<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended March 29, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ________ to________
Commission file number 0-16930
-------
EGGHEAD, INC.
-------------
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1296187
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
EAST 22705 MISSION
LIBERTY LAKE, WASHINGTON 99019
------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (509) 922-7031
---------------
Securities registered pursuant to Section 12(b) of the Act: NONE
-----
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
-------------
$.01 PAR VALUE
--------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
-----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K _______
To the best of Egghead, Inc.'s knowledge, the aggregate market value of the
voting stock held by non-affiliates of the registrant at May 24, 1997 was
$47,745,815.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS MAY 24, 1997
----- ------------
Common Stock, $.01 par value 17,591,087 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to the
Company's 1997 Annual Meeting of Shareholders are incorporated by reference into
Part III of this Form 10-K.
1
<PAGE>
EGGHEAD, INC.
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 12
Item 4. Submission of Matters to a Vote of Security Holders. . . . 12
PART II
Item 5. Market for the Registrant's Common Equity and Related Share-
holder Matters . . . . . . . . . . . . . . . . . . . . . . 13
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . 15
Item 8. Financial Statements and Supplementary Data. . . . . . . . 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . 21
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . 40
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . 40
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . 40
Item 13. Certain Relationships and Related Transactions . . . . . . 40
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 40
2
<PAGE>
PART 1
ITEM 1. BUSINESS OF EGGHEAD
GENERAL
Egghead, Inc. ("Egghead") is a national reseller of personal computer
("PC") hardware, software, peripherals and accessories through 87 retail
stores, its 1-800-EGGHEAD direct response unit and its Internet commerce
site. Egghead, a Washington corporation, was incorporated in 1988 and is the
successor to a corporation that was incorporated in Washington in 1984. In
1995, Egghead moved its corporate headquarters from Issaquah, Washington to
its current facility in Liberty Lake, Washington. Egghead is the parent
company of DJ&J Software Corporation, EH Direct, Inc. and Elekom Corporation
("ELEKOM"). Unless the context indicates otherwise, references to "Egghead"
include Egghead and its subsidiaries.
Egghead's primary source of revenue is sales through its retail stores.
As of March 29, 1997, Egghead operated 87 retail stores. Egghead's retail
stores offer a broad selection of PC-related products and services at
competitive prices. Egghead also operates the 1-800-EGGHEAD direct response
unit, which processes telephone, facsimile and mail orders for the same
hardware and software products that are offered in its retail stores.
1-800-EGGHEAD also allows customers access to products not ordinarily
available through its retail outlets by offering a special order service.
Egghead maintains a site on the Internet (HTTP://WWW.EGGHEAD.COM) that
contains information about Egghead and its merchandise offerings and permits
customers to place orders for hardware and software products on-line.
On May 1, 1997, Egghead announced a definitive agreement to acquire
closely held Surplus Software, Inc. ("Surplus Direct") for up to 5,600,000
newly issued shares of Egghead Common Stock ("the Merger"). In connection
with the Merger, Egghead will repay approximately $5.6 million of Surplus
Direct's outstanding debt. Surplus Direct is a reseller of previous version
computer hardware and software and reported sales for the nine months ended
February 28, 1997 of approximately $35.0 million. Surplus Direct has a
relatively limited operating history, and, although it reported break-even to
profitable results for the three fiscal years ended May 31, 1996, 1995 and
1994, it reported a $1.2 million loss for the nine months ended February 28,
1997. Egghead believes that the Merger will create synergies through the
combination of Surplus Direct's hardware purchasing expertise, access to the
surplus PC products channel, entrepreneurial management and Internet commerce
development capabilities with Egghead's greater software product procurement
expertise and seasoned retail management. There can be no assurance that
these benefits will be achieved. The two companies participate in a 50-50
joint venture store operated under the name Egghead Computer Surplus.
Egghead's 87 retail stores include the joint venture store. The Merger is
subject to approval by Egghead's and Surplus Direct's shareholders and to
customary closing conditions, and is expected to be completed in August 1997.
MARKET OVERVIEW
Sales of PC hardware, software and related products depend on the continued
purchase and expanded use of PCs in households and businesses, the continued
development of PC software and other changes in the PC industry. The use and
acceptance of PCs has increased over the last decade due to technological
changes such as improved operating systems and hardware, the availability of
quality hardware and software products at reasonable prices and the ability to
utilize PCs to obtain information on the Internet.
Rapid technological change presents both opportunity and risk for PC
product resellers. For example, prices of microprocessor chips are
decreasing due to increased competition among computer chip manufacturers and
the introduction of newer, faster microprocessor chips. The decrease in
microprocessor chip prices has contributed to reductions in PC prices,
resulting in increased sales of PCs to businesses and individual consumers.
However, the rapid improvements in processing capability made possible by
improvements in microprocessor chips, improved operating systems and other
technological advances contribute to shorter product life cycles that may
result in reduced margins due to rapid product obsolescence.
3
<PAGE>
The availability of more sophisticated and user-friendly software at
reasonable prices has also increased demand for PC products. For example,
improvements in graphical user interfaces, the development of integrated
software packages, such as office suite products, and new interactive
educational and entertainment products encourage purchases of PC hardware, as
well as software and other PC products. New technologies, such as CD-ROM, which
provide a multimedia experience involving full-motion video and stereo sound,
enable home users to more effectively use PCs for educational and entertainment
purposes. Sales of PC hardware accessories, such as hard drives and modems,
also have increased as consumers enhance their PCs. Egghead believes that new
technologies such as these result in enhanced product offerings, generating
demand for software and hardware products as these technologies are developed
and brought to the market place.
Access to electronic communications networks, such as the Internet and
commercially available on-line services, has also become important to both
businesses and individual consumers and has increased the demand for PCs.
Egghead anticipates that such networks will provide substantial opportunities
both now and in the future for communications, commerce and the exchange of
data. Software publishers have recognized the significance of this trend and
have begun to integrate interfaces for these electronic communications networks
into their operating systems and workgroup software.
Although Egghead believes that these factors are likely to contribute to a
continued increase in demand for PC products, a long-term decline in the
purchase or use of home or business PCs, or an interruption in the continued
development of PC software, would have a material adverse effect on Egghead's
financial condition and results of operations. The number of distribution
channels for PC products has also increased, and such channels have become
extremely competitive. PC products are distributed through resellers that
include specialty retail stores, office supply super stores, electronic
superstores, merchandise clubs, mass merchandisers and direct response
businesses. In addition, Internet commerce and other means of electronic
distribution are becoming increasingly viable channels. Egghead believes,
nevertheless, that the PC product market offers significant opportunities for
resellers that can provide desired merchandise at competitive prices, supported
by extensive product knowledge and service.
PRODUCTS AND SERVICES
Through its retail outlets, 1-800-EGGHEAD direct response unit and
Internet commerce site, Egghead sells PC hardware, software, peripheral
devices, accessories and computer-related magazines, books and tutorials.
Egghead carries products categorized under approximately 2,000 separate
stock-keeping units in its retail stores. Customers may also order thousands
of additional products through the 1-800-EGGHEAD special order service and
Egghead's Internet commerce site.
Egghead began operations in 1984 primarily as a software reseller, but in
recent years has expanded its product offering to include a greater percentage
of hardware and other non-software products. Approximately 39% of Egghead's
revenues for the fourth quarter of the fiscal year ended March 29, 1997 were
derived from sales of hardware and other non-software products, primarily due to
Egghead's increased and continuing focus on these product offerings, and Egghead
expects that this percentage will continue to grow. Egghead has increased its
hardware offerings in an effort to respond to a broader range of customer needs
and to position itself as a one-stop shopping alternative for PC consumers.
Egghead's management also believes that the PC hardware market is attractive
because hardware products offer resellers higher dollar gross margins relative
to software products.
Egghead provides a variety of customer services in order to enhance and
support the marketing of PC products. In all of its retail stores, Egghead
employs a knowledgeable sales force and offers free product demonstrations to
assist customers in selecting PC products, with PCs available for in-store
evaluation of Egghead's hardware and software products. In addition, 31 of
Egghead's retail stores also offer computer upgrade and installation services
on a fee basis. Egghead also offers product information and customer
assistance through its 1-800-EGGHEAD direct response unit and its Internet
commerce site.
Egghead has established the Custom Updates and Eggstras ("CUE-SM-") program,
a preferred customer
4
<PAGE>
membership program that provides discounts and other benefits to Egghead's
customers. Egghead regularly sends CUE-SM- members catalogs and other
mailings that contain advance notice of sales promotions and new offerings of
PC products and other technology. CUE-SM- provides Egghead with a database
of customers, their PC equipment profiles and a history of their software
purchases.
RETAIL OPERATIONS
Egghead's retail stores offer a broad selection of computer-related
products and services at competitive prices. Its retail stores are designed to
provide a convenient shopping environment for individuals and organizations who
purchase PC hardware, software and related products for their personal and
business use. Egghead's knowledgeable sales force offers solutions-oriented
assistance to its customers. As of March 29, 1997, Egghead operated 87 retail
stores including the joint venture store that sells closeout and clearance
merchandise.
Egghead's traditional stores contain approximately 2,500 square feet of
retail selling space and typically are located in strip shopping centers. New
store locations are extensively researched, and Egghead seeks to locate new
stores in densely populated areas with a significant concentration of PC owners
and high mean income levels. Egghead recently implemented a new merchandising
format in certain of its retail stores that offers a broader selection of
hardware and other non-software products in an expanded space that is
approximately twice the size of its traditional stores. The larger store format
provides more room for bulkier merchandise such as PC hardware. Egghead's sales
of hardware and other non-software products increased from approximately 33% of
revenue in the fourth quarter of fiscal 1996 to approximately 39% of revenue in
the fourth quarter of fiscal 1997.
Egghead believes that additional hardware and other non-software
offerings and service and upgrade capabilities will attract a broader base of
customers. The performance of these new stores has been mixed, however, and
management continues to evaluate results while refining the format. As of
March 29, 1997, Egghead operated 24 of its retail stores under this expanded
format, and as store leases expire on Egghead's traditional, smaller format
stores, Egghead may replace certain of these stores with new, larger stores.
In November 1996, Egghead and Surplus Direct opened Egghead Computer
Surplus, a joint venture retail store in Portland, Oregon, that offers
overstocked, close-out, discontinued and previous version computer hardware
and software at discounted prices, as well as installation and upgrade
services.
On January 31, 1997, Egghead announced a strategic realignment of its
business organization involving the closure of 77 of the 156 Egghead retail
stores that were open as of December 28, 1996. As of March 29, 1997, 70 of
these stores had been closed, reducing the number of geographic locations in
which Egghead operates from 54 to 26. Concurrently with the reduction in retail
stores, Egghead reduced its headquarters personnel, closed its Lancaster,
Pennsylvania distribution center and offered for sale certain real estate
assets, including its administrative headquarters building located in Liberty
Lake, Washington.
1-800-EGGHEAD AND INTERNET COMMERCE OPERATIONS
Egghead also sells PC-related products and provides additional customer
services through its 1-800-EGGHEAD direct response unit and its Internet
commerce site.
1-800-EGGHEAD. The 1-800-EGGHEAD direct response unit processes telephone,
facsimile and mail orders for the same hardware and software products that are
offered in Egghead's retail stores. 1-800-EGGHEAD also allows customers access
to products not ordinarily available through its retail outlets by offering a
special order service. The 1-800-EGGHEAD service enables customers who do not
live near an Egghead retail store, or who prefer the convenience of shopping at
home, to purchase Egghead merchandise from their homes or businesses. Orders
typically are placed from circulars containing lists and descriptions of
available merchandise that are distributed by Egghead to individuals and
organizations. Merchandise purchased through 1-800-EGGHEAD is generally shipped
directly to the customer from
5
<PAGE>
Egghead's distribution center in Sacramento, California. Customer
representatives in the 1-800-EGGHEAD direct response unit also provide customer
service support for Egghead's retail stores and refer callers who would like to
preview a particular product to one of Egghead's retail stores or its Internet
commerce site.
INTERNET AND ELECTRONIC COMMERCE. Egghead maintains a site on the Internet
(HTTP://WWW.EGGHEAD.COM) that contains information about Egghead and its
merchandise offerings and permits customers to place orders for software and
hardware products on-line. In February 1996, Egghead began offering hardware
and software products through its Internet commerce site, and in November 1996,
Egghead began offering electronic delivery of selected software products. This
service permits a customer to place an order for selected software products and
to have the products downloaded directly onto his or her PC through purely
electronic means. Egghead customers can use the Internet commerce site to
search for software titles, browse Egghead's merchandise selection and view
demonstrations of selected software programs before placing an order. In
addition, Egghead's Internet commerce site contains lists of Egghead store
locations and of manufacturers' technical support hotlines for many of the
products it offers. Customers can also use the site to make customer service
inquiries, offer suggestions and read articles and reviews regarding Egghead's
hardware and software offerings.
In November 1996, Egghead began offering electronic delivery of selected
software products. Egghead management believes that electronics software
distribution may eventually become increasingly common and that electronic
distribution may offer significant cost advantage over traditional means of
delivery.
In August 1995, Egghead formed ELEKOM to develop electronic commerce
applications and services that link customers and their suppliers. An
Internet-compatible commerce application developed by ELEKOM is designed to
provide large organizations an easy-to-use, cost-effective, secure and reliable
product ordering and order management system for goods and services. The
application permits businesses to submit purchase orders to their suppliers
electronically and allows the purchaser and supplier to establish pre-set
pricing, quantity and other specifications for such orders. Elekom is currently
testing prototypes of the application with one large organization.
MARKETING, ADVERTISING AND PROMOTION
Egghead's marketing, advertising and promotional efforts are designed to
position it as the PC product reseller of choice. These efforts have
established strong customer identification of Egghead's name and logo. Egghead
strives to create market awareness of its retail stores, and to create primary
demand for the products it sells, through aggressive advertising and marketing
efforts. Egghead's advertising campaigns emphasize the broad selection of
merchandise and competitive prices offered by Egghead. Egghead also advertises
to promote major new product launches.
Egghead's primary advertising medium is direct mail, which is used to
target the segment of the population that owns and/or uses PCs. In addition to
mailing to a database of more than 3.7 million CUE customers, Egghead mails its
circulars to PC owners targeted from purchased lists. Egghead also advertises
in both local and national newspapers, as well as on its Internet commerce site.
Egghead routinely enters into cooperative advertising and other promotional and
market development fund arrangements with manufacturers, publishers and
distributors.
MERCHANDISING
Egghead purchases most of its products through a central purchasing
department, which determines inventory levels and product mix based upon rates
of sale, seasonality and store demographics. Egghead also places special orders
of nonstocked PC products in response to customer requests.
Egghead purchases merchandise primarily through distributors. Egghead also
purchases hardware, software and other products directly from approximately
300 manufacturers and publishers, including Microsoft, which is Egghead's
primary vendor. In fiscal 1997, purchases from Microsoft represented
approximately 18.3% of Egghead's total net purchases.
Egghead's purchasing department seeks to take advantage of volume
discounts offered by certain manufacturers, publishers and distributors
whenever consistent with Egghead's inventory policies. The closure of
Egghead stores in connection with the strategic restructuring may adversely
affect the level of volume discounts Egghead receives from its vendors.
Egghead has historically managed its product obsolescence risk through its
vendor exchange, return and pricing
6
<PAGE>
mechanisms. Egghead's exchange and return privileges with its distributors and
vendors typically include time, volume and other limitations. Although such
exchange and return privileges add complexity and expense to Egghead's
purchasing operations, they allow Egghead to reduce the risk of loss resulting
from obsolete and defective merchandise.
DISTRIBUTION
Egghead operates a 138,000-square-foot distribution center in Sacramento,
California. Most inventory that Egghead purchases is received by this
distribution facility before it is sent to a customer or to a retail store,
although some merchandise is shipped directly from vendors or distributors to
Egghead's retail stores or customers. Egghead's distribution facility also
processes returned merchandise. During June 1996, Egghead closed its
distribution center in Wilmington, Ohio. It closed its Lancaster, Pennsylvania
distribution facility in March 1997 in connection with the restructuring of its
business.
COMPETITION
The business of selling PC software, hardware and related products is
intensely competitive. Since its inception in 1984, Egghead has witnessed a
proliferation of competing distribution outlets for PC software and hardware
products, including chains of large specialty stores, systems integrators,
manufacturers and publishers selling directly, mail-order firms and mass
merchandise retailers. In addition, electronic communications networks such
as the Internet are creating new opportunities for the distribution of
software and hardware products, and the cost savings associated with such
electronic distribution channels may eventually be expected to result in
further price reductions in the industry.
Egghead believes that the major competitive factors in its business include
price, breadth and depth of selection, customer service (including technical
support), and marketing and sales capabilities. Given the highly competitive
nature of the PC industry, there can be no assurance that Egghead can compete
successfully with respect to these factors. Egghead's financial condition and
results of operations would be materially adversely affected if its competitors
were to offer PC products at significantly lower prices or if Egghead were
unable to obtain products in a timely manner for an extended period of time.
Egghead competitors include computer and office superstores such as Comp
USA, Inc. and Office Depot, Inc., consumer electronics superstores such as
Fry's Electronics, mass merchandisers such as Wal-Mart Stores, Inc. and
warehouse membership clubs such as Sam's Club. Computer superstores typically
are very price competitive and offer a wide product selection, while office
superstores have a more limited selection. Computer superstores also offer
on-site installation of software and hardware upgrades, and some offer
training and technical services. Mass merchandisers and warehouse clubs are
price-competitive but carry relatively few software titles and a limited
selection of hardware products. In addition, direct response businesses, such
as Micro-Warehouse, Inc. ("Micro-Warehouse"), and manufacturers, such as Dell
Corp., selling directly to consumers, compete directly with Egghead. Egghead
also faces intense competition in the electronic commerce market on the
Internet, which is evolving rapidly. In the Internet market, Egghead competes
with companies that have established Internet commerce sites or that derive a
substantial portion of their revenue from electronic commerce. Several
companies with substantial customer bases in the computer and peripherals
catalog business, such as Micro-Warehouse, also may devote more resources to
Internet commerce in the future.
Because the PC product market is very competitive, resellers typically have
low gross margins and operating income as a percentage of sales. Increased
competition may lead to reduced profit margins on PC hardware, software and
related products, which could have a material adverse effect on Egghead's
results of operations. Therefore, Egghead's
7
<PAGE>
profitability depends heavily on effective internal operating and cost control
and the ability to adapt quickly and efficiently to changes in industry trends.
EMPLOYEES
At March 29, 1997, Egghead had approximately 1,310 employees. Egghead's
employees are not represented by a collective bargaining unit. Egghead
believes that its employee relations are generally good.
TRADEMARKS AND TRADE NAMES
"EGGHEAD-Registered Trademark-," "EGGHEAD DISCOUNT SOFTWARE-Registered
Trademark-," "EGGSPERT-Registered Trademark-," "All You Need to
Know-Registered Trademark-," the "PROFESSOR EGGHEAD-Registered Trademark-"
design and "EGGCESSORIES-Registered Trademark-" are registered in the United
States Patent and Trademark Office as service marks or trademarks of Egghead.
Egghead also does business under the trade names "Egghead Computer,"
"Egghead Software," "Egghead Discount Software," and "Mac's Place at
Egghead." In addition, Egghead is the owner of a number of common law
trademarks and service marks, including "SOFTWARE ASSET MANAGEMENT-SM-,"
"SAM-SM-," "CUE-SM-," "EGGHEAD-Registered Trademark-EXPRESS-TM-," "EGG
CARTON-TM-," "ELEKOM-TM-," "EleTrade-TM-" and certain "EGG" combination
words. Egghead believes the strength of its trademarks and service marks
benefits its business and intends to continue to protect and promote its
registered and common law trademarks and service marks.
CERTAIN RISK FACTORS
In addition to other information contained in this filing, the following
factors could affect the Company's actual results and could cause such results
to differ materially from those achieved in the past or expressed in the
Company's forward-looking statements. When used in this filing, the words
"expects," "believes," "anticipates," and similar expressions are intended to
identify forward-looking statements.
RESTRUCTURING AND REORGANIZATION OF EGGHEAD OPERATIONS; RECENT LOSSES.
Egghead has reported substantial losses from its continuing operations over its
last five fiscal years, including an after-tax loss of $49.0 million and an
overall net loss of $39.6 million for its fiscal year ended March 29, 1997.
These losses included a $24.0 million restructuring and impairment charge and a
net noncash charge of $10.7 million for the establishment of a deferred tax
valuation allowance. Egghead has taken a number of steps intended to reduce or
eliminate its losses and to achieve break-even results on an operating cash flow
basis for fiscal 1998. These steps included divesting a non-retail business
segment, closing unprofitable stores, upgrading existing stores, experimenting
with new store formats, developing electronic commerce tools through its
subsidiary Elekom and implementing a new Internet commerce site.
For example, in May 1996, Egghead sold its Corporate, Government and
Education ("CGE") division to generate cash and to allow management to
focus on retail operations. The sale resulted in a net gain of $22.3
million, offset by a related loss from the CGE operations of $12.3 million.
During the fourth quarter of fiscal 1997, Egghead substantially restructured
and reorganized its operations by (i) closing 70 of its worst performing
retail stores, (ii) substantially reducing its headquarters personnel, (iii)
closing its Lancaster, Pennsylvania distribution center, and (iv) offering
for sale certain real estate assets, including its headquarters building
located in Liberty Lake, Washington. Egghead intends to close an additional
seven poorly performing retail stores as part of the restructuring and
reorganization. Since fiscal 1996, Egghead has also opened or remodeled
eight 5,000 square-foot stores, which are approximately twice the size of its
traditional stores, and increased its hardware product offerings in these
stores in an effort to improve sales.
These initiatives have achieved mixed results. Egghead's gross margin as
a percentage of sales may decline as the company continues to expand its
hardware assortment. Further reductions in operating expenses may be
necessary, and Egghead may need to close additional retail stores. Results
from Egghead's new larger stores have been mixed, and
8
<PAGE>
Egghead will continue to evaluate the performance of its larger format stores
and expects that further refinement of its store format will be required. There
can be no assurance that Egghead will be able to maintain the improved it has
achieved in its upgrade stores or replicate them in other stores. Egghead's
Internet commerce site, which was activated in February 1996, did not generate
significant revenues in fiscal 1997, and there can be no assurance that this
distribution method will generate significant revenues in the future. Although
ELEKOM is currently testing prototypes of its products, Egghead's investment in
ELEKOM has not resulted in any revenues to date, and there can be no assurance
that it will generate revenue in the future. Moreover, there can be no
assurance that Egghead will be able to sell its real estate assets at a profit
or in a timely manner that will avoid additional carrying costs. Competition is
intensifying in all of Egghead's geographic markets, and prices continue to
erode. Furthermore, despite the restructuring and reorganization measures
described herein, Egghead anticipates that it will sustain additional losses in
fiscal 1998 and a modest loss in fiscal 1999 on a stand-alone basis
Accordingly, it is not clear that Egghead has developed a business strategy
that will accomplish its goal of reducing and eliminating its losses, and there
can be no assurance that it will be able to do so. If Egghead cannot develop a
profitable strategy, and its losses continue, it will deplete its financial
resources and reduce shareholders' equity.
FLUCTUATIONS IN, AND UNCERTAINTY OF, FUTURE OPERATING RESULTS; FUTURE
LOSSES. Egghead's operating results have fluctuated in the past and are likely
to do so in the future, particularly on a quarterly basis. As with many
retailers and direct marketers, a significant portion of both companies' sales
will be generated in the fiscal quarter that includes the winter holiday selling
season. As a result, the annual earnings of the company will depend heavily on
the results of that quarter. Egghead's quarterly results of operations may also
fluctuate as a result of the amount of sales contributed by new stores, the
timing of costs associated with the construction and opening of these stores and
the timing of the closing of any stores. The company's quarterly results of
operations may fluctuate in response to the overall demand for PC products,
shifts in the mix of demand for hardware and software products, the introduction
of new products or upgrades and the success of the Internet commerce site.
Egghead's operating results are also highly dependent on respective levels
of gross profit as a percentage of net sales, which fluctuate due to factors
that may be outside of their control. These factors include product mix,
competitive pricing pressures, product availability and changes in prices from
suppliers and the need to reduce prices to dispose of older inventory for which
there was less demand than anticipated.
COMPETITION. The business of selling PC software, hardware and related
products is intensely competitive. Since its inception in 1984, Egghead has
witnessed a proliferation of competing distribution outlets for PC software
and hardware products, from chains of large specialty stores and other
resellers to manufacturers and publishers selling directly, mail-order firms
and mass merchandise retailers. In addition, electronic communication
networks such as the Internet are creating new opportunities for the
distribution of software and hardware products, which has resulted in
additional competition. The cost savings associated with such electronic
distribution channels can also be expected to result in further price
reductions in the industry.
Because the PC product market is very competitive, resellers typically
have low gross margins and operating income as a percentage of sales.
Increased competition in Egghead's business may lead to reduced profit
margins on PC hardware, software and related products, which could have a
material adverse effect on the company's results of operations. Therefore,
the company's profitability will depend heavily on effective internal
operating and cost control and the ability to adapt quickly and efficiently
to changes in industry trends. Many of Egghead's current and potential
competitors have significantly greater financial, technical, marketing and
other resources than the company. As a result, such competitors may be able
to secure merchandise from vendors on more favorable terms than those that
may be obtained by the company, and may be able to respond more quickly to
changes in customer preferences or to devote greater resources to the
development, promotion and sale of their merchandise than the company. The
company's financial condition and results of operations would be materially
adversely affected if its competitors were to offer PC products at
significantly lower prices, if the company were unable to obtain products in
a timely manner for an extended period of time or if more effective
competitors emerge.
EGGHEAD DEPENDENCE ON SUPPLY SOURCES. Egghead purchases merchandise
primarily through distributors. Egghead also purchases hardware, software and
other products directly from approximately 300 manufacturers and publishers,
including Microsoft, which is Egghead's primary vendor. In fiscal 1997,
purchases from Microsoft represented approximately 18.3% of Egghead's total
net purchases. Egghead and Microsoft are currently working to transition
Egghead's source of supply to distribution. Vendors which have established
9
<PAGE>
significant market share in the PC product market can, to some extent,
influence Egghead's merchandising policies and other aspects of Egghead's
operations. Egghead does not have long-term contracts or arrangements with
its vendors that would ensure the availability of merchandise, and there can
be no assurance that Egghead's current vendors will continue to supply
merchandise to Egghead. To the extent that Egghead purchases from
manufacturers, moreover, there is a risk that the reduction in the volume of
Egghead's purchases resulting from store closures undertaken as part of its
restructuring and reorganization will adversely affect its ability to
purchase directly from such manufacturers. Egghead's financial performance
in large part depends on the terms it obtains from its suppliers. Such terms
include unit prices, unsold product return policies, advertising and market
development allowances, freight charges and payment terms. If Egghead is
unable to maintain favorable terms with its suppliers, its results of
operations could be materially adversely affected. See "BUSINESS OF
EGGHEAD--Merchandising."
LIMITED EXPERIENCE, AND RISKS ASSOCIATED, WITH INTERNET COMMERCE.
Egghead seeks to utilize the Internet and other means of electronic commerce
to sell and distribute merchandise. Revenues generated through the company's
Internet commerce site still represents only a relatively small percentage of
the company's total net sales. Egghead established its Internet commerce
site in February 1996 and began directly downloading selected software
products to its customers' PCs in November 1996. Total net sales from
Egghead's Internet commerce site did not represent a significant portion
of its total net sales in fiscal 1997.
Demand for and market acceptance of recently introduced services and
products sold over the Internet are subject to a high level of uncertainty, and
there exist few proven services and products. The Internet is also
characterized by rapid technological change, changes in user and customer
requirements, frequent new service or product introductions and the emergence of
new industry standards and practices. In addition, as with other providers of
Internet services, Egghead must rely on an Internet service provider to connect
the Internet commerce site to the Internet, and on encryption and authentication
technology licensed from third parties to provide the security and
authentication necessary to effect secure transmission of confidential
information on the Internet. There can be no assurance that a sufficiently
broad base of customers will adopt and continue to use the Internet as a medium
of commerce, the company will be successful in using new technologies
effectively or adapting its Internet commerce sites and proprietary technology
to customer requirements or industry standards, that interruptions in the
company's Internet commerce site connections or the telecommunications access
will not occur or that compromises or breaches will not occur in the encryption
and authentication technology utilized by the company. Failure of an Internet
commerce market to develop, or the occurrence of any of the events described
above, could have a material adverse effect on the business, financial condition
and results of operations of the company.
10
<PAGE>
ITEM 2 PROPERTIES
At March 29, 1997, Egghead operated 87 retail stores (including its joint
venture store with Surplus Direct) in 19 states and the District of Columbia.
Most of Egghead's stores are located in strip shopping centers to provide
customers convenient access. As of March 29, 1997, Egghead's retail store
locations were as follows:
NUMBER OF
LOCATION RETAIL OUTLETS
--------------------------------- ----------------
Arizona. . . . . . . . . . . . . . . . . 2
California . . . . . . . . . . . . . . . 18
Colorado . . . . . . . . . . . . . . . . 2
Connecticut. . . . . . . . . . . . . . . 2
District of Columbia . . . . . . . . . . 1
Illinois . . . . . . . . . . . . . . . . 3
Maryland . . . . . . . . . . . . . . . . 3
Massachusetts. . . . . . . . . . . . . . 8
Michigan . . . . . . . . . . . . . . . . 5
New Jersey . . . . . . . . . . . . . . . 6
New Mexico . . . . . . . . . . . . . . . 1
New York . . . . . . . . . . . . . . . . 5
North Carolina . . . . . . . . . . . . . 2
Oregon . . . . . . . . . . . . . . . . . 6
Pennsylvania . . . . . . . . . . . . . . 3
Tennessee. . . . . . . . . . . . . . . . 1
Texas. . . . . . . . . . . . . . . . . . 2
Utah . . . . . . . . . . . . . . . . . . 3
Virginia . . . . . . . . . . . . . . . . 4
Washington . . . . . . . . . . . . . . . 10
--
Total. . . . . . . . . . . . . . . . . . 87
--
--
As part of the restructuring and reorganization, Egghead intends to close
an additional seven stores. Egghead leases all of its retail stores under
leases expiring from fiscal 1998 to fiscal 2007. Egghead expects that leases
with terms expiring during fiscal year 1998 will be renewable at Egghead's
option under substantially similar terms. Nearly all of Egghead's leases
provide for a minimum monthly rent that either is constant or adjusts
periodically throughout the lease term, including renewal periods.
Egghead currently leases its distribution facility in Sacramento,
California. The lease on Egghead's Sacramento distribution facility expires
in September 1998, with renewal options available. During June 1996, Egghead
closed its distribution center in Wilmington, Ohio. It closed its Lancaster,
Pennsylvania distribution facility in March 1997 in connection with the
reduction in scope of its business and plans to sublease that facility.
Egghead owns and is currently offering for sale its administrative
headquarters building in Liberty Lake, Washington. Approximately 51% of the
Liberty Lake, Washington facility currently is being leased to Software
Spectrum, Inc. pursuant to a call center lease agreement entered into by
Egghead and Software Spectrum, Inc. in connection with the sale of Egghead's
CGE division. The lease has a three-year term expiring in 1999 with an
option for renewal. Egghead's Liberty Lake facility houses its corporate
headquarters, information systems and Egghead's 1-800-EGGHEAD direct response
operation. Egghead is evaluating whether to enter into a sale and leaseback
of its existing headquarters facility or to relocate its headquarters to
another facility in the Spokane, Washington area during fiscal 1998.
11
<PAGE>
Compliance with federal, state and local laws enacted for protection of the
environment has had no material effect on Egghead's capital expenditures,
earnings or competitive position. Egghead does not anticipate any material
adverse effects in the future based on the nature of its operations and the
current focus of such laws.
ITEM 3. LEGAL PROCEEDINGS
Various claims and lawsuits arising in the normal course of business are
pending against the Company. The subject matter of these proceedings primarily
includes commercial disputes and employment issues. The results of these
proceedings described above are not expected to have a material adverse effect
on the Company's consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders in the fourth
quarter of fiscal year 1997.
12
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
MARKET AND MARKET PRICE FOR COMMON STOCK
Egghead's common stock, $0.01 par value, is traded over the counter under
the symbol EGGS and is quoted as part of the NASDAQ National Market System.
The Egghead common shares are NASDAQ quoted on the Nasdaq National
Market. The table below sets forth for the periods indicated the high and
low sale prices per Egghead common share on the Nasdaq National Market as
reported in published financial sources. For current price information, the
Egghead shareholders are urged to consult publicly available sources.
HIGH LOW
---- ---
FISCAL 1997 (ENDED MARCH 29, 1997):
Fourth Quarter . . . . . . . . . . . . . 6.00 4.38
Third Quarter. . . . . . . . . . . . . . 6.63 5.00
Second Quarter . . . . . . . . . . . . . 10.88 5.88
First Quarter. . . . . . . . . . . . . . 13.63 9.50
FISCAL 1996 (ENDED MARCH 30, 1996):
Fourth Quarter . . . . . . . . . . . . . 10.69 5.13
Third Quarter. . . . . . . . . . . . . . 8.75 5.88
Second Quarter . . . . . . . . . . . . . 13.75 7.88
First Quarter. . . . . . . . . . . . . . 13.38 8.88
HOLDERS
The approximate number of holders of record of Egghead's common stock as
recorded on the books of Egghead's Registrar and Transfer Agent as of May 24,
1997 was 1,054.
DIVIDENDS
No cash dividends were declared or paid by Egghead during any of the
periods presented above. Egghead presently does not intend to pay any cash
dividends in the foreseeable future, but intends to retain all earnings for use
in its business operations.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
1
The following selected historical financial data of Egghead have been
derived from Egghead's historical consolidated financial statements. Fiscal
year 1993 had 53 weeks. All other fiscal years presented had 52 weeks. All
Statement of Operations amounts reflect the CGE activities as discontinued
operations. The selected financial data presented below should be read in
conjunction with such consolidated financial statements and the notes thereto.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA:
FISCAL YEAR
-----------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 321,566 $ 373,510 $ 434,021 $ 403,841 $ 360,715
Cost of sales, including certain buying, occupancy and
distribution costs. . . . . . . . . . . . . . . . . . . . . 270,266 322,210 380,428 357,373 326,044
--------- --------- --------- --------- ---------
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . 51,300 51,300 53,593 46,468 34,671
Selling, general and administrative expenses . . . . . . . . . 48,249 56,096 53,895 59,639 60,632
Depreciation and amortization expenses, net of amounts
included in cost of sales . . . . . . . . . . . . . . . . . 6,089 7,603 7,363 7,449 6,043
Provision for restructuring and impairment costs . . . . . . . 858 -- -- -- 15,597
Provision for shareholder litigation . . . . . . . . . . . . . -- 1,200 -- -- --
--------- --------- --------- --------- ---------
Operating loss . . . . . . . . . . . . . . . . . . . . . . . . (3,896) (13,599) (7,665) (20,620) (47,601)
Theft insurance recovery . . . . . . . . . . . . . . . . . . . -- -- 1,650 -- --
Other (expense) income . . . . . . . . . . . . . . . . . . . . (489) (101) 618 2,469 3,428
--------- --------- --------- --------- ---------
Loss from continuing operations before income taxes. . . . . . (4,385) (13,700) (5,397) (18,151) (44,173)
Income tax benefit (provision) . . . . . . . . . . . . . . . . 1,711 5,343 2,106 7,030 (4,788)
--------- --------- --------- --------- ---------
Loss from continuing operations. . . . . . . . . . . . . . . . (2,674) (8,357) (3,291) (11,121) (48,961)
Income from discontinued operations, net of tax. . . . . . . . 9,604 7,843 5,959 376 (12,254)
Gain on disposal of discontinued operations, net of tax. . . . -- -- -- -- 22,286
--------- --------- --------- --------- ---------
Income (loss) from discontinued operations . . . . . . . . . . 9,604 7,843 5,959 376 10,032
--------- --------- --------- --------- ---------
Net income (loss) before cumulative effect of change in
accounting principles . . . . . . . . . . . . . . . . . . . 6,930 (514) 2,668 (10,745) (38,929)
Cumulative effect of change in accounting principles, net of tax -- -- -- -- (711)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --------- --------- --------- --------- ---------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . $ 6,930 $ (514) $ 2,668 $ (10,745) $ (39,640)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings (loss) per share:
Continuing operations . . . . . . . . . . . . . . . . . . . $ (0.15) $ (0.49) $ (0.19) $ (0.64) $ (2.78)
Discontinued operations net . . . . . . . . . . . . . . . . $ 0.56 $ 0.46 $ 0.34 $ 0.02 $ .57
Cumulative effect of change in accounting principle, net. . -- -- -- -- (.04)
--------- --------- --------- --------- ---------
Net income (loss) per share . . . . . . . . . . . . . . . . $ 0.41 $ (0.03) $ 0.15 $ (0.62) $ (2.25)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
OPERATING DATA:
Number of retail stores:
Open at end of period. . . . . . . . . . . . . . . . . . 205 189 169 164 86
Opened during period . . . . . . . . . . . . . . . . . . 33 3 -- 10 6
Closed during period . . . . . . . . . . . . . . . . . . 10 19 20 15 84
Weighted average number open during period(1). . . . . . 195 197 178 166 145
BALANCE SHEET DATA:
Total assets. . . . . . . . . . . . . . . . . . . . . . . . $ 263,216 $ 256,010 $ 270,141 $ 281,555 $ 175,520
Shareholders' equity. . . . . . . . . . . . . . . . . . . . 142,990 143,416 146,416 139,269 100,047
</TABLE>
_______________
(1) Calculated by dividing the total number of store months open during the
period by 12.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Selected financial data for each quarter of fiscal years 1996 and 1997 follows
(in millions, except per share data). Each quarter consists of 13 weeks.
CONTINUING OPERATIONS
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
--------------- --------------- --------------- ----------------
1996 1997 1996 1997 1996 1997 1996 1997
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 84.7 $78.6 $100.6 $80.0 $121.7 $113.2 $96.8 $88.9
Gross margin 10.0 6.6 11.2 8.2 14.5 15.6 10.8 4.3
Selling, general, and
administrative expense 14.3 17.9 15.3 15.0 14.9 12.4 15.2 15.3
Operating income (loss) (6.1) (13.1) (5.9) (8.6) (2.2) 1.7 (6.4) (27.6)
Theft insurance recovery -- -- -- -- -- -- -- --
Income (loss) from
continuing operations
before income taxes (5.4) (12.4) (5.0) (7.6) (1.8) 2.5 (6.0) (26.6)
Income (loss) from
continuing
operations (3.3) (7.6) (3.0) (4.7) (1.1) 1.5 (3.7) (38.2)
Earnings (loss) per share
from continuing
operations $(0.19) $(0.43) $(0.17) $(0.27) $(0.06) $0.09 $(0.21) $(2.17)
</TABLE>
DISCONTINUED OPERATIONS
Financial data for the CGE division for each quarter follows. This division
was sold May 13, 1996 and is reported as discontinued operations in the
consolidated financial statements included in this filing.
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
--------------- --------------- --------------- ----------------
1996 1997 1996 1997 1996 1997 1996 1997
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 90.0 $39.3 $ 90.6 $ -- $ 94.7 $ -- $88.0 $ --
Gross margin 9.3 (23.8) 8.6 -- 8.8 -- 10.1 --
Selling, general, and
administrative expense 8.2 -- 8.6 -- 8.0 -- 8.6 (3.7)
Operating income (loss) 0.4 (23.8) (0.6) -- 0.2 -- 0.9 3.7
Income (loss) before income
taxes 0.2 (23.8) (0.8) -- 0.3 -- 0.9 3.7
Income (loss) from
discontinued operations;
net of tax 0.1 (14.5) (0.5) -- 0.2 -- 0.6 2.3
Earnings (loss) per share
from discontinued
operations 0.01 (0.83) (0.03) -- $ 0.01 -- $ 0.03 0.13
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Egghead is a national reseller of PC hardware, software, peripherals and
accessories through 87 retail stores, its 1-800-EGGHEAD direct response unit and
its Internet commerce site. Egghead began operations in 1984 primarily as a
software reseller, but in recent years has expanded its product offerings to
include a greater percentage of hardware and other non-software products.
Egghead's profitability over its early operating history was mixed;
however, over its last five fiscal years, Egghead has reported increasing
losses from continuing operations. Egghead's losses over the last five
fiscal years are attributable primarily to an increased number of competitors
selling PC products through a greater variety of channels, severe price
competition among PC product resellers, a trend toward lower margins on
computer and related software products, Egghead's relatively high
headquarters expenses and other factors described in more detail under "RISK
FACTORS." Egghead has taken a number of steps intended to reduce or
eliminate Egghead's losses and to achieve break-even operating results on a
cash-flow basis for fiscal 1998. These steps include divesting a non-retail
business segment, focusing its retail operations in certain geographic
markets, closing unprofitable stores, upgrading existing stores,
experimenting with new store formats, developing electronic commerce tools
through its ELEKOM subsidiary and implementing a new Internet commerce site.
For example, in May 1996, Egghead sold its CGE division to generate cash
and to allow management to focus on retail operations. The sale resulted in a
net gain of $22.3 million, offset by a related loss from the CGE operations of
$12.3 million. During the fourth quarter of fiscal 1997, Egghead substantially
restructured and reorganized its operations by (i) closing 70 of its worst
performing retail stores, (ii) substantially reducing its headquarters
personnel, (iii) closing its Lancaster, Pennsylvania distribution center, and
(iv) offering for sale certain real estate assets, including its administrative
headquarters building located in Liberty Lake, Washington. Egghead intends to
close an additional seven poorly performing retail stores as part of the
restructuring and reorganization. The restructuring and reorganization
concentrated Egghead's retail stores into 26 geographic markets and is expected
to reduce headquarters and distribution expenses for continuing operations to
approximately $17.0 million on an annualized basis from $32.0 million in fiscal
1997. Since fiscal 1996, Egghead has also opened or remodeled eight
5,000 square foot stores, which are approximately twice the size of its
traditional stores, and increased its hardware product offerings in these stores
in an effort to improve sales. Egghead currently operates 24 of these larger
format stores, 12 of which were existing stores that have been open for more
than one year and were expanded, remodeled or relocated. In fiscal 1997,
Egghead generated comparable store sales and operating profit increases of 17%
and 28%, respectively, from these 12 stores. In November 1996, Egghead opened
one Egghead Computer Surplus store, operated as a joint venture with Surplus
Direct, to participate in a new retail channel for surplus PC products.
These initiatives have achieved mixed results. Although the 1997
restructuring and reorganization will reduce headquarters and distribution
expenses, further reductions in operating expenses may be necessary. Closure of
poorly performing stores should improve retail store operating performance and
inventory turn ratios for the remaining stores, but results from its new larger
stores have been mixed. Egghead will continue to evaluate the performance of
its larger format stores and expects that further refinement of its store format
will be required. There can be no assurance that Egghead will be able to
maintain the improved results it has achieved in its upgraded stores or
replicate them in other stores. Egghead's Internet commerce site, which was
activated in February 1996, did not generate significant amounts of revenue and
there can be no assurance that this distribution method will generate
significant revenue in the future. Although ELEKOM is currently testing
prototypes of its products, Egghead's investment in ELEKOM has not resulted in
any revenue to date, and there can be no assurance that it will generate
revenues in future periods.
Accordingly, it is not yet clear that Egghead has developed a business
strategy that will accomplish the goal of further reducing and eliminating its
losses, and there can be no assurance that it will be able to do so. If Egghead
cannot develop a profitable strategy, and its losses continue, Egghead will
deplete its financial resources and reduce shareholders' equity.
15
<PAGE>
On May 1, 1997, Egghead announced a definitive agreement (the "Merger
Agreement") to acquire closely held Surplus Direct for up to 5.6 million
newly issued shares of Egghead Common Stock. The transaction includes
repayment of $5.6 million of Surplus Direct debt. Surplus Direct, a reseller
of previous version computer hardware and software, had sales for the nine
months ended February 28, 1997 of approximately $35.0 million. Surplus
Direct has a relatively limited operating history, and, although it reported
break-even to profitable results for the three fiscal years ended May 31,
1996, 1995 and 1994, it reported a $1.2 million loss for the nine months
ended February 28, 1997. Egghead believes that the Merger will create
synergies through the combination of Surplus Direct's hardware purchasing
expertise, access to the surplus PC products channel, entrepreneurial
management and Internet commerce development capabilities with Egghead's
greater software product procurement expertise and seasoned retail
management. Nevertheless, there can be no assurance that these benefits will
be achieved. The transaction is subject to approval by Egghead's and Surplus
Direct's shareholders and customary closing conditions, and is expected to be
completed in August 1997.
In connection with the signing of the Merger Agreement, Egghead and
Surplus Direct entered into a Bridge Loan Agreement, dated April 30, 1997,
pursuant to which Egghead loaned Surplus Direct $2.0 million to finance its
working capital needs pending completion of the Merger (the "Bridge Loan").
The Bridge Loan bears interest at the prime rate (as quoted by Seattle-First
National Bank) plus 5.0% per annum and is due on December 31, 1997 in the
event that the Merger does not occur. The Bridge Loan is subordinated to up
to $4.5 million of senior indebtedness (the "Bank Debt") of Surplus Direct
under a credit facility with its principal bank (the "Bank") and ranks pari
passu with $2.0 million of Surplus Direct debt under a subordinated note (the
"SV Capital Note") payable to SV Capital Partners, L.P., which is a
substantial shareholder of Surplus Direct ("SV Capital Partners"). The
Bridge Loan and the SV Capital Note are secured by a second lien (behind the
Bank Debt) on the principal assets of Surplus Direct. Egghead has agreed to
repay the Bank Debt and the SV Capital Note at the Closing and the Bank and
SV Capital Partners have agreed not to accelerate their loans prior to the
closing of the Merger, except under specified circumstances.
Egghead uses a 52/53-week fiscal year, ending on the Saturday nearest
March 31 of each year. Each fiscal quarter consists of 13 weeks. Information
contained in this report excludes, unless otherwise stated, any data relative to
the discontinued operations of the CGE division.
RESULTS OF OPERATIONS
OVERVIEW
Egghead reported a total net loss for fiscal 1997 of $39.6 million compared
to a total net loss of $10.7 million for fiscal 1996 and net income of
$2.7 million for fiscal 1995. On a pre-tax basis, the loss from continuing
operations for fiscal 1997 was $44.2 million ($20.2 million excluding
restructuring and impairment charges) compared to losses of $18.2 million for
fiscal 1996 and $5.4 million for fiscal 1995. In addition to the restructuring
and impairment charges, the total net loss for fiscal 1997 included a net
noncash charge of $10.7 million for the establishment of a deferred tax
valuation allowance and a $36.5 million gain on the sale of the CGE division,
partially offset by the related loss from discontinued operations of
$20.1 million.
The restructuring and impairment charges totaled $24.0 million before
income taxes and were recorded during the fourth quarter of fiscal 1997. The
charges included $6.5 million in gross margin expenses, $5.8 million for
settlement of store and warehouse leases, $4.3 million for fixed asset
dispositions, professional fees and miscellaneous expenses, $3.3 million in
store closing costs and related fixed asset dispositions, $1.3 million for the
impairment and disposition of real estate and $2.8 million for severance and
related benefits.
The pretax loss during fiscal 1996 was due primarily to a decrease in sales
compared to fiscal 1995 resulting from a reduction in the average number of
stores in full operation during the year, as well as one-time costs of
approximately $4.6 million associated with the relocation of Egghead's corporate
headquarters, costs of rolling out its larger format retail stores, and its
investment of approximately $1.1 million in ELEKOM. Fiscal year 1995 pretax
income was primarily
16
<PAGE>
attributable to increases from fiscal 1994 in hardware and accessory sales and
included a one-time theft insurance recovery of $1.65 million, pretax, related
to inventory stolen from retail stores in prior years.
Given its recent losses, Egghead determined that its deferred tax assets no
longer met the realization criteria of SFAS No. 109 ("SFAS 109"). Under
SFAS 109, the realization of the deferred tax assets depends on generating
future taxable income. Egghead management has determined that it is more likely
than not that the deferred tax assets could not currently be realized.
Accordingly, Egghead recorded a net noncash charge in fiscal 1997 of
$10.7 million for the establishment of a deferred tax valuation allowance in
accordance with SFAS 109. Egghead's net operating losses can be recovered over
a 15-year period for tax purposes if Egghead achieves profitability. Until
Egghead has determined that all of its existing net operating losses are
realizable, it will not record a tax charge or benefit for future operating
results. For comparative purposes Egghead's results of operations are discussed
below on a pretax basis.
CONTINUING OPERATIONS
PRETAX LOSS. Loss before income taxes includes the results of Egghead's
retail stores, 1-800-EGGHEAD direct response unit, Internet commerce operations
and ELEKOM, as well as the selling, general and administrative expenses related
to these operations. The following table shows the relationship of certain
items relating to continuing operations included in Egghead's Consolidated
Statements of Operations, including restructuring and impairment charges,
expressed as a percentage of net sales:
FISCAL YEAR
-------------------------
1995 1996 1997
----- ----- -----
Net sales. . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of sales, including certain buying, occupancy
and distribution costs. . . . . . . . . . . . . 87.7 88.5 90.4
----- ----- -----
Gross margin . . . . . . . . . . . . . . . . . . . 12.3 11.5 9.6
Selling, general and administrative expense. . . . 12.4 14.8 16.8
Depreciation and amortization expense, net of
amounts included in cost of sales . . . . . . . 1.7 1.8 1.7
Restructuring and impairment cost. . . . . . . . . -- -- 4.3
----- ----- -----
Operating income (loss). . . . . . . . . . . . . . (1.8) (5.1) (13.2)
Other income, net. . . . . . . . . . . . . . . . . 0.5 0.6 1.0
----- ----- -----
Loss before income taxes . . . . . . . . . . . . . (1.3)% (4.5)% (12.2)%
----- ----- -----
----- ----- -----
NET SALES. Sales through Egghead's retail stores constitute the
principal component of Egghead's net sales. Although Egghead commenced sales
of PC products through the Internet in February 1996, Internet commerce sales
did not represent a significant percentage of net sales in fiscal 1997.
Sales through Egghead's retail stores are primarily related to the number of
such stores in operation during the fiscal period, the size of those stores,
the number of new retail stores and the performance of comparable retail
stores during the period. Net sales are also affected by new PC product
releases, competition from other resellers and a variety of other factors.
As is the case with many retailers, a significant portion of Egghead's sales
are generated in the fiscal quarter that includes the winter holiday selling
season. As a result, Egghead's fiscal year results will be heavily dependent
on the results for that quarter. See BUSINESS OF EGGHEAD--Certain Risk
Factors--Fluctuations in, and Uncertainty of, Future Operating Results;
Future Losses" and "--Competition."
During fiscal 1997, Egghead opened seven stores, remodeled two stores and
closed 84 stores, operating a total of 87 stores at March 29, 1997, including
Egghead Computer Surplus. This compares to the 164 stores open at fiscal
year-end 1996 and the 169 stores open at fiscal year-end 1995. Egghead
intends to close an additional seven stores in connection with the
restructuring and reorganization. Of the 87 stores open at the end of fiscal
1997, 24, not including the Egghead Computer Surplus Store, were
approximately twice the size of Egghead's traditional stores. Twelve of the
24 larger stores are existing stores that have been open for more than one
year and were expanded, remodeled or relocated. In fiscal 1997, Egghead
generated comparable store sales and operating profit
17
<PAGE>
increases of 17% and 28%, respectively, from these 12 stores. Nevertheless, the
overall performance of the larger format stores has been mixed. Egghead will
continue to evaluate the performance of its larger format stores and expects
that further refinement of its store format will be required.
Net sales for fiscal 1997 were $360.7 million, a decrease of 11% from the
$403.8 million in the prior year. The decrease in sales is attributable
primarily to the closure of 84 stores during fiscal 1997 and a decrease in
overall sales volume. Egghead closed 70 stores during the fourth quarter of
fiscal year 1997. Sales for fiscal 1997 from the 86 Egghead stores that were
open at the end of fiscal 1997 accounted for $238.4 million or 66% of Egghead's
fiscal year retail store revenue. Net sales in fiscal 1996 were $403.8 million,
a decrease of $30.2 million or 7% from net sales of $434.0 million in fiscal
1995. Fiscal 1996 sales decreases resulted primarily from the reduction in the
average number of stores in full operation during the year. Fiscal 1995 sales
increased $60.5 million or 16% from fiscal 1994 sales of $373.5 million. Fiscal
1995 increases primarily resulted from an increase in hardware and related
accessories sales, a full year of sales from a direct mail company acquired by
Egghead in 1994 and broad product price reductions initiated in 1994.
Comparable retail store sales measure sales for stores that were open in
both periods being evaluated. Comparable store sales decreased 9.5% during
fiscal 1997 due to a general sales decrease in fiscal 1997 and to Microsoft's
launch of Windows 95 in fiscal 1996, which increased sales in 1996. Of the 87
retail stores that were open at the end of fiscal 1997, Egghead expects that
80 stores will be retained after completion of the restructuring and
reorganization. These 80 stores recorded a 1.6% decrease in comparable store
sales for fiscal 1997 compared to the decrease of 9.5% in comparable store sales
for the entire company. In the fourth quarter of fiscal 1997, these stores
generated a comparable store increase of 6.0% over the fourth quarter of fiscal
1996. These stores also contributed store operating profits (before
distribution, marketing and corporate overhead expenses) in excess of total
year-to-date retail store operating profits. The increases in comparable retail
store sales for fiscal 1996 and 1995 were 0.1% and 21.0%, respectively, over the
prior periods. Comparable store sales for fiscal 1996 were flat compared to
fiscal 1995, despite the release of Windows 95 in fiscal 1996, due to an overall
decrease in sales of other products. As discussed above, fiscal 1995 comparable
store sales benefited primarily from price reductions initiated in fiscal 1994.
GROSS MARGIN. Gross margin consists of net sales minus cost of sales,
including certain buying, occupancy and distribution costs. Gross margin is
primarily affected by sales volume and the mix of PC products sold, as well as
vendor rebates and freight and obsolescence charges. Gross margin as a
percentage of net sales may also be significantly affected by industry-wide
pricing pressure related to both competitors' pricing and vendors' pricing.
Beginning in fiscal 1996, Egghead began to increase the percentage of hardware
and other non-software products offered. Such products typically generate
higher gross margins in absolute dollars, though not necessarily as a percentage
of sales.
Gross margin for fiscal 1997 was $34.7 million, or 9.6% of net sales,
compared to $46.5 million, or 11.5% of net sales, for fiscal 1996. The
decrease in 1997 gross margin was primarily attributable to the inventory
liquidation associated with the closure of 70 stores in connection with the
reorganization and restructuring. Excluding the $6.5 million gross margin
restructuring charge, gross margin in fiscal 1997 would have been $41.2
million, or 11.7% of net sales. The store closures in 1997 will
substantially reduce the quantities of merchandise purchased by Egghead and
may adversely affect Egghead's ability to obtain volume discounts in the
future. Gross margin as a percentage of net sales was also reduced by
increased sales of hardware and other non-software related products, which
represented approximately 36% of net sales in fiscal 1997, compared to
approximately 34% in fiscal 1996. Sales of hardware and other non-software
related products represented 39% of net sales in the fourth quarter of fiscal
1997 compared to 33% in the fourth quarter of 1996, and Egghead expects sales
of such products to increase as a proportion of net sales.
As a percentage of net sales, gross margin of 11.5% in fiscal 1996 compared
to 12.3% in fiscal years 1995. Fiscal 1996 gross margin was negatively affected
by the pricing and promotion terms relating to the sale of Microsoft Windows 95
and a clearance sale during the last quarter of the fiscal year. Fiscal 1995
gross margin reflects a full year of broad price reductions initiated in the
middle of 1994.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE ("SG&A"). SG&A expense
consists primarily of operating expense, excluding occupancy for retail,
1-800-EGGHEAD and Internet operations and headquarters expense, and excluding
18
<PAGE>
product procurement and marketing. Such operating expenses include payroll and
benefits for headquarters and distribution support functions,
telecommunications, credit card processing costs and supplies.
SG&A expense as a percentage of net sales was 16.8% for fiscal 1997,
compared to 14.8% of sales for the prior fiscal year. The increase was
primarily due to reduced sales and to restructuring and reorganization costs of
$1.9 million. These costs consist primarily of payroll and other costs relating
to the closure of the 70 stores announced in January.
In fiscal 1996, SG&A expense as a percentage of net sales was 14.8%
compared to 12.4% in fiscal 1995. The increased expenses in fiscal 1996 include
$4.6 million incurred in connection with the relocation of the corporate
headquarters to Liberty Lake and $1.1 million related to development of products
by ELEKOM. SG&A expense as a percentage of net sales not including relocation
expense and ELEKOM expenditures would have been 13.3% in fiscal 1996 and 12.3%
in fiscal 1995. The improvement in the fiscal 1995 SG&A expense as a percentage
of sales compared to fiscal 1994 was due mainly to sales increasing at a faster
rate than expenses during the period.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense, net
of amounts included in cost of sales, primarily includes depreciation of
Egghead's headquarters facility and capital equipment. The expense of
$6.0 million for fiscal 1997 declined compared to $7.4 million for the prior
year, primarily due to the disposition of fixed assets related to the sale of
the CGE division. Depreciation and amortization expense, net of amounts
included in cost of sales, of $7.4 million in fiscal 1996 was consistent with
fiscal 1995.
Assuming consummation of the Merger, depreciation and amortization expense
will increase in fiscal 1998 and subsequent periods as a result of the
amortization of goodwill resulting from the Merger. See "Pro Forma Condensed
Financial Statements."
OTHER INCOME, NET. Interest income in fiscal 1997, 1996 and 1995 was
$3.4 million, $2.2 million and $0.8 million, respectively. Increases in
interest income are primarily due to the increases in cash balances discussed
under "--Liquidity and Capital Resources." In addition, fiscal 1995 included
theft insurance recovery of $1.7 million, representing settlement of an
insurance claim, net of expenses, for inventory stolen by members of a
multistate shoplifting ring from numerous retail stores during fiscal years
1991, 1992 and 1993.
DISCONTINUED OPERATIONS
All results for the operations of the CGE division are reported as a
discontinued operation. Certain general, administrative and distribution areas
have traditionally supported all of Egghead's business lines. The expenses
included in the results of the discontinued operations reflect only those
activities directly related to the CGE division.
