supplemental Inventory Available Credit, Dealer
will, immediately upon demand, repay an amount of the Supplemental Inventory
Loans equal to the difference between (a) such aggregate amount of outstanding
Supplemental Inventory Loans and (b) the Supplemental Inventory Available
Credit. Furthermore, as an amendment to the terms of Dealer's SPP Program, in
the event Dealer's SPP Deficit exceeds at any time (a) the Loan Value of
Dealer's Supplemental Inventory, minus (b) the outstanding
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<PAGE> 7
Supplemental Inventory Loans, Dealer will immediately pay to DFS, as a reduction
of Dealer's total current outstanding indebtedness to DFS under the SPP Program,
the difference between (i) Dealer's SPP Deficit, and (ii) (a) the Loan Value of
Dealer's Supplemental Inventory minus (b) Dealer's Outstanding Supplemental
Inventory LOANS.
29.7 WARRANTIES, REPRESENTATIONS AND COVENANTS. Dealer warrants and represents
to DFS and covenants and agrees with DFS that (except as otherwise specified in
this Agreement: (a) Inventory will be at all times subject to DFS' duly
perfected first priority security interest; (b) Inventory will be kept only at
the following locations: ______________________________________________________
______________________________; (c) on or before the 10th day of each month and,
in any event, immediately upon each demand by DFS therefor, Dealer will execute
and deliver to DFS schedules specifying Dealer's cost of Inventory, the selling
price thereof and such other matters and information relating to Inventory as
DFS may from time to time request: (d) Dealer now keeps and will keep correct
and accurate records itemizing and describing the kind, type, quality and
quantity of Inventory, Dealer's cost therefor and the selling price thereof, the
daily withdrawals therefrom and the additions thereto: (e) Inventory is not and
will not be stored with a bailee, repairman, warehouseman or similar party
without DFS' prior written consent, and Dealer will, concurrently with delivery
to such party, cause any such party to issue and deliver to DFS, in form
acceptable to DFS, warehouse receipts, in DFS' name evidencing the storage Of
such Inventory, and waivers of warehouseman's liens in favor of DFS; (f) DFS and
its agents and representatives may, from time to time upon demand, during
Dealer's usual business hours and upon 24 hour advance written notice to dealer
and any warehouseman, inspect and examine Inventory and check and test the same
as to quality, quantity, Value and condition, and any collection by DFS of any
amounts Dealer owes DFS under this Agreement at or during DFS' examination of
the Inventory will not relieve Dealer of its continuing obligation to pay its
obligations owed to DFS in strict accordance with the terms of this Agreement;
(g) Dealer will pay all taxes, rents, business taxes, and the like on the
premises where the Inventory is located; and (h) Dealer will not rent, lease,
lend, demonstrate, pledge, transfer or secrete any of the Inventory or use any
of the Inventory for any purpose other than exhibition and sale to buyers in the
ordinary course of business, without DFS' prior written consent.
29.8 REVISIONS. Dealer agrees that the percentage of Value advanced, the
acceptability and Value of Inventory and the period during which such advances
are to remain outstanding are and will be entirely in DFS' sole discretion and
that DFS has the right at any time to revise any limit placed by DFS on the
amount of such advances or on the valuation of Inventory or DFS may, in its sole
discretion, refuse to make further advances. If Inventory remains in stock for a
period of time which DFS in its sole judgment deems excessive, such Inventory
may, at DFS' option, be considered to be of no value for the purpose of loans or
advances although the same remains in stock and DFS shall retain its security
interest therein according to the terms and provisions of this Agreement.
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<PAGE> 8
29.9
(a) INCREASED COSTS. If, as a result of any law, regulation, treaty OR
directive, or any change therein, or in the interpretation or application
thereof or compliance by DFS with any request or directive (whether or not
having the force of law) from any court or governmental authority, agency or
instrumentality:
(i) the basis of taxation of payments to DFS (for purposes of this
Section 29.9, "DFS" shall also refer to any affiliates of DFS engaged in
the funding of the lending obligations hereunder) of the principal of or
interest on any LIBOR Loan (other than taxes imposed on the overall net
income of DFS by the jurisdiction in which DFS has its principal office)
is changed;
(ii) any reserve, special deposit or similar requirements against assets
of, deposits with or for the account of, or credit extended by, DFS are
imposed, modified or deemed applicable; or
(iii) any other condition affecting this Agreement or the LIBOR Loans is
imposed on DFS or the interbank eurodollar market;
and DFS determines that, by reason thereof, the cost to DFS of making or
maintaining any of the LIBOR Loans is increased, or the amount of any
sum receivable by DFS hereunder in respect of any of the LIBOR Loans is
reduced;
then, Dealer shall pay to DFS upon demand (which demand shall be
accompanied by a statement setting forth the basis for the calculation
thereof but only to the extent not theretofore provided to Dealer) such
additional amount or amounts as will compensate DFS for such additional
cost or reduction (provided such amount has not been compensated for in
the calculation of the Eurocurrency Reserve Percentage). Determinations
by DFS for purposes of this Section of the additional amounts required
to compensate DFS in respect of the foregoing shall be conclusive,
absent manifest error.
(b) EURODOLLAR DEPOSITS UNAVAILABLE OR INTEREST RATE UNASCERTAINABLE. If Dealer
has any LIBOR Loan outstanding, or has notified DFS of the intention to borrow a
LIBOR Loan as provided herein, then in the event that prior to any Interest
Period DFS shall have determined (which determination shall be conclusive and
binding on the parties hereto) that deposits of the necessary amount for that
relevant Interest Period are not available to DFS in the interbank eurodollar
market or that, by reason of circumstances affecting such market, adequate and
reasonable means do not exist for ascertaining the LIBOR Rate applicable to such
period or term, as the case may be, DFS shall promptly give notice of such
determination to Dealer, and any notice of new LIBOR Loans previously given by
Dealer and not yet borrowed or Converted shall be deemed a notice to make a
Prime Rate Loan to the extent of DFS' proposed LIBOR Loan.
(c) CHANGES IN LAW RENDERING LIBOR LOANS UNLAWFUL. If at any time due to any new
law, treaty or regulation, or any change of any existing law, treaty or
regulation, or any interpretation thereof by any governmental or other
regulatory authority charged with the administration thereof, or for any other
reason arising subsequent to the date hereof, it shall become unlawful for DFS
to fund any LIBOR Loan which it is committed to make hereunder, the obligation
of DFS to provide LIBOR Loans shall, upon the
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<PAGE> 9
happening of such event, forthwith be suspended for the duration of such
illegality. If any such change shall make it unlawful to continue LIBOR Loans
previously made by it hereunder, DFS shall, upon the happening of such event,
notify Dealer thereof in writing stating the reasons therefor, and Dealer shall,
if required by such law, regulation or interpretation, on such date as shall be
specified in such notice, either Convert such unlawful LIBOR Loans to Prime Rate
Loans, or prepay all such LIBOR Loans, without any penalty or premium whatsoever
(except as provided in Section 29.9(e), to DFS in full. Any prepayment made
pursuant to this Section 29.9(c) shall be deemed to reduce the aggregate credit
available under the Supplemental Inventory Facility by the principal amount so
prepaid. Any such prepayment shall be subject to the provisions of Section
29.9(e).
(d) CAPITAL ADEQUACY. If DFS shall determine at any time that the adoption of
any law, rule, guideline or regulation regarding capital adequacy, or compliance
with any law, rule, guideline or regulation regarding capital adequacy, or any
change therein or in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by DFS with any request
or directive or compliance with any law, rule, guideline or regulation regarding
capital adequacy (whether or not having the force of law) from any such
authority, central bank or comparable agency, has or would have the effect of
reducing the rate of return on DFS' capital as a consequence of its obligations
hereunder to a level below that which DFS could have achieved but for such
adoption, change or compliance (taking into consideration DFS' policies with
respect to capital adequacy) by an amount deemed by DFS to be material, then
Dealer shall pay to DFS upon demand such amount or amounts, in addition to the
amounts payable under the other provisions of this Agreement, as will compensate
DFS for such reduction. Any such demand by DFS hereunder shall be in writing,
and shall set forth the reasons for such demand and copies of all documentation
reasonably relevant in support thereof. Determinations by DFS for purposes of
this Section 29.9(d) of the additional amount or amounts required to compensate
DFS in respect of the foregoing shall be conclusive in the absence of manifest
error. In determining such amount or amounts, DFS may use any reasonable
averaging and attribution methods.
(e) INDEMNITY; PREPAYMENT FEE.
(i) Dealer will indemnify DFS against any loss or expense which DFS may
sustain or incur, including without limitation, any loss or expense
sustained or incurred in obtaining, liquidating or employing deposits or
other funds acquired to effect, fund or maintain a Supplemental
Inventory Loan (a) as a consequence of any failure by Dealer to make any
payment when due of any amount due hereunder in connection with a LIBOR
Loan, (b) due to any failure of Dealer to borrow on a date specified
therefor in a notice thereof, or (c) due to any payment or prepayment of
any LIBOR Loan on a date other than the last day of the Interest Period
for such Loan.
(ii) In the event Dealer prepays any LIBOR Loan for any reason, in
addition to paying any amounts for which Dealer may be obligated under
Section 29-9(eHi) above, and in addition to paying all interest owed on
such LIBOR Loan, Dealer agrees to pay DFS a prepayment fee in an amount
equal to the difference, if any, between (a) the interest which would
have been payable by Dealer to DFS if such LIBOR Loan had been a Prime
Rate Loan made by DFS on the same day DFS made such LIBOR Loan and
repaid on the date of prepayment,
9
<PAGE> 10
minus (b) the interest payable by Dealer on such LIBOR Loan through the
date of prepayment. Such prepayment fee will be due and payable in
accordance with DFS' billing statement.
