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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1998 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 8, 1999 was approximately $60,346,077 (1), based upon the last sales
price per share of $11.00 as reported by the NASDAQ National Market.
The number of shares of the registrant's Common Stock outstanding as of March 8,
1999, was 13,227,447.
(1) Excludes value of Common Stock held of record as of March 8, 1999 by
executive officers, directors and 10% shareholders of the registrant. Includes
Common Stock held of record as of that date by certain depository
organizations. Exclusion of shares held by any person should not be construed
to indicate that such person possesses the power, direct or indirect, to direct
or cause the direction of the management or policies of the registrant, or that
such person is controlled by or is under common control with the registrant.
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MULTIPLE ZONES INTERNATIONAL, INC.
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PART I.
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10K PAGE NO.
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Item 1. Business 3
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 4a. Executive Officers of the Registrant 12
PART II.
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Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 15
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 20
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 21
PART III.
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Item 10. Directors and Executive Officers of the Registrant 21
Item 11. Executive Compensation 21
Item 12. Security Ownership of Certain Beneficial Owners and Management 21
Item 13. Certain Relationships and Related Transactions 21
PART IV.
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Item 14. Exhibits, Financial Statements and Reports on Form 8-K 22
Signatures 24
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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 over 100,000 computer products to businesses and consumers. The
Company serves customers through its Internet superstore, zones.com, and its
flagship brands: Zones Business Solutions, zones.com, THE PC ZONE-REGISTERED
TRADEMARK- and THE MAC ZONE-REGISTERED TRADEMARK- with products from leading
manufacturers, including IBM, Compaq, Hewlett Packard, Microsoft, Toshiba and
Apple. 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. Internet
sales and electronic marketing via e-mail began in 1997.
INDUSTRY BACKGROUND
According to industry data published by International Data Corporation
("IDC"), domestic sales of personal computers were $75.5 billion in 1998 and
are projected to increase to $103.8 billion in 2002,representing a compounded
annual growth rate of 8.3%. However, market trends indicate that growth rates
of the Internet, direct and outbound channels will far exceed that of the
overall market.
The Company believes that there will continue to be significant growth in
e-commerce due to increased Internet access, growing user confidence, better
payment systems, and rapidly improving Internet security. Market trends
support this assertion. Worldwide Internet commerce grew by 225%, from $15.5
billion in 1997 to $50.4 billion in 1998, according to IDC, and are expected
to grow to $733.6 billion by 2002. The value of consumer purchases via the
Internet is expected to increase nearly 1,800% between 1997 and 2002, from $5
billion to $94 billion, according to PricewaterhouseCoopers LLP's 1998 Annual
Technology forecast.
PricewaterhouseCoopers LLP's 1998 Annual Technology Forecast predicts a
very rapid increase in business conducted over the Internet. Between 1996 and
1997, business-to-business trade online doubled every six months and this
rate was accelerating to doubling every 3 to 4 months as of March, 1998,
according to the survey.
The Company believes that many individuals and businesses, increasingly familiar
with microcomputers, have become more receptive to direct marketing and now make
their purchase decisions based primarily on product selection, 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.
Direct marketing channels have 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 these channels are
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increasing, as consumer familiarity with microcomputer products grows and
online technologies provide unprecedented levels of information and service.
Products are becoming increasingly user-friendly, and manufacturers recognize
the cost-effectiveness of direct channels. 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 direct channels.
Included in these channels are those manufactures of hardware and software
that sell directly to the end customer. The manufacturer direct producers are
having an increased impact on the direct marketing channel, but direct
resellers have an advantage based on the large variety of products that they
can offer to the customer. The Company believes the explosion of the
Internet, coupled with growing acceptance of direct channels in general,
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. For
this purpose, any statements that are not statements of historical fact may
be forward-looking statements. Without limiting the 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. The Company's net sales have grown from $80.5 million in 1993
to $501.4 million in 1998. In 1998, sales increased 4.0% from 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.
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 52.0% and 54.4% of the Company's gross sales in 1998 and
1997, respectively. Apple Computer has, until recently, been experiencing a
decline in sales, reflecting uncertainties in the Mac marketplace. During
late 1997 Apple began selling directly to customers. Additionally during 1997
and 1998, Apple cancelled licenses for clone manufacturers, removing
competition for CPU production. 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 or reducing its dependence on sales of Mac products.
COMPETITION. The microcomputer products industry is highly and increasingly
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. In addition, a number of
the Company's competitors are increasing the sale of computer products
via the Internet, and several new Internet only competitors have emerged.
Although the Company offers products for sale through the Internet, there can be
no assurance that the Company's Internet based sales will be successful. 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
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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 7 foreign countries and also derives royalties from catalog direct marketers
in 6 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 and transportation
risks; and foreign laws and government regulations.
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. Computer 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 have a material adverse effect on the
Company's business, financial condition and results of operation.
POTENTIAL DISRUPTION OF BUSINESS. The Company's success is dependent in part on
the quality, reliability and proper utilization of its information,
telecommunication, desktop publishing and other systems, which are used for
marketing, catalog design and production, purchasing, inventory management,
order processing, product distribution, accounts receivable, customer service
and general accounting functions. Any interruption in any of the Company's
systems or telecommunication systems could have a material adverse effect on the
Company's business, financial condition and results of operations.
POTENTIAL INCREASES IN POSTAGE, SHIPPING AND PAPER COSTS. Postage and shipping
costs, as well as the cost of paper for the Company's catalogs, are significant
expenses in the operation of the Company's business. The Company generally mails
its catalogs through the U.S. Postal Service and ships its products to customers
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 36.7% and 35.9% of the Company's total purchases in 1998 and 1997,
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
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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. However,
legislation that would expand the ability of states to impose sales tax
collection obligations on direct marketers has been introduced in Congress on
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. Airborne Logistics Services, an affiliate
of Airborne Express, provides and operates a warehouse and distribution center
for the Company in Wilmington, Ohio under a contract that expires in August
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 participates
in first-to-market and end-of-life-cycle purchase opportunities, both of which
carry 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
direct marketer of brand name competitively priced computer products to the
consumer, small office/home office ("SOHO") and small to medium sized business
markets. The Company is organized to serve these unique customer groups, taking
advantage of web-based technologies to further its direct marketing reach and
offer its customers new ways to solve their computing product needs.
Zones.com is a full service electronic retailer of PC and Mac microcomputers
and related peripherals and software products to consumers and SOHO
customers. Zones.com employs a data-driven customer contact strategy that
matches marketing vehicles, timing and frequency with targeted customer
segments. Marketing vehicles used by Zones.com include the zones.com online
superstore, e-mail, e-catalogs (e-mails with product photos that link to the
Company's web store), external banners, links and online partnerships, THE PC
ZONE-REGISTERED TRADEMARK- and THE MAC ZONE-REGISTERED TRADEMARK- paper
catalogs, direct mail and print media advertising.
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Zones Business Solutions (ZBS) markets primarily to small and medium-sized
business and education institutions through dedicated teams of outbound account
managers. ZBS reaches its target audience through a combination of outbound
telemarketing, customized web-stores, targeted e-mail, e-catalogs, paper
catalogs, direct mail and print media advertising.
The Company's business strategy is comprised of the following central elements:
ELECTRONIC MARKETING. The Company believes that the Internet offers both market
expansion opportunities and a more cost efficient means of communicating with
and fulfilling the needs of customers. Using the Internet, the Company can
display and offer significantly more products to reach more customers and offer
customers more options for getting information and making purchases. Similarly,
e-mail and e-catalogs offer growth opportunities, cost efficiencies and customer
convenience. The Company uses electronic and "offline" media in an integrated
fashion to optimize customer satisfaction and response.
EXPANSION OF ZONES BUSINESS SOLUTIONS. Sales to corporate and education accounts
represent a strong growth opportunity for the Company. The Company intends to
increase sales to these accounts by expanding its outbound sales team.
Additionally, the Company has established the ZBS brand to provide a focused
offering for small and medium sized businesses. In addition to outbound sales,
ZBS is using dedicated e-marketing and traditional direct marketing vehicles to
acquire new business accounts. ZBS is also providing individually customized
web stores for its larger corporate customers.
DATABASE MARKETING. The Company uses advanced database marketing techniques to
optimize the use of its marketing vehicles across customer segments and to
maximize customer satisfaction and lifetime value. The Company's core competence
lies in attracting and retaining customers via several distinct but highly
complementary marketing vehicles. The Company's Internet superstore, zones.com,
is the online portal for all the Company's marketing efforts. Zones.com is
structured to capture information about its users that allow the Company to
customize the appropriate contact strategy for each customer and prospective
customer. The Company uses e-mail, e-catalogs, paper catalogs, magazine
advertising, and direct mail to activate new customers and promote existing
customers for both consumer and business customers. In addition, the Company
uses outbound telemarketing to acquire, promote to and meet the needs of
customers in the business and education markets.
INCREASED SALES OF PC PRODUCTS. The Company intends to focus on growth within
the vast PC market. The Company believes that the percentage of PC products sold
through the direct 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 predominantly purchase PC products.
REDUCTION OF OPERATING COSTS. The Company continually seeks ways to work more
efficiently - the result of which has lowered selling, general and
administrative expenses from 13.1% of sales in 1993 to 10.4% in the fourth
quarter of 1998. During 1998 the Company began certain restructuring
initiatives designed to continue its reduction of administrative costs,
improve efficiencies and increase sales. A number of these projects are still
underway, including expanded use of the Internet, electronic data interchange
and the streamlining of product acquisition.
PRODUCTS AND MERCHANDISING
Through the Company's catalogs, Internet site and consultative sales force,
the Company can offer the customer access to over 100,000 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.
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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.
The following table shows the Company's gross sales attributable to various
product categories during 1996, 1997 and 1998.
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YEAR ENDED DECEMBER 31,
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1998 1997 1996
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Microcomputers 32.7% 33.8% 31.2%
Peripherals and accessories 49.3 48.8 50.6
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Total hardware 82.0 82.6 81.8
Software 18.0 17.4 18.2
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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 Internet and catalog offerings 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 Internet marketing and catalog production.
The merchandising group is also responsible for developing effective advertising
campaigns for manufacturers, managing web-site and 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 for first-to-market and
end-of-life-cycle product offerings.
The Company is continually trying to increase the number of products which it is
authorized to sell. The Company is 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 represented 48.0% of
net sales in 1998, compared to 45.6% and 30.2% of net sales in 1997 and 1996,
respectively. The Company's PC sales grew 5.9% during 1998 over 1997 and
increased 59.5% during 1997 over 1996.
The Company's Mac sales decreased 3.9% during 1998 over 1997 and declined 17.9%
during 1997 over 1996. Sales of Apple branded products alone constituted 19.4%
of gross sales in 1998, compared to 17.1% of gross sales in 1997 and 22.5% of
gross sales in 1996. 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, the Company will continue its efforts to increase sales to business
and education 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. The
Company purchased 36.7% and 35.9% of its products from distributors in 1998 and
1997, respectively. Purchases from Ingram Micro and Apple represented 20.8% and
21.7%, respectively, of the Company's total product purchases in 1998. No other
vendor supplied more than 10.0% of the Company's total product purchases in
1998. The Company seeks to efficiently manage its inventory to achieve high
product availability and fill rates. The Company utilizes sophisticated
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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 many 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 6.2% and 7.5% of gross saleS in 1998 and 1997, 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 and THE MAC ZONE, each of which has been published monthly
since January 1995. Customers receive frequent catalog mailings that vary
depending on their purchase activity. A catalog is also included with each order
shipped. Catalogs are 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 and THE MAC ZONE catalogs
published domestically in 1998, 1997 and 1996.
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THE PC ZONE THE MAC ZONE
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1998 1997 1996 1998 1997 1996
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Number of editions 12 13 12 12 13 12
Total circulation 22,650,000 20,000,000 14,000,000 22,800,000 29,000,000 28,000,000
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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, 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 sell computer products online. The Company has built and maintains one of
the largest electronic commerce sites on the Internet (zones.com). To drive
traffic to its Internet sites, the Company 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 way to
offer customers detailed product information and the convenience of online
purchasing. 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
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Company periodically analyzes and updates its database and other available
information in order to enhance customer response and order rates. The
Company tracks the buying patterns of its customers in an attempt to
anticipate customers' needs and generate additional product orders. The
Company also strives to improve the size, quality and responsiveness of its
database through the use of sophisticated modeling techniques. The Company
believes that by selectively targeting its catalogs to specific groups of
customers with known product affinities and purchasing characteristics, the
Company will be able to increase order rates from customers and enhance the
effectiveness of its catalogs and their desirability as a marketing channel
for product manufacturers. The Company leverages its database marketing
capabilities by providing key product manufacturers with marketing research
such as price sensitivity tests, list response analyses, and database
marketing consulting services. The Company believes these efforts assist it
in promoting and preserving positive relationships with these manufacturers.
SALES, TECHNICAL SUPPORT AND CUSTOMER SERVICE
OUTBOUND SALES. At December 31, 1998, the Company had a staff of 142 experienced
account managers and support staff who pursue sales to corporate and education
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 150 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 13 countries worldwide.
The Company's subsidiaries are located in Austria, France, Germany, India,
Mexico, Switzerland, and The United Kingdom. The Company's licensees are
located in 6 other foreign countries.
The Company's international sales were $79.8 million in 1998, $70.7 million in
1997 and $59.2 million in 1996, representing increases of 12.9%, 19.5%, and
125.1%, respectively, over the comparable prior periods. The catalogs of the
Company's subsidiaries and licensees are published under THE PC ZONE and THE MAC
ZONE service marks, but are designed and produced locally in the native
language, which allows them to be customized both in presentation and product
mix to suit local needs. The Company's headquarters provides ongoing support in
database marketing, catalog design, establishing relationships with product
manufacturers, and product merchandising. The international catalogs attract
manufacturers seeking broad international exposure for marketing of their
microcomputer hardware, software and peripheral products.
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
<PAGE>
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 August 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
MicroWarehouse, 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. Many of these competitors rely heavily on the Internet as a marketing
and sales channel. 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, 1998, the Company had 659 employees in its domestic operations,
and over 200 persons were employed by the Company's foreign subsidiaries. The
Company considers its employee relations to be good. The Company has never had a
work stoppage and no employees are represented by a labor organization. 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.
<PAGE>
TRADEMARKS
The Company conducts its business in the United States primarily under the
service marks THE PC ZONE-REGISTERED TRADEMARK- and THE MAC ZONE-REGISTERED
TRADEMARK- 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
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, France, Germany, India, Mexico,
Switzerland and the United Kingdom.
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 1998 to a vote of
security holders.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
FIROZ H. LALJI, age 52, has served as the Company's President and Chief
Executive Officer since May of 1998. He was appointed to the additional
office of Chairman of the Board in March 1999. Mr. Lalji has served as a
director of the Company since March 1990. From 1985 to 1998, Mr. Lalji was
President and Chief Executive Officer of Fana Group of Companies. Fana Group
of Companies owns real estate and hotels in the United States and Canada.
From 1981 to 1997, he was also President and Chief Executive Officer of Kits
Cameras, Inc., which operates over 140 camera specialty stores in eight
western states.
LORNE G. RUBIS, age 48, was appointed Chief Operating Officer in February of
1999. Mr. Rubis joined the Company and 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 42, 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.
<PAGE>
MARK A. BRADLEY, age 33, was Senior Vice President of Merchandising from January
of 1998 to February of 1999. 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 48, 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.
GUIO G. BARELA, age 46, joined the Company in November of 1998 as Senior Vice
President of Corporate Development. From 1997 to 1998, Mr. Barela was Vice
President at Insight Enterprises, Inc. From 1996 to 1997, Mr. Barela was CEO and
Founder of ICXpress. From 1995 to 1997, he served as Vice President of Supplier
Relations of Tandy Procurement Alliance, a Tandy Corporation.
<PAGE>
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ National Market under the
symbol MZON. The following table sets forth the range of high and low sales
prices for the Common Stock as reported by the NASDAQ National Market.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997
---- ----
HIGH LOW HIGH LOW
---- ----- ----- -----
<S> <C> <C> <C> <C>
First quarter 5 3/8 3 1/2 12 3/8 8 3/4
Second quarter 4 1/4 2 11/16 11 1/2 4 1/2
Third quarter 4 1/4 2 11/16 7 1/4 4 9/16
Fourth quarter 56 2 3/4 6 11/16 3 1/2
</TABLE>
As of the March 8th record date the Company had approximately 8,900 holders
of record of its Common Stock. The Company has never paid and has no present
plans to pay a cash dividend on its Common Stock. The Company intends to
retain its earnings to finance the expansion of its business.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth the selected historical consolidated income
and balance sheet data of Multiple Zones International, Inc. and its
subsidiaries. The balance sheet data at December 31, 1998 and 1997 and the
statement of operations data for the years ended December 31, 1998, 1997 and
1996 have been derived from the audited financial statements and notes
thereto included in this Annual Report on Form 10-K. The balance sheet data
for the years ended December 31, 1996, 1995 and 1994 and the statement of
operations data for the years ended December 31, 1995 and 1994 have been
derived from audited consolidated financial statements and notes thereto not
included in this Annual Report on Form 10-K. This information should be read
in conjunction with the consolidated financial statements and notes thereto
included in Item 8 and Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $501,441 $490,025 $457,007 $242,587 $113,456
Cost of sales (1,2) 447,005 431,905 393,998 211,037 98,211
-------- -------- -------- -------- --------
Gross profit 54,436 58,120 63,009 31,550 15,245
Selling, general and administrative
expenses (1,2) 63,409 62,910 44,613 25,425 14,411
-------- -------- -------- -------- --------
Income (loss) from operations (8,973) (4,790) 18,396 6,125 834
Other expense, net (1) 3,474 1,618 1,397 1,086 215
-------- -------- -------- -------- --------
Income (loss) before income taxes (12,447) (6,408) 16,999 5,039 619
Provision for (benefit from) income
taxes (4,114) (965) 6,125 1,847 207
-------- -------- -------- -------- --------
Net income (loss) (1,2) $ (8,333) $ (5,443) $ 10,874 $ 3,192 $ 412
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Diluted earnings (loss) per share (1,2) $ (0.64) $ (0.42) $ 0.91 $ 0.32 $ 0.04
Shares used in computation of diluted
earnings (loss) per share 13,079 12,965 11,912 9,460 9,431
BALANCE SHEET DATA:
Working capital $ 27,601 $ 35,057 $ 39,809 $ 7,750 $ 525
Total assets 133,047 104,810 149,801 79,392 25,705
Short-term debt 2,943 3,045 3,960 12,757 3,617
Long-term debt, net of current portion 338 892 1,748 1,665 791
Series B preferred stock 6,461
Total shareholders' equity 37,350 44,971 49,469 4,736 1,705
SELECTED OPERATING DATA: (3)
Catalogs distributed 46,300,000 50,500,000 44,000,000 29,000,000 15,000,000
Number of shipments (4) 1,189,000 1,266,000 1,229,000 859,000 522,000
Average order size (4) $ 378 $ 358 $ 352 $ 273 $ 212
Customer and inquirer database (5) 3,317,000 2,970,000 2,504,000 1,908,000 1,626,000
</TABLE>
(1) During 1998, the Company recorded charges related to the write-off of
inventory, the closure of international subsidiaries, staffing reductions
and the disposal of unproductive computer hardware and software.