Gain on the disposition of the discontinued operation during fiscal 1997
was $36.5 million ($22.3 million after tax). The sales price for the CGE
division was $45.0 million in cash, which did not include the accounts
receivable, which were collected during fiscal 1997. The reported gain is net
of fixed assets and lease write-offs of $1.2 million, transaction, legal and
accounting fees of $2.0 million, transition period employment costs of
$1.8 million and costs of $3.4 million related to the fulfillment of post-sale
obligations.
Loss from the discontinued operation was $20.1 ($12.3 million net of tax)
for the 1997 fiscal year. The major components of the loss were inventory
write-offs of $6.9 million, accounts receivable write-offs of $5.1 million,
fixed asset dispositions and equipment lease buyouts of $3.2 million, warehouse
closing costs of $1.9 million and operating losses, severance and other costs of
$3.0 million.
Net sales for the discontinued operations of CGE declined $65.2 million, or
15.2% from $428.5 million in fiscal 1995 to $363.3 million in fiscal 1996, due
primarily to disruptions in sales efforts related to the consolidation of its
regional sales offices and Egghead's headquarters relocation to Liberty Lake,
Washington. Gross margin for CGE as a percentage of net sales was 10.1% in
fiscal 1996, compared to 11.3% in 1995.
The increase in SG&A expense as a percentage of net sales was 9.2% in
fiscal 1996, compared to 8.6% in fiscal 1995. The increase is primarily
attributable to the sales shortfall.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
In recent fiscal years, Egghead has funded its operations through cash
provided by operations, bank lines of credit and the proceeds of the sale of the
CGE division. Egghead elected not to renew its bank line of credit after the
line expired in April 1996 because it had sufficient cash to fund operations.
Egghead had no outstanding borrowings under the line at the expiration date.
Cash and cash equivalents increased $33.9 million from $49.6 million at the
end of fiscal 1996 to $83.5 million at March 29, 1997. The increase in the cash
balance was primarily due to the sale of the CGE division, the collection of
related accounts receivable and a liquidation of merchandise inventories, offset
by a reduction in accounts payable. Egghead expects these cash balances will be
adequate to meet future cash requirements for operations.
Net property and equipment decreased $9.8 million from $29.5 million at the
end of fiscal 1996 to $19.7 million at March 29, 1997. The decrease is
principally due to the sale of the CGE division, the disposition of assets
related to the restructuring and reorganization and normal depreciation. Net
property and equipment increased $7.6 million from $21.9 million at the end of
fiscal 1995 to $29.5 million at March 30, 1996. The increase is principally due
to the addition or remodel of the larger format stores, as well as improvements
to the corporate headquarters building in Liberty Lake, offset by depreciation
expense.
Capital expenditures in fiscal 1997 totaled $5.1 million, primarily for new
stores and computer hardware. Capital expenditures in fiscal 1996 totaling
$16.2 million included leasehold improvements, fixtures, computer hardware,
software and communications equipment, principally due to the remodel or
addition of 19 larger format stores and the relocation of the corporate
headquarters. Capital expenditures in fiscal 1995 totaling approximately
$14.7 million included land and a building in Liberty Lake, Washington for the
corporate headquarters, computer software and communications equipment.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." This new standard requires that
long-lived assets and certain identifiable intangible assets be evaluated to
determine whether the carrying amount is recoverable based on estimated future
cash flows expected from the use of the assets and cash to be received upon
disposal of the assets. Egghead adopted this standard in the first quarter of
fiscal 1997. The cumulative effect of the change in accounting principle was a
charge of $0.7 million, after tax, for fiscal 1997. This charge represents the
write-down of Egghead's property held for sale in Kalispell, Montana and the
related goodwill. The impact on continuing operations during fiscal 1997 was
$1.1 million, primarily related to Egghead's fourth quarter restructuring and
reorganization and the corresponding impairment of certain real estate assets
that are held for sale.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This new standard requires entities to choose either a fair
value based method or an intrinsic value-based method of accounting for all
employee stock compensation plans. Egghead adopted the standard during fiscal
1997 and has historically and will in the future use the intrinsic value-based
method, which requires no compensation cost to be recognized at the date of the
stock compensation grant if the option is granted at the current market price.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share"
("SFAS 128"). SFAS 128 establishes new standards for computing and presenting
earnings per share and supersedes Accounting Principles Board Opinion No. 15,
"Earnings Per Share." Egghead will adopt this new standard in the third quarter
of fiscal 1998. Egghead does not anticipate the adoption of this new standard
would have a material effect on loss per share for fiscal 1997, 1996 and 1995 as
currently reported.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Egghead, Inc.:
We have audited the accompanying consolidated balance sheets of Egghead,
Inc. (a Washington corporation) and subsidiaries as of March 29, 1997 and
March 30, 1996, and the related statements of operations, shareholders' equity
and cash flows for each of the three fiscal years in the period ended March 29,
1997. These financial statements are the responsibility of Egghead's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Egghead, Inc. and
subsidiaries as of March 29, 1997 and March 30, 1996, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended March 29, 1997, in conformity with generally accepted accounting
principles.
Seattle, Washington
May 13, 1997
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
21
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Consolidated Balance Sheets
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
March 30, March 29,
1996 1997
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 49,590 $ 83,473
Accounts receivable, net of allowance for
doubtful accounts of $2,098 and $5,319, respectively 24,079 13,917
Receivable from Joint Venture - 4,000
Merchandise inventories, net 84,712 49,087
Prepaid expenses and other current assets 9,455 4,116
Current deferred income taxes 4,859 -
Discontinued operations - net current assets 74,473 -
-------- --------
Total current assets 247,168 154,593
-------- --------
Property and equipment, net 29,495 19,710
Non-current deferred income taxes 4,221 -
Other assets 1,621 1,217
Discontinued operations - net long-term assets 1,727 -
-------- --------
$284,232 $175,520
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $119,341 $ 43,027
Accrued liabilities 16,112 12,996
Discontinued operations - current liabilities 8,327 7,754
Reserves and liabilities related to restructuring - 11,258
-------- --------
Total current liabilities 143,780 75,035
-------- --------
Other long-term liabilities 1,183 438
-------- --------
Total liabilities 144,963 75,473
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value: 10,000,000 authorized - -
no shares issued and outstanding
Common stock, $.01 par value: - -
50,000,000 shares authorized; 17,546,548 and
17,591,087 shares issued and outstanding, respectively 176 176
Additional paid-in capital 124,104 124,457
Retained earnings (deficit) 14,989 (24,586)
-------- --------
Total shareholders' equity 139,269 100,047
-------- --------
$284,232 $175,520
-------- --------
-------- --------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Consolidated Statements of Operations
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales $434,021 $403,841 $360,715
Cost of sales, including certain buying,
occupancy and distribution costs 380,428 357,373 326,044
-------- -------- --------
Gross margin 53,593 46,468 34,671
Selling, general and administrative expense 53,895 59,639 60,632
Depreciation and amortization expense,
net of amounts included in cost of sales 7,363 7,449 6,043
Restructuring and impairment charges - - 15,597
-------- -------- --------
Operating loss (7,665) (20,620) (47,601)
-------- -------- --------
Other income, net 2,268 2,469 3,428
-------- -------- --------
Loss from continuing operations
before income taxes (5,397) (18,151) (44,173)
Income tax (expense) benefit 2,106 7,030 (4,788)
-------- -------- --------
Net loss from continuing operations
before discontinued operations and
change in accounting principle (3,291) (11,121) (48,961)
-------- -------- --------
Discontinued operations:
Gain on disposal of discontinued operations,
net of tax expense of $14,249 - - 22,286
Income (loss) from discontinued
operations, net of tax (benefit) expense of
$3,811, $241 and $(7,833), respectively 5,959 376 (12,254)
-------- -------- --------
Net income (loss) before cumulative effect of change
in accounting principle 2,668 (10,745) (38,929)
Cumulative effect of change in accounting principle,
net of tax of $451 - - (711)
-------- -------- --------
Net income (loss) $ 2,668 $(10,745) $(39,640)
-------- -------- --------
-------- -------- --------
Earnings (loss) per share:
Continuing operations $ (0.19) $ (0.64) $ (2.78)
Discontinued operations:
Gain on disposal of discontinued operations - - 1.27
Income (loss) from discontinued operations 0.34 0.02 (0.70)
Change in accounting principle - - (0.04)
-------- -------- --------
Earnings (loss) per share $ 0.15 $ (0.62) $ (2.25)
-------- -------- --------
-------- -------- --------
Weighted average common shares outstanding 17,281 17,437 17,581
-------- -------- --------
-------- -------- --------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
(DOLLARS IN THOUSANDS)
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss from operations $ 2,668 $(10,745) $(39,640)
-------- -------- --------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 10,468 10,721 7,099
Deferred rent (108) (411) (465)
Deferred income taxes 1,084 (729) 10,750
(Gain) loss on disposition of property
and equipment 187 (55) 2,490
Gain on sale of CGE division - - (36,535)
Restructuring charges - - 23,000
Provisions for asset impairment - - 2,343
Changes in assets and liabilities:
Accounts receivable, net 1,089 (3,585) 10,162
Merchandise inventories 13,558 13,831 30,495
Prepaid expenses & other current assets (574) (5,410) 3,669
Other assets (245) 128 (658)
Discontinued operations, net (6,881) 3,005 67,101
Accounts payable 13,401 14,916 (76,373)
Accrued liabilities (2,528) (903) (7,268)
-------- -------- --------
Total adjustments 29,451 31,508 35,810
-------- -------- --------
Net cash provided by (used in)
operating activities 32,119 20,763 (3,830)
-------- -------- --------
Cash flows from investing activities:
Additions to property and equipment (14,741) (16,174) (5,091)
Proceeds from sale of property and equipment 103 86 1,757
Advances to Joint Venture - - (4,000)
Proceeds from sale of CGE division - - 45,000
Discontinued operations, net (520) (788) -
-------- -------- --------
Net cash provided by (used in)
investing activities (15,158) (16,876) 37,666
-------- -------- --------
Cash flows from financing activities:
Proceeds from stock issuances 286 3,536 353
Payments made on capital lease obligations (308) (487) (306)
-------- -------- --------
Net cash provided by (used in)
financing activities (22) 3,049 47
-------- -------- --------
Effect of exchange rates on cash (24) 62 -
-------- -------- --------
Net increase in cash and cash equivalents 16,915 6,998 33,883
Cash and cash equivalents at beginning of period 25,677 42,592 49,590
-------- -------- --------
Cash and cash equivalents at end of period $ 42,592 $ 49,590 $ 83,473
-------- -------- --------
-------- -------- --------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows (CONTINUED)
(DOLLARS IN THOUSANDS)
1995 1996 1997
------ ------ ------
SUPPLEMENTAL DISCLOSURES OF CASH PAID
DURING THE YEAR :
Interest $ 39 $ 77 $ 30
Income taxes $ 668 $ 334 $ -
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations totaling $0.2 million and $0.7 million were recorded
in fiscal 1995 and 1996 respectively, when Egghead acquired new equipment.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Consolidated Statements of Shareholders' Equity
(AMOUNTS IN THOUSANDS)
Common Stock Additional Retained
--------------------- Paid-in Earnings
Shares Amount Capital (Deficit) Total
------ ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, April 2, 1994 17,121 $171 $120,287 $22,958 $143,416
Stock issued for cash, pursuant to
employee stock purchase plan 42 1 258 - 259
Stock issued for cash, pursuant to stock
option plan 3 - 27 - 27
Translation adjustment - - - 46 46
Net income - - - 2,668 2,668
------ ---- -------- -------- --------
Balance, April 1, 1995 17,166 172 120,572 25,672 146,416
Stock issued for cash, pursuant to
employee stock purchase plan 46 1 286 - 287
Stock issued for cash, pursuant to
stock option plan 335 3 3,246 - 3,249
Translation adjustment - - - 62 62
Net loss - - - (10,745) (10,745)
------ ---- -------- -------- --------
Balance, March 30, 1996 17,547 176 124,104 14,989 139,269
Stock issued for cash, pursuant to
employee stock purchase plan 17 - 161 - 161
Stock issued for cash, pursuant to stock
option plan 27 - 192 - 192
Translation adjustment - - - 65 65
Net loss - - - (39,640) (39,640)
------ ---- -------- -------- --------
Balance, March 29, 1997 17,591 $176 $124,457 $(24,586) $100,047
------ ---- -------- -------- --------
------ ---- -------- -------- --------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
All references herein to fiscal 1995, 1996 and 1997 relate to the fiscal years
ended April 1, 1995, March 30, 1996, and March 29, 1997, respectively.
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Egghead, Inc. sells personal computer software, hardware and related
products through its wholly owned subsidiaries, DJ&J Software Corporation
(DJ&J, d/b/a Egghead Software) and Eggspert Software, Ltd. (Eggspert, a
Canadian subsidiary), EH Direct, Inc. (EH Direct), Egghead International,
Inc. (Egghead International), and ELEKOM Corporation (ELEKOM). References
to "Egghead" include Egghead, Inc., its predecessors, and its subsidiaries.
Eggspert and Egghead International became inactive subsidiaries on May 13,
1996 following the sale of corporate, government, and education (CGE)
division to Software Spectrum, Inc. (SSI). SEE NOTE 10.
CONSOLIDATION
The consolidated financial statements include the accounts of Egghead, Inc.
and its wholly owned subsidiaries, DJ&J, Eggspert, EH Direct, Egghead
International, and ELEKOM, and include all such adjustments and
reclassifications necessary to eliminate the effect of significant
intercompany accounts and transactions. Operating results for Eggspert and
Egghead International are included in discontinued operations. SEE NOTE
10.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. The most significant estimates with regard to these financial
statements are the restructure and reorganization reserves and liabilities
and the discontinued operations reserves and liabilities.
CASH AND CASH EQUIVALENTS
Egghead considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents. The
carrying amount of cash equivalents approximates fair value because of the
short-term maturity of those instruments.
ACCOUNTS RECEIVABLE AND REVENUE RECOGNITION
Certain advertising and promotional expenditures are reimbursable from
suppliers under cooperative advertising and other promotional and market
development fund arrangements. Amounts qualifying for reimbursement are
recorded as receivables from the suppliers and as a corresponding reduction
of net advertising expense in the period the promotion occurs. Also
included in accounts receivable are credit card receivables and amounts due
from vendors for returned inventory and other programs. Egghead records a
provision for uncollectible vendor receivables based upon historical
experience.
Egghead sales made on credit generally have terms of net 30 days. The
sales and corresponding trade receivables for inventoried product are
recorded upon merchandise shipment. Egghead records provisions for
doubtful accounts and sales returns and allowances based upon historical
experience.
27
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MERCHANDISE INVENTORIES
Merchandise inventories are accounted for using the moving weighted average
cost method and are stated at the lower of cost or market. Egghead
maintains reserves for the obsolescence of merchandise inventory. These
reserves totaled approximately $6.7 million and $3.7 million at March 30,
1996 and March 29, 1997, respectively. Management has developed a plan to
dispose of this obsolete inventory and believes the reserve is adequate to
cover any losses on disposition. Inventories on the balance sheet are
shown net of reserves.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation of equipment, furniture and fixtures is provided using the
straight-line method over their estimated useful lives ranging from two to
seven years. Depreciation of buildings is provided using the straight-line
method over their estimated useful lives of up to 30 years. Amortization of
leasehold improvements is provided using the straight-line method over the
lesser of the lease term or the assets' estimated useful lives.
GOODWILL
Net assets of organizations acquired in purchase transactions are recorded
at fair value at date of acquisitions. Unidentified intangibles are
amortized on a straight line basis over the estimated lives of the
remaining long-term assets acquired. Unidentified intangibles at March 30,
1996 were $998,000, net of accumulated amortization of $993,000.
Unidentified intangibles at March 29, 1997 were fully amortized.
ACCOUNTS PAYABLE
Outstanding checks included in accounts payable were $9.0 million and $7.0
million at March 30, 1996 and March 29, 1997, respectively.
DEFERRED RENT
Certain store lease agreements provide for scheduled rent increases or for
rent payments to commence at a date later than the date of occupancy. In
these cases, Egghead recognizes the aggregate rent expense on a
straight-line basis over the lease term beginning when the store opens.
INCOME TAXES
Egghead determines its income tax accounts in accordance with Statement of
Financial Accounting Standards No. 109. Deferred income taxes result
primarily from temporary differences in the recognition of certain items
for income tax and financial reporting purposes.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share amounts are computed using the weighted average
number of common shares and dilutive common equivalent shares outstanding
during each period using the treasury stock method. Common equivalent
shares result from the assumed exercise of stock options and from the
conversion of cash related to the employee stock purchase plan into common
shares based upon the terms of the plan which would have a dilutive effect
in years where there are earnings. Common equivalent shares had no
material effect on the computation in fiscal 1995, 1996 or 1997.
28
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (CONTINUED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." This new standard requires that long-lived assets and certain
identifiable intangible assets be evaluated to determine whether the
carrying amount is recoverable based on estimated future cash flows
expected from the use of the assets and cash to be received upon disposal
of the assets. Egghead adopted this standard at the beginning of the first
quarter of fiscal 1997. The cumulative effect of the change in accounting
principle was a charge of $0.7 million, after tax, or $0.04 per share for
fiscal 1997. This charge represents the write-down of Egghead's property
held for sale in Kalispell, Montana and the related goodwill. The impact
on continuing operations during fiscal 1997 was $1.1 million, primarily
related to Egghead's fourth quarter restructuring and reorganization and
the corresponding impairment of certain real estate assets that are held
for sale. (See Note 10 of Notes to Consolidated Financial Statements.)
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-based Compensation." This new
standard requires entities to choose either a fair value-based or intrinsic
value-based method of accounting for all employee stock compensation plans.
Egghead adopted the standard during fiscal 1997 and has historically, and
will in the future, use the intrinsic-value-based method, which requires no
compensation cost to be recognized at the date of the stock compensation
grant if the option is granted at the current market price.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128 (SFAS 128), "Earnings Per Share." SFAS 128 establishes
new standards for computing and presenting earnings per share and
supersedes Accounting Principles Board Opinion No. 15, "Earnings Per
Share." SFAS 128 will be adopted by Egghead in the third quarter of fiscal
1998. Management does not believe the adoption of this new standard would
have a material effect on earnings (loss) per share for fiscal 1995, 1996
or 1997, as currently reported.
FISCAL YEARS
Egghead uses a 52/53-week fiscal year, ending on the Saturday nearest
March 31 of each year. Fiscal quarters are such that the first three
quarters consist of 13 weeks and the fourth quarter consists of the
remaining 13/14 weeks. Fiscal 1995, 1996 and 1997 each had 52 weeks.
29
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (CONTINUED)
NOTE 2 PROPERTY AND EQUIPMENT
The components of property and equipment at March 30, 1996 and March 29,
1997 were as follows (in thousands):
March 30, March 29,
1996 1997
-------- --------
Land and buildings, net $ 8,547 $ 5,193
Equipment 38,814 16,937
Leasehold improvements 14,157 10,636
Furniture and fixtures 7,080 8,399
-------- --------
68,598 41,165
Less accumulated depreciation and
amortization (39,103) (21,455)
-------- --------
Property and equipment, net $ 29,495 $ 19,710
-------- --------
-------- --------
Property and equipment, net, at March 29,1997 includes Egghead's
headquarters building in Liberty Lake, Washington and property held for
sale in Kalispell, Montana with cost and accumulated depreciation of $10.9
million and $2.1 million, respectively, which are held for sale.
30
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (CONTINUED)
NOTE 3 INCOME TAXES
The provision (benefit) for income taxes from continuing operations is comprised
of the following (in thousands):
Fiscal year
-----------
1995 1996 1997
------- -------- -------
Current:
Federal $(2,048) $ (4,383) $-
State (896) (1,917) -
------- -------- -------
(2,944 (6,300) -
------- -------- -------
Deferred:
Federal 730 (404) 4,170
State 108 (326) 618
------- -------- -------
838 (730) 4,788
------- -------- -------
Total $(2,106) $ (7,030) $ 4,788
------- -------- -------
------- -------- -------
During fiscal 1995 and fiscal 1996, tax expense of $3,811 and $241,
respectively, was recorded against income from discontinued operations. During
fiscal 1997, Egghead also recorded income tax expense on the sale of the
discontinued CGE operations of $14,249 and income tax benefits against the loss
from discontinued operations and cumulative effect of change in accounting
principle of $7,833 and $451, respectively.
Deferred income taxes result primarily from temporary differences in certain
items for income tax and financial reporting purposes. The tax effects of
temporary differences giving rise to the deferred tax assets are as follows:
March 30, March 29,
1996 1997
------- -------
Accounts receivable $ 857 $ 2,695
Merchandise inventories 2,651 1,595
Property and equipment 3,625 3.008
Net operating loss carryforwards - 5,000
Reserves and liabilities related to
restructure - 4,391
Accrued liabilities and other 1,947 4,623
------- -------
Total deferred tax assets 9.080 21,312
Less valuation allowance - (21,312)
------- -------
Net deferred tax assets $ 9,080 -
------- -------
Given its recent losses, Egghead determined that its deferred tax assets no
longer meet the realization criteria of Statement of Financial Accounting
Standards No. 109 (SFAS 109). Under SFAS 109, the realization of the deferred
tax assets depends on generating future taxable income. Egghead management has
determined that it is more likely than not that the deferred tax assets could
not be currently realized. Accordingly, Egghead recorded a net noncash charge
in fiscal 1997 of $10.7 million for the establishment of a deferred tax
valuation allowance in accordance with SFAS 109. The charge is included in
continuing operations as a component of income tax expense. Egghead's net
operating loss carryforwards can be recovered over a 15-year period and begin to
expire in 2011.
31
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (CONTINUED)
NOTE 3 INCOME TAXES (CONTINUED)
Egghead's income tax provision (benefit) differs from the amount computed by
applying the statutory federal tax rate to loss from continuing operations
before taxes as follows:
Fiscal year
-----------
1995 1996 1997
------ ------ ------
Statutory Federal tax rate (34.0)% (34.0)% (34.0)%
State taxes, net of Federal benefit (4.0) (4.6) (4.0)
Tax exempt interest income (3.3) (1.8) (1.4)
Other, net 2.3 1.7 2.0
Change in valuation allowance - - 48.2
----- ----- -----
(39.0)% (38.7)% 10.8%
----- ----- -----
----- ----- -----
NOTE 4 STOCK OPTION AND STOCK PURCHASE PLANS
EMPLOYEE STOCK PURCHASE PLAN
The Egghead, Inc. 1989 Employee Stock Purchase Plan currently provides
options to acquire the Common Stock of Egghead to substantially all
full-time and certain other employees at the lesser of 85% of the fair
market value of the Common Stock on August 1 of the first and second plan
years and July 1 thereafter, or 85% of the fair market value on the
following July 31 of the first plan year and June 30 of each plan year
thereafter. Under the 1989 Plan, a maximum of 650,000 shares were reserved
for issuance. As of March 29, 1997, there were 323,844 shares available
for future issuance.
THE 1993 STOCK OPTION PLAN
In September 1993, Egghead's shareholders approved the 1993 Stock Option
Plan (the 1993 Plan), under which 2,000,000 shares of Egghead's Common
Stock were reserved for issuance. The 1993 Plan replaced the 1986 Combined
Incentive and Non-Qualified Stock Option Plan (the 1986 Combined Plan)
under which 2,000,000 shares were originally reserved for issuance. The
number of shares reserved for issuance under the 1993 Plan was increased by
the shares reserved for issuance under the 1986 Combined Plan that were not
subject to outstanding stock options. Shares presently subject to
outstanding stock options under the 1986 Combined Plan, which subsequently
are canceled or will expire, will increase the number of shares reserved
for issuance under the 1993 Plan. No additional stock options will be
granted under the 1986 Combined Plan. Options granted under the 1993 Plan
vest annually over three years and terminate after 10 years, unless
otherwise noted.
32
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (CONTINUED)
NOTE 4 STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED)
Egghead accounts for these plans under the intrinsic value based method of
accounting, under which no compensation cost has been recognized. Had
compensation cost for these plans been determined consistent with Statement
of Financial Accounting Standards, No. 123 (SFAS 123), Egghead's net income
and earnings per share (EPS) would have been reduced to the following pro
forma amounts:
Fiscal Year
1996 1997
---- ----
Net Loss As Reported $(10,745) $(39,640)
Pro Forma (11,846) (40,800)
Loss per share As Reported $(0.62) $(2.25)
Pro Forma (0.68) (2.32)
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to options granted
prior to April 1, 1995, and additional grants in future years are
anticipated.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model, with the following
assumptions used for grants in fiscal 1996 and 1997:
Fiscal Year
-----------
1996 1997
------ ------
Dividend yield 0% 0%
Volatility 67% 67%
Risk-free interest rate 5.91% 5.61%
Expected stock option life 4.4 yrs. 4.4 yrs.
Using these assumptions, the weighted average fair value of options granted
was $6.17 and $3.67 in fiscal 1996 and 1997, respectively.
33
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (CONTINUED)
NOTE 4 STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED)
Options granted, exercised, and canceled under the above Plans are
summarized as follows:
<TABLE>
<CAPTION>
Fiscal year
1995 1996 1997
------------------------ ------------------------ ------------------------
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of year 702,322 $11.88 1,513,089 $ 8.63 1,372,887 $9.33
Options granted(1) 1,140,900 6.49 621,100 10.67 1,444,200 6.80
Options exercised (2,625) 10.25 (55,395) 6.47 (27,891) 7.01
Options canceled (327,508) 7.45 (705,907) 8.94 (605,668) 9.50
--------- --------- ---------
Outstanding, end of year 1,513,089 8.63 1,372,887 9.33 2,183,528 7.75
--------- --------- ---------
--------- --------- ---------
Exercisable, end of year 293,139 $13.18 359,277 $10.85 837,156 $8.19
--------- --------- ---------
--------- --------- ---------
Available for grant in
future years 1,776,066 1,860,873 1,022,341
--------- --------- ---------
--------- --------- ---------
</TABLE>
(1) One million options granted during fiscal 1997 vest over a period of 18
months, with 294,400 vested as of March 29, 1997. The remaining 705,600
options vest monthly at a rate of 44,100 until all options are vested
The following table summarizes information regarding all stock options
outstanding at March 29, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- ------------------------
Remaining
Contractual Exercise Exercise
Range of Exercise Prices Number Life Price Number Price
------------------------ --------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
$5.375 - $8.125 1,686,668 8.97 years $ 5.97 670,386 $ 6.57
$9.00 - $10.75 591,501 4.64 years 10.52 477,809 10.46
$10.8125 - $16.00 976,716 4.85 years 12.72 602,818 13.79
$17.00 - $20.00 312,467 2.39 years 18.10 312,467 18.10
--------- ---------
$5.375 - $20.00 3,567,352 6.55 years $9.63 2,063,480 $11.33
--------- ---------
--------- ---------
</TABLE>
OPTION REPRICING
On April 23, 1997, the Compensation Committee of the Egghead Board approved
a plan pursuant to which certain executive officers were offered an
opportunity to exchange options having exercise prices in excess of the
then current fair market value of new options having an exercise price of
$4.375 per Egghead Common Share. Recipients of the repriced replacement
options received credit for vesting under the original options, but cannot
exercise the new options for a one-year period following the date of grant
of the new options. The Compensation Committee approved a similar option
repricing for employees other than executive officers on April 4, 1997.
34
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (CONTINUED)
NOTE 4 STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED)
THE NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
In September 1993, Egghead's shareholders approved the Non-employee
Director Stock Option Plan, and in August 1995 Egghead's shareholders
approved amendments thereto (as amended, the Director Plan) under which
450,000 shares of Egghead's Common Stock were reserved for issuance.
Options granted under the Director Plan vest annually over three years and
terminate after 10 years. As of March 29, 1997, 162,500 shares were
available for grant and 287,500 shares were subject to outstanding options,
which have been granted at prices ranging from $5.88 to $13.75. As of
March 29, 1997, options for 130,000 shares were vested.
THE EXECUTIVE PLAN
In February 1989, the Board of Directors approved four-year employment
agreements and stock option agreements for three executive officers who are
no longer with Egghead, whereby the officers' compensation was based on
equity incentives. Each drew an annual salary of $1 per year during his
term of employment. Options to acquire up to 1,700,000 shares of common
stock are authorized under the Plan. As of March 29, 1997, 325,000 options
approved under the plan were never granted and 1,096,324 were subject to
outstanding options, which have been granted to the above named executive
officers of Egghead at prices ranging from $10.38 to $20.00 per share. All
outstanding options are vested and expire in February 1999. As of March
29, 1997, 278,676 of the options had been exercised at $10.38 per share.
The Plan is no longer active and no further options will be granted under
the Plan, which will terminate on February 22, 1999.
NOTE 5 401(k) PLAN
Egghead has a 401(k) retirement plan for the benefit of its employees.
After six months of full-time employment (more than 1,000 hours), an
employee is eligible to participate in the plan. Employee contributions
are matched by Egghead at 50% of the employee's contribution up to 4% of
their compensation. Egghead contributions are fully vested upon the
completion of two years of service. Egghead contributions were
approximately $446,000, $228,000 and $466,000 in fiscal years 1995, 1996
and 1997, respectively. Subsequent to March 29, 1997, Egghead discontinued
the guaranteed matching of employee contributions. Egghead may, however,
make voluntary contributions in the future.
35
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (CONTINUED)
NOTE 6 COMMITMENTS AND CONTINGENCIES
SIGNIFICANT SUPPLIERS
In fiscal 1996 and 1997, three supplier/distributors in the aggregate
accounted for approximately 40% and 33%, respectively, of Egghead's
purchases. The loss of these suppliers could have a material adverse
effect on the Egghead's operating results and financial condition.
LEASES
Egghead leases retail stores and a distribution facility under operating
leases with remaining lives on most leases ranging from one to five years.
Some leases contain renewal options of one to five years which Egghead may
exercise at the end of the initial lease term. The leases generally
require Egghead to pay taxes, insurance and certain common area maintenance
costs.
Aggregate rental expense, including common area maintenance charges, for
all operating leases for fiscal 1995, 1996 and 1997 was approximately $16.8
million, $16.0 million and $15.4 million, respectively. As of March 29,
1997, future minimum rental payments under non-cancelable operating leases
for continuing retail stores and the distribution facility, and equipment
consisted of the following (in thousands):
Operating
Fiscal Year Leases
----------- ---------
1998 $ 6,215
1999 4,036
2000 2,318
2001 1,532
Thereafter 2,007
-------
Total minimum payments $16,108
-------
-------
36
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (CONTINUED)
NOTE 7 THEFT INSURANCE RECOVERY
Theft insurance recovery of $1.65 million included in other income, net in
fiscal 1995 represents settlement of an insurance claim, net of expenses,
for inventory stolen from numerous retail stores during fiscal 1991, 1992
and 1993 by members of a multi-state shoplifting ring.
NOTE 8 JOINT VENTURE
Effective November 22, 1996, Egghead invested $250,000 for a 50% interest
in a limited liability company joint venture (the JV). The other principal
shareholder of the JV is Surplus Direct. The JV operates a retail outlet
for surplus computer hardware, software and related accessories and
services. As of March 29, 1997, Egghead had loaned the JV $4.0 million at
a variable rate of 1/2% above the prime interest rate as published by
Seattle First National Bank (8.5% at March 29, 1997).
Egghead accounts for this investment under the equity method and any income
or loss is reflected in other income. Summary financial information of the
JV's revenue, expenses, assets and liabilities as of and for the period
ended March 29, 1997 are as follows (in thousands):
Revenue $4,477
Expenses 4,660
------
Loss before income taxes $ 183
------
------
Assets $4,723
Liabilities 4,656
------
$ 67
------
------
During fiscal 1997, Egghead had gross sales of $2.1 million to the JV.
Sales to this related party are transacted based on current market prices
and are typically at or below the original cost to Egghead. Egghead
records any markdowns on merchandise sold to the JV as a component of cost
of sales.
NOTE 9 RESTRUCTURING AND REORGANIZATION
In the fourth quarter, Egghead recorded a $24.0 million restructuring and
impairment charge to reorganize it's operations as announced on January 31,
1997. This plan involves among other things, closing 70 of the 156 Egghead
stores, which reduced the number of geographic locations in which Egghead
operated stores from 54 to 26, a significant reduction in its headquarters
staff and the closure of its Lancaster, Pennsylvania distribution center.
This charge includes $6.5 million of gross margin expense, $5.8 million in
settlement of store and warehouse leases, $3.3 million of store closing
costs and related fixed asset disposals, $1.3 million in disposal of real
estate, and $7.1 million of severance payments, other fixed asset
disposals, professional fees and other expenses associated with the
restructuring plan.
37
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (CONTINUED)
NOTE 10 DISCONTINUED OPERATIONS
Effective May 13, 1996, Egghead sold its CGE division to Software Spectrum,
Inc. (SSI), a Texas corporation, for $45.0 million in cash pursuant to the
terms of an asset purchase agreement entered into on March 23, 1996. The
asset purchase agreement required Egghead to provide SSI with certain
support services for a period not to exceed 120 days on Egghead's behalf,
SSI's collection of Egghead's CGE related accounts receivable for a period
not to exceed 150 days and a lease to SSI for a period of three years of a
portion of Egghead's Spokane facility.
Gain on the disposition of the discontinued operation was $36.5 million
($22.3 million after tax). The sales price for the CGE division was $45.0
million, which did not include the accounts receivable, which were
collected during the fiscal year. The reported gain is net of fixed assets
and lease write-offs of $1.2 million, transaction, legal and accounting
fees of $2.0 million, transition period employment costs of $1.8 million
and costs of $3.4 million related to the fulfillment of post-sale
obligations as noted above.
The net assets and liabilities relating to discontinued operations have
been segregated on the consolidated balance sheet from their historic
classifications to separately identify them as being related to the
discontinued operations. Discontinued operations -- current liabilities at
March 29, 1997 consisted of liabilities relating to CGE and additional
reserves deemed necessary to complete the disposal of remaining CGE assets
and to settle any remaining claims.
The income from discontinued operations for fiscal 1995, 1996, and 1997 is
comprised of the following (in millions):
Fiscal year
-----------
1995 1996 1997
------- ------- -------
Net sales $ 428.5 $ 363.3 $ 39.3
Costs and expenses 418.7 362.7 59.4
------- ------- -------
Income (loss) before provision
for income taxes 9.8 0.6 (20.1)
Income tax expense (benefit) 3.8 0.2 (7.8)
------- ------- -------
Income (loss) from
discontinued operations $ 6.0 $ 0.4 $(12.3)
------- ------- -------
------- ------- -------
NOTE 11 SUBSEQUENT EVENTS
On May 1, 1997, Egghead announced a definitive agreement to acquire closely
held Surplus Software, Inc. (dba Surplus Direct) for up to 5.6 million
newly issued Egghead common shares in a transaction valued at $31.5 million
based on Egghead's share price as of April 30, 1997. The transaction
includes repayment of $5.6 million of Surplus Direct debt. Surplus Direct,
engaged in the direct marketing of previous version computer hardware and
software, had sales for the nine months ended February 28, 1997 of
approximately $35 million. The transaction is subject to shareholder
approval and customary closing conditions, including normal governmental
approval, and is expected to be completed in August 1997.
38
<PAGE>
EGGHEAD, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (CONTINUED)
NOTE 11 SUBSEQUENT EVENTS (CONTINUED)
In connection with the signing of the agreement, Egghead and Surplus Direct
entered into a Bridge Loan Agreement, dated April 30, 1997, pursuant to
which Egghead loaned Surplus Direct $2.0 million to finance its working
capital needs pending completion of the merger (the Bridge Loan). The
Bridge Loan bears interest at the prime rate (as quoted by Seattle-First
National Bank) plus 5.0% per annum and is due on December 31, 1997 in the
event that the merger does not occur. The Bridge Loan is subordinated to
up to $4.5 million of senior indebtedness (the Bank Debt) of Surplus Direct
under a credit facility with its principal bank (the Bank) and ranks pari
passu with $2.0 million of Surplus Direct debt under a subordinated note
(the SV Capital Note) payable to SV Capital Partners, L.P., which is a
substantial shareholder of Surplus Direct (SV Capital Partners). The
Bridge Loan and the SV Capital Note are secured by a second lien (behind
the Bank Debt) on the principal assets of Surplus Direct. Egghead has
agreed to repay the Bank Debt and the SV Capital Note at the Closing and
the Bank and SV Capital Partners have agreed not to accelerate their loans
prior to the closing of the transaction, except under specified
circumstances.
39
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Part III, Item 10, is incorporated by reference
from Egghead, Inc.'s definitive Proxy Statement relating to Egghead, Inc.'s 1997
Annual Meeting of Shareholders, which will be filed pursuant to Regulation 14A
within 120 days of March 29, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Part III, Item 11, is incorporated by reference
from Egghead, Inc.'s definitive Proxy Statement relating to Egghead, Inc.'s 1997
Annual Meeting of Shareholders, which will be filed pursuant to Regulation 14A
within 120 days of March 29, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Part III, Item 12, is incorporated by reference
from Egghead, Inc.'s definitive Proxy Statement relating to Egghead, Inc.'s 1997
Annual Meeting of Shareholders, which will be filed pursuant to Regulation 14A
within 120 days of March 29, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Part III, Item 13, is incorporated by reference
from Egghead, Inc.'s definitive Proxy Statement relating to Egghead, Inc.'s 1997
Annual Meeting of Shareholders, which will be filed pursuant to Regulation 14A
within 120 days of March 29, 1997.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents filed as a part of this report:
1. Financial Statements -- The Consolidated Financial
Statements, Notes thereto, Financial Statement Schedules
(none), and Accountants' Report thereon are included in
Part II, Item 8 of this report.
2(a) Exhibits
(i) 3.1 Restated Articles of Incorporation of Egghead, Inc.
(vii) 3.2 Restated Bylaws of Egghead, Inc.
(x) 10.1* Microsoft 1995/1996 Channel Agreement dated July 1, 1995,
as amended through January 1, 1996.
10.2X* Amendment No. 1 to the Microsoft 1995/1996 Channel
Agreement, with attached addendums and amendments to the
addendums of such Agreement, through June 30, 1997.
10.3X** Form of Change of Control Agreements
10.4X** Executive Deferred Compensation Plan and related
documents effective July 1, 1996
10.5 Intentionally left blank
10.6 Intentionally left blank
40
<PAGE>
10.7 Intentionally left blank
10.8 Intentionally left blank
(v) 10.9* Reseller Agreement with WordPerfect Corporation dated
April 1, 1994.
(vi) 10.10* Microsoft 1994/1995 Channel Agreement dated July 1, 1994.
(vi) 10.11* Addendum to the Microsoft 1994/1995 Channel Agreement
dated July 1, 1994.
(vii) 10.11a Amendment No. 1 to the Addendum to the Microsoft 1994/1995
Channel Agreement (appointment as a Large Account
Reseller) dated July 1994.
(vi) 10.12* Follow-up letter dated August 2, 1994, from Microsoft
regarding Microsoft 1994/1995 Channel Agreement dated
July 1, 1994.
(vii) 10.13* Addendum to the 1994/1995 Microsoft Channel Agreement
dated January 1995.
10.14 Intentionally left blank.
10.15 Lease, as amended, dated June 9, 1988, between Sammamish
Park Place I Limited Partnership as Landlord and DJ&J
Software Corporation as Tenant regarding registrant's
administrative headquarters. (Previously filed with
registrant's Form 10-K for the fiscal year ended April 1,
1989, as Exhibit 10.46.)
10.16 First Amendment to June 9, 1988 Lease between Sammamish
Park Place I Limited Partnership and DJ&J Software
Corporation dated October 4, 1989. (Previously filed with
registrant's Form 10-K for the fiscal year ended March 31,
1990, as Exhibit 10.46a.)
10.17 Lease dated March 23, 1992 between Sammamish Park Place II
Limited Partnership as Landlord and DJ&J Software
Corporation as Tenant regarding registrant's
administrative headquarters. (Previously filed with
registrant's Form 10-K for the fiscal year ended March 28,
1992, as Exhibit 10.47.)
10.18 Lease Termination and Rent Payment Agreement between
Sammamish Park Place II Limited Partnership as Landlord
and DJ&J Software Corporation as Tenant regarding
registrant's administrative headquarters. (Previously
filed with registrant's Form 10-Q for the quarter ended
July 2, 1994.)
(vi) 10.18a First Amendment to Lease Termination and Rent Payment
Agreement between Sammamish Park Place II Limited
Partnership as Landlord and DJ&J Software Corporation as
Tenant.
(vi) 10.18b Second Amendment to Lease Termination and Rent Payment
Agreement between Sammamish Park Place II Limited
Partnership as Landlord and DJ&J Software Corporation as
Tenant.
(iii) 10.19 Lease dated March 23, 1989, between The CHY Company as
Landlord and DJ&J Software Corporation as Tenant regarding
registrant's Sacramento distribution facility.
(iii) 10.20 First amendment to lease between The CHY Company as
Landlord and
41
<PAGE>
DJ&J Software as Tenant regarding registrant's Sacramento
distribution facility.
10.21X Lease dated May 15, 1995 between Central Valley Limited
Liability Company as Lessor and DJ&J Software Corporation
d/b/a Egghead Software as Lessee, regarding Registrant's
Sacramento distribution facility, with attached Exercise
of Option extending lease term date to September 30, 1998.
(i) 10.22 Lease Agreement dated January 7, 1988 with Granite
Properties, a limited partnership, as Landlord and DJ&J
Software Corporation, as Tenant, regarding registrant's
Lancaster distribution facility.
10.23 Intentionally left blank
10.24 Intentionally left blank
(viii) 10.25 Asset Purchase Agreement by and among Software Spectrum,
Inc., Egghead, Inc. and DJ&J Software Corporation dated as
of March 23, 1996 with Exhibits 4.11 and 4.12 thereto.
10.26 Intentionally left blank.
10.27 Form of Indemnification Agreement between registrant and
its directors. (Previously filed with registrant's
Form 10-Q for the quarter ended December 31, 1994 as same
exhibit number.)
10.28 Form of Indemnification Agreement between DJ&J Software
Corporation and its directors. (Previously filed with
registrant's Form 10-Q for the quarter ended December 31,
1994 as same exhibit number.)
(vi) 10.29 Revolving Loan Agreement dated September 30, 1994, among
Seattle-First National Bank and U.S. Bank of Washington,
National Association, Egghead, Inc. and DJ&J Software
Corporation.
10.30 Revolving Loan Agreement dated September 30, 1993 among
Seattle-First National Bank and U.S. Bank of Washington,
National Association, Egghead, Inc. and DJ&J Software
Corporation. (Previously filed with registrant's
Form 10-Q for the quarter ended October 16, 1993, as same
exhibit number.)
10.31 Intentionally left blank.
10.32 Intentionally left blank.
10.33** Executive employment agreement between Egghead, Inc. and
Terence M. Strom dated June 28, 1993. (Previously filed
with registrant's Form 10-Q for the quarter ended October
16, 1993, as Exhibit 10.34.)
(ii) 10.34** Egghead, Inc. 1989 Executive Retention Incentive Stock
Option Plan.
(ii) 10.35** Egghead, Inc. 1989 Executive Retention Incentive Stock
Option Agreement between Egghead, Inc. and Stuart M. Sloan
dated February 23, 1989.
(ii) 10.36** Egghead, Inc. 1989 Executive Retention Non-Qualified Stock
Option Agreement between Egghead, Inc. and Stuart M. Sloan
dated February 23, 1989.
(iii) 10.36a** Amendment No. 1 to Egghead, Inc. 1989 Executive Retention
Non-Qualified Stock Option Agreement between Egghead, Inc.
and Stuart M. Sloan dated April 17, 1991.
42
<PAGE>
10.37 Intentionally left blank.
10.38 Intentionally left blank.
(ii) 10.39** Egghead, Inc. 1989 Executive Retention Incentive Stock
Option Agreement between Egghead, Inc. and Ronald A.
Weinstein dated February 23, 1989.
(iii) 10.39a** Amendment No. 1 to Egghead, Inc. 1989 Executive Retention
Incentive Stock Option Agreement between Egghead, Inc. and
Ronald A. Weinstein dated April 17, 1991.
(ii) 10.40** Egghead, Inc. 1989 Executive Retention Non-Qualified Stock
Option Agreement between Egghead, Inc. and Ronald A.
Weinstein dated February 23, 1989.
(iii) 10.40a** Amendment No. 1 to Egghead, Inc. 1989 Executive Retention
Non-Qualified Stock Option Agreement between Egghead, Inc.
and Ronald A. Weinstein dated April 17, 1991.
10.41 Intentionally left blank.
10.42 Intentionally left blank.
(ii) 10.43** Egghead, Inc. 1989 Executive Retention Incentive Stock
Option Agreement between Egghead, Inc. and Matthew J.
Griffin dated February 23, 1989.
(ii) 10.44** Egghead, Inc. 1989 Executive Retention Non-Qualified Stock
Option Agreement between Egghead, Inc. and Matthew J.
Griffin dated February 23, 1989.
(iii) 10.44a** Egghead, Inc. 1989 Executive Retention Non-Qualified Stock
Option Agreement between Egghead, Inc. and Matthew J.
Griffin dated April 17, 1991.
10.45 Intentionally left blank.
10.46 Intentionally left blank.
10.47 Intentionally left blank.
10.48** Egghead, Inc. 1989 Employee Stock Purchase Plan.
(Previously filed with registrant's Form S-8 dated
June 23, 1990, as Exhibit 10.)
10.49** Egghead, Inc. 1993 Stock Option Plan. (Previously filed
with registrant's Form 10-Q dated for the quarter ended
October 16, 1993, as Exhibit 10.31.)
(x) 10.50** Egghead, Inc. Restated Nonemployee Director Stock Option
Plan.
10.51X** Resignation & Release Agreement between Peter F.
Grossman and Egghead Inc. and DJ&J Software Corporation
effective April 29, 1997.
10.52X** Resignation & Release Agreement between Ronald J.
Smith and Egghead Inc. and DJ&J Software Corporation
effective February 15, 1997.
10.53X** Resignation & Release Agreement between Terrence M. Strom
and Egghead Inc. and DJ&J Software Corporation effective
February 15, 1997.
21.1X List of subsidiaries of Egghead, Inc.
23.1X Consent of Arthur Andersen LLP.
24.1X Power of Attorney (contained on signature page).
27.1X Financial Data Schedule
* See attached
_____________
X Filed herewith.
(i) Previously filed with registrant's Registration Statement on Form S-1,
Registration No. 33-21472, as same exhibit number.
43
<PAGE>
(ii) Previously filed with registrant's Form 8-K dated February 23,
1989, as Exhibits 10.1 to 10.13.
(iii) Previously filed with registrant's Form 10-K for the fiscal year
ended March 29, 1992, as same exhibit number.
(iv) Previously filed with registrant's Form 10-K for the fiscal year
ended April 3, 1993, as same exhibit number.
(v) Previously filed with registrant's Form 10-K for the fiscal year
ended April 2, 1994, as same exhibit number.
(vi) Previously filed with registrant's Form 10-Q for the quarter ended
October 1, 1994.
(vii) Previously filed with registrant's Form 10-K for the fiscal year
ended April 1, 1995, as same exhibit number.
(viii) Previously filed with registrant's Form 8-K dated March 23, 1996,
as Exhibit 2.1.
(x) Previously filed with registrant's Form 10-K for the fiscal year
ended March 30, 1996, as same exhibit number.
* Confidential portions of this exhibit have been omitted and filed
separately with the Securities and Exchange Commission pursuant to
an Application for Confidential Treatment under Rule 24b-2 under
the Securities Exchange Act of 1934, as amended. Each exhibit has
been marked to identify the confidential portions that are
omitted.
** Designates management contract or compensatory plan or
arrangement.
2b. Form 8-K
Egghead, Inc. filed one report on Form 8-K, dated April 30, 1997, during
the fourth quarter of its fiscal year ended March 29, 1997, which reported
on Item 5 of Form 8-K.
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Liberty
Lake, State of Washington, on June 20, 1997.
EGGHEAD, INC.
By /s/ George P. Orban
----------------------------------------------------
George P. Orban
Chief Executive Officer, Chairman of the Board
EGGHEAD, INC.
By /s/ Brian W. Bender
----------------------------------------------------
Brian W. Bender
Chief Accounting Officer, Chief Financial Officer
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes
George P. Orban and Brian W. Bender, or either of them, as attorneys-in-fact
with full power of substitution, to execute in the name and on behalf of each
person, individually and in each capacity stated below, and to file, any and all
amendments to this report, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that said attorneys-in-fact, of their
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on June 20, 1997, on behalf of
the Registrant and in capacities indicated.
Signature Title
- --------- -----
/s/ George P. Orban
- ------------------------------------ Chairman of the Board
George P. Orban
/s/ Richard P. Cooley
- ------------------------------------ Director
Richard P. Cooley
/s/ Steven E. Lebow
- ------------------------------------ Director
Steven E. Lebow
/s/ Linda Fayne Levinson
- ------------------------------------ Director
Linda Fayne Levinson
/s/ Eric P. Robison
- ------------------------------------ Director
Eric P. Robison
45
<PAGE>
/s/ Terence M. Strom
- ------------------------------------ Director
Terence M. Strom
/s/ Samuel N. Stroum
- ------------------------------------ Director
Samuel N. Stroum
/s/ Melvin A. Wilmore
- ------------------------------------ Director
Melvin A. Wilmore
46
<PAGE>
AMENDMENT NO. 1 TO THE
MICROSOFT CORPORATION
1995/1996 CHANNEL AGREEMENT
This Amendment No. 1 ("Amendment") amends that certain Microsoft Corporation
1995/1996 Channel Agreement ("Agreement") dated July 1, 1995, between MICROSOFT
CORPORATION ("MS") having its principal place of business at One Microsoft Way,
Redmond, WA 98052 and DJ&J SOFTWARE D/B/A EGGHEAD ("CUSTOMER") having its
principal place of business at 22705 East Mission, Liberty Lake, WA 99019. The
Agreement is hereby amended as follows:
2. TERM OF AGREEMENT
Section 2.1 is replaced in its entirety with the following:
"2.1 TERM
This Agreement shall take effect on the date indicated above and shall continue
until June 30, 1997."
3. CUSTOMER OBLIGATIONS
Section 3.6 is replaced in its entirety with the following:
"3.6 TAXES
3.6(a) CUSTOMER TAXES
All amounts to be paid by CUSTOMER to MS herein are exclusive of any federal,
state, municipal or other governmental taxes, including income, franchise,
excise, sale, use, gross receipts, value added, goods and services, property or
similar tax, now or hereafter imposed on CUSTOMER. Such charges will be the
responsibility of CUSTOMER and may not be passed on to MS, unless they are owed
solely as a result of entering into this Agreement and are required to be
collected from MS by CUSTOMER under applicable law.
3.6(b) BILLING AND COLLECTION
CUSTOMER will bill, collect and remit sales, use, value added, and other
comparable taxes determined by CUSTOMER to be due with respect to the
distribution of the Product. Microsoft is not liable for any taxes, including
without limitation, income taxes, withholding taxes, value added, franchise,
gross receipt, sales, use, property or similar taxes, duties, levies, fees,
excises or tariffs incurred in connection with or related to the distribution of
the Product. CUSTOMER takes full responsibility for all such taxes, including
penalties, interest and other additions thereon.
3.6(c) WITHHELD TAXES
If, after a determination by foreign tax authorities, any taxes are required to
be withheld, on payments made by CUSTOMER to Microsoft, CUSTOMER may deduct such
taxes from the amount owed Microsoft and pay them to the appropriate taxing
authority; provided, however, that CUSTOMER shall promptly secure and deliver to
Microsoft an official receipt for any such taxes withheld or other documents
necessary to enable Microsoft to claim a U.S. Foreign Tax Credit. CUSTOMER will
make certain that any taxes withheld are minimized to the extent possible under
applicable law.
CUSTOMER shall indemnify, defend and hold MS harmless from any Claims arising
from or related to any failure by CUSTOMER to comply with this Section."
IN WITNESS WHEREOF, the parties have executed this Amendment as of the dates
indicated below. The Amendment is hereby made part of the Agreement. Any terms
and conditions of the Agreement not modified herein shall remain in full force
and effect. This Amendment is not binding until executed by MS.
MICROSOFT CORPORATION ("MS") DJ&J SOFTWARE D/B/A EGGHEAD
("CUSTOMER")
By: /s/ Johan Liedgren By: /s/ Peter Grossman
---------------------------- ----------------------------
Johan Liedgren Peter Grossman
- ------------------------------- -------------------------------
Name (please print) Name (please print)
Director, Channel Policies Executive V.P.
- ------------------------------- -------------------------------
Title Title
7/11/96 7/1/96
- ------------------------------- -------------------------------
Date Date
MICROSOFT CONFIDENTIAL - DISCLOSURE PROHIBITED
<PAGE>
AMENDMENT NO. 1 TO THE
ADDENDUM OF THE MICROSOFT
1995/1996 CHANNEL AGREEMENT
(APPOINTMENT AS A DIRECT RESELLER)
This Amendment No. 1 ("Amendment") amends that certain Addendum to The Microsoft
1995/1996 Channel Agreement (the "Agreement") (Appointment As A Direct Reseller)
("Addendum") dated July 1, 1995, between MICROSOFT CORPORATION ("MS") having its
principal place of business at One Microsoft Way, Redmond, WA 98052 and DJ&J
SOFTWARE D/B/A EGGHEAD ("CUSTOMER") having its principal place of business at
22705 East Mission, Liberty Lake, WA 99019. The Addendum is hereby amended as
follows:
5. CUSTOMER AND MS OBLIGATIONS
5.2 DELIVERY AND PRODUCT DISTRIBUTION
Paragraphs 2 and 3 are replaced in their entirety with the following:
"In any month CUSTOMER participates in the MS Account Forecasting System ("AFS")
Program as outlined in MS' then current AFS Program Guidelines, for which MS is
allowed to choose the freight carrier and a mutually agreed-upon guaranteed
delivery window is established whereby Product is unloaded from the carrier
within four (4) hours of arrival, one hundred percent (100%) of the freight cost
of delivery of Product to each CUSTOMER warehouse, excluding consolidation
centers, will be paid by MS."
Section 5.3 is replaced in its entirety with the following:
"5.3 ORDER PROCESSING
CUSTOMER shall order Product from MS via EDI purchase order. All orders by
CUSTOMER shall be in Master Pack quantities only. MS shall have ten (10) days
from receipt to reject any purchase order. MS shall fulfill unconditional EDI
purchase orders from CUSTOMER subject to CUSTOMER's credit limits, current
payment status, and approved Average Payment Days ("APD") guidelines as
determined by MS.
Except as provided herein, CUSTOMER shall have the right to change or cancel any
purchase order, provided that CUSTOMER notifies MS of the change or cancellation
no later than forty-eight (48) hours prior to the order shipment to CUSTOMER by
MS. Should CUSTOMER choose to change or cancel a purchase order, CUSTOMER must
contact its Microsoft Account Management Specialist with such change or
cancellation request.
Notwithstanding the foregoing, MS reserves the right to limit order quantities."
5.5 INVENTORY BALANCING
Section 5.5 is amended to include the following as the final paragraph:
"MS may, at its sole discretion, allow CUSTOMER to exceed the Inventory
Balancing limits outlined above, provided that all such additional Inventory
Balancing shall be subject to a [*] percent [*] handling fee. Should
CUSTOMER's actual Inventory Balancing percentage for any two month period be
less than the Inventory Balancing limits outlined above, the remainder of any
such Inventory Balancing limit (i.e. [*] limit less .75% actual credit = [*]
remaining credit) may be used to increase CUSTOMER's Inventory Balancing limit
for any future period. Any additional Inventory Balancing limit accrued shall
expire on June 30, 1997."
* Confidential Treatment Requested
MICROSOFT CONFIDENTIAL - DISCLOSURE PROHIBITED
<PAGE>
5.6 PRIOR VERSION CREDIT
Section 5.6(a) if deleted in its entirety.
Section 5.6(c) is replaced in its entirety with the following:
"(c) CUSTOMER shall be eligible to receive a Purchase Credit for up
to (300) days from the date the new version of such Product first ships from
MS to CUSTOMER;"
Section 5.6 is amended to include the following as the final paragraph:
"MS may, at its sole discretion, allow CUSTOMER to return Prior Version Product
for Purchase Credit for the period of [*] days to [*] days from the date the
new version of such Product first ships from MS to CUSTOMER, provided that all
such returns shall be subject to a [*] percent [*] handling fee. In no event
shall MS accept returns of Prior Version Product after [*] days. All Product
returned for Prior Version Credit must be in resaleable condition.
5.7 UNRESALEABLE PRODUCT ALLOWANCE
Section 5.7 is replaced in its entirety with the following:
"Every other month CUSTOMER shall be eligible to receive a Purchase Credit of up
to [*] percent [*] of CUSTOMER's net purchases, excluding Microsoft Variable
Licenses, Microsoft Enterprise Licenses, and Microsoft Maintenance, for the
previous two (2) Months. Such Purchase Credit shall be to compensate CUSTOMER
for Product held in CUSTOMER's inventory which is no longer resaleable. All
Unresaleable Product shall be audited by MS. No Return Authorization will be
issued by MS, instead to receive the Unresaleable Product Credit, CUSTOMER must
submit its Unresaleable Product Allowance returns report, in a format determined
by CUSTOMER, to CUSTOMER's Microsoft Account Management Specialist no later than
two (2) days prior to MS' scheduled audit. Such Unresaleable Product Allowance
report shall include the MS part number, CUSTOMER's part number, product
description, quantity, unit price, and extended price. Unresaleable Product may
not be resold or donated.
MS may, at its sole discretion, allow CUSTOMER to exceed its Unresaleable
Product Allowance, provided that all such additional Unresaleable Product
Allowance shall be subject to a [*] percent [*] handling fee. Should CUSTOMER's
actual Unresaleable Product Allowance for any two month period be less than [*]
percent [*], the remainder of the Unresaleable Product Allowance limit (i.e.
[*] limit less .75% actual credit = [*] remaining credit) may be used to
increase CUSTOMER's Unresaleable Product Allowance for any future period. Any
additional Unresaleable Product Allowance accrued shall expire on June 30, 1997.
Unresaleable Product is defined only as current MS Product not fit for resale.
In no event shall CUSTOMER be eligible to receive a Unresaleable Product
Allowance for any Prior Version or obsolete Product no longer eligible for
return in accordance with the terms of Section 5.6."