(f) DISCRETION AS TO MANNER OF FUNDING. Notwithstanding any provision of the
Supplemental Inventory Facility to the contrary, DFS shall be entitled to fund
and maintain its funding of all or any part of its LIBOR Loans in any manner it
elects, it being understood, however, that for the purposes of the Supplemental
Inventory Facility all determinations hereunder shall be made as if DFS had
actually funded and maintained each LIBOR Loan through the purchase of deposits
having a maturity corresponding to the maturity of each LIBOR Loan and bearing
an interest rate equal to the LIBOR Rate. DFS may, if it so elects, fulfill any
commitment to make LIBOR Loans by causing a foreign affiliate to make or
continue such LIBOR Loans, provided, however, that in such event such
Supplemental Inventory Loans shall be deemed for the purposes of the
Supplemental Inventory Facility to have been made by DFS, and the obligation of
the Dealer to repay such Supplemental Inventory Loans shall nevertheless be to
DFS and shall be deemed held by DFS, to the extent of such Supplemental
Inventory Loans, for the account of such branch or affiliate.
29.10 CONTINUING REQUIREMENTS. Advances under the Supplemental Inventory
Facility will be made by DFS, at Dealer's direction, by paper check or
Electronic Transfer. If Dealer does not request advances be made in a specific
method of transfer, DFS may determine from time to time in its sole discretion
what method of transfer to use.
29.11 CERTAIN CHARGES. Dealer will pay DFS' fees for transfers of funds to or
from the Dealer. DFS may, from time to time, announce in writing to Dealer its
policies and procedures regarding its administration of this facility,
including, without limitation, DFS' fees for transfers of funds to or from
Dealer, including Electronic Transfers; any subsequent use by Dealer of this
facility following any such announcement shall constitute Dealer's acceptance of
such revised policies and procedures.
29.12 DEFAULT INTEREST RATE. In the event of a default under this Agreement and
Dealer's failure to cure same within the applicable cure period, if any, DFS may
without prior demand, raise the rate of interest accruing on the disbursed
unpaid principal balance of any Supplemental Inventory Loan by three percentage
points (3%) above the rate of interest otherwise applicable, whether or not DFS
elects to accelerate the unpaid principal balances as a result of a default.
29.13 BILLING STATEMENT. In accordance with and pursuant and subject to the
terms of Section 11 of this Agreement, DFS will send Dealer a monthly billing
statement identifying all interest, fees and other charges due on the
Supplemental Inventory Facility.
29.14 INCORPORATION OF OTHER TERMS. To the extent consistent with the terms of
the Supplemental Inventory Facility, the other terms of this Agreement shall
apply to the Supplemental Inventory Facility. Except as expressly stated above,
the terms of the Supplemental Inventory Facility will not apply to Dealer's SPP
Program.
10
<PAGE> 11
4. The following paragraph is incorporated into the Agreement as if
fully set forth therein:
"Dealer will at all times maintain:
(a) a Tangible Net Worth and Subordinated Debt in the combined
amount of not less than Thirty-Five Million Dollars
($35,000,000.00);
(b) a ratio of Debt minus Subordinated Debt to Tangible Net
Worth and Subordinated Debt of not more than three and one half
to one (3.5:1); and
(c) Working Capital of not less than Thirty Million Dollars
($30,000,000.00).
For purposes of this paragraph: (i) "Tangible Net Worth" means
the book value of Dealer's assets less liabilities, excluding
from such assets all Intangibles; (ii) "Intangibles" means and
includes general intangibles (as that term is defined in the
Uniform Commercial Code); accounts receivable and advances due
from officers, directors, employees, stockholders and
affiliates; leasehold improvements net of depreciation;
licenses; good will; prepaid expenses; escrow deposits;
covenants not to compete; the excess of cost over book value of
acquired assets; franchise fees; organizational costs; finance
reserves held for recourse obligations; capitalized research and
development costs; and such other similar items as DFS may from
time to time determine in DFS' sole discretion; (iii) "Debt"
means all of Dealer's liabilities and indebtedness for borrowed
money of any kind and nature whatsoever, whether direct or
indirect, absolute or contingent, and including obligations
under capitalized leases, guaranties, or with respect to which
Dealer has pledged assets to secure performance, whether or not
direct recourse liability has been assumed by Dealer; (iv)
"Subordinated Debt" means all of Dealer's Debt which is
subordinated to the payment of Dealer's liabilities to DFS by an
agreement in form and substance satisfactory to DFS; (v)
"Working Capital" means Current Tangible Assets less current
liabilities; and (v) "Current Tangible Assets" means Dealer's
current assets less, to the extent otherwise included herein,
all Intangibles. The foregoing terms shall be determined in
accordance with generally accepted accounting principles
consistently applied, and, if applicable, on a consolidated
basis."
5. In addition to the events of default set forth in the Agreement,
Dealer will be in default to DFS under the Agreement upon the occurrence of a
default by Dealer to U.S. Bank of Washington, N.A. (or any successor bank or
lending institution to the loan facility currently in effect between Dealer and
U.S. Bank of Washington, N.A.), and the expiration of any applicable cure period
granted by such bank to Dealer. Dealer will not be entitled to any cure period
under the Agreement with respect to any such default.
6. Attached hereto as Exhibit A is a list of all of Dealer's
subsidiaries and affiliates, their respective principal places of business and
states or registries of incorporation. Upon the creation of any NEW subsidiaries
or affiliates, Dealer will promptly provide DFS with a revised Exhibit A which
reflects such new subsidiaries and affiliates.
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<PAGE> 12
All other terms and provision of the Agreement, to the extent consistent
with the foregoing, are hereby ratified and will remain unchanged and in full
force and effect.
IN WITNESS WHEREOF, Dealer and DFS have both read this Amendment to the
Agreement for Wholesale Financing, understand all the terms and provisions
hereof and agree to be bound thereby and subject thereto as of this 23rd day of
April, 1997.
MULTIPLE ZONES INTERNATIONAL, INC.
Attest:
By: [SIG]
[SIG] -------------------------------
- - -------------------------------- Title: SVP Finance, CFO
(Assistant) Secretary ---------------------------
DEUTSCHE FINANCIAL SERVICES CORPORATION
By: [SIG]
-------------------------------
Title: Regional Vice President
---------------------------
12
<PAGE> 13
SECRETARY'S CERTIFICATE OF RESOLUTION
I certify that I am the Secretary or Assistant Secretary of the
corporation named below, and that the following completely and accurately sets
forth certain resolutions of the Board of Directors of the corporation adopted
at a special meeting thereof held on due notice (and with shareholder approval,
if required by law), at which meeting there was present a quorum authorized to
transact the business described below, and that the proceedings of the meeting
were in accordance with the certificate of incorporation, charter and by-laws of
the corporation, and that they have not been revoked, annulled or amended in any
manner whatsoever.
Upon motion duly made and seconded, the following resolution was
unanimously adopted after full discussion:
"RESOLVED, That the several officers, directors, and agents of this
corporation, or any one or more of them, are hereby authorized and empowered on
behalf of this corporation: to obtain financing from Deutsche Financial Services
Corporation ("DFS") in such amounts and on such terms as such officers,
directors or agents deem proper; to enter into financing, security, pledge and
other agreements with DFS relating to the terms upon which such financing may be
obtained and security and/or other credit support is to be furnished by this
corporation therefor; from time to time to supplement or amend any such
agreements; execute and deliver any and all assignments, loan requests and
schedules; and from time to time to pledge, assign, mortgage, grant security
interests, and otherwise transfer, to DFS as collateral security for any
obligations of this corporation to DFS, whenever and however arising, any assets
of this corporation, whether now owned or hereafter acquired; the Board of
Directors hereby ratifying, approving and confirming all that any of said
officers, directors or agents have done or may do with respect to the
foregoing."
I do further certify that the following are the names and specimen
signatures of the officers and agents of said corporation so empowered and
authorized, namely:
President:
------------------------ -------------------------------
(Print Name) (Signature)
Vice-President: Peter J. Biere [SIG]
------------------------ -------------------------------
(Print Name) (Signature)
Secretary: Robert L. Hines, Jr. [SIG]
------------------------ -------------------------------
(Print Name) (Signature)
Agent: Paul Kerwin [SIG]
------------------------ -------------------------------
(Print Name) (Signature)
Agent: Barbara Fastiggi [SIG]
------------------------ -------------------------------
(Print Name) (Signature)
IN WITNESS WHEREOF, I have executed and affixed the seal of the
corporation on the date stated below.
Dated: 4/23/97 ,1997 [SIG]
------------------- -------------------------------
(Assistant) Secretary
MULTIPLE ZONES INTERNATIONAL, INC.
(SEAL)
13
<PAGE> 14
EXHIBIT A
SUBSIDIARIES AND AFFILIATES
[To be provided by Dealer.]
14
<PAGE> 1
[U.S.BANK LOGO]
LOAN AGREEMENT
<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 04-24-1997 06-30-1998 391-208 365 6057628480 39159 TL
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.
BORROWER: MULTIPLE ZONES INTERNATIONAL, INC. LENDER: U.S. BANK OF WASHINGTON,
707 SOUTH GRADY WAY NATIONAL ASSOCIATION
RENTON, WA 98055 EKC CORPORATE BANKING
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 ACCOMMODATIONS, INCLUDING THOSE WHICH MAY BE DESCRIBED ON ANY
EXHIBIT OR SCHEDULE ATTACHED TO THIS AGREEMENT. ALL SUCH LOANS AND FINANCIAL
ACCOMMODATIONS, TOGETHER WITH ALL FUTURE LOANS AND FINANCIAL ACCOMMODATIONS
FROM LENDER TO BORROWER, ARE REFERRED TO IN THIS AGREEMENT INDIVIDUALLY AS THE
"LOAN" AND COLLECTIVELY AS THE "LOANS." BORROWER UNDERSTANDS AND AGREES THAT:
(A) IN GRANTING, RENEWING, OR EXTENDING ANY LOAN, LENDER IS RELYING UPON
BORROWER'S REPRESENTATIONS, WARRANTIES, AND AGREEMENTS, AS SET FORTH IN THIS
AGREEMENT; (B) THE GRANTING, RENEWING, OR EXTENDING OF ANY LOAN BY LENDER AT
ALL TIMES SHALL BE SUBJECT TO LENDER'S SOLE JUDGMENT AND DISCRETION; AND (C)
ALL SUCH LOANS SHALL BE AND SHALL REMAIN SUBJECT TO THE FOLLOWING TERMS AND
CONDITIONS OF THIS AGREEMENT.
TERM. This Agrement shall be effective as of APRIL 24, 1997, and shall continue
thereafter until all Indebtedness of Borrower to Lender has been performed in
full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
AGREEMENT. The word "Agreement" means this 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 of Borrower as provided below in the paragraph titled
"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) 80.000% of the
aggregate amount of Eligible Accounts.