Excluding the effect of these charges, the Company would have reported a
net loss of $(2,600,000) or $(0.20) per share.
(2) 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.
(3) Selected operating data exclude international operations.
(4) 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.
(5) 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
for the Company.
<PAGE>
ITEM 7. 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 items set forth in Item 1 above under the caption "Risk Factors."
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 on
Form 10-K.
GENERAL
Multiple Zones International, Inc. together with its majority owned
subsidiaries (collectively the "Company") is a leading international direct
marketer of over 100,000 computer products to businesses and consumers. The
Company serves customers through its Internet superstore, zones.com, and its
flagship brands: Zones Business Solutions, Zones.com, The PC Zone-Registered
Trademark- and The Mac Zone-Registered Trademark- with products from leading
manufacturers, including IBM, Compaq, Hewlett Packard, Microsoft, Toshiba
and Apple. 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. Internet
sales and electronic marketing via e-mail began in 1997.
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,
------------------------------------
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 89.1 88.1 86.2
----------- ------------ -----------
Gross profit 10.9 11.9 13.8
SG&A expenses 12.6 12.8 9.8
----------- ------------ -----------
Income (loss) from operations (1.8) (0.9) 4.0
Other expense 0.7 0.3 0.3
----------- ------------ -----------
Income (loss) before income taxes (2.5) (1.2) 3.7
Provision for (benefit from)
income taxes (0.8) (0.2) 1.3
----------- ------------ -----------
Net income (loss) (1.7)% (1.0)% 2.4%
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
NET SALES. Net sales increased 2.3% to $501.4 million in 1998 from $490.0
million in 1997. The increase resulted primarily from an increase in the
Company's Zones Business Solutions ("ZBS") division, which grew 22.2% to $176.3
million in 1998. The Company's Zones.com division, which is comprised of the
Internet and
<PAGE>
inbound catalog operations declined 6.4% to $243.9 million in 1998. Internet
sales increased 386.8% to $47.5 million in 1998.
Net domestic PC product sales increased 11.2% to $202.6 million in 1998 from
$182.2 million in 1997 (excluding $9.2 million in fourth quarter 1997 PC
Product sales to corporate resellers, which have been discontinued). The
increase was due primarily to an increase in the number of ZBS outbound
account managers to 142 at year-end, compared with 91 at the end of 1997.
Sales to business and education accounts increased 14.8% to $176.3 million
from $144.2 million in 1997. PC product sales represented 56.3% and 54.4% of
the sales to business and education accounts in 1998 and 1997, respectively.
Net domestic Mac product sales decreased 3.9% to $219.0 million in 1998 from
$228.0 million in 1997. Sales of Mac products to business and education
accounts through ZBS increased 17.5% during 1998 to $77.0 million, due
primarily to the increased number of outbound account managers. Sales of Mac
products through the combined catalog and Internet operations of Zones.com
declined 13.6% to $142.0 million, reflecting a continued overall decline in
consumer demand for Mac products.
International subsidiary net sales in 1998 were $79.8 million, an increase of
12.9% over the comparable period. The increase resulted primarily from sales
growth in the Company's operations in Germany, France, and the United Kingdom.
GROSS PROFIT. Gross profit decreased to $54.4 million in 1998 from $58.1 million
in 1997, and declined to 10.9% of net sales in 1998 from 11.9% of net sales in
1997. During the second quarter of each period, the Company recorded inventory
adjustments totaling $2.9 million and $2.5 million, respectively, primarily
related to allowances for obsolete and non-returnable inventory. 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 and education accounts which generally carry a lower average gross
margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased to $63.4
million in 1998 from $62.9 million in 1997, but declined as a percentage of net
sales between periods to 12.6% from 12.8%. During the second quarter of 1998,
the Company recorded charges totaling $2.3 million primarily related to staffing
reductions and the closure or sale of certain international operations. During
the second quarter of 1997 the Company recorded charges totaling $2.5 million
primarily related to uncollectable advertising receivables and staffing
reductions.
OTHER EXPENSE. Other expense increased to $3.4 million in 1998 from $1.6 million
in 1997. During the second quarter the Company recorded charges to income of
$3.5 million related to the disposal of certain unproductive computer hardware
and software costs.
INCOME TAX (BENEFIT)/EXPENSE. The income tax benefit for 1998 was $4.1 million.
The income tax benefit for 1997 was $965,000. As of December 31, 1998 and 1997,
the Company had deferred tax assets attributable to foreign subsidiaries.
NET LOSS. As a result of the above factors, a net loss of $8.3 million
or 1.7% of net sales was incurred in 1998. Net loss for 1997 was $5.4 million
or 1.0% of net sales.
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 and education accounts. PC catalog
circulation increased to 20.0 million in 1997 from 14.0 million in the
comparable period. Sales to business and education accounts increased 53.9% to
$153.5 million in 1997 from $99.7 million in 1996. PC
<PAGE>
product sales represent 57.3% and 42.6% of the sales to business and
education accounts in 1997 and 1996, respectively.
Net domestic Mac product sales decreased to $228.0 million in 1997 from
$277.9 million in 1996, a decrease of 18.0%. The decrease in the domestic Mac
product sales reflected the declining overall demand for Mac products.
International subsidiary net sales in 1997 were $70.7 million, an increase of
19.5% over 1996. 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 and education accounts which generally carry a lower average gross
margin.
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. These include $2.5 million related
to allowances for uncollectable 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 quarters 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 had 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.
TRENDS
During the quarter ended December 31, 1998, sales through the Company's Internet
superstore, zones.com, grew to $18.5 million, or 15.2% of domestic sales, an
increase of 284.5% over the fourth quarter of 1997 and 36.2% over the third
quarter of 1998. This increase was facilitated by a variety of website
improvements during the year, including hardware upgrades to increase system
capacity, improvements to the web-site's user-friendliness, and the addition of
expanded software-delivery capabilities. The Company plans to further customize
its website to provide more efficient access and improved product selection for
its business and education customers. The Company also promotes Internet sales
by offering telephone sales assistance to its online customers. About 70% of
sales dollars through the Company's Internet store are phone-assisted, which
affords additional sales opportunities and results in increased order sizes.
Outbound sales to business and education accounts grew to $50.2 million
during the fourth quarter, an increase of 1% and 9.3% over the fourth quarter
of 1997 and third quarter of 1998, respectively. This growth was achieved
<PAGE>
through a combination of process based productivity improvements and the
Company's successful efforts to expand its outbound account executive
headcount. The Company had 142 account executives at December 31, 1998,
representing a 22.4%increase during the fourth quarter, and intends to
continue its aggressive efforts to expand outbound sales personnel.
Inbound sales resulting from the circulation of the Company's catalogs, by
contrast, declined year over year to $52.5 million during the fourth quarter,
representing a 22.0% decrease from inbound sales in the fourth quarter of 1997.
The Company believes that the rapid growth of its Internet sales has been a
significant factor in the flattening of its inbound catalog sales, as increasing
numbers of catalog recipients choose to place their orders electronically rather
than over the phone. Approximately 60% of customers placing orders through the
Internet store have migrated from the Company's inbound catalog sales division.
The Company encourages this transition by featuring its Internet superstore
prominently throughout its catalogs and by making its inbound telephone sales
personnel available to assist online customers. The Company intends to continue
to adapt and adjust the size, content and circulation of its outbound sales
catalogs in an effort to optimize the combined sales of its inbound and Internet
divisions.
Gross product margins have continued to decline industry-wide, primarily due to
falling average unit selling prices and increased price competition. The
Company's average order size in the fourth quarter of 1998 has grown to $414, an
increase of 9.9% and 5.5% over the fourth quarter of 1997 and the third quarter
of 1998, respectively. This increase is due primarily to the increase in
outbound sales to business and education accounts which support a higher average
order. Although this increase in order size has roughly offset the recent
declines in gross margin percentage on an average order, the Company expects
that there may be further declines in gross product margins, and that continued
growth in order size, as well as continued cost reductions, will likely be
required to improve profitability.
The Company uses cooperative advertising funds to substantially offset the costs
associated with its catalog circulation and other marketing activities. The
amount of funding available from the Company's vendor-partners has generally
declined since 1997, both in dollars and as a percentage of sales. The Company's
domestic net cost of advertising totaled $3.3 million in 1998, or 0.8% of
domestic net sales. Domestic net advertising costs were $3.9 million in 1997 and
$2.0 million in 1996. Net advertising costs may continue to fluctuate or rise in
the future, as the Company continues to adapt and adjust its catalog
circulation, Internet and other marketing activities to optimize sales and
profitability in light of changing market conditions.
INDUSTRY
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 and have led to continued average price
reductions and lower margin dollars per transaction. A number of Internet-based
competitors are selling computer products at cost plus a transaction fee. 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.
<PAGE>
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 $27.3 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 $133.0 million at December 31, 1998, of which
$120.8 million were current assets. At December 31, 1998 and 1997, the Company
had cash and cash equivalents of $19.1 million and $1.6 million respectively,
and working capital of $27.6 million and $35.1 million, respectively. Net cash
provided by operating activities was $20.5 million in 1998 and $10.8 million in
1997, respectively, compared to net cash used by operating activities of $11.2
million in 1996. The cash inflows during 1998 were primarily due to higher
accounts payable offset by increased inventories and accounts receivable. The
cash inflow in 1997 was primarily due to lower inventory, prepaid expenses and
other assets, and accounts receivable, partly offset by decreased accounts
payable. The cash outflow in 1996 was 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.
Cash outlays for capital expenditures were $3.1 million in 1998 and $5.7
million for both 1997 and 1996, respectively. In addition, the Company incurred
capital lease obligations during 1998, 1997 and 1996 of $38,000, $420,000 and
$1.1 million, respectively. These expenditures were primarily for information
systems and software, leasehold improvements, telecommunication system
enhancements and furniture and equipment.
The Company has a domestic revolving line of credit of $15.0 million from a
commercial bank collateralized by accounts receivable. At December 31, 1998,
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, 1998, the Company had $2.5 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, 1998 was $79.7
million of which $31.4 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.
OTHER MATTERS
The year 2000 ("Y2K") issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Possible
effects of this issue could include disruption of operations including inability
to ship orders, process invoices and order product.
<PAGE>
The Company established a Y2K assessment team in late 1997 to review all of its
information technology ("IT") systems and non-IT systems for Y2K compliance. The
Company has contacted and received response from approximately 90% of its
domestic systems and service suppliers. All major hardware and software systems
have been reviewed. The Company believes that most of its systems, including its
enterprise software system, are Y2K compliant. The Company has identified
several systems it believes may not be compliant, including its phone system
operating software and various computer workstations and servers. Additionally,
a number of critical service providers have not indicated that they are
currently compliant, including local and long distance phone providers, and
several small software solution providers.
A plan to mitigate currently known compliance issues was completed during the
fourth quarter of 1998. Testing to verify compliance is scheduled for
completion during the second quarter of 1999. The Company will utilize both
internal and external resources to reprogram and test applications for
compliance. The Company has a project underway to upgrade its enterprise
software system and expects to complete this project early in the third
quarter of 1999. Although its current software version is Y2K compliant,
several minor software attachments will be replaced and brought into
compliance in the process. Compliance costs for repairing known systems and
software issues are estimated to be $400,000. Additionally, other minor
software compliance costs are expected to total less than $100,000.
Compliance testing costs are estimated to be $150,000.
The Company's assessment of the potential impact of Y2K issues on its foreign
subsidiaries is continuing, and the Company believes that it's subsidiaries
will be compliant before the end of 1999. The Company has not yet completed
testing to verify compliance for its domestic systems and accordingly has not
completed contingency planning. Once completed contingency plans and related
cost estimates will be continually refined, as additional information becomes
available. The Company cannot provide any assurance that it will be able to
achieve timely Y2K compliance, or that its critical service providers and
suppliers will not have service disruptions associated with the Y2K problem.
Failure of the Company or any of its critical service providers to achieve
Y2K compliance could result in serious disruptions of the Company's
operations, such as preventing the Company from receiving or processing
customer orders. Such disruptions would likely have a material adverse effect
on the Company's results of operations, liquidity or financial condition.
The activities associated with Y2K compliance have not had a material impact on
other critical IT or non-IT initiatives, and efforts to bring the Company's
non-compliant systems into compliance are not expected to delay any project or
impact financial results in any material way.
In June 1998, the Financial Accounting Standard Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Among other
provisions, SFAS No. 133 requires that entities recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Gains and losses resulting from changes in the
fair values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. SFAS No. 133
becomes effective for the Company beginning January 1, 2000. The Company is
currently assessing the impact, if any, to its financial position or results of
operations.
Management believes that the adoption of this new standard will not have a
material impact on the Company's financial position or results of operations.
<PAGE>
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to the risk of fluctuating interest rates in the normal
course of business, primarily as a result of its short-term borrowing and
investment activities which generally bear interest at variable rates. Because
the short-term borrowings and investments have maturities of three months or
less, the Company believes that the risk of material loss is low.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included in this report beginning at
page 28.
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 1999 Annual Meeting of
Shareholder under the caption "Proposal No. 1: Election of Directors," and
"Section 16(a) Beneficial Ownership Reporting Compliance." See also the
information concerning executive officers of the Company included in Item 4a of
Part I in this Report.
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 1999 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 1999 Annual Meeting of
Shareholders under the caption "Stock Ownership of Management and Certain Other
Holders."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The financial statements of Multiple Zones International, Inc. and
subsidiaries and Report of Independent Accountants are included herein
beginning on page 25.
(a) 2. Financial Statement Schedules:
Schedules are omitted since the required information is not present or
is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the
Consolidated Financial Statements and Notes thereto.
(a) 3. Exhibits required by Securities and Exchange Commission Regulation
S-K, Item 601:
Number Description
- -------------------------------------------------------------------------------
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
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 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))
10.5 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))
10.6 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))
10.7 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))
10.8 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))
10.9 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))
<PAGE>
10.10 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))
10.11 Employment Agreement dated as of July 14, 1997 between the
Registrant and Lorne G. Rubis (incorporated by reference from
exhibit 10.13 to the Annual Report on Form 10-K filed on March
31, 1998 (File No. 000-28488))
10.12 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
10.13 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))
10.14 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))
10.15 Industrial Real Estate Lease dated April 10, 1997 between the
Registrant and Pacific Industrial Park LLC (incorporated by
reference from exhibit 10.18 to the Annual Report on Form 10-K
filed on March 31, 1998 (File No. 000-28488))
10.16 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))
10.17 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))
10.18 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))
10.19 Amendment to Storage and Distribution Agreement dated December
30, 1997 between the Registrant and Advanced Logistics Services
Corp.
10.20 Agreement for Wholesale Financing dated 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))
10.21 Amendment to Agreement for Wholesale Financing dated April 23,
1997, between the Registrant and Deutsche Financial Services
Corporation (incorporated by reference from exhibit 10.24 to the
Annual Report on Form 10-K filed on March 31, 1998 (File No.