* Confidential Treatment Requested
AMENDMENT NO. 1 TO THE ADDENDUM TO
THE MICROSOFT CHANNEL AGREEMENT
(APPOINTMENT AS A DIRECT RESELLER) PAGE 2
<PAGE>
The Addendum is amended to add the following as Section 7:
"7. EXPORT RESTRICTIONS
All Product distributed by CUSTOMER pursuant to this Agreement is subject to the
export control laws and regulations of the United States. CUSTOMER agrees that
CUSTOMER will not directly or indirectly: (i) export or transmit any Product to
any country to which such export or transmission is restricted by any applicable
U.S. regulation or statute (currently including, but not limited to Cuba, the
Federal Republic of Yugoslavia (Serbia and Montenegro, U.N. Protected Areas and
areas of Republic of Bosnia and Herzegovina under the control of Bosnian Serb
forces), Iran, Iraq, Libya, North Korea, and Syria), without the prior written
consent, if required, of the Bureau of Export Administration of the U.S.
Department of Commerce, or such other governmental entity as may have
jurisdiction over such export or transmission; or (ii) provide any Product in
any manner to any Reseller or End User whom CUSTOMER knows or has reason to know
will utilize such Product in the design, development or production of nuclear,
chemical or biological weapons."
IN WITNESS WHEREOF, the parties have signed this Amendment as of the dates
indicated below. The Amendment is hereby made part of the Addendum. Any terms
and conditions of the Addendum or Agreement not amended herein shall remain in
full force and effect. This Amendment is not binding until executed by MS.
MICROSOFT CORPORATION ("MS") DJ&J SOFTWARE D/B/A EGGHEAD
("CUSTOMER")
By: /s/ Johan Liedgren By: /s/ Peter Grossman
---------------------------- ----------------------------
Johan Liedgren Peter Grossman
- ------------------------------- -------------------------------
Name (please print) Name (please print)
Director, Channel Policies Executive V.P.
- ------------------------------- -------------------------------
Title Title
7/11/96 7/1/96
- ------------------------------- -------------------------------
Date Date
AMENDMENT NO. 1 TO THE ADDENDUM TO
THE MICROSOFT CHANNEL AGREEMENT
(APPOINTMENT AS A DIRECT RESELLER) PAGE 3
<PAGE>
AMENDMENT NO. 2 TO THE
REBATE AND MARKETING FUND ADDENDUM TO THE
MICROSOFT 1995/1996 CHANNEL AGREEMENT
This Amendment No. 2 ("Amendment") amends that certain Rebate and Marketing Fund
Addendum (as amended "Addendum") to The Microsoft 1995/1996 Channel Agreement
(as amended "Agreement"), dated July 1, 1995, between MICROSOFT CORPORATION
("MS") having its principal place of business at One Microsoft Way, Redmond, WA
98052 and DJ&J SOFTWARE D/B/A EGGHEAD ("CUSTOMER") having its principal place of
business at 22705 East Mission, Liberty Lake, WA 99019. The Addendum is hereby
amended as follows:
2. TERM AND TERMINATION
The first sentence of the section is replaced with the following:
"This Addendum shall be effective as of July 1, 1996, and shall expire on
December 31, 1996."
4. REBATES
The section is replaced in its entirety with:
"4.1 PACKAGED PRODUCT REBATE
CUSTOMER is eligible to receive up to a [*] percent [*] Rebate on its
Qualified Sales, excluding Open License sales, made during the Rebate and
Marketing Fund Period. The Rebate shall be paid provided CUSTOMER complies with
the Rebate Program Guidelines outlined in Schedule B.
4.2 OPEN LICENSE REBATE
CUSTOMER is eligible to receive up to a [*] percent [*] Rebate on its Open
License sales made during the Rebate and Marketing Fund Period. The Rebate shall
be paid provided CUSTOMER complies with the those portions of the Packaged
Product Rebate Guidelines outlined in Schedule J.
4.3 PROVISION FOR EARLY PAYMENT OF REBATES
Notwithstanding such Rebate Program Guidelines, MS may, at its sole discretion,
pay all or any portion of the Rebate prior to the end of the Rebate and
Marketing Fund Period. The Rebate so paid may be adjusted subsequently based
upon compliance with the Rebate Program Guidelines."
5. MARKETING FUNDS
Section 5.4, Marketing Fund Reimbursement Policy, is deleted in its entirety.
The Addendum is amended to include the following as Section 7:
"7. FAILURE TO EXECUTE
CUSTOMER shall not be eligible to receive Rebates or Opportunity Marketing Funds
until both CUSTOMER and MS have executed this Addendum. Should CUSTOMER fail to
execute, or should MS be unable to execute this Addendum by July 1, 1996, for
each full month after July 1, 1996, in which this Addendum is not executed,
CUSTOMER shall forfeit such month's Achievement Rebate."
* Confidential Treatment Requested
MICROSOFT CONFIDENTIAL - DISCLOSURE PROHIBITED
<PAGE>
SCHEDULE B, REBATE PROGRAM GUIDELINES.
The Schedule as previously amended is replaced in its entirety with the attached
Schedule K.
SCHEDULE G, MARKETING FUND REIMBURSEMENT POLICY.
The Schedule as previously amended is removed in its entirety.
SCHEDULE J, OPEN LICENSE REBATE PROGRAMS.
The Schedule is replaced in its entirety with the attached Schedule L.
IN WITNESS WHEREOF, the parties have signed this Amendment on the date indicated
below. This Amendment is hereby made part of the Addendum. All terms and
conditions of the Addendum not amended herein shall remain in full force and
effect. This Amendment is not binding until executed by MS.
AGREED AND ACCEPTED TO BY AGREED AND ACCEPTED TO BY
MICROSOFT CORPORATION ("MS"): DJ&J SOFTWARE D/B/A EGGHEAD
("CUSTOMER"):
By /s/ Johan Liedgren By /s/ Peter Grossman
---------------------------- ----------------------------
Johan Liedgren Peter Grossman
- ------------------------------- -------------------------------
Name (please print) Name (please print)
Director, Channel Policies Executive V.P.
- ------------------------------- -------------------------------
Title Title
7/11/96 7/1/96
- ------------------------------- -------------------------------
Date Date
AMENDMENT NO. 2 TO THE REBATE AND
MARKETING FUND ADDENDUM TO THE
MICROSOFT 1995/1996 CHANNEL AGREEMENT PAGE 2
<PAGE>
SCHEDULE K
JULY - DECEMBER, 1996
REBATE GUIDELINES
PROGRAMS: Microsoft offers five (5) rebate programs for the July - December,
1996 Rebate period. The total available Rebate is divided as follows:
---------------------------------------------------------------------
MAXIMUM PERCENTAGE
REBATE PROGRAM AVAILABLE
---------------------------------------------------------------------
---------------------------------------------------------------------
Achievement Program [*]
---------------------------------------------------------------------
Total Sales-out Program [*]
---------------------------------------------------------------------
Desktop Applications Division Sales-out Program [*]
---------------------------------------------------------------------
Interactive Media Division Sales-out Program [*]
---------------------------------------------------------------------
Inventory Management Program [*]
---------------------------------------------------------------------
TOTAL [*]
---------------------------------------------------------------------
REBATE CALCULATIONS AND PAYMENTS: Rebates will be paid in the form of a
Microsoft Purchase Credit forty-five (45) days after the end of each quarterly
Rebate Period (i.e. November 15th for the July - September, 1996 quarter).
Rebates are calculated by multiplying the achieved Rebate percentage by the
total Qualified Sales for the Rebate Period. Revenue generated from Microsoft
Select Enrollment Forms executed by MS on or after July 1, 1994, shall be
included in calculating CUSTOMER's achievement toward the Sales-out goal, but
shall not be included in CUSTOMER's final total Qualified Sales for purposes of
Rebate payment. Revenue generated from Microsoft Select Enrollment Forms
executed by MS prior to July 1, 1994 will be included in calculating CUSTOMER's
achievement towards the sales-out goal and will also be eligible for a
Grandfathered rebate. Rebate payment for such Select Enrollment Forms shall be
in the form of a purchase credit forty-five (45) days after the end of each
quarterly Rebate Period.
PURCHASES THROUGH DISTRIBUTION: CUSTOMER's full packaged product and MLP
purchases through distribution will be subtracted from CUSTOMER's Qualified
Sales for purposes of Rebate payment.
PRODUCT AVAILABILITY: If Microsoft is unable to ship a CURRENT VERSION of a
product for any ten (10) consecutive business days, CUSTOMER's purchases through
distribution of those SKUs will count toward CUSTOMER's Qualified Sales for
purchases of Rebate payment.
All copies of eligible purchase orders placed through distribution along with a
copy of the Microsoft Stock Out Report must be sent to Microsoft no later than
fifteen (15) days following the quarter end. Please send purchase order copies
and the Microsoft Stock Out Report to the following address:
MICROSOFT CORPORATION
ONE MICROSOFT WAY
BLDG. 22/4054
REDMOND, WA 98052
ATTN.: KRISTIN WEEBER, MARKETING MANAGER
ACHIEVEMENT REBATE PAYMENT: The Microsoft Achievement Rebate will be calculated
on a monthly basis. If CUSTOMER has met all of the Achievement Rebate criteria
in a given month, CUSTOMER will be entitled to [*] percent [*] of that month's
total Qualified Sales. The Rebate payment will be made forty-five (45) days
after the end of each quarterly Rebate Period.
ANY ISSUES REGARDING REBATES SHOULD BE SENT IN WRITING TO KRISTIN WEEBER,
MARKETING MANAGER, NO LATER THAN THIRTY (30) DAYS FOLLOWING RECEIPT OF REBATE
PAYMENT. If such written notice is not provided within thirty (30) days,
CUSTOMER shall have no further right to dispute Rebate payment.
* Confidential Treatment Requested
AMENDMENT NO. 2 TO THE REBATE AND
MARKETING FUND ADDENDUM TO THE
MICROSOFT 1995/1996 CHANNEL AGREEMENT PAGE K1
<PAGE>
- --------------------------------------------------------------------------------
ACHIEVEMENT REBATE PROGRAM
- --------------------------------------------------------------------------------
PROGRAM OBJECTIVES: The objective of the Achievement Rebate Program is to
provide incentive for CUSTOMER to comply with Microsoft contractual requirements
for payments, Street Dates, reporting, and EDI ordering for Select 3.0.
ACHIEVEMENT: During any given month, failure to achieve any or all of the
current Achievement criteria will result in the forfeiture of the entire
Achievement Rebate for that month. In any month CUSTOMER has already forfeited
its Achievement Rebate, and violates one or more of the Achievement Rebate
criteria, MS reserves the right to withhold any or a portion of CUSTOMER's other
available Rebate.
1. MICROSOFT PAYMENT REQUIREMENTS
Microsoft requires its customers to pay its invoices within terms. In order
to maintain compliance, [*] percent [100%] of the gross invoice value for
non-Select and [*] of the gross invoice value for Select must be current
as of Microsoft's fiscal month-end. Additionally, no greater than [*]percent
[*] of the gross value for Select invoices shall be past net 60 days.
Unapplied credits will be excluded from the calculation.
2. MICROSOFT STREET DATE REQUIREMENTS
From time to time, Microsoft may announce a new product or new versions of an
existing product for which Microsoft shall set a Street Date. In order to comply
with the Street Date requirements, CUSTOMER shall not:
- Ship or deliver the product to any end-user customer prior to the
Street Date.
- Accept any end user payment for the product prior to the Street Date.
Checks and/or credit card numbers may be accepted by CUSTOMER, but
can only be processed when product is delivered to the end user on or
after the Street Date.
- Advertise, merchandise, or promote the product to end user customers
until it is officially announced by Microsoft. Usually, the product
announcement is on the Street Date. If the product announcement is
earlier than the Street Date, Microsoft will clearly communicate the
announce date to the channel. If product is announced by Microsoft
before the Street Date, the product can be advertised, merchandised
and/or promoted immediately after such announcement, provided that all
such promotions clearly state that the product is not yet available
for purchase.
- Allow it's distribution centers and/or warehouses to distribute, for a
period of up to twelve months, a Street Date product to any individual
sales office, retail store, or outlet which Microsoft in its sole
discretion has determined to be in violation of the Street Date
Requirements.
In the event CUSTOMER violates the Street Date for any special products
specified in a Microsoft Street Date letter, CUSTOMER shall forfeit up to the
entire Achievement Rebate for the six month Rebate Period in which the violation
occurred.
Should CUSTOMER fail to comply with the Street Date Requirements, Microsoft may
also, for a period of up to twelve (12) months, withhold shipments to CUSTOMER
of future product until the Street Date of such product.
Should CUSTOMER wish to report a Street Date violation, CUSTOMER may fax a copy
of a dated sales receipt to STREET DATE VIOLATIONS AT MICROSOFT AT (206) 936-
7329. Once a violation has been reported, Microsoft shall investigate the
violation, and take remedial action as appropriate. Please note, in order to
confirm a suspected violation, Microsoft must receive a dated sales receipt.
3. MICROSOFT SELECT TRANSACTION REQUIREMENTS
Electronic Data Interchange format ("EDI") transactions are defined as 850/855
EDI transactions. CUSTOMER must place EDI transaction orders at a minimum of
once per month per Enrollment Site if product is purchased during said month.
* Confidential Treatment Requested
AMENDMENT NO. 2 TO THE REBATE AND
MARKETING FUND ADDENDUM TO THE
MICROSOFT 1995/1996 CHANNEL AGREEMENT PAGE K2
<PAGE>
4. MICROSOFT REPORTING REQUIREMENTS
ALL REPORTS OUTLINED BELOW MUST BE TIMELY, ACCURATE, AND COMPLETE. FOR PURPOSES
OF THIS AGREEMENT, "TIMELY" IS DEFINED AS MS RECEIPT OF REPORTING BY THE DUE
DATE AND TIME INDICATED, "ACCURATE" IS DEFINED AS THE CORRECT POPULATION OF ALL
REPORTING FIELDS, AND "COMPLETE" IS DEFINED AS THE POPULATION OF ALL REQUIRED
REPORTING FIELDS.
Reporting is defined as a weekly report sent to Microsoft via Electronic Data
Interchange format ("EDI") of weekly Sales, Inventory, and Internal Market
Share. CUSTOMER must make the EDI reports available to MS' EDI mailbox each
Monday by 1:00 pm (Pacific time). These reports shall cover the seven-day period
(Sunday through Saturday EOB) ending the previous Saturday night. Please refer
to the EDI Reporting Guidelines for details on reporting requirements.
MICROSOFT PRODUCT REPORTING RULES
- - Each unit of Microsoft single license Full Package Product should be
reported as one (1) unit.
EXAMPLE: MICROSOFT-Registered Trademark- WORD FOR WINDOWS-Registered
Trademark- FPP-REPORT AS ONE (1) UNIT
- - Any single Microsoft Multiple License Pack (MLP) should be reported as one
(1) unit.
EXAMPLE: MICROSOFT-Registered Trademark- WINDOWS NT-Trademark- WORKSTATION
LICENSE PACK 20 USER - REPORT AS ONE (1) UNIT.
- - All Microsoft Volume Licensing Agreements (such as Open Licenses, Select
Variable Licenses and Enterprise Licenses) should be reported as one unit
for each license sold.
EXAMPLE: MICROSOFT SELECT MVLP LEVEL B (MIN 8000 LICENSES) AGREEMENT -
CUSTOMER BUYS 9356 WORD
- - All Microsoft Mail Servers and Network Operating Systems must be reported
as one (1) unit for each server license sold. Do not report client
licenses.
Accounts are required to report units sold and inventory units for each
Microsoft SKU, but are required only to report the total license count for
competitive products sold for each category. All SKUs for these titles should be
counted, including full packaged product, upgrades, license packs, initial sale
of new maintenance and education and government SKUs of the foregoing. Please
refer to the EDI Reporting Guidelines for details on reporting requirements.
MARKET SHARE REPORTING
The following table outlines the Market Share product categories for EDI
reporting. The table also specifies the top competitive products that must be
included in the aggregated market share reporting. All competitive products
within a given category must be reported. The products listed below are just
examples, not a comprehensive list. For a comprehensive competitive SKU list
please contact your Microsoft Channel Measurement Specialist.
A comprehensive competitive SKU list shall be provided to CUSTOMER at the
beginning of each quarter. CUSTOMER must implement use of the list no later than
thirty (30) days after receiving the list. To the extent that CUSTOMER sells any
of the products contained on the list, CUSTOMER's Internal Market Share
reporting will include those SKUs. If between quarters there are any new major
releases of competitive products that fall under the competitive product
categories or upgrades to products already listed on the competitive SKU list,
CUSTOMER shall include those SKUs in CUSTOMER's Internal Market Share reporting
immediately upon release of new products.
PRODUCTS TRACKED:
- --------------------------------------------------------------------------------
CATEGORY COMPETITIVE DOS & WINDOWS PRODUCTS
- --------------------------------------------------------------------------------
WORD PROCESSORS Adobe Legacy
Lotus AmiPro
Lotus WordPro
Novell WordPerfect
Softkey Wordstar
Software Publisher Office Writer & WritePlus &
Professional/Write
XYQuest XYWrite
- --------------------------------------------------------------------------------
AMENDMENT NO. 2 TO THE REBATE AND
MARKETING FUND ADDENDUM TO THE
MICROSOFT 1995/1996 CHANNEL AGREEMENT PAGE K3
<PAGE>
- --------------------------------------------------------------------------------
CATEGORY COMPETITIVE DOS & WINDOWS PRODUCTS
- --------------------------------------------------------------------------------
SPREADSHEETS Computer Associates SuperCalc
Corel-Registered Trademark- Quattro
Pro-Registered Trademark-
Lotus 1-2-3
Novell-Registered Trademark- Quattro
Pro-Registered Trademark
- --------------------------------------------------------------------------------
SUITES Corel-Registered Trademark- Office Professional
Corel-Registered Trademark- WordPerfect
-Registered Trademark- Suite
Lotus Smartsuite
Novell-Registered Trademark- Perfect Office
- --------------------------------------------------------------------------------
DATABASES Alpha 4 & 5
Borland dBase
Borland Paradox
Claris Filemaker Pro
Computer Associates Clipper
Computer Associates Supervase
Dataease
Lotus Approach
Symantec Q&A
- --------------------------------------------------------------------------------
MAIL SERVERS Banyon Beyond Mail
SERVERS ONLY Lotus cc:Mail
DO NOT REPORT CLIENT LICENSES Lotus Notes
Lotus NoteSuite
Novell Groupwise
- --------------------------------------------------------------------------------
NETWORK OPERATING SYSTEMS Banyan
SERVERS ONLY Novell-Registered Trademark- Netware-Registered
Trademark- 4.x, 3.x, 2.x -Registered Trademark-
DO NOT REPORT CLIENT LICENSES Novell-Registered Trademark- UnixWare
OS/Lan Server
SCO Global Access
SCO Open Server/Open Server Enterprise/Open
Server Network Systems
SCO Unixware Operating System
SCO-Registered Trademark- Unix
- --------------------------------------------------------------------------------
DEVELOPER PRODUCTS Borland C++
Borland C++ DBase Tools
Borland Delphi
Delphi Client/Svr Dev & Kit
Delphi Developer 2
Gupta Developer Tools
Gupta SQL Windows
IBM Visual Age Basic
IBM Visual Age C++
IBM Visual Age Small Talk
Metrowerks Codewarrior
Natural Intelligence Roaster
Oracle Developer/2000
Oracle Power Objects
Powersoft Powerbuilder
Sun Java WorkShop
Sunsoft Devpak
Symantec C++
Symantec Cafe
Symantec Enterprise Developer
Watcom C++
- --------------------------------------------------------------------------------
AMENDMENT NO. 2 TO THE REBATE AND
MARKETING FUND ADDENDUM TO THE
MICROSOFT 1995/1996 CHANNEL AGREEMENT PAGE K4
<PAGE>
COMPETITIVE PRODUCT MARKET SHARE REPORTING RULES
- - Each unit of COMPETITIVE single license FULL PACKAGE PRODUCT should be
reported as one (1) unit.
EXAMPLE: NOVELL PERFECTOFFICE PRO 3.0 FOR WINDOWS FPP-REPORT AS 1 UNIT
- - Any single COMPETITIVE product that is a MULTIPLE LICENSE PACK (MLP) should
be reported as the exact number of licenses contained in the MLP. Examples
of these products include competitive 10 User Packs, 20 User Packs, and 100
User Packs.
EXAMPLE: WORDPERFECT V6.0 DOS 20-USER LICENSE PACK - REPORT AS 20 UNITS
- - All SKUs (with the exception of Mail clients and Network Operating System
clients) contained in COMPETITIVE VOLUME LICENSING AGREEMENTS should be
reported as one (1) unit for each license sold within the volume license
agreement.
EXAMPLE: LOTUS VPO-LEVEL E 1-2-3 DOS (CUSTOMER BUYS 7421 UNITS) - REPORT AS
7421 UNITS
- - COMPETITIVE MAIL SERVERS and NETWORK OPERATING SYSTEMS must be reported as
one (1) unit for each SERVER LICENSE SOLD. DO NOT REPORT CLIENT LICENSES.
- - Report MAINTENANCE only at the time the maintenance SKU is sold.
In addition to CUSTOMER's EDI Market Share reporting, CUSTOMER may be required
to submit a separate report summarizing Market Share reporting for Non Partners
only.
CUSTOMER must supply to MS Monthly AMS Reporting as described in the attached
Schedule M. CUSTOMER's AMS Monthly Reporting shall be supplied to MS until
CUSTOMER is fully compliant with Weekly EDI Reporting and has MS received three
consecutive months' worth of compliant EDI Reporting. Achievement Rebates shall
not be granted for AMS Reporting.
- --------------------------------------------------------------------------------
SALES-OUT REBATE PROGRAMS
- --------------------------------------------------------------------------------
PROGRAM OBJECTIVE: The objective of all Sales-out Rebate Programs is to increase
the sales of Microsoft products. All license types (Select, Microsoft Open
License, Full Package Product, MLPs) are included in measuring performance
against this goal, however, the Rebate is paid on full packaged product sales
only.
REBATE GOALS: CUSTOMER has first quarter Sales-out goals and total Semester
Sales-out goals. CUSTOMER's performance for the first three months of the July -
December, 1996, semester will be measured against the first quarter Sales-out
goals. At the end of the first quarter, CUSTOMER will receive the percentage of
the eligible Rebates earned based on performance against the first quarter
goals. At the end of the Semester, CUSTOMER will be measured on their six-month
performance against the total Semester goals. Even if CUSTOMER does not meet one
hundred percent (100%) of the first quarter goals, CUSTOMER can still achieve
one hundred percent (100%) of the Semester goals provided that the Semester
goals are met at the end of the Rebate Period.
SALES-OUT DEFINITIONS/MEASUREMENT. MS Product Sales-out is defined as those MS
net Product units sold through CUSTOMER's outlet locations. CUSTOMER's full
packaged product, Microsoft Open License, and upgrade sales-out units will be
measured from the sales-out reported by CUSTOMER to MS. Licensing sales (Select,
Microsoft Maintenance) are captured and generated by MS' financial systems and
included in total sales-out used to measure product sales-out Rebate
performance.
Any Microsoft Select 2.x and 1.x and Microsoft Maintenance revenue credit is
granted as MS recognizes the revenue. This occurs when MS has received the
customer's license reporting. Following receipt of reporting, MS bills the
customer/reseller and simultaneously recognizes the revenue.
PAYMENT: At the end of the Semester, CUSTOMER will be paid Sales-out Rebates
based on performance against the Semester goals. If CUSTOMER achieves greater
than [*] percent [*] of each Semester Sales-out goal, CUSTOMER will receive
the exact achieved percentage of the eligible Sales-out Rebate up to one hundred
percent (100%). If CUSTOMER achieves less than [*] percent [*] of any Sales-
out Rebate goal, CUSTOMER will not receive any portion of that Sales-out Rebate.
* Confidential Treatment Requested
AMENDMENT NO. 2 TO THE REBATE AND
MARKETING FUND ADDENDUM TO THE
MICROSOFT 1995/1996 CHANNEL AGREEMENT PAGE K5
<PAGE>
Although MS pays the Sales-out Rebate ultimately based on performance against
the Semester Sales-out goal, Microsoft also pays a Sales-out Rebate at the end
of the first quarter based on performance against the first quarter goal.
Microsoft pays a portion of the Rebate after the first quarter to provide
incentive for CUSTOMER to focus on Sales-out throughout the entire Semester. The
scale for the first quarter payment is the same as the scale for the semester
payment. The first quarter payment amount will be subtracted from the final
semester payment for the Sales-out Rebate.
EXAMPLE: IF CUSTOMER HAS A QUARTERLY TOTAL SALES OUT GOAL OF $1,000,000 AND A
SEMESTER TOTAL SALES OUT GOAL $2,500,000, AND CUSTOMER SELLS $800,000 OVER THE
FIRST QUARTER PERIOD AND $2,600,000 OVER THE ENTIRE SEMESTER PERIOD, CUSTOMER
WILL RECEIVE THE FOLLOWING REBATE PAYMENTS:
---------------------------------------------------------------------------
PERIOD GOAL SELL-THROUGH PAYMENT
ACHIEVED
---------------------------------------------------------------------------
First Quarter $1,000,000 $800,000 80% of [*] eligible Rebate =
[*] of July - September sales.
---------------------------------------------------------------------------
Semester $2,500,000 $2,600,000 104% of [*] eligible rebate =
[*] of July - December sales
less first quarter payment. The
maximum allowable total sales
out Rebate is [*].
---------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TOTAL SALES-OUT REBATE PROGRAM
- --------------------------------------------------------------------------------
REBATE PERCENTAGES: The total possible Rebate percentage achievable for the
Total Sales-out Rebate Program is [*] percent [*] of Qualified Sales for the
July - December, 1996 Semester.
CUSTOMER's Total Sales-out Rebate Program goals are as follows:
- Quarter 1 Goal (July - September, 1996): [*]
- Semester Goal (July - December, 1996): [*]
- --------------------------------------------------------------------------------
DESKTOP APPLICATIONS DIVISION SALES-OUT REBATE PROGRAM
- --------------------------------------------------------------------------------
REBATE PERCENTAGES: The total possible Rebate percentage achievable for the
Desktop Applications Division Sales-out Rebate program is [*] percent [*] of
Qualified Sales for the July - December, 1996 Semester.
CUSTOMER's Desktop Applications Division Sales-out Rebate Program goals are as
follows:
- Quarter 1 Goal (July - September, 1996): [*]
- Semester Goal (July - December, 1996): [*]
* Confidential Treatment Requested
AMENDMENT NO. 2 TO THE REBATE AND
MARKETING FUND ADDENDUM TO THE
MICROSOFT 1995/1996 CHANNEL AGREEMENT PAGE K6
<PAGE>
- --------------------------------------------------------------------------------
INTERACTIVE MEDIA DIVISION (IMD) SALES-OUT REBATE PROGRAM
- --------------------------------------------------------------------------------
REBATE PERCENTAGES: The total possible Rebate percentage achievable for the
Interactive Media Division Sales-out Rebate Program is [*] percent [*] of
Qualified Sales for the July - December, 1996 Semester.
CUSTOMER's Interactive Media Division Sales-out Rebate Program goals are as
follows:
- Quarter 1 Goal (July - September, 1996): [*]
- Semester Goal (July - December, 1996): [*]
- --------------------------------------------------------------------------------
INVENTORY MANAGEMENT REBATE PROGRAM
- --------------------------------------------------------------------------------
PROGRAM OBJECTIVE: The objective of the Inventory Management Rebate Program is
to provide an incentive to Partners to manage inventory so that the CUSTOMER's
top twenty (20) SKUs are [*] percent [*] in-stock and on outlet shelves at all
times.
MEASUREMENT: MS shall conduct quarterly retail audits, which shall include a
representative sampling of CUSTOMER's outlets. The results of all audits must
confirm CUSTOMER is in-stock on its top twenty (20) SKUs [*] percent [*] of
the time. CUSTOMER must submit compliant weekly EDI Inventory reporting in
order to receive any portion of the Inventory Management Rebate.
PAYMENT: At the end of the first quarter, CUSTOMER will receive the percentage
of the eligible Rebate earned based on CUSTOMER's in-stock performance during
the quarter. If CUSTOMER's in-stock performance is greater than [*] percent
[*], CUSTOMER will receive the Inventory Management Rebate as follows:
---------------------------------------------------------------------------
PERCENTAGE IN-STOCK REBATE PERCENTAGE
---------------------------------------------------------------------------
[*] percent [*] or greater [*] percent [*] of the
available [*] percent [*]
---------------------------------------------------------------------------
[*] percent [*] - [*] [*] percent [*] of the
percent [*] available [*] percent [*]
---------------------------------------------------------------------------
[*] percent [*] - [*] [*] percent [*] of the
percent [*] available [*] percent [*]
---------------------------------------------------------------------------
If CUSTOMER achieves less than [*] percent [*] in-stock, CUSTOMER will not
receive any portion of the Inventory Management Rebate.
* Confidential Treatment Requested
AMENDMENT NO. 2 TO THE REBATE AND
MARKETING FUND ADDENDUM TO THE
MICROSOFT 1995/1996 CHANNEL AGREEMENT PAGE K7
<PAGE>
SCHEDULE L
JULY - DECEMBER, 1996
OPEN LICENSE
REBATE PROGRAMS
PROGRAMS: Microsoft offers four (4) Open License Rebate programs for the July -
December, 1996 Rebate Period. The total available Rebate is divided as follows:
---------------------------------------------------------------------
MAXIMUM PERCENTAGE
REBATE INCENTIVE AVAILABLE
---------------------------------------------------------------------
---------------------------------------------------------------------
Achievement Program [*]
---------------------------------------------------------------------
Total Sales-out Program [*]
---------------------------------------------------------------------
Desktop Business Systems Program [*]
---------------------------------------------------------------------
Office Sales-out Program [*]
---------------------------------------------------------------------
TOTAL [*]
---------------------------------------------------------------------
All guidelines, including actual Rebate goals, shall be as outlined in
Schedule K, July - December, 1996, Rebate Program Guidelines.
* Confidential Treatment Requested
AMENDMENT NO. 2 TO THE REBATE AND
MARKETING FUND ADDENDUM TO THE
MICROSOFT 1995/1996 CHANNEL AGREEMENT PAGE L1
<PAGE>
SCHEDULE M
MONTHLY AMS REPORTING
Each month CUSTOMER will provide to MS an AMS Report by the 10th of the month
following the applicable reporting month. Reporting shall be Sell To sales in
the format as defined in AMS Reporting Guidelines attached hereto. AMS Reporting
shall be in accordance with the AMS Guidelines. If CUSTOMER has multiple
outlets, AMS Reporting shall be on an outlet and sales office basis and include
outlet or sales office designation (name and number), street address, city,
state, and zip code for each outlet or sales office. Reports must be TIMELY,
ACCURATE, and COMPLETE to MS' satisfaction. Reporting shall be transmitted in
electronic format and sent via modem to 1-800-831-6316, or on tape or diskette
to MS at the following address:
MICROSOFT
RESELLER REPORTING GROUP - 8N/2
ONE MICROSOFT WAY
REDMOND, WA 98052
"Timely" is defined as Microsoft receiving the AMS reporting by the 10th of each
month.
"Accurate" is defined as the AMS fields being correctly populated with accurate
information.
"Complete" is defined as the required AMS fields being populated.
AMENDMENT NO. 2 TO THE REBATE AND
MARKETING FUND ADDENDUM TO THE
MICROSOFT 1995/1996 CHANNEL AGREEMENT PAGE M1
<PAGE>
CHANGE OF CONTROL AGREEMENT
This Change of Control Agreement (this "Agreement"), dated as of
July __,1996 is between Egghead, Inc. and DJ & J Software Corporation, a wholly
owned subsidiary of Egghead, Inc. (jointly and severally, the "Company"), and
___________________ (the "Executive").
1.0 EMPLOYMENT
1.1 CERTAIN DEFINITIONS
(a) "EFFECTIVE DATE" shall mean the first date during the Change of
Control Period (as defined in Section 1.1(b)) on which a Change of Control
occurs.
(b) "CHANGE OF CONTROL PERIOD" shall mean the period commencing on the
date hereof and ending on the second anniversary of such date; PROVIDED,
HOWEVER, that commencing on the date one year after the date hereof, and on each
annual anniversary of such date (such date and each annual anniversary thereof
shall be hereinafter referred to as the "Renewal Date"), the Change of Control
Period shall be automatically extended so as to terminate two years from such
Renewal Date, unless at least 60 days prior to the Renewal Date the Company
shall give notice to the Executive that the Change of Control Period shall not
be so extended.
1.2 EMPLOYMENT PERIOD
The Company hereby agrees to continue the Executive in its employ or in the
employ of its affiliated companies, and the Executive hereby agrees to remain in
the employ of the Company or its affiliated companies, in accordance with the
terms and provisions of this Agreement, for the period commencing on the
Effective Date and ending on the expiration of the Change of Control Period (the
"Employment Period").
1.3 POSITION AND DUTIES
During the Employment Period, the Executive's position (including status,
offices, titles and reporting requirements), authority, duties and
responsibilities shall be at least commensurate in all material respects with
the most significant of those held, exercised and assigned at any time during
the 90-day period immediately preceding the Effective Date.
-1-
<PAGE>
1.4 LOCATION
During the Employment Period, the Executive's services shall be performed
at the Company's headquarters on the Effective Date or any office which is
subsequently designated as the headquarters of the Company and is less than 50
miles from such location.
2.0 COMPENSATION
During the Employment Period, the Company agrees to pay or cause to be paid
to Executive, and the Executive agrees to accept in exchange for the services
rendered hereunder by him, the following compensation.
2.1 SALARY
The Executive shall receive an annual base salary (the "Annual Base
Salary"), at least equal to the annual salary established by the Board or the
Compensation Committee of the Board (the "Compensation Committee") for the
fiscal year in which the Effective Date occurs. The Annual Base Salary shall be
paid in substantially equal installments and at the same intervals as the
salaries of other officers of the Company are paid. During the Employment
Period, the Board or the Compensation Committee shall review the Annual Base
Salary at least annually and shall determine any increases in future years.
3.0 BENEFITS
3.1 INCENTIVE, RETIREMENT AND WELFARE BENEFIT PLANS; VACATION
During the Employment Period, the Executive shall be entitled to
participate, subject to and in accordance with applicable eligibility
requirements, in such fringe benefit programs as shall be provided to other
executives of the Company and its affiliated companies from time to time during
the Employment Period by action of the Board (or any person or committee
appointed by the Board to determine fringe benefit programs and other
emoluments), including, without limitation, paid vacations; the Company's
Voluntary Investment Plan and any other incentive, savings and retirement plan,
practice, policy or program; and all welfare benefit plans, practices, policies
and programs (including, without limitation, medical, prescription, dental,
disability, salary continuance, employee life, group life, accidental death and
travel accident insurance plans and programs.
-2-
<PAGE>
3.2 EXPENSES
During the Employment Period, the Executive shall be entitled to receive
prompt reimbursement for all reasonable employment expenses incurred by him in
accordance with the policies, practices and procedures of the Company and its
affiliated companies in effect for the executives of the Company and its
affiliated companies during the Employment Period.
4.0 TERMINATION
Employment of the Executive during the Employment Period may be terminated
as follows but, in any case, the nondisclosure provisions set forth in Section 7
hereof shall survive the termination of this Agreement and the termination of
the Executive's employment with the Company.
4.1 BY THE COMPANY OR THE EXECUTIVE
Upon giving Notice of Termination (as defined below), the Company may
terminate the employment of the Executive with or without Cause (as defined
below). Upon giving Notice of Termination, the Executive may terminate his or
her employment with or without Good Reason.
4.2 AUTOMATIC TERMINATION
This Agreement and the Executive's employment during the Employment Period
shall terminate automatically upon the death or Total Disability of the
Executive. The term "Total Disability" as used herein shall mean the
Executive's inability (with or without such accommodation as may be required by
law and which places no undue burden on the Company), as determined by a
physician selected by the Company and acceptable to the Executive, to perform
the duties set forth in Section 1.3 hereof for a period or periods aggregating
120 calendar days in any 12-month period as a result of physical or mental
illness, loss of legal capacity or any other cause beyond the Executive's
control, unless the Executive is granted a leave of absence by the Board. The
Executive and the Company hereby acknowledge that the Executive's ability to
perform the duties specified in Section 1.3 hereof is of the essence of this
Agreement.
4.3 NOTICE OF TERMINATION
Any termination by the Company during the Employment Period shall be
communicated by Notice of Termination to the other party given in accordance
with Section 10 hereof. The "Notice of Termination" shall mean a written notice
which
-3-
<PAGE>
(a) indicates the specific termination provision in this Agreement relied upon
and (b) to the extent applicable, sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated. The failure by the Company to set
forth in the Notice of Termination any fact or circumstance which contributes to
a showing of Good Reason or Cause shall not waive any right of the Executive or
the Company hereunder or precede the Executive or the Company from asserting
such fact or circumstance in enforcing the Executive's or the Company's rights
hereunder.
4.4 DATE OF TERMINATION
During Employment Period, "Date of Termination" means (a) if the
Executive's employment is terminated by reason of death, at the end of the
calendar month in which the Executive's death occurs, (b) if the Executive's
employment terminated by reason of Total Disability, immediately upon a
determination by the Company of the Executive's Total Disability, and (c) in all
other cases, five days after the date of mailing of the Notice of Termination.
The Executive's employment and performance of services will continue during such
five-day period; PROVIDED, HOWEVER, that the Company may, upon notice to the
Executive and without reducing the Executive's compensation during such period,
excuse the Executive from any or all of his duties during such period.
5.0 TERMINATION PAYMENTS
In the event of termination of the Executive's employment during the
Employment Period, all compensation and benefits set forth in this Agreement
shall terminate except as specifically provided in this Section 5.
5.1 TERMINATION BY THE COMPANY FOR OTHER THAN CAUSE OR BY THE EXECUTIVE FOR
GOOD REASON
If the Company terminates the Executive's employment other than for Cause
or the Executive terminates his or her employment for Good Reason prior to the
end of the Employment Period, the Executive shall be entitled to receive:
(a) payment of the following accrued obligations (the "Accrued
Obligations"):
(i) the Executive's Annual Base Salary through the Date of
Termination to the extent not theretofore paid;
-4-
<PAGE>
(ii) any compensation previously deferred by the Executive (together
with accrued interest or earnings thereon, if any) and any accrued vacation pay,
in each case to the extent not theretofore paid;
(b) payment of the Executive's Annual Base Salary for the period from the
Date of Termination through the expiration of the Employment Period;
(c) payment of the Executive's Annual Base Salary for a period of one
year/six months following the Date of Termination; and
(d) for the period from the Date of Termination through the expiration of
the Employment Period or for a period of one year/six months following the Date
of Termination, whichever is longer, benefits to the Executive and/or the
Executive's family at least equal to those which would have been provided to
them in accordance with the plans, programs, practices and policies described in
Section 3 hereof if the Executive's employment had not been terminated;
PROVIDED, HOWEVER, that if the Executive becomes reemployed with another
employer and is eligible to receive medical or other welfare benefits under
another employer provided plan, the medical and other welfare benefits described
herein shall be secondary to those provided under such other plan during such
applicable period of eligibility (such continuation of such benefits for the
period herein set forth shall be hereinafter referred to as the "Welfare Benefit
Continuation").
5.2 TERMINATION FOR CAUSE OR OTHER THAN FOR GOOD REASON
If the Executive's employment shall be terminated by the Company for Cause
or by the Executive for other than Good Reason during the Employment Period,
this Agreement shall terminate without further Obligation to the Executive other
than the Accrued Obligations.
5.3 EXPIRATION OF TERM
In the case of a termination of the Executive's employment as a result of
the expiration of the term of this Agreement, the Executive not be entitled to
receive any payment hereunder, other than the Accrued Obligations.
5.4 TERMINATION BECAUSE OF DEATH OR TOTAL DISABILITY
If the Executive's employment is terminated by reason and the Executive's
death or total Disability during the Employment Period, the Company shall make
the payments and assume the obligations set forth in Section 5.1 to the
Executive or his or her legal representative (which payments shall be made to
the Executive's estate or
-5-
<PAGE>
beneficiary, as applicable in the case of the Executive's death), and the timely
payment or provision of the Welfare Benefit Continuation.
5.5 LIMITATIONS TO PAYMENTS
Notwithstanding any other provisions of this Section 5, if either the
Company or the Executive receives confirmation from the Company's certified
public accounting firm, or such other accounting firm retained as independent
certified public accountants for the Company, that any payment by the Company
under this Section 5 would be considered to be an "excess parachute payment"
within the meaning of Section 28OG of the Internal Revenue Code of 1986, as
amended, or any successor statute then in effect, then the aggregate payments by
the Company pursuant to this Section 5 shall be reduced to an amount which is
$1.00 less than the smallest sum which would be deemed to be such an "excess
parachute payment" and, if permitted by applicable law, such reduction shall be
made to the last payment due hereunder; PROVIDED, FURTHER, that, if permitted by
applicable law, no such adjustment shall be made in any year in which the
Executive authorizes a reduction in the payment otherwise due the Executive
hereunder by an amount equal to any loss to be incurred by the Company because
such payments would not be deductible by the Company as a business expense for
income tax purposes for the reason that such payments constitute an excess
parachute payment in that year.
5.6 PAYMENT SCHEDULE
All payments under this Section 5 shall be made to the Executive at the
same intervals as such payments were made to him immediately prior to
termination, including the Annual Bonus (or pro rata portion thereof), which
shall be payable in a lump sum no later than 90 days after the end of the fiscal
year in which the Date of Termination occurs.
5.7 CAUSE
For purposes of this Agreement, "Cause" means cause given by the Executive
to the and shall include, without limitation, the occurrence of one or more of
the following events:
(a) Failure or refusal to carry out any lawful duties of the Executive
described in Section 1.3 hereof or any directions of the Board reasonably
consistent with the duties herein set forth to be performed by the Executive;
-6-
<PAGE>
(b) Violation the Executive of a state or federal criminal law involving
the commission of a crime against the Company or other criminal act involving
moral turpitude;
(c) Current abuse by the Executive of alcohol or controlled substances
deception, fraud, misrepresentation or dishonesty by the Executive; any incident
materially compromising the Executive's reputation or ability to represent the
Company with the public; any act or omission by the Executive which
substantially impairs the Company's business, goodwill or reputation; or any
other misconduct; or
(d) Any other material violation of any provision of this Agreement.
5.8 GOOD REASON
"GOOD REASON" means, without the Executive's express written consent:
(a) (i) the assignment to the Executive of duties, or limitation of the
Executive's responsibilities, inconsistent with the Executive's title, position,
duties, responsibilities and status with the Company as such duties and
responsibilities existed immediately prior to the date of the Change of Control,
or (ii) removal of the Executive from, or failure to re-elect the Executive to,
the Executive's positions with the Company or any Subsidiary that employs the
Executive immediately prior to the Change of Control, except in connection with
the involuntary termination of the Executive's employment by the Company for
Cause or as a result of Executive's death or Disability; or
(b) failure by the Company to pay, or reduction by the Company of, the
Executive's Annual Base Salary, as reflected in the Company's payroll records
for the Executive's last pay period immediately prior to the Change of Control;
(d) the relocation of the principal place of the Executive's employment to
a location that is more than 25 miles further from the Executive's principal
residence than such principal place of employment immediately prior to the
Change of Control; or
(e) the breach of any material provision of this Agreement by the Company,
including, without limitation, failure by the Company to bind any successor to
the Company to the terms and provisions of this Agreement in accordance with
Section 10.
-7-
<PAGE>
6.0 REPRESENTATIONS, WARRANTIES AND OTHER CONDITIONS
In order to induce the Company to enter into this Agreement, the Executive
Represents and warrants to the company as follows:
6.1 HEALTH
The Executive is in good health and knows of no physical or mental
disability which, with or without any accommodation which may be required by law
and which places no undue burden on the Company, would present him from
fulfilling his obligations hereunder. The Executive agrees, if the Company
requests, to submit to periodic medical examinations by a physician or
physicians by, paid for and arranged by the Company. The Executive agrees that
the examination's medical report shall be provided to the Company.
6.1 NO VIOLATION OF OTHER AGREEMENTS
The Executive represents that neither the execution nor the performance of
this Agreement by the Executive will violate or conflict in any which the
Executive may be bound.
7.0 NONDISCLOSURE; RETURN OF MATERIALS
7.1 NONDISCLOSURE
Except as required by his employment with the Company, the Executive will
not, at any time during the term of employment by the Company, or at any time
thereafter, directly, indirectly or otherwise, use, communicate, disclose,
disseminate, lecture upon or publish articles relating to any, confidential,
proprietary or trade secret information without the prior written consent of the
Company. In this Section 7, the term "employment" means employment as a regular
independent subcontractor or consultant, as well as a full-time or regular
part-time employee of the Company.
All documents, records, notebooks, notes, memoranda, drawings or other
documents made or compiled by the Executive at any time, or in his possession,
including any and all copies thereof, shall be the property of the Company and
shall be held by the Executive in trust and solely for the benefit of the
Company, and shall be delivered to the Company by the Executive upon termination
of employment or at any other time upon request by the Company.
The Executive understands that the Company will be relying on this
Agreement in continuing the Executive's employment, paying him compensation,
granting him
-8-
<PAGE>
any promotions or raises, or entrusting him with any information which helps the
Company compete with others.
7.2 ASSIGNMENT
The Executive will disclose promptly to the Company in writing all ideas,
inventions and discoveries conceived of and/or developed in whole or in part
during the term of his employment with the Company and relating to any of the
Company's business, whether or not conceived or developed during working hours
or on the property of the Company. Such ideas, inventions and discoveries shall
be the property of the Company and it shall have the right to any patents which
may be issued with respect to the same. The Executive will also, and hereby
does, assign to the Company and/or its nominees all his right, title and
interest in such ideas, inventions and discoveries and all right, title and
interest in any patent applications for patents, assignments and other papers,
and will do such things as the Company may require for establishing and
protecting its ownership and to effectuate the foregoing, either during his
employment or thereafter. There shall he excluded from the operations of this
Agreement the Executive's ideas, inventions and discoveries, patented and
unpatented, which were made prior to the Executive's employment by the Company
and which are specifically listed and described below.
8.0 NOTICE AND CURE OF BREACH
Whenever a breach of this Agreement by either party is relied upon as
justification for any action taken by the other party pursuant to any provision
of this Agreement, other than clause (b), (c) or (d) of Section 5.7 hereof,
before such action is taken, the party asserting the breach of this Agreement
shall give the other party at least ten days' prior written notice of the
existence and the nature of such breach before taking further action hereunder
and shall give the party purportedly in breach of this Agreement the opportunity
to correct such breach during the ten-day period.
9.0 FORM OF NOTICE
Every notice required by the terms of this Agreement shall be given in
writing by serving the same upon the party to whom it was addressed personally
or by registered or certified mail, return-receipt requested, at the address set
forth below or at such other address as may hereafter be designated by notice
given in compliance with the terms hereof:
If to the Executive:
-------------------------------------------
-------------------------------------------
-------------------------------------------
-9-
<PAGE>
If to the Company:
or such other address as shall be provided in accordance with the terms hereof.
Except as set forth in Section 5.4 hereof, if notice is mailed, such notice
shall be effective upon mailing.
10.0 ASSIGNMENT
This Agreement is personal to the Executive and shall not be assignable by
the Executive. The Company may assign its rights hereunder to (a) any
corporation resulting from any merger, consolidation or other reorganization to
which the Company is a party or (b) any corporation, partnership, association or
other person to which the Company may transfer all or substantially all of the
assets and business of the Company existing at such time. All the terms and
provisions of this Agreement shall be binding upon and inure to the benefit of
and be enforceable by the parties hereto and their respective successors and
permitted assigns.
The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all the
business and/or assets of the Company to assume expressly and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. As used in
this Agreement, "Company" shall mean and any successor to its business and/or
assets as aforesaid which assumes and agrees to perform this Agreement by
operation of law or otherwise.
11.0 WAIVERS
No delay or failure by any party hereto in exercising, protecting or
enforcing any of its rights, titles, interests or remedies hereunder, and no
course of dealing or performance with respect thereto, shall constitute a waiver
thereof. The express waiver by a party hereto of any right, title, interest or
remedy in a particular instance or circumstance shall not constitute a waiver
thereof in any other instance or circumstance. All rights and remedies shall be
cumulative and not exclusive of any other rights or remedies.
12.0 AMENDMENTS IN WRITING
No amendment, modification, waiver, termination or discharge of any
provision of this Agreement, nor consent to any departure therefrom, either
party hereto, shall in any event be effective unless the same shall be in
writing, specifically identifying this Agreement and the provision intended to
be amended, modified,
-10-
<PAGE>
waived, terminated or discharged and signed by the Company and the Executive,
and each such amendment, modification, waiver, termination or discharge shall be
effective only in the specific instance and for the specific purpose for which
given. No provision of this Agreement shall be varied, contradicted or
explained by any oral agreement, course of dealing or performance or any other
matter not set forth in an agreement in writing and signed by the Company and
the Executive.
13. GOVERNING LAW
This Agreement shall in all respects, including all matters of
construction, validity and performance, be governed by, and construed and
enforced in accordance with, the laws of the State of Washington, without regard
to any rules governing conflicts of laws.
14. SEVERABILITY
If any provision of this Agreement shall be held invalid, illegal or
unenforceable in any jurisdiction, for any reason, including, without limitation
the duration of such provision, its geographical scope or the extent of the
activities prohibited or required by it, then, to the full extent permitted by
law, (a) all other provisions hereof shall remain in full force and effect in
such jurisdiction and shall be liberally construed in order to carry out the
intent of the parties hereto as nearly as may be possible, (b) such invalidity,
illegality or unenforceability shall not affect the validity, legality or
enforceability of any other provision hereof, and (c) any court or arbitrator
having jurisdiction thereover shall have the power to reform such provision to
the extent necessary for such provision to be enforceable under applicable law.
15. ENTIRE AGREEMENT
This Agreement on and as of the date hereof constitutes the entire
agreement between the Company and the Executive with respect to the subject
matter hereof and all prior or contemporaneous oral or written communications,
understandings or agreements between the Company and the Executive with respect
to such subject matter are hereby superseded and nullified in their entireties,
except that the Employee Agreement, dated _____________, between the Executive
and the Company shall continue in full force and effect to the extent not
superseded by Section 7 hereof.
-11-
<PAGE>
16. WITHHOLDING
The Company may withhold from any amounts payable under this Agreement such
federal, state or local taxes as shall be required to be withheld pursuant to
any applicable law or regulation.
17. COUNTERPARTS
This Agreement may be executed in counterparts, each of which counterpart
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties have executed and entered into this
Agreement on the date set forth above.
EXECUTIVE
---------------------------
COMPANY
EGGHEAD, INC.
By
------------------------
Its
------------------------
-12-
<PAGE>
APPENDIX A TO
CHANGE OF CONTROL AGREEMENT BETWEEN EGGHEAD, INC.,
AND DJ & J SOFTWARE CORPORATION, A WHOLLY
OWNED SUBSIDIARY OF EGGHEAD, INC.,
AND
____________________
For purposes of this Agreement, a "Change of Control" shall mean:
(a) A "Board Change" which, for purposes of this Agreement, shall have
occurred if a majority (excluding vacant seats) of the seats on the Company's
Board are occupied by individuals who were neither (i) nominated by a majority
of the Incumbent Directors nor (ii) appointed by directors so nominated. An
"Incumbent Director" is a member of the Board who has been either (i) nominated
by a majority of the directors of the Company then in office or (ii) appointed
by directors so nominated, but excluding, for this purpose, any such individual
whose initial assumption of office occurs as a result of either an actual or
threatened election contest (as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person (as hereinafter defined) other than the
Board); or
(b) The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act)
of (i) 20% or more of either (A) the then outstanding shares of Common Stock of
the Company (the "Outstanding Company Common Stock") or (B) the combined voting
power of the then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Company Voting
Securities"), in the case of either (A) or (B) of this clause (i), which
acquisition is not approved in advance by a majority of the Incumbent Directors,
or (ii) 33% or more of either (A) the Outstanding Company Common Stock or
(B) the Outstanding Company Voting Securities, in the case of either (A) or (B)
of this clause (ii), which acquisition is approved in advance by a majority of
the Incumbent Directors; PROVIDED, HOWEVER, that the following acquisitions
shall not constitute a Change of Control: (x) any acquisition by the Company,
(y) any acquisition by an employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company or
(z) any acquisition by any corporation pursuant to a reorganization, merger or
-i-
<PAGE>
consolidation, if, following such reorganization, merger or consolidation, the
conditions described in clauses (i), (ii) and (iii) of subsection (c) of this
Appendix A are satisfied; or
(c) Approval by the stockholders of the Company of a reorganization,
merger or consolidation, in each case, unless, immediately following such
reorganization, merger or consolidation, (i) more than 60% of, respectively, the
then outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all the individuals and entities who were
the beneficial owners, respectively, of the Outstanding Company Common Stock and
the Outstanding Company Voting Securities immediately prior to such
reorganization, merger or consolidation in substantially the same proportion as
their ownership immediately prior to such reorganization, merger or
consolidation of the Outstanding Company Common Stock and the Outstanding
Company Voting Securities, as the case may be, (ii) no Person (excluding the
Company, any employee benefit plan (or related trust) of the Company or such
corporation resulting from such reorganization, merger or consolidation and any
Person beneficially owning, immediately prior to such reorganization, merger or
consolidation, directly or indirectly, 33% or more of the Outstanding Company
Common Stock or the Outstanding Voting Securities, as the case may be)
beneficially owns directly or indirectly, 33% or more of, respectively, the then
outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation or the combined voting power of the then
outstanding voting securities of such corporation entitled to vote generally in
the election of directors, and (iii) at least a majority of the members of the
board of directors of the corporation resulting from such reorganization, merger
or consolidation were the Incumbent Directors at the time of the execution of
the initial agreement providing for such reorganization, merger or
consolidation; or
(d) Approval by the stockholders of the Company of (i) a complete
liquidation or dissolution of the Company or (ii) the sale or other disposition
of all or substantially all the assets of the Company, other than to a
corporation with respect to which immediately following such sale or other
disposition, (A) more than 60% of, respectively, the then outstanding shares of
common stock of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote generally in
the election of directors is then beneficially owned, directly or indirectly, by
all or substantially all the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and the
Outstanding Company Voting Securities immediately prior to such sale or other
disposition in substantially the same proportion as their ownership,
immediately prior
-ii-
<PAGE>
to such sale or other disposition, of the Outstanding Company Common Stock
and the Outstanding Company Voting Securities, as the case may be, (B) no
Person (excluding the Company, any employee benefit plan (or related trust)
of the Company or such corporation and any Person beneficially owning,
immediately prior to such sale or other disposition, directly or indirectly,
33% or more of the Outstanding Company Common Stock or the Outstanding
Company Voting Securities, as the case may be) beneficially owns, directly or
indirectly, 33% or more of, respectively, the then outstanding shares of
common stock of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote generally
in the election of directors and (C) at least a majority of the members of
the board of directors of such corporation were approved by a majority of the
Incumbent Directors at the time of the execution of the initial agreement or
action of the Board providing for such sale or other disposition of assets of
the Company.
-iii-
<PAGE>
TABLE OF CONTENTS
PAGE
----
Article I PURPOSE AND EFFECTIVE DATE . . . . . . . . . . . . . . . . 1
Article II DEFINITIONS AND CERTAIN PROVISIONS . . . . . . . . . . . . 1
2.1 Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.2 Beneficiary. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.3 Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . 1
2.4 Bonus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.5 Committee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.6 Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.7 Compensation Committee . . . . . . . . . . . . . . . . . . . . . . 1
2.8 Deferral Year. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.9 Deferred Benefit Account . . . . . . . . . . . . . . . . . . . . . 1
2.10 Determination Date . . . . . . . . . . . . . . . . . . . . . . . . 1
2.11 Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.12 Participant. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.13 Investment Index or Indices. . . . . . . . . . . . . . . . . . . . 2
2.14 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.15 Salary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.16 Termination of Service . . . . . . . . . . . . . . . . . . . . . . 2
Article III PARTICIPATION AND COMPENSATION REDUCTION . . . . . . . . . 2
3.1 Eligibility and Participation. . . . . . . . . . . . . . . . . . . 2
3.2 New Participants . . . . . . . . . . . . . . . . . . . . . . . . . 2
3.3 Minimum and Maximum Deferral and Length of Participation . . . . . 3
3.4 Emergency Benefit: Waiver of Deferral . . . . . . . . . . . . . . 3
i
<PAGE>
TABLE OF CONTENTS
PAGE
----
Article IV DEFERRED BENEFIT ACCOUNT . . . . . . . . . . . . . . . . . 3
4.1 Timing of Deferral Credits . . . . . . . . . . . . . . . . . . . . 3
4.2 Matching Contributions . . . . . . . . . . . . . . . . . . . . . . 4
4.3 Investment Indices and Elections . . . . . . . . . . . . . . . . . 4
4.4 Reallocations. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4.5 Crediting of Earnings. . . . . . . . . . . . . . . . . . . . . . . 4
4.6 Vesting of Deferred Benefit Account. . . . . . . . . . . . . . . . 4
4.7 Reporting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Article V BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . . 4
5.1 In Service Withdrawal. . . . . . . . . . . . . . . . . . . . . . . 4
5.2 Accelerated Withdrawal . . . . . . . . . . . . . . . . . . . . . . 5
5.3 Termination Benefit. . . . . . . . . . . . . . . . . . . . . . . . 5
5.4 Death Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . 5
5.5 Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
5.6 Form of Benefit Payment. . . . . . . . . . . . . . . . . . . . . . 5
5.7 Commencement of Payments . . . . . . . . . . . . . . . . . . . . . 6
5.8 Tax Withholding. . . . . . . . . . . . . . . . . . . . . . . . . . 6
Article VI BENEFICIARY DESIGNATION. . . . . . . . . . . . . . . . . . 6
6.1 Beneficiary Designation. . . . . . . . . . . . . . . . . . . . . . 6
6.2 Amendments; Martial Status . . . . . . . . . . . . . . . . . . . . 6
6.3 No Beneficiary Designation . . . . . . . . . . . . . . . . . . . . 6
6.4 Effect of Payment. . . . . . . . . . . . . . . . . . . . . . . . . 6
Article-VII ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . 6
7.1 Committee: Duties . . . . . . . . . . . . . . . . . . . . . . . . 6
7.2 Agents 8
7.3 Binding Effect of Decisions. . . . . . . . . . . . . . . . . . . . 7
7.4 Indemnity of Committee . . . . . . . . . . . . . . . . . . . . . . 7
ii
<PAGE>
TABLE OF CONTENTS
PAGE
----
Article-VIII CLAIMS FOR BENEFITS PROCEDURE. . . . . . . . . . . . . . . 7
8.1 Claim for Benefits . . . . . . . . . . . . . . . . . . . . . . . . 7
8.2 Request for Review of a Denial of Claim for Benefits . . . . . . . 7
8.3 Decision Upon Review of Denial of Claim for Benefits . . . . . . . 7
8.4 Dispute Resolution . . . . . . . . . . . . . . . . . . . . . . . . 8
Article-IX AMENDMENT AND TERMINATION. . . . . . . . . . . . . . . . . 8
9.1 Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
9.2 Company's Right to Terminate . . . . . . . . . . . . . . . . . . . 8
Article-X TRUST. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
10.1 Establishment of Trust . . . . . . . . . . . . . . . . . . . . . . 9
10.2 Obligation of Company. . . . . . . . . . . . . . . . . . . . . . . 9
10.3 Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Article-XI MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . 9
11.1 Unfunded Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
11.2 Rights with Respect to the Trust . . . . . . . . . . . . . . . . . 9
11.3 No Implied Rights. . . . . . . . . . . . . . . . . . . . . . . . . 9
11.4 Unsecured General Creditor . . . . . . . . . . . . . . . . . . . . 9
11.5 Non-assignability. . . . . . . . . . . . . . . . . . . . . . . . . 10
11.6 Not a Contract of Employment . . . . . . . . . . . . . . . . . . . 10
11.7 Governing Laws . . . . . . . . . . . . . . . . . . . . . . . . . . 10
11.8 Validity 10
11.9 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
11.10 Successors, Mergers, and Consolidations. . . . . . . . . . . . . . 10
11.11 Protective Provisions. . . . . . . . . . . . . . . . . . . . . . . 11
11.12 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
iii
<PAGE>
EGGHEAD, Inc.