BUSINESS DAY. The words "Business Day" mean a day on which commercial
banks are open for business in the State of Washington.
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
CASH FLOW. The words "Cash Flow" mean net income after taxes, and exclusive
of extraordinary gains and income, plus depreciation and amortization.
COLLATERAL. The word "Collateral" means and includes without limitation
all property and assets granted as collateral security for a Loan,
whether real or personal property, whether granted directly or indirectly,
whether granted now or in the future, and whether granted in the form of a
security interest, mortgage, deed of trust, assignment, pledge, chattel
mortgage, chattel trust, factor's lien, equipment trust, conditional sale,
trust receipt, lien, charge, lien or title retention contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise. 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, credits, 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 the Account Debtor is not a
resident of the United States, except to the extent such Accounts are
supported by Insurance, bonds or other assurances satisfactory to
Lender.
(e) 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.
(f) Accounts which are subject to dispute, counterclaim, or setoff.
(g) Accounts with respect to which the Goods have not been shipped or
delivered, or the services have not been rendered, to the Account
Debtor.
(h) Accounts with respect to which Lender, in its sole discretion,
deems the creditworthiness or financial condition of the Account
Debtor to be unsatisfactory.
(i) 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 or federal bankruptcy, insolvency,
or debtor-in-relief acts; or who has had appointed a trustee,
custodian, or receiver for the assets of such Account Debtor; or who
has 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.
(j) Accounts with respect to which the Account Debtor is the United
States government or any department or agency of the United States.
(k) Accounts which have not been paid in full within 60 DAYS PAST DUE
from the invoice date. The entire balance of any Account of any
single Account debtor will be ineligible whenever the portion of the
Account which has not been paid within 60 DAYS PAST DUE from the
invoice date is in excess of 25.000% of the total amount outstanding
on the Account.
(l) DATINGS, PROGRESS BILLINGS, RETAINAGES, CASH SALES, COD, SERVICES
CHARGES.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
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.
INDEBTEDNESS. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and
liabilities of Borrower to Lender, or any one or more of them, as well as
all claims by Lender against Borrower, or any one or more of them; whether
now or hereafter existing, voluntary or involuntary, due or not due,
absolute or contingent, liquidated or unliquidated; whether Borrower may
be liable individually or jointly with others; whether Borrower may be
obligated as a guarantor, surety, or otherwise; whether recovery upon such
<PAGE> 2
04-24-1997 LOAN AGREEMENT Page 2
Loan No 391-208 (Continued)
================================================================================
Indebtedness may be or hereafter may become barred by any statute of
limitations; and whether such Indebtedness may be or hereafter may become
otherwise unenforceable.
LENDER. The word "Lender" means U.S. BANK OF WASHINGTON, NATIONAL
ASSOCIATION, its successors and assigns.
LINE OF CREDIT. The words "Line of Credit" mean the credit facility
described in the Section titled "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 owed by Borrower to Lender; (b) liens for
taxes, assessments, or similar charges either not yet due or being
contested in good faith; (c) liens of materialmen, mechanics, warehousemen,
or carriers, or other like liens arising in the ordinary course of business
and securing obligations which are not yet delinquent; (d) purchase money
liens or purchase money security interests upon or in any property acquired
or held by Borrower in the ordinary course of business to secure
Indebtedness outstanding on the date of this Agreement or permitted to be
incurred under the paragraph of this Agreement titled "Indebtedness and
Liens"; (e) liens and security interests which, as of the date of this
Agreement, have been disclosed to and approved by the Lender in writing;
and (f) those liens and security interests which in the aggregate
constitute an immaterial and insignificant monetary amount with respect to
the net value of Borrower's assets.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
SECURITY AGREEMENT. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
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 words "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, 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 and 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 titled "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 instructions 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 with 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 and general intangibles.
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 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
<PAGE> 3
04-24-1997 LOAN AGREEMENT Page 3
Loan No 391-208 (Continued)
==============================================================================
COLLATERAL SCHEDULES. Concurrently with the execution and delivery of this
Agreement, Borrower shall execute and deliver to Lender a schedule of
Accounts and Eligible Accounts, in form and substance satisfactory to the
Lender. Thereafter Borrower shall execute and deliver to Lender such
supplemental schedules of Eligible Accounts and such other matters and
information relating to Borrower's Accounts 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 END
OF EACH MONTH. THE FORMAT OF AGING WILL BE SIXTY (60) DAYS PAST DUE FROM
INVOICE DATE.
REPRESENTATIONS AND WARRANTIES CONCERNING ACCOUNTS. With respect to the
Accounts, Borrower represents and warrants to 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. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
ORGANIZATION. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the state of Borrower's
incorporation and is validly existing and in good standing in all states in
which Borrower is doing business. Borrower has the full power and authority
to own its properties and to transact the businesses in which it is
presently engaged or presently proposes to engage. Borrower also is duly
qualified as a foreign corporation and is in good standing in all states in
which the failure to so qualify would have a material adverse effect on its
businesses or financial condition.
AUTHORIZATION. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower; do not require the consent or approval of any
other person, regulatory authority or governmental body; and do not
conflict with, result in a violation of, or constitute a default under (a)
any provision of its articles of incorporation or organization, or bylaws,
or any agreement or other instrument binding upon Borrower or (b) any law,
governmental regulation, court decree, or order applicable to Borrower.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the date of the statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material contingent
obligations except as disclosed in such financial statements.
LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.
PROPERTIES. Except 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 or substance by any person on,
under, about or from any of the properties. (b) Borrower has no knowledge
of, or reason to believe that there has been (i) any use, generation,
manufacture, storage, treatment, disposal, release, or threatened release
of any hazardous waste or substance on, under, about or from the properties
by any prior owners or occupants of any of the properties, or (ii) any
actual or threatened litigation or claims of any kind by any person
relating to such matters. (c) Neither Borrower nor any tenant, contractor,
agent or other authorized 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 with all applicable federal,
state, and local laws, regulations, and ordinances, including without
limitation those laws, regulations and ordinances described above. Borrower
authorizes Lender and its agents to enter upon the properties to make such
inspections and tests as Lender may deem appropriate to determine
compliance of the properties with this section of the Agreement. Any
inspections or tests made by Lender shall be at Borrower's expense and for
Lender's purposes only and shall not be construed to create any
responsibility or liability on the part of Lender to Borrower or to any
other person. The representations and warranties contained herein are based
on Borrower's due diligence in investigating the properties for hazardous
waste and hazardous substances. Borrower hereby (a) releases and waives any
future claims against Lender for indemnity or contribution in the event
Borrower becomes liable for cleanup or other costs under any such laws, and
(b) agrees to indemnify and hold harmless Lender against any and all
claims, losses, liabilities, damages, penalties, and expenses which Lender
may directly or indirectly sustain or suffer resulting from a breach of
this section of the Agreement or as a consequence of any use, generation,
manufacture, storage, disposal, release or threatened release occurring
prior to Borrower's ownership or interest in the properties, whether or not
the same was or should have been known to Borrower. The provisions of this
section of the Agreement, including the obligation to indemnify, shall
survive the payment of the indebtedness and the termination or expiration
of this Agreement and shall not be affected by Lender's acquisition of any
interest in any of the properties, whether by foreclosure or otherwise.
LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which
may materially adversely affect Borrower's financial condition or
properties, other than litigation, claims, or other events, if any, that
have been disclosed to and acknowledged by Lender in writing.
TAXES. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith
in the ordinary course of business and for which adequate reserves have
been provided.
LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered in to or granted any Security Agreements, or
permitted the filing or attachment of any Security Interests on or
affecting any of the Collateral directly or indirectly securing repayment
of Borrower's Loan and Note, that would be prior or that may in any way be
superior to Lender's Security Interests and rights in and to such
Collateral.
BINDING EFFECT. This Agreement, the Note, all Security Agreements directly
or indirectly securing repayment of Borrower's Loan and Note and all of the
Related Documents are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns, and are legally enforceable in
accordance with their respective terms.
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower may
have any liability complies in all material respects with all applicable
requirements of law and regulations, and (i) no Reportable Event nor
Prohibited Transaction (as defined in ERISA) has occurred with respect to
any such plan, (ii) Borrower has not withdrawn from any such plan or
initiated steps to do so, (iii) no steps have been taken to terminate any
such plan, (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.
<PAGE> 4
04-24-1997 LOAN AGREEMENT PAGE 4
LOAN NO. 391-208 (CONTINUED)
FINANCIAL STATEMENTS. Furnish Lender with, as soon as available, but in no
event later than one hundred twenty (120) days after the end of each fiscal
year, Borrower's balance sheet and income statement for the year ended,
audited by a certified public accountant satisfactory to Lender, and, as
soon as available, but in no event later than 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:
NET WORTH RATIO. Maintain a ratio of Total Liabilities to Tangible Net
Worth of less than 2.50 to 1.00.
The following provisions shall apply for purpose of determining compliance
with the foregoing financial covenants and ratios: BORROWER UNDERSTANDS AND
AGREES THAT ALL COVENANTS AND RATIOS WILL BE MONITORED QUARTERLY. Except as
provided above, all computations made to determine compliance with the
requirements contained in this paragraph shall be made in accordance with
generally accepted accounting principles, applied on a consistent basis,
and certified by Borrower as being true and correct.
INSURANCE. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon request
of Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without at
least ten (10) days' prior written notice to Lender. Each insurance policy
also shall include an endorsement providing that coverage in favor of
Lender will not be impaired in any way by any act, omission or default of
Borrower or any other person. In connection with all policies covering
assets in which Lender holds or is offered a security interest for the
Loans, Borrower will provide Lender with such loss payable or other
endorsements as Lender may require.
INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the following: (a) the
name of the insurer; (b) the risks insured; (c) the amount of the policy
(d) the properties insured; (e) the then current property values on the
basis of which insurance has been obtained, and the manner of determining
those values; and (f) the expiration date of the policy. In addition, upon
request of Lender (however not more often than annually), Borrower will
have an independent appraiser satisfactory to Lender determine, as
applicable, the actual cash value or replacement cost of any Collateral.
The cost of such appraisal shall be paid by Borrower.
