-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HTGMldZcS8te0HvnCSXb7pORRdmO79RnZTTTBQdLOJyZ7rtafGFr/PlUuuz1x5Vq Zfqb50WFosluJ1XoJMGEOA== 0000891020-98-000496.txt : 19980402 0000891020-98-000496.hdr.sgml : 19980402 ACCESSION NUMBER: 0000891020-98-000496 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980401 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MULTIPLE ZONES INTERNATIONAL INC CENTRAL INDEX KEY: 0001013786 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 911431894 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-28488 FILM NUMBER: 98584563 BUSINESS ADDRESS: STREET 1: 15815 SE 37TH ST CITY: BELLEVUE STATE: WA ZIP: 98006 BUSINESS PHONE: 2066032400 MAIL ADDRESS: STREET 1: 15815 S E 37TH ST CITY: BELLEVUE STATE: WA ZIP: 98006-1800 10-K405/A 1 AMENDMENT TO FORM 10-K FILED PURSUANT TO ITEM 405 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 0-28488 MULTIPLE ZONES INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) WASHINGTON 91-1431894 (State of Incorporation) (I.R.S. Employer Identification Number) 707 SOUTH GRADY WAY RENTON, WASHINGTON 98055-3233 (Address of Principal Executive Offices) (Zip Code) (425) 430-3000 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this form 10-K. [ X ] The aggregate market value of the Common Stock held by non-affiliates as of March 6, 1998 was approximately $20,520,557 (1), based upon the last sales price per share of $4.13 as reported by the NASDAQ National Market. The number of shares of the registrant's Common Stock outstanding as of March 6, 1998, was 13,065,844. (1) Excludes value of Common Stock held of record as of March 6, 1998 by executive officers and directors of the registrant. Includes Common Stock held of record as of that date by certain depository organizations. Exclusion of share held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant, or that such person is controlled by or is under common control with the registrant. ================================================================================ 2 DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated into the parts of this Form 10-K designated to the right of the document listed. INCORPORATED DOCUMENT LOCATION IN FORM 10-K - --------------------- ----------------------- 1997 Annual Report to Shareholders Part II, Items 5, 6, 7 and 8 Proxy Statement for the 1997 Annual Part III, Items 10, 11 and 12 Meeting of Shareholders An Index to Exhibits appears at pages 16 and 17 herein 2 3 MULTIPLE ZONES INTERNATIONAL, INC. FORM 10-K ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 1997 TABLE OF CONTENTS PART I.
10K Page No. ------------ Item 1. Business 4 Item 2. Properties 13 Item 3. Legal Proceedings 13 Item 4. Submission of Matters to a Vote of Security Holders 13 PART II. -------- Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 14 Item 6. Selected Financial Data 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of 14 Operations Item 8. Financial Statements and Supplementary Data 14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 14 PART III. --------- Item 10. Directors and Executive Officers of the Registrant 14 Item 11. Executive Compensation 15 Item 12. Security Ownership of Certain Beneficial Owners and Management 15 Item 13. Certain Relationships and Related Transactions 15 PART IV. -------- Item 14. Exhibits, Financial Statements and Reports on Form 8-K 16 Signatures 19 - --------------------------------------------------------------------------------------------------------
3 4 PART I. ITEM 1. BUSINESS GENERAL Multiple Zones International, Inc. together with its majority owned subsidiaries (collectively the "Company") is a leading international direct marketer of brand name microchip-based hardware, software, accessories and peripheral products for users of both the PC/Wintel ("PC") and Macintosh ("Mac") operating systems. The Company markets products through its two flagship catalogs, THE PC ZONE(R) and THE Mac ZONE(R). The Company began operations in 1988 by advertising in national trade publications. Catalog circulation commenced with The Mac Zone in 1990, followed by The PC Zone in 1992. International subsidiary operations and licensing activities commenced in 1992, and outbound telemarketing operations, principally to business accounts, were added in 1993. The Company distributed over 50 million catalogs domestically in 1997, with additional circulation by its subsidiaries and licensees through operations in 24 other countries worldwide. The Company offers a broad selection of microcomputer products at competitive prices primarily through its distinctive catalogs, as well as through major trade publications and an outbound telemarketing sales team focused on corporate, governmental and educational accounts. INDUSTRY BACKGROUND According to industry data published by Merrin Information Services, Inc. in May 1997, domestic sales of personal computers and related products were $77.8 billion in 1996 and are projected to increase to $138.2 billion in 2000, representing a compounded annual growth rate of 15.4%. The direct marketing channel is expected to be one of the fastest growing segments for the domestic personal computer and related products industry. The Company believes that many individuals and businesses, increasingly familiar with microcomputers, have become more receptive to catalog marketing and now make their purchase decisions based primarily on product selection and availability, convenience and price. Direct marketers enjoy efficiencies in the form of centralized operations and distribution and also the ability to offer a broad product selection and purchasing convenience. The Company believes direct marketing efficiencies not only better satisfy many segments of the customer market but also provide a cost-effective marketing vehicle for product manufacturers. The direct marketing channel has historically served a significant share of the market for Mac products, but a relatively small share of the market for PC