Executive Deferred Compensation Plan
I. PURPOSE AND EFFECTIVE DATE
The purpose of this Executive Deferred Compensation Plan ("Plan")
is to permit a select group of management or highly compensated
employees of Egghead, Inc. and its subsidiaries to defer income
which would otherwise become payable to them. This Plan shall be
effective as of July 1, 1996.
II. DEFINITIONS AND CERTAIN PROVISIONS
2.1 "AGREEMENT" means the Agreement(s), pursuant to the Plan,
executed between a Participant and the Company, whereby a
Participant agrees to defer a portion of Salary or Bonus, or
both, pursuant to the provisions of the Plan, and the Company
agrees to make benefit payments in accordance with the provisions
of the Plan. In the event the terms of the Agreement conflict
with the terms of the Plan, the terms of the Plan shall be
controlling.
2.2 "BENEFICIARY" means the person or persons who under this Plan
becomes entitled to receive a Participant's interest in the event
of the Participant's death.
2.3 "BOARD OF DIRECTORS" means the Board of Directors of the Company.
2.4 "BONUS" means any amount(s) paid during a calendar year to the
Participant under any Company bonus arrangement determined by the
Committee as eligible under this Plan.
2.5 "COMMITTEE" means the Committee named by the Egghead, Inc.
Compensation Committee to administer this Plan.
2.6 "COMPANY" means Egghead, Inc., a Washington corporation, and any
participating subsidiary as determined by the Board of Directors
and any successor in interest. For purposes of the Plan, a
subsidiary is a corporation, 50% or more of the voting shares of
which are owned directly or indirectly by the Company, which is
incorporated under the laws of one of the states of the United
States.
2.7 "COMPENSATION COMMITTEE" means the Compensation Committee of the
Board of Directors.
2.8 "DEFERRAL YEAR" means the calendar year.
2.9 "DEFERRED BENEFIT ACCOUNT" means the cumulative total dollar
amount that a Participant elects to defer in the Agreement,
including gains, losses and distributions as maintained on the
books of the Company for a Participant under this Plan. A
Participant's Deferred Benefit Account shall not constitute or be
treated as a trust fund of any kind.
2.10 "DETERMINATION DATE" means the date on which the amount of a
Participant's Deferred Benefit Account is determined as provided
in Article III hereof. The last day of each calendar month shall
be a Determination Date.
1
<PAGE>
2.11 "DISABILITY" shall have the same meaning as the phrase "Totally
and Permanently Disabled" under the Egghead, Inc. Long Term
Disability Plan. The determination of a Participant having
become Disabled shall be made by the Committee .
2.12 "PARTICIPANT" means an employee of the Company who is eligible to
participate in the Plan pursuant to Article III, who has executed
an Agreement with the Company, and who has commenced Salary or
Bonus, or both Salary and Bonus, reductions pursuant to such
Agreement.
2.13 "INVESTMENT INDEX OR INDICES" means each index selected by a
Participant to be used as an earnings index pursuant to Article
IV. Each Investment Index shall be a phantom investment fund,
which shall be credited with earnings (whether a gain or a loss)
according to the performance of the actual index.
2.14 "PLAN" means the Egghead, Inc. Executive Deferred Compensation
Plan as amended from time to time.
2.15 "SALARY" means the Participant's base salary which would be
received during a calendar year if no election to defer were made
under this Plan or the Nest Egg 401(k) Plan.
2.16 "TERMINATION OF SERVICE" means the Participant's cessation of
service with the Company for any reason whatsoever, whether
voluntarily or involuntarily, including by reason of retirement,
death or Disability.
III. PARTICIPATION, COMPENSATION REDUCTION AND DEFERRED BENEFIT ACCOUNTS
3.1 ELIGIBILITY AND PARTICIPATION. Participation in the Plan
shall be limited to employees of the Company who are deemed
eligible by the Committee and elect to participate in the Plan by
filing an Agreement with the Committee prior to the first day of
the deferral period in which a Participant's participation
commences in the Plan. The election to participate shall be
effective upon receipt by the Committee of the Agreement that is
properly completed and executed in conformity with the Plan. The
deferral period for salary and bonus is January 1 through
December 31 each year. However, upon adoption of this Plan the
deferral period shall commence upon adoption and end on December
31, of that year. Deferral elections shall relate to bonuses
which will accrue to participants during the deferral period,
regardless of when payment would be made.
3.2 NEW PARTICIPANTS. When an individual is hired at a position
eligible for the Plan, an Agreement may be submitted to the
Committee no later than thirty (30) days after the Committee
notifies that individual of eligibility to participate. Such
Agreement shall be effective only with regard to salary or bonus
earned following submission to the Committee. A currently
employed individual who is promoted to a position eligible for
the Plan during the year will be eligible to participate in the
immediately following deferral period.
2
<PAGE>
3.3 MINIMUM AND MAXIMUM DEFERRAL AND LENGTH OF PARTICIPATION.
A Participant may elect to defer up to 100% of Salary and up to
100% of Bonus. In the event an individual elects to defer 100%
of either Salary or Bonus all payroll related taxes will be
withheld first from non-deferred compensation to the extent
possible then from the deferred compensation. In no event may
the amount of a Participant's deferral be less than $1,000 in any
Deferral Year during which a Participant has elected to defer a
portion of Salary or Bonus, or both. A Participant shall make an
annual election for the upcoming Deferral Year in the year
preceding the Deferral Year for which the election is being made.
Except as provided in Section 3.4, "Emergency Benefit: Waiver of
Deferral," any election so made shall be irrevocable with respect
to Salary and Bonus applicable to that Deferral Year.
3.4 EMERGENCY BENEFIT: WAIVER OF DEFERRAL. In the event that
the Committee, upon written petition of the Participant or
Participant's Beneficiary, determines in its sole discretion,
that the Participant or Participant's Beneficiary has suffered an
unforeseeable financial emergency, the Company shall pay to the
Participant or Participant's Beneficiary as soon as possible
following such determination, an amount from the Participant's
Deferred Benefit Account not in excess of the amount necessary to
satisfy the emergency. For purposes of this Plan, an
"unforeseeable financial emergency" is an unanticipated emergency
that is caused by an event beyond the control of the Participant
or Beneficiary and that would result in severe financial hardship
to the individual if the emergency distribution were not
permitted. The Committee may also grant a waiver of a
Participant's agreement to defer a stated amount of Salary or
Bonus upon finding that the Participant has suffered an
unforeseeable financial emergency. Any Participant who receives
a distribution under this Section 3.4 must cease all deferrals
under this Plan effective as of the date of the emergency
distribution and may not resume or elect to make any new
deferrals under this Plan until the next Deferral Year beginning
after 12 months following receipt of the emergency distribution.
IV. DEFERRED BENEFIT ACCOUNT
4.1 TIMING OF DEFERRAL CREDITS. The amount of Salary or Bonus, or
both that a Participant elects to defer in the Agreement shall
cause an equivalent reduction in the Participant's Salary and
Bonus, respectively. Deferrals shall be credited throughout each
Deferral Year as the Participant is paid the non-deferred portion
of Salary and Bonus for such Deferral Year.
4.2 MATCHING CONTRIBUTIONS. The Participating Employer shall
provide a matching contribution for each calendar year for each
Participant who is making deferrals of Salary under this Plan, if
the amount of Salary less total annual deferrals under this Plan
("Net Salary") is less than the amount specified under Section
401(a)(17) of the Internal Revenue Code of 1986 for such calendar
year ("Compensation Limit"). The matching contribution shall be
two percent (2%) of the lesser of (i) the Participant's annual
elective Salary deferral under this Plan, or (ii) the
Compensation Limit less Net Salary. The Participant will be one
hundred percent (100%) vested in their matching contribution at
the end of two (2) years from date of hire. Notwithstanding the
Participant's Investment Indices elections, all matching
contributions shall be credited with earnings at a rate
determined by the Committee.
3
<PAGE>
4.3 INVESTMENT INDICES AND ELECTIONS. Participants, retired
Participants, and Beneficiaries may elect that their Deferred
Benefit Accounts be credited with earnings, gains and losses as
if such accounts held actual assets and such assets were among
such investment funds as the Company may designate. Any such
direction of investment shall be subject to such rules as the
Company and the Committee may prescribe, including, without
limitation, rules concerning the minimum percentage of the total
Deferred Benefit Account that may be allocated to any specific
fund choice, the manner of providing investment directions, the
frequency of changing such investment directions, and method of
crediting earnings, gains and losses for any portion of a
Deferred Benefit Account which is not covered by any valid
investment directions.
The Committee shall have the sole discretion to determine the
number of Investment Indices to be designated hereunder and may
change or eliminate the Investment Indices provided hereunder
from time to time.
4.4 REALLOCATIONS. A Participant may elect to reallocate,
effective as of the first day of the following quarter following
such election to reallocate. All or any whole percentage portion
of a Deferred Benefit Account and future deferrals may be
reallocated. Such election must be in writing and received by
the Committee two (2) weeks prior to the first day of the next
quarter. Such reallocation shall be pursuant to procedures
established by the Committee.
4.5 CREDITING OF EARNINGS. As of the close of business on each
Determination Date, the Deferred Benefit Account of each
Participant shall be valued and adjusted as if such accounts held
actual assets and such assets were among such investment funds as
the Participant, retired Participant or Beneficiary elected
pursuant to Section 4.2. As of each Determination Date the
Deferred Benefit Accounts of each Participant shall be adjusted
to reflect the change, if any, of such values including any
deferrals added to the Deferred Benefit Account or withdrawals
from such account, based upon the value of such assets on the
date of the transaction. The specific method of valuing Deferred
Benefit Accounts shall be under the sole discretion of the
Committee.
4.6 VESTING OF DEFERRED BENEFIT ACCOUNT. Each Participant shall
at all times be 100 percent (100%) vested in a Deferred Benefit
Account.
4.7 REPORTING. Participants shall be provided with Deferred
Benefit Account statements each calendar quarter. Such
statements shall be provided as soon as practicable but no later
than sixty (60) days after the end of each calendar quarter.
V. BENEFITS
5.1 IN SERVICE WITHDRAWAL. Participants may elect to withdraw
all or a portion of amounts deferred. Such election must be made
at the time the Participant executes an Agreement. The amount of
the withdrawal shall be equal to the lesser of:
(a) the amount deferred in a specific year; or
(b) the Participant's Deferred Benefit Account.
4
<PAGE>
Each such withdrawal shall be made in a lump sum as soon as
administratively feasible on or after the last business day of December,
commencing no sooner than the seventh year following the year in which
the deferral is earned, provided that the Participant continues in the
employ of the Company, its subsidiary or affiliated company until such
date. Once the Participant elects to receive a withdrawal, the election
shall be irrevocable. A withdrawal pursuant to this section shall only
be paid prior to a Participant's Termination of Service. Any return of
deferral paid shall be deemed a distribution, and shall be deducted from
the Participant's Deferred Benefit Account. A separate withdrawal
election shall be made for each Deferral Year.
5.2 ACCELERATED WITHDRAWAL.
(a) Notwithstanding any other provision of this Plan, any
Participant who has a Deferred Benefit Account hereunder
may, at any time, elect to receive an immediate lump sum
payment of all or a portion of the balance of that
Participant's Deferred Benefit Account, reduced by a penalty
equal to ten percent (10%) of the Participant's Deferred
Benefit Account as of the Determination Date. The ten
percent (10%) penalty shall be permanently forfeited and
shall not be paid to, or in respect of, the Participant or
any other Participant in the Plan.
(b) Any Participant who receives a payment under section 5.2(a),
must cease all deferrals under this Plan effective as of the
date of the lump sum payment and may not resume or elect to
make any new deferrals under this Plan until the next Plan
Year beginning after 12 months following receipt of the lump
sum payment.
5.3 TERMINATION BENEFIT. Upon a Termination of Service, a
Participant shall receive the Participant's Deferred Benefit
Account. The form of benefit payment shall be in accordance with
Section 5.6. The commencement of such payment shall be in
accordance with Section 5.7.
5.4 DEATH BENEFITS. Upon the death of a Participant or a
retired Participant, the Beneficiary of such Participant shall
receive the Participant's Deferred Benefit Account. Payment of a
Participant's Deferred Benefit Account shall be in accordance
with Sections 5.6 and 5.7.
5.5 DISABILITY. In the event of a Termination of Service due to
Disability a disabled Participant shall receive the Participant's
Deferred Benefit Account. Payment of a Participant's Deferred
Benefit Account shall be in accordance with Sections 5.6 and 5.7.
5.6 FORM OF BENEFIT PAYMENT.
(a) Subject to such rules, procedures, limits and restrictions
as the Committee may establish from time to time, a
Participant may elect that distributions of the
Participant's Deferred Benefit Account upon Termination or
Death be made (I) in a lump sum or (II) in monthly
installments over a period of 60, 120 or 180 months.
Earnings (gain or loss) on the unpaid balance shall continue
to be at the appropriate Investment Index.
(b) The Committee, in its sole discretion, may amend a
Participant's election, if so requested by a Participant.
5
<PAGE>
5.7 COMMENCEMENT OF PAYMENTS. Unless otherwise provided,
commencement of payments under this Plan shall be as soon as
administratively feasible on or after the first business day of
the month following the receipt of notice and approval by the
Committee of an event which entitles a Participant or a
Beneficiary to payments under this Plan.. Commencement of
payments shall not be later than 60 days after the event which
entitles a Participant or Beneficiary to payments under this
Plan.
5.8 TAX WITHHOLDING. The Company shall withhold from payments
made hereunder any taxes required to be withheld from a
Participant's wages under federal, state, or local law.
V1. BENEFICIARY DESIGNATION
6.1 BENEFICIARY DESIGNATION. Each Participant shall have the
right, at any time, to designate any person or persons as
Beneficiary or Beneficiaries (both primary as well as secondary)
to whom benefits under this Plan shall be paid in the event of
the Participant's death prior to complete distribution to the
Participant of the benefits due under the Plan. Each Beneficiary
designation shall be in a written form prescribed by the
Committee, and will be effective only when filed with the
Committee during the Participant's lifetime. Designation by a
married Participant of a Beneficiary other than the Participant's
spouse shall not be effective unless the spouse executes a
written consent that acknowledges the effect of the designation
and is witnessed by a notary public, or the consent cannot be
obtained because the spouse cannot be located.
6.2 AMENDMENTS; MARITAL STATUS. Any Beneficiary designation may
be changed by a Participant without the consent of any designated
Beneficiary by the filing of a new Beneficiary designation with
the Committee. The filing of a new Beneficiary designation form
will cancel all Beneficiary designations previously filed. If a
Participant's salary is community property, any Beneficiary
designation shall be valid or effective only as permitted under
applicable law.
6.3 NO BENEFICIARY DESIGNATION. In the absence of an effective
Beneficiary designation, or if all designated Beneficiaries
predecease the Participant or die prior to complete distribution
of the Participant's benefits, then the Participant's designated
Beneficiary shall be deemed to be the Participant's estate.
6.4 EFFECT OF PAYMENT. The payment to the deemed Beneficiary
shall completely discharge the Company's obligations under this
Plan.
VII. ADMINISTRATION
7.1 COMMITTEE; DUTIES. This Plan shall be administered by the
Committee which shall consist of not less than three persons
appointed by the Compensation Committee. Any member of the
Committee may be removed at any time by the Compensation
Committee. Any member may resign by delivering a written
resignation to the Compensation Committee. Upon the existence of
any vacancy, the Compensation Committee may appoint a successor.
The Committee shall have the authority to make, amend, interpret,
and enforce all appropriate rules and regulations for the
administration of this Plan and decide or resolve any and all
questions including interpretations of this Plan, as may arise in
connection with the Plan. A majority of the members of the
Committee shall constitute
6
<PAGE>
a quorum for the transaction of business. A majority vote of the
Committee members constituting a quorum shall control any
decision.
7.2 AGENTS. In the administration of this Plan, the Committee
may, from time to time, employ agents and delegate to them such
administrative duties as it sees fit, and may from time to time
consult with counsel who may be counsel to the Company.
7.3 BINDING EFFECT OF DECISIONS. Subject to Article VIII, the
decision or action of the Committee in respect to any question
arising out of or in connection with the administration,
interpretation and application of the Plan and the rules and
regulations promulgated hereunder shall be final and conclusive
and binding upon all persons having any interest in the Plan.
7.4 INDEMNITY OF COMMITTEE. To the extent permitted by applicable
law, the Company shall indemnify, hold harmless and defend the
members of the Committee against any and all claims, loss,
damage, expense or liability arising from any action or failure
to act with respect to this Plan, except with respect to acts of
gross negligence on the part of any Committee member.
VIII. CLAIMS FOR BENEFITS PROCEDURE
8.1 CLAIM FOR BENEFITS. Any claim for benefits under the Plan
shall be made in writing to any member of the Committee. If such
claim is wholly or partially denied by the Committee, the
Committee shall, within a reasonable period of time, but not
later than sixty (60) days after receipt of the claim, notify the
claimant of the denial of the claim. Such notice of denial shall
be in writing and shall contain:
(a) The specific reason or reasons for denial of the claim;
(b) A reference to the relevant Plan provisions upon which the
denial is based;
(c) A description of any additional material or information
necessary for the claimant to perfect the claim, together
with an explanation of why such material or information is
necessary; and
(d) An explanation of the Plan's claim review procedure.
If no such notice is provided, the claim shall be deemed to have
been denied.
8.2 REQUEST FOR REVIEW OF A DENIAL OF A CLAIM FOR BENEFITS.
Upon the receipt by the claimant of written notice of denial of
the claim, the claimant may file a written request to the
Committee, requesting a review of the denial of the claim, which
review shall include a hearing if deemed necessary by the
Committee. In connection with the claimant's appeal of the
denial of his claim, the claimant may review relevant documents
and may submit issues and comments in writing.
8.3 DECISION UPON REVIEW OF DENIAL OF CLAIM FOR BENEFITS. The
Committee shall render a decision on the claim review promptly,
but no more than sixty (60) days after the receipt of the
claimant's request for review, unless special circumstances (such
as the need to hold a
7
<PAGE>
hearing) require an extension of time, in which case the sixty
(60) day period shall be extended to 120 days. Such decision
shall:
(a) Include specific reasons for the decision;
(b) Be written in a manner calculated to be understood by the
claimant; and
(c) Contain specific references to the relevant Plan provisions
upon which the decision is based.
The decision of the Committee shall be final and binding in all
respects on both the Company and the claimant.
8.4 DISPUTE RESOLUTION. Notwithstanding the preceding sections,
after the Committee decides a claim, any dispute between a
Participant (or Beneficiary) and the Company as to the
interpretation or application of the provisions of a Plan and
amounts payable hereunder may, be determined by binding
arbitration in the State of Washington in accordance with the
Commercial Arbitration Rules of the American Arbitration
Association then in effect. Judgment may be entered on the
arbitrator's award in any court of competent jurisdiction. All
fees and expenses of such arbitration shall be paid by the party
bringing such arbitration.
The right to select arbitration shall be solely that of the
Participant (or Beneficiary) in his or her sole discretion.
Arbitration is not mandatory on the Participant (or Beneficiary),
and the Participant (or Beneficiary) may choose to bring an
action in an appropriate civil court. However, once arbitration
is commenced by Participant (or Beneficiary), it may not be
discontinued without mutual consent of all parties to the
arbitration.
IX. AMENDMENT AND TERMINATION
9.1 AMENDMENT. The Plan may be amended in whole or in part by
either the Board of Directors or the Compensation Committee at
any time. The Committee shall have the authority to amend the
Plan to comply with legal or legislative requirements, to effect
ease of administration and to clarify any Plan provision. Notice
of any such amendment shall be given in writing to the Committee
and to each Participant and each Beneficiary. No amendment shall
decrease the value of a Participant's Deferred Benefit Account or
deprive the Participant or Beneficiary of any rights to which the
Participant would have been entitled if the Plan had been
terminated immediately prior to the effective date of said
amendment.
9.2 COMPANY'S RIGHT TO TERMINATE. The Board of Directors may
partially or fully terminate the Plan and may terminate any
Agreements pertaining to the Participant at any time after the
Effective Date of the Plan. In the event of any such
termination, the Participant shall be entitled to the amount of
that Participant's Deferred Benefit Account as of the
Determination Date immediately following such termination.
Such benefit shall be paid to the Participant in monthly
installments over a period of no more than ten (10) years, except
that the Company, in its sole discretion, may pay out such
benefit in a lump sum or in installments over a period shorter
than ten (10) years. In the event benefits are paid out in
installments the Company shall have the sole authority to choose
the Investment Index used to value the balances in each Deferred
Benefit Account.
8
<PAGE>
X. TRUST
10.1 ESTABLISHMENT OF TRUST. Notwithstanding any other provision
or interpretation of this Plan, the Company may establish a Trust
in which to hold cash, annuities, insurance polices or other
assets to be used to make, or reimburse the Company for, payments
to the Participants or Beneficiaries of all or part of the
benefits under this Plan. Any Trust assets shall at all times
remain subject to the claims of general creditors of the Company
in the event of its insolvency as more fully described in such
Trust.
10.2 OBLIGATION OF THE COMPANY. Notwithstanding the fact that a
Trust may be established under Section 10.1, the Company shall
remain liable for paying the benefits under this Plan. However,
any payment of benefits to a Participant or Beneficiary made by
such a Trust shall satisfy the Company's obligation to make such
payment to such person.
10.3 INVESTMENTS. In the Company's sole discretion, it may acquire
insurance policies, annuities or other financial investments for
the purpose of providing future assets to meet its anticipated
liabilities under this Plan. Such policies, annuities or other
investments, shall at all times be and remain unrestricted
general property and assets of the Company or property of a trust
established pursuant to Article X hereof. Participants and
Beneficiaries shall have no rights, other than as general
creditors, with respect to such policies, annuities or other
investments.
XI. MISCELLANEOUS
11.1 UNFUNDED PLAN. This Plan is intended to be an unfunded plan
maintained primarily to provide supplemental retirement benefits
for a select group of "management or highly compensated
employees" within the meaning of Sections 201, 301 and 401 of the
Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and therefore to be exempt from the provisions of
Parts 2, 3 and 4 of Title I of ERISA. Accordingly, the Plan
shall terminate and no further benefits shall be paid hereunder
in the event it is determined by a court of competent
jurisdiction or by an opinion of counsel that the Plan
constitutes an employee pension benefit plan within the meaning
of Section 3(2) of ERISA which is not so exempt.
11.2 RIGHTS WITH RESPECT TO THE TRUST. Any trust, and any assets
held thereby to assist the Company in meeting its obligation
under the Plan, shall in no way be deemed to controvert the
provisions of Section 11.1.
11.3 NO IMPLIED RIGHTS. Neither the establishment of the Plan
nor any amendment thereof shall be construed as giving any
Participant, retired Participant, Beneficiary, or any other
person any legal or equitable right unless such right shall be
specifically provided for in the Plan or conferred by specific
action of the Company in accordance with the terms and provisions
of the Plan. Except as expressly provided in this Plan, the
Company shall not be required or be liable to make any payment
under the Plan.
11.4 UNSECURED GENERAL CREDITOR. Neither the Participant nor any
other person shall acquire by reason of the Plan any right in or
title to any assets, funds or property of the Company whatsoever
including, without limiting the generality of the foregoing, any
specific funds, assets, or other property which the Company, in
its sole discretion, may set
9
<PAGE>
aside. Any benefits which become payable hereunder shall be paid
from the general assets of the Company. With respect to amounts
credited to any Deferred Benefit Accounts hereunder and any
benefits payable hereunder, a Participant or Beneficiary shall
have the status of general unsecured creditors of the Company by
which such Participant is employed and may look only to the
Company and its general assets for payment of such benefits. The
Participant shall have only a contractual right to the amounts,
if any, payable hereunder unsecured by any asset of the Company.
Nothing contained in the Plan constitutes a guarantee by the
Company that the assets of the Company shall be sufficient to pay
any benefit to any person.
11.5 NON-ASSIGNABILITY. Neither the Participant nor any other
person shall have any voluntary or involuntary right to commute,
sell, assign, pledge, anticipate, mortgage or otherwise encumber,
transfer, hypothecate or convey in advance of actual receipt the
amounts, if any, payable hereunder, or any part thereof, which
are expressly declared to be unassignable and non-transferable.
No part of the amounts payable shall be, prior to actual payment,
subject to seizure or sequestration for the payment of any debts,
judgments, alimony or separate maintenance owed by the
Participant or any other person, or be transferable by operation
of law in the event of the Participant's or any other person's
bankruptcy or insolvency.
11.6 NOT A CONTRACT OF EMPLOYMENT. The terms and conditions of his
Plan shall not be deemed to constitute a contract of employment
between the Company and the Participant, and the Participant (or
his Beneficiary) shall have no rights against the Employer except
as may otherwise be specifically provided herein. Moreover,
nothing in this Plan shall be deemed to give a Participant the
right to be retained in the service of the Employer or to
interfere with the right of the Employer to discipline or
discharge him at any time. Nothing herein shall be construed as
fixing or regulating the Salary and Bonus payable to the
Participant.
11.7 GOVERNING LAWS. The Plan shall be construed, interpreted
and governed in all respects in accordance with applicable
federal law and, to the extent not preempted by such federal law,
in accordance with the laws of the State of Washington.
11.8 VALIDITY. If any provision of this Plan shall be held illegal
or invalid for any reason, the remaining provisions shall
nevertheless continue in full force and effect without being
impaired or invalidated in any way.
11.9 NOTICE. Any notice or filing required or permitted to be
given to the Committee under the Plan shall be sufficient if in
writing and hand-delivered, or sent by registered or certified
mail, to any member of the Committee, or to the Employer's
statutory agent. Such notice shall be deemed given as of the
date of delivery or, if delivery is made by mail, as of the date
shown on the postmark on the receipt for registration or
certification.
11.10 SUCCESSORS, MERGERS, AND CONSOLIDATIONS. The Plan and any
Agreement thereunder shall inure to the benefit of and be binding
upon (i) the Company and its successors and assigns, including
without limitation, any corporation into which the Company may be
merged or consolidated, or which acquires all or substantially
all of the assets and business of the Company and (ii) the
Participant and the Participant's heirs, executors,
administrators and legal representatives.
10
<PAGE>
11.11 PROTECTIVE PROVISIONS. A Participant will cooperate with the
Employer by furnishing any and all information requested by the
Employer, in order to facilitate the payment of benefits
hereunder, and by taking such physical examinations as the
Employer may deem necessary and taking such other action as may
be requested by the Employer.
11.12 CAPTIONS. The captions of the articles, sections, and
paragraph; of this Plan are for convenience only and shall not
control or affect the meaning or construction of any of its
provisions.
11.13 ENTIRE AGREEMENT. This Plan document represents the entire
agreement between the Company and any Participant in this Plan.
This agreement supersedes any and all prior agreements between
the Company and any Participant, whether such agreement or
agreements were written or oral. Any amendment or modification
to the terms of this Plan must be in writing and signed by an
authorized officer of the Company. No Agreement, as defined in
Section 2.1, shall in any way amend, modify, alter or revise this
Plan. In the event the terms of the Agreement conflict with the
terms of the Plan, the terms of the Plan shall be controlling.
IN WITNESS WHEREOF, the Company has adopted this EXECUTIVE DEFERRED
COMPENSATION PLAN as of July 1, 1996.
EGGHEAD, INC.
By: /s/ Kurt S. Conklin
----------------------------
Its: Senior V.P.
---------------------------
Executed: November 1
---------------------------
1996
11
<PAGE>
EGGHEAD, INC.
TRUST AGREEMENT
By and Between
EGGHEAD, INC.
And
Wells Fargo Bank, N.A.
For
EXECUTIVE DEFERRED COMPENSATION PLAN
Egghead, Inc. Company
22705 E. Mission
Liberty Lake, Washington 99019
Wells Fargo Bank, N.A. Trustee
- ------------------------------
999 Third Avenue
- ------------------------------
Seattle, WA 98111
- ------------------------------
<PAGE>
INDEX OF TERMS
TERM AND PROVISION NUMBER PAGE
- --------------------------------- ----
PREAMBLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE I-EFFECTIVE DATE; DURATION . . . . . . . . . . . . . . . . . . . . 3
1.01 Effective Date and Trust Year. . . . . . . . . . . . . . . . . . . . 3
1.02 Duration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.03 Irrevocability . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.04 Special Circumstance . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE II-TRUST FUND AND FUNDING POLICY . . . . . . . . . . . . . . . . . 6
2.01 Contributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.02 Investments and Valuation. . . . . . . . . . . . . . . . . . . . . . 9
2.03 Subtrusts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.04 Recapture of Excess Assets . . . . . . . . . . . . . . . . . . . . . 14
2.05 Substitution of Other Property . . . . . . . . . . . . . . . . . . . 14
2.06 Administrative Powers of Trustee . . . . . . . . . . . . . . . . . . 15
ARTICLE III-ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . 18
3.01 Committee; Company Representatives . . . . . . . . . . . . . . . . . 18
3.02 Payment of Benefits. . . . . . . . . . . . . . . . . . . . . . . . . 18
3.03 Disputed Claims. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.04 Records. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.05 Accountings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.06 Expenses and Fees. . . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE IV-LIABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.01 Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.02 Bonding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ARTICLE V-INSOLVENCY . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
5.01 Trustee Responsibility Regarding Payments When Company Is
Insolvent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
5.02 Insolvency Administration. . . . . . . . . . . . . . . . . . . . . . 23
5.03 Termination of Insolvency Administration . . . . . . . . . . . . . . 23
5.04 Creditors' Claims During Solvency. . . . . . . . . . . . . . . . . . 24
ARTICLE VI-SUCCESSOR TRUSTEES. . . . . . . . . . . . . . . . . . . . . . . 24
6.01 Resignation and Removal. . . . . . . . . . . . . . . . . . . . . . . 24
6.02 Appointment of Successor . . . . . . . . . . . . . . . . . . . . . . 24
6.03 Accountings; Continuity. . . . . . . . . . . . . . . . . . . . . . . 24
<PAGE>
TERM AND PROVISION NUMBER PAGE
- --------------------------------- ----
ARTICLE VII-GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . 25
7.01 Interests Not Assignable . . . . . . . . . . . . . . . . . . . . . . 25
7.02 Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
7.03 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
7.04 Agreement Binding on All Parties . . . . . . . . . . . . . . . . . . 26
7.05 Notices and Directions . . . . . . . . . . . . . . . . . . . . . . . 26
7.06 No Implied Duties. . . . . . . . . . . . . . . . . . . . . . . . . . 26
7.07 Gender, Singular and Plural. . . . . . . . . . . . . . . . . . . . . 26
7.08 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
ARTICLE VIII-INSURER . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
8.01 Insurer Not a Party. . . . . . . . . . . . . . . . . . . . . . . . . 27
8.02 Authority of Trustee . . . . . . . . . . . . . . . . . . . . . . . . 27
8.03 Contract Ownership . . . . . . . . . . . . . . . . . . . . . . . . . 27
8.04 Limitation of Liability. . . . . . . . . . . . . . . . . . . . . . . 27
8.05 Change of Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . 27
APPENDIX A
Assumptions and Methodology for Calculations Required Under 2.01 and 2.04
APPENDIX B
Arbitration of Disputes
SCHEDULE I
Plans and Agreements Covered by Trust Agreement
<PAGE>
TERM AND PROVISION NUMBER PAGE
- --------------------------------- ----
B
Board: 1.02-3, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
C
Change in Control: 1.04-3, . . . . . . . . . . . . . . . . . . . . . . . . 5
Code: Preamble,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Committee: Preamble, . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Company: Heading,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Contracts: 2.02-1, . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
D
Default: 1.04-5, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
E
ERISA: Preamble, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ERISA Funding: 1.02-4, . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Excess Assets: 2.04-2, . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Expert: 2.06-2,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
I
Insolvency Administration: 5.02, . . . . . . . . . . . . . . . . . . . . . 24
Insolvent or Insolvency: 5.01-1, . . . . . . . . . . . . . . . . . . . . . 23
Insurer: 2.02-1, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Investment Manager: 2.02-4,. . . . . . . . . . . . . . . . . . . . . . . . 11
P
Participants: Preamble,. . . . . . . . . . . . . . . . . . . . . . . . . . 2
Payment Schedule: 2.01-5,. . . . . . . . . . . . . . . . . . . . . . . . . 8
Plans: Preamble, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Potential Change in Control: 2.01-7, . . . . . . . . . . . . . . . . . . . 8
S
Segregated Fund: 2.02-4(a),. . . . . . . . . . . . . . . . . . . . . . . . 11
Special Circumstance: 1.04-2,. . . . . . . . . . . . . . . . . . . . . . . 5
Subtrust: 2.03-1,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
T
Tax Funding: 1.02-4, . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Trust: Heading,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
W
Written Consent of Participants: 1.02-5, . . . . . . . . . . . . . . . . . 4
<PAGE>
TRUST AGREEMENT FOR
EGGHEAD, INC.
This Trust Agreement is made and entered into by and between Egghead, Inc.
(the "Company") and Wells Fargo Bank, N.A.
WHEREAS, the Company wishes to establish a trust (the "Trust") and to
contribute to the Trust assets that shall be held therein, subject to the claims
of Company's creditors in the event of Company's insolvency, until paid to
Participants (as herein defined) and their beneficiaries in such manner and at
such times as specified in the Plans (as herein defined);
WHEREAS, it is the intention of the parties that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the Plans
as unfunded plans maintained for the purpose of providing deferred compensation
for a select group of management or highly compensated employees for purposes of
Title I of the Employee Retirement Income Security Act of 1974; and
WHEREAS, it is the intention of the Company to make contributions to the
Trust to provide itself with a source of funds to assist it in the meeting of
its liabilities under the Plans;
NOW, THEREFORE, the parties do hereby agree as follows:
PREAMBLE
The Company hereby establishes with the Trustee the Trust to hold all
monies and other property, together with the income thereon, as shall be paid or
transferred to it hereunder in accordance with the terms and conditions of this
Trust Agreement. The Trustee hereby accepts the Trust established under this
Trust Agreement and agrees to hold, IN TRUST, all monies and other property
transferred to and accepted by it hereunder, together with the income therefrom
and any increment thereon, for the uses and purposes and upon the terms and
conditions set forth herein, and the Trustee further agrees to discharge and
perform fully and faithfully all of the duties and obligations imposed upon it
under this Trust Agreement.
The Company has adopted the plans and/or agreements listed on Schedule I
hereto (the "Plans"), which shall initially be subject to this Trust. If only
one (1) plan or agreement is subject to this Trust at any time, references in
this Trust Agreement to the Plans shall refer to such Plan.
The Plans are administered by an administrative committee (the "Committee")
appointed by the Company. The Plan participants who are covered by this Trust
Agreement ("Participants") shall be all persons who are Plan participants prior
to a Special Circumstance, unless the Company specifically designates in
Schedule I only specified individuals or groups of Plan participants as
Participants covered by this Trust Agreement. After a person becomes a
Participant covered by this Trust Agreement, such person will continue to be a
Participant at all times thereafter (including after retirement or other
termination of service) until all Plan benefits payable to such Participant have
been paid, the Participant ceases to be entitled to any Plan benefits, or the
Participant's death, whichever occurs first.
PAGE 1 - TRUST AGREEMENT
<PAGE>
At any time prior to a Special Circumstance, the Company may, by written
notice to the Trustee which shall include a revised Schedule I to this Trust
Agreement and with the Trustee's written consent, cause additional plans and/or
agreements to become Plans subject to this Trust Agreement or cause additional
Plan participants to become Participants covered by this Trust Agreement. Upon
and after a Special Circumstance, the Company may not add any additional plans
or agreements or Plan participants to this Trust Agreement.
The Company shall provide the Trustee with certified copies of the
following items: (i) the Plan documents; (ii) all Plan amendments promptly upon
their adoption; and (iii) lists and specimen signatures of the members of the
Committee(s) which administer the Plan(s) and this Trust Agreement and any other
Company representatives authorized to take action in regard to the
administration of the Plan(s) and this Trust, including any changes in the
members of such Committee(s) and of such other representatives promptly
following any such change. The Company shall also provide the Trustee at least
annually with a list of all Participants in each Plan who are covered by this
Trust Agreement. The Trustee shall be entitled to rely upon any such lists until
notified in writing to the contrary by the Company.
The purpose of this Trust is to give Participants greater security by
placing assets in trust for use only to pay Plan benefits to Participants or, if
the Company becomes insolvent, to pay creditors. The Company shall continue to
be liable to Participants to make all payments required under the terms of the
Plans to the extent such payments are not made from this Trust. Distributions
made from this Trust to Participants or their beneficiaries shall, to the extent
of such distributions, satisfy the Company's obligations to pay benefits to
Participants and their beneficiaries under the Plans.
The Trust is intended to be a grantor trust, of which the Company is the
grantor, within the meaning of subpart E, part I, subchapter J, chapter 1,
subtitle A of the Internal Revenue Code of 1986, as amended (the "Code"), and
shall be construed accordingly. The Company hereby agrees to report all items of
income, deductions and credits of the Trust on its own income tax returns; and
the Company shall have no right to any distributions from the Trust or any claim
against the Trust for funds necessary to pay any income taxes which the Company
is required to pay on account of reporting the income of the Trust on its income
tax returns. No contribution to or income of the Trust is intended to be taxable
to Participants until benefits are distributed to them.
The principal of the Trust and any earnings thereon shall be held separate
and apart from other funds of the Company and shall be used exclusively for the
uses and purposes of Participants and general creditors as herein set forth.
Participants and their beneficiaries shall have no preferred claim on, or any
beneficial ownership interest in, any assets of the Trust. Any rights created
under the Plans and this Trust Agreement shall be mere unsecured contractual
rights of Participants and their beneficiaries against the Company. Any assets
held by the Trust will be subject to the claims of Company's general creditors
under federal and state law in the event of the Company's insolvency.
The Plans are intended to be "unfunded" and maintained "primarily for the
purpose of providing deferred compensation for a select group of management or
highly compensated employees" for purposes of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") and as such are intended not to be
covered by Parts 2 through 4 of Subtitle B of Title I of ERISA (relating to
participation and vesting, funding and fiduciary responsibility). The existence
of this Trust is not intended to alter this characterization of the Plans.
PAGE 2 - TRUST AGREEMENT
<PAGE>
ARTICLE I-EFFECTIVE DATE; DURATION
1.01 Effective Date and Trust Year
This Trust shall become effective when the Trust Agreement has been
executed by the Company and the Trustee and the Company has made a contribution
to the Trust.
For tax purposes the trust year shall be the Company's fiscal year. The
Company shall report any change in its fiscal year to the Trustee.
1.02 Duration
1.02-1 This Trust shall continue in effect until all assets of the trust
fund are exhausted through distribution of benefits to Participants, payment to
creditors in the event of insolvency, payment of fees and expenses of the
Trustee, and return of remaining funds to the Company pursuant to 1.02-2.
Notwithstanding the foregoing, if required to comply with applicable state laws
regulating the maximum length for which trusts may be established, this Trust
shall terminate six (6) months before twenty-one (21) years after the death of
the last survivor of all present or future Participants who are now living and
those persons now living who are designated as beneficiaries of any such
Participants in accordance with the terms of any of the Plans.
1.02-2 Except as otherwise provided in 1.02, the Trust shall be
irrevocable until all benefits payable under the Plans to Participants who are
covered by this Trust Agreement are paid. The Trustee, upon written direction of
the Company, shall then return to the Company any assets remaining in the Trust.
1.02-3 If the existence of this Trust or any Subtrust is held to be
ERISA Funding or Tax Funding by a federal court and appeals from that holding
are no longer timely or have been exhausted, this Trust or such Subtrust shall
terminate. The Board of Directors of the Company (the "Board") may also
terminate this Trust or any Subtrust if it determines, based on an opinion of
legal counsel which is satisfactory to the Trustee, that either (i) judicial
authority or the opinion of the U.S. Department of Labor, Treasury Department or
Internal Revenue Service (as expressed in proposed or final regulations,
advisory opinions or rulings, or similar administrative announcements) creates a
significant risk that the Trust or any Subtrust will be held to be ERISA Funding
or Tax Funding or (ii) ERISA or the Code requires the Trust or any Subtrust to
be amended in a way that creates a significant risk that the Trust or such
Subtrust will be held to be ERISA Funding or Tax Funding, and failure to so
amend the Trust or such Subtrust could subject the Company to material
penalties. Upon any such termination, the assets of each terminated Trust or
Subtrust remaining after payment of the Trustee's fees and expenses shall be
distributed, in accordance with the written directions of the Company, as
follows:
(a) Such assets shall be transferred to a new trust established by
the Company which is not deemed to be ERISA Funding or Tax Funding, but
which is similar in all other respects to this Trust, if the Company
determines that it is possible to establish such a trust.
(b) If the Company determines that it is not possible to establish
the trust in (a) above, then the assets shall be distributed to the
Company if the Written Consent of Participants, as defined in 1.02-5, in
the Trust or applicable Subtrust is obtained for such distribution.
PAGE 3 - TRUST AGREEMENT
<PAGE>
(c) If the Company determines that it is not possible to establish
the trust in (a) above and the Written Consent of Participants in the
Trust or applicable Subtrust is not obtained to distribute the assets to
the Company within a reasonable time, then the assets of the terminated
Subtrust shall be allocated in proportion to the vested accrued benefits
of Participants under the applicable Plans and shall be distributed to
such Participants in lump sums. Any assets remaining upon termination of
a Subtrust shall be distributed to other Subtrusts or the Company in
accordance with 2.04.
Notwithstanding the foregoing, the Trustee, upon the written direction of
the Committee, shall distribute Plan benefits to a Participant to the extent
that a federal court has held that the interest of the Participant in this Trust
causes such Plan benefits to be includible for federal income tax purposes in
the gross income of the Participant prior to actual payment of such Plan
benefits to the Participant and appeals from that holding are no longer timely
or have been exhausted. The Trustee may also distribute Plan benefits to a
Participant, upon written direction of the Committee, if the Trustee reasonably
believes, based on an opinion of legal counsel which is satisfactory to the
Trustee, that there is a significant risk that the Participant's interest in the
trust fund will be held to be ERISA Funding or Tax Funding with respect to such
Participant or that such Participant will be determined not to be a "management
or highly compensated employee" for purposes of ERISA. The provisions of this
paragraph shall also apply to any beneficiary of a Participant.
1.02-4 This Trust is "Tax Funding" if it causes the interest of a
Participant in this Trust to be includible for federal income tax purposes in
the gross income of the Participant prior to actual payment of Plan benefits to
the Participant.
This Trust is "ERISA Funding" if it prevents any of the Plans from
meeting the "unfunded" criterion of the exceptions to application of the
provisions of Parts 2 through 4 of Subtitle B of Title I of ERISA for plans that
are unfunded and maintained primarily for the purpose of providing deferred
compensation for a select group of management or highly compensated employees.
1.02-5 "Written Consent of Participants" means, for the purposes of this
Trust Agreement, consent in writing by Participants who (i) are a majority in
number and (ii) have more than fifty percent (50%) in value of the accrued
benefits, of the Participants in the Trust or in each affected Subtrust under
this Trust Agreement on the date of such consent. For this purpose, Participants
shall not include any beneficiaries of Participants.
1.03 Irrevocability
1.03-1 This Trust shall be irrevocable, subject to 1.02.
1.04 Special Circumstance
1.04-1 Upon the occurrence of a Special Circumstance described in
1.04-2, the Trust assets shall be held for Participants who had accrued benefits
under the Plans before the Special Circumstance occurred, including benefits
accrued for such Participants after the Special Circumstance.
1.04-2 A "Special Circumstance" shall mean a Change in Control (as
defined in 1.04-3) or a Default (as defined in 1.04-5).
1.04-3 A "Change in Control" shall be deemed to occur:
PAGE 4 - TRUST AGREEMENT
<PAGE>
(a) A "Board Change" which, for purposes of this Agreement, shall
have occurred if a majority (excluding vacant seats) of the seats on the
Company's Board are occupied by individuals who were neither (i)
nominated by a majority of the Incumbent Directors nor (ii) appointed by
directors so nominated. An "Incumbent Director" is a member of the Board
who has been either (i) nominated by a majority of the directors of the
Company then in office or (ii) appointed by directors so nominated, but
excluding, for this purpose, any such individual whose initial assumption
of office occurs as a result of either an actual or threatened election
contest (as such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Securities and Exchange Act of 1934, as amended
(the "Exchange Act") or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person (as hereinafter defined)
other than the Board; or
(b) The acquisition by an individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person"
of beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of (i) 20% or more of either (A) the then
outstanding shared of Common Stock of the Company (the "Outstanding
Company Common Stock") or (B) the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally
in the election of directors (the "Outstanding Company Voting
Securities") in case of either (A) or (B) of this clause (i), which
acquisition is not approved in advance by majority of the Incumbent
Directors, or (ii) 33% or more of either (A) the Outstanding Company
Common Stock or (B) the Outstanding Company Voting Securities, in the
case of either (A) or (B) of this clause (ii), which acquisition is
approved in advance by a majority of the Incumbent Directors; provided,
however, that the following acquisitions shall not constitute a Change of
Control: (x) any acquisition by the Company, (y) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the
Company or any corporation controlled by the Company or (z) any
acquisition by any corporation pursuant to a reorganization, merger or
consolidation, if, following such reorganization, merger or
consolidation, the conditions described in clauses (i), (ii) and (iii) of
subsection (c) of this Appendix A are satisfied; or
(c) Approval by the stockholders of the Company of a reorganization,
merger or consolidation, in each case, unless, immediately following such
reorganization, merger or consolidation, (i) more than 60% of,
respectively, the then outstanding shares of common stock of the
corporation resulting from such reorganization, merger or consolidation
and the combined voting power of the then outstanding voting securities
of such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by all or
substantially all the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and the
Outstanding Company Voting Securities immediately prior to such
reorganization, merger or consolidation in substantially the same
proportion as their ownership immediately prior to such reorganization,
merger or consolidation of the Outstanding Company Common Stock and the
Outstanding Company Voting Securities, as the case may be, (ii) no Person
(excluding the Company, any employee benefit plan (or related trust) of
the Company or such corporation resulting from such reorganization,
merger or consolidation and any Person beneficially owning, immediately
prior to such reorganization, merger or consolidation, directly or
indirectly, 33% or more of the Outstanding Company Common Stock or the
Outstanding Voting Securities, as the case may be) beneficially owns
directly or indirectly, 33% or more of, respectively, the then
outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation or the combined voting power of
the then outstanding voting securities of such corporation entitled to
vote generally in the election of directors, and (iii) at least a
majority of the members of the board of directors of the corporation
resulting from such reorganization, merger or consolidation were the
Incumbent Directors at the time of the execution of the initial agreement
providing for such reorganization merger or consolidation; or
(d) Approval by the stockholders of the Company of (i) a complete
liquidation or dissolution of the Company or (ii) the sale or other
disposition of all or substantially all the assets of the Company, other
than to a corporation with respect to which immediately following such
sale or other disposition, (A) more than 60% of, respectively, the then
outstanding shares of common stock of such corporation and the combined
voting power of the then outstanding voting securities of such
corporation entitled to vote
PAGE 5 - TRUST AGREEMENT
<PAGE>
generally in the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all the individuals and
entities who were the beneficial owners, respectively, of the Outstanding
Company Common Stock and the Outstanding Company Voting Securities
immediately prior to such sale or other disposition in substantially the
same proportion as their ownership, immediately prior to such sale or
other disposition, of the Outstanding Company Common Stock and the
Outstanding Company Voting Securities, as the case may be, (B) no Person
(excluding the Company, any employee benefit plan (or related trust) of
the Company or such corporation and any Person beneficially owning,
immediately prior to such sale or other disposition, directly or
indirectly, 33% or more of the Outstanding Company Common Stock or the
Outstanding Company Voting Securities, as the case may be) beneficially
owns, directly or indirectly, 33% or more of, respectively, the then
outstanding shares of common stock of such corporation and the combined
voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors and
(C) at least a majority of the members of the board of directors of such
corporation were approved by a majority of the Incumbent Directors at the
time of the execution of the initial agreement or action of the Board
providing for such sale or other disposition of assets of the Company.
1.04-5 A "Default" shall mean a failure by the Company to contribute,
within thirty (30) days of receipt of written notice from the Trustee, any of
the following amounts:
(a) The full amount of any insufficiency in assets of the Trust or
any Subtrust that is required to pay any Plan benefit that is payable by
the Trustee pursuant to 3.02-3 or upon final resolution of a disputed
claim pursuant to 3.03-2; or
(b) Any contribution which is then required to be made by the Company
to the Trust or any Subtrust under 2.01, 2.02-5, 2.05-3, 3.03-3, or
3.06-2.
If, after the occurrence of a Default, the Company at any time cures such
Default by contributing to the Trust all amounts which are then required under
subparagraphs (a) and (b) above, it shall then cease to be deemed that a Default
has occurred or that a Special Circumstance has occurred by reason of such
Default.
ARTICLE II-TRUST FUND AND FUNDING POLICY
2.01 Contributions
2.01-1 In its discretion, the Company may contribute to the Trust such
amounts or assets as the Committee may reasonably decide are necessary to
provide security for all Plan benefits payable to Participants covered by this
Trust.
The Company shall also contribute to the Trust such amounts as are
necessary to enable the Trustee to make all Plan benefit payments to
Participants when due, unless the Company makes such payments directly, whenever
the Trustee advises the Company that the assets of the Trust or Subtrust are
insufficient to make such payments.
2.01-2 Whenever the Company makes a contribution to the Trust, the
Company shall designate the Plan(s) and Subtrust(s) to which such contribution
(or designated portions thereof) shall be allocated. The Company may also make
contributions to a special reserve for payment of future fees and expenses of
the Trustee and future trust fees and expenses for legal and administrative
proceedings. The Company may designate a separate Subtrust to receive such
contributions, which shall be distinct from the other Subtrust(s) established
for the Plan(s).
PAGE 6 - TRUST AGREEMENT
<PAGE>
2.01-3 The Company shall, within sixty (60) days after the occurrence of
a Special Circumstance (as defined in 1.04-2) or a Potential Change in Control
(as defined in 2.01-7), and not later than sixty (60) days after the end of each
calendar year following a Special Circumstance, contribute to the Trust the
amount by which the sum of the following amounts exceeds the value of all Trust
assets as of the applicable date:
(a) The present value of all benefits (vested and unvested) payable
under the Plans on a pretax basis to Participants covered by this Trust.
Each Participant's benefit under any Plan for purposes of calculating
present value shall be the highest benefit the Participant would have
accrued under the Plan within the twenty-four (24) months following such
event, assuming that the Participant's service continues for twenty-four
(24) months at the same rate of compensation, that the Participant
continues to make future deferrals under deferred compensation plans in
accordance with his prior elections, and that the Participant is
terminated at a time when the Participant is entitled to receive any
benefit enhancement provided by the Plans upon a Change in Control.
(b) The present value of future interest due on any outstanding
policy loans on insurance contracts held in the Trust, assuming interest
continues to be payable at the then current policy loan rate for
twenty-five (25) more years or until the insured attains age eighty (80),
whichever is sooner.
(c) The present value of a reasonable estimate provided by the
Trustee of its fees and expenses due over the remaining duration of the
Trust. Unless the Trustee estimates a greater amount, such amount shall
be presumed to be equal to .05 of one percent of the present value of
all accrued benefits (vested and unvested) payable under the Plans on a
pretax basis to Participants covered by this Trust.
(d) The present value of a reasonable estimate provided by the
Trustee of the anticipated fees and expenses for the purpose of
commencing or defending lawsuits or legal or administrative proceedings
over the remaining duration of the Trust. Unless the Trustee estimates a
greater amount, such amount shall be presumed to be equal to five
percent (5%) of the present value of all accrued benefits (vested and
unvested) payable under the Plans on a pretax basis to Participants
covered by this Trust. Notwithstanding the foregoing, in no event shall
the Trustee have any duty or responsibility to commence, defend or
otherwise maintain any such lawsuit or proceeding, unless there shall be
funds in the Trust sufficient to cover the fees and expenses related
thereto.
2.01-4 The calculations required under 2.01-3 shall be made by the
Company, or a qualified actuary or consultant selected by the Committee, based
on the terms of the Plans and the actuarial assumptions and methodology set
forth in Appendix A attached hereto. Before a Special Circumstance, Appendix A
may be revised by the Committee from time to time. After a Special Circumstance,
Appendix A may be revised only with the Written Consent of Participants.
2.01-5 Whenever the Company makes a contribution to the Trust pursuant
to 2.01-3, it shall furnish the Trustee with a written statement setting forth
the computation of all required amounts contributed under subparagraphs (a),
(b), (c) and (d) of 2.01-3. The Trustee shall have no duty or responsibility to
review or otherwise question any such computation.
PAGE 7 - TRUST AGREEMENT
<PAGE>
Whenever a Special Circumstance occurs or the Company makes a
contribution pursuant to 2.01-3, the Company shall deliver to the Trustee,
contemporaneously with or immediately prior to such event, a schedule (the
"Payment Schedule") indicating the amounts payable under each Plan in respect of
each Participant, or providing a formula or instructions acceptable to the
Trustee for determining the amounts so payable, the form in which such amounts
are to be paid (as provided for or available under the Plans) and the time of
commencement for payment of such amounts. The Payment Schedule shall include any
other necessary instructions with respect to Plan benefits (including legal
expenses) payable under the Plans and any conditions with respect to any
Participant's entitlement to, and the Company's obligation to provide, such
benefits, and such instructions may be revised from time to time to the extent
so provided under the Plans or this Trust Agreement.
A modified Payment Schedule shall be delivered by the Company to the
Trustee (i) at each time that additional amounts are required to be paid by the
Company to the Trustee pursuant to 2.01-3, (ii) whenever Excess Assets are
returned to the Company pursuant to 2.04, and (iii) upon the occurrence of any
event requiring a modification of the Payment Schedule. The Company shall also
furnish a Payment Schedule or modified Payment Schedule for any or all Plan(s)
upon request by the Trustee at any other time. Whenever the Company is required
to deliver to the Trustee a Payment Schedule or a modified Payment Schedule, the
Company shall also deliver at the same time to each Participant the respective
portion of the Payment Schedule or modified Payment Schedule that sets forth the
amount payable to that Participant.
2.01-6 Any contribution to the Trust which is made by the Company under
2.01-3 on account of a Potential Change in Control shall be returned to the
Company, if a Change in Control does not occur, when a Potential Change in
Control no longer exists, if the Company requests such return within one (1)
year after the Potential Change in Control ceases to exist.
If no such request is made within this one (1) year period, the
contribution shall become a permanent part of the trust fund.
2.01-7 A "Potential Change in Control" shall be deemed to occur if:
(a) Any person, as defined in Section 13(d)(3) of the Act, other than
a trustee or other fiduciary holding securities under an employee benefit
plan of the Company , delivers to the Company a statement containing the
information required by Schedule 13-D under the Act, or any amendment to
any such statement, that shows that such person has acquired, directly or
indirectly, the beneficial ownership of (i) more than fifteen percent
(15%) of any class of equity security of the Company entitled to vote as
single class in the election or removal from office of directors, or (ii)
more than fifteen percent (15%) of the voting power of any group of
classes of equity securities of the Company entitled to vote as a single
class in the election or removal from office of directors;
(b) The Company becomes aware that preliminary or definitive copies
of a proxy statement and information statement or other information have
been filed with the Securities and Exchange Commission pursuant to Rule
14a-6, Rule 14c-5, or Rule 14f-1 under the Act relating to a Potential
Change in Control of the Company (Parent Company);
(c) Any person delivers to the Company pursuant to Rule 14d-3 under
the Act a Tender Offer Statement relating to Voting Securities of the
Company;
PAGE 8 - TRUST AGREEMENT
<PAGE>
(d) Any person (other than the Company) publicly announces an
intention to take actions which if consummated could constitute a Change
in Control;
(e) The Company enters into an agreement or arrangement, the
consummation of which could result in the occurrence of a Change in
Control;
(f) The Board approves a proposal, which if consummated could
constitute a Change in Control; or
(g) The Board adopts a resolution to the effect that, for purposes of
this Trust Agreement, a Potential Change in Control has occurred.