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
with all environmental protection federal, state and local laws, statutes,
regulations and ordinances; not cause or permit to exist, as a result of an
intentional or unintentional action or omission on its part or on the part
of any third party, on property owned and/or occupied by Borrower, any
environmental activity where damage may result to the environment, unless
such environmental activity is pursuant to and in compliance with the
conditions of a permit issued by the appropriate federal, state or local
governmental authorities; shall furnish to Lender promptly and in any event
within thirty (30) days after receipt thereof a copy of any notice,
summons, lien, citation, directive, letter or other communication from any
governmental agency or instrumentality concerning any intentional or
unintentional action or omission on Borrower's part in connection with any
environmental activity whether or not there is damage to the environment
and/or other natural resources.
ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing
statements, instruments, documents and other agreements as Lender or its
attorneys may reasonably request to evidence and secure the Loans and to
perfect all Security Interests.
RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law,
rule, regulation or guideline, or the interpretation or application of any
thereof by any court or administrative or governmental authority (including any
request or policy not having the force of law) shall impose, modify or make
applicable any taxes (except U.S. federal, state or local income or franchise
taxes imposed on Lender), reserve requirements, capital adequacy requirements or
other obligations which would (a) increase the cost to Lender for extending or
maintaining the credit facilities to which this Agreement relates, (b) reduce
the amounts payable to Lender under this Agreement or the Related Documents, or
(c) reduce the rate of return on Lender's capital as a consequence of Lender's
obligations with respect to the credit facilities to which this Agreement
relates, then Borrower agrees to pay Lender such additional amounts as will
compensate Lender therefor, within five (5) days after Lender's written demand
for such payment, which demand shall be accompanied by an explanation of such
imposition or charge and a calculation in reasonable detail of the additional
amounts payable by Borrower, which explanation and calculations shall be
conclusive in the absence of manifest error.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume indebtedness for borrowed money,
including capital leases, (b) except as allowed as a Permitted Lien, sell,
transfer, mortgage, assign, pledge, lease, grant a security interest in, or
encumber any of Borrower's assets, or (c) sell with recourse any of
Borrower's accounts, except to Lender.
CONTINUITY OF OPERATIONS. (a) Engage in any business activities
substantially different than those in which Borrower is presently engaged,
(b) cease operations, liquidate, merge, transfer, acquire or consolidate
with any other entity, change ownership, change its name, dissolve or
transfer or sell Collateral out of the ordinary course of business, (c) pay
any dividends on Borrower's stock (other than dividends payable in its
stock), provided, however that notwithstanding the foregoing, but only so
long as no Event of Default has occurred and is continuing or would result
from the payment of dividends, if Borrower is a "Subchapter S Corporation"
(as defined in the Internal Revenue code of 1986, as amended) Borrower may
pay cash dividends on its stock to its shareholders from time to time in
amounts necessary to enable the shareholders to pay income taxes and make
estimated income tax payments to satisfy their liabilities under federal
and state law which arise solely from their status as Shareholders
<PAGE> 5
04-24-1997 LOAN AGREEMENT Page 5
Loan No 391-208 (Continued)
================================================================================
of a Subchapter S Corporation because of their ownership of shares of stock
of Borrower, or (d) purchase or retire any of Borrower's outstanding shares
or alter or amend Borrower's capital structure.
LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money
or assets, (b) purchase, create or acquire any interest in any other
enterprise or entity, or (c) incur any obligation as surety or guarantor
other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement
or any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt: (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or
any other loan with Lender; or (e) Lender in good faith deems itself insecure,
even though no Event of Default shall have occurred.
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.
ADDITIONAL PROVISION. BORROWER AGREES TO SUBMIT TO LENDER MONTHLY A COMPLETE
DEBTOR AND ADDRESS LIST.
BORROWER AGREES TO SUBMIT TO LENDER A BORROWER'S CERTIFICATE MONTHLY.
BORROWER AGREES TO SUBMIT TO ONE COLLATERAL AUDIT PER YEAR TO BE PERFORMED BY
LENDER'S INTERNAL STAFF OR LENDER APPROVED EXTERNAL EXAMINERS. DIRECT
VERIFICATIONS SHALL BE REQUIRED. BORROWER AGREES TO PAY ALL LENDER'S EXPENSES
INCURRED IN CONNECTION WITH THE COLLATERAL AUDIT.
TANGIBLE NET WORTH. MAINTAIN TANGIBLE NET WORTH AT A MINIMUM OF $46,000,000.00
UNTIL 12/31/97 WHEN IT INCREASES TO $60,000.00.
WORKING CAPITAL. WORKING CAPITAL SHALL BE MAINTAINED AT A MINIMUM OF
$30,000,000.00 UNTIL 12/31/97 WHEN IT INCREASES TO $45,000,000.00.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on the Indebtedness against
any and all such accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT OF INDEBTEDNESS. Failure of Borrower to make any payment when due
on the Loans.
OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or failure
of Borrower to comply with or to perform any other term, obligation,
covenant or condition contained in any other agreement between Lender and
Borrower.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's or any
Grantor's ability to repay the Loans or perform their respective
obligations under this Agreement or any of the Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at
any time thereafter.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any Security
Agreement to create a valid and perfected Security Interest) at any time
and for any reason.
INSOLVENCY. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any creditor
of any Grantor against any collateral securing the Indebtedness, or by any
governmental agency. This includes a garnishment, attachment, or levy on or
of any of Borrower's deposit accounts with Lender.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or any Guarantor dies or
becomes incompetent, or revokes or disputes the validity of, or liability
under, any Guaranty of the Indebtedness.
CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%)
or more of the common stock of Borrower.
ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
INSECURITY. Lender, in good faith, deems itself insecure.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement or the Related Documents or any
other agreement immediately will terminate (including any obligation to make
Loan Advances or disbursements), and, at Lender's option, all Indebtedness
immediately will become due and payable, all without notice of any kind to
Borrower, except that in the case of an Event of Default of the type described
in the "Insolvency" subsection above, such acceleration shall be automatic and
not optional. In addition, Lender shall have all the rights and remedies
provided in the Related Documents or available at law, in equity, or otherwise.
Except as may be prohibited by applicable law, all of Lender's rights and
remedies shall be cumulative and may be exercised singularly or concurrently.
Election by Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform an
obligation of Borrower or of any Grantor shall not affect Lender's right to
declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
APPLICABLE LAW. THIS AGREEMENT HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY
LENDER IN THE STATE OF WASHINGTON. IF THERE IS A LAWSUIT, BORROWER AGREES
UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF KING
COUNTY, THE STATE OF WASHINGTON. SUBJECT TO THE PROVISIONS ON ARBITRATION,
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF WASHINGTON.
ARBITRATION. LENDER AND BORROWER AGREE THAT ALL DISPUTES, CLAIMS AND
CONTROVERSIES BETWEEN THEM, WHETHER INDIVIDUAL, JOINT, OR CLASS IN NATURE,
ARISING FROM THIS AGREEMENT OR OTHERWISE, INCLUDING WITHOUT LIMITATION CONTRACT
AND TORT DISPUTES, SHALL BE ARBITRATED PURSUANT TO THE RULES OF THE AMERICAN
ARBITRATION ASSOCIATION, UPON REQUEST OF EITHER PARTY. No act to take or dispose
of any Collateral shall constitute a waiver of this arbitration agreement or be
prohibited by this arbitration agreement. This includes, without limitation,
obtaining injunctive relief or a temporary restraining order; invoking a power
of sale under any deed of trust or mortgage; obtaining a writ of attachment or
imposition of a receiver; or exercising any rights relating to personal
property, including taking or disposing of such property with or without
judicial process pursuant to Article 9 of the Uniform Commercial Code. Any
disputes, claims, or controversies concerning the lawfulness or reasonableness
of any act, or exercise of any right, concerning any Collateral, including any
claim to rescind, reform, or otherwise modify any agreement relating to the
Collateral, shall also be arbitrated, provided however that no arbitrator shall
have the right or the power to enjoin or restrain any act of any party. Judgment
upon any award rendered by any arbitrator may be entered in any court having
jurisdiction. Nothing in this Agreement shall preclude any party from seeking
equitable relief from a court of competent jurisdiction. The statute of
limitations, estoppel, waiver, laches, and similar doctrines which would
otherwise be applicable in an action brought by a party shall be applicable in
any arbitration proceeding, and the commencement of an arbitration proceeding
shall be deemed the commencement of an action for these purposes. The Federal
Arbitration Act shall apply to the construction, interpretation, and enforcement
of this arbitration provision.
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.
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
<PAGE> 6
04-24-1997 LOAN AGREEMENT PAGE 6
LOAN NO 391-208 (CONTINUED)
==============================================================================
relating to the Loan, and Borrower hereby waives any rights to privacy it may
have with respect to such matters. Borrower additionally waives any and all
notices of sale of participation interests, as well as all notices of any
repurchase of such participation interests. Borrower also agrees that the
purchasers of any such participation interests will be considered as the
absolute owners of such interests in the Loans and will have all the rights
granted under the participation agreement or agreements governing the sale of
such participation Interests. Borrower further waives all rights of offset or
counterclaim that it may have now or later against Lender or against any
purchaser of such a participation interest and unconditionally agrees that
either Lender or such purchaser may enforce Borrower's obligation under the
Loans irrespective of the failure or insolvency of any holder of any interest
in the Loans. Borrower further agrees that the purchaser of any such
participation interests may enforce its interests irrespective of any personal
claims or defenses that Borrower may have against Lender.
COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorney's fees, incurred in connection
with the preparation, execution, enforcement, modification and collection of
this Agreement or in connection with the Loans made pursuant to this Agreement.
Lender may pay someone else to help collect the Loans and to enforce this
Agreement, and Borrower will pay that amount. This includes, subject to any
limits under applicable law, Lender's attorneys' fees and Lender's legal
expenses, whether or not there is a lawsuit, including attorneys' fees for
bankruptcy proceedings (including efforts to modify or vacate any automatic
stay or injunction), appeals, and any anticipated post-judgment collection
services. Borrower also will pay any court costs, in addition to all other sums
provided by 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 parties, specifying that the purpose of the notice
is to change the party's address. To the extent permitted by applicable law, if
there is more than one Borrower, notice to any Borrower will constitute notice
to all Borrowers. For notice purposes, Borrower will keep Lender informed at
all times of Borrower's current address(es).