products. However, sales of PC products through this channel are increasing, as consumer familiarity with microcomputer products grows. Products are becoming increasingly user-friendly, and manufacturers recognize the cost-effectiveness of the catalog channel. As the industry continues to evolve, the Company believes that first-time buyers may largely utilize retail channels that provide the opportunity to "touch and feel" the products, but that a growing number of computer-literate consumers will increasingly rely on the convenience and other advantages of the direct marketing channel. Included in the direct marketing channel are those manufactures of hardware and software that sell directly to the end customer. The manufacturer direct producers are having a increased impact on the direct marketing channel, but catalog resellers have an advantage based on the large variety of products that they can offer to the customer. The Company believes the growing acceptance of the direct marketing channel as a whole, particularly for PC products, presents a significant opportunity for increased sales by direct marketers. RISK FACTORS The discussion of the Company's business and operations contained in the Annual Report on Form 10-K contains certain forward-looking statements. Fort his purpose, any statement contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the 4 5 foregoing, the words "believes," "anticipates," "plans," and "expects," and similar expressions are intended to identify forward-looking statements. There are number of important factors that could cause the Company's actual results to differ materially from those indicated by any such forward-looking statements, including the "Risk Factors" identified below, or other factors of which the Company may not yet be aware. Future Growth. Net sales have grown from $80.5 million for the year ended December 31, 1993 to $490.0 million for the year ended December 31, 1997. The Company's business strategy is to pursue additional growth and expand its customer base. The Company's future success will depend in part on the ability of the Company to manage and grow effectively in the future. There can be no assurance that the Company will realize future growth in net sales or will not experience decreases in net sales. In March of 1998, the Company announced that it anticipates a shortfall in net sales for the first quarter ended March 31, 1998. The Company has experienced weakness in CPU unit sales and decreased unit sales prices on peripherals. Dependence on Sales of Mac Products. The Company is largely dependent on sales of Mac products manufactured by a broad variety of vendors, including Apple. Mac products represented 54.4% and 69.8% of the Company's gross sales in 1997 and 1996, respectively. Apple has experienced a decline in sales, as well as a decline in its share of worldwide and domestic microcomputer markets, reflecting uncertainties in the Mac marketplace. Additionally, during 1997 Apple has begun selling directly to customers. A further decline in the demand for, or availability of, Apple or other Mac products would likely have a material adverse effect on the Company's business, financial condition and results of operations. The Company intends to expand its presence in the PC market. The Company plans to grow its entire PC customer base while focusing on growing outbound sales to business, education and corporate accounts. There can be no assurance that the Company will be successful in increasing sales of PC products and also reduce its dependence on sales of Mac products. Competition. The microcomputer products industry is highly competitive. The Company competes with other national and international direct marketers. The Company also competes with traditional microcomputer retailers, computer superstores, consumer electronics and office supply superstores, and product manufacturers that sell direct to end-users. Some of the Company's larger competitors compete principally on the basis of price and may have lower costs than the Company. There can be no assurance that the Company will be able to compete effectively with existing competitors or any new competitors that may enter the market, or that the Company's business, financial condition and results of operations will not be adversely affected by intensified competition. Price Reductions. The microcomputer industry has experienced intense price competition. The Company believes that competition may increase in the future and that it may be required to reduce its gross margins to remain competitive. In addition, the Company continues its efforts to increase its sales of microcomputer hardware products, for which gross margins are generally lower than those associated with software products. Variability of Operating Results. The Company has experienced significant fluctuations in its operating results from quarter to quarter as a result of many factors, including general economic conditions, the condition of the microcomputer products industry, shifts in demand for microcomputer products and industry announcements of new products or upgrades. There can be no assurance that the Company will be profitable on a quarterly or annual basis. Risks of International Operations. The Company currently operates subsidiaries in 11 foreign countries and also derives license fees and royalties from catalog direct marketers in 13 other foreign countries who sell microcomputer products using the Company's service marks. The Company's international operations are subject to the general risks of remote management as well as other risks associated with the conduct of business in foreign countries, including economic, legal and regulatory uncertainties; currency fluctuations, which the Company generally does not attempt to hedge; restrictions on repatriation of earnings; potential conflicting claims to its service marks; export-import regulations; customs matters; foreign collection problems; military, political