Notwithstanding the foregoing, a Potential Change in Control shall not be
deemed to occur as a result of any event described in (a) through (f) above, if
Directors, who were a majority of the members of the Board prior to such event
determine that the event shall not constitute a Potential Change in Control and
furnish written notice to the Trustee of such determination.
2.01-8 For purposes of this Trust, a Potential Change in Control shall
be deemed to have occurred only upon receipt by the Trustee of written notice to
that effect from the Company.
The Chief Executive Officer of the Company or the Board shall furnish
written notice to the Trustee when a Potential Change in Control occurs under
2.01-7. Upon receipt of a written demand from a Participant, the Trustee shall
request the Chief Executive Officer of the Company and the Board to advise it
whether a Potential Change in Control (as defined in the Trust Agreement) has
occurred.
2.01-9 The Trustee shall accept the contributions made by the Company
and hold them as a trust fund for the payment of benefits under the Plans. The
Trustee shall not be responsible for determining the required amount of
contributions or for collecting any contribution not voluntarily paid, nor shall
the Trustee be responsible for the adequacy of the trust fund to meet and
discharge all liabilities under the Plans. Contributions may be in cash or in
other assets specified in 2.02.
2.02 Investments and Valuation
2.02-1 The trust fund shall be invested primarily in insurance
(including annuity) contracts ("Contracts"). Such Contracts may be purchased by
the Company and transferred to the Trustee as in-kind contributions or may be
purchased by the Trustee with the proceeds of cash contributions (or may be
purchased upon direction by the Committee pursuant to 2.02-2 or an Investment
Manager pursuant to 2.02-4). The Trustee shall have the power to exercise all
rights, privileges, options and elections granted by or permitted under any
Contract or under the rules of the insurance company issuing the Contract
("Insurer"), including the right to obtain policy loans against the cash value
of the Contract. Prior to a Special Circumstance, the exercise by the Trustee of
any incidents of ownership under any Contract shall be subject to the direction
of the Committee.
Prior to a Special Circumstance, the Trustee shall execute the
application for any insurance contract to be applied for in such form as the as
directed Company shall deem appropriate. Following a Special Circumstance,
insurance contracts shall be obtained in the discretion of the Trustee. The
Trustee shall be the absolute owner of all Contracts which shall be held as part
of the Trust corpus. The Trustee, upon direction of the Committee, shall pay
from the Trust corpus premiums, assessments, dues, charges and interest to
acquire or maintain any Contracts held in the Trust; provided that following a
Special Circumstance, such payments shall be made or continue to be made in the
discretion
PAGE 9 - TRUST AGREEMENT
<PAGE>
of the Trustee. For such purposes the Trustee may use any money held by the
Trustee as part of the Trust corpus. If, prior to a Special Circumstance, the
cash available in the Trust is not sufficient to pay all of the sums due with
respect to such Contracts, the Trustee shall immediately notify the Company of
the amount of the deficiency; and the Trustee shall be under no duty or
obligation to make any such payments unless and until the Trustee shall be in
receipt of a Company contribution which is sufficient to make such payments.
As directed by the Committee prior to a Special Circumstance, but
otherwise in its discretion, the Trustee shall, without the consent of any other
person, collect and receive all dividends or other payments of any kind payable
with respect to, under, or arising out of any insurance contracts held in the
Trust or shall leave the same with the Insurer. As directed by the Committee
prior to a Special Circumstance, but otherwise in its discretion, the Trustee
shall have the power to convert from one (1) form of Contract to any other form
of Contract; to designate any mode of settlement of the proceeds of any Contract
held in the Trust; to borrow sums of money from the Insurer upon any Contract or
Contracts issued by it and held in the Trust; to agree with the Insurer issuing
any Contract to any release, reduction, modification or amendment thereof; and,
without limitation of any of the foregoing, to exercise any and all of the
rights, options or privileges that belong to the absolute owner of any Contracts
held in the Trust or that are granted by the terms of any such Contracts or of
this Trust Agreement.
The Committee may from time to time direct the Trustee in writing as to
the designation of beneficiary of Participant under a contract for any part of
the death benefits payable to such beneficiary there under and the Trustee shall
file such designation with the Insurer.
Notwithstanding anything contained herein to the contrary, the Trustee
shall not be liable for the refusal of any Insurer to issue or change any
Contract or Contracts or to take any other action requested by the Trustee; nor
for the form, genuineness, validity, sufficiency or effect of any Contract or
Contracts held in the Trust; nor for the act of any person or persons that may
render any such Contract or Contracts null and void; nor for failure of any
Insurer to pay the proceeds of any such Contract or Contracts as and when the
same shall become due and payable; nor for any delay in payment resulting from
any provision contained in any such Contract or Contracts; nor for the fact that
for any reason whatsoever (other than its own negligence or willful misconduct)
any Contracts shall lapse or otherwise become uncollectible.
2.02-2 Prior to a Special Circumstance, the Trustee shall invest the
trust fund in accordance with written directions by the Committee, including
directions for exercising rights, privileges, options and elections pertaining
to Contracts and for borrowing from Contracts or other borrowing by the Trustee.
The Trustee shall act only as an administrative agent in carrying out directed
investment transactions and shall not be responsible for the investment
decision. If a directed investment transaction violates any duty to diversify,
to maintain liquidity or to meet any other investment standard under this Trust
Agreement or applicable law, the entire responsibility shall rest upon the
Company. The Trustee shall be fully protected in acting upon or complying with
any investment objectives, guidelines, restrictions or directions provided in
accordance with this paragraph.
After a Special Circumstance, the Committee shall no longer be entitled
to direct the Trustee with respect to the investment of the trust fund, unless
the Written Consent of Participants is obtained for the Committee to continue to
have this right pursuant to 2.02-2. If such Written Consent of Participants is
not obtained, the trust fund shall be invested by the Trustee pursuant to 2.02-3
or by an Investment Manager pursuant to 2.02-4. The Trustee or Investment
Manager shall have the right to invest the Trust Fund primarily in insurance
contracts pursuant to 2.02-1.
PAGE 10 - TRUST AGREEMENT
<PAGE>
The Trustee may not invest in securities (including stock or rights to
acquire stock) or obligations issued by the Company or its affiliates or in
other real or personal property of the Company or its affiliates, without the
Written Consent of Participants. No rights associated with assets of the Trust
shall be exercisable by or rest with Participants.
The Committee may not direct the Trustee to make any investments, and the
Company may not make any contributions to the trust fund, which are not
permissible investments under 2.02-2 and 2.02-3.
2.02-3 After a Special Circumstance, the Trustee shall invest and
reinvest the assets of the trust fund as the Trustee, in its sole discretion,
may deem appropriate, in accordance with applicable law, except as provided in
2.02-2 or 2.02-4.
Permissible investments shall be limited to the following:
(a) Insurance or annuity contracts, including variable insurance or
annuity contracts;
(b) Preferred or common stocks, bonds, notes, debentures, commercial
paper, certificates of deposit, money market funds, obligations of
governmental bodies, or other securities;
(c) Interest-bearing savings or deposit accounts with any
federally-insured bank or savings and loan association (including the
Trustee or an affiliate of the Trustee); [or]
(d) Shares or certificates of participation issued by investment
companies, investment trusts, mutual funds, or common or pooled
investment funds (including any common or pooled investment fund now or
hereafter maintained by the Trustee or an affiliate of the Trustee).
Investments in securities, obligations or real personal property of the
Company or its affiliates shall be subject to the limitations under 2.02-2.
2.02-4 Before or after a Special Circumstance, the Company may appoint
one (1) or more investment managers ("Investment Manager") subject to the
following provisions:
(a) The Company may appoint one (1) or more Investment Managers to
manage (including the power to acquire and dispose of) a specified
portion of the assets of the Trust (hereinafter referred to as that
Investment Manager's "Segregated Fund"). Any Investment Manager so
appointed must be either (A) an investment adviser registered as such
under the Investment Advisers Act of 1940, (B) a bank, as defined in that
Act, or (C) an insurance company qualified to perform services in the
management, acquisition or disposition of the assets of trusts under the
laws of more than one (1) state; and any Investment Manager so appointed
must acknowledge in writing to the Company and to the Trustee that it is
a fiduciary with respect to the Plans. The Trustee, until notified in
writing to the contrary, shall be fully protected in relying upon any
written notice of the appointment of an Investment Manager furnished to
it by the Company. In the event of any vacancy in the office of
Investment Manager, the Trustee shall be deemed to be the Investment
Manager of that Investment Manager's Segregated Fund until an Investment
Manager thereof shall have been duly appointed; and in such event, until
an Investment Manager shall have been so appointed and qualified,
references
PAGE 11 - TRUST AGREEMENT
<PAGE>
herein to the Trustee's acting in respect of that Segregated Fund
pursuant to direction from the Investment Manager shall be deemed to
authorize the Trustee to act in its own discretion in managing and
controlling the assets of that Segregated Fund, and subparagraphs (c) and
(d) below shall have no effect with respect thereto and shall be
disregarded.
(b) Each Investment Manager appointed pursuant to subparagraph (a)
above shall have exclusive authority and discretion to manage and control
the assets of its Segregated Fund and may invest and reinvest the assets
of the Segregated Fund in any investments in which the Trustee is
authorized to invest under 2.02-3, subject to the terms and limitations
of any written instruments pertaining to its appointment as Investment
Manager. Copies of any such written instruments shall be furnished to the
Trustee. In addition, each Investment Manager from time to time and at
any time may direct the Trustee to invest and reinvest otherwise
uninvested cash held in its Segregated Fund temporarily in bonds, notes
or other evidences of indebtedness issued or fully guaranteed by the
United States of America or any agency or instrumentality thereof, or in
other obligations of a short-term nature, including prime commercial
obligations or part interests therein.
(c) Unless the Trustee knowingly participates in, or knowingly
undertakes to conceal, an act or omission of an Investment Manager,
knowing such act or omission to be a breach of the fiduciary
responsibility of the Investment Manager with respect to the Plans, the
Trustee shall not be liable for any act or omission of any Investment
Manager and shall not be under any obligation to invest or otherwise
manage the assets of the Plans that are subject to the management of any
Investment Manager. Without limiting the generality of the foregoing, the
Trustee shall not be liable by reason of its taking or refraining from
taking at the direction, or in the absence of a direction, of an
Investment Manager any action in respect of that Investment Manager's
Segregated Fund. The Trustee shall be under no duty to question or to
make inquiries as to any direction or order or failure to give direction
or order by any Investment Manager; and the Trustee shall be under no
duty to make any review of investments acquired for the Trust at the
direction or order of any Investment Manager and shall be under no duty
at any time to make any recommendation with respect to disposing of or
continuing to retain any such investment.
2.02-5 The values of all assets in the trust fund shall be reasonably
determined by the Trustee and may be based on the determination of qualified
independent parties or Experts (as described in 2.06-2). At any time before or
after a Special Circumstance, the Trustee shall have the right to secure
confirmation of value by a qualified independent party or Expert for all
property of the trust fund, as well as any property to be substituted for other
property of the trust fund pursuant to 2.05. Before a Special Circumstance the
Company may designate one (1) or more independent parties, who are acceptable to
the Trustee, to determine the fair market value of any notes, securities, real
property or other assets.
Any insurance or annuity contracts held in the trust fund shall be valued
at their cash surrender value, except for purposes of substituting other
property for such Contracts pursuant to 2.05-2. All other assets of the trust
fund shall be valued at their fair market value.
The Company shall pay all costs incurred in valuing the assets of the
trust fund, including any assets to be substituted for other assets of the trust
fund pursuant to 2.05. If not so paid, these costs shall be paid from the trust
fund. The Company shall fully reimburse the trust fund within thirty (30) days
after receipt of a trust statement from the Trustee indicating such costs paid
out of the trust fund.
PAGE 12 - TRUST AGREEMENT
<PAGE>
2.02-6 In order to permit the Committee or an Investment Manager, as the
case may be, to make timely and informed decisions regarding the management of
those assets of the Trust subject to its respective control, the Trustee shall
forward to the Committee or Investment Manager, as the case may be, for
appropriate action any and all proxies, proxy statements, notices, requests or
other communications received by the Trustee (or its nominee) as the record
owner of such assets.
2.03 Subtrusts
2.03-1 The Company shall direct the Trustee to establish (i) a
separate subtrust ("Subtrust") for each Plan to which the Trustee shall
credit contributions it receives which are earmarked for that Plan and
Subtrust and (ii) a separate Subtrust to which the Trustee shall credit
contributions it receives which are earmarked to the special reserve for
payment of future fees and expenses of the Trustee and future Trust fees and
expenses for legal and administrative proceedings. Each Subtrust shall
reflect an undivided interest in assets of the trust fund and shall not
require any segregation of particular assets. When Subtrusts are established,
all contributions shall be designated by the Company for a particular
Subtrust. However, any contribution received by the Trustee which is not
designated by the Company for a particular Subtrust before a Special
Circumstance shall be allocated among the Subtrusts as the Trustee may
determine in its sole discretion.
After a Special Circumstance, the Trustee shall maintain a separate
sub-account within each Subtrust for a Plan for each Participant who is covered
by the Subtrust. Each sub-account in a Subtrust shall reflect an individual
interest in assets of the Subtrust and, as much as possible, shall operate in
the same manner as if it were a separate Subtrust.
2.03-2 The Trustee shall allocate investment earnings and losses and
expenses of the trust fund as of a valuation date among the Subtrusts equal to
the actual earnings and losses of each subtrust's assets. Payments to creditors
during Insolvency Administration under 5.02 shall be charged against the
Subtrusts in proportion to their balances, except that payment of Plan benefits
to a Participant as a general creditor shall be charged against the Subtrust for
that Plan.
2.03-3 Assets allocated to a Subtrust for one (1) Plan may not be
utilized to provide benefits under any other Plans until all benefits under such
Plan have been paid in full, except that Excess Assets of a Subtrust may be
transferred to other Subtrusts pursuant to 2.04-5.
2.04 Recapture of Excess Assets
2.04-1 In the event the Trust shall hold Excess Assets, the Committee,
at its option, may direct the Trustee to return part or all of such Excess
Assets to the Company.
2.04-2 "Excess Assets" are assets of the Trust exceeding one hundred
percent (100%) of the amounts described in subparagraphs (a), (b), (c) and (d)
of 2.01-3.
2.04-3 The calculation required by 2.04-2 shall be based on the terms of
the Plans and the actuarial assumptions and methodology set forth in Appendix A.
Before a Special Circumstance, the calculation shall be made by the Company or a
qualified actuary or consultant selected by the Committee. After a Special
Circumstance, the calculation shall be made by a qualified actuary or consultant
selected by the Trustee, provided the Committee may select a qualified actuary
or consultant with the Written Consent of Participants.
PAGE 13 - TRUST AGREEMENT
<PAGE>
2.04-4 Excess Assets shall be returned to the Company in the following
order of priority, unless the Trustee determines otherwise to protect the
Participants:
(a) Cash and cash equivalents;
(b) All taxable investments of the Trust (other than cash and cash
equivalents and Contracts with Insurers), in such order as the Committee
may request;
(c) All nontaxable investments of the Trust (other than cash and cash
equivalents and Contracts with Insurers), in such order as the Committee
may request; and
(d) Contracts with Insurers, proceeding in order of Contracts on
insureds from the youngest to the oldest ages based on the insured's
attained age on the date of return of Excess Assets.
Notwithstanding the foregoing, Excess Assets may be returned in any other
order of priority directed by the Committee with the Written Consent of
Participants.
2.04-5 If any Subtrust holds Excess Assets, the Committee may direct the
Trustee to transfer such Excess Assets to other Subtrusts, either ratably in
proportion to the unfunded liabilities to Participants for Plan benefits of all
other Subtrusts or first to the other Subtrust(s) with the largest percentage of
such unfunded liabilities. After a Special Circumstance the Trustee may also
transfer Excess Assets of a Subtrust to other Subtrusts upon its own initiative
in such amounts as it may determine in its sole discretion.
Excess Assets of a Subtrust for a Plan shall be determined in the same
manner as Excess Assets of the Trust are determined pursuant to 2.04-2 and
2.04-3. In making this determination each Subtrust for a Plan shall bear its
allocable share of the amounts described in subparagraphs (a) and (b) of 2.01-3
which relate to that Plan.
2.05 Substitution of Other Property
2.05-1 The Company shall have the power to reacquire part or all of the
assets or collateral held in the trust fund at any time, by simultaneously
substituting for it other readily marketable property of equivalent value, net
of any estimated costs of disposition; provided that, if the Trust holds Excess
Assets, the property which is substituted shall not be required to be of
equivalent value, but only of sufficient value so that the Trust will retain
Excess Assets of not less than one thousand dollars ($1,000) after such
substitution. The property which is substituted must be among the types of
investments authorized under 2.02 and may not be less liquid or marketable or
less well secured than the property for which it is substituted, as determined
by the Trustee. Such power is exercisable by the Company in a nonfiduciary
capacity and may be exercised without the approval or consent of Participants or
any other person, subject to the limitations under 2.05.
2.05-2 Except for insurance contracts, the value of any assets
reacquired under 2.05-1 shall be determined as provided in 2.02-5. The value of
any insurance contract reacquired under 2.05-1 shall be the present value of
future projected cash flow or benefits payable under the Contract, but not less
than the cash surrender value. The projection shall include death benefits based
on reasonable mortality assumptions, including known facts specifically relating
to the health of the insured and the terms of the Contract to be reacquired.
Values shall be reasonably determined by the Trustee and may be based on the
determination of qualified independent parties and Experts, as described in
2.02-5 and 2.06-2.
PAGE 14 - TRUST AGREEMENT
<PAGE>
The Trustee shall have the right, but shall be under no duty or obligation, to
secure confirmation of value by a qualified independent party or Expert for all
property to be substituted for other property.
2.05-3 The Company shall pay all costs incurred in valuing the assets of
the trust fund, including any assets to be substituted for other assets of the
trust fund pursuant to 2.05. If not so paid, these costs shall be paid from the
trust fund. The Company shall reimburse the trust fund within thirty (30) days
after receipt of a bill from the Trustee for any such costs paid out of the
trust fund.
2.06 Administrative Powers of Trustee
2.06-1 Subject in all respects to direction by the Committee or
Investment Manager, as applicable, and to the applicable provisions of this
Trust Agreement, including limitations on investment of the trust fund, the
Trustee shall have the rights, powers and privileges of an absolute owner when
dealing with property of the Trust, including (without limiting the generality
of the foregoing) the powers listed below:
(a) To sell, convey, transfer, exchange, convert, partition, lease,
and otherwise dispose of any of the assets of the Trust at any time held
by the Trustee under this Trust Agreement and generally to make, execute,
acknowledge and deliver any and all assignments and other instruments
whenever such actions may be required to perform its obligation
hereunder;
(b) To exercise any option, conversion privilege, subscription right,
or other privilege given the Trustee as the owner of any security held in
the Trust; to vote any corporate stock either in person or by proxy, with
or without power of substitution; to consent to or oppose any
reorganization, consolidation, merger, readjustment of financial
structure, sale, lease or other disposition of the assets of any
corporation or other organization, the securities of which may be an
asset of the Trust; and to take any action in connection therewith and
receive and retain any securities resulting therefrom;
(c) To deposit any security with any voting trust or protective or
reorganization committee (and to delegate to such committee such power
and authority with respect thereto as the Trustee may deem proper), or
with depositories designated thereby, and to agree to pay out of the
Trust such portion of the expenses and compensation of such voting trust
or committee as the Trustee, in its discretion, shall deem appropriate;
(d) To cause any property of the Trust to be issued, held or
registered in the name of the Trustee as trustee, or in the name of one
(1) or more of its nominees, or one (1) or more nominees of any system
for the central handling of securities, or in such form that title will
pass by delivery, provided that the records of the Trustee shall in all
events indicate the true ownership of such property, or to deposit any
securities held in the Trust with a securities depository;
(e) To renew or extend the time of payment of any obligation due or
to become due;
(f) To commence or defend lawsuits or legal or administrative
proceedings; to compromise, arbitrate or settle claims, debts or damages
in favor of or against the Trust; to deliver or accept, in either total
or partial satisfaction of any indebtedness or other obligation, any
property; to continue to hold for such period of time as the Trustee may
deem appropriate
PAGE 15 - TRUST AGREEMENT
<PAGE>
any property so received; and to pay all costs and reasonable attorneys'
fees in connection therewith out of the assets of the Trust; provided,
however, that the Trustee shall be obligated to take any such action only
to the extent the assets of the Trust are sufficient to fund such action;
(g) To foreclose any obligation by judicial proceeding or otherwise;
(h) Subject to 2.02, to borrow money from any person in such amounts,
upon such terms and for such purposes as the Trustee may be directed by
the Committee prior to a Special Circumstance or as the Trustee, in its
discretion, may deem appropriate; and in connection therewith, to execute
promissory notes, mortgages or other obligations and to pledge or
mortgage any trust assets as security; and to lend money on a secured or
unsecured basis to any person other than a party in interest;
(i) To manage any real property in the Trust in the same manner as if
the Trustee were the absolute owner thereof, including the power to lease
the same for such term or terms within or beyond the existence of the
Trust and upon such conditions as the Trustee may be directed by the
Committee or may deem proper; and to grant options to purchase or acquire
options to purchase any real property;
(j) To appoint one (1) or more persons or entities as custodian or
ancillary trustee or sub-trustee for the purpose of investing in and
holding title to real or personal property or any interest therein
located outside the State of Washington; provided that any such
custodian, ancillary trustee or sub-trustee shall act with such power,
authority, discretion, duties, and functions of the Trustee as shall be
specified in the instrument establishing such custodianship, ancillary
trust or sub-trust, including (without limitation) the power to receive,
hold and manage property, real or personal, or undivided interests
therein; and the Trustee may pay the reasonable expenses and compensation
of such custodians, ancillary trustees or sub-trustees out of the Trust;
(k) To hold such part of the assets of the Trust uninvested for such
limited periods of time as may be necessary for purposes of orderly trust
administration or pending required directions, or to create reserves for
the payment of expenses or for distributions pursuant to the Plans
without liability for payment of interest;
(l) To determine how all receipts and disbursements shall be
credited, charged or apportioned as between income and principal, and the
decision of the Trustee shall be final and not subject to question by any
Participant or beneficiary of the Trust;
(m) To pay the expenses and taxes of the Trust out of the assets held
hereunder, including, without limitation, reasonable expenses and
compensation for its services as Trustee;
(n) To deposit any securities with stock clearing corporations or
similar organizations, whether located within the State of Washington or
in another state of the United States of America or elsewhere;
(o)To employ suitable agents, consultants, custodians, and legal
counsel, and, as part of its reasonable expenses under this Trust
Agreement, to pay their reasonable expenses and compensation;
PAGE 16 - TRUST AGREEMENT
<PAGE>
(p) To make, execute, acknowledge, and deliver any and all documents
of transfer and conveyance and any and all other instruments that may be
necessary or appropriate to carry out the powers granted herein;
(q) Generally to do all acts, whether or not expressly authorized,
which the Trustee may deem necessary or desirable for the orderly
administration or protection of the trust fund.
Notwithstanding any powers granted to the Trustee pursuant to this Trust
Agreement or applicable law, the Trustee shall not have any power that could
give this Trust the objective of carrying on a business and dividing the gains
therefrom, within the meaning of Section 301.7701-2 of the Procedure and
Administrative Regulations promulgated pursuant to the Internal Revenue Code.
2.06-2 The Trustee may engage one (1) or more qualified independent
attorneys, accountants, actuaries, appraisers, arbitrators, consultants or other
experts (an "Expert") for any purpose, including the determination of Excess
Assets pursuant to 2.04 or disputed claims pursuant to 3.03. For purposes of
valuing any insurance contract, the issuer of any such Contract shall be deemed
to be an Expert. The determination of an Expert shall be final and binding on
the Company, the Trustee, and all of the Participants unless, within sixty (60)
days after receiving a determination deemed by any Participant to be adverse,
any Participant disputes the determination using the procedure for disputed
claims pursuant to 3.03. The Trustee shall have no duty to oversee,
independently evaluate or otherwise question the determination of the Expert and
shall be fully protected in relying upon, and acting in accordance with, any
advice or determination of any such Expert. The Trustee shall be authorized to
pay the fees and expenses of any Expert out of the assets of the trust fund.
2.06-3 The Company shall from time to time pay taxes (references in this
Trust Agreement to the payment of taxes shall include interest and applicable
penalties) of any and all kinds whatsoever which at any time are lawfully levied
or assessed upon or become payable in respect of the trust fund, the income or
any property forming a part thereof, or any security transaction pertaining
thereto. To the extent that any taxes levied or assessed upon the trust fund are
not paid by the Company or contested by the Company pursuant to the last
sentence of this paragraph, the Trustee shall pay such taxes out of the trust
fund, and the Company shall deposit into the trust fund an amount equal to the
amount paid from the trust fund to satisfy such tax liability, upon notice by
the Trustee that any such amount has been paid by the Trustee. If requested by
the Company, the Trustee may, at the Company's expense, contest the validity of
such taxes in any manner deemed appropriate by the Company or its counsel, but
only if it has received an indemnity bond or other security satisfactory to it
to pay any expenses or any liability it may incur in connection with such
contest. Alternatively, the Company may itself contest the validity of any such
taxes, but any such contest shall not affect the Company's obligation to
reimburse the trust fund for taxes paid from the trust fund.
2.06-4 Notwithstanding any provisions in the Plans or this Trust
Agreement to the contrary, the Company and Trustee may withhold any benefits
payable to a beneficiary as a result of the death of the Participant or any
other beneficiary until such time as (a) the Company is able to determine
whether a generation-skipping transfer tax, as defined in Chapter 13 of the
Code, or any substitute provision therefor, is or may become payable by the
Company or Trustee as a result of benefit payments to the beneficiary; and (b)
the Company has determined the amount of generation-skipping transfer tax that
is or may become due, including interest thereon. If any such tax is or may
become payable, the Company shall reduce the benefits otherwise payable
hereunder to such beneficiary by such amounts as the Company feels are
reasonably necessary to pay any generation-skipping transfer tax and interest
thereon which is or may become due.
PAGE 17 - TRUST AGREEMENT
<PAGE>
Any excess amounts so withheld from a beneficiary, which are not used to
pay generation-skipping transfer tax and interest thereon, shall be payable to
the beneficiary as soon as there is a final determination of the applicable
generation-skipping transfer tax and interest thereon. Whenever any amounts
which were withheld are paid to any beneficiary, interest shall be payable by
the Company or Trustee to such beneficiary for the period of time between the
date when such amounts would otherwise have been paid to the beneficiary and the
date when such amounts are actually paid to the beneficiary after the
aforementioned generation-skipping transfer tax determinations are made and the
amount of benefits payable to the beneficiary is finally determined. Interest
shall be payable at the same rate as provided under 5.03-2.
ARTICLE III-ADMINISTRATION
3.01 Committee; Company Representatives
3.01-1 The Committee is the plan administrator for the Plans and has
general responsibility to interpret the Plans and determine the rights of
Participants and beneficiaries.
3.01-2 The Trustee shall be given the names and specimen signatures of
the members of the Committee and any other Company representatives authorized to
take action in regard to the administration of the Plans and this Trust. The
Trustee shall accept and rely upon the names and signatures until notified of
any change. Instructions to the Trustee shall be signed for the Committee by its
Chair or such other person as the Committee may designate and for the Company by
any officer or such other representative as the Company may designate.
3.02 Payment of Benefits
3.02-1 A Participant's entitlement to benefits under the Plans shall
initially be determined by the Committee or consultant designated by the
Committee. Any claim for such benefits shall be considered and reviewed under
the normal claims procedures established for the Plans.
3.02-2 Benefit payments shall normally be made directly by the Company.
If such payments are not made when due, the Participant or beneficiaries shall
give written notice of the amount of such non-payment to the Trustee. The
Trustee shall forward such notice to the Company and may pay such benefits to
the Participant or beneficiaries on behalf of the Company thirty (30) days after
such notice had been forwarded to the Company, unless the Company notifies the
Trustee in writing in a timely manner that such payment already has been made.
At any time the Company may direct the Trust to pay benefits to Participants and
beneficiaries on behalf of the Company in satisfaction of the Company's
obligations under the Plans, subject to the limitations provided under this
Trust Agreement. The Company shall contribute to the Trust such amounts as are
necessary to enable the Trustee to make all Plan benefit payments to
Participants when due, within thirty (30) days of receipt of written notice from
the Trustee that the assets of the Trust or the applicable Subtrust are
insufficient to make such payments. Benefit payments from the Trust or a
Subtrust shall be made in full until the assets of the Trust or Subtrust are
exhausted. Payments due on the date the Trust or Subtrust is exhausted shall be
covered pro rata. The Company's obligation shall not be limited to the trust
fund, and a Participant or beneficiary shall have a claim against the Company
for any payment not made by the Trustee.
The Trustee shall bear no liability if the assets of the Trust or any
Subtrust are insufficient to satisfy any liability of the Plan or Trust, and no
Participant or beneficiary or the Company shall have a claim against the Trustee
with respect to such insufficiency.
PAGE 18 - TRUST AGREEMENT
<PAGE>
3.02-3 The Trustee shall make payments in accordance with written
directions from the Committee or consultant designated by the Committee, except
as provided in 3.03. The Trustee may request such directions from the Committee
or consultant designated by the Committee. If the Committee or consultant
designated by the Committee fails to furnish written directions to the Trustee,
within thirty (30) days after receiving a written request for directions from
the Trustee, the Trustee may make payments in accordance with the Plan or the
most recent Payment Schedule furnished to it by the Company.
The Trustee shall not be liable for payment of any tax assessed under any
existing or future law against the assets of the trust fund. With respect to any
benefit payment which is subject to federal, state or local income tax
withholding, as directed in writing by the Company, the Trustee shall distribute
assets of the trust fund to the Company for its submission to the applicable
taxing authority or may pay amounts so withheld to taxing authorities on the
Company's behalf, as the Trustee may determine in its discretion. With respect
to any federal, state or local income tax on the earnings on the assets of the
trust fund, such tax shall be paid by the Company.
3.02-4 The Trustee shall use the assets of the Trust or any Subtrust to
make benefit payments or other payments in the following order of priority,
unless the Trustee determines otherwise to protect the Participants:
(a) Cash contributions from the Company which are specifically
designated to enable the Trustee to make such benefit payments or other
payments when due;
(b) Cash and cash equivalents of the Trust or Subtrust;
(c) All taxable investments of the Trust or Subtrust (other than cash
and cash equivalents and Contracts with Insurers), in such order as the
Trustee may determine;
(d) All nontaxable investments of the Trust or Subtrust (other than
cash and cash equivalents and Contracts with Insurers), in such order as
the Trustee may determine; and
(e) Contracts with Insurers held in the Trust or Subtrust, in such
order and manner (for example, making tax-free withdrawals prior to any
taxable withdrawals from Contracts) as the Trustee may determine. Unless
the Trustee determines otherwise to protect the Participants, the Trustee
shall make tax-free withdrawals prior to any taxable withdrawals from
Contracts; shall make withdrawals from Contracts to the premium vanish
point before surrendering any Contracts; and shall surrender Contracts,
only if necessary, proceeding in order of Contracts on insureds from the
youngest to the oldest ages based on the insured's age on the date of
surrender of the Contract.
Notwithstanding the foregoing, the Trustee may use the assets of the
Trust or any Subtrust in any other order of priority directed by the Committee
with the Written Consent of Participants affected thereby.
3.03 Disputed Claims
3.03-1 A Participant covered by this Trust whose claim has been denied
in whole or in part by the Committee, or who has received no response to the
claim within sixty (60) days after submission to the Committee, may submit the
claim in writing to the Trustee. The Trustee shall give written
PAGE 19 - TRUST AGREEMENT
<PAGE>
notice of the claim to the Committee. If the Trustee receives no written
response from the Committee within thirty (30) days after the date the Committee
is given written notice of the claim, the Trustee shall pay the Participant the
amount claimed. If a written response is received within such thirty (30) days,
the Trustee shall designate an Expert to consider the claim pursuant to 2.06-2.
If the merits of the claim depend on compensation, service or other data in the
possession of the Company and it is not provided, the Expert may rely upon
information provided by the Participant..
3.03-2 The Trustee shall give written notice to the Participant and the
Committee of the Expert's decision on the claim. If the decision is to grant the
claim, the Trustee shall make payment to the Participant.
Either the Participant or the Company may challenge the Expert's decision
by filing suit in a court of competent jurisdiction. If no filing is made, such
suit is filed within sixty (60) days after delivery of written notice of the
Expert's decision, the decision shall become final and binding on all parties.
Notwithstanding the two preceding paragraphs, after the Expert decides a
claim, any dispute between a Participant (or beneficiary) and the Company or the
Trustee as to the interpretation or application of the provisions of a Plan or
this Trust Agreement and amounts payable hereunder may, at the election of any
party to such dispute, be determined by binding arbitration in the State of
Washington in accordance with the Commercial Arbitration Rules of the American
Arbitration Association then in effect. [Procedure for arbitration of disputes
set forth in Appendix B hereto.] Judgment may be entered on the arbitrator's
award in any court of competent jurisdiction. All fees and expenses of the
Trustee in such arbitration shall be paid by the Trustee from the trust fund and
considered an expense of the trust under 3.06.
3.03-3 If the Committee opposes a claim presented under 3.03-1 and the
Trustee ultimately pays the claim from trust assets, the Trustee shall reimburse
the Participant's expenses in pursuing the claim, including attorneys fees, from
the assets of the Trust. The Company shall reimburse the trust fund within
thirty (30) days after receipt of a bill from the Trustee for any such
Participant's expenses which are reimbursed by the Trustee.
3.04 Records
3.04-1 The Trustee shall keep complete records on the trust fund open to
inspection by the Company, Committee and Participants at all reasonable times.
In addition to accountings required below, the Trustee shall furnish to the
Company, Committee and Participants any information reasonably requested about
the trust fund.
3.05 Accountings
3.05-1 The Trustee shall furnish the Company with a complete statement
of accounts annually within sixty (60) days after the end of the trust year
showing assets and liabilities and income and expense for the year of the Trust
and each Subtrust. The Trustee shall also furnish the Company with accounting
statements at such other times as the Company may reasonably request. The form
and content of the statement of accounts shall be sufficient for the Company to
include in computing its taxable income and credits the income, deductions and
credits against tax that are attributable to the trust fund.
3.05-2 The Company may object to an accounting within one hundred twenty
(120) days after it is furnished and require that it be settled by audit by a
qualified, independent certified public ac-
PAGE 20 - TRUST AGREEMENT
<PAGE>
countant selected by mutual agreement of the Company and the Trustee. Either the
Company or the Trustee may require that the account be settled by a court of
competent jurisdiction, in lieu of or in conjunction with the audit. All
expenses of any audit or court proceedings, including reasonable attorneys'
fees, shall be allowed as administrative expenses of the Trust.
3.05-3 If the Company does not object to an accounting within the time
provided, the account shall be settled for the period covered by it.
3.05-4 When an account is settled, it shall be final and binding on all
parties, including all Participants and persons claiming through them.
3.06 Expenses and Fees
3.06-1 The Trustee shall be reimbursed for all reasonable expenses and
shall be paid a reasonable fee fixed by agreement with the Company from time to
time. No increase in the fee shall be effective before thirty (30) days after
the Trustee gives written notice to the Company of the increase. The Trustee
shall notify the Company periodically of expenses and fees.
3.06-2 Trustee and other administrative and valuation fees and expenses
shall be paid from the trust fund, unless otherwise paid by the Company. The
Company shall reimburse the trust fund within thirty (30) days after receipt of
a bill from the Trustee for any fees and expenses paid out of the trust fund.
ARTICLE IV-LIABILITY
4.01 Indemnity
4.01-1 Subject to such limitations as may be imposed by applicable law,
the Company shall indemnify and hold harmless the Trustee from any claim, loss,
liability or expense, including reasonable attorneys' fees, which the Trustee
may incur or pay out by reason of any alleged or actual act or failure to act on
the part of any person authorized to act with respect to the Plans or the Trust
created hereunder, including without limitation any claim, loss, liability or
expense, including reasonable attorneys' fees, arising from any action or
inaction in administration of this Trust based on direction or information
provided to the Trustee from either the Company, Committee, any Investment
Manager, any Expert, or any other person authorized to act hereunder, absent
willful misconduct, gross negligence or bad faith on the part of the Trustee.
All indemnities provided herein shall survive termination of this Agreement.
4.02 Bonding
4.02-1 The Trustee need not give any bond or other security for
performance of its duties under this Trust.
PAGE 21 - TRUST AGREEMENT
<PAGE>
ARTICLE V-INSOLVENCY
5.01 Trustee Responsibility Regarding Payments When Company Is Insolvent
5.01-1 The Trustee shall cease payment of benefits to Participants and
their beneficiaries if it is notified in writing that the Company is Insolvent.
The Company shall be considered "Insolvent" for purposes of this Trust Agreement
if (i) the Company is unable to pay its debts as they become due, or (ii) the
Company is subject to a pending proceeding as a debtor under the United States
Bankruptcy Code.
5.01-2 At all times during the continuance of this Trust, the principal
and income of the Trust shall be subject to claims of general creditors of the
Company under federal and state law as set forth below.
(a) The Board of Directors and the Chief Executive Officer of the
Company shall have the duty to inform the Trustee in writing of the
Company's Insolvency. If a person claiming to be a creditor of the
Company alleges in writing to the Trustee that the Company has become
Insolvent, the Trustee shall determine whether the Company is Insolvent
and, pending such determination, the Trustee shall discontinue payment of
benefits to Participants or their beneficiaries.
(b) Unless the Trustee has actual knowledge of the Company's
Insolvency, or has received notice from the Company or a person claiming
to be a creditor alleging that the Company is Insolvent, the Trustee
shall have no duty to inquire whether the Company is Insolvent. The
Trustee may in all events rely on such evidence concerning the Company's
solvency as may be furnished to the Trustee and that provides the Trustee
with a reasonable basis for making a determination concerning the
Company's solvency.
(c) If at any time the Trustee has determined that the Company is
Insolvent, the Trustee shall discontinue payments to Participants or
their beneficiaries and shall hold the assets of the Trust for the
benefit of the Company's general creditors. Nothing in this Trust
Agreement shall in any way diminish any rights of Participants or their
beneficiaries to pursue their rights as general creditors of the Company
with respect to benefits due under the Plans or otherwise.
(d) The Trustee shall resume the payment of benefits to Participants
or their beneficiaries in accordance with Article III of this Trust
Agreement only after the Trustee has determined that the Company is not
Insolvent (or is no longer Insolvent).
(e) The expenses of any determination of Insolvency or solvency shall
be allowed as administrative expenses of the Trust.
5.01-3 Provided that there are sufficient assets, if the Trustee
discontinues the payment of benefits from the Trust pursuant to 5.01-2 hereof
and subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to
Participants or their beneficiaries under the terms of the Plans for the period
of such discontinuance, less the aggregate amount of any payments made to
Participants or their beneficiaries by the Company in lieu of the payments
provided for hereunder during any such period of discontinuance.
PAGE 22 - TRUST AGREEMENT
<PAGE>
5.02 Insolvency Administration
5.02-1 During Insolvency Administration while the Company is Insolvent,
the Trustee shall hold the trust fund for the benefit of the creditors of the
Company and make payments only in accordance with 5.01 and 5.02-2. The
Participants and beneficiaries shall have no greater rights than general
creditors of the Company. The Trustee shall continue the investment of the trust
fund in accordance with 2.02.
5.02-2 The Trustee shall make payments out of the trust fund in one (1)
or more of the following ways:
(a) To creditors in accordance with instructions from a court, or a
person appointed by a court, having jurisdiction over the Company's
condition of Insolvency;
(b) To Participants and beneficiaries in accordance with such
instructions; or
(c) In payment of its own fees or expenses.
5.02-3 The Trustee shall have a priority claim against the trust fund
with respect to its own fees and expenses.
5.03 Termination of Insolvency Administration
5.03-1 Insolvency Administration shall terminate when the Trustee
determines that the Company:
(a) Is not Insolvent, in response to a notice or allegation of
insolvency under 5.01;
(b) Has ceased to be Insolvent; or
(c) Has been determined by a court of competent jurisdiction not to
be Insolvent or to have ceased to be Insolvent.
5.03-2 Upon termination of Insolvency Administration under 5.03-1, the
trust fund shall continue to be held for the benefit of the Participants and
beneficiaries under the Plans. Benefit payments due during the period of
Insolvency Administration shall be made as soon as practicable, together with
interest from the due dates, as directed by the Committee, based upon the
following rates:
(a) For deferred compensation or other defined contribution plans,
the rate credited on the Participant's account under the Plan.
(b) For supplemental retirement or other defined benefit plans, a
rate equal to the average PBGC rate applicable to immediate annuities
during the period while benefit payments were suspended.
5.04 Creditors' Claims During Solvency
5.04-1 During periods of solvency, the Trustee shall hold the trust fund
exclusively to pay Plan benefits and fees and expenses of the Trust until all
Plan benefits have been paid. Creditors of the
PAGE 23 - TRUST AGREEMENT
<PAGE>
Company shall not be paid during solvency from the trust fund, which may not be
seized by or subjected to the claims of such creditors in any way.
5.04-2 A period of solvency is any period when the Company is not
Insolvent.
ARTICLE VI--SUCCESSOR TRUSTEES
6.01 Resignation and Removal
6.01-1 The Trustee may resign at any time by written notice to the
Company, which shall be effective in sixty (60) days unless the Company and the
Trustee agree otherwise.
6.01-2 The Trustee may be removed by the Company on sixty (60) days'
written notice or shorter notice accepted by the Trustee. After a Special
Circumstance, the Trustee may be removed only with the Written Consent of
Participants.
6.01-3 When resignation or removal is effective, the Trustee shall begin
transfer of assets to the successor Trustee as soon as practicable.
6.02 Appointment of Successor
6.02-1 The Company may appoint any national or state bank or trust
company that is unrelated to the Company as a successor to replace the Trustee
upon resignation or removal. The appointment shall be effective when accepted in
writing by the new Trustee, which shall have all of the rights and powers of the
former Trustee, including ownership rights in the Trust assets. The former
Trustee shall execute any instruments necessary or reasonably requested by the
Company or the successor Trustee to evidence the transfer. After a Special
Circumstance, a successor Trustee may be appointed by the Company only with the
Written Consent of Participants.
6.02-2 The successor Trustee need not examine the records and acts of
any prior Trustee and may retain or dispose of existing Trust assets, subject to
Article II. The successor Trustee shall not be responsible for, and the Company
shall indemnify and hold harmless the successor Trustee from any claim or
liability because of, any action or inaction of any prior Trustee or any other
past event, any existing condition or any existing assets.
6.03 Accountings; Continuity
6.03-1 A Trustee who resigns or is removed shall submit a final
accounting to the Company as soon as practicable. The accounting shall be
received and settled as provided in 3.05 for regular accountings.
6.03-2 No resignation or removal of the Trustee or change in identity of
the Trustee for any reason shall cause a termination of the Plans or this Trust.
ARTICLE VII--GENERAL PROVISIONS
7.01 Interests Not Assignable
PAGE 24 - TRUST AGREEMENT
<PAGE>
7.01-1 The interest of a Participant in the Trust may not be assigned,
pledged or otherwise encumbered, seized by legal process, transferred or
subjected to the claims of the Participant's creditors in any way.
In particular, no amount payable to or in respect of any Participant
shall be subject in any manner to alienation by anticipation, sale, transfer,
assignment, bankruptcy, pledge, attachment, charge or encumbrance of any kind,
and any attempt to do so will be void. The Trust corpus or income shall in no
manner be liable for or subject to the debts or liabilities of Participants or
their beneficiaries. No Participant or beneficiary (or any party related to
either of the foregoing) may have any interest in the Trust's assets either as
an owner, a nominee, or otherwise. It is the intention that establishment of
this Trust will not cause the Plans to be funded for federal income tax purposes
or for purposes of Title I of the Employee Retirement Income Security Act of
1974, as amended, and the assets of this Trust shall be subject to the claims of
general creditors of the Company when the Company is or becomes Insolvent.
7.01-2 The Company may not create a security interest in the trust fund
in favor of any of its creditors. The Trustee shall not make payments from the
trust fund of any amounts to creditors of the Company other than Participants,
except as provided in 5.01 and 5.02.
7.01-3 The Participants shall have no interest in the assets of the
trust fund beyond the right to receive payment of Plan benefits and
reimbursement of expenses from such assets, subject to the limitations during
Insolvency referred to in 5.01 and 5.02. During Insolvency Administration the
Participants' rights to Trust assets shall not be superior to those of any other
general creditors of the Company.
7.02 Amendment
7.02-1 The Company and the Trustee may amend this Trust Agreement at any
time by a written instrument executed by both parties, except that no amendment
shall make this Trust revocable or have retroactive effect so as to deprive any
Participant or beneficiary of any benefit which has previously been paid to such
Participant or beneficiary from Trust assets. Except as provided below, any
amendment after a Special Circumstance may be made only with the Written Consent
of Participants. Notwithstanding the foregoing, any amendment may be made by
written agreement of the Company and the Trustee without the Written Consent of
Participants if such amendment will not have a material adverse effect on the
rights of any Participant hereunder or is necessary to comply with any laws,
regulations or other legal requirements.
7.03 Applicable Law
7.03-1 This Trust shall be governed, construed and administered
according to the laws of Washington, except as preempted by ERISA.
7.04 Agreement Binding on All Parties
7.04-1 This Trust Agreement shall be binding upon the heirs, personal
representatives, successors and assigns of any and all present and future
parties.
7.05 Notices and Directions
7.05-1 Any certificates, notices, orders, requests, instructions,
directions or objections of the Company, Committee or an Investment Manager
pursuant to this Trust Agreement shall be satis-
PAGE 25 - TRUST AGREEMENT
<PAGE>
factorily evidenced to the Trustee by a written statement (provided, however,
that the Trustee may, in its sole discretion, accept oral notices, orders,
requests, instructions, directions and objections subject to confirmation in
writing). The Trustee may act upon any certificate, notice, order, request,
instruction, direction or objection purporting to have been signed on behalf of
the Company, Committee or an Investment Manager which the Trustee believes to be
genuine and to have been executed by the Company, Committee or an Investment
Manager, or by any person whose authority to act for the Company, Committee or
an Investment Manager has been certified to the Trustee by the Company,
Committee or an Investment Manager, as the case may be, and shall be fully
protected for acting in accordance therewith or for failing to act in the
absence thereof. Communications to the Trustee shall be sent to the Trustee's
office as set forth below or to such other address as the Trustee shall specify
in writing, and such communications to the Trustee shall be effective when
received by the Trustee.
7.05-2 Any notice or direction under this Trust Agreement shall be in
writing and shall be effective when actually received. Notices sent to a party
shall be directed to the address stated below or to such other address as either
party may specify by notice to the other party. Notices to the Committee shall
be sent to the address of the Company. Notices to Participants who have
submitted claims under 3.03 shall be mailed to the address shown in the claim
submission. Until notice is given to the contrary, notices to the Company and
the Trustee shall be addressed as follows:
Company: Egghead, Inc.
22705 E. Mission
Liberty Lake, Washington 99019
Attention: Kurt Conklin
Trustee: Wells Fargo Bank, N.A.
999 Third Avenue, 14th Floor
Seattle, WA 98111
Attention: Wendell Coombs
7.06 No Implied Duties
7.06-1 The duties of the Trustee shall be those stated in this Trust,
and no other duties shall be implied.
7.07 Gender, Singular and Plural
7.07-1 All pronouns and any variations thereof shall be deemed to refer
to the masculine or feminine, as the identity of the person or persons may
require. As the context may require, the singular may be read as the plural and
the plural as the singular.
7.08 Counterparts
7.08-1 This Trust Agreement may be executed in counterparts, each of
which shall be deemed an original, and said counterparts shall constitute one
(1) and the same instrument, which may be sufficiently evidenced by any one (1)
counterpart.
ARTICLE VIII--INSURER
PAGE 26 - TRUST AGREEMENT
<PAGE>
8.01 Insurer Not a Party
8.01-1 The Insurer shall not be deemed to be a party to this Trust
Agreement, and its obligations shall be measured and determined solely by the
terms of its Contracts and other agreements executed by it.
8.02 Authority of Trustee
8.02-1 The Insurer shall accept the signature of the Trustee on any
documents or papers executed in connection with such Contracts. The signature of
the Trustee shall be conclusive proof to the Insurer that the person on whose
life an application is being made is eligible to have such Contract issued on
his life and is eligible for a Contract of the type and amount requested.
8.03 Contract Ownership
8.03-1 The Insurer shall deal with the Trustee as the sole and absolute
owner of the Trust's interests in such Contracts and shall have no obligation to
inquire whether any action or failure to act on the part of the Trustee is in
accordance with or authorized by the terms of the Plans or this Trust Agreement.
8.04 Limitation of Liability
8.04-1 The Insurer shall be fully discharged from any and all liability
for any action taken or any amount paid in accordance with the direction of the
Trustee and shall have no obligation to see to the proper application of the
amounts so paid. The Insurer shall have no liability for the operation of this
Trust Agreement or the Plans, whether or not in accordance with their terms and
provisions.
8.05 Change of Trustee
8.05-1 The Insurer shall be fully discharged from any and all liability
for dealing with a party or parties indicated on its records to be the Trustee
until such time as it shall receive at its home office written notice from the
Company of the appointment and qualification of a successor Trustee.
PAGE 27 - TRUST AGREEMENT
<PAGE>
IN WITNESS WHEREOF, the Company and the Trustee have caused this Trust
Agreement to be executed by their respective duly authorized officers on the
dates set forth below.
EGGHEAD, INC.
By: /s/ Kurt S. Conklin
-------------------------------------
Its: Sr. V.P.
-------------------------------------
Executed: Nov. 1
------------------------------------,
1996
TRUSTEE
By:_____________________________________
Its:_____________________________________
Executed:____________________________________,
19____
PAGE 28 - TRUST AGREEMENT
<PAGE>
APPENDIX A
Assumptions and Methodology for
Calculations Required Under 2.01 and 2.04
1. The liability for benefits under each Plan will be calculated using two (2)
different assumptions as to when Participants terminate service:
(a) As of the applicable date under 2.01 or 2.04, and
(b) Twenty-four (24) months after the applicable date, assuming future
compensation continues at current levels, and future deferrals under
deferred compensation plans continue pursuant to prior elections.
The liability for accrued benefits under each Plan will be the greater of
the liabilities calculated in accordance with (a) and (b) above.
2. Calculations will be based upon the most valuable optional form of payment
available to the Participant.
3. The liability for benefits under deferred compensation or other defined
contribution Plans shall be equal to the deferral or other account balances
(vested and unvested) of Participants as of the applicable date, plus
projected deferrals expected to be made within twenty-four (24) months
after the applicable date pursuant to prior elections. Account balances of
Participants under a Plan shall be calculated based on crediting the
highest rate of interest which may become payable to Participants under the
Plan.
4. The liability for benefits under supplemental retirement or other defined
benefit Plans shall be equal to the present value of accrued benefits
(vested and unvested) of Participants as of the relevant dates under 1(a)
or (b) above, discounted in accordance with paragraph 8 below.
5. The liability for benefits under each Plan shall be calculated by assuming
that each Participant is terminated at a time when he is entitled to
receive any benefit enhancement provided by the Plan upon a Change in
Control.
6. The liability for benefits under all Plans shall also include the present
value (discounted to the applicable date in accordance with paragraph 8
below) of any survivor benefits which exceed the account balances or other
accrued benefits of Participants and are not covered by death benefits
payable under insurance contracts held in the Trust.
EXHIBIT A.1
<PAGE>
APPENDIX A
Assumptions and Methodology for
Calculations Required Under 2.01 and 2.04
(Continued)
7. No mortality is assumed prior to the commencement of benefits, except for
purposes of calculating any additional accrued liability under paragraph 6
above. Future mortality is assumed to occur in accordance with the 1983
Group Annuity Mortality Table after the commencement of benefits.
8. The present value of amounts under subparagraphs (a) (with respect to
defined benefit plans), (b), (c) and (d) of 2.01-3 shall be determined
using a discount rate equal to the lesser of (i) one hundred percent (100%)
of the applicable long-term Federal rate determined under Section 1274(d)
of the Code or (ii) the interest rate (or series of interest rates) used to
determine the amount of a lump sum payment under the applicable Plan.
9. Where left undefined above, calculations will be performed in accordance
with generally accepted actuarial principles.
EXHIBIT A.2
<PAGE>
APPENDIX B
Arbitration of Disputes
(a) RIGHT TO ARBITRATION. Time is of the essence in the resolution of any
and all disputes which may arise under this Trust Agreement and the
determination of whether any payments are due hereunder or the amount or timing
thereof. A Participant (or following his or her death, his or her beneficiary)
may, but need not, submit any such dispute, disagreement or claim for payment
hereunder to arbitration as provided herein.
The right to select arbitration shall be solely that of the Participant (or
beneficiary) in his or her sole discretion. Arbitration is not mandatory on the
Participant (or beneficiary), and the Participant (or beneficiary) may choose in
lieu thereof to bring an action in an appropriate civil court. However, once an
arbitration is commenced by the Participant (or beneficiary), it may not be
discontinued without the mutual consent of all parties to the arbitration.
During the lifetime of the Participant, only the Participant can initiate an
arbitration proceeding under this Trust Agreement.
In the event that the Company commences an action or proceeding in any
court against a Participant (or beneficiary), whether with respect to a dispute,
disagreement or claim for payment under this Trust Agreement, the Participant
(or beneficiary) may, but need not, apply to a court of competent jurisdiction,
within ninety (90) days following receipt of service of a summons and complaint
or the equivalent thereof, for an order dismissing or staying (pending the final
completion of arbitration as provided herein) all or so much of such action or
proceeding as affects or relates to a dispute, disagreement or claim for payment
under this Trust Agreement or relieving the Participant (or beneficiary) of any
obligation to file an affirmative defense or counterclaim in such action or
proceeding to the extent the same affects or relates to a dispute, disagreement
or claim for payment under this Trust Agreement.
The Company hereby consents to the issuance of such an order, upon such
application, with respect to any aspect of the action, proceeding, defense or
counterclaim which the Participant (or beneficiary) demonstrates to the court's
satisfaction may reasonably affect or relate to any dispute, disagreement or
claim for payment under this Trust Agreement. Any such order may be conditioned
upon the prompt initiation of arbitration by the Participant (or beneficiary) in
accordance with this Appendix B.
(b) INITIATION OF ARBITRATION. A Participant (or beneficiary) who intends
to initiate arbitration hereunder shall first deliver to the Committee which
administers the Plan a claim in writing for payment under the Plan setting forth
in reasonable detail the basis for and calculation of the claim or a proposed
resolution of any other dispute or disagreement that may exist.
EXHIBIT B.1
<PAGE>
APPENDIX B
Arbitration of Disputes
(Continued)
If the Company does not pay the full amount of the claim for payment, or
does not deliver a written, unconditional acceptance of the proposed resolution,
within sixty (60) days following delivery of the claim for payment or proposed
resolution, or upon entry of an order of a court as provided in paragraph (a)
hereof, the Participant (or beneficiary) may deliver to the Company a written
list of five proposed arbitrators, each of whom must be either (i) a member of
the National Academy of Arbitrators residing in the State of Washington, or (2)
a retired judge of the Washington Superior Court, Court of Appeals or Supreme
Court or the United States District Court for the Districts of Washington or the
United States Court of Appeals for the Ninth Circuit, provided, however, that
any such judge must then reside in the State of Washington.
Within seven (7) days following delivery of such list, the Company shall
select one (1) of the proposed arbitrators as the arbitrator for the dispute,
disagreement or claim for payment in question and shall, within said seven (7)
day period, deliver written notice of such selection to the Participant (or
beneficiary). If the Company fails to deliver such written notice within said
period, the Participant (or beneficiary) shall select one (1) of the proposed
arbitrators, promptly deliver written notice thereof to the Company, and such
selection shall be binding upon the Company.
(c) CONDUCT OF ARBITRATION. The arbitration proceeding shall commence
within seven (7) days following selection of the arbitrator, or as soon
thereafter as possible, and shall proceed with all due diligence. No continuance
or postponement of the arbitration shall be granted to the Company without the
consent of the Participant (or beneficiary). Absence from or the failure to
participate in any hearing or session of the arbitration by the Company shall
not prevent the issuance of an award. Without the consent of the Participant (or
beneficiary), no arbitration hearing or session shall be conducted outside the
County of Spokane.
The arbitration shall be conducted in accordance with such rules and
procedures as may be determined by the arbitrator. The arbitrator may determine
when sufficient evidence has been submitted to permit the issuance of an award.
The arbitrator's award shall be issued in writing as expeditiously as possible
and in no event more than thirty (30) days following the close of the hearing.
The arbitrator may, if he or she deems it necessary to the issuance of an award,
engage the services of an accountant, actuary or other expert to advise and
assist in the arbitration.
Notwithstanding the right of the Plan administrator to administer and
interpret the Plan, no decision by the Plan administrator in this regard shall
be entitled to any deference in such arbitration.
(d) ARBITRATION AWARD. The arbitrator may order the Company to take, or
to refrain from taking, any action and may make a monetary award to the
Participant (or beneficiary).
EXHIBIT B.2
<PAGE>
APPENDIX B
Arbitration of Disputes
(Continued)
Any monetary award and any additional awards shall bear interest at a rate
determined by the arbitrator from the date, as determined by the arbitrator,
that any payment should have been made by the Company to the Participant (or
beneficiary).
(e) COSTS OF ARBITRATION. The arbitrator shall order the losing party in
the arbitration (1) to pay for the costs of the arbitration, including, without
limitation, the arbitrator's fees and expenses and the fees of a stenographic
reporter if employed, and (2) to reimburse the prevailing party for all costs of
the arbitration which have previously been paid by the prevailing party. Each
party shall pay for its own fees and expenses in connection with the
arbitration, including, without limitation, its fees and expenses of counsel,
accountants, actuaries and other experts.
The Participant (or beneficiary) shall be deemed to be the prevailing party
if the arbitrator (1) finds that the Company has breached the provisions of the
Plan or this Trust Agreement or orders the Company to take, or to refrain from
taking, any action or (2) makes a monetary award of any amount to the
Participant (or beneficiary).
The arbitration award, the additional award, interest, and the costs of the
arbitration shall be due and payable within five (5) days following the issuance
of the award.