SEVERABILILTY. 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 insure 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 in exercising any right shall operate as a
waiver of such right or any other right. A waiver by Lender of a provision of
this Agreement shall not prejudice or constitute a waiver of Lender's right
otherwise to demand strict compliance with that provision or any other
provision of this Agreement. No prior waiver by Lender, nor any course of
dealing between Lender and Borrower, or between Lender and any Grantor, shall
constitute a waiver of any of Lender's rights or of any obligations of Borrower
or of any Grantor as to any future transactions. Whenever the consent of Lender
is required under this Agreement, the granting of such consent by Lender in any
instance shall not constitute continuing consent in subsequent instances where
such consent is required, and in all cases such consent may be granted or
withheld in the sole discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT,
AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF APRIL 24, 1997.
BORROWER:
MULTIPLE ZONES INTERNATIONAL, INC.
BY: [SIGNATURE ILLEGIBLE]
------------------------------------------
TITLE: SVP FINANCE, CFD
LENDER:
U.S. BANK OF WASHINGTON, NATIONAL ASSOCIATION
BY: /s/ TONY W. CHALFANT, V.P.
------------------------------------------
AUTHORIZED OFFICER
================================================================================
<PAGE> 1
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(in thousands, except per share and selected operating data)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ................................ $ 490,025 $ 457,007 $ 242,587 $ 113,456 $ 80,515
Cost of sales ............................ 431,905 393,998 211,037 98,211 69,298
------------ ------------ ------------ ------------ ------------
Gross profit ............................. 58,120 63,009 31,550 15,245 11,217
Selling, general and administrative
expenses .............................. 62,910 44,613 25,425 14,411 10,586
------------ ------------ ------------ ------------ ------------
Income (loss) from operations ............ (4,790) 18,396 6,125 834 631
Other (income) expense:
Interest expense ...................... 1,096 1,500 1,149 277 213
Other income .......................... 414 (298) (132) (78) (44)
Minority interest ..................... 108 195 69 16 8
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes ........ (6,408) 16,999 5,039 619 454
Provision for (benefit from) income taxes. (965) 6,125 1,847 207 3
------------ ------------ ------------ ------------ ------------
Net income (loss)(1),(2) ................. $ (5,443) $ 10,874 $ 3,192 $ 412 $ 451
============ ============ ============ ============ ============
Diluted earnings (loss) per share ........ $ (0.42) $ 0.91 $ 0.32 $ 0.04
============ ============ ============ ============
Shares used in computation of diluted
earnings (loss) per share.............. 12,965 11,912 9,460 9,431
============ ============ ============ ============
SELECTED OPERATING DATA(4):
Catalogs distributed ..................... 50,500,000 44,000,000 29,000,000 15,000,000 8,000,000
Number of shipments(5) ................... 1,266,000 1,229,000 859,000 522,000 415,000
Average order size(5) .................... $ 358 $ 352 $ 273 $ 212 $ 201
Customer and inquirer database(6) ........ 2,970,000 2,504,000 1,908,000 1,626,000
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital ...................... $ 35,075 $ 39,809 $ 7,750 $ 525 $ 217
Total assets ......................... 104,810 149,801 79,392 25,705 17,681
Short-term debt ...................... 3,045 3,960 12,757 3,617 1,303
Long-term debt, net of current portion 892 1,748 1,665 791 732
Series B preferred stock ............ 6,461
Total shareholders' equity ........... 44,971 49,469 4,736 1,705 1,287
</TABLE>
- - ----------
(1) During 1997, the Company recorded charges related to the write-off of
goodwill, accounts receivable, inventory and the closure of three
international subsidiaries. Excluding the effect of these charges, the
Company would have reported net income of $2,713,000 or $0.21 per share.
(2) 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.
Accordingly the Company 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.
(3) In February of 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("SFAS 128"), which specifies the computation, presentation, and disclosure
requirements for earnings per share. The Company adopted SFAS 128 in the
fourth quarter of 1997 and has restated all previously reported per share
amounts to conform to the new presenation.
(4) Selected operating data exclude international operations.
21
<PAGE> 2
(5) 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.
(6) 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
1993 is not comparable to the data for more recent periods and accordingly
has 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
Multiple Zones International, Inc. together with its majority owned
subsidiaries (collectively the "Company") is a leading international direct
marketer of brand name microchip-based hardware, software, accessories and
peripheral products for users of both the PC/Wintel ("PC") and Macintosh
("Mac") operating systems. The Company markets products through its two
flagship catalogs, THE PC ZONE(R) and THE Mac ZONE(R). The Company began
operations in 1988 by advertising in national trade publications. Catalog
circulation commenced with The Mac Zone in 1990, followed by The PC Zone in
1992. International subsidiary operations and licensing activities commenced
in 1992, and outbound telemarketing operations, principally to business
accounts, were added in 1993. The Company distributed over 50 million catalogs
domestically in 1997, with additional circulation by its subsidiaries and
licensees through operations in 24 other countries worldwide.
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,
-----------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 88.1 86.2 87.0
----- ----- -----
Gross profit 11.9 13.8 13.0
SG&A expenses 12.8 9.8 10.5
----- ----- -----
Income from operations (0.9) 4.0 2.5
Other expense 0.3 0.3 0.4
----- ----- -----
Income (loss) before income taxes (1.2) 3.7 2.1
Provision for (benefit from) income taxes (0.2) 1.3 0.8
----- ----- -----
</TABLE>
23
<PAGE> 4
<TABLE>
<S> <C> <C> <C>
Net income (loss) (1.0)% 2.4% 1.3%
===== ===== =====
</TABLE>
Second and Third Quarter Adjustments
The Company analyzes its inventory and vendor co-op receivables monthly by age,
platform and product category. During the second quarter ended June 30, 1997,
as a result of market weakness in sales, the Company recorded additional
inventory allowances of $2.5 million for obsolete, slow-moving and excess
inventory, and allowances for uncollectible vendor co-op receivables of $2.5
million.
The Company plans to work aggressively to grow its PC sales base aggressively
in order to lessen its dependence on the Mac platform. Many of the Company's
international subsidiaries are dependent on the sale of Mac products. During
the second quarter of 1997 the Company reevaluated the carrying value of
goodwill and other assets in its subsidiaries in Australia, Germany, Mexico and
Holland. Based upon its analysis of expected future sales mix, margins,
operating results and cash flows, the Company recorded a $1.4 million charge to
income representing all of the goodwill relating to these subsidiaries, and
$347,000 for the write-off of other assets relating to the international Mac
marketplace.
During the third quarter ended September 30, 1997, the Company further
evaluated the prospects for growing the PC business in its international
operations and decided to exit Belgium, Australia and Holland. As a result,
during the third quarter, the Company recorded charges totaling $2.1 million
related to closing of these operations.
Comparison of Years Ended December 31, 1997 and 1996
Net Sales. Net sales increased 7.2% to $490.0 million in 1997 from $457.0
million in 1996. The increase resulted primarily from an increase in domestic
PC product sales partially offset by a decrease in domestic Mac product sales.
Net domestic PC product sales increased to $191.4 million in 1997 from $120.0
million in 1996. The increase is due to an increase in PC catalog circulation,
in addition to growth in sales to business, education, and government accounts.
PC catalog circulation increased to 20.0 million in 1997 from 14.0 million in
the comparable period. Sales to business, education, and government accounts
increased 53.9% to $153.5 million in 1997 from $99.7 million in 1996. PC
product sales represent 57.3% and 42.6% of the sales to business, education,
and government accounts in each of the respective periods.
Net domestic Mac product sales decreased to $228.0 million in 1997 from $277.9
million in the comparable period, a decrease of 18.0%. The decrease in the
domestic Mac product sales reflects the declining overall demand for Mac
products.
International subsidiary net sales in 1997 were $70.7 million, an increase of
19.5% over the comparable period. The increase in international subsidiary net
sales resulted primarily from the addition of subsidiaries in Sweden, Venezuela
and India, as well as sales growth in the Company's operations in France, and
Mexico.
Gross Profit. Gross profit decreased to $58.1 million in 1997 from $63.0
million in 1996, and decreased to 11.9% of net sales in 1997 from 13.8% in
1996. During the second quarter of 1997, the Company recorded inventory
allowances totaling $2.5 million in connection with slow moving and excess
inventories. During the third quarter of 1997, the Company recorded $356,000 of
inventory write-downs related to its Belgium, Australia, and Holland
subsidiaries. In addition to these adjustments, gross margin declined due to
increased price competition, lower average unit selling prices, and an increase
in PC product sales and sales to business, education and government accounts
which generally carry a lower average gross margin.
24
<PAGE> 5
Selling, General and Administrative Expenses. SG&A expenses increased to $62.9
million in 1997 from $44.6 million in 1996, and increased as a percentage of
net sales between periods to 12.8% from 9.8%. During the second quarter of
1997, the Company recorded several charges to income, including $2.5 million
related to allowances for uncollectible vendor co-op receivables, $1.4 million
related to the write-off of international goodwill, severance expense of
$490,000, write-off of other assets totaling $378,000, write-off of $234,000
related primarily to asset valuation adjustments for the Company's subsidiary
in Holland and additional professional fees of $243,000. During the third
quarter of 1997, the Company recorded a $1.6 million charge to income related
to the closure of its Belgium, Australia, and Holland subsidiaries. The charges
related to the write-off of accounts receivable, legal expenses, and other
operating expenses. In addition to these adjustments, SG&A expense increased
due to costs of focusing on growing the PC and outbound sales businesses,
higher salary costs, professional fees, and depreciation.
Other Expense. Other expense increased to $1.6 million in 1997 from $1.4
million in 1996, primarily as a result of the $284,000 loss on disposal of
assets recorded in the second and third quarter of 1997.
Income Tax (Benefit) Expense. The income tax benefit for 1997 was $965,000. The
income tax expense for 1996 was $6.1 million. As of December 31, 1997, the
Company has deferred tax assets attributable to foreign subsidiaries. As the
realization of these deferred tax assets is uncertain, the Company established
a valuation allowance of $1.4 million. The valuation allowance has decreased
the income tax benefit
Net Income. As a result of the above factors, a net loss of $5.4 million or
1.0% of net sales was incurred in 1997. Net income for 1996 was $10.9 million
or 2.4% of net sales.