000-28488))
10.22 Business Loan Agreement dated February 28, 1999, between the
Registrant and U.S. Bank of Washington, National Association
EXHIBIT NO. 21: SUBSIDIARIES OF THE REGISTRANT
21.1 Subsidiaries of the Registrant
EXHIBIT NO. 23: CONSENTS OF EXPERTS AND COUNSELS
23.1 Consent of PricewaterhouseCoopers LLP
EXHIBIT NO. 27: FINANCIAL DATA SCHEDULE
27.1 Financial Data Schedule (December 31, 1998)
<PAGE>
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 31, 1999
BY: /S/ FIROZ H. LALJI
----------------------------------
Firoz H. Lalji, Chairman and
Chief Executive Officer
BY: /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 31, 1999
- -------------------------------
John H. Bauer
/S/ JOHN T. CARLETON Director March 31, 1999
- -------------------------------
John T. Carleton
/S/ RICHARD E. CARTER Director March 31, 1999
- -------------------------------
Richard E. Carter
/S/ FIROZ H. LALJI Director March 31, 1999
- -------------------------------
Firoz H. Lalji
/S/ KATHLEEN S. PUSHOR Director March 31, 1999
- -------------------------------
Kathleen S. Pushor
</TABLE>
<PAGE>
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Consolidated Balance Sheets
December 31, 1998 and 1997 26
Consolidated Statements of Operations and Comprehensive Income
Twelve months ended December 31, 1998, 1997 and 1996 27
Statements of Shareholders' Equity
Twelve months ended December 31, 1998, 1997 and 1996 28
Consolidated Statements of Cash Flows
Twelve months ended December 31, 1998, 1997 and 1996 29
Notes to Consolidated Financial Statements 30
Report of Independent Accountants 41
<PAGE>
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,092 $ 1,645
Receivables, net 43,687 42,944
Inventories, net 48,543 40,169
Prepaid expenses 3,632 4,012
Income taxes receivable 2,460 1,127
Deferred income taxes 3,353 1,889
-------- --------
Total current assets 120,767 91,786
Property and equipment, net 10,384 12,417
Other assets 1,896 607
-------- --------
Total assets $133,047 $104,810
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank lines of credit $ 2,032 $ 2,084
Accounts payable 79,659 44,067
Accrued liabilities and other 9,364 9,059
Current portion of capital lease obligations 911 961
Income taxes payable 1,200 540
-------- --------
Total current liabilities 93,166 56,711
Capital lease obligations, net of current portion 338 892
Other 1,695 1,608
-------- --------
Total liabilities 95,199 59,211
-------- --------
Minority interest 498 628
-------- --------
Commitments and contingencies
Shareholders' equity:
Common stock, no par value, 45,000,000 authorized
and 13,173,692 shares issued and outstanding at
December 31, 1998 and 13,041,464 shares at
December 31, 1997 38,434 37,751
Retained earnings (982) 7,256
Foreign currency translation adjustment (102) (36)
-------- --------
Total shareholders' equity 37,350 44,971
-------- --------
Total liabilities and shareholders' equity $133,047 $104,810
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net sales $501,441 $490,025 $457,007
Cost of sales 447,005 431,905 393,998
-------- -------- --------
Gross profit 54,436 58,120 63,009
Selling, general and administrative 63,409 62,910 44,613
-------- -------- --------
Income (loss) from operations (8,973) (4,790) 18,396
-------- -------- --------
Interest expense 598 1,096 1,500
Other (income) expense 2,774 414 (298)
Minority interest 102 108 195
-------- -------- --------
3,474 1,618 1,397
-------- -------- --------
Income (loss) before taxes (12,447) (6,408) 16,999
Provision (benefit) for income taxes (4,114) (965) 6,125
-------- -------- --------
Net income (loss) $ (8,333) $ (5,443) $ 10,874
-------- -------- --------
-------- -------- --------
Other comprehensive income (expense), net of tax:
Foreign currency translation adjustment (11) 47 (81)
Reclassification for gains included in net
income (55)
-------- -------- --------
Other comprehensive income (expense) (66) 47 (81)
-------- -------- --------
Comprehensive income (loss) $ (8,399) $ (5,396) $ 10,793
-------- -------- --------
Net income (loss) attributable to basic earnings
per share $ (8,333) $ (5,443) $ 10,415
Basic earnings (loss) per share $ (0.64) $ (0.42) $ 0.94
Shares used in computing basic earnings (loss)
per share 13,079 12,965 11,104
Diluted earnings (loss) per share $ (0.64) $ (0.42) $ 0.91
Shares used in computing diluted earnings (loss)
per share 13,079 12,965 11,912
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Foreign
Retained Currency
Common Stock Earnings Translation
Shares Amount (Deficit) Adjustment Total
---------- ------- --------- ----------- -------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 9,374,999 $ 2,750 $ 1,988 $ (2) $ 4,736
Accretion of Series B Redeemable Convertible
Preferred Stock (459) (459)
Issuance of common stock 2,537,106 27,303 27,303
Conversion of Series B Redeemable Convertible
Preferred Stock 918,711 6,920 6,920
Exercise of stock options 45,800 15 15
Net income 10,874 10,874
Tax effect of stock options exercised 161 161
Translation adjustments (81) (81)
---------- ------- ------- ----- -------
Balance, December 31, 1996 12,876,616 36,988 12,564 (83) 49,469
Issuance of common stock 33,748 196 196
Exercise of stock options 131,100 567 567
Net loss (5,443) (5,443)
Tax effect of stock options exercised 135 135
Translation adjustments 47 47
---------- ------- ------- ----- -------
Balance, December 31, 1997 13,041,464 37,751 7,256 (36) 44,971
Issuance of common stock 33,223 96 96
Exercise of stock options 53,695 242 242
Exercise of warrants 45,310 345 345
Net loss (8,333) (8,333)
Tax effect of stock options exercised 95 95
Translation adjustments (66) (66)
---------- ------- ------- ----- -------
Balance, December 31, 1998 13,173,692 $38,434 $ (982) $(102) $37,350
---------- ------- ------- ----- -------
---------- ------- ------- ----- -------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (8,333) $ (5,443) $ 10,874
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 3,641 2,943 1,651
Allowance for inventory and receivables 2,197 3,528 669
Write off of goodwill 1,233
Deferred income taxes (2,179) (1,246) (567)
Loss on disposal of assets 3,651 376
Minority interest (102) 108 229
Tax effect of stock options exercised 95 135 161
Changes in assets and liabilities excluding
effect of acquisitions:
Accounts receivable (4,233) 4,626 (26,734)
Inventory (10,936) 35,157 (35,251)
Prepaid expenses and other assets (466) 5,016 (1,968)
Accounts payable 37,043 (36,044) 37,039
Accrued liabilities 872 1,807 3,068
Income taxes payable (796) (1,387) (371)
-------- -------- ---------
Net cash provided by (used in) operating
activities 20,454 10,809 (11,200)
Cash flows from investing activities:
Purchases of property and equipment (3,064) (5,664) (5,725)
Acquisitions of subsidiaries (479)
Other 51
-------- -------- ---------
Net cash used in investing activities (3,064) (5,613) (6,204)
Cash flows from financing activities:
Payments under line of credit agreement (13,190) (76,215) (110,918)
Borrowings under line of credit agreement 13,202 75,372 101,853
Net change in book overdrafts 244 (2,985) (260)
Payments on capital leases (641) (1,250) (769)
Net proceeds from sale of common stock 683 763 27,317
Other (130) (264) 12
-------- -------- ---------
Net cash provided by (used in) financing
activities 168 (4,579) 17,235
Effect of exchange rate on cash and cash equivalents (111) 52 (70)
Net increase (decrease) in cash and cash equivalents 17,447 669 (239)
Cash and cash equivalents at beginning of period 1,645 976 1,215
-------- -------- ---------
Cash and cash equivalents at end of period $ 19,092 $ 1,645 $ 976
-------- -------- ---------
-------- -------- ---------
Supplemental cash flow information:
Cash paid during the period for interest 598 $ 1,095 $ 1,500
Cash paid for income taxes $ (1,356) $ 992 $ 6,796
Noncash investing and financing activity:
Capital leases to finance purchases of equipment $ 38 $ 420 $ 1,064
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
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, 1998 and 1997 are net of allowances of approximately $3,834,000 and
$2,400,000 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.
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.
USE OF ESTIMATES
<PAGE>
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.
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, 1998 and 1997
$2,257,000 and $2,294,000, 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 $3,300,000, $3,852,000 and $2,026,000 for the years ended December
31, 1998, 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
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.
SEGMENT REPORTING
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 has determined it's business has two
segments, The United States and International.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standard Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Among other
provisions, SFAS No. 133 requires that entities recognize
<PAGE>
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Gains and losses
resulting from changes in the fair values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. SFAS No. 133 becomes effective for the Company beginning
January 1, 2000. The Company is currently assessing the impact, if any, to its
financial position or results of operations
Management believes that the adoption of this new standard 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,
--------------------
1998 1997
------- -------
<S> <C> <C>
Trade $40,153 $32,381
Co-op advertising 4,105 4,510
Licensees 289 506
Returns, rebates and other 3,912 8,423
------- -------
48,459 45,820
Less allowances (4,772) (2,876)
------- -------
$43,687 $42,944
------- -------
------- -------
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Equipment $ 7,845 $ 5,169
Computer hardware and software under capital leases 3,915 6,773
Computer software 3,742 3,995
Furniture and fixtures and leasehold improvements 3,022 3,654
------- -------
18,524 19,591
Less accumulated depreciation and
Amortization (8,140) (7,174)
------- -------
Property and equipment, net $10,384 $12,417
------- -------
------- -------
</TABLE>
Included in accumulated depreciation and amortization is accumulated
amortization associated with capital leases at December 31, 1998 and 1997 of
$2,861,000 and $3,020,000, respectively.
<PAGE>
6. BANK LINES OF CREDIT
At December 31, 1998, the Company had a $15,000,000 revolving bank line of
credit expiring August 31, 1999. Interest is charged at the prime lending rate
7.75% and 8.50% at December 31, 1998 and 1997, respectively. At December 31,
1998 and 1997 no borrowings were outstanding. 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, 1998 or 1997.
The line of credit agreements contain 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 $2,032,000 and $2,084,000 of borrowings by
the Company's foreign subsidiaries at December 31, 1998 and 1997, 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, 1998 and 1997 the Company had book overdrafts of $3,227,000 and $2,983,000
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, 1998, accounts payable included $31,421,000 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.
8. INCOME TAXES
The income tax provision consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Current $(1,935) $ 281 $6,692
Deferred (2,496) (2,671) (567)
Valuation allowance for deferred tax asset 317 1,425
------- ------- ------
Total $(4,114) $ (965) $6,125
------- ------- ------
------- ------- ------
</TABLE>
<PAGE>
The components of deferred taxes were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
------- -------
<S> <C> <C>
Assets:
Allowance for doubtful accounts $ 1,413 $ 738
Inventory allowances 1,261 643
Inventory capitalization 50 63
Property and equipment depreciation 75
Deferred rent 624 593
Accrued liabilities and other 835 445
Net operating losses 1,849 1,579
Valuation allowance (1,708) (1,391)
------- -------
$ 4,399 $ 2,670
------- -------
Liabilities:
Property and equipment depreciation $ (423)
------- -------
$ (423)
------- -------
Net deferred tax asset $ 4,399 $ 2,247
------- -------
------- -------
</TABLE>
The net deferred tax asset is recognized in the accompanying balance sheet as
follows (in thousands):
<TABLE>
<S> <C> <C>
Current deferred tax asset $3,353 $1,889
Non-current deferred income tax asset,
net of valuation allowance of $1,708
in 1998 and $1,391 in 1997. 1,046 358
------ ------
Net deferred tax asset $4,399 $2,247
------ ------
------ ------
</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 tax 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,
-----------------------
1998 1997 1996
---- ----- ----
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
State income tax 1.4 1.4 1.4
Other 0.9 0.9 (0.4)
Valuation allowance for deferred tax assets (2.5) (22.2)
---- ----- ----
Effective tax rate 33.0% 15.1% 36.0%
---- ----- ----
---- ----- ----
</TABLE>
<PAGE>
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, 1998, future minimum payments under operating leases
were as follows (in thousands):
<TABLE>
<S> <C>
1999..................................... $2,007
2000..................................... 1,884
2001..................................... 1,846
2002..................................... 1,752
2003..................................... 1,006
------
Total............................... $8,495
------
------
</TABLE>
Rental expense totaled $2,657,000, $2,522,000 and $1,532,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
OBLIGATIONS UNDER CAPITAL LEASES
The Company leases equipment and software under various long-term capital
leases. Future lease payments as of December 31, 1998 were as follows (in
thousands):
<TABLE>
<S> <C>
1999....................................... $ 962
2000....................................... 255
2001....................................... 93
------
Total future minimum lease payments 1,310
Less amount representing interest (61)
------
Present value of net minimum lease payments 1,249
Less current portion (911)
------
Noncurrent portion $ 338
------
------
</TABLE>
DISTRIBUTION CENTER
The Company has contracted with a freight company to provide and operate its
primary distribution center under a contract that expires August 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 $2,526,000 at December 31,
1998.
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 for the
three-year period. On February 25, 1999, the minority shareholders of the
Company's German subsidiary exercised their option to sell their minority
shares to the Company, which the Company accepted. The Company is currently
valuing the purchase price of the minority shares, the range of which is
estimated to be between $1,300,000 and $3,300,000.
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
involuntary liquidation value of each preferred share was $11.43 plus accrued
and unpaid dividends. Offering costs related to the sale were $691,992. Upon
consummation of the initial public offering all outstanding shares
<PAGE>
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. In connection with the offering, the
Company also issued warrants for the purchase of 45,310 shares of common stock
exercisable at $7.62 per share. The warrants were exercised during the fourth
quarter of 1998.
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, 1998.
In addition, the Company has granted options to the Board of Directors.
Options outstanding to these individuals at December 31, 1998, were 93,125
shares at option prices of $2.75 -$10.50 per share.
On June 1, 1998, the Board of Directors adopted a resolution for all
employees below the level of vice-president, repricing all options granted
and unexercised prior to June 1, 1998 to that day's fair market value, or
$3.13 per share. The total number of shares re-priced was 344,672. While the
vesting periods were not affected, employees must wait one year to exercise
vested shares at the new price.
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):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net earnings (loss) - as reported $(8,333) $(5,443) $10,874
------- ------- -------
------- ------- -------
Net earnings (loss) - pro forma $(8,575) $(6,816) $10,200
------- ------- -------
------- ------- -------
Diluted earnings (loss) per share - as reported $ (0.64) $ (0.42) $ 0.91
------- ------- -------
------- ------- -------
Diluted earnings (loss) per share - pro forma $ (0.66) $ (0.53) $ 0.86
------- ------- -------
------- ------- -------
</TABLE>
<PAGE>
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 1998, 1997 and 1996, respectively: expected
volatility of 98%, 75% and 66%; risk-free interest rate of 5.1%, 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, 1996 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
Granted 1,212,905 3.53
Exercised (53,695) 4.11
Cancelled (1,582,539) 8.58
---------- --------------
Outstanding, December 31, 1998 1,245,296 $ 4.84
---------- --------------
---------- --------------
1998 option price range for exercised shares $0.33 - $11.13
1998 weighted-average fair value of options
granted during the year $ 2.23
</TABLE>
The following tables summarize information about fixed-price stock options
outstanding at December 31, 1998.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------------------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED-
RANGE OF OUTSTANDING REMAINING AVERAGE
EXERCISE PRICES AT 12/31/98 CONTRACTUAL YEARS EXERCISE PRICE
--------------- ----------- ----------------- --------------
<S> <C> <C> <C>
$0.33 - $3.13 610,255 9.00 $2.94
$3.38 - $5.75 427,460 9.04 4.48
$6.67 - $25.88 207,581 7.81 11.17
--------------- ----------- ----------------- --------------
$0.33 - $25.88 1,245,296 8.82 $4.84
--------------- ----------- ----------------- --------------
--------------- ----------- ----------------- --------------
</TABLE>
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
--------------------------------------------------------
RANGE OF NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/98 EXERCISE PRICE
--------------- ----------- ----------------
<S> <C> <C>
$0.33 - $3.13 61,765 $2.68
$3.38 - $5.75 56,125 4.66
$6.67 - $25.88 79,234 11.71
--------------- ----------- ----------------
$0.33 - $25.88 197,124 $6.86
--------------- ----------- ----------------
--------------- ----------- ----------------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In December 1995, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan") which was effective upon the completion of the public offering.
Under the terms of the Purchase Plan, employees other than officers and
employees of the Company's subsidiaries may purchase a total of up to 450,000
shares of common stock. The purchase price per share is 85% of the lower of the
market value per share of common stock determined as of the beginning or end of
the quarterly purchase period specified in the Purchase Plan.
<PAGE>
12. EARNINGS PER SHARE
The Company has 45,000,000 common shares issued, with 13,173,692 outstanding at
December 31, 1998. The Company has also granted options and warrants to purchase
common shares to the employees and directors of the Company and had also issued
convertible preferred stock. The options, warrants and preferred stock may have
a dilutive effect on the calculation of earnings per share. The following is a
reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations as required by SFAS 128 (in thousands).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income (loss) $(8,333) $(5,433) $10,874
Less: Series B accretion and dividends (459)
------- ------- -------
Income available to common shareholders $(8,333) $(5,433) 10,415
------- ------- -------
------- ------- -------
Weighted average shares outstanding 13,079 12,965 11,104
------- ------- -------
------- ------- -------
Basic earnings (loss) per share $ (0.64) $ (0.42) $ 0.94
------- ------- -------
------- ------- -------
DILUTED EARNINGS PER SHARE:
Net income (loss) $(8,333) $(5,433) $10,874
Weighted average shares outstanding 13,079 12,965 11,104
Series B Preferred stock 461
Stock options and warrants 347
------- ------- -------
Total commons shares and dilutive securities 13,079 12,965 11,912
------- ------- -------
------- ------- -------
Dilutive earnings (loss) per share $ (0.64) $ (0.42) $ 0.91
------- ------- -------
------- ------- -------
</TABLE>
All options and warrants to purchase common stock were excluded from the
computation of diluted earnings per share for the year ended December 31, 1998
and 1997 because the effect of the options and warrants on the calculation
would have been antidilutive.