transportation risks; and foreign laws and government regulations. The 5 6 Company's licensees may terminate their agreements with the Company on short notice. Following termination, most licensees retain rights to their customer information without an express contractual restriction preventing future competition. There can be no assurance that the Company will be able to retain its licensees or to replace any licensees in the future. Year 2000. The Company is currently working to resolve the potential impact of the year 2000 on the processing of date-sensitive information by the Company's computerized information systems. The year 2000 problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. If the Company, its customers or vendors are unable to resolve such processing issues in a timely manner, it could result in a material financial risk. Accordingly, the Company plans to devote the necessary resources to resolve all significant year 2000 issues in a timely manner. Potential Disruption of Business. The Company's success is dependent in part on the quality, reliability and proper utilization of its information, telecommunication, desktop publishing and other systems, which are used for marketing, catalog design and production, purchasing, inventory management, order processing, product distribution, accounts receivable, customer service and general accounting functions. Any interruption in any of the Company's systems or telecommunication systems, could have a material adverse effect on the Company's business. Potential Increases in Postage, Shipping and Paper Costs. Postage and shipping costs, as well as the cost of paper for the Company's catalogs, are significant expenses in the operation of the Company's business. The Company generally mails its catalogs through the U.S. Postal Service and ships its products to customers by overnight delivery. Any future increases in postage, shipping rates or paper costs could have a material adverse effect on the Company's business, financial condition or results of operations. Changing Methods of Distributions. The market for microcomputer products is evolving rapidly in terms of product offerings and methods of distribution. New methods of distribution, such as on-line shopping services and electronic distribution of software, have emerged. Additionally, some manufacturers sell their hardware and software product directly to end-users, or to certain categories of end-users such as corporate accounts. These methods of distribution have attracted increased patronage and other new methods of distribution may emerge in the future. The Company will be required to remain competitive with existing and evolving distribution channels and methods, and to develop or adopt new methods for distribution in the future. Failure by the Company to do so could have a material adverse effect on its business, financial condition and results of operations. Reliance on Vendor Relationships. The Company acquires products for resale from manufacturers, as well as from distributors. Purchases from distributors constituted 35.9% and 25.5% of the Company's total purchases in 1997 and 1996, respectively. Certain hardware manufacturers limit the number of product units available to direct marketers such as the Company. In addition, certain manufacturers and distributors provide the Company with co-op advertising support and incentives in the form of rebate dollars, discounts and allowances. Substantially all of the Company's contracts and arrangements with its vendors are terminable without notice or upon short notice. Termination, interruption or contraction of the Company's relationships with its vendors, in the form of co-op advertising support, could have a material adverse effect on the Company's business, financial condition and results of operations. State Sales or Use Tax Uncertainties. The Company currently collects sales taxes or similar taxes on sales to customers in the States of Washington and Ohio. Various states have sought to require direct marketers to collect sales taxes on sales shipped to their residents. The United States Supreme Court recently affirmed its position that it is unconstitutional for a state to impose sales or use tax collection obligations on an out-of-state mail order company whose only contacts with the state are limited to the distribution of catalogs and other advertising materials through the mail and the subsequent delivery of purchased goods by United States mail or by interstate common carrier. Howeer, legislation that would expand the ability of states to impose sales tax collection obligations on direct marketers has been introduced in Congress on 6 7 many occasions. Due to its presence on various forms of electronic media and other factors, the Company's contact with various states may exceed the contact involved in the Supreme Court case. The Company cannot predict the level of contact that is sufficient to permit a state to impose a sales tax collection obligation on the Company. If legislation is passed to overturn the Supreme Court decision, the requirement to collect sales taxes or similar taxes on sales would result in additional administrative expenses for the Company, could result in increased prices to customers and could have a material adverse effect on the Company's business, financial condition or results of operations. Dependence on Key Personnel. The Company's future success will depend to a significant extent upon the efforts and abilities of key senior management personnel. The loss of the services of one or more the Company's senior management could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's success will depend on its ability to hire, train and retain skilled personnel in all areas of its business. Reliance on Outsourced Distribution. Advanced Logistics Services Corp. ("Airborne Logistics") provides and operates a warehouse and distribution center for the Company in Wilmington, Ohio under a contract that expires in