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.
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.
25
<PAGE> 6
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.
TRENDS
In 1997, the Company increased its focus on PC product sales and sales to
business, education and government accounts. PC product sales have grown to
49.7% of domestic net sales for the fourth quarter from 45.3% and 34.4% in the
third quarter of 1997 and fourth quarter of 1996, respectively. Additionally,
domestic net PC product sales increased 51.7% to $61.3 million for the fourth
quarter of 1997 from $40.4 million in the fourth quarter of 1996. The increased
sales are the result of the Company's focus on increasing PC sales and sales to
business, education and government accounts along with the results of the
historically higher fourth quarter sales due to the seasonal factors discussed
below.
Domestic net sales to business, education, and government accounts were $49.9
million in the fourth quarter of 1997 compared to $38.2 million and $32.2
million in the third quarter of 1997 and fourth quarter of 1996, respectively.
During the three month periods ended December 31, 1997, September 30, 1997, and
December 31, 1996, PC sales represented 65.2%, 56.9%, and 45.0%, respectively,
of the sales to business, education, and government accounts. The number of
outbound telemarketing staff has decreased to 91 as of December 31, 1997 as the
Company has focused on increasing productivity, compared to 103 at September
30,1997 and increased from 89 at December 31, 1996.
PC product sales and sales to business accounts tend to carry a lower average
gross margin percentage and have contributed to a decrease in the gross margin
percentage as compared to the prior year. The Company's gross margin percentage
decreased to 12.2% in the fourth quarter of 1997 from 13.4% in the fourth
quarter of 1996.
Net domestic Mac product sales decreased to $62.0 million in the fourth quarter
of $77.0 million in the fourth quarter of 1996. Even with weakness in the Mac
market the company has been able to maintain its Mac sales due to new product
introductions. A further decline in the demand for 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 changes and
frequent introductions of new products and product enhancements. These changes
result in rapid price fluctuations. Typically, prices of microcomputer products
initially increase with improvements in features, such as processing speed and
storage capacity. Prices subsequently decrease as manufacturers pass on savings
from lower-cost components and reduce their inventory of older models. In order
to remain competitive, the Company may be required to reduce its prices. Such a
reduction in prices could have a material adverse effect on the Company's
future results of operations.
SEASONAL FACTORS
Seasonal factors cause sales of microcomputer software and hardware products
through the direct marketing channel to be somewhat stronger in the fourth
calendar quarter than in the other periods. Sales during the fourth quarter
tend to be stronger as manufacturers make year-end introductions of new
products and increase marketing activities related to the holiday season, and
as corporate purchasing activities increase at the end of budgetary cycles.
26
<PAGE> 7
INFLATION
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.
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 $104.8 million at December 31, 1997, of which
$91.8 million were current assets. At December 31, 1997 and 1996, the Company
had cash and cash equivalents of $1.6 million and $976,000 respectively, and
working capital of $35.1 million and $39.8 million, respectively. Net cash
provided by operating activities was $13.4 million in 1997 compared to net cash
used by operating activities of $11.2 million and $14.4 million in 1996 and
1995, respectively. The cash inflows during 1997 were primarily due to lower
inventory, prepaid expenses and other assets, and accounts receivable offset by
decreased accounts payable. Cash outflows in 1996 and 1995 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 and 1995, accounts receivable increased by
$26.7 million and $12.5 million, respectively, and inventories increased by
$35.3 million and $28.2 million, respectively.
Cash outlays for capital expenditures were $5.7 million in 1997 and 1996,
respectively, and $1.4 million in 1995. In addition, the Company incurred
capital lease obligations during 1997, 1996 and 1995 of $420,000, $1.1 million
and $1.8 million respectively. These expenditures were primarily for leasehold
improvements, information and telecommunication system enhancements and
furniture and equipment.
The Company has a domestic revolving line of credit of $30.0 million from a
commercial bank collateralized by accounts receivable. At December 31, 1997,
there were no borrowings outstanding under the facility. The facility contains
certain restrictive covenants related to leverage, current ratios and
subsidiary investments. Additionally, at December 31, 1997, the Company had
$2.7 million of unused letters of credit.
In May 1997, the Company obtained an additional $20.0 million line of credit
from a commercial lender collateralized by inventory.
The net amount of vendor credit outstanding at December 31, 1997 was $44.1
million of which $8.1 million 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 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
OTHER MATTERS
The Company is currently working to resolve the potential impact of the year
2000 on the processing of date-sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures. If the
Company, its customers or vendors are unable resolve such processing issues in
a timely manner, it could result in a material financial risk. Accordingly,
the Company plans to devote the necessary resources to resolve all significant
year 2000 issues in a timely manner.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Comprehensive
Income". This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of financial statements.
Comprehensive income includes items such as foreign currency translation
adjustments that are currently being presented by the Company as a component of
shareholders' equity. The Company will adopt the statement for the year ending
December 31, 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which changes the way public companies
report information about operating segments. The Company will adopt the
statement in 1998. This statement, which is based on the management approach
to segment reporting, establishes requirements to report selected segment
information quarterly and to report entity-wide disclosures about products and
services, major customers and the major countries in which the company holds
assets and reports revenues. The Company is currently assessing how it will
present its segments and believes that it will present additional information.
Management believes that the adoption of these new standards will not have a
material impact on the Company's financial position or results of operations.
28
<PAGE> 9
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,645 $ 976
Receivables, net 42,944 49,975
Inventories, net 40,169 77,501
Prepaid expenses 4,012 7,149
Income taxes receivable 1,127
Deferred income taxes 1,889 1,216
--------- ---------
Total current assets 91,786 136,817
Property and equipment, net 12,417 9,759
Other assets 607 3,225
--------- ---------
Total assets $ 104,810 $ 149,801
========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Bank lines of credit $ 2,084 $ 3,026
Accounts payable 44,067 83,848
Accrued liabilities and other 9,059 8,405
Current portion of capital lease obligations 961 934
Income taxes payable 540 795
--------- ---------
Total current liabilities 56,711 97,008
Capital lease obligations, net of current portion 892 1,748
Deferred income taxes 249
Other 1,608 858
--------- ---------
Total liabilities 59,211 99,863
--------- ---------
Minority interest 628 469
--------- ---------
Commitments and contingencies
Shareholders' equity:
Common stock, no par value, 45,000,000 authorized,
13,041,464 shares issued and outstanding at
December 31, 1997 and 12,876,616 shares at
December 31, 1996 37,751 36,988
Retained earnings 7,256 12,564
Foreign currency translation adjustment (36) (83)
--------- ---------
Total shareholders' equity 44,971 49,469
--------- ---------
Total liabilities and shareholders' equity $ 104,810 $ 149,801
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
29
<PAGE> 10
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 490,025 $ 457,007 $ 242,587
Cost of sales 431,905 393,998 211,037
--------- --------- ---------
Gross profit 58,120 63,009 31,550
Selling, general and administrative 62,910 44,613 25,425
--------- --------- ---------
Income (loss) from operations (4,790) 18,396 6,125
--------- --------- ---------
Interest expense 1,096 1,500 1,149
Other (income) expense 414 (298) (132)
Minority interest 108 195 69
--------- --------- ---------
1,618 1,397 1,086
--------- --------- ---------
Income (loss) before taxes (6,408) 16,999 5,039
Provision (benefit) for income taxes (965) 6,125 1,847
--------- --------- ---------
Net income (loss) $ (5,443) $ 10,874 $ 3,192
========= ========= =========
Net income (loss) attributable to basic $ $ 10,415 $ 3,038
earnings per share $ (5,443)
Basic earnings (loss) per share $ (0.42) $ 0.94 $ 0.32
12,965 11,104 9,375
Shares used in computing basic earnings
(loss) per share
Diluted earnings (loss) per share $ (0.42) $ 0.91 $ 0.32
Shares used in computing diluted earnings 12,965 11,912 9,460
(loss) per share
</TABLE>
The accompanying notes on an integral part of the consolidated financial
statements.
30
<PAGE> 11
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Retained
Preferred Stock Common Stock Earnings
Shares Amount Shares Amount (Deficit)
------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 625,000 $ 2,000 7,500,000 $ 750 $ (1,051)
Conversion of Series A Convertible
Preferred Stock to common stock (625,000) (2,000) 1,874,999 2,000
Accretion of Series Redeemable
Convertible Preferred Stock (153)
Net income 3,192
Translation adjustment
------- ----------- --------- ----------- -----------
Balance, December 31, 1995 9,374,999 2,750 1,988
Accretion of Series B Redeemable
Convertible Preferred Stock (459)
Issuance of common stock 2,537,106 27,303
Conversion of Series B Redeemable
Convertible Preferred Stock 918,711 6,920
Exercise of stock options 45,800 15
Net income 10,874
Tax effect of stock options exercised 161
Translation adjustments
------- ----------- --------- ----------- -----------
Balance, December 31, 1996 12,876,616 36,988 12,564
Issuance of common stock 33,748 196
Exercise of stock options 131,100 567
Net loss (5,443)
Tax effect of stock options exercised 135
Translation adjustments
------- ----------- ---------- ----------- -----------
Balance, December 31, 1997 13,041,464 $ 37,751 $ 7,256
======= =========== ========== =========== ===========
<CAPTION>
Foreign
Currency
Translation
Adjustment Total
----------- -----------
<S> <C> <C>
Balance, January 1, 1995 $ 6 $ 1,705
Conversion of Series A Convertible
Preferred Stock to common stock
Accretion of Series Redeemable
Convertible Preferred Stock (153)
Net income 3,192
Translation adjustment (8) (8)
----------- -----------
Balance, December 31, 1995 (2) 4,736
Accretion of Series B Redeemable
Convertible Preferred Stock (459)
Issuance of common stock 27,303
Conversion of Series B Redeemable
Convertible Preferred Stock 6,920
Exercise of stock options 15
Net income 10,874
Tax effect of stock options exercised 161
Translation adjustments (81) (81)
----------- -----------
Balance, December 31, 1996 (83) 49,469
Issuance of common stock 196
Exercise of stock options 567
Net loss (5,443)
Tax effect of stock options exercised 135
Translation adjustments 47 47
----------- -----------
Balance, December 31, 1997 $ (36) $ 44,971
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
31
<PAGE> 12
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (5,443) $ 10,874 $ 3,192
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 2,943 1,651 1,001
Allowance for inventory and receivables 3,528 669 478
Write off of goodwill 1,233
Deferred income taxes (1,246) (567) (226)
Loss on disposal of assets 376
Minority interest 108 229 69
Tax effect of stock options exercised 135 161
Changes in assets and liabilities excluding effect
of acquisitions:
Accounts receivable 4,626 (26,734) (12,465)
Inventory 35,157 (35,251) (28,218)
Prepaid expenses and other assets 5,016 (1,968) (5,690)
Accounts payable (33,429) 37,039 24,268
Accrued liabilities 1,807 3,068 2,401
Income taxes payable (1,387) (371) 802
--------- --------- ---------
Net cash provided by (used in) operating 13,424 (11,200) (14,388)
activities
Cash flows from investing activities:
Purchases of property and equipment (5,664) (5,725) (1,397)
Acquisitions of subsidiaries (479) (690)
Other 51 13
--------- --------- ---------
Net cash used in investing activities (5,613) (6,204) (2,074)
Cash flows from financing activities:
Payments under line of credit agreement (76,215) (110,918) (56,665)
Borrowings under line of credit agreement 75,372 101,853 65,408
Net change in book overdrafts (5,600) (260) 2,755
Payments on capital leases (1,250) (769) (549)
Net proceeds from sale of common stock 763 27,317
Net proceeds from sale of preferred stock 6,308
Other (264) 12 (87)
--------- --------- ---------
Net cash provided by (used in) financing (7,194) 17,235 17,170
activities
Effect of exchange rate on cash and cash equivalents 52 (70) (7)
Net increase (decrease) in cash and cash equivalents 669 (239) 701
Cash and cash equivalents at beginning of period 976 1,215 514
--------- --------- ---------
Cash and cash equivalents at end of period $ 1,645 $ 976 $ 1,215
========= ========= =========
Supplemental cash flow information:
Cash paid during the period for interest $ 1,095 $ 1,500 $ 1,111
Cash paid for income taxes $ 992 $ 6,796 $ 1,251
Noncash investing and financing activity:
Capital leases to finance purchases of equipment $ 420 $ 1,064 $ 1,804
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
32
<PAGE> 13
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
microchip-based hardware, software, peripherals and accessories for users of
both the PC/Wintel ("PC") and Macintosh ("Mac") operating systems. 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.