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 1998, 1997 and 1996 were as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Sales to licensees $1,009 $1,660 $2,586
</TABLE>
15. SEGMENT INFORMATION
The Company has determined its reportable segments based on geographic areas
of operation. The Company's reportable segments are the United States and
International. The Company's international operations consist of majority
owned subsidiaries primarily concentrated in Europe. Intersegment revenues
are eliminated as the operations of the segments are consolidated.
<PAGE>
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, 1998
Net sales $421,625 $ 80,838 $(522) $501,441
Depreciation and amortization (3,246) (395) (3,641)
Income from operations (10,369) 1,396 (8,973)
Interest revenue (expense) 245 (322) (77)
Total assets 121,178 15,239 (3,369) 133,047
YEAR ENDED DECEMBER 31, 1997
Net sales $419,360 $ 71,552 $(887) $490,025
Depreciation and amortization (2,677) (266) (2,943)
Income from operations (1,616) (3,174) (4,790)
Interest revenue (expense) (702) (381) (1,083)
Total assets 89,710 17,311 (2,211) 104,810
YEAR ENDED DECEMBER 31, 1996
Net sales $397,653 $ 60,743 $(1,589) $457,077
Depreciation and amortization (1,431) (220) (1,651)
Income from operations 16,972 1,424 18,396
Interest revenue (expense) (1,087) (130) (1,217)
Total assets 137,999 16,926 (5,124) 149,801
</TABLE>
<PAGE>
16. SELECTED QUARTERLY FINANCIAL DATE (UNAUDITED)
The following information is for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
(in thousands, except per share data)
First Second Third Fourth
DECEMBER 31, 1998 Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $117,809 $112,872 $124,329 $146,431
Cost of sales 103,891 102,740 110,199 130,175
-------- -------- -------- --------
Gross profit 13,918 10,132 14,130 16,256
SG&A expenses 15,908 18,364 13,877 15,260
-------- -------- -------- --------
Income (loss) from operations (1,990) (8,232) 253 996
Other expense (32) 3,465 27 14
-------- -------- -------- --------
Income (loss) before income taxes (1,958) (11,697) 226 982
Provision (benefit from) for income taxes (724) (3,930) 77 463
-------- -------- -------- --------
Net income (loss) $ (1,234) $ (7,767) $ 149 $ 519
-------- -------- -------- --------
-------- -------- -------- --------
Diluted earnings (loss) per share(1) $ (0.09) $ (0.59) $ 0.01 $ 0.04
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
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>
(1) Net income (loss) per share is computed independently for each of the
quarters presented therefore, the sum of the quarterly net income (loss) per
share does not equal the total computed for the year due to shares issued each
quarter.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Multiple Zones International, Inc.
Renton, Washington
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive income, shareholders'
equity and cash flows present fairly, in all material respects, the financial
position of Multiple Zones International, Inc. and Subsidiaries at December 31,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Seattle, Washington
February 8, 1999
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
MULTIPLE ZONES INTERNATIONAL, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I SHAREHOLDERS................................................. 1
1.1 Annual Meeting............................................... 1
1.1.1 Time and Place of Meeting............................ 1
1.1.2 Business Conducted at Meeting........................ 1
1.2 Special Meetings............................................. 2
1.3 Notice of Meetings........................................... 3
1.3.1 Notice of Special Meeting............................ 3
1.3.2 Proposed Articles of Amendment, Merger, Exchange,
Sale, Lease, or Disposition.......................... 3
1.3.3 Proposed Dissolution................................. 3
1.3.4 Declaration of Mailing............................... 4
1.3.5 Waiver of Notice..................................... 4
1.4 Quorum; Vote Requirement..................................... 4
1.5 Adjourned Meetings........................................... 4
1.6 Fixing Record Date........................................... 5
1.7 Shareholders' List for Meeting............................... 5
1.8 Ratification................................................. 5
1.9 Action by Shareholders Without a Meeting..................... 5
1.10 Telephonic Meetings.......................................... 6
ARTICLE II BOARD OF DIRECTORS........................................... 6
2.1 Responsibility of Board of Directors......................... 6
2.2 Number of Directors; Qualification........................... 6
2.3 Election of Directors; Nominations........................... 7
2.3.1 Election and Term of Office.......................... 7
2.3.2 Nominations for Directors............................ 7
2.4 Vacancies.................................................... 8
2.5 Removal...................................................... 9
2.6 Resignation.................................................. 9
2.7 Annual Meeting............................................... 9
2.8 Regular Meetings............................................. 9
2.9 Special Meetings............................................. 9
2.10 Notice of Meeting............................................ 9
2.11 Quorum of Directors.......................................... 10
2.12 Dissent by Directors......................................... 10
2.13 Action by Directors Without a Meeting........................ 10
2.14 Telephonic Meetings.......................................... 11
2.15 Compensation................................................. 11
2.16 Committees................................................... 11
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ARTICLE III OFFICERS..................................................... 12
3.1 Appointment.................................................. 12
3.2 Qualification................................................ 12
3.3 Officers Enumerated.......................................... 12
3.3.1 Chairman of the Board................................ 12
3.3.2 Chief Executive Officer.............................. 12
3.3.3 President or Co-Presidents........................... 13
3.3.4 Vice Presidents...................................... 13
3.3.5 Secretary............................................ 13
3.3.6 Treasurer............................................ 14
3.4 Delegation................................................... 14
3.5 Resignation.................................................. 14
3.6 Removal...................................................... 14
3.7 Vacancies.................................................... 14
3.8 Other Officers and Agents.................................... 14
3.9 Compensation................................................. 15
3.10 General Standards for Officers............................... 15
ARTICLE IV CONTRACTS, CHECKS AND DRAFTS................................. 15
4.1 Contracts.................................................... 15
4.2 Checks, Drafts, Etc.......................................... 15
4.3 Deposits..................................................... 15
ARTICLE V STOCK........................................................ 15
5.1 Issuance of Shares........................................... 15
5.2 Certificates of Stock........................................ 16
5.3 Stock Records................................................ 16
5.4 Restrictions on Transfer..................................... 16
5.5 Transfers.................................................... 17
ARTICLE VI RECORDS OF CORPORATE MEETINGS................................ 17
ARTICLE VII FINANCIAL MATTERS............................................ 18
ARTICLE VIII DISTRIBUTIONS................................................ 18
ARTICLE IX CORPORATE SEAL............................................... 18
ARTICLE X INDEMNIFICATION.............................................. 18
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10.1 Definitions.................................................. 18
10.2 Mandatory Indemnification.................................... 18
10.3 Insurance.................................................... 19
10.4 Changes in Law............................................... 19
10.5 Exclusivity; Nature of Rights; Amendment..................... 19
ARTICLE XI MISCELLANY................................................... 19
11.1 Communications by Facsimile.................................. 19
11.2 Inspector of Elections....................................... 20
11.3 Rules of Order............................................... 20
11.4 Construction................................................. 21
11.5 Severability................................................. 21
ARTICLE XII AMENDMENT OF BYLAWS.......................................... 21
ARTICLE XIII AUTHENTICATION............................................... 21
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AMENDED AND RESTATED BYLAWS
OF
MULTIPLE ZONES INTERNATIONAL, INC.
These Bylaws are promulgated pursuant to the Washington Business
Corporation Act, as set forth in Title 23B of the Revised Code of Washington
(the "Act").
ARTICLE I
SHAREHOLDERS
1.1 ANNUAL MEETING.
1.1.1 TIME AND PLACE OF MEETING. The annual meeting of the
shareholders of the corporation for the election of directors and for the
transaction of such other business as may properly come before the meeting
shall be held each year at a place, day, and time to be set by the Board of
Directors.
1.1.2 BUSINESS CONDUCTED AT MEETING.
(a) At an annual meeting of shareholders, an item of
business may be conducted, and a proposal may be considered and acted upon,
only if such item or proposal is brought before the meeting (i) by, or at the
direction of, the Board of Directors, or (ii) by any shareholder of the
corporation who is entitled to vote at the meeting and who complies with the
procedures set forth in the remainder of this Section 1.1.2. This Section
1.1.2 shall not apply to matters of procedure that, pursuant to Section
11.3(a) of these Bylaws, are subject to the authority of the chairman of the
meeting.
(b) For an item of business or proposal to be brought
before an annual meeting by a shareholder, the shareholder must have given
timely notice thereof in writing to the Secretary of the corporation. To be
timely, a shareholder's notice must be delivered to, or mailed and received
at, the principal office of the corporation not less than seventy (70) days
prior to the date scheduled for the meeting (regardless of any postponements,
deferrals or adjournments of that meeting to a later date), or, if notice or
public disclosure of the date scheduled for the meeting is not given or made
at least eighty (80) days prior thereto, not more than ten (10) days
following the day on which notice of the date scheduled for the meeting is
mailed or the day on which disclosure of that date is made, whichever is
earlier.
(c) A shareholder's notice to the Secretary under
Section 1.1.2(b) shall set forth, as to each item of business or proposal the
shareholder intends to bring before the meeting (i) a brief description of
the item of business or proposal and the reasons for bringing it before the
meeting, (ii) the name and address, as they appear on the corporation's
books, of the shareholder and of any other shareholders that the shareholder
knows or anticipates will support the item of business or proposal, (iii) the
number and class of shares of stock of the corporation that are beneficially
owned on the date of such notice by the shareholder and by any such other
shareholders, and (iv) any financial interest of the shareholder or any such
other shareholders in such item of business or proposal.
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(d) The Board of Directors, or a designated committee
thereof, may reject a shareholder's notice that is not timely given in
accordance with the terms of Section 1.1.2(b). If the Board of Directors, or a
designated committee thereof, determines that the information provided in a
shareholder's notice does not satisfy the requirements of Section 1.1.2(c) in
any material respect, the Secretary of the corporation shall notify the
shareholder of the deficiency in the notice. The shareholder shall have an
opportunity to cure the deficiency by providing additional information to the
Secretary within such period of time, not to exceed five (5) days from the
date such deficiency notice is given to the shareholder, as the Board of
Directors or such committee shall reasonably determine. If the deficiency is
not cured within such period, or if the Board of Directors or such committee
determines that the additional information provided by the shareholder,
together with information previously provided, does not satisfy the
requirements of Section 1.1.2(c) in any material respect, then the Board of
Directors or such committee may reject the shareholder's notice.
(e) Notwithstanding the procedures set forth in Section
1.1.2(d), if a shareholder desires to bring an item of business or proposal
before an annual meeting, and neither the Board of Directors nor any committee
thereof has made a prior determination of whether the shareholder has complied
with the procedures set forth in this Section 1.1.2 in connection with such
item of business or proposal, then the chairman of the meeting shall determine
and declare at the meeting whether the shareholder has so complied. If the
chairman determines that the shareholder has so complied, then the chairman
shall so state and ballots shall be provided for use at the meeting with
respect to such item of business or proposal. If the chairman determines that
the shareholder has not so complied, then, unless the chairman, in his sole
and absolute discretion, determines to waive such compliance, the chairman
shall state that the shareholder has not so complied and the item of business
or proposal shall not be brought before the meeting.
(f) This Section 1.1.2 shall not prevent the consideration
and approval or disapproval at the annual meeting of reports of officers,
directors and committees of the Board of Directors, but, in connection with
such reports, no item of business may be conducted, and no proposal may be
considered and acted upon, unless there has been compliance with the
procedures set forth in this Section 1.1.2 in connection therewith.
1.2 SPECIAL MEETINGS. Special meetings of the shareholders for any
purpose or purposes may be called at any time by the Board of Directors or by
the Chairman of the Board (if one be appointed) or by the President or by one
or more shareholders holding shares representing not less than one-tenth
(1/10) of all the votes entitled to be cast on any issue proposed to be
considered at that meeting, to be held at such time and place as the Board or
the Chairman (if one be appointed) or the President may prescribe; provided,
that, at any time when the corporation is subject to the reporting
requirements of Section 13 or Section 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), special meetings of the shareholders
for any purpose or purposes may be called at any time only by the Board of
Directors or the Chairman of the Board (if one be appointed) or the President
or one or more shareholders holding shares representing not less than
twenty-five percent (25%) of all the votes entitled to be cast on any issue
proposed to be considered at that meeting.
Subject to the requirements of Section 2.3.2 if the purpose of the special
meeting is the
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election of directors, if a special meeting is called by any person or persons
other than the Board of Directors or the Chairman of the Board (if one be
appointed) or the President, then a written demand, describing with reasonable
clarity the purpose or purposes for which the meeting is called and specifying
the general nature of the business proposed to be transacted, shall be
delivered personally or sent by registered mail or by telegraphic or other
facsimile transmission to the Secretary of the corporation. Upon receipt of
such a demand, the Secretary shall cause notice of such meeting to be given,
within thirty (30) days after the date the demand was delivered to the
Secretary, to the shareholders entitled to vote, in accordance with the
provisions of Section 1.3 of these Bylaws.
1.3 NOTICE OF MEETINGS. Except as otherwise provided below, the
Secretary, Assistant Secretary, or any transfer agent of the corporation shall
give, in any manner permitted by law, not less than ten (10) nor more than
sixty (60) days before the date of any meeting of shareholders, written notice
stating the place, day, and time of the meeting to each shareholder of record
entitled to vote at such meeting. If mailed, notice to a shareholder with
first-class postage prepaid, correctly addressed to the shareholder at the
shareholder's address as it appears on the current record of shareholders of
the corporation, shall be effective when mailed. Otherwise, written notice
shall be effective at the earliest of the following: (a) when received, (b)
five (5) days after its deposit in the United States mail, as evidenced by the
postmark, if mailed with first-class postage prepaid and correctly addressed,
or (c) on the date shown on the return receipt, if sent by registered or
certified mail, return receipt requested, and the receipt is signed by or on
behalf of the addressee.
1.3.1 NOTICE OF SPECIAL MEETING. In the case of a special
meeting, the written notice shall also state with reasonable clarity the
purpose or purposes for which the meeting is called and the general nature of
the business proposed to be transacted at the meeting. No business other than
that within the purpose or purposes specified in the notice may be transacted
at a special meeting.
1.3.2 PROPOSED ARTICLES OF AMENDMENT, MERGER, EXCHANGE, SALE,
LEASE, OR DISPOSITION. If the business to be conducted at any meeting
includes any proposed amendment to the Articles of Incorporation or any
proposed merger or exchange of shares, or any proposed sale, lease, exchange,
or other disposition of all or substantially all of the property and assets
(with or without the goodwill) of the corporation not in the usual or regular
course of its business, then the written notice shall state that the purpose
or one of the purposes is to consider the proposed amendment or plan of
merger, exchange of shares, sale, lease, exchange, or other disposition, as
the case may be, shall describe the proposed action with reasonable clarity,
and shall be accompanied by a copy of the proposed amendment or plan. Written
notice of such meeting shall be given to each shareholder of record, whether
or not entitled to vote at such meeting, not less than twenty (20) days before
such meeting, in the manner provided in Section 1.3 above.
1.3.3 PROPOSED DISSOLUTION. If the business to be conducted at
any meeting includes the proposed voluntary dissolution of the corporation,
then the written notice shall state that the purpose or one of the purposes is
to consider the advisability thereof. Written notice of such meeting shall be
given to each shareholder of record, whether or not entitled to
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vote at such meeting, not less than twenty (20) days before such meeting, in
the manner provided in Section 1.3 above.
1.3.4 DECLARATION OF MAILING. A declaration of the mailing or
other means of giving any notice of any shareholders' meeting, executed by the
Secretary, Assistant Secretary, or any transfer or other agent of the
corporation giving notice on its behalf, shall be prima facie evidence of the
giving of such notice.
1.3.5 WAIVER OF NOTICE. A shareholder may waive notice of any
meeting at any time, either before or after such meeting. Except as provided
below, the waiver must be in writing, be signed by the shareholder entitled to
the notice, and be delivered to the corporation for inclusion in the minutes
or filing with the corporate records. A shareholder's attendance at a meeting
in person or by proxy waives objection to lack of notice or defective notice
of the meeting unless the shareholder at the beginning of the meeting objects
to holding the meeting or transacting business at the meeting on the ground
that the meeting is not lawfully called or convened. In the case of a special
meeting, or an annual meeting at which fundamental corporate changes are
considered, a shareholder waives objection to consideration of a particular
matter that is not within the purpose or purposes described in the meeting
notice unless the shareholder objects to considering the matter when it is
presented.
1.4 QUORUM; VOTE REQUIREMENT. A quorum shall exist at any meeting of
shareholders if a majority of the votes entitled to be cast is represented in
person or by proxy. Once a share is represented for any purpose at a meeting
other than solely to object to holding the meeting or transacting business at
the meeting, it is deemed present for quorum purposes for the remainder of the
meeting and for any adjournment of that meeting unless a new record date is or
must be set for that adjourned meeting. Subject to the foregoing, the
determination of the voting groups entitled to vote (as required by law), and
the quorum and voting requirements applicable thereto, must be made separately
for each matter being considered at a meeting. In the case of any meeting of
shareholders that is adjourned more than once because of the failure of a
quorum to attend, those who attend the third convening of such meeting,
although less than a quorum, shall nevertheless constitute a quorum for the
purpose of electing directors, provided that the percentage of shares
represented at the third convening of such meeting shall not be less than
one-third of the shares entitled to vote.
If a quorum exists, action on a matter (other than the election of
directors) is approved by a voting group if the votes cast within the voting
group favoring the action exceed the votes cast within the voting group
opposing the action unless a greater number of affirmative votes is required
by law or by the Articles of Incorporation.