(f) ENFORCEMENT OF THE AWARD. The award of the arbitrator shall be final,
binding and conclusive upon the parties and shall not be subject to judicial
review except as set forth in Sections 7.04.160 and 7.04.170 of the Washington
Code of Civil Procedure or any successor statute thereto. Any party may apply to
a court of competent jurisdiction for confirmation or enforcement of such award.
EXHIBIT B.3
<PAGE>
SCHEDULE I
Plans and Agreements
Covered by Trust Agreement
- - Egghead, Inc. Deferred Compensation Plan
- - Egghead, Inc. Supplemental Life Insurance Benefit Plan
[PARTICIPANTS AND BENEFICIARIES COVERED BY TRUST AGREEMENT]
All Participants in the Plans identified above who are in active service
with Egghead on or after July, and beneficiaries of such Participants.
Participants in these Plans who retired or terminated service for any reason
prior to such date and their beneficiaries are not covered by this Trust
Agreement.
SCHEDULE I
<PAGE>
EGGHEAD, INC.
Supplemental Life Insurance Benefit Plan
PREAMBLE
The purpose of this Supplemental Life Insurance Benefit Plan ("Plan") is to
provide a supplemental life insurance benefit to a select group of management or
highly compensated employees of Egghead, Inc. This Plan shall be effective as
of September 15, 1996.
ARTICLE I
DEFINITIONS
A. Part One is an amount payable to the Company equal to the cash value
of the Policy, plus any proceeds in excess of the Part Two amount
defined below.
B. Part Two is an amount equal to the promised life insurance benefit as
listed in the attached Appendix A.
C. PLAN - This Supplemental Life Insurance Benefit as effective September
15, 1996.
ARTICLE II
LIFE INSURANCE POLICY
A. In furtherance of the purposes of this Plan to provide pre-retirement
death benefits, life insurance (the Policy) has been applied for on
the lives of Participants listed in Appendix A (the Insured
Participant) from one or more insurance companies (the Insurer). The
Participants agree to cooperate in the application for such Policies
and agree that the Company shall have an insurable interest in each
Participant or Participant/Beneficiary.
B. This Plan is effective as to a particular Policy upon execution, or
upon issuance and acceptance of such Policy, whichever is later.
ARTICLE III
OWNERSHIP RIGHTS AND DUTIES UNDER THE POLICY
A. The Company shall be the owner of all rights and incidents of
ownership in the Policy. The Insured Participant's only right shall
be to designate Company the beneficiary of Part Two of the proceeds of
such Policy.
B. The Company shall be responsible for safeguarding the Policy.
C. The Company shall execute and promptly deliver any appropriate
documents, including the Policy, as required by the Insurer. The
beneficiary of Part Two of such Policy shall be in accordance with the
written direction of the Insured Participant.
1
<PAGE>
ARTICLE IV
POLICY LOANS AND WITHDRAWALS
The Company shall have all rights of ownership of Policy cash values,
including, but not limited to, the right to obtain loans secured by the
Policy as well as withdrawals. The amount of any withdrawals or loans,
together with the unpaid interest thereon, shall at no time exceed that
amount that the Company would be entitled to as determined by the
definitions of Part One and Part Two in Article I. The interest due on any
Policy loans shall be a debt of the Company owed to the Insurer. The
Insured Participant shall have no rights or interests in Policy cash values
or in any part of the Company's interests in the Policy.
ARTICLE V
PAYMENT OF PREMIUMS
All premiums due on the Policy shall be paid by the Company.
ARTICLE VI
PAYMENT OF PROCEEDS
On the Insured Participant's death, the Company shall receive Part One of
the Policy, and such party or parties as designated by the Insured
Participant in writing pursuant to Article III shall be the beneficiary of
Part Two of the Policy.
ARTICLE VII
TERMINATION OF PLAN WITH RESPECT TO INSURED PARTICIPANTS
The provisions of this Plan shall terminate immediately as to an Insured
Participant for any of the following reasons:
1. Performance of its terms, following the death of the Insured
Participant;
2. Reaching the Insured Participant's Retirement Date;
3. Termination of the Insured Participant's employment with the Company
for reasons other than death or disability;
4. The Company's delivery of written notice to the Insured Participant of
its decision to terminate such provisions by amendment of this Plan.
ARTICLE VIII
REPAYMENT FOR REASONS OTHER THAN DEATH
A. In all instances of termination of the Policy other than death, the
Company shall certify as required by the Insurer that such repayment
shall release the Insurer from any liability to the Company.
2
<PAGE>
B. Such repayment to the Company of the amounts owed it shall be made
from the total cash values of the Policy. All parties shall execute
the documents necessary to facilitate such use of the total cash
values.
ARTICLE IX
DEATH
Each Participant shall designate a Beneficiary or Beneficiaries on a form
to be filed with the Company. If a Participant is married when the
Beneficiary designation is made and such designation is someone other than
the spouse, the designation shall not be valid without the written consent
of the spouse. If no designation is filed with the Company or if the
designated Beneficiary shall not survive such Participant, then the
payments from the account of the deceased Participant shall be paid to the
surviving spouse, if any, or, if none, then to the Participant's personal
legal representative.
ARTICLE X
NAMED FIDUCIARY
A. The Secretary of the Company is hereby designated as the Named
Fiduciary of this Plan, in accordance with the Employee Retirement
Income Security Act of 1974 and shall serve in such capacity until
resignation or removal by the Board of Directors of the Company and
appointment of a successor by a duly adopted resolution of the Board.
The business address and telephone number of the Named Fiduciary are:
Egghead, Inc. 22705 East Mission, Liberty Lake, WA 99019. Phone
(509) 921-2882.
B. The Named Fiduciary shall have the authority to control and manage the
operation and administration of the Split-Dollar Provisions of the
Plan. The Named Fiduciary shall be responsible for making timely
delivery of any required premiums to the Insurer.
C. The Plan, and all related documents, shall be retained by the Named
Fiduciary and made available for examination at the above indicated
business address. Upon written request, the Plan and related
documents shall be provided to the parties to this Agreement.
ARTICLE XI
CLAIMS PROCEDURE
A. Death Benefits shall be payable in accordance with the provisions of
the Plan. Should the Insured Participant's beneficiary fail to
receive benefits to which there is a reasonable belief of entitlement,
such beneficiary may file a claim. Any claim for a benefit hereunder
shall be filed by the beneficiary (claimant) of this Plan by written
communication which is made by the claimant or the claimant's
authorized representative and is reasonably calculated to bring the
claim to the attention of the Named Fiduciary.
B. If a claim for a death benefit is wholly or partially denied, a
written notice of the decision shall be furnished to the claimant by
the Named Fiduciary or the Named Fiduciary's designee within a
reasonable period of time after receipt of the claim, which notice
shall include the following information:
3
<PAGE>
a) The specific reason or reasons for the denial;
b) Specific reference to the pertinent provisions upon which the
denial is based;
c) A description of any additional material or information necessary
for the claimant to perfect the claim and an expression of why
such material or information is necessary; and
d) An explanation of the Plan's claim review procedures.
C. In order that a claimant may appeal a denial of a claim, a claimant or
the claimant's duly authorized representative:
a) May request a review by written application to the Named
Fiduciary or the Named Fiduciary's designee not later than 60
days after receipt by the claimant of written notification of
denial of a claim;
b) May review pertinent documents; and
c) May submit issues and comments in writing.
D. A decision of review of a denied claim shall be made not later than 60
days after receipt of a request for review, unless special
circumstances require an extension of time for processing, in which
case a decision shall be rendered within a reasonable period of time,
but not later than 120 days after receipt of a request for review.
The decision of review shall be in writing and shall include the
specific reason(s) for the decision and the specific reference(s) to
the pertinent Plan provisions on which the decision is based.
E. Notwithstanding anything contained in this procedure to the contrary,
any claim for a death benefit under an insurance policy under the Plan
shall be filed with the Insurer by the claimant or the claimant's
authorized representative on the form or forms prescribed for such
purpose by the Insurer. The Insurer shall have sole authority for
determining whether a death claim shall or shall not be paid, either
in whole or in part, in accordance with the terms of such insurance
contract which may have been purchased on the life of the Insured
Participant.
ARTICLE XII
LIABILITY OF INSURER
A. The Insurer is not a party to this Plan. With respect to any Policy
issued pursuant to this Plan, the Insured shall have no liability
except as set forth in the Policy. Such Insurer shall not be bound to
inquire into or take notice of any of the terms of this Plan or as to
the application of the proceeds of such Policies.
B. The Insurer shall be discharged from all liability by making payments
of the proceeds of the Policy as directed by the Company and in
permitting rights and privileges under a Policy to be exercised
pursuant to the provisions of the Policy.
4
<PAGE>
ARTICLE XIII
TERMINATION OF EMPLOYMENT
Nothing herein provided shall abrogate or modify in any way the Company's right
to terminate the Company's employment of any Participant at any time, with or
without cause.
ARTICLE XIV
AMENDMENT AND TERMINATION OF AGREEMENT
A. RIGHT TO AMEND AND TERMINATE. The Board of Directors of the Company
shall have the right to terminate this Plan at any time or to modify,
alter or amend it in whole or in part, subject to the Company's
obligations to pay all sums then credited to Participants,
Participant/Beneficiaries and Beneficiaries under the terms of this
Plan.
B. TERMINATION OF PLAN. This Plan shall terminate upon written notice by
the Board of Directors of the Company, upon complete discontinuance of
contributions by the Company for a period of three (3) years, in the
event of the bankruptcy or receivership of the Company or upon the
dissolution or merger of the Company unless a successor to the
business agrees to continue the Plan by executing an appropriate
supplemental agreement. In the event that the Company is taken over
by a successor who agrees to continue the Plan, the employment of any
employee who is continued in the employ of such successor shall not be
deemed to have been terminated or severed for any purpose hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
this 1 day of Nov 1996.
--- ----------------,
Egghead, Inc.
By: /s/ Kurt S. Conklin
--------------------------------
Its: Senior V.P.
-------------------------------
Executed:__________________________
19__
5
<PAGE>
APPENDIX A
NAME DEATH BENEFIT
Stephen Boer $100,000
William S. Burbank $175,000
Tommy E. Collins $300,000
Kurt S. Conklin $350,000
Thomas P. Dipiertro $100,000
Steven T. Dong $175,000
Rosamaria Gonzales Cobery $100,000
Robert J. Grammar, Jr. $100,000
Peter F. Grossman $500,000
Michael J. Harkins $175,000
Norm Hollinger $175,000
Lane C. Hubbard $175,000
Jim Kalasky $300,000
Kathleen J. Kennedy $175,000
William J. Kennedy $175,000
Kirk W. Lockhart $300,000
Daniel J. MacDonald $100,000
Jim Reuss $175,000
Randall L. Rohde $100,000
Julie Shifflet $175,000
Ronald J. Smith $350,000
Terence M. Strom $750,000
Judy Suter $100,000
Charles Tunnicliffe $100,000
Robert K. Waite $100,000
Francis W. Warden $100,000
Ed Wozniak $300,000
6
<PAGE>
EXERCISE OF OPTION #1
----------------------
MARCH 19, 1997
This is the Option Renewal for the Lease by and between Central Valley Limited
Liability Company (Lessor) and DJ&J Software Corporation, a Washington
Corporation, dba Egghead (Lessee) for the premises located at 8825 Elder Creek
Road, Sacramento, California, 95828.
Lessee exercises its Option to Renew the Lease dated May 15, 1995, for the above
referenced premises. Pursuant to Addendum paragraph #39, this serves as
Lessee's notice to exercise the Year 3 Option.
Rent shall increase to $35,200.00 per month on October 14, 1997, for 12 months
following the end of the current term.
Additional Insureds: Pursuant to paragraph 8(a) Lessee will name the following
as additional Insureds: Central Valley Limited Liability Company (Lessor), A & A
Properties, Inc. (Property Manager) and Marvin L. Oates (Managing Member).
Lessee and Lessor shall remain obligated to all terms and conditions of the
Lease Agreement dated May 15, 1995.
LESSOR LESSEE
CENTRAL VALLEY LIMITED DJ&J SOFTWARE CORPORATION
LIABILITY COMPANY A Washington Corporation, dba
EGGHEAD
/s/ Marvin L. Oates /s/ George P. Orban
---------------------- ---------------------------
Marvin L. Oates By:
Managing Member
Date: 4-14-97 Date: Mar 24 1997
----------------- ----------------------
<PAGE>
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE-MODIFIED NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. BASIS PROVISIONS ("BASIC PROVISIONS").
1.1 PARTIES: This Lease ("Lease"), dated for reference purposes only,
May 15, 1995, is made by and between CENTRAL VALLEY LIMITED LIABILITY COMPANY
("Lessor") and DJ&J SOFTWARE CORPORATION, A Washington Corporation dba EGGHEAD
SOFTWARE ("Lessee"), (collectively the "Parties," or individually a "Party").
1.2(a) PREMISES: That certain portion of the Building, including all
improvements therein or to be provided by Lessor under the terms of this
Lease, commonly known by the street address of 8825 Elder Creek Road, located
in the City of Sacramento, County of Sacramento, State of California, with
zip code 95828, as outlined on Exhibit A-2 attached hereto ("Premises"). The
"Building" is that certain building containing the Premises and generally
described as (describe briefly the nature of the Building): approximately
138,380 square feet of warehouse space being a portion of 428,000 square foot
concrete tilt up industrial building to include 7,000 square feet of office
(see Exhibit "A-2" attached). In addition to Lessee's rights to use and
occupy the Premises as hereinafter specified, Lessee shall have non-exclusive
rights to the Common Area (as defined in Paragraph 2.7 below) as hereinafter
specified, but shall not have any rights to the roof, exterior walls or
utility raceways of the Building or to any other buildings in the Industrial
Center. The Premises, the Building, the Common Areas, the land upon which
they are located, along with all other buildings and improvements thereon,
are herein collectively referred to as the "Industrial Center." (Also see
Paragraph 2.)
1.2(b) PARKING: 150 unreserved vehicles parking spaces ("Unreserved
Parking Spaces"); and zero reserved parking spaces ("Reserved Parking Spaces").
(Also see Paragraph 2.6)
1.3 TERM: Two (2) years and zero (0) months ("Original Term") commencing
October 1, 1995 ("Commencement Date") and ending September 30, 1997 ("Expiration
Date"). (Also see Paragraph 3.)
1.4 EARLY POSSESSION: See Paragraph 58 ("Early Possession Date"). (Also
see Paragraphs 3.2 3.3.)
1.5 BASE RENT: $ 34,194.00 per month ("Base Rent"), payable on the first
day of each month commencing ___________________ (Also see Paragraph 4.)
[x] If this box is checked, this Lease provides for the Base Rent to be
adjusted per Addendum 1.5, attached hereto.
1.6(a) BASE RENT PAID UPON EXECUTION: $ 34,194.00 as Base Rent for the
period first month's rent.
1.6(b) LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES: thirty two and
thirty-three tenth percent (32.33%) ("Lessee's Share") as determined by [x]
prorate square footage of the Premises as compared to the total square
footage of the Building or [] other criteria as described in Addendum __.
LESSEE'S SHARE SHALL NOT EXCEED $.06 PER SQUARE FOOT, PER MONTH, FOR THE
FIRST YEAR OF THE LEASE TERM ONLY.
1.7 SECURITY DEPOSIT: $N/A ("Security Deposit"). (Also Sea Paragraph 5.)
1.8 PERMITTED USE: warehousing and distribution ("Permitted Use"). (Also
see Paragraph 6.)
1.9 INSURING PARTY. Lessor is the "Insuring Party." (Also see Paragraph
8.)
1.10(a) REAL ESTATE BROKERS. The following real estate broker(s)
(collectively, the "Brokers") and brokerage relationships exist in this
transaction and consented to by the Parties (check applicable boxes):
[ ]___________________represents Lessor exclusively ("Lessor's Broker");
[ ]___________________represents Lessee exclusively ("Lessee's Broker"); or
[x] BUZZ OATES REAL ESTATE represents both Lessor and Lessee ("Dual Agency").
(Also see Paragraph 15.)
1.10(b) PAYMENT TO BROKERS. Upon the execution of this Lease by both
Parties, Lessor shall pay to said Broker(s) jointly, or in such separate shares
as they may mutually designate in writing, a fee as set forth in a separate
written agreement between Lessor and said Broker(s) (or in the event there is no
separate written agreement between Lessor and said Broker(s), the sum of $ per
separate agreement) for brokerage services rendered by said Broker(s) in
connection with this transaction.
1.11 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 49 through 57, and Exhibits A through B, all of which
constitute a part of this Lease.
2. PREMISES, PARKING AND COMMON AREAS.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the Premises, for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this Lease. Unless otherwise provided
herein, any statement of square footage set forth in this Lease or that may have
been used in calculating rental and/or Common Area Operating Expenses, is an
approximation which Lessor and Lessee agree is reasonable and the rental and
Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and free
of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, electrical systems, fire sprinkler system, lighting, air conditioning
and heating systems and loading doors, if any, in the Premises, other than those
constructed by Lessee, shall be in good operating condition on the Commencement
Date. If a non-compliance with said warranty exists as of the Commencement
Date, Lessor shall, except as otherwise provided in this Lease, promptly after
receipt of written notice from Lessee setting forth with specificity the nature
and extent of such non-compliance, rectify same at Lessor's expense. If Lessee
does not give Lessor written notice of a non-compliance with this warranty
within thirty (30) days after the Commencement Date, correction of that
non-compliance shall be the obligation of Lessee at Lessee's sole cost and
expense.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor
warrants that any Improvements (other than those constructed by Lessee or at
Lessee's direction) on or in the Premises which have been constructed or
installed by Lessor or with Lessor's consent or at Lessor's direction shall
comply with all applicable covenants or restrictions of record and applicable
building codes, regulations and ordinances in effect on the Commencement
Date. Lessor further warrants to Lessee that Lessor has no knowledge of any
claim having been made by any governmental agency that a violation or
violations of applicable building codes, regulations, or ordinances exist
with regard to the Premises as of the Commencement Date. Said warranties
shall not apply to any Alterations or Utility Installations (defined in
Paragraph 7.3(a)) made or to be made by Lessee. If the Premises do not
comply with said warranties, Lessor shall, except as otherwise provided in
this Lease, promptly after receipt of written notice from Lessee given within
six (6) months following the Commencement Date and setting forth with
specificity the nature and extent of such non-compliance, take such action,
at Lessor's expense, as may be reasonable or appropriate to rectify the
non-compliance. Lessor makes no warranty that the Permitted Use in Paragraph
1.8 is permitted for the Premises under Applicable Laws (as defined in
Paragraph 2-4).
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has
been advised by the Broker(s) to satisfy itself with respect to the condition of
the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, seismic and earthquake requirements,
and compliance with the Americans with Disabilities Act and applicable zoning,
municipal, county, state and federal laws, ordinances and regulations and any
covenants or restrictions of record (collectively, "APPLICABLE LAWS") and the
present and future suitability of the Premises for Lessee's intended use;
(b) that Lessee has made such investigation as it deems necessary with reference
to such matters, is satisfied with reference thereto, and assumes all
responsibility therefore as the same relate to Lessee's occupancy of the
Premises and/or the terms of this Lease; and (c) that neither Lessor, nor any of
Lessor's agents, has made any oral or written representations or warranties with
respect to said matters other than as set forth in this Lease. SEE ADDENDUM
PARAGRAPH 64.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date set
forth in Paragraph 1.1. Lessee was the owner or occupant of the Premises. In
such event, Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises with said warranties.
<PAGE>
2.6 VEHICLE PARKING. Lessee shall be entitled to use the number of
Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph
1.2(b) on those portions of the Common Areas designated from time to time by
Lessor for parking. Lessee shall not use more parking spaces than said number.
Said parking spaces shall be used for parking by vehicles no larger than
full-size passenger automobiles or pick-up trucks, herein called "PERMITTED SIZE
VEHICLES." Vehicles other than Permitted Size Vehicles shall be parked and
loaded or unloaded as directed by Lessor in the Rules and Regulations (as
defined in Paragraph 40) issued by Lessor. (Also see Paragraph 2.9.)
(a) Lessee shall not permit or allow any vehicles that belong to or
are controlled by Lessee or Lessee's employees, suppliers, shippers, customers,
contractors or invitees to be loaded, unloaded, or parked in areas other than
those designated by Lessor for such activities.
(b) If Lessee permits or allows any of the prohibited activities
described in this Paragraph 2.6, then Lessor shall have the right, without
notice, in addition to such other rights and remedies that it may have, to
remove or tow away the vehicle involved and charge the cost to Lessee, which
cost shall be immediately payable upon demand by Lessor.
(c) Lessor shall at the Commencement Date of this Lease, provide the
parking facilities required by Applicable Law.
2.7 COMMON AREAS - DEFINITION. The term "Common Areas" is defined as all
areas and facilities outside the Premises and within the exterior boundary line
of the Industrial Center and Interior utility raceways within the Premises that
are provided and designated by the Lessor from time to time for the general
non-exclusive use of Lessor, Lessee and other lessees of the Industrial Center
and their respective employees, suppliers, shippers, customers, contractors and
invitees, including parking areas, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, driveways and landscaped areas. The
Industrial Center is defined as the real property described in Exh. "A-1".
2.8 COMMON AREAS - LESSEE'S RIGHTS. Lessor hereby grants to Lessee, for
the benefit of Lessee and its employees, suppliers, shippers, contractors,
customers and invitees, during the term of this Lease, the non-exclusive right
to use, in common with others entitled to such use, the Common Areas as they
exist from time to time, subject to any rights, powers, and privileges reserved
by Lessor under the terms hereof or under the terms of any rules and regulations
or restrictions governing the use of the Industrial Center. Under no
circumstances shall the right herein granted to use the Common Areas bE deemed
to include the right to store any property, temporarily or permanently, in the
Common Areas. Any such storage shall be permitted only by the prior written
consent of Lessor or Lessor's designated agent, which consent may be revoked at
any time. In the event that any unauthorized storage shall occur then Lessor
shall have the right, without notice, in addition to such other rights and
remedies that it may have, to remove the property and charge the cost to Lessee,
which cost shall be immediately payable upon demand by Lessor.
2.9 COMMON AREAS - CHANGES. Lessor shall have the right, in Lessor's
sole discretion, from time to time:
(a) To make changes to the Common Areas, including, without
limitation, changes in the location, size, shape and number of driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, landscaped areas, walkways and utility raceways;
(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
(c) To add additional buildings and improvements to the Common Areas;
(d) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Industrial Center, or any portion
thereof; and
(e) To do and perform such other acts and make such other changes in,
to or with respect to the Common Areas and Industrial Center as Lessor may, in
the exercise of sound business judgement, deem to be appropriate.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If an Early Possession Date is specified in
Paragraph 1.4 and if Lessee totally or partially occupies the Premises after the
Early Possession Date but prior to the Commencement Date, the obligation to pay
Base Rent shall be abated for the period of such early occupancy. All other
terms of this Lease, however, (including but not limited to the obligations
carry the insurance required by Paragraph 8) shall be in effect during such
period. Any such early possession shall not affect nor advance the Expiration
Date of the Original Term.
3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver
possession of the Premises to Lessee by the Early Possession Date, if one is
specified in Paragraph 1.4, or if no Early Possession Date is specified, by the
Commencement Date, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease, or the obligations of
Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not,
except as otherwise provided herein, be obligated to pay rent or perform any
other obligation of Lessee under the terms of this Lease until Lessor delivers
possession of the Premises to Lessee. If possession of the Premises is not
delivered to Lessee within sixty (60) days after the Commencement Date, Lessee
may, at its option, by notice in writing to Lessor within ten (10) days after
the end of said sixty (60) day period, cancel this Lease, in which event the
parties shall be discharged from all obligations hereunder; provided further,
however, that if such written notice of Lessee is not received by Lessor within
said ten (10) day period, Lessee's right to cancel this Lease hereunder shall
terminate and be of no further force or effect. Except as may be otherwise
provided, and regardless of when the Original Term actually commences, if
possession is not tendered to Lessee when required by this Lease and Lessee does
not terminate this Lease, as aforesaid, the period free of the obligation to pay
Base Rent, if any, that Lessee would otherwise hove enjoyed shall run from the
date of delivery of possession and continue for a period equal to the period
during which the Lessee would have otherwise enjoyed under the terms hereof, but
minus any days of delay caused by the acts, changes or omissions of Lessee.
4. RENT.
4.1 BASE RENT. Lessee shall pay Base Rent and other rent or charges, as
provided herein, to Lessor in lawful money of the United States, without offset
or deduction, on or before the day on which it is due under the terms of this
Lease. Base Rent and all other rent and charges for any period during the term
hereof which is for less than one full month shall be prorated based upon the
actual number of days of the month involved. Payment of Base Rent and other
charges shall be made to Lessor at its address stated herein or to such other
persons or at such other addresses as Lessor may from time to time designate in
writing to Lessee.
4.2 COMMON AREA OPERATING EXPENSES. Lessee shall pay to Lessor during the
term hereof, in addition to the Base Rent, Lessee's Share (as specified in
Paragraph 1.6(b)) of all Common Area Operating Expenses, as hereinafter defined,
during each calendar year of the term of this Lease, in accordance with the
following provisions:
(a) "Common Area Operating Expenses" are defined, for purposes of
this Lease, as all costs incurred by Lessor rotating to the ownership and
operation of the Industrial Center, including, but not limited to, the
following:
(i) The operation, repair and maintenance, in neat, clean, good
order and condition, of the following:
(aa) The Common Areas, including parking areas, loading
and unloading areas, trash areas, roadways, sidewalks, walkways, parkways,
driveways, landscaped areas, striping, bumpers, irrigation systems, Common Area
lighting facilities, fences and gates, elevators and roof, and pain of exterior
wall.
(bb) Exterior signs and any tenant directories.
(cc) Fire detection and sprinkler systems.
(ii) The cost of water, gas, electricity and telephone to
service the Common areas.
(iii) Trash disposal, property management and security services
and the costs of any environmental inspections.
(iv) Real Property Taxes (as defined in Paragraph 10.2) to be
paid by Lessor for the Building and the Common Areas under Paragraph 10 hereof.
(v) The cost of the premiums for the insurance policies
maintained by Lessor under Paragraph 8 hereof.
(vi) Any deductible portion of an insured loss concerning the
Building or the Common Areas.
(vii) Any other services to be provided by Lessor that are stated
elsewhere in this Lease to be a Common Area Operating Expense.
(b) Any Common Area Operating Expenses and Real Property Taxes that
are specifically attributable to the Building or to any other building in the
Industrial Center or to the operation, repair and maintenance thereof, shall be
allocated entirely to the Building or to such other building. However, any
Common Area Operating Expenses and Real Property Taxes that are not specifically
attributable to the Building or to any other building or to the operation,
repair and maintenance thereof, shall be equitably allocated by Lessor to all
buildings in the Industrial Center.
(c) The inclusion of the improvements, facilities and services set
forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon
Lessor to either have said improvements or facilities or to provide those
services unless the Industrial Center already has the same, Lessor already
provides the services, or Lessor has agreed elsewhere in this Lease to provide
the same or some of them.
(d) Lessee's Share of Common Area Operating Expenses shall be payable
by Lessee within ten (10) days after a reasonably detailed statement of actual
expenses is presented to Lessee by Lessor. At Lessor's option, however, an
amount may be estimated by Lessor from time to time of Lessee's Share of annual
Common Area Operating Expenses and the same shall be payable monthly or
quarterly, as Lessor shall designate, during each 12-month period of the Lessee
term, on the same day as the Base Rent is due hereunder. Lessor shall deliver
to Lessee within sixty (60) days after the expiration of each calendar year a
reasonably detailed statement showing Lessee's Share of the actual Common Area
Operating Expenses incurred during the preceding year. If Lessee's payments
under this Paragraph 4.2(d) during said preceding year exceed Lessee's Share as
indicated on said statement, Lessor shall be credited the amount of such over-
** which painting, and parking lot striping shall not be done more
often than once every five years.
<PAGE>
payment against Lessee's Share of Common Area Operating Expenses next becoming
due. If Lessee's payments under this Paragraph 4.2(d) during said preceding
year were less than Lessee's Share as indicated on said statement, Lessee shall
pay to Lessor the amount of the deficiency within ten (10) days after delivery
by Lessor to Lessee of said statement.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon Lessee's execution
hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain
all or any portion of said Security Deposit for the payment of any amount due
Lessor or to reimburse or compensate Lessor for any liability, cost, expense,
loss or damage (including attorneys' fees) which Lessor may suffer or incur by
reason thereof. If Lessor uses or applies all or any portion of said Security
Deposit, Lessee shall within ten (10) days after written request therefore
deposit monies with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Any time the Base Rent increases during the
term of this Lease, Lessee shall, upon written request from Lessor, deposit
additional monies with Lessor as an addition to the Security Deposit so that the
total amount of the Security Deposit shall at all times bear the same proportion
to the then current Base Rent as the initial Security Deposit bears to the
initial Base Rent set forth in Paragraph 1.5. Lessor shall not be required to
keep all or any part of the Security Deposit separate from its general accounts.
Lessor shall, at the expiration or earlier termination of the term hereof and
after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option,
to the last assignee, if any, of Lessee's Interest herein), that portion of the
Security Deposit not used or applied by Lessor. Unless otherwise expressly
agreed in writing by Lessor, no part of the Security Deposit shall be considered
to be held in trust, to bear interest or other increment for its use, or to be
prepayment for any monies to be paid by Lessee under this Lease.
6. USE
6.1 PERMITTED USE.
(a) Lessee shall use and occupy the Premises only for the Permitted
Use set forth in Paragraph 1.8, or any legal use which is reasonably comparable
thereto, and for no other purpose. Lessee shall not use or permit the use of
the Premises in a manner that is unlawful, creates waste or a nuisance, or that
disturbs owners and/or occupants of, or causes damage to the Premises or
neighboring premises or properties.
(b) Lessor hereby agrees to not unreasonably withhold or delay its
consent to any written request by Lessee, Lessee's assignees or subtenants, and
by prospective assignees and subtenants of Lessee, its assignees and subtenants,
for a modification of said Permitted Use, so long as the same will not impair
the structural integrity of the improvements on the Premises or in the Building
or the mechanical or electrical systems therein, does not conflict with uses by
other lessees, is not significantly more burdensome to the Premises or the
Building and the Improvements thereon, and is otherwise permissable pursuant to
this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall
within live (5) business days after such request give a written notification of
same, which notice shall include an explanation of Lessor's reasonable
objections to the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE"
as used in this Lease shall mean any product, substance, chemical, material or
waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment, or the Premises; (ii) regulated or monitored by any governmental
authority; or (iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substance shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, crude oil or any products or by-products thereof. Lessee
shall not engage in any activity in or about the Premises which constitutes a
Reportable Use (as hereinafter defined of Hazardous Substances without the
express, prior written consent of Lessor and compliance in a timely manner
(at Lessee's sole cost and expense) with all Applicable Requirements (as
defined in Paragraph 6.3). "REPORTABLE USE" shall mean (i) the installation
or use of any above or below ground storage tank, (ii) the generation,
possession, storage, use, transportation, or disposal of a Hazardous
Substance that requires a permit from, or with respect to which a report,
notice, registration or business plan is required to be filed with, any
governmental authority, and (iii) the presence in, on or about the Premises
of a Hazardous Substance with respect to which any Applicable Laws require
that a notice be given to persons entering or occupying the Premises or
neighboring properties. Notwithstanding the foregoing, Lessee may, without
Lessor's prior consent, and in compliance with all Applicable Requirements,
use any ordinary and customary materials reasonably required to be used by
Lessee in the normal course of the Permitted Use, so long as such use is not
a Reportable Use and does not expose the Premises or neighboring properties
to any meaningful risk or contamination or damage or expose Lessor to any
liability therefor. In addition, Lessor may (but without any obligation to
do so) condition its consent to any Reportable Use of any Hazardous Substance
by Lessee's giving Lessor such additional assurances as Lessor, in its
reasonable discretion, deems necessary to protect itself, the public, the
Premises and the environment against damage, contamination or injury and/or
liability therefor, including but not limited to the installation (and, at
Lessor's option, removal on or before Lease expiration or earlier
termination) of reasonably necessary protective modifications to the Premises
(such as concrete encasements).
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause
to believe, that a Hazardous Substance has come to be located in, on, under or
about the Premises or the Building, other than as previously consented to by
Lessor, Lessee shall immediately give Lessor written notice thereof, together
with a copy of any statement, report, notice, registration, application, permit,
business plan, license, claim, action, or proceeding given to, or received from,
any governmental authority or private party concerning the presence, spill,
release, discharge of, or exposure to, such Hazardous Substance including but
not limited to all such documents as may be involved in any Reportable Use
involving the Premises. Lessee shall not cause or permit any Hazardous
Substance to be spilled or released in, on under or about the Premises
(including, without limitation, through the plumbing or sanitary sewer system).
(c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and
hold Lessor, its agents, employees, lenders and ground lessor. If any, and the
Premises, harmless from and against any and all danger, liabilities, judgments,
costs, claims, liens, expenses, penalties, loss of permits and attorneys' and
consultants' fees arising out of or involving any Hazardous Substance brought
onto the Premises by or for Lessee or by anyone under Lessee's control.
Lessee's obligations under this Paragraph 6.2(c) shall include, but not be
limited to, the effects of any contamination or injury to person, property or
the environment created or suffered by Lessee, and the cost of investigation
(including consultants' and attorneys' fees and testing), removal, remediation,
restoration and/or abatement thereof, or of any contamination therein involved,
and shall survive the expiration or earlier termination of this Lease. No
termination, cancellation or release agreement entered into by Lessor and Lessee
shall release Lessee from its obligations under this Lease with respect to
Hazardous Substances, unless specifically so agreed by Lessor in writing at the
time of such agreement. See Addendum
6.3 LESSEE'S COMPLIANCE WITH REQUIREMENTS. Lessee shall, at Lessee's sole
cost and expense, fully, diligently and in a timely manner, comply with all
"APPLICABE REQUIREMENTS," which termis used in this Lease to mean all laws,
rules requlations, ordinances, directives, convenants, easements and
restreictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, relating in any manner to the
Premises (including but not limited to matters pertaining to (i) industrial
hygiene, (ii) environmental conditions on, in, under or about the Premises,
including soil and groundwater conditions, and (iii) the use, generation,
manufacture, production, installation, maintenance, removal, transportation,
storage, spill, or release of any Hazardous Substance), now in effect or
which may hereafter come into effect. Lessee shall, within five (5) days
after receipt of Lessor's written request, provide Lessor with copies of all
documents and information, including but not limited to permits,
registrations, manifests, applications, reports and certificates, evidencing
Lessee's compliance with any Applicable Requirements specified by Lessor, and
shall immediately upon receipt, notify Lessor in writing (with copies of any
documents involved) of any threatened or actual claim, notice, citation,
warning, complaint or report pertaining to or involving failure by Lessee or
the Premises to comply with any Applicable Requirements.
6.4 INSPECTION; COMPLIANCE WITH LAW, Lessor, Lessor's Agents, employees.
Contractors and Designated Representatives, and the holders of any mortgages,
deeds of trust or ground leases on the Premises ("Lenders") shall have the
right to enter the Premises at any time in the case of an emergency, and
otherwise at reasonable times, for the purpose of inspecting the condition of
the Premises and for verifying compliance by Lessee with this Lease and all
Applicable Requirements (as defined in Paragraph 8.3), and Lessor shall be
entitled to employ experts and/or consultants in connection therewith to
advise Lessor with respect to Lessee's activities, including but not limited
to Lessee's installation, operation, use, monitoring, maintenance, or removal
of any Hazardous Substance on or from the Premises. The costs and expenses
of any such inspections shall be paid by the party requesting same, unless a
Default or Breach of this Lease by Lessee or a violation of Applicable
Requirements or a contamination, caused or materially contributed to by
Lessee, is found to exist or to be imminent, or unless the inspection is
requested or ordered by a governmental authority as the result of any such
existing or imminent violation or contamination. In such case, Lessee shall
upon request reimburse Lessor or Lesser's Lendor, as the case may be, for the
costs and expenses of such inspections.
7. MAINTENANCE, REPAIRS, UTILITY INSTALLATIONS, TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3
(Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's
Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at
Lessee's sole cost and expense and at all times, keep the Premises and every
part thereof in good order, condition and repair (whether or not such portion of
the Premises requiring repair, or the means of repairing the same, are
reasonably or readily accessible to Lessee, and whether or not the need for such
repairs occurs as a result of Lessee's use, any prior use, the elements or the
age of such portion of the Premises), including, without limiting the generality
of the foregoing, all equipment or facilities specifically serving the Premises,
such as plumbing, heating, air conditioning, ventilating, electrical, lighting
facilities, boilers, fired or unfired pressure vessels, fire hose connections if
within the Premises, fixtures, interior walls, interior surfaces of exterior
walls, ceilings, floors, windows, doors, plate glass, and skylights, but not
excluding any items which are the responsibility of Lessor pursuant to Paragraph
7.2 below. Lessee, in keeping the Premises in good order, condition and repair,
shall exercise and perform good maintenance practices. Lessee's obligations
shall include restorations, replacements or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order, condition
and state of repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain a contract, with copies to Lessor, in customary form and substance for
and with a contractor specializing and experienced in the inspection,
maintenance and service of the heating, air conditioning and ventilation system
for the Premises. However, Lessor reserves the right, upon notice to Lessee, to
procure and maintain the contract for the heating, air conditioning and
ventilating systems, and if Lessor so selects, Lessee shall reimburse Lessor,
upon demand, for the cost thereof.
(c) If Lessee fails to perform Lessee's obligations under this
Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days' prior
written notice to Lessee (except in the case of an emergency, in which case no
notice shall be required), perform such obligations on Lessee's behalf, and put
the Premises in good order, condition and repair, in accordance with Paragraph
13.2 below.
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs
2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building
Code), 4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's
Obligations), 9 (Damage or Destruction) and 14 (Condemnation), Lessor,
subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order,
condition and repair the foundations, exterior walls, structural condition of
interior bearing walls, exterior roof, fire sprinkler and/or standpipe and
hose (if located in the Common Areas) or other automatic fire extinguishing
system including fire alarm and/or smoke
-3-
<PAGE>
detection systems and equipment, fire hydrants, parking lots, walkways,
parkways, driveways, landscaping, fences, signs and utility systems
serving the Common Areas and all parts thereof, as well as providing
the services for which there is a Common Area Operating Expense
pursuant to Paragraph 4.2. Lessor shall not be obligated to paint
the exterior or interior surfaces of exterior walls nor shall Lessor
be obligated to maintain, repair or replace windows, doors or plate
glass of the Premises. Lessee expressly waives the benefit of any
statute now or hereafter in effect which would otherwise afford
Lessee the right to terminate this Lease because of Lessor's failure
to keep the Building, Industrial Center or Common Areas in good
order, condition and repair.
7.3 UTILITY INSTALLATIONS, TRADE FIXTURES, ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "Utility
Installations" is used in this Lease to refer to all air lines, power panels,
electrical distribution, security, fire protection systems, communications
systems, lighting fixtures, heating, ventilating and air conditioning
equipment, plumbing, and fencing in, on or about the Premises. The term
"Trade Fixtures" shall mean Lessee's machinery and equipment which can be
removed without doing material damage to the Premises. The term "Alterations"
shall mean any modification of the Improvements on the Premises which are
provided by Lessor under the terms of this Lease, other than Utility
Installations or Trade Fixtures. "Lessee-Owned Alterations and/or Utility
Installations" are defined as Alterations and/or Utility Installations made
by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a).
Lessee shall not make nor cause to be made any Alterations or Utility
Installations in, on, under or about the Premises without Lessor's prior
written consent. Lessee may, however, make non-structural Utility
Installations to the Interior of the Premises (excluding the roof) without
Lessor's consent but upon notice to Lessor, so long as they are not visible
from the outside of the Premises, do not involve puncturing, relocating or
removing the roof or any existing walls, or changing or interfering with the
fire sprinkler or fire detection systems and the cumulative cost thereof
during the term of this Lease as extended does not exceed $2,500.00.
(b) CONSENT. Any Alterations or Utility Installations that
Lessee shall desire to make and which require the consent of the Lessor shall
be presented to Lessor in written form with detailed plans. All consents
given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent
specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring
all applicable permits required by governmental authorities; (ii) the
furnishing of copies of such permits together with a copy of the plans and
specifications for the Alteration or Utility Installation to Lessor prior to
commencement of the work thereon; and (iii) the compliance by Lessee with all
conditions of said permits in a prompt and expeditious manner. Any
Alterations or Utility Installations by Lessee during the term of this Lease
shall be done in a good and workmanlike manner, with good and sufficient
materials, and be in compliance with all Applicable Requirements. Lessee
shall promptly upon completion thereof furnish Lessor with as-built plans and
specifications therefor.
(c) LIEN PROTECTION. Lessee shall pay when due all claims
for labor or materials furnished or alleged to have been furnished to or for
Lessee at or for use on the Premises, which claims are or may be secured by
any mechanic's or materialmen's lien against the Premises or any Interest
therein. Lessee shall give Lessor not less than ten (10) days' notice prior
to the commencement of any work, on, or about the Premises, and Lessor shall
have the right to post notices of non-responsibility in or on the Premises as
provided by law. If Lessee shall, in good faith, contest the validity of any
such lien, claim or demand, then Lessee shall, at its sole expense, defend
and protect itself, Lessor and the Premises against the same and shall pay
and satisfy any such adverse judgment that may be rendered thereon before the
enforcement thereof against the Lessor or the Premises. If Lessor shall
require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor
in an amount equal to one and one-half times the amount of such contested lien
claim or demand, indemnifying Lessor against liability for the same, as
required by law for the holding of the Premises free from the effect of such
lien or claim. In addition, Lessor may require Lessee to pay Lessor's
attorneys' fees and costs in participating in such action if Lessor shall
decide it is to its best interest to do so.
7.4 OWNERSHIP, REMOVAL, SURRENDER, AND RESTORATION.
(a) REMOVAL. Unless otherwise agreed in writing, Lessor may
require that any or all Lessee-Owned Alterations or Utility Installations be
removed by the expiration or earlier termination of this Lease,
notwithstanding that their installation may have been consented to by Lessor.
Lessor may require the removal at any time of all or any part of any
Alterations or Utility Installations made without the required consent of
Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender the
Premises by the end of the last day of the Lease term or any earlier
termination date, clean and free of debris and in good operating order,
condition and state of repair, ordinary wear and tear and damage by insured
casualty excepted. Ordinary wear and tear shall not include any damage or
deterioration that would have been prevented by good maintenance practice or
by Lessee performing all of its obligations under this Lease. The obligation
of Lessee shall include the repair of any damage occasioned by the
installation, maintenance or removal of Lessee's Trade Fixtures, furnishings,
equipment, and Lessee-Owned Alterations and Utility Installations, as well as
the removal of any storage tank installed by or for Lessee, and the removal,
replacement, or remediation of any soil, material or ground water
contaminated by Lessee, all as may then be required by Applicable
Requirements and/or good practice. Lessee's Trade Fixtures shall remain the
property of Lessee and shall be removed by Lessee subject to its obligation
to repair and restore the Premises per this Lease.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT OF PREMIUMS. The cost of the premiums for the insurance
policies maintained by Lessor under this Paragraph 8 shall be a Common Area
Operating Expense pursuant to Paragraph 4.2 hereof. Premiums for policy
periods commencing prior to, or extending beyond, the term of this Lease
shall be prorated to coincide with the corresponding Commencement Date or
Expiration Date. All tenant insurance may be under a blanket policy.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force
during the term of this Lease a Commercial General Liability policy of
Insurance protecting Lessee, Lessor and any Lender(s) whose names have been
provided to Lessee in writing (as additional insureds) against claims for
bodily injury, personal injury and property damage based upon, involving or
arising out of the ownership, use, occupancy or maintenance of the Premises
and all areas appurtenant thereto. Such Insurance shall be on an occurrence
basis providing single limit coverage in an amount not less than
$2,000,000.00 per occurrence with an "Additional Insured--Managers or Lessors
of Premises" endorsement and contain the "Amendment of the Pollution
Exclusion" endorsement for damage caused by heat, smoke or fumes from a
hostile fire. The policy shall not contain any intra-insured exclusions as
between insured persons or organizations, but shall include coverage for
liability assumed under this Lease as an "insured contract" for the
performance of Lessee's indemnity obligations under this Lease. The limits of
said Insurance required by this Lease or as carried by Lessee shall not,
however, limit the liability of Lessee nor relieve Lessee of any obligation
hereunder. All Insurance to be carried by Lessee shall be primary to and not
contributory with any similar insurance carried by Lessor, whose insurance
shall be considered excess insurance only.
(b) CARRIED BY LESSOR. Lessor shall also maintain liability
insurance described in Paragraph 8.2(a) above, in addition to and not in lieu
of, the Insurance required to be maintained by Lessee. Lessee shall not be
named as an additional insured therein.
8.3 PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. Lessor shall obtain and keep
in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and to any Lender(s), insuring against
loss or damage to the Premises. Such insurance shall be for full replacement
cost, as the same shall exist from time to time, or the amount required by
any Lender(s), but in no event more than the commercially reasonable and
available insurable value thereof if, by reason of the unique nature or age
of the Improvements involved, such latter amount is less than full
replacement cost. Lessee-Owned Alterations and Utility Installations, Trade
Fixtures and Lessee's personal property shall be insured by Lessee pursuant
to Paragraph 8.4 If the coverage is available and commercially appropriate,
Lessor's policy or policies shall insure against all risks of direct physical
loss or damage (including the perils of flood and/or earthquake), including
coverage for any additional costs resulting from debris removal and
reasonable amounts of coverage for the enforcement of any ordinance or law
regulating the reconstruction or replacement of any undamaged sections of the
Building required to be demolished or removed by reason of the enforcement of
any building, zoning, safety or land use laws as the result of a covered
loss, but not including plate glass insurance. Said policy or policies shall
also contain an agreed valuation provision in lieu of any co-insurance
clause, waiver of subrogation, and inflation guard protection causing an
increase in the annual property insurance coverage amount by a factor of not
less than the adjusted U.S. Department of Labor Consumer Price Index for All
Urban Consumers for the city nearest to where the Premises are located.
(b) RENTAL VALUE. Lessor shall also obtain and keep in force
during the term of this Lease a policy or policies in the name of Lessor, with
loss payable to Lessor and any Lender(s), insuring the loss of the full
rental and other charges payable by all lessees of the Building to Lessor for
one year (including all Real Property Taxes, Insurance costs, all Common Area
Operating Expenses and any scheduled rental increases). Said Insurance may
provide that in the event the Lease is terminated by reason of an insured
loss, the period of indemnity for such coverage shall be extended beyond the
date of the completion of repairs or replacement of the Premises, to provide
for one full year's loss of rental revenues from the date of any such loss.
Said insurance shall contain an agreed valuation provision in lieu of any
co-insurance clause, and the amount of coverage shall be adjusted annually to
reflect the projected rental income, Real Property Taxes, insurance premium
costs and other expenses, if any, otherwise payable, for the next 12-month
period. Common Area Operating Expenses shall include any deductible amount in
the event of such loss.
(c) ADJACENT PREMISES. Lessee shall pay for any increase in
the premiums for the property insurance of the Building and for the Common
Areas or other buildings in the Industrial Center if said increase is caused
by Lessee's acts, omissions, use or occupancy of the Premises.
(d) LESSEE'S IMPROVEMENTS. Since Lessor is the Insuring
Party, Lessor shall not be required to insure Lessee-Owned Alterations and
Utility Installations unless the item in question has become the property of
Lessor under the terms of this Lease.
8.4 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policyholders
Rating" of at least B+, V, or such other rating as may be required by a
Lender, as set forth in the most current issue of "Best's Insurance Guide."
Lessee shall not do or permit to be done anything which shall invalidate the
insurance policies referred to in
-4-
<PAGE>
this Paragraph 8. Lessee shall cause to be delivered to Lessor, within seven
(7) days after the earlier of the Early Possession Date or the Commencement
Date, certified copies of, or certificates evidencing the existence and
amounts of, the insurance required under Paragraph 8.2(b) and 8.4. No such
policy shall be cancelable or subject to modification except after thirty
(30) days' prior written notice to Lessor. Lessee shall at least thirty (30)
days prior to the expiration of such policies, furnish Lessor with evidence
of renewals or "insurance binders" evidencing renewal thereof, or Lessor may
order such insurance and charge the cost thereof to Lessee, which amount
shall be payable by Lessee to Lessor upon demand.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and
waive their entire right to recover damages (whether in contract or in tort)
against the other, for loss or damage to their property arising out of or
incident to the perils required to be insured against under Paragraph 8. The
effect of such releases and waivers of the right to recover damages shall not
be limited by the amount of insurance carried as required, or by any
deductibles applicable thereto. Lessor and Lessee agree to have their
respective insurance companies issuing property damage insurance waive any
right to subrogation that such companies may have against Lessor or Lessee,
as the case may be, so long as the insurance is not invalidated thereby.
8.7 INDEMNITY. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners
and Lenders, from and against any and all claims, loss of rents and/or
damages, costs, liens, judgments, penalties, loss of permits, reasonable
attorneys' and consultants' fees, expenses and/or liabilities arising out of,
involving, or in connection with, the occupancy of the Premises by Lessee,
the conduct of Lessee's business, any act, omission or neglect of Lessee, its
agents, contractors, employees or invitees, and out of any Default or Breach
by Lessee in the performance in a timely manner of any obligation on Lessee's
part to be performed under this Lease. The foregoing shall include, but not
be limited to, the defense or pursuit of any claim or any action or
proceeding involved therein, and whether or not (in the case of claims made
against Lessor) litigated and/or reduced to judgment. In case any action or
proceeding be brought against Lessor by reason of any of the foregoing
matters. Lessee upon notice from Lessor shall defend the same at Lessee's
expense by counsel reasonably satisfactory to Lessor and Lessor shall
cooperate with Lessee in such defense. Lessor need not have first paid any
such claim in order to be so indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Except for Lessor's negligence
and/or breach of express warranties Lessor shall not be liable for injury or
damage to the person of goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by
or results from fire, steam, electricity, gas, water or rain, or from the
breakage, leakage, obstruction or other defects of pipes, fire sprinklers,
wires, appliances, plumbing, air conditioning or lighting fixtures, or from
any other cause, whether said injury or damage results from conditions
arising upon the Premises or upon other portions of the Building of which the
Premises are a part, from other sources or places, and regardless of whether
the cause of such damage or injury or the means of repairing the same is
accessible or not. Lessor shall not be liable for any damages arising from
any act or neglect of any other lessee of Lessor nor from the failure by
Lessor to enforce the provisions of any other lease in the Industrial Center.
Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall
under no circumstances be liable for injury to Lessee's business or for any
loss of income or profit therefrom. Except as stated otherwise in this Lease,
Lessor indemnifies Lessee for Lessor's obligations under this Lease.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to
the Premises, other than Lessee-Owned Alterations and Utility Installations,
the repair cost of which damage or destruction is less than fifty percent
(50%) of the then Replacement Cost (as defined in Paragraph 9.1(d)) of the
Premises (excluding Lessee-Owned Alterations and Utility installations and
Trade Fixtures) immediately prior to such damage or destruction.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction
to the Premises, other than Lessee-Owned Alterations and Utility
Installations, the repair cost of which damage or destruction is fifty
percent (50%) or more of the then Replacement Cost of the Premises (excluding
Lessee-Owned Alterations and Utility Installations and Trade Fixtures)
immediately prior to such damage or destruction. In addition, damage or
destruction to the Building, other than Lessee-Owned Alterations and Utility
Installations and Trade Fixtures of any lessees of the Building, the cost of
which damage or destruction is fifty percent (50%) or more of the then
Replacement Cost (excluding Lessee-Owned Alterations and Utility
Installations and Trade Fixtures of any lessees of the Building) of the
Building shall, at the option of Lessor, be deemed to be Premises Total
Destruction.
(c) "INSURED LOSS" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations and
Trade Fixtures, which was caused by an event required to be covered by the
insurance described in Paragraph 6.3(a) irrespective of any deductible
amounts or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild
the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of applicable building codes,
ordinances or laws, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 PREMISES PARTIAL DAMAGE - INSURED LOSS. If Premises Partial Damage
that is an insured Loss occurs, then Lessor shall, at Lessor's expense,
repair such damage (but not Lessees' Trade Fixtures or Lessee-Owned
Alterations and Utility Installations) as soon as reasonably possible but not
more than 120 days and this Lease shall continue in full force and effect.
Premises Partial Damage due to flood or earthquake shall be subject to
Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be
some insurance coverage, but the net proceeds of any such insurance shall be
made available for the repairs if made by either Party.
9.3 PARTIAL DAMAGE - UNINSURED LOSS. If Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect), Lessor may at Lessor's
option, either (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which event this Lease shall continue in full force and
effect, or (ii) give written notice to Lessee within thirty (30) days after
receipt by Lessor of knowledge of the occurrence of such damage of Lessor's
desire to terminate this Lease as of the date sixty (60) days following the
date of such notice. In the event Lessor elects to give such notice of
Lessor's intention to terminate this Lease, Lessee shall have the right
within ten (10) days after the receipt of such notice to give written notice
to Lessor of Lessee's commitment to pay for the repair of such damage totally
at Lessee's expense and without reimbursement from Lessor. Lessee shall
provide Lessor with the required funds or satisfactory assurance thereof
within thirty (30) days following such commitment from Lessee. In such event
this Lease shall continue in full force and effect, and Lessor shall proceed
to make such repairs as soon as reasonably possible after the required funds
are available. If Lessee does not give such notice and provide the funds or
assurance thereof within the times specified above, this Lease shall
terminate as of the date specified in Lessors's notice of termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the
damage or destruction is an insured Loss or was caused by a negligent or
willful act of Lessee. In the event, however, that the damage or destruction
was caused by Lessee, Lessor shall have the right to recover Lessor's damages
from Lessee except as released and waived in Paragraph 9.7.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one month's Base Rent, whether or not an Insured Loss, Lessor may, at
Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of
Lessor's election to do so within thirty (30) days after the date of
occurrence of such damage. Provided, however, if Lessee at that time has an
exercisable option to extend this Lease or to purchase the Premises, then
Lessee may preserve this Lease by (a) exercising such option, and (b)
providing Lessor with any shortage in insurance proceeds (or adequate
assurance thereof) needed to make the repairs on or before the earlier of (i)
the date which is ten (10) days after Lessee's receipt of Lessor's written
notice purporting to terminate this Lease, or (ii) the day prior to the date
upon which such option expires. If Lessee duly exercises such option during
such period and provides Lessor with funds (or adequate assurance thereof) to
cover any shortage in Insurance proceeds, Lessor shall, at Lessor's expense
repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option
and provide such funds or assurance during such period, then this Lease shall
terminate as of the date set forth in the first sentence of this Paragraph
9.5.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of (i) Premises Partial Damage or (ii) Hazardous
Substance Condition for which Lessee is not legally responsible, the Base
Rent, Common Area Operating Expenses and other charges, if any, payable by
Lessee hereunder for the period during which such damage or condition, its
repair, remediation or restoration continues, shall be abated in proportion
to the degree to which Lessee's use of the Premises is impaired, but not in
excess of proceeds from insurance required to be carried under Paragraph
8.3(b). Except for abatement of Base Rent, Common Area Operating Expenses and
other charges, if any, as aforesaid, all other obligations of Lessee
hereunder shall be performed by Lessee, and Lessee shall have no claim
against Lessor for any damage suffered by reason of any such damage,
destruction, repair, remediation or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises
within ninety (30) days after such obligation shall accrue, Lessee may, at
any time prior to the commencement of such repair or restoration, give
written notice to Lessor and to any Lenders of which Lessee has actual notice
of Lessee's election to terminate this Lease on a date not less than sixty
(20) days following the giving of such notice. If Lessee gives such notice to
Lessor and such Lenders and such repair or restoration is not commenced
within thirty (20) days after receipt of such notice, this Lease shall
terminate as of the date specified in said notice. If Lessor or a Lender
commences the repair or restoration of the Premises within thirty (20) days
after the receipt of such notice, this Lease shall continue in full force and
effect. "Commence" as used in this Paragraph 9.6 shall mean either the
unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever occurs first.
9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable
Requirements and this Lease shall continue in full force and effect, but
subject
-5-
<PAGE>
to Lessor's rights under Paragraph 6.2(c) and Paragraph 13). Lessor may at
Lessors's option either (i) investigate and remediate such Hazardous
Substance Condition, if required, as soon as reasonably possible at Lessor's
expense, in which event this Lease shall continue in full force and effect.
9.8 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, Lessor shall return to Lessee any advance
payment made by Lessee to Lessor and so much of Lessee's Security Deposit as
has not been, or is not then required to be, used by Lessor under the terms
of this Lease.
9.9 WAIVER OF STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
and the Building with respect to the termination of this Lease and hereby
waived the provisions of any present or future statute to the extent it is
inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes on , or
before their due date, as defined in Paragraph 10.2, applicable to the
Industrial Center, and except as otherwise provided in Paragraph 10.3, any
such amounts shall be included in the calculation of Common Area Operating
Expenses in accordance with the provisions of Paragraph 4.2.
10.2 REAL PROPERTY TAX DEFINITION. As used herein, the term "REAL
PROPERTY TAXES" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
excise, franchise, business and occupation, personal income or estate taxes)
imposed upon the Industrial Center by any authority having the direct or
indirect power to tax, including any city, state or federal government, or
any school, agricultural, sanitary, fire, street, drainage, or other
improvement district thereof, levied against any legal or equitable interest
of Lessor in the Industrial Center or any portion thereof, Lessor's right to
rent or other income therefrom, and/or Lessor's business of leasing the
Premises. The term "REAL PROPERTY TAXES" shall also include any tax, fee, levy
assessment or charge, or any increase therein, imposed by reason of events
occurring, or changes in Applicable Law taking effect, during the term of
this Lease, including by not limited to a change in the ownership of the
Industrial Center or in the improvements thereon, the execution of this
Lease, or any modification, amendment or transfer thereof, and whether or not
contemplated by the Parties. In calculating Real Property Taxes for any
calendar year, the Real Property Taxes for any real estate tax year shall be
included in the calculation of Real Property Taxes for such calendar year
based upon the number of days which such calendar year and tax year have in
common.
10.3 ADDITIONAL IMPROVEMENTS. Common Area Operating Expenses shall not
include Real Property Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Industrial
Center by other lessees or by Lessor for the exclusive enjoyment of such
other lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however,
pay to Lessor at the time Common Area Operating Expenses are payable under
Paragraph 4.2, the entirety of any increase in Real Property Taxes if
assessed solely by reason of Alterations, Trade Fixtures or Utility
Installations placed upon the Premises by Lessee or at Lessee's request.