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, 1997 and 1996 are net of allowances of approximately
$2,400,000 and $700,000 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.
Depreciation for computer hardware and software is generally over 3 to 5 years.
Other property and equipment is depreciated over 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. The Company evaluates the carrying value of long-lived
assets based upon current and anticipated undiscounted cash flows, and
recognizes an impairment when it is probable that such estimated future net
income and/or cash flows will be less than the asset carrying value. During
the year ended December 31, 1997, the Company evaluated the carrying value of
goodwill on its foreign subsidiaries and deemed the assets impaired. The
Company's foreign subsidiaries are heavily dependent on the Mac marketplace and
with the weakness and uncertainty in this market it was determined that the
goodwill should be written off. The Company recorded a charge of $1,400,000,
included in Selling, general and administrative expenses, to eliminate the
goodwill.
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.
33
<PAGE> 14
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
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"), which
specifies the computation, presentation, and disclosure requirements for
earnings per share ("EPS"). It replaces primary and fully diluted EPS with
basic and diluted EPS. Basic EPS excludes all dilution. It is based upon the
weighted average number of common shares outstanding during the period.
Diluted EPS reflects the potential dilution that would occur if securities or
other contracts to issue common stock were exercised or converted into common
stock. The Company adopted SFAS 128 in the fourth quarter of 1997 and has
restated all previously reported per share amounts to conform to the new
presentation.
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, 1997 and 1996
$2,294,000 and $4,013,000, respectively, of capitalized advertising costs were
included with prepaid expenses. The Company receives market 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 $3,852,000 and $2,026,000 for the years ended December 31,
1997 and 1996, respectively.
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
34
<PAGE> 15
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.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Comprehensive
Income". This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of financial statements.
Comprehensive income includes items such as foreign currency translation
adjustments that are currently being presented by the Company as a component of
shareholders' equity. The Company will adopt the statement for the year ending
December 31, 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which changes the way public companies
report information about operating segments. The Company will adopt the
statement in 1998. This statement, which is based on the management approach
to segment reporting, establishes requirements to report selected segment
information quarterly and to report entity-wide disclosures about products and
services, major customers and the major countries in which the company holds
assets and reports revenues.
Management believes that the adoption of these new standards will not have a
material impact on the Company's financial position or results of operations.
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 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
-------- --------
<S> <C> <C>
Trade $ 32,381 $ 31,113
Co-op advertising 4,510 5,896
Licensees 506 690
Returns, rebates and other 8,423 13,423
-------- --------
45,820 51,122
Less allowances (2,876) (1,147)
-------- --------
$ 42,944 $ 49,975
======== ========
</TABLE>
35
<PAGE> 16
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
-------- --------
<S> <C> <C>
Equipment $ 5,169 $ 3,536
Computer hardware and software under capital leases 6,773 6,471
Computer software 3,995 499
Furniture and fixtures 805 721
Leasehold improvements 2,849 2,836
-------- --------
19,591 14,063
Less accumulated depreciation and Amortization (7,174) (4,304)
-------- --------
Property and equipment, net $ 12,417 $ 9,759
======== ========
</TABLE>
Included in accumulated depreciation and amortization is accumulated
amortization associated with capital leases at December 31, 1997 and 1996 of
$3,020,000 and $2,082,000, respectively.
6. BANK LINES OF CREDIT
At December 31, 1997, the Company had a $30,000,000 revolving bank line of
credit expiring June 30, 1998. Interest is charged at the prime lending rate
8.5% and 8.25% at December 31, 1997 and 1996, respectively. At December 31,
1997 no borrowings were outstanding. At December 31, 1996, $2,000,000, was
borrowed on the line. The line is collateralized by the Company's accounts
receivable.
In May 1997 the company obtained an additional $20,000,000 bank line of credit.
This line is collaterized by the Company's inventories. No amounts were
outstanding at December 31, 1997.
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. The Company has complied with the
restrictive covenants contained in the agreements.
Bank lines of credit also included $2,084,000 and $1,060,000 of borrowings by
the Company's foreign subsidiaries at December 31, 1997 and 1996, 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, 1997 and 1996 the Company had book overdrafts of $368,000 and $5,968,000,
respectively, which are included with accounts payable.
7. TRADE CREDIT ARRANGEMENT
In 1996, the Company entered into 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 $35,000,000.
At December 31, 1997, accounts payable included $8,165,000 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.
36
<PAGE> 17
8. INCOME TAXES
The income tax provision consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current $ 281 $ 6,692 $ 2,073
Deferred (2,671) (567) (226)
Valuation allowance for deferred tax asset 1,425
------- ------- -------
Total $ (965) $ 6,125 $ 1,847
======= ======= =======
</TABLE>
The components of deferred taxes were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
------- -------
<S> <C> <C>
Assets:
Allowance for doubtful accounts $ 738 $ 422
Inventory allowances 643 254
Inventory capitalization 63 99
Deferred rent 593 189
Accrued liabilities and other 445 237
Net operating losses 1,579 204
Valuation allowance (1,391)
------- -------
$ 2,670 $ 1,405
------- -------
Liabilities:
Property and equipment depreciation $ (423) $ (313)
Other (125)
------- -------
$ (423) $ (438)
------- -------
Net deferred tax asset $ 2,247 $ 967
======= =======
The net deferred tax asset is recognized in the
accompanying balance sheet as follows (in thousands):
Current deferred tax asset $ 1,889 $ 1,216
Non-current deferred income tax asset (liability), net of 358 (249)
------- -------
valuation allowance of $1,391 in 1997
Net deferred tax asset $ 2,247 $ 967
======= =======
</TABLE>
The deferred tax asset valuation allowance is primarily related to deferred tax
assets of foreign operations, including net operating loss carryforwards in
several foreign markets. Although realization is not assured, management
believes it is more likely than not that the unreserved deferred asset will be
realized through future taxable income or taxable loss carrybacks. The
Company's foreign net operating losses begin expiring in 2002. In certain
countries the losses never expire.
A reconciliation of the effective income tax rate on income before taxes with
the federal statutory rate follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---- ---- ----
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 34.0%
State income tax (net of federal income tax benefit) 1.4 1.4 1.5
Other 0.9 (0.4) 1.2
Reserve of deferred tax assets (22.2)
---- ---- ----
Effective tax rate 15.1% 36.0% 36.7%
==== ==== ====
</TABLE>
37
<PAGE> 18
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, 1997, future minimum payments under operating leases
were as follows (in thousands):
<TABLE>
<S> <C>
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,828
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,127
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,859
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,817
2002 and thereafter. . . . . . . . . . . . . . . . . . . . . . . . 2,756
-------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $10,387
=======
</TABLE>
Rental expense totaled $2,522,000, $1,532,000 and $608,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Obligations Under Capital Leases
The Company leases equipment and software under long-term capital leases.
Future lease payments as of December 31, 1997 were as follows (in thousands):
<TABLE>
<S> <C>
1998 $ 1,097
1999 763
2000 127
2001 33
-------
Total future minimum lease payments $ 2,020
Less amount representing interest (167)
-------
Present value of net minimum lease payments $ 1,853
Less current portion (961)
-------
Noncurrent portion $ 892
=======
</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, 1999.
Under this contract, the Company pays a flat rate for each order filled.
Letters of Credit
The Company had unused letters of credit totaling $2,686,000 at December 31,
1997.
Acquisitions
Certain of the purchase agreements relating to the Company's acquisitions of
foreign subsidiaries 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 was
entitled to a cumulative annual dividend of $1.14 per share, payable only to
the extent that dividends were declared to common shareholders. Voluntary and
38
<PAGE> 19
involuntary liquidation value of each preferred share was $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.
11. SHAREHOLDERS' EQUITY
Common Stock
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 $27,237,000, net of the underwriting discount
and other direct expenses of $3,123,000. 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,
1997, 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, 1997.