1.5 ADJOURNED MEETINGS. An adjournment or adjournments of any
shareholders' meeting, whether by reason of the failure of a quorum to attend
or otherwise, may be taken to such date, time, and place as the chairman of the
meeting may determine without new notice being given if the date, time, and
place are announced at the meeting at which the adjournment is taken. However,
if the adjournment is for more than one hundred twenty (120) days from the date
set for the original meeting, a new record date for the adjourned meeting shall
be fixed and a new notice of the adjourned meeting shall be given to each
shareholder of record entitled to vote at the adjourned meeting, in accordance
with the provisions of Section 1.3 of
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these Bylaws. At any adjourned meeting, the corporation may transact any
business which might have been transacted at the original meeting. Any meeting
at which directors are to be elected shall be adjourned only from day to day
until such directors are elected.
1.6 FIXING RECORD DATE. For the purpose of determining shareholders
entitled to notice of or to vote at any meeting of shareholders (or, subject to
Section 1.5 above, any adjournment thereof), the Board of Directors may fix in
advance a date as the record date for any such determination of shareholders,
such date in any case to be not more than seventy (70) days prior to the
meeting. If no such record date is fixed for the determination of shareholders
entitled to notice of or to vote at a meeting of shareholders, then the day
before the first notice is delivered to shareholders shall be the record date
for such determination of shareholders. If no notice is given because all
shareholders entitled to notice have waived notice, then the record date for
the determination of shareholders entitled to notice of or to vote at a meeting
shall be the date on which the last such waiver of notice was obtained or the
date of the meeting, if earlier. When a determination of shareholders entitled
to vote at any meeting of shareholders has been made as provided in this
section, such determination shall apply to any adjournment thereof, except as
provided in Section 1.5 of these Bylaws. If no notice is given because all
shareholders entitled to notice have signed a consent as described in Section
1.9 below, the record date for determining shareholders entitled to take action
without a meeting is the date the first shareholder signs the consent.
1.7 SHAREHOLDERS' LIST FOR MEETING. The corporation shall cause to be
prepared an alphabetical list of the names of all of its shareholders on the
record date who are entitled to notice of a shareholders' meeting or any
adjournment thereof. The list must be arranged by voting group (and within each
voting group by class or series of shares) and show the address of and the
number of shares held by each shareholder. The shareholders' list must be
available for inspection by any shareholder, beginning ten (10) days prior to
the meeting and continuing through the meeting, at the principal office of the
corporation or at a place identified in the meeting notice in the city where
the meeting will be held. Such list shall be produced and kept open at the time
and place of the meeting. During such ten-day period, and during the whole time
of the meeting, the shareholders' list shall be subject to the inspection of
any shareholder, or the shareholder's agent or attorney. In cases where the
record date is fewer than ten (10) days prior to the meeting because notice has
been waived by all shareholders, the Secretary shall keep such record available
for a period from the date the first waiver of notice was delivered to the date
of the meeting. Failure to comply with the requirements of this section shall
not affect the validity of any action taken at the meeting.
1.8 RATIFICATION. Subject to the requirements of RCW 23B.08.730,
23B.17.020, and 23B.19.040, any contract, transaction, or act of the
corporation or of any director or officer of the corporation that shall be
authorized, approved, or ratified by the affirmative vote of a majority of
shares represented at a meeting at which a quorum is present shall, insofar as
permitted by law, be as valid and as binding as though ratified by every
shareholder of the corporation.
1.9 ACTION BY SHAREHOLDERS WITHOUT A MEETING. Any action which may be
or which is required by law to be taken at any meeting of shareholders may be
taken, without a meeting or notice of a meeting, if one or more consents in
writing, setting forth the action so
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taken, are signed by all of the shareholders entitled to vote or, in the place
of any one or more of such shareholders, by a person holding a valid proxy to
vote with respect to the subject matter thereof, and are delivered to the
corporation for inclusion in the minutes or filing with the corporate records.
If notice of the proposed action to be taken by unanimous consent of the
voting shareholders is required by law to be given to nonvoting shareholders,
the corporation must give its nonvoting shareholders written notice of the
proposed action at least ten (10) days before the action is taken. The notice
must contain or be accompanied by the same material that, by law, would have
been required to be sent to nonvoting shareholders in a notice of meeting at
which the proposed action would have been submitted to such shareholders for
action. Action taken by unanimous written consent is effective when all
consents are in possession of the corporation, unless the consent specifies a
later effective date. Such consent shall have the same force and effect as a
meeting vote of shareholders and may be described as such in any articles or
other document filed with the Secretary of State of the State of Washington.
1.10 TELEPHONIC MEETINGS. Shareholders may participate in a meeting by
means of a conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other at the same
time, and participation by such means shall constitute presence in person at a
meeting.
ARTICLE II
BOARD OF DIRECTORS
2.1 RESPONSIBILITY OF BOARD OF DIRECTORS. The business and affairs and
property of the corporation shall be managed under the direction of a Board of
Directors. A director shall discharge the duties of a director, including
duties as a member of a committee, in good faith, with the care an ordinarily
prudent person in a like position would exercise under similar circumstances,
and in a manner the director reasonably believes to be in the best interests of
the corporation. In discharging the duties of a director, a director is
entitled to rely on information, opinions, reports, or statements, including
financial statements and other financial data, if prepared or presented by:
(a) one or more officers or employees of the corporation whom the director
reasonably believes to be reliable and competent in the matters presented; (b)
legal counsel, public accountants, or other persons as to matters the director
reasonably believes are within the person's professional or expert competence;
or (c) a committee of the Board of Directors of which the director is not a
member, if the director reasonably believes the committee merits confidence. A
director is not acting in good faith if the director has knowledge concerning
the matter in question that makes reliance otherwise permitted above
unwarranted. The creation of, delegation of authority to, or action by a
committee does not alone constitute compliance by a director with the standards
of conduct imposed by law upon directors. A director is not liable for any
action taken as a director, or any failure to take any action, if the director
performed the duties of the director's office in compliance with this section.
2.2 NUMBER OF DIRECTORS; QUALIFICATION. The exact number of directors of
the corporation shall be five (5) until amended in accordance with these Bylaws.
No reduction of
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the authorized number of directors shall have the effect of removing any
director before that director's term of office expires. No director need be a
shareholder of the corporation or a resident of Washington. Each director must
be at least eighteen (18) years of age.
2.3 ELECTION OF DIRECTORS; NOMINATIONS.
2.3.1 ELECTION AND TERM OF OFFICE. At each annual meeting of
shareholders, the shareholders shall elect directors. Directors may also be
elected at a special meeting of shareholders called specifically for that
purpose. Each director so elected shall hold office until the next annual
meeting of shareholders or, in the case of staggered terms as permitted by RCW
23B.08.060, for the term for which he is elected, and in each case until his
successor shall have been elected and qualified.
2.3.2 NOMINATIONS FOR DIRECTORS.
(a) Nominations of candidates for election as
directors at an annual or special meeting of shareholders may only be made (i)
by, or at the direction of, the Board of Directors, or (ii) by any shareholder
of the corporation who is entitled to vote at the meeting and who complies
with the procedures set forth in the remainder of this Section 2.3.2.
(b) If a shareholder proposes to nominate one or more
candidates for election as directors at an annual or special meeting, the
shareholder must have given timely notice thereof in writing to the Secretary
of the corporation. To be timely, a shareholder's notice must be delivered to,
or mailed and received at, the principal office of the corporation not less
than seventy (70) days prior to the date scheduled for the meeting (regardless
of any postponements, deferrals or adjournments of that meeting to a later
date), or, if notice or public disclosure of the date scheduled for the
meeting is not given or made at least eighty (80) days prior thereto, not more
than ten (10) days following the day on which notice of the date scheduled for
the meeting is mailed or the day on which disclosure of that date is made,
whichever is earlier.
(c) A shareholder's notice to the Secretary under
Section 2.3.2(b) shall set forth, as to each person whom the shareholder
proposes to nominate for election as a director (i) the name, age, business
address and residence address of such person, (ii) the principal occupation or
employment of such person, (iii) the number and class of shares of stock of
the corporation that are beneficially owned on the date of such notice by such
person, and (iv) if the corporation at such time has any security registered
pursuant to Section 12 of the Exchange Act, any other information relating to
such person required to be disclosed in solicitations of proxies with respect
to nominees for election as directors pursuant to Regulation 14A under the
Exchange Act, including but not limited to information required to be
disclosed by Schedule 14A of Regulation 14A, and any other information that
the shareholder would be required to file with the Securities and Exchange
Commission in connection with the shareholder's nomination of such person as a
candidate for director or the shareholder's opposition to any candidate for
director nominated by, or at the direction of, the Board of Directors. In
addition to the above information, a shareholder's notice to the Secretary
under Section 2.3.2(b) shall (A) set forth (i) the name and address, as they
appear on the corporation's books, of the shareholder and of any other
shareholders that the shareholder knows or anticipates will support any
candidate or candidates nominated by the shareholder,
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and (ii) the number and class of shares of stock of the corporation that are
beneficially owned on the date of such notice by the shareholder and by any
such other shareholders, and (B) be accompanied by a written statement, signed
and acknowledged by each candidate nominated by the shareholder, that the
candidate agrees to be so nominated and to serve as a director of the
corporation if elected at the meeting.
(d) The Board of Directors, or a designated committee
thereof, may reject any shareholder's nomination of one or more candidates for
election as directors if the nomination is not made pursuant to a
shareholder's notice timely given in accordance with the terms of Section
2.3.2(b). If the Board of Directors, or a designated committee thereof,
determines that the information provided in a shareholder's notice does not
satisfy the requirements of Section 2.3.2(c) in any material respect, the
Secretary of the corporation shall notify the shareholder of the deficiency in
the notice. The shareholder shall have an opportunity to cure the deficiency
by providing additional information to the Secretary within such period of
time, not to exceed five (5) days from the date such deficiency notice is
given to the shareholder, as the Board of Directors or such committee shall
reasonably determine. If the deficiency is not cured within such period, or if
the Board of Directors or such committee determines that the additional
information provided by the shareholder, together with information previously
provided, does not satisfy the requirements of Section 2.3.2(c) in any
material respect, then the Board of Directors or such committee may reject the
shareholder's notice.
(e) Notwithstanding the procedures set forth in
Section 2.3.2(d), if a shareholder proposes to nominate one or more candidates
for election as directors at an annual or special meeting, and neither the
Board of Directors nor any committee thereof has made a prior determination of
whether the shareholder has complied with the procedures set forth in this
Section 2.3.2 in connection with such nomination, then the chairman of the
meeting shall determine and declare at the meeting whether the shareholder has
so complied. If the chairman determines that the shareholder has so complied,
then the chairman shall so state and ballots shall be provided for use at the
meeting with respect to such nomination. If the chairman determines that the
shareholder has not so complied, then, unless the chairman, in his sole and
absolute discretion, determines to waive such compliance, the chairman shall
state that the shareholder has not so complied and the defective nomination
shall be disregarded.
2.4 VACANCIES. Except as otherwise provided by the Articles of
Incorporation or by law, any vacancy occurring in the Board of Directors
(whether caused by resignation, death, or otherwise) may be filled by the
affirmative vote of a majority of the directors present at a meeting of the
Board at which a quorum is present, or, if the directors in office constitute
less than a quorum, by the affirmative vote of a majority of all of the
directors in office. Notice shall be given to all of the remaining directors
that such vacancy will be filled at the meeting. However, if the vacant
director's position was held by a director elected by one or more voting groups
composed of less than all of the voting shareholders, such vacancy may only be
filled by (i) the remaining directors, if any, elected by the same voting group
or groups; or (ii) the shareholders in the voting group or groups that elected
the director who formerly held the vacant office. A director elected to fill
any vacancy shall hold office until the next meeting of
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shareholders at which directors are elected, and until his successor shall
have been elected and qualified.
2.5 REMOVAL. Any director or the entire Board of Directors may be removed
as provided in Section 6.2 of the Articles of Incorporation.
2.6 RESIGNATION. A director may resign at any time by delivering written
notice to the Board of Directors, its Chairman, the President, or the
Secretary. A resignation is effective when the notice is delivered unless the
notice specifies a later effective date.
2.7 ANNUAL MEETING. The first meeting of each newly elected Board of
Directors shall be known as the annual meeting thereof and shall be held
without notice immediately after the annual shareholders' meeting or any
special shareholders' meeting at which a Board of Directors is elected. Such
meeting shall be held at the same place as such shareholders' meeting unless
some other place shall be specified by resolution of the shareholders.
2.8 REGULAR MEETINGS. Regular meetings of the Board of Directors may be
held at such place, day, and time as shall from time to time be fixed by
resolution of the Board without notice other than the delivery of such
resolution as provided in Section 2.10 below.
2.9 SPECIAL MEETINGS. Special meetings of the Board of Directors may be
called by the President or the Chairman of the Board (if one be appointed) or
any two or more directors, to be held at such place, day, and time as specified
by the person or persons calling the meeting.
2.10 NOTICE OF MEETING. Notice of the place, day, and time of any meeting
of the Board of Directors for which notice is required shall be given, at least
two (2) days preceding the day on which the meeting is to be held, by the
Secretary or an Assistant Secretary, or by the person calling the meeting, in
any manner permitted by law, including orally. Any oral notice given by
personal communication over the telephone or otherwise may be communicated
either to the director or to a person at the office of the director who, the
person giving the notice has reason to believe, will promptly communicate it to
the director. Notice shall be deemed to have been given on the earliest of (a)
the day of actual receipt, (b) five (5) days after the day on which written
notice is deposited in the United States mail, as evidenced by the postmark,
with first-class postage prepaid and correctly addressed, or (c) on the date
shown on the return receipt, if sent by registered or certified mail, return
receipt requested, and the receipt is signed by or on behalf of the addressee.
No notice of any regular meeting need be given if the place, day, and
time thereof have been fixed by resolution of the Board of Directors and a
copy of such resolution has been given to each director, either by personally
delivering the copy to the director at least two (2) days, or by depositing
the copy in the United States mail with first-class postage prepaid and
correctly addressed to the director at the director's address as it appears on
the records of the corporation at least five (5) days (as evidenced by the
postmark), prior to the day of the first meeting held in pursuance thereof.
Notice of a meeting of the Board of Directors need not be given to any
director if it is waived by the director in writing, whether before or after
such meeting is held. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the Board of Directors need be
specified in the notice or waiver of notice of such meeting unless required
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by law, the Articles of Incorporation, or these Bylaws.
A director's attendance at or participation in a meeting shall constitute a
waiver of notice of such meeting except when a director attends or participates
in a meeting for the express purpose of objecting on legal grounds prior to or
at the beginning of the meeting (or promptly upon the director's arrival) to
the holding of the meeting or the transaction of any business and does not
thereafter vote for or assent to action taken at the meeting. Any meeting of
the Board of Directors shall be a legal meeting without any notice thereof
having been given if all of the directors have received valid notice thereof,
are present without objecting, or waive notice thereof, or any combination
thereof.
2.11 QUORUM OF DIRECTORS. Except in particular situations where a lesser
number is expressly permitted by law, and unless a greater number is required
by the Articles of Incorporation, a majority of the number of directors
specified in or fixed in accordance with these Bylaws shall constitute a quorum
for the transaction of business, and the affirmative vote of a majority of the
directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors. If the number of directors in office at any time is
less than the number specified in or fixed in accordance with these Bylaws,
then a quorum shall consist of a majority of the number of directors in office;
provided that in no event shall a quorum consist of fewer than one-third of the
number specified in or fixed in accordance with these Bylaws.
Directors at a meeting of the Board of Directors at which a quorum is
initially present may continue to transact business notwithstanding the
withdrawal of directors, provided such withdrawal does not reduce the number
of directors attending the meeting below the level of a quorum.
A majority of the directors present, whether or not constituting a
quorum, may adjourn any meeting of the Board of Directors to another time and
place. If the meeting is adjourned for more than forty-eight (48) hours, then
notice of the time and place of the adjourned meeting shall be given before
the adjourned meeting takes place, in the manner specified in Section 2.10 of
these Bylaws, to the directors who were not present at the time of the
adjournment.
2.12 DISSENT BY DIRECTORS. Any director who is present at any meeting of
the Board of Directors at which action on any corporate matter is taken shall
be presumed to have assented to the action taken unless the director objects at
the beginning of the meeting (or promptly upon the director's arrival) to the
holding of, or the transaction of business at, the meeting; or unless the
director's dissent or abstention shall be entered in the minutes of the
meeting; or unless the director delivers written notice of the director's
dissent or abstention to the presiding officer of the meeting before the
adjournment thereof or to the corporation within a reasonable time after the
adjournment of the meeting. Such right to dissent or abstention shall not be
available to any director who votes in favor of such action.
2.13 ACTION BY DIRECTORS WITHOUT A MEETING. Any action required by law to
be taken or which may be taken at a meeting of the Board of Directors may be
taken without a meeting if one or more consents in writing, setting forth the
action so taken, shall be signed
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either before or after the action so taken by all of the directors and
delivered to the corporation for inclusion in the minutes or filing with the
corporate records. Such consent shall have the same effect as a meeting vote.
Action taken under this section is effective when the last director signs the
consent, unless the consent specifies a later effective date.
2.14 TELEPHONIC MEETINGS. Except as may be otherwise restricted by the
Articles of Incorporation, members of the Board of Directors may participate in
a meeting of the Board by any means of communication by which all directors
participating in the meeting may simultaneously hear each other during the
meeting. Participation by such means shall constitute presence in person at a
meeting.
2.15 COMPENSATION. By resolution of the Board of Directors, the directors
may be paid their expenses, if any, and may be paid a fixed sum or a stated
salary as a director, for attendance at each meeting of the Board. No such
payment shall preclude any director from serving the corporation in any other
capacity and receiving compensation therefor.