10.4 JOINT ASSESSMENT. If the Building is not separately assessed, Real
Property Taxes allocated to the Building shall be an equitable proportion of
the Real Property Taxes for all of the land and improvements included within
the tax parcel assessed, such proportion to be determined by Lessor from the
respective valuations assigned in the assessor's work sheets or such other
information as may be reasonably available. Lessor's reasonable
determination thereof, in good faith, shall be conclusive.
10.5 LESSEE'S PROPERTY TAXES. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal
property of Lessee contained in the Premises or stored within the Industrial
Center. When possible, Lessee shall cause its Lessee-Owned Alterations and
Utility Installations, Trade Fixtures, furnishings, equipment and all other
personal property to be assessed and billed separately from the real property
of Lessor. If any of Lessee's said property shall be assessed with Lessor's
real property, Lessee shall pay Lessor the taxes attributable to Lessee's
property within the (10) days after receipt of a written statement setting
forth the taxes applicable to Lessee's property.
11. UTILITIES. Lessee shall pay directly for all utilities and services
supplied to the Premises, including but not limited to electricity,
telephone, security, gas and cleaning of the Premises, together with any
taxes thereon. If any such utilities or services are not separately metered
to the Premises or separately billed to the Premises, Lessee shall pay to
Lessor a reasonable proportion to be determined by Lessor of all such
charges jointly metered or billed with other premises in the Building, in the
manner and within the time periods set forth in Paragraph 4.2(d).
12. ASSIGNMENT AND SUBLETTING.
12.1 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. SEE
ADDENDUM
(a) Regardless of Lessor's consent, any assignment or
subletting shall not (i) be effective without the express written assumption
by such assignee or sublessee of the obligations of Lessee under this Lease,
(ii) release Lessee of any obligations hereunder, nor (iii) after the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
-6-
<PAGE>
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said default. A "DEFAULT" by Lessee is
defined as a failure by Lessee to observe, comply with or perform any of the
terms, covenants, conditions or rules applicable to Lessee under this Lease. A
"BREACH" by Lessee is defined as the occurrence of any one or more of the
following Defaults, and, where a grace period for cure after notice is specified
herein, the failure by Lessee to cure such Default prior to the expiration of
the applicable grace period, and shall entitle Lessor to pursue the remedies set
forth in Paragraphs 13.2 and/or 13.3:
(a) The abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Base Rent, Lessee's Share of Common
Area Operating Expenses, or any other monetary payment required to be made by
Lessee hereunder as and when due, the failure by Lessee to provide Lessor
with reasonable evidence of insurance of surety bond required under this
Lease, or the failure of Lessee to fulfill any obligation under this Lease
which endangers or threatens life or property, where such failure continues
for a period of 10 days following written notice thereof by or on behalf of
Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence of (i)
compliance with Applicable Requirements per Paragraph 6.3, (ii) the
inspection, maintenance and service contracts required under Paragraph
7.1(b), (iii) the rescission of an unauthorized assignment or subletting per
Paragraph 12.1, (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the
subordination or non-subordination of this Lease per Paragraph 30, (vi) the
guaranty of the performance of Lessee's obligations under this Lease if
required under Paragraphs 1.11 and 37, (vii) the execution of any document
requested under Paragraph 42 (easements).
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof
that are to be observed, complied with or performed by Lessee, other than
those described in Subparagraphs 13.1(a), (b) or (c), above, where such
Default continues for a period of thirty (30) days after written notice
thereof by or on behalf of Lessor to Lessee; provided, however, that if the
nature of Lessee's Default is such that more than thirty (30) days are
reasonably required for its cure, then it shall not be deemed to be a Breach
of this Lease by Lessee if Lessee commences such cure within said thirty (30)
day period and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making by
Lessee of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section 101 or
any successor statute thereto (unless, in the case of a petition filed
against Lessee, the same is dismissed within sixty (60) days); (iii) the
appointment of a trustee or receiver to take possession of substantially all
of Lessee's assets located at the Premises or of Lessee's interest in this
Lease, where possession is not restored to Lessee within thirty (30) days; or
(iv) the attachment, execution or other judicial seizure of substantially all
of Lessee's assets located at the Premises or of Lessee's interest in this
Lease, where such seizure is not discharged within thirty (30) days; provided,
however, in the event that any provision of this Subparagraph 13.1(e) is
contrary to any applicable law, such provision shall be of no force or
effect, and shall not affect the validity of the remaining provisions.
(f) The discovery by Lessor that any financial statement of Lessee or
of any Guarantor, given to Lessor by Lessee or any Guarantor, was materially
false.
13.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written
notice to Lessee (or in case of an emergency, without notice), Lessor may at
its option (but without obligation to do so), perform such duty or obligation
on Lessee's behalf, including but not limited to the obtaining of reasonably
required bonds, insurance policies, or governmental licenses, permits or
approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee to Lessor upon invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its own option, may require all future payments to be made under
this Lease by Lessee to be made only by cashier's check. In the event of a
Breach of this Lease by Lessee (as defined in Paragraph 13.1), with or
without further notice or demand, and without limiting Lessor in the exercise
of any right or remedy which Lessor may have be reason of such Breach, Lessor
may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate
and Lessee shall immediately surrender possession of the Premises to Lessor.
In such event Lessor shall be entitled to recover from Lessee: (i) the worth
at the time of the award of the unpaid rent which had been earned at the time
of termination; (ii) the worth at the time of award of the amount by which
the unpaid rent which would have been earned after termination until the time
of award exceeds the amount of such rental loss that the Lessee proves could
have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid rent for the balance of the term after the time of
award exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor
for all the detriment proximately caused by the Lessee's failure to perform
its obligations under this Lease or which in the ordinary course of things
would be likely to result therefrom, including but not limited to the cost of
recovering possession of the Premises, expenses of reletting, including
necessary renovation and alteration of the Premises, reasonable attorneys'
fees, and that portion of any leasing commission paid by Lessor in connection
with this Lease applicable to the unexpired term of this Lease. The worth at
the time of award of the amount referred to in provision (iii) of the
immediately preceding sentence shall be computed by discounting such amount
at the discount rate of the Federal Reserve Bank of San Francisco or the
Federal Reserve Bank District in which the Premises are located at the time
of award plus one percent (1%). Efforts by Lessor to mitigate damages caused
by Lessee's Default or Breach of this Lease shall not waive Lessor's right to
recover damages under this Paragraph 13.2. If termination of this Lease is
obtained through the provisional remedy of unlawful detainer, Lessor shall
have the right to recover in such proceeding the unpaid rent and damages as
are recoverable therein, or Lessor may reserve the right to recover all or
any part thereof in a separate suit for such rent and/or damages. If a notice
and grace period required under Subparagraph 13.1(b), (c) or (d) was not
previously given, a notice to pay rent or quit, or to perform or quit, as the
case may be, given to the Lessee under any statute authorizing the forfeiture
of leases for unlawful detainer shall also constitute the applicable notice for
grace period purposes required by Subparagraph 13.1(b),(c) or (d). In such
case, the applicable grace period under the unlawful detainer statue shall
run concurrently after the one such statutory notice, and the failure of
Lessee to cure the Default within the greater of the two (2) such grace
periods shall constitute both an unlawful detainer and a Breach of this Lease
entitling Lessor to the remedies provided for in this Lease and/or by said
statute.
(b) Continue the Lease and Lessee's right to possession in effect
(in California under California Civil Code Section 1951.4) after Lessee's
Breach and recover the rent as it becomes due, provided Lessee has the right
to sublet or assign, subject only to reasonable limitations. Lessor and
Lessee agree that the limitations on assignment and subletting in this Lease
are reasonable. Acts of maintenance or preservation, efforts to relet the
Premises, or the appointment of a receiver to protect the Lessor's interest
under this Lease, shall not constitute a termination of the Lessee's right to
possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
Initials: [ILLEGIBLE]
------------
/s/ JC
------------
-7-
<PAGE>
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor
for free or abated rent or other charges applicable to the Premises, or for
the giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of
which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS",
shall be deemed conditioned upon Lessee's full and faithful performance of
all of the terms, covenants and conditions of this Lease to be performed or
observed by Lessee during the term hereof as the same may be extended. Upon
the occurrence of a Breach (as defined in Paragraph 13.1) of this Lease by
Lessee, any such Inducement Provision shall automatically be deemed deleted
from this Lease and of no further force or effect, and any rent, other
charge, bonus, inducement or consideration theretofore abated, given or paid
by Lessor under such an Inducement Provision shall be immediately due and
payable by Lessee to Lessor, and recoverable by Lessor, as additional rent
due under this Lease, notwithstanding any subsequent cure of said Breach by
Lessee. The acceptance by Lessor of rent or the cure of the Breach which
initiated the operation of this Paragraph 13.3 shall not be deemed a waiver
by Lessor of the provisions of this Paragraph 13.3 unless specifically so
stated in writing by Lessor at the time of such acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee
to Lessor of rent and other sums due hereunder will cause Lessor to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Lessor by the
terms of any ground lease, mortgage or deed of trust covering the Premises.
Accordingly, if any installment of rent or other sum due from Lessee shall not
be received by Lessor or Lessor's designee within fifteen (15) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to six percent (6%) of such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder. Rent and other charges may be paid by electronic funds transfer.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt
by Lessor, and by any Lender(s) whose name and address shall have been
furnished to Lessee in writing for such purpose, of written notice specifying
wherein such obligation of Lessor has not been performed; provided, however,
that if the nature of Lessor's obligation is such that more than thirty (30)
days after such notice are reasonably required for its performance, then
Lessor shall not be in breach of this Lease if performance is commenced
within such thirty (30) day period and thereafter diligently pursued to
completion.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said
power (all of which are herein called "condemnation"), this Lease shall
terminate as to the part so taken as of the date the condemning authority
takes title or possession, whichever first occurs. If more than ten percent
(10%) of the floor area of the Premises, or more than twenty-five percent
(25%) of the portion of the Common Areas designated for Lessee's parking, is
taken by condemnation, Lessee may, at Lessee's option, to be exercised in
writing within ten (10) days after Lessor shall have given Lessee written
notice of such taking (or in the absence of such notice, within ten (10) days
after the condemning authority shall have taken possession) terminate this
Lease as of the date the condemning authority takes such possession. If
Lessee does not terminate this Lease in accordance with the foregoing, this
Lease shall remain in full force and effect as to the portion of the Premises
remaining, except that the Base Rent shall be reduced in the same proportion
as the rentable floor area of the Premises taken bears to the total rentable
floor area of the Premises. No reduction of Base Rent shall occur if the
condemnation does not apply to any portion of the Premises. Any award for the
taking of all or any part of the Premises under the power of eminent domain
or any payment made under threat of the exercise of such power shall be the
property of Lessor, whether such award shall be made as compensation for
diminution of value of the leasehold or for the taking of the fee, or as
severance damages; provided, however, that Lessee shall be entitled to any
compensation, separately awarded to Lessee for Lessee's relocation expenses
and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not
terminated by reason of such condemnation, Lessor shall to the extent of its
net severance damages received, over and above Lessee's Share of the legal
and other expenses incurred by Lessor in the condemnation matter, repair any
damage to the Premises caused by such condemnation authority. Lessee shall be
responsible for the payment of any amount in excess of such net severance
damages required to complete such repair.
15. BROKERS' FEES.
15.1 PROCURING CAUSE. The Broker(s) named in Paragraph 1.10 is/are the
procuring cause of this Lease.
15.2 ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's
interest in this Lease, whether such transfer is by agreement or by operation of
law, shall be deemed to have assumed Lessor's obligation under this Paragraph
15. Each Broker shall be an intended third party beneficiary of the provisions
of Paragraph 1.10 and of this Paragraph 15 to the extent of its interest in any
commission arising from this Lease and may enforce that right directly against
Lessor and its successors.
15.3 REPRESENTATIONS AND WARRANTIES. Lessee and Lessor each represent and
warrant to the other that it has had no dealings with any person, firm, broker
or finder other than as named in Paragraph 1.10(a) in connection with the
negotiation of this Lease and/or the consummation of the transaction
contemplated hereby, and that no broker or other person, firm or entity other
than said named Broker(s) is entitled to any commission or finder's fee in
connection with said transaction. Lessee and Lessor do each hereby agree to
indemnify, protect, defend and hold the other harmless from and against
liability for compensation or charges which may be claimed by any such unnamed
broker, finder or other similar party by reason of any dealings or actions of
the Indemnifying Party, including any costs, expenses, and/or attorneys' fees
reasonably incurred with respect thereto.
16. TENANCY AND FINANCIAL STATEMENTS.
16.1 TENANCY STATEMENT. Each Party (as "RESPONDING PARTY") shall within ten
(10) days after written notice from the other Party (the "REQUESTING PARTY")
execute, acknowledge and deliver to the Requesting Party a statement in writing
in a form similar to the then most current "TENANCY STATEMENT" form published
by the American Industrial Real Estate Association, plus such additional
information, confirmation and/or statements as may be reasonably requested by
the Requesting Party.
16.2 FINANCIAL STATEMENT. If Lessor desires to finance, refinance, or sell
the Premises or the Building, or any part thereof, Lessee and all Guarantors
shall deliver to any potential lender or purchaser designated by Lessor a copy
of Tenant's most recent annual report and 10-Q. All such financial statements
shall be received by Lessor and such lender or purchaser in confidence and shall
be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises. In the event
of a transfer of Lessor's title or interest in the Premises or in this Lease,
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor at the time of such transfer or
assignment. Except as provided in Paragraph 15.3, upon such transfer or
assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the obligations and/or
covenants under this Lease thereafter to be performed by the Lessor. Subject to
the foregoing, the obligations and/or covenants in this Lease to be performed by
the Lessor shall be binding only upon the Lessor as hereinabove defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within ten (10)
days following the date on which it was due, shall bear interest from the
date due at 10% per annum but not exceeding the maximum rate allowed by law,
in addition to the potential late charge provided for in Paragraph 13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein,
and no other prior or contemporaneous agreement or understanding shall be
effective. Lessor and Lessee each represents and warrants to the Brokers that
it has made, and is relying solely upon, its own investigation as to the
nature, quality, character and financial responsibility of the other Party to
this Lease and as to the nature, quality and character of the Premises.
Brokers have no responsibility with respect thereto or with respect to any
default or breach hereof by either Party. Each Broker shall be an intended
third party beneficiary of the provisions of this Paragraph 22.
23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted by this
Lease shall be in writing and may be delivered in person (by hand or by
messenger or courier service) or may be sent by regular, certified or
registered mail or U.S. Postal Service Express Mail, with postage prepaid,
during normal business hours, and shall be deemed sufficiently given if
served in a manner specified in this Paragraph 23. The addresses noted
adjacent to a Party's signature on this Lease shall be that Party's address
for delivery or mailing of notice purposes. Either Party may be written
notice to the other specify a different address for notice purposes. A copy
of all notices required or permitted to be given to Lessor hereunder shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by written notice to Lessee.
23.2 DATE OF NOTICE. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown
on the receipt card, or if no delivery date is shown, the postmark thereon.
If sent by regular mail, the notice shall be deemed given forty-eight (48)
hours after the same is addressed as required herein and mailed with postage
prepaid. Notices delivered by United States Express Mail or overnight courier
that guarantees next day
-8-
<PAGE>
delivery shall be deemed given twenty-four (24) hours after delivery of the
same to the United States Postal Service or courier. If notice is received on
a Saturday or a Sunday or a legal holiday, it shall be deemed received on the
next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any such act shall not be deemed to render
unnecessary the obtaining of Lessor's consent to, or approval of, any
subsequent or similar act by Lessee, or be construed as the basis of an
estoppel to enforce the provision or provisions of this Lease requiring such
consent. Regardless of Lessor's knowledge of a Default or Breach at the time
of accepting rent, the acceptance of rent by Lessor shall not be a waiver of
any Default or Breach by Lessee of any provision hereof. Any payment given
Lessor by Lessee may be accepted by Lessor on account of moneys or damages
due Lessor, notwithstanding any qualifying statements or conditions made by
Lessee in connection therewith, which such statements and/or conditions shall
be of no force or effect whatsoever unless specifically agreed to in writing
by Lessor at or before the time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over in violation of this
Paragraph 26 then the Base Rent payable from and after the time of the
expiration or earlier termination of this Lease shall be increased to 125% of
the Base Rent applicable during the month immediately preceding such
expiration or earlier termination. Nothing contained herein shall be
construed as a consent by Lessor to any holding over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
Parties, their personal representatives, successors and assigns and be
governed by the laws of the State in which the Premises are located. Any
litigation between the Parties hereto concerning this Lease shall be
initiated in the county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or
other hypothecation or security device (collectively, "SECURITY DEVICE"), now
or hereafter placed by Lessor upon the real property of which the Premises
are a part, to any and all advances made on the security thereof, and to all
renewals, modifications, consolidations, replacements and extensions thereof.
Lessee agrees that the Lenders holding any such Security Device shall have no
duty, liability or obligation to perform any of the obligations of Lessor
under this Lease, but that in the event of Lessor's default with respect to any
such obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default
pursuant to Paragraph 13.5. If any Lender shall elect to have this Lease
and/or any Option granted hereby superior to the lien of its Security Device
and shall give written notice thereof to Lessee, this Lease and such Options
shall be deemed prior to such Security Device, notwithstanding the relative
dates of the documentation or recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device,
and that in the event of such foreclosure, such new owner shall not: (i) be
liable for any act or omission of any prior lessor or with respect to events
occurring prior to acquisition of ownership, (ii) be subject to any offsets
or defenses which Lessee might have against any prior lessor, or (iii) be
bound by prepayment of more than one month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this lease, Lessee's subordination of this
Lease shall be subject to receiving assurance (a "non-disturbance agreement")
from the Lender that Lessee's possession and this Lease, including any
options to extend the term hereof, will not be disturbed so long as Lessee is
not in Breach hereof and attorns to the record owner of the Premises.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall
be effective without the execution of any further documents; provided,
however, that upon written request from Lessor or a Lender in connection
with a sale, financing or refinancing of Premises, Lessee and Lessor shall
execute such further writings as may be reasonably required to separately
document any such subordination or non-subordination, attornment and/or
non-disturbance agreement as is provided for herein.
31. ATTORNEY'S FEES. If any Party or Broker brings an action or proceeding
to enforce the terms hereof or declare rights hereunder, the Prevailing Party
(as hereafter defined) in any such proceeding, action, or appeal thereon,
shall be entitled to reasonable attorneys' fees. Such fees may be awarded in
the same suit or recovered in a separate suit, whether or not such action or
proceeding is pursued to decision or judgment. The term "PREVAILING PARTY"
shall include, without limitation, a Party or Broker who substantially
obtains or defeats the relief sought, as the case may be, whether by
compromise, settlement, judgment, or the abandonment by the other Party or
Broker of its claim or defense. The attorneys' fee award shall not be
computed in accordance with any court fee schedule, but shall be such as to
fully reimburse all attorneys' fees reasonably incurred. Broker(s) shall be
intended third party beneficiaries of this Paragraph 31.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times upon prior notice for the
purpose of showing the same to prospective purchasers, lenders, or lessees,
and making such alterations, repairs, improvements or additions to the
Premises or to the Building, as Lessor may reasonably deem necessary. Lessor
may at any time Place on or about the Premises or Building any ordinary "For
Sale" signs and Lessor may at any time during the last one hundred eighty
(180) days of the term hereof place on or about the Premises any ordinary "For
Lease" signs. All such activities of Lessor shall be without abatement of
rent or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first
having obtained Lessor's prior written consent. Notwithstanding anything to
the contrary in this Lease, Lessor shall not be obligated to exercise any
standard of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the exterior of the Premises
or the Building, except that Lessee may, with Lessor's prior written consent,
install (but not on the roof) such signs as are reasonably required to
advertise Lessee's own business so long as such signs are in a location
designated by Lessor and comply with Applicable Requirements and the signage
criteria established for the Industrial Center by Lessor. The installation of
any sign on the Premises by or for Lessee shall be subject to the provisions
of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures
and Alterations). Unless otherwise expressly agreed herein, Lessor reserves
all rights to the use of the roof of the Building, and the right to install
advertising signs on the Building, including the roof, which do not
unreasonably interfere with the conduct of Lessee's business; Lessor shall be
entitled to all revenues from such advertising signs.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for
Breach by Lessee, shall automatically terminate any sublease or lesser estate
in the Premises; provided, however, Lessor shall, in the event of any such
surrender, termination or cancellation, have the option to continue any one
or all of any existing subtenancies, Lessor's failure within ten (10) days
following any such event to make a written election to the contrary by
written notice to the holder of any such lesser interest, shall constitute
Lessor's election to have such event constitute the termination of such
interest.
36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise
provided herein, wherever in this Lease the consent of a Party is required to
an act by or for the other Party, such consent shall not be unreasonably
withheld or delayed. Lessor's actual reasonable costs and expenses (including
by not limited to architects', attorneys', engineers' and other consultants'
fees) incurred in the consideration of, or response to, a request by Lessee
for any Lessor consent pertaining to this Lease or the Premises, including by
not limited to consents to an assignment a subletting or the presence or use
of a Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of
an Invoice and supporting documentation therefor. Lessor's consent to any
act, assignment of this Lease or subletting of the Premises by Lessee shall
not constitute an acknowledgment that no Default or Breach by Lessee of this
Lease exists, nor shall such consent be deemed a waiver of any then existing
Default or Breach, except as may be otherwise specifically stated in writing
by Lessor at the time of such consent.
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises
and the performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this
Lease, Lessee shall have quiet possession of the Premises for the
entire term hereof subject to all of the provisions of this Lease.
-9-
<PAGE>
39. OPTIONS.
39.1 DEFINITION. As used in this Lease, the word "Option" has the
following meaning; (a) the right to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property
of Lessor; (b) the right of first refusal to lease the Premises or the right
of first offer to lease the Premises or the right of first refusal to lease
other property of Lessor or the right of first offer to lease other property
of Lessor; (c) the right to purchase the Premises, or the right of first
refusal to purchase the Premises, or the right of first offer to purchase the
Premises or the right to purchase other property of Lessor, or the right of
first refusal to purchase other property of Lessor, or the right of first
offer to purchase other property of Lessor.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Options
to extend or renew this Lease, a later option cannot be exercised unless the
prior Options to extend or renew this Lease have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary: (i)
during the period commencing with the giving of any notice of Default under
Paragraph 13.1 and continuing until the noticed Default is cured, or (ii)
during the period of time any monetary obligation due Lessor from Lessee is
unpaid (without regard to whether notice thereof is given Lessee), or (iii)
during the time Lessee is in Breach of this Lease, or (iv) in the event that
Lessor has given to Lessee three (3) or more notices of separate Defaults
under Paragraph 13.1 during the twelve (12) month period immediately
preceding the exercise of the Option, whether or not the Defaults are cured.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise
an Option because of the provisions of Paragraph 39.4(a)
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due
and timely exercise of the Option, if, after such exercise and during the
term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation
of Lessee for a period of thirty (30) days after such obligation becomes due
(without any necessity of Lessor to give notice thereof to Lessee), or (ii)
Lessor gives to Lessee three (3) or more notices of separate Defaults under
Paragraph 13.1 during any twelve (12) month period, whether or not the
Defaults are cured, or (iii) if Lessee commits a Breach of this Lease.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide
same. Lessee assumes all responsibility for the protection of the Premises,
Lessee, its agents and invitees and their property from the acts of third
parties.
42. RESERVATIONS. Lessor reserves the right, from time to time, to grant,
without the consent or joinder of Lessee, such easements, rights of way,
utility raceways, and dedications that Lessor deems necessary, and to cause
the recordation of parcel maps and restrictions, so long as such easements,
rights of way, utility raceways, dedications, maps and restrictions do not
reasonably interfere with the use of the Premises by Lessee. Lessee agrees to
sign any documents reasonably requested by Lessor to effectuate any such
easement rights, dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such
payment shall not be regarded as a voluntary payment and there shall survive
the right on the part of said Party to institute suit for recovery of such
sum. If it shall be adjudged that there was no legal obligation on the part
of said Party to pay such sum or any part thereof, said Party shall be
entitled to recover such sum or so much thereof as it was not legally
required to pay under the provisions of this Lease.
44. AUTHORITY. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute
and deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
46. OFFER. Preparation of this Lease by either Lessor or Lessee or Lessor's
agent or Lessee's agent and submission of same to Lessee or Lessor shall not
be deemed an offer to lease. This Lease is not intended to be binding until
executed and delivered by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease.
-10-
<PAGE>
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM
AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY
REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH
RESPECT TO THE PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR
ATTORNEY'S REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO
EVALUATE THE CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF
ASBESTOS, UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO
REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL
REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR
CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL
EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH
IT RELATES. THE PARTIES SHALL RELY SOLELY UPON THE ADVISE OF THEIR OWN
COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE
SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM
THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place and on the
dates specified above their respective signatures.
<TABLE>
<S> <C>
Executed at: Sacramento CA Executed at: Issaquah, WA
---------------------- ------------------------
on: July 6, 1995 on: June 26, 1995
------------------------------- ---------------------------------
By LESSOR: By LESSEE:
CENTRAL VALLEY LIMITED LIABILITY COMPANY DJ&J SOFTWARE CORPORATION, A Washington Corporation, dba
EGGHEAD SOFTWARE
By: /s/ Marvin L. Oates By: /s/ Terence M. Strom
------------------------------- ---------------------------------
Name Printed: Marvin L. Oates Name Printed: Terence M. Strom
--------------------- -----------------------
Title: Title: President/CEO
---------------------------- ------------------------------
By: By:
------------------------------- ---------------------------------
Name Printed: Name Printed:
--------------------- -----------------------
Title: Title:
---------------------------- ------------------------------
Address: 8615 Elder Creek Road, Sacio, CA 95828 Address: 22011 S.E. 51st St. Box 7004, Issaquah, WA 98027
--------------------------------------- -------------------------------------------------
Telephone: (916) 381-3600 Telephone: (206) 557-3566
------------------------ --------------------------
Facsimile: (916) 381-1834 Facsimile: (206) 391-6180
------------------------ --------------------------
BROKER: BROKER:
Executed at: Executed at:
---------------------- ------------------------
on: on:
------------------------------- ---------------------------------
By: By:
------------------------------- ---------------------------------
Name Printed: Name Printed:
--------------------- -----------------------
Title: Title:
---------------------------- ------------------------------
Address: Address:
-------------------------- ----------------------------
Telephone: ( ) Telephone: ( )
------------------------ --------------------------
Facsimile: ( ) Facsimile: ( )
------------------------ --------------------------
</TABLE>
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are utilizing
the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 345 So.
Figueroa St., M-1, Los Angeles, CA 90071. (213)687-8777.
-11-
<PAGE>
ADDENDUM TO STANDARD INDUSTRIAL COMMERCIAL MULTI-TENANT LEASE-NET DATED MAY 15,
1995 BY AND BETWEEN CENTRAL VALLEY LIMITED LIABILITY COMPANY (LESSOR) AND DJ&J
SOFTWARE CORPORATION DBA EGGHEAD SOFTWARE (LESSEE).
1.5 BASE RENT (CONT.) MONTHLY
Years 1 - 2 $34,194.00 per month
6.2(d). HAZARDOUS SUBSTANCES (CONT.) Landlord hereby warrants to Tenant
that the Premises do not contain any asbestos. Landlord also represents and
warrants that it has not yet received notification of any kind from any
governmental agency regarding actual, potential, or threatened contamination
of the Property by Hazardous Substances. Landlord agrees to indemnify and
hold Tenant harmless from any and all costs of any governmental required
remedial action or cleanup suffered or incurred by Tenant arising out of or
related to any use of the Premises, building or Property or presence of
asbestos or Hazardous Substances in any such areas or portion thereof
occurring prior to the Lease Commencement Date.
12.2(a). ASSIGNMENT (CONT.) Notwithstanding any contrary provision of this
Paragraph 12.2 (a), Lessor shall release Lessee from its obligations under the
Lease of the assignee's net worth (or that of its parent company, to the extent
such parent shall guaranty assignee's obligations under this Lease) is in excess
of One Hundred Million Dollars ($100,000,000.00) as evidenced by annual
financial statements provided to Lessor by assignee's accountants or by reports
published in accordance with the Securities and Exchange Commission's reporting
requirements for publicly traded companies, as computed in accordance with
generally accepted accounting principles.
39. OPTIONS (CONT). Lessee is granted eight (8) one (1) year options. Lessee
shall exercise "Options" for years 3-10 by notifying Lessor in writing 180 days
prior to the commencement of said Option Term.
Option (Year 3) $35,220.00 per month
Option (Year 4) $36,277.00 per month
Option (Year 5) $37,365.00 per month
Option (Year 6) $38,299.00 per month
Option (Year 7) $39,256.00 per month
Option (Year 8) $40,237.00 per month
Option (Year 9) $41,243.00 per month
Option (Year 10) $42,274.00 per month
49. MOVE OUT PENALTY. If Lessee elects to vacate the Premises prior to Year 6,
Lessee agrees to pay the following penalty in cash within 90 days prior to
Lessee vacating the Premises:
The office improvement cost is hereby established at $375,000.00. The cost of
the move out penalty will equal one-half (1/2) the remaining unamortized balance
of the office improvement cost. The original amount shall be amortized at 9%
per annum over 8 years. If Lessee remains in the Premises for five (5) years,
there shall be no move out penalty.
Example: Penalty after 2 years: 81.3% of the original balance divided by 2 =
move out penalty cost.
Penalty after 3 years: 70.6% of the original balance divided by 2 =
move out penalty cost.
Penalty after 4 years: 58.9% of the original balance divided by 2 =
move out penalty cost.
THE EXACT PENALTY SHALL BE COMPUTED AS OF THE ACTUAL MOVE-OUT DATE.
50. RIGHT OF FIRST REFUSAL. Lessor hereby grants Lessee a one (1) time first
right of refusal to lease the adjacent 19,720 square foot bay, shown on Exhibit
"A" as "1st Right Area". Lessee shall pay to Lessor $8,000.00 in advance to
move the demising wall. Lessee's exercise of the first right of refusal shall
be effective provided:
A. Lessee is not in default under any of the conditions and provisions of this
Lease.
B. Lessee agrees to lease adjacent bay in its entirety. Lessor shall not be
required to make any improvements other than moving the demising wall.
C. Upon written notification from Lessor to Lessee of a bonafide offer to
lease adjacent space, Lessee shall have five (5) working days to exercise right
of first refusal and execute a Lease Amendment.
51. SIZE REDUCTION. Only at the end of the two (2) year term, Lessee may
reduce size of warehouse by 1 or 2 bays of 19,720 square feet each, shown on
Exhibit "A" as "Reduction Area". Lessee may not reduce total space to less than
98,940 square feet. Lessee agrees to pay $8,000.00 to move demising wall if
Lessee elects to reduce space. The monthly rent shall be reduced $4,338.00 per
bay.
52. ADDITIONAL IMPROVEMENTS. In the event Lessee requests additional
improvements or changes in the above Lessee Improvements listed in Exhibit
"B: attached, Lessor shall respond to such requests with written change orders.
All parties shall sign each change order prior to construction of such changes.
Lessor shall bill Lessee upon completion of each approved change order. Lessee
shall pay the total costs of all change orders in cash within 10 days of Lease
Commencement.
<PAGE>
ADDENDUM TO STANDARD INDUSTRIAL COMMERCIAL MULTI-TENANT LEASE-NET DATED MAY 15,
1995 BY AND BETWEEN CENTRAL VALLEY, A LIMITED LIABILITY COMPANY (LESSOR) AND
DJ&J SOFTWARE CORPORATION DBA EGGHEAD SOFTWARE (LESSEE).
PAGE TWO
53. FLOOD: Lessee expressly acknowledges and assumes the risk that the
Premises and improvements may be subject to flooding. Lessee unconditionally
waives any flood-related property damage claim asserting liability on the
part of the Lessor. Lessor's predecessors and successors-in-interest, the
City of Sacramento or its officers, agents, or employees premised on the
issuance of a permit for construction of the improvements, whether or not the
issuance of this permit is due to the negligence of Lessor, Lessor's
predecessors or successors, the City or its officers, agents or employees.
54. ADA: Lessor warrants that any new construction by Lessor pursuant to
this Lease shall be in conformity with the building plans and permits, and
shall comply with current interpretations of the Americans With Disabilities
Act of 1990 ("ADA") regarding the type of building and/or tenant improvements
constructed by Lessor. However, if any governmental authority should require
any additional improvements, permits or approvals, under ADA or otherwise,
due to Lessee's particular use, or Lessee's employees, customers, or
invitees, other than those which are stated in this Lease, and other than
requirements generally for buildings of this type, including without
limitation additional fire protection equipment or flow capacity, use
permits, or zoning variances, such improvements or changes to the permitted
uses shall be made at Lessee's sole expense.
55. FIRE EXTINGUISHERS: Lessee responsible for supplying fire extinguishers
(2A10:BC) as required per code within 75 feet of any door in space.
56. FORKLIFT RESTRICTIONS: Asphaltic cement can not withstand non-inflatable
forklift tires. In the event the asphalt is damaged by Lessee's use of a
forklift with non-inflatable tires, it will be Lessee's obligation to repair the
damage asphaltic cement at Lessee's sole expense.
57. LESSEE'S FENCE: Subject to applicable governmental regulation, Lessee may,
at its sole cost, construct additional fencing on the east side of the building,
north of the demising wall, to restrict access to Lessee's parking and dock
areas.
58. EARLY POSSESSION: Lessee may have early possession on the earlier to occur
of August 1, 1995 or after completion of the demising wall, which shall be at
least 30 days prior to completion of all improvements.
59. LESSOR'S FENCE: Lessor may, at Lessor's sole cost, erect a fence or other
barrier 75' south of the northwest corner of the building preventing Lessee from
access and parking on the entire west side of the building.
<PAGE>
EXHIBIT "A-1"
CERTIFICATE OF COMPLIANCE
FOR
"PARCEL A" IN THAT CERTAIN CERTIFICATE OF COMPLIANCE
RECORDED IN BOOK 83-03-23 PAGE NO 1969, OFFICIAL RECORDS. AND
LOT 32, AS SHOWN ON THE "PLAT OF FLORIN DEPOT INDUSTRIAL PARK"
FILED IN OFFICE OF THE COUNTY RECORDER OF THE SACRAMENTO
COUNTY ON FEBRUARY 6, 1966, IN BOOK 167 OF MAPS, MAP NO.18
[PLAT MAP]
<PAGE>
EXHIBIT "A-2"
[MAP OF PROPOSED WAREHOUSE]
<PAGE>
EXHIBIT "B-1"
A. Landlord, at Landlord's sole cost and expense, shall construct
approximately 7,000 square feet of the following standard office
improvements located and in accordance with plan and specifications
prepared by Landlord and approved by Tenant, as shown on Exhibit "B-3".
B. Landlord to provide a metal full height demising wall.
C. Six (6) 5'x4' sliding windows.
D. Counter between reception and lobby area with glass window separator and
sliding glass window for reception operator.
E. Two (2) sets of double doors (see Office Exhibit).
F. Restrooms and lockers as shown on Exhibit "B-4". Lessee shall provide and
install lockers.
G. 800 amp 277/480 volt 3-phase electrical main service with distribution to
office and warehouse lighting only.
BUILDING STANDARD WORK OFFICE AREA
1. PARTITIONING:
Landlord shall provide one hundred (100) lineal feet of partitioning per
one thousand (1,000) square feet of leased area.
2. DOORS:
In addition to required exterior entry door(s), Landlord shall provide
three (3) doors per one thousand (1,000) square feet of leased area.
Walnut legacy hollow core, hung in Timely brown tone metal jams with
Schlage "F" series hardware.
3. CEILING:
2'x4' Donn grid (white) & Random fissured with acoustical tile ceiling will
be provided at building standard.
4. FLOORING:
Building standard carpet 26 oz. level loop, linoleum Armstrong cambray,
V.C.T. 3/32" all with 4" rubber base will be installed.
5. HEATING/AIR CONDITIONING:
Heating and air conditioning will be provided throughout the leased area in
accordance with sound engineering practice.
6. ELECTRICAL OUTLETS:
One (1) standard wall duplex outlet will be provided for every one hundred
(100) square feet of leased area.
7. TELEPHONE OUTLETS:
None - one (1) conduit only for future telephones to be installed by
Lessee.
8. SWITCHES:
One (1) switch will be provided per two hundred (200) square feet of leased
area.
9. LIGHT FIXTURES:
One (1) 2'x4' lay-in fluorescent fixture with Prismatic lens will be
provided for every seventy-five (75) square feet of leased area.
10. PAINTING:
All walls shall be painted with one (1) finish coat. Flat Latex-
Sherwin/Williams paint textured walls.
11. INSULATION:
All perimeter walls and ceilings next to unconditioned spaces.
12. TOILET PARTITIONING:
Knickerbocker baked enamel metal. (where required)
13. RESTROOMS:
Toilet paper dispensers and handicapped fixtures.
<PAGE>
EXHIBIT "B-2"
SPECIFICATIONS
LESSOR shall construct various improvements in accordance with the Plans
described below.
IN THE EVENT OF A CONFLICT BETWEEN THE PLANS AND THE SPECIFICATIONS STATED IN
THE LEASE, THE PLANS SHALL GOVERN THE SPECIFICATIONS STATED IN THE LEASE.
PLAN SHEET INDEX
Leo McGlade - Engineer - Dated: 10/29/93
Job # 0-1-660
1 SITE PLAN
2-4 FLOOR PLAN
5-6 ELEVATIONS
7-9 FOUNDATION PLANS
10-11 TYPICAL CONCRETE SECTIONS/STRUCTURAL PANEL ELEVATIONS
TENANT IMPROVEMENT PLANS FOR FRAMING. MECHANICAL, ELECTRICAL, AND PLUMBING SHALL
BE REVIEWED AND APPROVED BY THE PARTIES AS SUCH PLANS ARE COMPLETED.
<PAGE>
[FLOOR PLAN]
EXHIBIT "B-3"
<PAGE>
[FLOOR PLAN]
EXHIBIT "B-4"
<PAGE>
NOTICE OF DISCLOSURE AND AGREEMENT
DATE: MAY 15, 1995
__________________________
LANDLORD/
SELLER: CENTRAL VALLEY LIMITED LIABILITY COMPANY
______________________________________________________
TENANT/
PURCHASER: EGGHEAD SOFTWARE
______________________________________________________
PROPERTY: 8825 ELDER CREEK ROAD, SACRAMENTO, CA 95828
______________________________________________________
BROKERS: BUZZ OATES REAL ESTATE REPRESENTING CENTRAL VALLEY
__________________
BUZZ OATES REAL ESTATE REPRESENTING EGGHEAD SOFTWARE
______________________ __________________
BROKER REPRESENTATION
X
- --- check if applicable. Seller/Landlord and Purchaser/Tenant hereby
acknowledge that Broker represents both parties hereto; and both parties
consent thereto.
ALQUIST-PRIOLO NOTIFICATION: ALQUIST-PRIOLO EARTHQUAKE FAULT ZONING ACT
The property is or may be situated in an Earthquake Fault Zone as designated
under the Alquist-Priolo earthquake Fault Zoning Act, Section 2621-2630,
inclusive, of the California Public Resources Code; and, as such, the
construction or development on the Property of any structure for human
occupancy may be subject to the findings of a geologic report prepared by a
geologist registered in the State of California, unless such report is waived
by the city or county under the terms of that Act. No representations on the
subject are made by Seller/Landlord or by BUZZ OATES REAL ESTATE, or its
agents or employees, and the Purchaser/Tenant should make his/her/its own
inquiry or investigation.
Special Studies Zone yes X no Source Fault-Rupture Hazard Zones in
-- -- California Special Publication 42,
Figure 4-H
----------------------------------
NOTIFICATION RE: NATIONAL FLOOD INSURANCE PROGRAM
This Property is or may be located in a Special Flood Hazard Area on United
State Department of Housing and urban Development (HUD) "Special Flood Zone
Area Maps". Federal law requires that as a condition of obtaining federally
related financing on most properties located in "flood zones", banks, savings
and loan associations, and some insurance lenders require flood insurance to
be carried where the property, real or personal, is security for a loan. This
requirement is mandated by the National Flood Insurance Act of 1968 and the
Flood Disaster Protection Act of 1973. The purpose of the program is to
provide flood insurance to property owners at a reasonable cost. cities or
counties participating in the National Flood Insurance Program may have
adopted building or zoning restrictions, or other measures, as part of their
participation in the program. You should contact the city of county in which
the Property is located to determine any such restrictions. The extent of
coverage available in your area and the cost of this coverage, may vary and
for further information, you should consult your lender or insurance carrier.
Flood Zone Designation: Zone X Source FEMA Map #060243-0017D
---
HAZARDOUS WASTE OR SUBSTANCES AND UNDERGROUND STORAGE TANKS
Comprehensive federal and state laws and regulations have been enacted in the
past several years in an effort to control the use, storage, handling,
clean-up, removal and disposal of hazardous waste or substances. Some of
these laws and regulations (such as, for example, the Comprehensive
Environmental Response Compensation and Liability Act [CERCLA] provide for
broad liability on the part of owners, tenants, or other users of property
for clean-up costs and damages, regardless of fault.) Other laws and
regulations set standards for the handling of asbestos, and establish
requirements for the use, modification, abandonment and closure of
underground storage tanks.
It is not practical or possible to list all such laws and regulations in this
Notice. Therefore, Seller/Landlords and Purchaser/Tenants are urged to
consult legal counsel to determine their prospective rights and liabilities
with respect to the issues described in this Notice, as well as all other
aspects of the proposed transaction. If hazardous wastes or substances have
been, or are going to be used, stored, handled or disposed on the Property,
or if the Property has been or may have underground storage tanks, it is
essential that legal and technical advice be obtained to determine, among
other things, the nature of permits and approvals which have been obtained or
may be required; the estimated costs and expenses associated with the use,
storage, handling, clean-up, disposal or removal of hazardous wastes or
substances; and the nature and extent of contractual provisions necessary or
desirable in this transactio. Broker recommends expert assistance and site
investigation to determine past uses of the Property, which may provide
valuable information as to the likelihood of hazardous wastes or substances,
or underground storage tanks, being on the Property.
Seller/Landlord agree to disclose to Broker and to Purchaser/Tenant any and
all information which he/she/it has regarding present and future zoning and
environmental matters affecting the Property and regarding the condition of
the Property, including, but not limited to, structural, mechanical and soil
conditions, the presence and location of asbestos, PCB transformers, other
toxic, hazardous or contaminated substances and underground storage tanks,
in, on or about the Property.
Broker has conducted no investigations regarding the subject matter hereof,
except as may be contained in a separate written document signed by Broker.
Broker makes no representations concerning the existence or nonexistence of
hazardous wastes or substances, or underground storage tanks, in, on or about
the Property. Purchaser/Tenant should contact a professional, such as a civil
engineer, industrial hygienist or other persons with experience in these
matters, to advise on these matters.
The term "hazardous wastes or substances" is used in its very broad sense and
includes, but is not limited to, petroleum based products, paints and
solvents, lead, cyanide, DDT, printing inks, acids, pesticides, ammonium
compounds, asbestos, PCB's and other chemical products. Hazardous wastes or
substances and underground storage tanks may be presented on all types of
real property. This Notice is intended to apply to any transaction involving
any type of real property, whether improved or unimproved.
1
<PAGE>
BROKER DISCLOSURE
The parties hereby expressly acknowledge that broker has made no independent
determination or investigation regarding the following: present or future use
or zoning of the property; environmental matter affecting the Property; the
condition of the Property, including, but not limited to, structural,
mechanical and soils condition, as well as issues surrounding hazardous
wastes or substances as set out above; violations of the Occupational Safety
and Health Act or any other federal, state, county or municipal laws,
ordinances or statutes; measurements of land and/or buildings.
Purchaser/Tenant agrees to make its own investigation and determination
regarding such items.
COMPLIANCE WITH LAWS
The parties hereto agree to comply with all applicable federal, state and
local laws, regulations, codes, ordinances and administrative orders having
jurisdiction over the parties, property or the subject matter of this
Agreement, including, but not limited to, the 1964 civil Rights Act and all
amendments thereto, the Foreign Investment in Real Property Tax Act, the
Comprehensive Environmental Response Compensation and Liability Act, and the
Americans With Disabilities Act.
AMERICANS WITH DISABILITIES ACT (ADA)
Owners or tenants of real property may be subject to the American With
Disabilities Act (ADA), a federal law codified at 42 USC Section 12101 et
seq. Among other requirements of the ADA that could apply to your property,
Title III of the Act requires owners and tenants of "public accommodations"
to remove barriers to access by disabled persons and provide auxiliary aids
and services for hearing, vision, or speech impaired persons. The regulations
under Title III of the ADA are codified at 28 CFR Part 36.
EARTHQUAKE SAFETY (CALIFORNIA ONLY)
Owners or their agents who are involved in the transfer of a precast concrete
or reinforced or unreinforced masonry building with wood frame, floors, or
roof which was built before January 1, 1975, must deliver to the transferee a
copy of a state publication entitled "The Commercial Property Owner's Guide
to Earthquake Safety" published by the California Seismic Safety Commission.
If applicable to the subject property, the undersigned Purchaser/Tenant of
the real property herein described acknowledges that BUZZ OATES REAL ESTATE
has delivered to the undersigned a copy thereof in accordance with California
Government Code Section 8875.6 and Sections 8893 et seq.
Receipt of a copy of this Notice of Disclosure and Agreement is hereby
acknowledged.
Dated: May 15, 1995 /s/(Illegible Signature)
---------- -- --------------------------------
Seller/Landlord
--------------------------------
Seller/Landlord
Dated: May 15, 1995
---------- -- --------------------------------
Purchaser/Tenant
--------------------------------
Purchaser/Tenant
CONSULT YOUR ADVISORS - This lease/purchase agreement has been prepared for
approval by your attorney. No representation or recommendation is made by
Buzz Oates Real Estate, as to the legal sufficiency or tax consequences of
this document or the transaction to which it relates, the National Flood
Insurance Program, nor other legislation referred to herein. These are
questions for your attorney or accountant.
In any real estate transaction, it is recommended that you consult with a
professional, such as a civil engineer, industrial hygienist, or other
person, with experience, in evaluating the condition of the Property,
including the possible presence of asbestos, hazardous materials, and
underground storage tanks.
2
<PAGE>
COMMENCEMENT OF LEASE AGREEMENT
WHEREAS, by Lease dated May 15, 1995 has been amended by and
between CENTRAL VALLEY L.L.C. (LANDLORD) and DJ&J Software (TENANT) for
the area described therein in the industrial/office building situated at
8825 Elder Creek Road; approximately 138,380 square feet in a 428,000
square foot building.
WHEREAS, Landlord's work has been substantially completed;
NOW, THEREFORE, in accordance with the above, the parties hereto
agree that the term of said two (2) years shall commence on October 14,
1995 (actual move-in) and expire on October 13, 1997.**
All other terms and conditions of said Lease are hereby reaffirmed
as being in full force and effect.
LESSOR: LESSEE:
CENTRAL VALLEY L.L.C. DJ&J SOFTWARE
dba EGGHEAD SOFTWARE
By: /s/ Marvin L. Oates By: /s/ Terence M. Strom
-------------------------- -------------------------
Marvin L. Oates Terence M. Strom
President & CEO
Date: 11-9-95 Date: 11/01/95
------------------------ -----------------------
** These dates shall serve as the commencement and expiration date of
the original two year lease term.
<PAGE>
RESIGNATION AND RELEASE AGREEMENT
This RESIGNATION AND RELEASE AGREEMENT (the "Agreement") among Peter F.
Grossman ("Grossman"), Egghead, Inc. and D J & J Software Corporation d/b/a
Egghead (D J & J Software Corporation, collectively with Egghead, Inc.,
"Egghead") is dated as of April 29, 1997. Grossman and Egghead wish to
amicably terminate Grossman's employment with Egghead, and the parties wish
to clearly set forth the terms and conditions of Grossman's departure from
his employment. Therefore, in consideration of the mutual promises and
undertakings in this Agreement, Grossman and Egghead agree as follows:
1. RESIGNATION. Grossman will resign from his employment as the Executive
Vice President of Egghead and from any other designated Egghead responsibilities
no earlier than April 15, 1997 and no later than July 15, 1997. For purposes
of this Agreement, Grossman's actual date of resignation, or termination by
Egghead, as the case may be, shall be the "Date of Resignation."
2. PAY PROTECTION.
(a) GUARANTEED PAYMENT. Commencing the Date of Resignation, Egghead
shall pay Grossman his current annual base salary of $250,000 for a period of
nine (9) months (the "Severance Period"), less any lawful withholding. Such
amount shall be paid in bi-weekly installments at normal bi-weekly payroll
intervals or pursuant to a payment schedule that is mutually agreeable to the
parties. Grossman shall also be paid in full for any unused vacation pay
accrued as of the Date of Resignation, as reflected in Egghead's records, to
be paid at the end of the payroll period next following the Date of
Resignation, or pursuant to a payment schedule that is mutually agreeable to
the parties. Grossman shall not be entitled to vacation pay accrual during
the Severance Period. Grossman agrees to be available for consulting, either
in person or via telephonic means, no more than one day per month during the
Severance Period, at the reasonable request of Egghead management.
(b) EXTENSION PAYMENT. Upon termination of the Severance Period, and
provided Grossman has failed to commence alternative employment, Egghead shall
continue to pay Grossman his current annual base salary, less any lawful
withholding, in bi-weekly installments for a period that will terminate on the
earlier of: (i) twelve (12) months from the ending date of the Severance Period;
or (ii) the date Grossman commences
1
<PAGE>
alternative employment (the "Extension Period"). Such extension payments shall
be paid at normal bi-weekly payroll intervals. Grossman shall not be entitled to
vacation pay accrual during the Extension Period. From time to time during the
Extension Period, but in no event more frequently than monthly, Grossman will be
available to orally (by telephone) update either the President or Chief
Financial Officer of Egghead, Inc. on the status of his efforts to obtain
alternative employment, and he will notify Egghead in writing within ten (10)
days after accepting alternative employment. Upon accepting new employment,
Grossman will not unreasonably delay commencing work for his new employer in
order to continue receiving payments during the Extension Period. For purposes
of this Agreement, "alternative employment" is defined as any business
relationship from which Grossman receives gross monthly W-2/1099 wages equal to
fifty percent (50%) or more of his average gross monthly Egghead severance
payment as herein described in Section 2(a).
(c) DEATH OR DISABILITY. In the event of Grossman's death prior to
completion of the Severance Period, Egghead shall be obligated to continue until
the end of the Severance Period the severance payments set forth under Section
2(a) hereof and the COBRA subsidies set forth under Section 3(b), if applicable.
In the event of Grossman's death subsequent to the end of the Severance Period
but prior to completion of the Extension Period, and provided he has not
procured alternative employment as herein defined, Egghead shall be obligated to
continue until the end of the Extension Period Grossman's extension payments set
forth under Section 2(b) hereof and the COBRA subsidies, if applicable.
In the event of death, such payments shall be made to Grossman's spouse, if
then living, and if Grossman's spouse is not then living, said payments shall be
paid to Grossman's estate. Other than the foregoing, Egghead shall have no
further obligation to Grossman's estate under this Agreement in the event of his
death.
In the event Grossman becomes totally disabled (as herein defined) prior to
the end of the Severance Period, then the severance payments set forth under
Section 2(a) otherwise payable to Grossman shall be continued for the entire
Severance Period. If Grossman is receiving extension payments under Section
2(b) and Grossman becomes totally disabled prior to the end of the Extension
Period, and provided he has not procured alternative employment as herein
defined, then the extension payments set forth under Section 2(b) shall be
continued for the entire Extension Period. Notwithstanding the foregoing,
Egghead shall have no obligation to make any payments pursuant to either of the
preceding two sentences unless Egghead has received proof to its satisfaction
that Grossman has suffered a total disability. For purposes of this Agreement,
total disability shall mean
2
<PAGE>
an illness or physical or mental incapacity that prevents Grossman from seeking
or procuring alternative employment. Proof of such disability shall be supplied
by Grossman in the form of a written letter of Grossman's physician stating that
in the physician's opinion Grossman is physically or mentally incapable of
seeking or procuring alternative employment. Egghead shall have the right to
have Grossman examined by a physician of Egghead's choice, solely at Egghead's
expense, to render an opinion as to whether or not Grossman is physically or
mentally incapable of seeking or procuring alternative employment. In the event
the physician selected by Grossman and the physician selected by Egghead render
contrary opinions, the issue of whether Grossman is physically or mentally
incapable of seeking or procuring alternative employment may be submitted by
Egghead to arbitration under Washington law, and the decision of such
arbitration shall be final and binding on all parties. So long as any payments
are made to Grossman, Egghead will also continue to make COBRA (defined below)
subsidies as herein described, if applicable. Other than the foregoing, Egghead
shall have no further obligation to Grossman under this Agreement in the event
of his total disability.
3. EMPLOYEE BENEFIT PROGRAMS.
(a) STOCK OPTIONS. Egghead agrees to provide Grossman a period of
twenty-one months from the Date of Resignation to exercise the unexercised
options to purchase common stock of Egghead, Inc. that have been issued to
Grossman pursuant to Egghead Inc.'s 1993 Stock Option Plan, provided that after
the Date of Resignation Grossman may only exercise the portion of such options
that was vested as of the Date of Resignation. The exercise price of each such
option shall be as set forth in the option letter agreement relating to such
option. Grossman and Egghead, Inc. expressly agree that there shall be no
further vesting of any options held by Grossman after the Date of Resignation.
Subject to the foregoing, Grossman's exercise shall be in conformance with the
provisions of Egghead, Inc.'s 1993 Stock Option Plan and with the provisions of
Section 16 of the Securities Exchange Act of 1934, as amended. Any change to
Egghead Inc.'s 1993 Stock Option Plan shall not adversely affect Grossman's
rights under this Section 3(a).
(b) COBRA. Except as expressly provided in this Agreement, all benefits
and perquisites, original, remaining or otherwise, to which Grossman may have
had an entitlement as of immediately prior to the Date of Resignation shall
cease effective the Date of Resignation. At his election, Grossman and his
family may continue to participate in Egghead's medical and dental benefit plans
governed by the Comprehensive Omnibus Budget Reconciliation Act ("COBRA") for
the time period provided in COBRA. Egghead will subsidize the cost of such
coverage at the level in effect for Grossman and his family as of the Date of
Resignation through the earlier of
3
<PAGE>
(i) the end of the eighteenth month after the Date of Resignation or (ii) the
date Grossman commences alternative employment; or (iii) the end of the
Extension Period. Grossman will pay the balance of such cost, if any.
4. ANNOUNCEMENT AND COMMUNICATION.
(a) INTERNAL ANNOUNCEMENT. Grossman may communicate notice of his
resignation to his direct reports and staff thirty (30) days prior to his Date
of Resignation as hereinabove defined. Egghead shall communicate notice of
Grossman's resignation to all Egghead employees on or after the date Grossman
communicates his resignation to his direct reports. Such communication by each
party as it relates to the parties' relationship shall be limited to
substantially the following information: "Peter F. Grossman has resigned as
Executive Vice President of Egghead to pursue other opportunities."
(b) EXTERNAL COMMUNICATION. Egghead will communicate notice of
Grossman's resignation to third parties by press release and date determined
in Egghead's sole discretion. Such notice will be in form and substance
substantially similar to that communicated to all Egghead employees as
provided in Section 4(a) hereof, or, if Egghead so elects, in such other form
and substance as the parties hereto may mutually agree in writing.
5. REFERENCES. Upon request, Egghead will provide a letter of
recommendation for Grossman containing his dates of employment and pay and title
confirmation only. Unless authorized by Grossman in writing, Egghead's response
to any inquiry from third parties regarding Grossman's employment with Egghead
shall be limited to this same information.
6. RELOCATION EXPENSES. Egghead shall reimburse Grossman for the cost of
relocating Grossman's residence to any place outside Spokane County, Washington,
up to a total amount not to exceed $40,000 promptly after receipt of valid
receipts submitted by Grossman for the cost of moving household goods and for
costs related to the sale of his Spokane residence. No other relocation
expenses shall be reimbursed. Egghead has no obligation to reimburse or pay
Grossman any amount with respect to any decrease in the value of Grossman's
residential property from the amount paid by Grossman to purchase such
residential property. No reimbursement under this Section 6 will be made after
sixty (60) days from the date of Grossman's final severance or extension
payment, as the case may be, received in accordance with the provisions of
Section 2 hereof.
7. NON-DISPARAGEMENT. Grossman agrees not to make any disparaging or
derogatory remarks, comments or statements about Egghead
4
<PAGE>
and its officers, directors, and employees, or any of them, at any time.
Egghead agrees not to, and will instruct its current officers, directors and
senior management not to, make any disparaging or derogatory remarks, comments
or statements about Grossman at any time.
8. CONFIDENTIALITY, NON-SOLICITATION, AND NON-COMPETITION.
(a) NON-DISCLOSURE. Except as required by applicable law or regulation
and except as may be required to insure compliance with the terms of this
Agreement, Egghead and Grossman agree to keep the terms of this Agreement
confidential; provided, that Grossman may share its provisions with his spouse,
attorneys, and professional advisors, who will be informed of and bound by this
confidentiality obligation, and Egghead may share its provisions with its senior
management, attorneys, and professional advisors, who will be informed of and
bound by this confidentiality obligation. Grossman agrees not to use or
disclose any confidential information. As used herein, "confidential
information" means all trade secrets, non-public information, methods,
strategies, practices, computer programs and systems, research and related
documentation, customer lists and other data, marketing plans, financial
information, and all other compilations of information that relate in any manner
to the business of Egghead, any of the direct or indirect subsidiaries of
Egghead, Inc., or Egghead SSI, LLC d/b/a Egghead Computer Surplus (such
subsidiaries, together with Egghead SSI, LLC d/b/a Egghead Computer Surplus, the
"Affiliate Entities") or any of them. Grossman acknowledges that all
confidential information is the proprietary and confidential property of Egghead
or the Affiliate Entities. Grossman further agrees to return all tangible items
containing such confidential information, wherever located and in whatever form,
in addition to all other property belonging to Egghead or the Affiliate
Entities, on or before the Date of Resignation.