March 1999. Any limitation or interruption of the service being provided by Airborne Logistics could have a material adverse effect on the Company's business, financial and results of operations. Rapid Technological Change and Inventory Obsolescence. The microcomputer industry is characterized by rapid technological change and frequent introductions of new products and product enhancements. In order to satisfy customer demand and obtain greater purchase discounts, the Company may be required to carry increased inventory levels of certain products, which will subject it to increased risk of inventory obsolescence. The Company intends to increase its participation in first-to-market purchase opportunities and end-of-life-cycle purchase opportunities, both of which will further increase the risk of inventory obsolescence. Special purchase products are sometimes acquired without return privileges and there can be no assurance that the Company will be able to avoid losses related to obsolete inventory. In addition, some vendors provide the Company with co-op advertising support in the form of products, for which there may be no return privileges. While the Company seeks to reduce its inventory exposure through a variety of inventory control procedures and policies, there can be no assurance that the Company will be able to avoid losses related to obsolete inventory. BUSINESS STRATEGY The Company's business objective is to strengthen its position as a leading international direct marketer of products for users of PC and Mac microcomputers. The central elements of the Company's business strategy include: Direct Marketing. The Company's core competence lies in generating demand for microcomputer products by utilizing three distinct and complementary direct marketing vehicles. The flagship catalogs, THE PC ZONE(R) and THE MAC ZONE(R), are directed at customers who phone the 1- 800 numbers. The Company's outbound account managers meet the needs of customers in the business, education and governmental markets. The Company's Internet sites appeal to the growing World Wide Web market and provide the Company a way to market a larger number of products to its customers. Increased Sales of PC Products. The Company intends to focus on the vast PC market. The Company believes that the percentage of PC products sold through this channel is increasing steadily, reflecting the importance of convenience and broad product selection and availability to a growing number of PC consumers. A part of this strategy involves increased emphasis on outbound telemarketing to business accounts which predominately purchase PC products. Expansion of Outbound Sales. Sales to corporate, education and governmental accounts represent a strong growth opportunity for the Company. The Company intends to increase sales to these accounts by 7 8 expanding its outbound sales team. Additionally, the Company seeks to acquire new business accounts through targeted catalog mailings. Internet Commerce. The Company believes that the Internet offers growth opportunities outside of the current catalog offerings. The Company can display and offer significantly more products to reach more customers and offer customers an additional way to purchase from the Company. Product Breadth and Mix. Through the Company's catalogs, Internet site and consultative sales force the Company is developing the capability to offer the customer access to over 45,000 hardware, software, peripheral and accessory products for users of PC and Mac microcomputers, providing its customers with comprehensive computing solutions. Microcomputer and technology products are in a constant state of change and improvement. The Company's goal is to offer the newest and best-selling products that are demanded by its customers. Maintain Low Operating Costs. The Company continually seeks ways to work more efficiently - the result of which has lowered SG&A expenses from 13.1% of sales in 1993 to 12.8% in 1997. In 1997, the Company streamlined its catalog production flow and also its credit approval process for business, education and government accounts. Both process improvement initiatives are directed at improving the Company's internal processes to eliminate costs and better serve the Company's vendor partners and its customers. Maintaining a low cost structure is a key part of the Company's business strategy. PRODUCTS AND MERCHANDISING Through the Company's catalogs, Internet site and consultative sales force the Company is developing the capability to offer the customer access to over 45,000 hardware, software, peripheral and accessory products for users of PC and Mac microcomputers from over 1,600 manufacturers. The Company is also authorized to sell volume site licenses for products of Microsoft, Lotus and Novell. Microcomputers. The Company offers a large selection of desktop, laptop and notebook personal microcomputer systems from leading manufacturers such as Apple, Compaq, Hewlett-Packard, IBM, and Toshiba. Peripherals and Accessories. The Company also sells peripherals and components such as printers, monitors, keyboards, memory, fax and other add-on circuit boards, networking and communications products, mass storage devices, modems and scanners, as well as various accessories and supplies such as toner cartridges, diskettes and connectors. Brands offered by the Company include 3Com, Apple, Canon, Epson, Hewlett-Packard, Iomega, Logitech, Motorola, Okidata, Phillips, Quantum, Sony, SyQuest, ViewSonic and UMAX. Software. The Company sells a wide variety of software packages in the business and personal productivity, connectivity, utility, language, educational and entertainment categories. The Company offers products from larger, well-known manufacturers as well as numerous specialty products from new and emerging software development companies. Brands offered by the Company include Adobe, Corel, Filemaker Incorporated, IBM, Intuit, Lotus, Macromedia, Microsoft, Novell, CUC, and Symantec.