2.16 COMMITTEES. The Board of Directors, by resolution adopted by the
greater of (a) a majority of all of the directors in office, or (b) the number
of directors required by the Articles of Incorporation or these Bylaws to take
action may from time to time create, and appoint individuals to, one or more
committees, each of which must have at least two (2) members. If a committee is
formed for the purpose of exercising functions of the Board, the committee must
consist solely of directors. If the only function of a committee is to study
and make recommendations for action by the full Board, the committee need not
consist of directors. Members of a committee composed solely of directors, in
fulfilling their standard of conduct, may rely upon Section 2.1 above.
Committees of directors may exercise the authority of the Board of Directors to
the extent specified by such resolution or in the Articles of Incorporation or
these Bylaws. However, no committee shall:
(a) authorize or approve a distribution (as defined in RCW
23B.01.400) except according to a general formula or method prescribed by the
Board of Directors;
(b) approve or propose to shareholders action that by law is
required to be approved by shareholders;
(c) fill vacancies on the Board of Directors or on any of its
committees;
(d) amend the Articles of Incorporation;
(e) adopt, amend, or repeal Bylaws;
(f) approve a plan of merger not requiring shareholder approval; or
(g) authorize or approve the issuance or sale or contract for sale of
shares, or determine the designation and relative rights, preferences, and
limitations of a class or series of shares, except that the Board of Directors
may authorize a committee of directors (or a senior executive officer of the
corporation) to do so within limits specifically prescribed by the Board of
Directors.
Committees shall be governed by the same provisions as govern the
meetings, actions
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without meetings, notice and waiver of notice, quorum and voting requirements,
and standards of conduct of the Board of Directors. The Executive Committee
(if one be established) shall meet periodically between meetings of the full
Board. All committees shall keep regular minutes of their meetings and shall
cause them to be recorded in books kept for that purpose at the office of the
corporation.
ARTICLE III
OFFICERS
3.1 APPOINTMENT. The officers of the corporation shall be appointed
annually by the Board of Directors at its annual meeting held after the annual
meeting of the shareholders. If the appointment of officers is not held at such
meeting, such appointment shall be held as soon thereafter as a Board meeting
conveniently may be held. Except in the case of death, resignation, or removal,
each officer shall hold office until the next annual meeting of the Board of
Directors and until his successor is appointed and qualified.
3.2 QUALIFICATION. None of the officers of the corporation need be a
director, except as specified below. Any two or more of the corporate offices
may be held by the same person.
3.3 OFFICERS ENUMERATED. Except as otherwise provided by resolution of
the Board of Directors, the officers of the corporation and their respective
powers and duties shall be as follows:
3.3.1 CHAIRMAN OF THE BOARD. The Chairman of the Board (if such
an officer is appointed) shall be a director and shall perform such duties as
shall be assigned to him by the Board of Directors and in any employment
agreement. The Chairman shall preside at all meetings of the shareholders and
at all meetings of the Board at which he is present.
3.3.2 CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall
be the chief executive officer of the corporation and, subject to the control
of the Board of Directors and the Executive Committee (if one is established),
shall supervise and control all of the assets, business, and affairs of the
corporation. The Chief Executive Officer may sign certificates for shares of
the corporation, deeds, mortgages, bonds, contracts, and other instruments,
except when the signing thereof has been expressly delegated by the Board of
Directors or by these Bylaws solely to some other officer or agent of the
corporation or is otherwise required by law to be signed by some other officer
or in some other manner. The Chief Executive Officer shall vote the shares
owned by the corporation in other corporations, domestic or foreign, unless
otherwise prescribed by law or resolution of the Board. In general, the Chief
Executive Officer shall perform all duties customarily performed by a chief
executive officer and such other duties as may be prescribed by the Board from
time to time. In the absence of the Chairman of the Board, the Chief Executive
Officer shall preside over all meetings of the shareholders and, if a
director, over all meetings of the Board of Directors. The Chief Executive
Officer shall have the authority to appoint one or more Assistant Secretaries
and Assistant Treasurers, as he deems necessary.
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3.3.3 PRESIDENT OR CO-PRESIDENTS. The President, subject to the
supervision and control of the Chief Executive Officer, the Board of Directors
and the Executive Committee (if one is established), shall supervise and
control all of the assets, business, and affairs of the corporation. The
President may sign certificates for shares of the corporation, deeds,
mortgages, bonds, contracts, and other instruments, except when the signing
thereof has been expressly delegated by the Board of Directors or by these
Bylaws solely to some other officer or agent of the corporation or is
otherwise required by law to be signed by some other officer or in some other
manner. In the absence or disability of the Chief Executive Officer, the
President or a Co-President designated by the Board of Directors shall perform
all the duties of the Chief Executive Officer and when so acting shall have
all the powers of, and be subject to all the restrictions upon, the Chief
Executive Officer. The President shall have the authority to appoint one or
more Assistant Secretaries and Assistant Treasurers, as the President deems
necessary. If Co-Presidents are appointed, all references to "President" in
these Bylaws shall be deemed to be references to Co-Presidents.
3.3.4 VICE PRESIDENTS. The Vice Presidents shall have such other
powers and perform such other duties as from time to time may be respectively
prescribed for them by the Board, these Bylaws, the Chief Executive Officer,
the President, or the Chairman of the Board (if one is appointed).
3.3.5 SECRETARY. The Secretary shall:
(a) have responsibility for preparing minutes of meetings
of the shareholders and the Board of Directors and for authenticating records
of the corporation;
(b) see that all notices are duly given in accordance
with the provisions of Sections 1.3, 1.5, 2.8, and 2.10 of these Bylaws and as
required by law;
(c) be custodian of the corporate records and seal of the
corporation, if one be adopted;
(d) keep a register of the post office address of each
shareholder and director;
(e) attest certificates for shares of the corporation;
(f) have general charge of the stock transfer books of
the corporation;
(g) when required by law or authorized by resolution of
the Board of Directors, sign with the Chief Executive Officer, President, or
other officer authorized by the Chief Executive Officer or President, or the
Board, deeds, mortgages, bonds, contracts, and other instruments; and
(h) in general, perform all duties incident to the office
of Secretary and such other duties as from time to time may be assigned by the
Chief Executive Officer, the President or the Board of Directors.
In the absence of the Secretary, an Assistant Secretary may perform the
duties of the Secretary.
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3.3.6 TREASURER. If required by the Board of Directors, the
Treasurer shall give a bond for the faithful discharge of his duties in such
sum and with such surety or sureties as the Board shall determine. The
Treasurer shall:
(a) have charge and custody of and be responsible for all
funds and securities of the corporation;
(b) receive and give receipts for moneys due and payable
to the corporation from any source whatsoever and deposit all such moneys in
the name of the corporation in banks, trust companies, or other depositories
selected in accordance with the provisions of these Bylaws; and
(c) in general, perform all of the duties incident to the
office of Treasurer and such other duties as from time to time may be assigned
by the Chief Executive Officer, the President or the Board of Directors. In
the absence of the Treasurer, an Assistant Treasurer may perform the duties of
the Treasurer.
3.4 DELEGATION. In case of the absence or inability to act of any officer
of the corporation and of each person herein authorized to act in his place,
the Board of Directors may from time to time delegate the powers and duties of
such officer to any other officer or other person whom it may select.
3.5 RESIGNATION. Any officer may resign at any time by delivering
notice to the corporation. Any such resignation shall take effect at the time
the notice is delivered unless the notice specifies a later effective date.
Unless otherwise specified therein, acceptance of such resignation by the
corporation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract to which the officer is a party.
3.6 REMOVAL. Any officer or agent may be removed by the Board with or
without cause. An officer empowered to appoint another officer or assistant
officer also has the power to remove any officer he would have the power to
appoint whenever in his judgment the best interests of the corporation would
be served thereby. The removal of an officer or agent shall be without
prejudice to the contract rights, if any, of the corporation or the person so
removed. Appointment of an officer or agent shall not of itself create
contract rights.
3.7 VACANCIES. A vacancy in any office because of death, resignation,
removal, disqualification, creation of a new office, or any other cause may be
filled by the Board of Directors for the unexpired portion of the term or for a
new term established by the Board.
3.8 OTHER OFFICERS AND AGENTS. One or more Vice Presidents and such other
officers and assistant officers as may be deemed necessary or advisable may be
appointed by the Board of Directors or, to the extent provided in Section 3.3.2
and 3.3.3 above, by the Chief Executive Officer or President. Such other
officers and assistant officers shall hold office for such periods, have such
authorities, and perform such duties as are provided in these Bylaws or as may
be provided by resolution of the Board. Any officer may be assigned by the
Board any additional title that the Board deems appropriate. The Board may
delegate to any
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officer or agent the power to appoint any such assistant officers or agents
and to prescribe their respective terms of office, authorities, and duties.
3.9 COMPENSATION. Compensation, if any, for officers and other agents
and employees of the corporation shall be determined by the Board of
Directors, or by the Chief Executive Officer, or by the President to the
extent such authority may be delegated to him or them by the Board. No officer
shall be prevented from receiving compensation in such capacity by reason of
the fact that he is also a director of the corporation.
3.10 GENERAL STANDARDS FOR OFFICERS. Officers with discretionary
authority shall discharge their duties under that authority in accordance with
the same standards of conduct applicable to directors as specified in Section
2.1 above (except for subsection (c) thereof).
ARTICLE IV
CONTRACTS, CHECKS AND DRAFTS
4.1 CONTRACTS. The Board of Directors may authorize any officer or
officers or agent or agents to enter into any contract or execute and deliver
any instrument in the name of and on behalf of the corporation. Such authority
may be general or confined to specific instances. Subject to the limitations
set forth in RCW 23B.08.700 through 23B.08.730, 23B.17.020, and 23B.19.040, to
the extent applicable, the corporation may enter into contracts and otherwise
transact business as vendor, purchaser, lender, borrower, or otherwise with
its directors and shareholders and with corporations, associations, firms, and
entities in which they are or may be or become interested as directors,
officers, shareholders, members, or otherwise. Any such contract or
transaction shall not be affected or invalidated or give rise to liability by
reason of the director's or shareholder's having an interest in the contract
or transaction.
4.2 CHECKS, DRAFTS, ETC. All checks, drafts, and other orders for the
payment of money, notes, and other evidences of indebtedness issued in the name
of the corporation shall be signed by such officer or officers or agent or
agents of the corporation and in such manner as may be determined from time to
time by resolution of the Board of Directors.
4.3 DEPOSITS. All funds of the corporation not otherwise employed shall
be deposited from time to time to the credit of the corporation in such banks,
trust companies, or other depositories as the Treasurer, subject to the
direction of the Board of Directors, may select.
ARTICLE V
STOCK
5.1 ISSUANCE OF SHARES. No shares of the corporation shall be issued
unless authorized by the Board of Directors, which authorization shall include
the maximum number of shares to be issued, the consideration to be received for
each share, and, if the consideration is in a form other than cash, the
determination of the value of the consideration.
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5.2 CERTIFICATES OF STOCK. All shares of the corporation shall be
represented by certificates in such form, not inconsistent with the Articles of
Incorporation, as the Board of Directors may from time to time prescribe.
Certificates of stock shall be issued in numerical order and shall be signed by
the President or a Vice President, attested to by the Secretary or an Assistant
Secretary, and sealed with the corporate seal, if any. If any certificate is
manually signed by a transfer agent or a transfer clerk and by a registrar, the
signatures of the President, Vice President, Secretary or Assistant Secretary
upon that certificate may be facsimiles that are engraved or printed. If any
person who has signed or whose facsimile signature has been placed on a
certificate no longer is an officer when the certificate is issued, the
certificate may nevertheless be issued with the same effect as if the person
were still an officer at the time of its issue. Every certificate of stock
shall state:
(a) The state of incorporation;
(b) The name of the registered holder of the shares represented
thereby;
(c) The number and class of shares, and the designation of the
series, if any, which such certificate represents;
(d) If the corporation is authorized to issue different classes of
shares or different series within a class, either a summary of (on the face or
back of the certificate), or a statement that the corporation will furnish to
any shareholder upon written request and without charge a summary of, the
designations, relative rights, preferences, and limitations applicable to each
class and the variations in rights, preferences and limitations determined for
each series, and the authority of the Board of Directors to determine
variations for future series; and
(e) If the shares are subject to transfer or other restrictions
under applicable securities laws or contracts with the corporation, either a
complete description of or a reference to the existence and general nature of
such restrictions on the face or back of the certificate.
5.3 STOCK RECORDS. The corporation or its agent shall maintain at the
registered office or principal office of the corporation, or at the office of
the transfer agent or registrar of the corporation, if one be designated by the
Board of Directors, a record of its shareholders, in a form that permits
preparation of a list of the names and addresses of all shareholders in
alphabetical order by class of shares showing the number and class of shares
held by each. The person in whose name shares stand on the books of the
corporation shall be deemed by the corporation to be the owner thereof for all
purposes.
5.4 RESTRICTIONS ON TRANSFER. The Board of Directors shall have the
authority to issue shares of the capital stock of this corporation and the
certificates therefor subject to such transfer restrictions and other
limitations as it may deem necessary to promote compliance with applicable
federal and state securities laws, and to regulate the transfer thereof in such
manner as may be calculated to promote such compliance or to further any other
reasonable purpose. Except to the extent that the corporation has obtained an
opinion of counsel acceptable to the corporation that transfer restrictions are
not required under applicable securities laws, all certificates representing
shares of the corporation shall bear the following
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legend (or a legend of substantially the same import) on the face of the
certificate or on the reverse of the certificate if a reference to the legend
is contained on the face:
NOTICE: RESTRICTIONS ON TRANSFER
The securities represented by this certificate have not been
registered under the Securities Act of 1933, or any state securities
laws, and may not be offered, sold, transferred, encumbered, or
otherwise disposed of except upon satisfaction of certain
conditions. Information concerning these restrictions may be
obtained from the corporation or its legal counsel. Any offer or
disposition of these securities without satisfaction of said
conditions will be wrongful and will not entitle the transferee to
register ownership of the securities with the corporation.
5.5 TRANSFERS. Shares of stock may be transferred by delivery of the
certificates therefor, accompanied by:
(a) an assignment in writing on the back of the certificate,
or an assignment separate from certificate, or a written power of attorney to
sell, assign, and transfer the same, signed by the record holder of the
certificate; and
(b) such additional documents, instruments, and other items of
evidence as may be reasonably necessary to satisfy the requirements of any
transfer restrictions applicable to such shares, whether arising under
applicable securities or other laws, or by contract, or otherwise.
Except as otherwise specifically provided in these Bylaws, no shares of
stock shall be transferred on the books of the corporation until the
outstanding certificate therefor has been surrendered to the corporation. All
certificates surrendered to the corporation for transfer shall be canceled,
and no new certificate shall be issued until the former certificate for a like
number of shares shall have been surrendered and canceled, except that, in
case of a lost, destroyed, or mutilated certificate, a new one may be issued
therefor upon such terms (including indemnity to the corporation) as the Board
of Directors may prescribe.
ARTICLE VI
RECORDS OF CORPORATE MEETINGS
The corporation shall keep, as permanent records, minutes of all meetings
of its shareholders and Board of Directors, a record of all actions taken by
the shareholders or Board of Directors without a meeting, and a record of all
actions taken by a committee of the Board of Directors exercising the
authority of the Board of Directors on behalf of the corporation. The
corporation shall keep at its principal office a copy of the minutes of all
shareholders' meetings that have occurred, and records of all action taken by
shareholders without a meeting, within the past three (3) years. Any person
dealing with the corporation may rely upon a copy of any of the records of the
proceedings, resolutions, or votes of the Board or shareholders when certified
by the President or Secretary.
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ARTICLE VII
FINANCIAL MATTERS
The corporation shall maintain appropriate accounting records at its
principal office and shall prepare the annual financial statements required by
RCW 23B.16.200. Except to the extent otherwise expressly determined by the
Board of Directors or otherwise required by law, the accounting records of the
corporation shall be kept and prepared in accordance with generally accepted
accounting principles applied on a consistent basis from period to period. The
fiscal year of the corporation shall be the calendar year unless otherwise
expressly determined by the Board of Directors.
ARTICLE VIII
DISTRIBUTIONS
The Board of Directors may from time to time authorize, and the
corporation may make, distributions (as defined in RCW 23B.01.400) to its
shareholders to the extent permitted by RCW 23B.06.400, subject to any
limitation in the Articles of Incorporation. A director who votes for or
assents to a distribution made in violation of RCW 23B.06.400 is personally
liable to the corporation for the amount of the distribution that exceeds that
which could have been distributed without violating RCW 23B.06.400 if it is
established that the director did not perform the director's duties in
compliance with Section 2.1 above.
ARTICLE IX
CORPORATE SEAL
The Board of Directors may, but shall not be required to, adopt a corporate
seal for the corporation in such form and with such inscription as the Board
may determine. If such a corporate seal shall at any time be so adopted, the
application of or the failure to apply such seal to any document or instrument
shall have no effect upon the validity or invalidity of such document or
instrument under otherwise applicable principles of law.
ARTICLE X
INDEMNIFICATION
As provided by Section 6.5 of the Articles of Incorporation:
10.1 DEFINITIONS. The capitalized terms in this Article X shall have the
meanings set forth in RCW 23B.08.500.