(b) NON-SOLICITATION. Grossman agrees that during the Severance Period
he will not individually, or in conjunction with any other person,
corporation or other entity, in any capacity, directly or indirectly (i)
knowingly solicit or recruit any employee of or consultant to Egghead or any
of the Affiliate Entities or (ii) knowingly cause or seek to cause (A) any
employee of or consultant to Egghead or any of the Affiliate Entities to
terminate his or her employment or consulting relationship with Egghead or
any of the Affiliate Entities or (B) any customer, client or vendor of
Egghead or any of the Affiliate Entities to alter or terminate any business
relationship with Egghead or any of the Affiliate Entities.
5
<PAGE>
(c) NON-COMPETITION. Grossman agrees that he will not, directly or
indirectly, during his employment and for a period of twenty-one months from the
Date of Resignation, be employed by, own, manage, operate, join, control or
participate in the ownership, management, operation or control of or "be
connected with" (as that phrase is interpreted below), any person or entity
engaged in any operations in competition with Egghead or any of the Affiliate
Entities in the retail sale of computer software or computer hardware, or both,
through stores, mail order, telephonic means or electronic commerce, including,
without limitation, through the Internet; provided, however, that for purposes
of this Section 8(c) the following shall be deemed to be persons or entities not
engaged in operations in competition with Egghead or any of its Affiliate
Entities: (i) any person or entity if its sales of computer software and
computer hardware constitute less than ten (10) percent of its total annual
revenue and of the total annual revenue of the division, if any, of that person
or entity the primary purpose of which is the sale of computer software or
computer hardware, or both; (ii) any person or entity that is a software
publisher or hardware manufacturer provided that it sells only products that it
develops or manufacturers; and (iii) any person or entity that is an importer
of computer hardware provided that it sells only computer hardware. The Board
of Directors of Egghead, Inc. may, in its sole discretion, release Grossman from
any or all of his obligations pursuant to this Section 8(c), provided that such
release shall not be effective unless in writing. Grossman shall be deemed to
"be connected with" such business if such business is carried on by a
partnership, corporation or association of which he is an officer, director,
employee, partner, member, consultant or agent; provided, however, that nothing
herein shall prevent the purchase or ownership by Grossman of shares which
constitute less than 2% of the outstanding equity securities of a publicly or
privately held corporation.
(d) VIOLATION. Grossman acknowledges that his confidentiality,
non-solicitation and non-competition obligations under this Section 8 are
material inducements to Egghead in entering into this Agreement, that his
violation thereof shall constitute a material breach of this Agreement and that
any disclosure or action by Grossman in violation of this Section 8 may cause
serious and irreparable injury to Egghead for which there may be no adequate
remedy at law. Consequently, in any action specifically to enforce any
provision of this Section 8, Grossman hereby waives any claim or defense therein
that an adequate remedy at law or in damages exists. Grossman further agrees
that Egghead shall be entitled to injunctive relief, specific performance or
other equitable relief to prevent violation of this Section 8. If, upon
investigation, Egghead in its discretion determines in good faith that Grossman
has materially violated or is in material violation of this Section 8, then
Egghead will give Grossman written notice of the violation, and if Grossman
shall not have cured such violation within six business days of such notice, as
determined in the sole discretion of Egghead, then Egghead
6
<PAGE>
may retain as liquidated damages the balance of the payments coming due Grossman
under Section 2 hereof, if any. Notwithstanding Section 17 hereof, Egghead may
exercise the remedy set forth in the preceding sentence without regard to
whether its claim for violation of Section 8 has been submitted to arbitration;
PROVIDED, HOWEVER, that if Egghead has exercised such remedy and Grossman
disputes whether Egghead's determination that Grossman has materially violated
this Section 8 or has failed to timely cure such violation was made in good
faith, then the matter may be submitted to arbitration in accordance with
Section 17 hereof. The rights and remedies set forth in this Section 8 are in
addition to all other legal, equitable and contractual rights and remedies
available to Egghead, including, but not limited to, the reimbursement of
reasonable attorneys' fees and costs associated with any such actions.
9. REPRESENTATIONS AND WARRANTIES.
(a) BY GROSSMAN. Grossman hereby represents and warrants as follows:
(i) That, to the best of his knowledge, as of the date hereof, there
is no litigation or claim of any kind pending or contemplated in any court
or before any governmental authority or regulatory body or arbitrator,
pertaining to acts or omissions that occurred within the scope of his
employment as an officer of Egghead, and that he knows of no facts or
circumstances that would give rise to such litigation or claim.
(ii) That he has reviewed this Agreement with independent legal
counsel, that the terms of this Agreement have been negotiated in good
faith at arms' length, that he has read and understands the terms of this
Agreement and the consequences thereof, and that he enters into this
Agreement as his free, voluntary and independent act.
(b) BY EGGHEAD. Egghead represents and warrants as follows:
(i) That, to the best of its knowledge, as of the date hereof, there
is no litigation or claim of any kind pending or contemplated in any court
or before any governmental authority or regulatory body or arbitrator,
pertaining to acts or omissions that occurred within the scope of
Grossman's employment as an officer of Egghead, and that it knows of no
facts or circumstances that would give rise to such litigation or claim;
(ii) That it is a Washington corporation duly authorized and validly
existing under the laws of the State of Washington;
7
<PAGE>
(iii) That this Agreement and the obligations and undertakings arising
hereunder constitute the valid, binding and enforceable obligations of
Egghead; and
(iv) That it will promptly inform its officers, director and senior
managers of its obligations under the relevant sections of this Agreement.
10. MUTUAL RELEASE. In consideration of the benefits and payments provided
to Grossman in this Agreement, and as a material inducement to Egghead to enter
into this Agreement, Grossman, individually and for his marital community,
heirs, personal representatives, successors and assigns (collectively "Grossman
Releasees"), releases and forever discharges Egghead and the Affiliate Entities,
including any and all of Egghead's and each Affiliate Entity's affiliates,
shareholders, officers, directors, representatives, agents, and employees, each
of their successors and assigns, and each of them (collectively "Egghead
Releasees"), from any and all Claims (as defined below) that Grossman may have
against any of the Egghead Releasees as of the Date of Resignation The Egghead
Releasees release and forever discharge the Grossman Releasees from any and all
Claims (as defined below) that any of the Egghead Releasees may have against any
of the Grossman Releasees as of the Date of Resignation. "Claims" as used in
this Section 10 is defined to mean any and all claims, demands, charges,
liability, causes of action, and damages, including without limitation,
attorneys' fees and costs actually incurred, known or unknown, including without
limitation, any and all claims, rights, demands, and causes of action for breach
of any employment contract or agreement (whether express or implied, written or
oral), wrongful discharge, intentional and/or negligent infliction of emotional
distress, defamation, invasion of privacy, tort claims, discrimination on the
basis of marital status, race, sex, national origin, color, religion, handicap
or disability, retaliation, violation of public policy, and violation of any and
all federal, state and/or local statutes, laws, rules, regulations and/or
ordinances, including, but not limited to, Title VII of the Civil Rights Act of
1964, as amended, Sections 1981 through 1988 of Title 42 of the United States
Code, as amended, The National Labor Relations Act, as amended, The Americans
with Disabilities Act of 1990, as amended, The Family and Medical Leave Act of
1993, The Age Discrimination in Employment Act of 1967 ("ADEA"), as amended, The
Washington State Wage and Hour Laws, and The Washington Law Against
Discrimination, Ch. 49.60 RCW, as amended; except that the term "Claims" does
not include: (i) any claims for indemnification pursuant to Article IX of the
Bylaws of Egghead, Inc. that Grossman may have as a former officer of Egghead or
pursuant to policies of insurance held by Egghead, if any, that provide coverage
for liability of former officers and directors of Egghead; (ii) any claims based
on rights created by this
8
<PAGE>
Agreement; and (iii) any claims where the events in dispute first arise after
the Date of Resignation. Egghead will not contest any claim for unemployment
compensation filed by Grossman, but Egghead may report the severance payments
paid to Grossman hereunder as appropriate.
11. TAX LIABILITY. Some or all of the payments and benefits which Grossman
may receive hereunder may be deemed income and taxable to Grossman under
relevant provisions of the Internal Revenue Code of 1986, as amended, and
other federal, state, and local statutes and regulations (collectively
"Codes"). Grossman is advised that Egghead does not "gross up" benefits paid
to or on behalf of its employees. Grossman shall have sole responsibility to
determine and, to the extent any withholdings made by Egghead hereunder are
insufficient, to pay, and shall indemnify and hold Egghead harmless from, all
income taxes coming due under such Codes. This hold harmless and indemnity
obligation covers only those taxes which, in the ordinary course, would
normally be obligations of or paid by Grossman.
12. NONADMISSION CLAUSE. This Agreement shall not be construed as an
admission by either party of any liability to the other party, breach of any
agreement between the parties, or violation by either party of any statute, law,
rule or regulation.
13. CONSIDERATION/REVOCATION PERIOD. Grossman acknowledges that he has been
informed of his right to fully consider the terms of this Agreement for a period
not to exceed twenty-one (21) days pursuant to applicable provisions of the
ADEA. If Grossman chooses to execute this Agreement, he shall have an
additional seven (7) days after signing this Agreement to revoke it by providing
written notice thereof to Egghead.
14. SEVERABILITY. If any provision of this Agreement is held to be invalid or
unenforceable, the remaining provisions shall nevertheless continue to be valid
and enforceable to the maximum extent consistent with applicable law.
15. COMPLETE AGREEMENT. This Agreement contains the entire understanding
and agreement between the parties in connection with its subject matter and
supersedes any and all other prior and contemporaneous oral or written
agreements, understandings, or representations between the parties pertaining
to same. This Agreement cannot be altered except in a writing signed by
Grossman and an authorized representative of Egghead.
16. FURTHER ASSURANCES. The parties agree to execute any further documents
and instruments as may be reasonably necessary to fully carry out the terms
and conditions of this Agreement.
9
<PAGE>
17. ARBITRATION. Except as set forth under Section 2(c) and Section 8(d)
hereof, and except for any claim for injunctive or other equitable relief (which
the party bringing such claim may elect either to bring in any court of
competent jurisdiction or to submit for arbitration), any controversy or claim
arising out of this Agreement shall be resolved by arbitration pursuant to this
paragraph and the then current rules and supervision of the American Arbitration
Association ("AAA"). The arbitration shall be held in Spokane before a single
arbitrator either mutually agreed upon by the parties or selected in accordance
with AAA Rules. The arbitrator shall have no authority to add to, subtract
from, or modify any of the terms of this Agreement. The arbitrator's decision
shall be final and binding upon the parties hereto and may be entered in any
court having jurisdiction.
18. NOTICES. All notices, requests, payments and other communications required
or permitted to be given hereunder shall be in writing and shall be delivered by
overnight courier or sent postage prepaid by the United States certified mail,
return receipt requested, to the addressee's mailing address as hereafter set
forth:
If to Egghead: Egghead, Inc.
22705 East Mission
Liberty lake, WA 99019
Attention: Legal Department
If to Grossman: Peter F. Grossman
709 West Sumner Avenue
Spokane, WA 99204-3791
Any party hereto may, by proper notice to the other parties, designate such
other address for the giving of notice as required hereunder. Any notice shall
be deemed given on the first day following the date such notice is sent by
overnight courier or on the third day following the date such notice is mailed
in accordance with this Agreement.
19. BINDING AGREEMENT. This Agreement shall bind and inure to the benefit of
the parties and their respective heirs, personal representatives, marital
communities, related entities, shareholders, officers, directors, employees,
agents, attorneys, successors and assigns, except that Grossman may not assign
any of his rights or delegate any of his duties hereunder without the prior
written consent of Egghead.
20. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Washington without application of the
principles of conflicts of laws, and venue for any proceeding hereunder shall be
in Spokane County, Washington.
10
<PAGE>
21. COUNTERPARTS. This Agreement may be executed on separate counterparts,
any one of which need not contain signatures of more than one party, but all
of which taken together shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties execute this Agreement as of the date first
above written.
EGGHEAD, INC.
/s/ Peter F. Grossman /s/ George P. Orban
- --------------------------- ---------------------------------------
Peter F. Grossman By: George P. Orban, Chairman of the
Board of Directors
D J & J SOFTWARE CORPORATION
d/b/a EGGHEAD
/s/ George P. Orban
---------------------------------------
By: George P. Orban
----------------------------------
Its Chairman of the Board of Directors
-----------------------------------
11
<PAGE>
RESIGNATION AND RELEASE AGREEMENT
This RESIGNATION AND RELEASE AGREEMENT (the "Agreement") among Ronald J.
Smith ("Smith"), Egghead, Inc. and DJ&J Software Corporation d/b/a Egghead
(D J & J Software Corporation, collectively with Egghead, Inc., "Egghead") is
dated as of February 15, 1997. Smith and Egghead wish to amicably terminate
Smith's employment with Egghead, and the parties wish to clearly set forth
the terms and conditions of Smith's departure from his employment.
Therefore, in consideration of the mutual promises and undertakings in this
Agreement, Smith and Egghead agree as follows:
1. RESIGNATION. Effective February 15, 1997 ("Date of Resignation"), Smith's
employment with Egghead is terminated and Smith resigns from his employment as
Senior Vice President of Egghead and from any other designated Egghead
responsibilities.
2. PAY PROTECTION.
(a) GUARANTEED PAYMENT. Commencing the Date of Resignation, Egghead
shall pay Smith his current annual base salary of $170,000 for a period of
nine (9) months (the "Severance Period"), less any lawful withholding. Such
amount shall be paid in bi-weekly installments at normal bi-weekly payroll
intervals or pursuant to a payment schedule that is mutually agreeable to the
parties. Smith shall also be paid any unused vacation pay accrued as of the
Date of Resignation, as reflected in Egghead's records, to be paid at the end
of the payroll period next following the Date of Resignation, or pursuant to
a payment schedule that is mutually agreeable to the parties. Smith shall
not be entitled to vacation pay accrual during the Severance Period. Smith
agrees to be available for consulting, either in person or via telephonic
means, no more than one day per month, at the reasonable request of Egghead
management.
(b) CONDITIONAL PAYMENT. Upon termination of the Severance Period, and
provided Smith has failed to commence alternative employment, Egghead shall
continue to pay Smith his current annual base salary, less any lawful
withholding, in bi-weekly installments for a period that will terminate on the
earlier of: (i) nine (9) months from the ending date of the Severance Period; or
(ii) the date Smith commences alternative employment (the "Extension Period").
Such extension payments shall be paid at normal bi-weekly payroll intervals.
Smith shall not be entitled to vacation pay accrual during the Extension Period.
From time to time during the Extension Period, but in no event more frequently
than monthly, Smith will be available to orally (by telephone) update either the
President or Chief Financial Officer of
1
<PAGE>
Egghead, Inc. on the status of his efforts to obtain alternative employment, and
he will notify Egghead in writing within ten (10) days after accepting
alternative employment. Upon accepting new employment, Smith will not
unreasonably delay commencing work for his new employer in order to continue
receiving payments during the Extension Period. For purposes of this Agreement,
"alternative employment" is defined as any business relationship from which
Smith receives W-2/1099 wages equal to fifty percent (50%) or more of his
average monthly Egghead severance payment as herein described in Section 2(a).
(c) DEATH OR DISABILITY. In the event of Smith's death prior to
completion of the Severance Period, Egghead shall be obligated to continue until
the end of the Severance Period the severance payments set forth under Section
2(a) hereof and the COBRA subsidies (defined below) set forth under Section
3(b), if applicable. In the event of Smith's death subsequent to the end of the
Severance Period but prior to completion of the Extension Period, and provided
he has not procured alternative employment as herein defined, Egghead shall be
obligated to continue until the end of the Extension Period Smith's extension
payments set forth under Section 2(b) hereof and the COBRA subsidies (defined
below), if applicable.
In the event of death, such payments shall be made to Smith's spouse, if
then living, and if Smith's spouse is not then living, said payments shall be
paid to Smith's estate. Other than the foregoing, Egghead shall have no further
obligation to Smith's estate under this Agreement in the event of his death.
In the event Smith becomes totally disabled (as herein defined) prior to
the end of the Severance Period and provided he has not already procured
alternative employment as herein defined, then the severance payments set forth
under Section 2(a) otherwise payable to Smith shall be continued for the entire
Severance Period. If Smith is receiving extension payments under Section 2(b)
and Smith becomes totally disabled prior to the end of the Extension Period, and
provided he has not procured alternative employment as herein defined, then the
extension payments set forth under Section 2(b) otherwise payable to Smith shall
be continued for the entire Extension Period. Notwithstanding the foregoing,
Egghead shall have no obligation to make any payments pursuant to the preceding
two sentences unless Egghead has received proof to its satisfaction that Smith
has suffered a total disability. For purposes of this Agreement, total
disability shall mean an illness or physical or mental incapacity that prevents
Smith from seeking or procuring alternative employment. Proof of such
disability shall be supplied by Smith in the form of a written letter of Smith's
physician stating that in the physician's opinion Smith is physically or
mentally incapable of seeking or procuring alternative employment. Egghead
shall have the right to have
2
<PAGE>
Smith examined by a physician of Egghead's choice, solely at Egghead's expense,
to render an opinion as to whether or not Smith is physically or mentally
incapable of seeking or procuring alternative employment. In the event the
physician selected by Smith and the physician selected by Egghead render
contrary opinions, the issue of whether Smith is physically or mentally
incapable of seeking or procuring alternative employment may be submitted by
Egghead to arbitration under Washington law, and the decision of such
arbitration shall be final and binding on all parties. So long as any payments
are made to Smith, Egghead will also continue to make COBRA subsidies as herein
described, if applicable. Other than the foregoing, Egghead shall have no
further obligation to Smith under this Agreement in the event of his total
disability.
3. EMPLOYEE BENEFIT PROGRAMS.
(a) STOCK OPTIONS. Egghead and Smith agree that there are two groups of
stock options which Smith has had certain rights to exercise. The first group
pertains to nonqualified stock options to purchase 3,000 shares of common stock
of Egghead, Inc. at an exercise price of $12.75 per share, to purchase 3,000
shares of common stock of Egghead, Inc. at an exercise price of $13.75 per
share, and to purchase 6,000 shares of common stock of Egghead, Inc. at an
exercise price of $17.00 per share, all of which were granted pursuant to
Egghead Inc.'s 1986 Combined Incentive and Non-Qualified Stock Option Plan,
Amended and Restated as of July 15, 1992 (the "1986 Plan"), and all of which are
vested (collectively, the "Vested 1986 Plan Options"). Pursuant to the 1986
Plan, Smith may only exercise the Vested 1986 Plan Options prior to the
expiration of three months after the Date of Resignation. The second group
pertains to a nonqualified stock option to purchase 25,000 shares of common
stock of Egghead, Inc. at an exercise price of $6.1875 per share, of which
rights to purchase 12,500 shares are vested, and a nonqualified stock option to
purchase 20,000 shares of common stock of Egghead, Inc. at an exercise price of
$10.75 per share, of which rights to purchase 3,334 shares are vested (such
vested portion to purchase 3,334 shares, together with the vested portion to
purchase 12,500 shares, the "Vested 1993 Plan Options"), both of which options
were granted pursuant to Egghead Inc.'s 1993 Stock Option Plan (the "1993
Plan"). Egghead, Inc. agrees to provide Smith eighteen months from the Date of
Resignation to exercise the Vested 1993 Plan Options. Egghead, Inc. and Smith
expressly agree that there shall be no further vesting of any options held by
Smith beyond the Date of Resignation. Subject to the foregoing, Smith's
exercise of the Vested 1986 Plan Options and the Vested 1993 Plan Options shall
be in compliance with the provisions of the 1986 Plan and the 1993 Plan,
respectively, and with the provisions of Section 16 of the Securities Exchange
Act of 1934, as amended. Any change to the 1986 Option Plan or the 1993 Option
Plan shall not adversely affect Smith's rights under this Section 3(a).
3
<PAGE>
(b). COBRA. Except as expressly provided in this Agreement, all benefits
and perquisites, original, remaining or otherwise, to which Smith may have had
an entitlement as of immediately prior to the Date of Resignation shall cease
effective the Date of Resignation. At his election, Smith and his family may
continue to participate in Egghead's medical and dental benefit plans governed
by the Comprehensive Omnibus Budget Reconciliation Act ("COBRA") for the time
period provided in COBRA. Egghead will subsidize the cost of such coverage at
the level in effect for Smith and his family as of the Date of Resignation until
Smith commences alternative employment or the end of the Extension Period,
whichever occurs first. Smith will pay the balance of such cost, if any.
4. REFERENCES. Upon request, Egghead will provide a letter of
recommendation for Smith containing his dates of employment and pay confirmation
only. Unless authorized by Smith in writing, Egghead's response to any inquiry
from third parties regarding Smith's employment with Egghead shall be limited to
this same information.
5. RELOCATION EXPENSES. Egghead shall reimburse Smith for the cost of
relocating Smith's residence to any place outside Spokane County, Washington, up
to a total amount not to exceed $40,000 promptly after receipt of valid receipts
submitted by Smith for the cost of moving household goods and for costs related
to the sale of his Spokane residence. No other relocation expenses shall be
reimbursed. Egghead has no obligation to reimburse or pay Smith any amount with
respect to any decrease in the value of Smith's residential property from the
amount paid by Smith to purchase such residential property. No reimbursement
under this Section 5 will be made after sixty (60) days from the date of Smith's
final severance or extension payment, as the case may be, received in accordance
with the provisions of Section 2 hereof.
6. NON-DISPARAGEMENT. Smith agrees not to make any disparaging or
derogatory remarks, comments or statements about Egghead and its officers,
directors, and employees, or any of them, at any time. Egghead agrees not
to, and will instruct its current officers, directors and senior management
not to, make any disparaging or derogatory remarks, comments or statements
about Smith at any time.
7. CONFIDENTIALITY, NON-SOLICITATION, AND NON-COMPETITION.
(a) NON-DISCLOSURE. Except as required by applicable law or regulation
and except as may be required to insure compliance with the terms of this
Agreement, Egghead and Smith agree to keep the terms of this Agreement
confidential; provided, that Smith may share its provisions with
4
<PAGE>
his spouse, attorneys, and professional advisors, who will be informed of and
bound by this confidentiality obligation, and Egghead may share its provisions
with its senior management, attorneys, and professional advisors, who will be
informed of and bound by this confidentiality obligation. Smith agrees not to
use or disclose any confidential information. As used herein, "confidential
information" means all trade secrets, non-public information, methods,
strategies, practices, computer programs and systems, research and related
documentation, customer lists and other data, marketing plans, financial
information, and all other compilations of information that relate in any manner
to the business of Egghead, any of the direct or indirect subsidiaries of
Egghead, Inc., or Egghead SSI, LLC d/b/a Egghead Computer Surplus (such
subsidiaries, together with Egghead SSI, LLC d/b/a Egghead Computer Surplus, the
"Affiliate Entities") or any of them. Smith acknowledges that all confidential
information is the proprietary and confidential property of Egghead or the
Affiliate Entities. Smith further agrees to return all tangible items
containing such confidential information, wherever located and in whatever form,
in addition to all other property belonging to Egghead or the Affiliate
Entities, on or before the Date of Resignation.
(b) NON-SOLICITATION. Smith agrees that during the Severance Period he
will not individually, or in conjunction with any other person, corporation or
other entity, in any capacity, directly or indirectly, (i) solicit or recruit
any employee of or consultant to Egghead or any of the Affiliate Entities or
(ii) cause or seek to cause (A) any employee of or consultant to Egghead or any
of the Affiliate Entities to terminate his or her employment or consulting
relationship with Egghead or any of the Affiliate Entities or (B) any customer,
client or vendor of Egghead or any of the Affiliate Entities to alter or
terminate any business relationship with Egghead or any Affiliate Entities.
(c) NON-COMPETITION. For a period of eighteen months from the Date of
Resignation, Smith shall not, directly or indirectly, be employed by, own,
manage, operate, join, control or participate in the ownership, management,
operation or control of or be connected with", (as that phrase is described
below), any person or entity engaged in any operations in competition with
Egghead or any of the Affiliate Entities in the retail sale of computer software
or computer hardware, or both, through stores, mail order, telephonic means or
electronic commerce, including, without limitation, through the Internet;
provided, however, that for purposes of this Section 7(c) the following shall be
deemed to be persons or entities not engaged in operations in competition with
Egghead or any of its Affiliate Entities: (i) any person or entity if its
sales of computer software and computer hardware constitute less than ten (10)
percent of its total revenues and of the total revenues of the division, if any,
of that person or entity the primary purpose
5
<PAGE>
of which is the sale of computer software or computer hardware, or both; (ii)
any person or entity that is a software publisher or hardware manufacturer
provided that it sells only products that it develops or manufacturers; and
(iii) any person or entity that is an importer of computer hardware provided
that it sells only computer hardware. The Board of Directors of Egghead, Inc.
may, in its sole discretion, release Smith from any or all of his obligations
pursuant to this Section 7(c), provided that such release shall not be effective
unless in writing. Smith shall be deemed to "be connected with" such business
if such business is carried on by a partnership, corporation or association of
which he is an officer, director, employee, partner, member, consultant or
agent; provided, however, that nothing herein shall prevent the purchase or
ownership by Smith of shares which constitute less than 2% of the outstanding
equity securities of a publicly or privately held corporation.
(d) VIOLATION. Smith acknowledges that his confidentiality,
non-solicitation and non-competition obligations under this Section 7 are
material inducements to Egghead in entering into this Agreement, that his
violation thereof shall constitute a material breach of this Agreement and
Egghead's Code of Ethics, and that any disclosure or action by Smith in
violation of this Section 7 will cause serious and irreparable injury to Egghead
for which there is no adequate remedy at law. If, upon investigation, Egghead
in its discretion determines that Smith is in violation of this Section 7, then
Egghead will give Smith written notice of the violation, and if Smith shall not
have cured such violation within four business days of such notice, as
determined in the sole discretion of Egghead, then Egghead may retain as
liquidated damages the balance of the payments coming due Smith under Section 2
hereof, if any, and may obtain immediate and permanent injunctive relief in any
court of competent jurisdiction. The rights and remedies set forth in this
Section 7 are in addition to all other legal, equitable and contractual rights
and remedies available to Egghead.
8. REPRESENTATIONS AND WARRANTIES.
(a) BY SMITH. Smith hereby represents and warrants as follows:
(i) That, to the best of his knowledge, as of the Date of
Resignation, there is no litigation or claim of any kind pending or
contemplated in any court or before any governmental authority or
regulatory body or arbitrator, pertaining to acts or omissions that
occurred within the scope of his employment as an officer of Egghead and
that he knows of no facts or circumstances that would give rise to such
litigation or claim.
(ii) That he has reviewed this Agreement with independent legal
counsel, that the terms of this Agreement have been negotiated
6
<PAGE>
in good faith at arms' length, that he has read and understands the terms
of this Agreement and the consequences thereof, and that he enters into
this Agreement as his free, voluntary and independent act.
(b) BY EGGHEAD. Egghead represents and warrants as follows:
(i) That, to the best of its knowledge, as of the Date of
Resignation, there is no litigation or claim of any kind pending or
contemplated in any court or before any governmental authority or
regulatory body or arbitrator, pertaining to acts or omissions that
occurred within the scope of Smith's employment as an officer of Egghead,
and that it knows of no facts or circumstances that would give rise to such
litigation or claim.
(ii) That it is a Washington corporation duly authorized and validly
existing under the laws of the State of Washington;
(iii) That this Agreement and the obligations and undertakings arising
hereunder constitute the valid, binding and enforceable obligations of
Egghead; and
(iv) That it will promptly inform its officers, director and senior
managers of its obligations under the relevant sections of this Agreement.
9. MUTUAL RELEASE. In consideration of the benefits and payments provided
to Smith in this Agreement, and as a material inducement to Egghead to enter
into this Agreement, Smith, individually and for his marital community, heirs,
personal representatives, successors and assigns (collectively "Smith
Releasees"), releases and forever discharges Egghead and the Affiliated
Entities, including any and all of Egghead's and each Affiliated Entity's
affiliates, shareholders, officers, directors, representatives, agents, and
employees, each of their successors and assigns, and each of them (collectively,
the "Egghead Releasees"), from any and all Claims (as defined below) that Smith
may have against any of the Egghead Releasees as of the Date of Resignation.
The Egghead Releasees release and forever discharge the Smith Releasees, from
any and all Claims (as defined below) that any of the Egghead Releasees may have
against any of the Smith Releasees as of February 15, 1997. "Claims" as used in
this Section 9 is defined to mean any and all claims, demands, charges,
liability, causes of action, and damages, including without limitation,
attorneys' fees and costs actually incurred, known or unknown, including without
limitation, any and all claims, rights, demands, and causes of action for breach
of any employment contract or agreement (whether express or implied, written or
oral), wrongful discharge, intentional and/or negligent infliction of emotional
distress, defamation,
7
<PAGE>
invasion of privacy, tort claims, discrimination on the basis of marital status,
race, sex, national origin, color, religion, handicap or disability,
retaliation, violation of public policy, and violation of any and all federal,
state and/or local statutes, laws, rules, regulations and/or ordinances,
including, but not limited to, Title VII of the Civil Rights Act of 1964, as
amended, Sections 1981 through 1988 of Title 42 of the United States Code, as
amended, The National Labor Relations Act, as amended, The Employee Retirement
Income Security Act of 1974, as amended, The Americans with Disabilities Act of
1990, as amended, The Family and Medical Leave Act of 1993, The Age
Discrimination in Employment Act of 1967 ("ADEA"), as amended, The Washington
State Wage and Hour Laws, and The Washington Law Against Discrimination, Ch.
49.60 RCW, as amended; except that the term "Claims" does not include: (i) any
claims for indemnification pursuant to Article IX of the Bylaws of Egghead, Inc.
that Smith may have as a former officer of Egghead or pursuant to policies of
insurance held by Egghead, if any, that provide coverage for liability of former
officers and directors of Egghead; (ii) any claims based on rights created by
this Agreement; and (iii) any claims where the events in dispute first arise
after the date of this Agreement.
10. TAX LIABILITY. Some or all of the payments and benefits which Smith may
receive hereunder may be deemed income and taxable to Smith under relevant
provisions of the Internal Revenue Code of 1986, as amended, and other federal,
state, and local statutes and regulations (collectively "Codes"). Smith is
advised that Egghead does not "gross up" benefits paid to or on behalf of its
employees. Smith shall have sole responsibility to determine and, to the extent
any withholdings made by Egghead hereunder are insufficient, to pay, and shall
indemnify and hold Egghead harmless from, all taxes coming due under such Codes.
This hold harmless and indemnity obligation covers only those taxes which, in
the ordinary course, would normally be obligations of or paid by Smith.
11. NONADMISSION CLAUSE. This Agreement shall not be construed as an
admission by either party of any liability to the other party, breach of any
agreement between the parties, or violation by either party of any statute, law,
rule or regulation.
12. CONSIDERATION/REVOCATION PERIOD. Smith acknowledges that he has been
informed of his right to fully consider the terms of this Agreement for a period
not to exceed twenty-one (21) days pursuant to applicable provisions of the
ADEA. If Smith chooses to execute this Agreement, he shall have an additional
seven (7) days after signing this Agreement to revoke it by providing written
notice thereof to Egghead.
13. SEVERABILITY. If any provision of this Agreement is held to be invalid or
unenforceable, the remaining provisions shall nevertheless
8
<PAGE>
continue to be valid and enforceable to the maximum extent consistent with
applicable law.
14. COMPLETE AGREEMENT. This Agreement contains the entire understanding
and agreement between the parties in connection with its subject matter and
supersedes any and all other prior and contemporaneous oral or written
agreements, understandings, or representations between the parties pertaining
to same. This Agreement cannot be altered except in a writing signed by
Smith and an authorized representative of Egghead.
15. FURTHER ASSURANCES. The parties agree to execute any further documents
and instruments as may be reasonably necessary to fully carry out the terms
and conditions of this Agreement.
16. ARBITRATION. Except as set forth under Section 2(c) hereof, any
controversy or claim arising out of this Agreement shall be resolved by
arbitration pursuant to this paragraph and the then current rules and
supervision of the American Arbitration Association ("AAA"); provided, Egghead
may obtain the relief set forth in Section 7 hereof in addition to any
resolution of such claim or controversy by arbitration as provided herein. The
arbitration shall be held in Spokane before a single arbitrator either mutually
agreed upon by the parties or selected in accordance with AAA Rules. The
arbitrator shall have no authority to add to, subtract from, or modify any of
the terms of this Agreement. The arbitrator's decision shall be final and
binding upon the parties hereto and may be entered in any court having
jurisdiction.
17. NOTICES. All notices, requests, payments and other communications required
or permitted to be given hereunder shall be in writing and shall be delivered by
overnight courier or sent postage prepaid by the United States certified mail,
return receipt requested, to the addressee's mailing address as hereafter set
forth:
If to Egghead: Egghead, Inc.
22705 East Mission
Liberty lake, WA 99019
Attention: Legal Department
If to Smith: Ronald J. Smith
4026 South Conklin Road
Greenacres, WA 99016
Any party hereto may, by proper notice to the other parties, designate such
other address with the giving of notice as required hereunder. Any notice shall
be deemed given on the first day following the date such notice is
9
<PAGE>
sent by overnight courier or on the third day following the date such notice is
mailed in accordance with this Agreement.
18. BINDING AGREEMENT. This Agreement shall bind and inure to the benefit of
the parties and their respective heirs, personal representatives, marital
communities, related entities, shareholders, officers, directors, employees,
agents, attorneys, successors and assigns, except that Smith may not assign any
of his rights or delegate any of his duties hereunder without the prior written
consent of Egghead.
19. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Washington without application of the
principles of conflicts of laws, and venue for any proceeding hereunder shall be
in Spokane County, Washington.
20. COUNTERPARTS. This Agreement may be executed on separate counterparts,
any one of which need not contain signatures of more than one party, but all
of which taken together shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
EGGHEAD, INC.
/s/ Ronald J. Smith /s/ George P. Orban
- ------------------------- ---------------------------------------
Ronald J. Smith By: George P. Orban, Chairman of the
Board of Directors
D J & J SOFTWARE CORPORATION
/s/ George P. Orban
---------------------------------------
By: George P. Orban
-----------------------------------
Its Chairman of the Board of Directors
----------------------------------
10
<PAGE>
RESIGNATION AND RELEASE AGREEMENT
This RESIGNATION AND RELEASE AGREEMENT (the "Agreement") among Terence M.
Strom ("Strom"), Egghead, Inc. and DJ&J Software Corporation d/b/a Egghead
(D J & J Software Corporation, collectively with Egghead, Inc., "Egghead") is
dated as of February 15, 1997. Strom and Egghead wish to amicably terminate
Strom's employment with Egghead, and the parties wish to clearly set forth the
terms and conditions of Strom's departure from his employment. Therefore, in
consideration of the mutual promises and undertakings in this Agreement, Strom
and Egghead agree as follows:
1. RESIGNATION. Effective February 15, 1997 (the "Date of Resignation"),
Strom's employment with Egghead is terminated. Concurrent thereto, Strom will
resign from his position as a member of the Board of Directors of Elekom
Corporation and from any other designated Egghead responsibilities other than as
provided in Section 2(b) hereof, effective as of the Date of Resignation, except
that Strom shall continue his term on the Board of Directors of Egghead, Inc.
and D J & J Software Corporation until his successor is elected and qualified or
until his earlier death, resignation or removal. The parties acknowledge and
confirm that Strom previously resigned from his positions as President and Chief
Executive Officer of Egghead, Inc. and D J & J Software Corporation, effective
January 30, 1997.
2. PAY PROTECTION.
(a) GUARANTEED PAYMENT. Commencing the Date of Resignation, Egghead
shall pay Strom his current annual base salary of $300,000 for a period of
twenty-four (24) months (the "Severance Period"), less any lawful withholding.
Such amount shall be paid in bi-weekly installments at normal bi-weekly payroll
intervals or pursuant to a payment schedule that is mutually agreeable to the
parties. Strom shall also be paid any unused vacation pay accrued as of the
Date of Resignation, as reflected in Egghead's records, to be paid at the end of
the payroll period next following the Date of Resignation, or pursuant to a
payment schedule that is mutually agreeable to the parties. Strom shall not be
entitled to vacation pay accrual during the Severance Period.
(b) CONSULTING ARRANGEMENT. In consideration for the severance payments
described herein, Strom agrees to provide to Egghead consulting services for a
period not to exceed twelve (12) months from the Date of Resignation. The
purpose of such consulting is to ensure an orderly transition of Strom's duties.
Such duties shall be rendered in the state of Washington, and at such other
place or places as Egghead shall in good faith
1
<PAGE>
require, or as the interests, needs, businesses or opportunities of Egghead
shall require. Prior to the time Strom obtains other employment, Strom's
services on behalf of Egghead shall occur no more than an average of one full
business day per week, and Strom agrees that during such time he shall comply
with all policies, standards, and regulations of Egghead, including but not
limited to, entering into confidentiality agreements. Strom agrees to perform
all duties required to the best of his ability, experience and talents. Egghead
further understands that once Strom obtains alternative employment, his
consulting work will be limited to providing that assistance which does not
interfere with Strom's employment. At that time, Egghead will make a good faith
effort to limit consulting requests to phone rather than in-person. Egghead
will pay all reasonable and necessary business expenses incurred by Strom while
acting as a consultant for Egghead promptly after receipt from Strom of receipts
or other evidence satisfactory to Egghead verifying such expenses.
(c) DEATH OR DISABILITY. In the event of Strom's death prior to
completion of the Severance Period, Egghead shall be obligated to continue the
severance payments set forth under Section 2(a) hereof and the COBRA subsidies
set forth under Section 3(b) hereof, if applicable. Upon death, such payments
shall be made to Strom's spouse, if then living, and if Strom's spouse is not
then living, said payments shall be paid to Strom's estate. Other than the
foregoing, Egghead shall have no further obligation to Strom's estate under this
Agreement in the event of his death.
If Strom is unable to perform his consulting duties pursuant to Section
2(b) for a period of more than twelve (12) weeks, the severance payments set
forth under Section 2(a) otherwise payable to Strom shall be continued for the
entire Severance Period, which shall include the twelve (12) weeks during which
Strom was unable to perform his consulting duties; provided, however, that such
severance payments shall only continue if Egghead has received proof to its
satisfaction that Strom has suffered a total disability. For purposes of this
Agreement, total disability shall mean an illness or physical or mental
incapacity that prevents Strom from carrying out his consulting duties pursuant
to this Agreement. Proof of such disability shall be supplied by Strom in the
form of a written letter of Strom's physician stating that in the physician's
opinion Strom is physically or mentally incapable of performing his consulting
duties pursuant to this Agreement. Egghead shall have the right to have Strom
examined by a physician of Egghead's choice, solely at Egghead's expense, to
render an opinion as to whether or not Strom is physically or mentally incapable
of performing his consulting duties pursuant to this Agreement. In the event
the physician selected by Strom and the physician selected by Egghead render
contrary opinions, the issue of whether Strom is physically or mentally
incapable of performing his consulting duties pursuant to this Agreement may be
submitted by Egghead
2
<PAGE>
to arbitration under Washington law, and the decision of such arbitration shall
be final and binding on all parties. So long as severance payments are made to
Strom, Egghead will also continue to make COBRA subsidies, if applicable. Other
than the foregoing, Egghead shall have no further obligation to Strom under this
Agreement in the event of his total disability.
3. EMPLOYEE BENEFIT PROGRAMS.
(a) STOCK OPTIONS. Egghead and Strom agree that there are two groups of
stock options which Strom has had certain rights to exercise. The first group
pertains to a nonqualified stock option to purchase 200,000 shares of common
stock of Egghead, Inc. at an exercise price of $8.125 per share, all of which
are fully vested. The second group pertains to a nonqualified stock option to
purchase 50,000 shares of common stock of Egghead, Inc. at an exercise price of
$10.25 per share, of which rights to purchase 25,000 shares are vested as of the
Date of Resignation (such vested portion to purchase 25,000 shares, together
with the vested option to purchase 200,000 shares described in the preceding
sentence, the "Vested Options"). Egghead agrees to provide Strom two years from
the Date of Resignation to exercise the Vested Options. Egghead, Inc. and Strom
expressly agree that there shall be no further vesting of any options held by
Strom beyond the Date of Resignation or beyond the 225,000 options already
vested. Subject to the foregoing, Strom's exercise shall be in compliance with
the provisions of Egghead, Inc.'s 1993 Stock Option Plan and with the provisions
of Section 16 of the Securities Exchange Act of 1934, as amended. Any change to
such stock option plan shall not adversely affect Strom's rights under this
Section 3(a).
(b) COBRA. Except as expressly provided in this Agreement and except as
set forth in the succeeding three sentences of this Section 3(b), all benefits
and perquisites, original, remaining or otherwise, to which Strom may have had
an entitlement immediately prior to the Date of Resignation shall cease
effective the Date of Resignation. At his election, Strom and his family may
continue to participate in Egghead's medical and dental benefit plans governed
by the Comprehensive Omnibus Budget Reconciliation Act ("COBRA") for the time
period provided in COBRA ("COBRA Period"). Egghead will subsidize the cost of
such coverage at the level in effect for Strom and his family as of the Date of
Resignation through the end of the COBRA Period. Strom will pay the balance of
such cost, if any.
4. REFERENCES. Upon request, Egghead will provide a letter of
recommendation for Strom containing his dates of employment and pay confirmation
only. Unless authorized by Strom in writing, Egghead's response to any inquiry
from third parties regarding Strom's employment with Egghead shall be limited to
this same information.
3
<PAGE>
5. RELOCATION EXPENSES. Egghead shall reimburse Strom for the cost of
relocating Strom's residence to any place outside Spokane County, Washington, up
to a total amount not to exceed $80,000, promptly after receipt of valid
receipts submitted by Strom for the costs of moving household goods, farm
equipment and pets and for costs related to the sale of his Spokane residence,
including real estate commissions. No other relocation expenses shall be
reimbursed. Egghead has no obligation to reimburse or pay Strom any amount with
respect to any decrease in the value of Strom's residential property from the
amount paid by Strom to purchase such residential property. No reimbursement
under this Section 5 will be made after sixty (60) days from the date of Strom's
final severance payment received in accordance with the provisions of Section 2
hereof.
6. NON-DISPARAGEMENT. Strom agrees not to make any disparaging or derogatory
remarks, comments or statements about Egghead and its officers, directors, and
employees, or any of them, at any time. Egghead agrees not to, and will
instruct its officers, directors and senior management not to, make any
disparaging or derogatory remarks, comments or statements about Strom at any
time.
7. CONFIDENTIALITY, NON-SOLICITATION AND NON-COMPETITION.
(a) NON-DISCLOSURE. Except as required by applicable law or regulation
and except as may be required to insure compliance with the terms of this
Agreement, Egghead and Strom agree to keep the terms of this Agreement
confidential; provided, that Strom may share its provisions with his spouse,
attorneys, and professional advisors, who will be informed of and bound by this
confidentiality obligation, and Egghead may share its provisions with its senior
management, attorneys, and professional advisors, who will be informed of and
bound by this confidentiality obligation. Strom agrees not to use or disclose
any confidential information. As used herein, "confidential information" means
all non-public information, trade secrets, methods, strategies, practices,
computer programs and systems, research and related documentation, customer
lists and other data, marketing plans, financial information, and all other
compilations of information that relate in any manner to the business of
Egghead, Inc., the direct or indirect subsidiaries of Egghead, Inc., or Egghead
SSI, LLC d/b/a Egghead Computer Surplus (such subsidiaries, together with
Egghead SSI, LLC d/b/a Egghead Computer Surplus, the "Affiliate Entities") or
any of them. Strom acknowledges that all confidential information is the
proprietary and confidential property of Egghead or the Affiliate Entities.
Strom further agrees to return all tangible items containing any confidential
information, wherever located and in whatever form, in addition to all other
property belonging to Egghead or the Affiliate Entities, on or before the Date
of
4
<PAGE>
Resignation; provided, however, that Strom may retain the FAX machine, printer,
monitor, PC and laptop computer, all as more specifically set forth on the
attached Exhibit A herein incorporated by this reference. Strom will transfer
to Egghead and delete from electronic storage on such PC and peripherals any
confidential information stored therein; provided further, however, Strom is not
obligated to transfer to Egghead, but must simply delete from his personal
records, such information that he knows is duplicative of information already in
Egghead's possession and control. Egghead shall execute such documentation, if
any, required to effect transfer of title in the property listed on Exhibit A.
(b) NON-SOLICITATION. Strom agrees that during the Severance Period he
will not individually, or in conjunction with any other person, corporation or
other entity, in any capacity, directly or indirectly (i) solicit or recruit
any employee of Egghead or any of the Affiliate Entities or (ii) cause or seek
to cause (A) any employee of or consultant to Egghead or any of the Affiliate
Entities to terminate his or her employment or consulting relationship with
Egghead or any of the Affiliate Entities or (B) any customer, client or vendor
of Egghead or any of the Affiliate Entities to alter or terminate any business
relationship with Egghead or any of the Affiliate Entities. "Consultant" as
used in this Section 7(b) shall mean any individual that is a consultant to
Egghead or any Affiliate Entity.
(c) NON-COMPETITION. For a period of two (2) years from the Date of
Resignation, Strom shall not, directly or indirectly, be employed by, own,
manage, operate, join, control or participate in the ownership, management,
operation or control of or "be connected with" (as that phrase is interpreted
below), any person or entity engaged in any operations in competition with
Egghead or any of the Affiliate Entities in the retail sale of computer software
or computer hardware or both, through stores, mail order, telephonic means or
electronic commerce, including, without limitation, through the Internet;
provided, however, that for purposes of this Section 7(c) the following shall be
deemed to be persons or entities not engaged in operations in competition with
Egghead or any of its Affiliate Entities: (i) any person or entity if the sale
of computer software and computer hardware generates less than ten (10) percent
of its total annual revenue and less than ten (10) percent of the total annual
revenue of the division of such person or entity, if any, which Strom is
connected with; (ii) any person or entity that is a software publisher or
hardware manufacturer provided that it generates the substantial majority of its
annual revenue from the sale of products that it developed or manufactured; and
(iii) any person or entity that is an importer of computer hardware provided
that it sells only computer hardware. The Board of Directors of Egghead, Inc.
may, in its sole discretion, release Strom from any or all of his obligations
pursuant to this Section 7(c), provided that such release shall not be effective
unless made in writing.
5
<PAGE>
Strom shall be deemed to be "connected with" such business if such business is
carried on by a partnership, corporation or association of which he is an
officer, director, employee, partner, member, consultant or agent; provided,
however, that nothing herein shall prevent the purchase or ownership by Strom of
shares which constitute less than 2% of the outstanding equity securities of a
publicly or privately held corporation.
(d) VIOLATION. Strom acknowledges that his confidentiality,
non-solicitation and non-competition obligations under this Section 7 are
material inducements to Egghead in entering into this Agreement, that his
violation thereof shall constitute a material breach of this Agreement and
that any disclosure or action by Strom in violation of this Section 7 will
cause serious and irreparable injury to Egghead for which there is no
adequate remedy at law. If, upon investigation, Egghead determines that Strom
is in material violation of this Section 7, then Egghead may retain as
liquidated damages the balance of the payments coming due Strom under Section
2 hereof, if any, and may obtain immediate and permanent injunctive relief in
any court of competent jurisdiction. If Egghead determines that Strom is in
violation of this Section 7, then Egghead may in its sole discretion provide
Strom an opportunity to cure such violation, but Egghead shall have no
obligation to do so. The rights and remedies set forth in this Section 7 are
in addition to all other legal, equitable and contractual rights and remedies
available to Egghead.
8. REPRESENTATIONS AND WARRANTIES.
(a) BY STROM. Strom hereby represents and warrants as follows:
(i) That, to the best of his knowledge, as of the Date of
Resignation, there is no litigation or claim of any kind pending or
contemplated in any court or before any governmental authority or
regulatory body or arbitrator, pertaining to acts or omissions that
occurred within the scope of his employment as an officer of Egghead or as
a member of Egghead's Board of Directors, and that he knows of no facts or
circumstances that would give rise to such litigation or claim.
(ii) That he has reviewed this Agreement with independent legal
counsel, that the terms of this Agreement have been negotiated in good
faith at arms' length, that he has read and understands the terms of this
Agreement and the consequences thereof, and that he enters into this
Agreement as his free, voluntary and independent act.
(b) BY EGGHEAD. Egghead represents and warrants as follows:
6
<PAGE>
(i) That, to the best of its knowledge, as of the Date of
Resignation, there is no litigation or claim of any kind pending or
contemplated in any court or before any governmental authority or
regulatory body or arbitrator, pertaining to acts or omissions that
occurred within the scope of Strom's employment as an officer of Egghead,
and that it knows of no facts or circumstances that would give rise to such
litigation or claim;
(ii) That it is a Washington corporation duly authorized and validly
existing under the laws of the State of Washington;
(iii) That this Agreement and the obligations and undertakings
arising hereunder constitute the valid, binding and enforceable obligations
of Egghead; and
(iv) That it will promptly inform its officers, directors and senior
managers of its obligations under the relevant sections of this Agreement.
9. MUTUAL RELEASE. In consideration of the benefits and payments provided
to Strom in this Agreement, and as a material inducement to Egghead to enter
into this Agreement, Strom, individually and for his marital community, heirs,
personal representatives, successors and assigns (collectively "Strom
Releasees"), releases and forever discharges Egghead and the Affiliate Entities,
including any and all of Egghead's and each Affiliate Entity's affiliates,
shareholders, officers, directors, representatives, agents, and employees, each
of their successors and assigns, and each of them (collectively, the "Egghead
Releasees"), from any and all Claims (as defined below) that Strom may have
against any of the Egghead Releasees as of the Date of Resignation. The Egghead
Releasees release and forever discharge the Strom Releasees from any and all
Claims (as defined below) that any of the Egghead Releasees may have against any
of the Strom Releasees as of February 15, 1997. "Claims" as used in this
Section 9 is defined to mean any and all claims, demands, charges, liability,
causes of action, and damages, including without limitation, attorneys' fees and
costs actually incurred, known or unknown, including without limitation, any and
all claims, rights, demands, and causes of action for breach of any employment
contract or agreement (whether express or implied, written or oral), wrongful
discharge, intentional and/or negligent infliction of emotional distress,
defamation, invasion of privacy, tort claims, discrimination on the basis of
marital status, race, sex, national origin, color, religion, handicap or
disability, retaliation, violation of public policy, and violation of any and
all federal, state and/or local statutes, laws, rules, regulations and/or
ordinances, including, but not limited to, Title VII of the Civil Rights Act of
1964, as amended, Sections 1981 through 1988 of Title 42 of the United States
Code, as amended, The
7
<PAGE>
National Labor Relations Act, as amended, The Employee Retirement Income
Security Act of 1974, as amended, The Americans with Disabilities Act of
1990, as amended, The Family and Medical Leave Act of 1993, The Age
Discrimination in Employment Act of 1967 ("ADEA"), as amended, The Washington
State Wage and Hour Laws, and The Washington Law Against Discrimination, Ch.
49.60 RCW, as amended; except that the term "Claims" does not include (i) any
claims for indemnification that Strom may have as a former officer or
director of Egghead pursuant to the Bylaws of Egghead, Inc. or pursuant to
any policies of insurance held by Egghead, if any, that provide coverage for
liability of former officers and directors of Egghead; (ii) any claims based
on rights created by this Agreement; and (iii) any claims where the events in
dispute first arise after the date of this Agreement. Egghead will not
contest any claim for unemployment compensation filed by Strom, but Egghead
may report the severance payments paid to Strom hereunder as appropriate.
10. TAX LIABILITY. Some or all of the payments and benefits which Strom may
receive hereunder may be deemed income and taxable to Strom under relevant
provisions of the Internal Revenue Code of 1986, as amended, and other federal,
state, and local statutes and regulations (collectively "Codes"). Strom is
advised that Egghead does not "gross up" benefits paid to or on behalf of its
employees. Strom shall have sole responsibility to determine and, to the extent
any withholdings made by Egghead hereunder are insufficient, to pay, and shall
indemnify and hold Egghead harmless from, all taxes coming due under such Codes.
This hold harmless and indemnity obligation covers only those taxes which, in
the ordinary course, would normally be obligations of or paid by Strom.
11. NONADMISSION CLAUSE. This Agreement shall not be construed as an
admission by either party of any liability to the other party, breach of any
agreement between the parties, or violation by either party of any statute, law,
rule or regulation.
12. CONSIDERATION/REVOCATION PERIOD. Strom acknowledges that he has been
informed of his right to fully consider the terms of this Agreement for a period
not to exceed twenty-one (21) days pursuant to applicable provisions of the
ADEA. If Strom chooses to execute this Agreement, he shall have an additional
seven (7) days after signing this Agreement to revoke it by providing written
notice thereof to Egghead addressed to: Brian W. Bender, Vice President and
Chief Financial Officer, 22705 East Mission Ave., Liberty Lake, WA 99019.
13. SEVERABILITY. If any provision of this Agreement is held to be invalid or
unenforceable, the remaining provisions shall nevertheless
8
<PAGE>
continue to be valid and enforceable to the maximum extent consistent with
applicable law.
14. COMPLETE AGREEMENT. This Agreement contains the entire understanding and
agreement between the parties in connection with its subject matter and
supersedes any and all other prior and contemporaneous oral or written
agreements, understandings, or representations between the parties pertaining to
same. This Agreement cannot be altered except in a writing signed by Strom and
an authorized representative of Egghead.
15. FURTHER ASSURANCES. The parties agree to execute any further documents and
instruments as may be reasonably necessary to fully carry out the terms and
conditions of this Agreement.
16. ARBITRATION. Except as set forth under Section 2(c) hereof, any
controversy or claim arising out of this Agreement shall be resolved by
arbitration pursuant to this Section 16 and the then current rules and
supervision of the American Arbitration Association ("AAA"); provided, Egghead
may obtain the relief set forth in Section 7 hereof in addition to any
resolution of such claim or controversy by arbitration as provided herein. The
arbitration shall be held in Spokane before a single arbitrator either mutually
agreed upon by the parties or selected in accordance with AAA Rules. The
arbitrator shall have no authority to add to, subtract from, or modify any of
the terms of this Agreement. The arbitrator's decision shall be final and
binding upon the parties and may be entered in any court having jurisdiction.
17. BINDING AGREEMENT. This Agreement shall bind and inure to the benefit of
the parties and their respective heirs, personal representatives, marital
communities, related entities, shareholders, officers, directors, employees,
agents, attorneys, successors and assigns, except that Strom may not assign any
of his rights or delegate any of his duties hereunder without the prior written
consent of Egghead.
18. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Washington without application of the
principles of conflicts of laws, and venue for any proceeding hereunder shall be
in Spokane County, Washington.
19. COUNTERPARTS. This Agreement may be executed on separate counterparts, any
one of which need not contain signatures of more than one
9
<PAGE>
party, but all of which taken together shall constitute one and the same
agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
EGGHEAD, INC.
/s/ Terence M. Strom /s/ George P. Orban
- ------------------------- ------------------------------------
Terence M. Strom By: George P. Orban, Chairman of
the Board of Directors
D J & J SOFTWARE CORPORATION
/s/ George P. Orban
---------------------------------------
By: George P. Orban
-----------------------------------
Its: Chairman of the Board of Directors
----------------------------------
10
<PAGE>
EXHIBIT "A"
TO
RESIGNATION AND RELEASE AGREEMENT
of
Terence M. Strom
EGGHEAD PROPERTY TO BE RETAINED BY TERENCE M. STROM:
DESCRIPTION OF EQUIPMENT SERIAL OR OTHER I.D. NUMBER
Hewlett Packard Office Jet FAX Egghead #21759
Hewlett Packard Laser Jet 4 Printer Egghead #15156
Toshiba Laptop Computer T2155CDS Egghead #91664
Samsung Computer Monitor H3NF 400003
Toshiba Port Replicator Y2100 02516473
11
<PAGE>
EXHIBIT 21.1
SCHEDULE OF EGGHEAD SUBSIDIARIES
FORM 10K FOR FISCAL YEAR ENDED 3/29/97
PARENT COMPANY: EGGHEAD, INC.
SUBSIDIARIES, WHOLLY OWNED BY EGGHEAD, INC.:
D J & J SOFTWARE CORPORATION (WA)
ELEKOM CORPORATION (WA)
EH DIRECT, INC. (WA)
MPI CORPORATION (WA) (WHOLLY OWNED SUBSIDIARY OF EH DIRECT, INC.)
Inactive corporation
EGGHEAD INTERNATIONAL, INC. (WA)
Inactive corporation
EGGHEAD EUROPE, INC. (WA) (WHOLLY OWNED SUBSIDIARY OF EH INTERNATL, INC.)
Inactive corporation
NORTH FACE SUB, INC.
Currently inactive corporation
<PAGE>
Exhibit 23.1
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation
of our reports included in this form 10-K, into the Company's previously filed
Registrations Statements No. 33-29453 (Egghead, Inc. 1989 Employee Stock
Purchase Plan); No. 33-59779 (Egghead, Inc. 1989 Option Plan); and No. 33-64033
(Egghead, Inc. Restated Nonemployee Director Stock Option).
//Arthur Anderson, LLP
Seattle, Washington
June 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-29-1997
<PERIOD-END> MAR-29-1997
<CASH> 83,473
<SECURITIES> 0
<RECEIVABLES> 23,236
<ALLOWANCES> 5,319
<INVENTORY> 49,087
<CURRENT-ASSETS> 154,593
<PP&E> 41,165
<DEPRECIATION> 21,455
<TOTAL-ASSETS> 175,520
<CURRENT-LIABILITIES> 75,035
<BONDS> 0
0
0
<COMMON> 176
<OTHER-SE> 99,871
<TOTAL-LIABILITY-AND-EQUITY> 175,520
<SALES> 360,715
<TOTAL-REVENUES> 360,715
<CGS> 326,044
<TOTAL-COSTS> 326,044
<OTHER-EXPENSES> 18,182
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30
<INCOME-PRETAX> (44,173)
<INCOME-TAX> (4,788)
<INCOME-CONTINUING> (48,961)
<DISCONTINUED> 10,032
<EXTRAORDINARY> 0
<CHANGES> (711)
<NET-INCOME> (39,640)
<EPS-PRIMARY> (2.25)
<EPS-DILUTED> (2.25)
</TABLE>