In addition to options granted under the Plan, the Company has granted options
under two separate plans to the CEO and the Board of Directors. Options
outstanding to these individuals at December 31, 1997, were 713,957 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,
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 (in thousands, except per share data):
39
<PAGE> 20
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
1997 1996
-----------------------------------------------------------------------------
<S> <C> <C>
Net earnings (loss) - as reported $ (5,443) $ 10,874
========= ==========
Net earnings (loss) - pro forma $ (6,816) $ 10,200
========= ==========
Diluted earnings (loss) per share - as reported $ (0.42) $ 0.91
========= ==========
Diluted earnings (loss) per share - pro forma $ (0.53) $ 0.86
========= ==========
</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 1997 and 1996: expected volatility of 75% and
66%; risk-free interest rate of 6.2% and 6.5%; and expected lives of 4 years.
Information regarding the stock option plans is as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Weighted-
Average
Options Exercise Price
------- --------------
<S> <C> <C>
----------------------------------------------------------------------------
Outstanding, January 1, 1995 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
Granted 1,422,816 9.43
Exercised (131,100) 4.33
Cancelled (717,851) 10.29
--------- ------------
Outstanding, December 31, 1997 1,668,625 $ 9.32
========= ============
--------------------------------------------------------------------------
1997 option price range for exercised shares $0.33 - $6.67
1997 weighted-average fair value of options granted
during the year $5.47
--------------------------------------------------------------------------
</TABLE>
The following tables summarize information about fixed-price stock options
outstanding at December 31, 1997.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
Options Outstanding
--------------------------------------------------------------------------
Weighted-
Number average Weighted-
range of outstanding remaining Average
exercise prices at 12/31/97 contractual years Exercise price
--------------------------------------------------------------------------
<S> <C> <C> <C>
$ 0.17 - $ 6.67 437,610 8.79 $ 5.23
$ 8.38 - $12.67 1,211,830 8.97 10.59
$ 17.75 - $25.88 19,185 8.82 22.23
----------------- --------------- ---------------- -----------------
$ 0.17 - $25.88 1,668,625 8.92 $ 9.32
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------
Options Exercisable
-----------------------------------------------------
Range of Number Weighted-average
Exercise prices at 12/31/97 Exercise price
----------------- --------------- -----------------
<S> <C> <C>
$ 0.17 - $ 6.67 117,115 $ 4.09
$ 8.38 - $ 12.67 268,099 11.58
$ 17.75 - $ 25.88 6,456 23.71
----------------- --------------- -----------------
$ 0.17 - $ 25.88 391,670 $ 9.54
================= =============== =================
</TABLE>
40
<PAGE> 21
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.
12. EARNINGS PER SHARE
In the fourth quarter of 1997, the Company adopted the provisions of Statement
of Finacial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). 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 basic earnings per share. For
the year ended December 31, 1996, diluted earnings per share is computed using
the weighted average effect of the conversion of Series B Preferred Stock to
Common Stock. The calculation uses the treasury stock method in determining
the resulting incremental weighted average equivalent shares outstanding (in
thousands, except per share data).
<TABLE>
<CAPTION>
INCOME PER SHARE
(LOSS) SHARES AMOUNT
-------- ------ --- ----
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Income (loss) from operations $ (5,443)
BASIC AND DILUTED EPS $ (5,443) 12,965 $ ( 0.42)
YEAR ENDED DECEMBER 31, 1996
Income from operations $ 10,874
Less: Series B accretion and dividends (459)
--------
BASIC EPS $ 10,415 11,104 $ 0.94
EFFECT OF DILUTIVE SECURITIES
Series B Preferred Stock 459 461
Stock options and warrants 347
-------- ------
DILUTED EPS $ 10,874 11,912 $ 0.91
YEAR ENDED DECEMBER 31, 1995
Income from operations $ 3,192
Less: Series B accretion and dividends (154)
-------- ------
BASIC EPS $ 3,038 9,375 $ 0.32
EFFECT OF DILUTIVE SECURITIES
Stock options and warrants 85
-------- ------
DILUTED EPS $ 3,038 9,460 $ 0.32
</TABLE>
All options to purchase common stock were excluded from the computation of
diluted earning per share for the year ended December 31, 1997 because the
effect of the options' on the calculation would have been antidilutive.
41
<PAGE> 22
13. 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 15% of annual compensation subject to
certain limitations specified by the Internal Revenue Code.
14. RELATED PARTY TRANSACTIONS
Related party transactions for 1997, 1996 and 1995 were as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Sales to licensees $1,660 $2,586 $1,274
Sales to affiliates 88
Purchases from affiliates 882
Accounts Payable to affiliates 21
Accounts receivable from affiliates 17
</TABLE>
15. OPERATIONS BY GEOGRAPHIC AREA
The Company operates primarily in one industry segment, the distribution of
computer hardware and software. Information about the Company's operations in
different geographic areas for 1997, 1996 and 1995 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 (in
thousands):
<TABLE>
<CAPTION>
UNITED STATES INTERNATIONAL ELIMINATIONS TOTAL
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Net sales $ 419,360 $ 70,665 $ $ 490,025
Income from operations (1,616) (3,174) (4,790)
Identifiable assets 88,964 16,412 (2,211) $ 103,165
Corporate assets 1,645
---------
Total assets $ 104,810
=========
YEAR ENDED DECEMBER 31, 1996
Net sales $ 397,853 $ 59,154 $ $ 457,007
Income from operations 16,972 1,424 18,396
Identifiable assets 137,916 16,033 (5,124) $ 148,825
Corporate assets 976
---------
Total assets $ 149,801
=========
YEAR ENDED DECEMBER 31, 1995
Net sales $ 216,261 $ 26,326 $ $ 242,587
Income from operations 5,575 550 6,125
Identifiable assets 71,359 8,735 (1,916) $ 78,178
Corporate assets 1,214
---------
Total assets $ 79,392
=========
</TABLE>
42
<PAGE> 23
16. SELECTED QUARTERLY FINANCIAL DATE (UNAUDITED)
The following information is for the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
(in thousands, except per share data)
First Second Third Fourth
DECEMBER 31, 1997 Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 122,755 $ 108,043 $ 115,725 $ 143,502
Cost of sales 106,208 97,057 102,694 125,946
--------- --------- --------- ---------
Gross profit 16,547 10,986 13,031 17,556
SG&A expenses 12,928 18,285 15,279 16,418
--------- --------- --------- ---------
Income (loss) from operations 3,619 (7,299) (2,248) 1,138
Other expense 389 317 326 586
--------- --------- --------- ---------
Income (loss) before income taxes 3,230 (7,616) (2,574) 552
Provision (benefit from) for income taxes 1,164 (1,979) (236) 86
--------- --------- --------- ---------
Net income (loss) $ 2,066 $ (5,637) $ (2,338) $ 466
========= ========= ========= =========
Diluted earnings (loss) per share $ 0.16 $ (0.44) $ (0.18) $ 0.04
========= ========= ========= =========
</TABLE>
<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
========= ========= ========= =========
Diluted earnings per share $ 0.21 $ 0.23 $ 0.24 $ 0.23
========= ========= ========= =========
</TABLE>
43
<PAGE> 24
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, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Seattle, Washington
February 10, 1998
45
<PAGE> 1
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, File No.
333-13501 and File No. 333-25859) of our report dated February 10, 1998, on our
audits of the consolidated financial statements of Multiple Zones
International, Inc. as of December 31, 1997 and 1996, and for the years ended
December 31, 1997, 1996 and 1995, which report is incorporated by reference in
this Form 10-K.
COOPERS & LYBRAND L.L.P
Seattle, Washington
March 25, 1998
44
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,645
<SECURITIES> 0
<RECEIVABLES> 45,820
<ALLOWANCES> 2,876
<INVENTORY> 40,169
<CURRENT-ASSETS> 91,786
<PP&E> 19,591
<DEPRECIATION> 7,174
<TOTAL-ASSETS> 104,810
<CURRENT-LIABILITIES> 56,711
<BONDS> 0
0
0
<COMMON> 37,751
<OTHER-SE> 7,220
<TOTAL-LIABILITY-AND-EQUITY> 104,810
<SALES> 490,025
<TOTAL-REVENUES> 490,025
<CGS> 431,905
<TOTAL-COSTS> 431,905
<OTHER-EXPENSES> 64,528
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,408)
<INCOME-TAX> (965)
<INCOME-CONTINUING> (5,443)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,443)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS 6-MOS 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 SEP-30-1996 JUN-30-1996 MAR-31-1996 DEC-31-1995
<CASH> 976 1,571 523 994 1,215
<SECURITIES> 0 0 0 0 0
<RECEIVABLES> 51,122 34,484 34,991 32,083 23,718
<ALLOWANCES> 1,147 1,051 1,039 986 606
<INVENTORY> 77,501 50,292 47,053 47,822 42,031
<CURRENT-ASSETS> 136,817 90,297 86,484 85,258 73,344
<PP&E> 14,063 11,833 8,687 7,643 7,168
<DEPRECIATION> 4,304 3,787 3,348 2,992 2,649
<TOTAL-ASSETS> 149,801 100,778 94,230 92,701 79,392
<CURRENT-LIABILITIES> 97,008 52,028 76,063 76,760 65,594
<BONDS> 0 0 0 0 0
0 0 6,920 6,691 6,461
0 0 0 0 0
<COMMON> 36,988 36,912 2,750 2,750 2,750
<OTHER-SE> 12,481 9,249 6,114 3,955 1,986
<TOTAL-LIABILITY-AND-EQUITY> 149,801 100,778 94,230 92,701 79,392
<SALES> 457,007 321,734 212,338 100,927 242,587
<TOTAL-REVENUES> 457,007 321,734 212,338 100,927 242,587
<CGS> 393,998 276,819 182,944 86,964 211,037
<TOTAL-COSTS> 393,998 276,819 182,944 86,964 211,037
<OTHER-EXPENSES> 46,010 32,701 22,108 10,546 26,511
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 0 0 0 0 0
<INCOME-PRETAX> 16,999 12,214 7,286 3,417 5,039
<INCOME-TAX> 6,125 4,397 2,671 1,244 1,847
<INCOME-CONTINUING> 10,874 7,817 4,615 2,173 3,192
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 10,874 7,817 4,615 2,173 3,192
<EPS-PRIMARY> .94 0.66 0.44 0.21 0.32
<EPS-DILUTED> .91 0.65 0.44 0.21 0.32
</TABLE>