10.2 MANDATORY INDEMNIFICATION. The Corporation shall indemnify and hold
harmless each individual who is or was serving as a Director or officer of the
Corporation or who, while serving as a Director or officer of the Corporation,
is or was serving at the request
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of the Corporation as a director, officer, partner, trustee, employee, or
agent of another foreign or domestic corporation, partnership, joint venture,
trust, employee benefit plan, or other enterprise, against any and all
Liability incurred with respect to any Proceeding to which the individual is
or is threatened to be made a Party because of such service, and shall make
advances of reasonable Expenses with respect to such Proceeding, to the
fullest extent permitted by law, without regard to the limitations in RCW
23B.08.510 through 23B.08.550; provided that no such indemnity shall indemnify
any Director or officer from or on account of (a) acts or omissions of the
Director or officer finally adjudged to be intentional misconduct or a knowing
violation of law; (b) conduct of the Director or officer finally adjudged to
be in violation of RCW 23B.08.310; or (c) any transaction with respect to
which it was finally adjudged that such Director or officer personally
received a benefit in money, property, or services to which the Director or
officer was not legally entitled.
10.3 INSURANCE. The Corporation may purchase and maintain insurance on
behalf of an individual who is or was a director, officer, employee, or agent
of the Corporation or, who, while a director, officer, employee, or agent of
the Corporation, is or was serving at the request of the Corporation as a
director, officer, partner, trustee, employee, or agent of another foreign or
domestic corporation, partnership, joint venture, trust, employee benefit plan,
or other enterprise against Liability asserted against or incurred by the
individual in that capacity or arising from the individual's status as a
director, officer, employee, or agent, whether or not the Corporation would
have power to indemnify the individual against such Liability under RCW
23B.08.510 or 23B.08.520.
10.4 CHANGES IN LAW. If, after the effective date of this Article X, the
Act is amended to authorize further indemnification of Directors or officers,
then Directors and officers of the Corporation shall be indemnified to the
fullest extent permitted by the Act as so amended.
10.5 EXCLUSIVITY; NATURE OF RIGHTS; AMENDMENT. To the extent permitted by
law, the rights to indemnification and advance of reasonable Expenses conferred
in this Article X shall not be exclusive of any other right which any
individual may have or hereafter acquire under any statute, provision of the
Bylaws, agreement, vote of shareholders or disinterested directors, or
otherwise. The right to indemnification conferred in this Article X shall be a
contract right upon which each Director or officer shall be presumed to have
relied in determining to serve or to continue to serve as such. Any amendment
to or repeal of this Article X shall not adversely affect any right or
protection of a Director or officer of the Corporation for or with respect to
any acts or omissions of such Director or officer occurring prior to such
amendment or repeal.
ARTICLE XI
MISCELLANY
11.1 COMMUNICATIONS BY FACSIMILE. Whenever these Bylaws require notice,
consent, or other communication to be delivered for any purpose, transmission
by phone, wire, or wireless equipment which transmits a facsimile of such
communication shall constitute
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sufficient delivery for such purpose. Such communication shall be deemed to
have been received by or in the possession of the addressee upon completion of
the transmission.
11.2 INSPECTOR OF ELECTIONS. Before any annual or special meeting of
shareholders, the Board of Directors may appoint an inspector of elections to
act at the meeting and any adjournment thereof. If no inspector of elections is
so appointed by the Board, then the chairman of the meeting may appoint an
inspector of elections to act at the meeting. If any person appointed as
inspector fails to appear or fails or refuses to act, then the chairman of the
meeting may, and upon the request of any shareholder or a shareholder's proxy
shall, appoint a person to fill that vacancy.
Such inspector of elections shall:
(a) determine the number of shares outstanding and the voting power
of each, the number of shares represented at the meeting, the existence of a
quorum, and, with the advice of legal counsel to the corporation, the
authenticity, validity, and effect of proxies pursuant to RCW 23B.07.220 and
23B.07.240 and any procedure adopted by the Board of Directors pursuant to RCW
23B.07.230;
(b) receive votes, ballots, or consents;
(c) hear and determine all challenges and questions in any way
arising in connection with the right to vote;
(d) count and tabulate all votes or consents;
(e) determine the result; and
(f) do any other acts that may be proper to conduct the election or
vote with fairness to all shareholders.
11.3 RULES OF ORDER. The rules contained in the most recent edition of
Robert's Rules of Order, Revised, shall govern all meetings of shareholders and
directors where those rules are not inconsistent with the Articles of
Incorporation or Bylaws, subject to the following:
(a) The chairman of the meeting shall have absolute authority over
matters of procedure, and there shall be no appeal from the ruling of the
chairman. If the chairman in his absolute discretion deems it advisable to
dispense with the rules of parliamentary procedure for any meeting or any part
thereof, the chairman shall so state and shall clearly state the rules under
which the meeting or appropriate part thereof shall be conducted.
(b) If disorder should arise which prevents continuation of the
legitimate business of the meeting, the chairman may quit the chair and
announce the adjournment of the meeting; upon so doing, the meeting shall be
deemed immediately adjourned, subject to being reconvened in accordance with
Section 1.5 or 2.11 of these Bylaws, as the case may be.
(c) The chairman may ask or require that anyone not a bona fide
shareholder or proxy leave the meeting of shareholders.
(d) A resolution or motion at a meeting of shareholders shall be
considered for vote only if proposed by a shareholder or duly authorized proxy
and seconded by an
20
<PAGE>
individual who is a shareholder or duly authorized proxy other than the
individual who proposed the resolution or motion.
11.4 CONSTRUCTION. Within these Bylaws, words of any gender shall be
construed to include any other gender, and words in the singular or plural
number shall be construed to include the plural or singular, respectively,
unless the context otherwise requires.
11.5 SEVERABILITY. If any provision of these Bylaws or any application
thereof shall be invalid, unenforceable, or contrary to applicable law, the
remainder of these Bylaws, and the application of such provisions to
individuals or circumstances other than those as to which it is held invalid,
unenforceable, or contrary to applicable law, shall not be affected thereby.
ARTICLE XII
AMENDMENT OF BYLAWS
Subject to the requirements of RCW 23B.10.210 relating to supermajority
quorum provisions for the Board of Directors, the Bylaws of the corporation
may be amended or repealed, or new Bylaws may be adopted, by: (a) the
shareholders, even though the Bylaws may also be amended or repealed, or new
Bylaws may also be adopted, by the Board of Directors; or (b) subject to the
power of the shareholders of the corporation to change or repeal the Bylaws,
the Board of Directors, unless such power is reserved, by the Articles of
Incorporation or by law, exclusively to the shareholders in whole or in part,
or unless the shareholders, in amending or repealing a particular bylaw,
provide expressly that the Board of Directors may not amend or repeal that
bylaw.
ARTICLE XIII
AUTHENTICATION
The foregoing Amended and Restated Bylaws were read, approved and duly
adopted by the Board of Directors of Multiple Zones International, Inc. on
March29, 1999, and the President and Secretary of the corporation were
empowered to authenticate such Bylaws by their signatures below.
/s/ Firoz H. Lalji
-------------------------------
Firoz H. Lalji, President
ATTEST:
/s/ Peter J. Biere
- ------------------------------
Peter J. Biere, Secretary
21
<PAGE>
EX-10.22
ALTERNATIVE RATE OPTIONS
PROMISSORY NOTE
(PRIME RATE, LIBOR)
$15,000,000.00 DATED AS OF: FEBRUARY 28, 1999
- --------------------------------------------------------------------------------
MULTIPLE ZONES INTERNATIONAL, INC. ("Borrower")
- --------------------------------------------------------------------
U.S. BANK NATIONAL ASSOCIATION ("Lender")
1. TYPE OF CREDIT. This note is given to evidence Borrower's obligation to
repay all sums which Lender may from time to time advance to Borrower
("Advances") under a:
/ / single disbursement loan. Amounts loaned to Borrower hereunder will be
disbursed in a single Advance in the amount shown in Section 2.
/X/ revolving line of credit. No Advances shall be made which create a
maximum amount outstanding at any one time which exceeds the maximum
amount shown in Section 2. However, Advances hereunder may be borrowed,
repaid and reborrowed, and the aggregate Advances loaned hereunder from
time to time may exceed such maximum amount.
/ / non-revolving line of credit. Each Advance made from time to time
hereunder shall reduce the maximum amount available shown in Section 2.
Advances loaned hereunder which are repaid may not be reborrowed.
2. PRINCIPAL BALANCE. The unpaid principal balance of all Advances
outstanding under this note ("Principal Balance") at one time shall not
exceed $15,000,000.00.
3. PROMISE TO PAY. For value received Borrower promises to pay to Lender
or order at U.S. BANK NATIONAL ASSOCIATION, 555 S.W. OAK, PORTLAND, OR 97204,
the Principal Balance of this note, with interest thereon at the rate(s)
specified in Sections 4 and 11 below.
4. INTEREST RATE. The interest rate on the Principal Balance outstanding
may vary from time to time pursuant to the provisions of this note. Subject
to the provisions of this note, Borrower shall have the option from time to
time of choosing to pay interest at the rate or rates and for the applicable
periods of time based on the rate options provided herein; PROVIDED, however,
that once Borrower notifies Lender of the rate option chosen in accordance
with the provisions of this note, such notice shall be irrevocable. The rate
options are the Prime Borrowing Rate and the LIBOR Borrowing Rate, each as
defined herein.
(a) DEFINITIONS. The following terms shall have the following meanings:
"Business Day" means any day other than a Saturday, Sunday, or
other day that commercial banks in Portland, Oregon or New York City are
authorized or required by law to close; provided, however that when used
in connection with a LIBOR Rate, LIBOR Amount or LIBOR Interest Period such
term shall also exclude any day on which dealings in U.S. dollar deposits are
not carried on in the London interbank market.
"LIBOR Amount" means each principal amount for which Borrower
chooses to have the LIBOR Borrowing Rate apply for any specified LIBOR
Interest Period.
"LIBOR Interest Period" means as to any LIBOR Amount, a period of
ONE, TWO, THREE or SIX months commencing on the date the LIBOR Borrowing Rate
becomes applicable thereto; PROVIDED, however, that: (i) the first day of
each LIBOR Interest Period must be a Business Day; (ii) no LIBOR Interest
Period shall be selected which would extend beyond AUGUST 31, 1999; (ii) no
LIBOR Interest Period shall extend beyond the date of any principal payment
required under Section 6 of this note, unless the sum of the Prime Rate
Amount, plus LIBOR Amounts with LIBOR Interest Periods ending on or before
the scheduled date of such principal payment, plus principal amounts remaining
unborrowed under a line of credit, equals or exceeds the amount of such
principal payment; (iv) any LIBOR Interest Period which would otherwise
expire on a day which is not a Business Day, shall be extended to the next
succeeding Business Day, unless the result of such extension would be to
extend such LIBOR Interest Period into another calendar month, in which event
the LIBOR Interest Period shall end on the immediately preceding Business Day;
and (v) any LIBOR Interest Period that begins on the last Business Day of a
calendar month (or on a day for which there is no numerically corresponding
day in the calendar month at the end of such LIBOR Interest Period) shall end
on the last Business Day of a calendar month.
"LIBOR Rate" means, for any LIBOR Interest Period, the rate per
annum (computed on the basis of a 360-day year and the actual number of days
elapsed and rounded upward to the nearest 1/16 of 1%) established by Lender
as its LIBOR Rate, based on Lender's determination, on the basis of such
factors as Lender deems relevant, of the rate of interest at which U.S. dollar
deposits would be offered to U.S. Bank National Association in the London
interbank market at approximately 11 a.m. London time on the date which is two
Business Days prior to the first day of such LIBOR Interest Period for
delivery on the first day of such LIBOR Interest Period for the number of
months therein; provided, however, that the LIBOR Rate shall be adjusted to
take into account the maximum reserves required to be maintained for
Eurocurrency liabilities by banks during each such LIBOR Interest Period as
specified in Regulation D of the Board of Governors of the Federal Reserve
System or any successor regulation.
"Prime Rate" means the rate of interest which Lender from time to
time establishes as its prime rate and is not, for example, the lowest
rate of interest which Lender collects from any borrower or class of
borrowers. When the Prime Rate is applicable under Section 4(b) or 11(b), the
interest rate hereunder shall be adjusted without notice effective on the day
the Prime Rate changes, but in no event shall the rate of interest be higher
than allowed by law.
"Prime Rate Amount" means any portion of the Principal Balance
bearing interest at the Prime Borrowing Rate.
(b) THE PRIME BORROWING RATE.
(i) The Prime Borrowing Rate is a per annum rate equal to the Prime
Rate plus 0.00% per annum.
(ii) Whenever Borrower desires to use the Prime Borrowing Rate option,
Borrower shall give Lender notice orally or in writing in accordance with
Section 15 of this note, which notice shall specify the requested effective
date (which must be a Business Day) and principal amount of the Advance or
increase in the Prime Rate Amount, and whether Borrower is requesting a new
Advance under a line of credit or conversion of a LIBOR Amount to the Prime
Borrowing Rate.
(iii) Subject to Section 11 of this note, interest shall accrue on the
Unpaid Principal Balance at the Prime Borrowing Rate unless and except to the
extent that the LIBOR Borrowing Rate is in effect.
(c) THE LIBOR BORROWING RATE.
(i) The LIBOR Borrowing Rate is the LIBOR Rate plus 1.750% per annum.
(ii) Borrower may obtain LIBOR Borrowing Rate quotes from Lender
between 8:00 a.m. and 10:00 a.m. (Portland, Oregon time) on any Business
Day. Borrower may request an Advance, conversion of any portion of the
Prime Rate Amount to a LIBOR Amount or a new LIBOR Interest Period for an
existing LIBOR Amount, at such rate only by giving Lender notice in
accordance with Section 4(c)(iii) before 10:00 a.m. (Portland, Oregon time)
on such day.
<PAGE>
(iii) Whenever Borrower desires to use the LIBOR Borrowing Rate option,
Borrower shall give Lender irrevocable notice (either in writing or orally
and promptly confirmed in writing) between 8:00 a.m. and 10:00 a.m.
(Portland, Oregon time) two (2) Business Days prior to the desired effective
date of such rate. Any oral notice shall be given by, and any written notice
or confirmation of an oral notice shall be signed by, the person(s)
authorized in Section 15 of this note, and shall specify the requested
effective date of the rate, LIBOR Interest Period and LIBOR Amount, and
whether Borrower is requesting a new Advance at the LIBOR Borrowing Rate
under a line of credit, conversion of all or any portion of the Prime Rate
Amount to a LIBOR Amount, or a new LIBOR Interest Period for an outstanding
LIBOR Amount. Notwithstanding any other term of this note, Borrower may
elect the LIBOR Borrowing Rate in the minimum principal amount of $500,000.00
and in multiples of $100,000.00 above such amount; PROVIDED, however, that no
more than FOUR separate LIBOR Interest Periods may be in effect at any one
time.
(iv) If at any time the LIBOR Rate is unascertainable or unavailable to
Lender or if LIBOR Rate loans become unlawful, the option to select the LIBOR
Borrowing Rate shall terminate immediately. If the LIBOR Borrowing Rate is
then in effect, (A) it shall terminate automatically with respect to all
LIBOR Amounts (i) on the last day of each then applicable LIBOR Interest
Period, if Lender may lawfully continue to maintain such loans, or (ii)
immediately if Lender may not lawfully continue to maintain such loans
through such day, and (B) subject to Section 11, the Prime Borrowing Rate
automatically shall become effective as to such amounts upon such termination.
(v) If at any time after the date hereof (A) any revision in or adoption
of any applicable law, rule, or regulation or in the interpretation or
administration thereof (i) shall subject Lender or its Eurodollar lending
office to any tax, duty, or other charge, or change the basis of taxation of
payments to Lender with respect to any loans bearing interest based on the
LIBOR Rate, or (ii) shall impose or modify any reserve, insurance, special
deposit, or similar requirements against assets of, deposits with or for the
account of, or credit extended by Lender or its Eurodollar lending office, or
Impose on Lender or its Eurodollar lending office any other condition
affecting any such loans, and (B) the result of any of the foregoing is (i)
to increase the cost to Lender of making or maintaining any such loans or
(ii) to reduce the amount of any sum receivable under this note by Lender or
its Eurodollar lending office, Borrower shall pay Lender within 15 days after
demand by Lender such additional amount as will compensate Lender for such
increased cost or reduction. The determination hereunder by Lender of such
additional amount shall be conclusive in the absence of manifest error. If
Lender demands compensation under this Section 4(c)(v), Borrower may upon
three (3) Business Days' notice to Lender pay the accrued interest on all
LIBOR Amounts, together with any additional amounts payable under Section
4(c)(vi). Subject to Section 11, upon Borrower's paying such accrued interest
and additional costs, the Prime Borrowing Rate immediately shall be effective
with respect to the unpaid principal balance of such LIBOR Amounts.
(vi) Borrower shall pay to Lender, on demand, such amount as Lender
reasonably determines (determined as though 100% of the applicable LIBOR
Amount had been funded in the London interbank market) is necessary to
compensate Lender for any direct or indirect losses, expenses, liabilities,
costs, expenses or reductions in yield to Lender, whether incurred in
connection with liquidation or re-employment of funds or otherwise, incurred
or sustained by Lender as a result of: (A) Any payment or prepayment of a
LIBOR Amount, termination of the LIBOR Borrowing Rate or conversion of a
LIBOR Amount to the Prime Borrowing Rate on a day other than the last day of
the applicable LIBOR Interest Period (including as a result of acceleration
or a notice pursuant to Section 4(c)(v)); or (B) Any failure of Borrower to
borrow, continue or prepay any LIBOR Amount or to convert any portion of the
Prime Rate Amount to a LIBOR Amount after Borrower has given a notice thereof
to Lender.
(vii) If Borrower chooses the LIBOR Borrowing Rate, Borrower shall pay
interest based on such rate, plus any other applicable taxes or charges
hereunder, even though Lender may have obtained the funds loaned to Borrower
from sources other than the London interbank market. Lender's determination
of the LIBOR Borrowing Rate and any such taxes or charges shall be conclusive
in the absence of manifest error.
(viii) Notwithstanding any other term of this note, Borrower may not
select the LIBOR Borrowing Rate if an event of default hereunder has occurred
and is continuing.
(ix) Nothing contained in this note, including without limitation the
determination of any LIBOR Interest Period or Lender's quotation of any LIBOR
Borrowing Rate, shall be construed to prejudice Lender's right, if any, to
decline to make any requested Advance or to require payment on demand.
5. COMPUTATION OF INTEREST. All interest under Section 4 and Section 11 will
be computed at the applicable rate based on a 360-day year and applied to the
actual number of days elapsed.
6. PAYMENT SCHEDULE.
(a) PRINCIPAL. Principal shall be paid:
/ / on demand.
/x/ on demand. or if no demand, on AUGUST 31, 1999.
/ / on ______.
/ / subject to Section 8, in installments of
/ / ____ each, plus accrued interest, beginning on ____ and on the
same day of each ____ thereafter until _____ when the entire
Principal Balance plus interest thereon shall be due and payable.
/ / ____ each, including accrued interest, beginning on ____ and on
the same day of each ____ thereafter until _____ when the entire
Principal Balance plus interest thereon shall be due and payable.
/ / _____.
(b) INTEREST.
(i) Interest on the Prime Rate Amount shall be paid:
/X/ on the LAST day of MARCH, 1999 and on the same day of each
MONTH thereafter prior to maturity and at maturity.
/ / at maturity.
/ / at the time each principal installment is due and at maturity.
/ / ____.
(ii) Interest on all LIBOR Amounts shall be paid:
/ / on the last day of the applicable LIBOR Interest Period, and if
such LIBOR Interest Period is longer than three months, on the
last day of each three month period occurring during such LIBOR
Interest Period, and at maturity.
/X/ on the LAST day of MARCH, 1999 and on the same day of
each MONTH thereafter prior to maturity and at maturity.
/ / at maturity.
/ / at the time each principal installment is due and at maturity.
/ / _____.
(iii) PERFORMANCE PRICING: If during the term of the credit line
facility, beginning with the quarter ending December 31, 1998, the company
reports a quarterly Net Loss, the interest rate options will immediately
increase to the Prime Borrowing Rate plus 0.75% per annum fully floating or
the LIBOR Borrowing Rate plus 2.50% per annum.
<PAGE>
7. PREPAYMENT.
(a) Prepayments of all or any part of the Prime Rate Amount may be made at
any time without penalty.
(b) Except as otherwise specifically set forth herein, Borrower may not
prepay all or any part of any LIBOR Amount or terminate any LIBOR Borrowing
Rate, except on the last day of the applicable LIBOR Interest Period.
(c) Principal prepayments will not postpone the date of or change the amount
of any regularly scheduled payment. At the time of any principal
prepayment, all accrued interest, fees, costs and expenses shall also be
paid.
8. CHANGE IN PAYMENT AMOUNT. Each time the interest rate on this note
changes the holder of this note may, from time to time, in holder's sole
discretion, increase or decrease the amount of each of the installments
remaining unpaid at the time of such change in rate to an amount holder in
its sole discretion deems necessary to continue amortizing the Principal
Balance at the same rate established by the installment amounts specified in
Section 6(a), whether or not a "balloon" payment may also be due upon
maturity of this note. Holder shall notify the undersigned of each such
change in writing. Whether or not the installment amount is increased under
this Section 8, Borrower understands that, as a result of increases in the
rate of interest, the final payment due, whether or not a "balloon" payment,
shall include the entire Principal Balance and interest thereon then
outstanding, and may be substantially more than the installment specified in
Section 6.
9. ALTERNATE PAYMENT DATE. Notwithstanding any other term of this note, if
in any month there is no day on which a scheduled payment would otherwise be
due (e.g. February 31), such payment shall be paid on the last banking day of
that month.
10. PAYMENT BY AUTOMATIC DEBIT.
/x/ Borrower hereby authorizes Lender to automatically deduct the amount of
all principal and interest payments from account number 153504684322 at 1420
5th AVENUE, SEATTLE, WA 98101. If there are insufficient funds in the account
to pay the automatic deduction in full, Lender may allow the account to
become overdrawn, or Lender may reverse the automatic deduction. Borrower
will pay all the fees on the account which result from the automatic
deductions, including any overdraft and non-sufficient funds charges. If for
any reason Lender does not charge the account for a payment, or if an
automatic payment is reversed, the payment is still due according to this
note. If the account is a Money Market Account, the number of withdrawals
from that account is limited as set out in the account agreement. Lender may
cancel the automatic deduction at any time in its discretion.
Provided, however, if no account number is entered above, Borrower does not
want to make payments by automatic debit.
11. DEFAULT.
(a) Without prejudice to any right of Lender to require payment on demand or
to decline to make any requested Advance, each of the following shall be an
event of default: (i) Borrower fails to make any payment when due. (ii)
Borrower fails to perform or comply with any term, covenant or obligation in
this note or any agreement related to this note, or in any other agreement or
loan Borrower has with Lender. (iii) Borrower defaults under any loan,
extension of credit, security agreement, purchase or sales agreement, or any
other agreement, in favor of any other creditor or person that may materially
affect any of Borrower's property or Borrower's ability to repay this note or
perform Borrower's obligations under this note or any related documents. (iv)
Any representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now
or at the time made or furnished. (v) Borrower dies, becomes insolvent,
liquidates or dissolves, a receiver is appointed for any part of Borrower's
property. Borrower makes an assignment for the benefit of creditors, or any
proceeding is commenced either by Borrower or against Borrower under any
bankruptcy or insolvency laws. (vi) Any creditor tries to take any of
Borrower's property on or in which Lender has a lien or security interest.
This includes a garnishment of any of Borrower's accounts with Lender. (vii)
Any of the events described in this default section occurs with respect to
any general partner in Borrower or any guarantor of this note, or any
guaranty of Borrower's indebtedness to Lender ceases to be, or is asserted
not to be, in full force and effect. (viii) There is any material adverse
change in the financial condition or management of Borrower or Lender in good
faith deems itself insecure with respect to the payment or performance of
Borrower's obligations to Lender. If this note is payable on demand, the
inclusion of specific events of default shall not prejudice Lender's right to
require payment on demand or to decline to make any requested Advance.
(b) Without prejudice to any right of Lender to require payment on demand,
upon the occurrence of an event of default, Lender may declare the entire
unpaid Principal Balance on this note and all accrued unpaid interest
immediately due and payable, without notice. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted
under applicable law, increase the interest rate on this note to a rate equal
to the Prime Borrowing Rate plus 5%. The interest rate will not exceed the
maximum rate permitted by applicable law. In addition, if any payment of
principal or interest is 19 or more days past due, Borrower will be charged a
late charge of 5% of the delinquent payment.
12. EVIDENCE OF PRINCIPAL BALANCE; PAYMENT ON DEMAND. Holder's records shall,
at any time, be conclusive evidence of the unpaid Principal Balance and
interest owing on this note. Notwithstanding any other provisions of this
note, in the event holder makes Advances hereunder which result in an unpaid
Principal Balance on this note which at any time exceeds the maximum amount
specified in Section 2, Borrower agrees that all such Advances, with
interest, shall be payable on demand.
13. LINE OF CREDIT PROVISIONS. If the type of credit indicated in Section 1
is a revolving line of credit or a non-revolving line of credit, Borrower
agrees that Lender is under no obligation and has not committed to make any
Advances hereunder. Each Advance hereunder shall be made at the sole option
of Lender.
14. DEMAND NOTE. If this note is payable on demand, Borrower acknowledges and
agrees that (a) Lender is entitled to demand Borrower's immediate payment in
full of all amounts owing hereunder and (b) neither anything to the contrary
contained herein or in any other loan documents (including but not limited
to, provisions relating to defaults, rights of cure, default rate of
interest, installment payments, late charges, periodic review of Borrower's
financial condition, and covenants) nor any act of Lender pursuant to any
such provisions shall limit or impair Lender's right or ability to require
Borrower's payment in full of all amounts owing hereunder immediately upon
Lender's demand.
15. REQUESTS FOR ADVANCES.
(a) Any Advance may be made or interest rate option selected upon the request
of Borrower (if an individual), any of the undersigned (if Borrower consists
of more than one individual), any person or persons authorized in subsection
(b) of this Section 15, and any person or persons otherwise authorized to
execute and deliver promissory notes to Lender on behalf of Borrower.
(b) Borrower hereby authorizes any ____ of the following individuals to request
Advances and to select interest rate options; ____ unless Lender is otherwise
instructed in writing.
(c) All Advances shall be disbursed by deposit directly to Borrower's account
number ____ at ____ branch of Lender, or by cashier's check issued to Borrower.
(d) Borrower agrees that Lender shall have no obligation to verify the
indentity of any person making any request pursuant to this Section 15, and
Borrower assumes all risks of the validity and authorization of such
requests. In consideration of Lender agreeing, at its sole discretion, to
make Advances upon such requests, Borrower promises to pay holder, in
accordance with the provisions of this note, the Principal Balance together
with interest thereon and other sums due hereunder, although any Advances may
have been requested by a person or persons not authorized to do so.
16. PERIODIC REVIEW. Lender will review Borrower's credit accommodations
periodically. At the time of the review, Borrower will furnish Lender with
any additional information regarding Borrower's financial condition and
business operations that Lender requests. This information may include but is
not limited to, financial statements, tax returns, lists of assets and
liabilities, agings of receivables and payables, inventory schedules, budgets
and forecasts. If upon review, Lender, in its sole discretion, determines
that there has been a material adverse change in Borrower's financial
condition, Borrower will be in default. Upon default, Lender shall have all
rights specified herein.
<PAGE>
17. NOTICES. Any notice hereunder may be given by ordinary mail, postage
paid and addressed to Borrower at the last known address of Borrower as shown
on holder's records. If Borrower consists of more than one person,
notification of any of said persons shall be complete notification of all.
18. ATTORNEY FEES. Whether or not litigation or arbitration is commenced,
Borrower promises to pay all costs of collecting overdue amounts. Without
limiting the foregoing, in the event that holder consults an attorney
regarding the enforcement of any of its rights under this note or any
document securing the same, or if this note is placed in the hands of an
attorney for collection or if suit or litigation is brought to enforce this
note or any document securing the same, Borrower promises to pay all costs
thereof including such additional sums as the court or arbitrator(s) may
adjudge reasonable as attorney fees, including without limitation, costs and
attorney fees incurred in any appellate court, in any proceeding under the
bankruptcy code, or in any receivership and post-judgment attorney fees
incurred in enforcing any judgment.
19. WAIVERS; CONSENT. Each party hereto, whether maker, co-maker, guarantor
or otherwise, waives diligence, demand, presentment for payment, notice of
non-payment, protest and notice of protest and waives all defenses based on
suretyship or impairment of collateral. Without notice to Borrower and
without diminishing or affecting Lender's rights or Borrower's obligations
hereunder, Lender may deal in any manner with any person who at any time is
liable for, or provides any real or personal property collateral for, any
indebtedness of Borrower to Lender, including the indebtedness evidenced by
this note. Without limiting the foregoing, Lender may, in its sole
discretion: (a) make secured or unsecured loans to Borrower and agree to any
number of waivers, modifications, extensions and renewals of any length of
such loans, including the loan evidenced by this note; (b) impair, release
(with or without substitution of new collateral), fail to perfect a security
interest in, fail to preserve the value of, fail to dispose of in accordance
with applicable law, any collateral provided by any person; (c) sue, fail to
sue, agree not to sue, release, and settle or compromise with, any person.
20. JOINT AND SEVERAL LIABILITY. All undertakings of the undersigned
Borrowers are joint and several and are binding upon any marital community of
which any of the undersigned are members. Holder's rights and remedies under
this note shall be cumulative.
21. SEVERABILITY. If any term or provision of this note is declared by a
court of competent jurisdiction to be illegal, invalid or unenforceable for
any reason whatsoever, such illegality, invalidity or unenforceability shall
not affect the balance of the terms and provisions hereof, which terms and
provisions shall remain binding and enforceable, and this note shall be
construed as if such illegal, invalid or unenforceable provision had not been
contained herein.
22. ARBITRATION.
(a) Either Lender or Borrower may require that all disputes, claims,
counterclaims and defenses, including those based on or arising from any
alleged tort ("Claims") relating in any way to this note or any transaction
of which this note is a part (the "Loan"), be settled by binding arbitration
in accordance with the Commercial Arbitration Rules of the American
Arbitration Association and Title 9 of the U.S. Code. All Claims will be
subject to the statutes of limitation applicable if they were litigated. This
provision is void if the Loan, at the time of the proposed submission to
arbitration, is secured by real property located outside of Oregon or
Washington, or if the effect of the arbitration procedure (as opposed to any
Claims of Borrower) would be to materially impair Lender's ability to realize
on any collateral securing the Loan.
(b) If arbitration occurs and each party's Claim is less than $100,000, one
neutral arbitrator will decide all issues; if any party's Claim is $100,000
or more, there neutral arbitrators will decide all issues. All arbitrators
will be active Washington State Bar members in good standing. All arbitration
hearings will be held in Seattle, Washington. In addition to all other
powers, the arbitrator(s) shall have the exclusive right to determine all
issues of arbitrability. Judgment on any arbitration award may be entered
in any court with jurisdiction.
(c) If either party institutes any judicial proceeding relating to the Loan,
such action shall not be a waiver of the right to submit any Claim to
arbitration. In addition, each has the right before, during and after any
arbitration to exercise any number of the following remedies, in any order or
concurrently: (i) setoff; (ii) self-help repossession; (iii) judicial or
non-judicial foreclosure against real or personal property collateral; and
(iv) provisional remedies, including injunction, appointment of receiver,
attachment, claim and delivery and replevin.
23. GOVERNING LAW. This note shall be governed by and construed and
enforced in accordance with the laws of the State of Washington without
regard to conflicts of law principles; PROVIDED, however, that to the extent
that Lender has greater rights or remedies under Federal law, this provision
shall not be deemed to deprive Lender of such rights and remedies as may be
available under Federal law.
24. DISCLOSURE.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO
FOREBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER
WASHINGTON LAW.
25. YEAR 2000.
Borrower has reviewed and assessed its business operations and computer
systems and applications to address the "year 2000 problem" (that is, that
computer applications and equipment used by Borrower, directly or indirectly
through third parties, may be unable to properly perform date-sensitive
functions before, during and after January 1, 2000). Borrower reasonably
believes that the year 2000 problem will not result in a material adverse
change in Borrower's business condition (financial or otherwise), operations,
properties or prospects or ability to repay Lender. Borrower is in the
process of implementing a plan to remediate year 2000 problems and will
complete implementation of such plan with respect to any material year 2000
problems, and testing thereof, by September 30, 1999. Borrower agrees that
this representation will be true and correct on and shall be deemed made by
Borrower on each date Borrower requests any advance under this Agreement or
Note or delivers any information to Lender. Borrower will promptly deliver to
Lender such information relating to this representation and covenant as
Lender requests from time to time.
EACH OF THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF
THIS DOCUMENT.
MULTIPLE ZONES INTERNATIONAL, INC.
- --------------------------------------------------------
Borrower Name (Corporation, Partnership or other Entity)
/s/ illegible SVP Finance, CFO
- ---------------------------- ---------------------
NAME (AUTHORIZED OFFICER) TITLE
For valuable consideration, Lender agrees to the terms of the arbitration
provision set forth in this note.
Lender Name: U.S. Bank National Association
-----------------------------------
By: /s/ illegible
--------------------------------------------
Title: Vice President
-----------------------------------------
Date: 2-16-99
------------------------------------------
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
SUBSIDIARY JURISDICTION OF INCORPORATION
- ---------- -----------------------------
<S> <C>
Multiple Zones Austria GesmbH................................................... Austria
The Mac Zone PC Zone S.A........................................................ France
Multiple Zones Germany GmbH..................................................... Germany
Multiple Zones Limited.......................................................... Great Britain
Multiple Zones India Private Ltd. (80% owned by Multiple Zones Mauritius Ltd.,
a holding company wholly owned by Multiple Zones International, Inc.)......... India
Multiple Zones de Mexico, S.A. de C.V........................................... Mexico
Multiple Zones Switzerland AG................................................... Switzerland
</TABLE>
<PAGE>
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 8, 1999, on
our audits of the consolidated financial statements of Multiple Zones
International, Inc. as of December 31, 1998 and 1997, and for the years ended
December 31, 1998, 1997 and 1996, which report is incorporated by reference in
this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Seattle, Washington
March 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 19,092
<SECURITIES> 0
<RECEIVABLES> 48,459
<ALLOWANCES> 4,772
<INVENTORY> 48,543
<CURRENT-ASSETS> 120,767
<PP&E> 18,524
<DEPRECIATION> 8,140
<TOTAL-ASSETS> 133,047
<CURRENT-LIABILITIES> 93,166
<BONDS> 0
0
0
<COMMON> 38,434
<OTHER-SE> (1,084)
<TOTAL-LIABILITY-AND-EQUITY> 133,047
<SALES> 501,441
<TOTAL-REVENUES> 501,441
<CGS> 447,005
<TOTAL-COSTS> 447,005
<OTHER-EXPENSES> 66,883
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 598
<INCOME-PRETAX> (12,447)
<INCOME-TAX> (4,114)
<INCOME-CONTINUING> (8,333)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,333)
<EPS-PRIMARY> (0.64)
<EPS-DILUTED> (0.64)
</TABLE>