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ----------------- ----------------- Microcomputers . . . . . . . . . . 33.8% 31.2% 20.7% Peripherals and accessories . . . . 48.8 50.6 50.3 ----- ----- ----- Total hardware . . . . . . . . . 82.6 81.8 71.0 Software . . . . . . . . . . . . . 17.4 18.2 29.0 ----- ----- ----- Total . . . . . . . . . . 100.0% 100.0% 100.0% ===== ===== =====
8 9 The Company's merchandising group determines the manufacturers whose products are featured in its catalogs and negotiates the terms and conditions of product coverage. In exchange for product coverage and the benefit of having information about their products available to the Company's customers, most manufacturers provide the Company with co-op advertising support, which significantly defrays the expense of catalog production. The merchandising group is also responsible for developing effective advertising campaigns for manufacturers, managing catalog design and layout, and coordinating product procurement and inventory management with the Company's purchasing group. In addition, the merchandising group works closely with the purchasing group to capitalize on opportunities to expand the Company's first-to-market, end-of- life-cycle and private-label product offerings. The Company is continually trying to increase the number of products which it is authorized to sell. The Company has been authorized by Apple, Compaq, Hewlett-Packard, IBM, Motorola and Toshiba to offer all or a portion of their product lines. The availability of these products has allowed the Company to increase its hardware sales by emphasizing its catalog coverage of these and other hardware products, particularly desktop, notebook and laptop microcomputers. The Company has focused on expanding its PC sales. PC sales grew 59.5% during 1997 over 1996. Additionally, PC sales have grown to represent 45.6% of net sales in 1997, compared to 30.2% and 26.9% of net sales in 1996 and 1995, respectively. The Company's Mac sales decreased 17.9% in 1997as compared to 1996. Sales of Apple branded products alone constituted 17.1% of gross sales in 1997, compared to 22.5% of gross sales in 1996 and 22.8% of gross sales in 1995. The Company believes that the percentage of its sales represented by Mac products is likely to continue to decline over time as a result of increasing acceptance of the direct marketing channel by PC product manufacturers and users and the Company's expanded focus on PC product sales. In addition to the Company's focus on PC products it will continue its efforts to increase sales to business accounts, which tend to be concentrated more heavily on PC products. PURCHASING The Company acquires products directly from manufacturers such as Apple and IBM as well as from distributors such as Ingram Micro, Merisel and others. Purchases of products from distributors increased from 25.5% to 35.9% of the Company's total product purchases in 1996 and 1997, respectively. Purchases from Ingram Micro Apple represented 20.9% and 15.2%, respectively, of the Company's total product purchases in 1997. No other vendor supplied more than 10.0% of the Company's total product purchases in 1997. The Company seeks to efficiently manage its inventory to achieve high product availability and fill rates. The Company utilizes sophisticated computerized systems that permit real-time monitoring of inventory and assist the Company in managing inventory at appropriate levels. The Company has 30-day return privileges on most of its product purchases, and has agreements with many of its vendors providing price protection should a vendor subsequently lower its price. The Company had a domestic customer return rate of 7.5% and 8.0% of gross sales in 1997 and 1996, respectively. Product returns are closely monitored to identify trends in product offerings, enhance customer satisfaction and reduce overall returns. CATALOGS The Company markets products primarily through targeted mailings of its flagship catalogs, THE PC ZONE(R) and THE MAC ZONE(R), each of which has been published monthly since January 1995. Customers receive frequent catalog mailings that vary depending on their purchase activity. A catalog is also included with each order shipped. Catalogs are mailed periodically to potential customers in the Company's proprietary database and to prospects obtained from list brokers and other sources. The following table provides information regarding the number of editions and total circulation of THE PC ZONE(R) and THE MAC ZONE(R) catalogs published domestically in 1997, 1996 and 1995. 9 10
THE PC ZONE(R) THE MAC ZONE(R) ---------------------------------- ---------------------------------- 1997 1996 1995 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- ---------- Number of editions .......... 13 12 12 13 12 12 Total circulation ........... 20,000,000 14,000,000 10,500,000 29,000,000 28,000,000 18,500,000
Each edition of the catalogs is typically produced with several cover versions, which highlight different products of particular interest to specific customer segments, such as graphics or entertainment products, based on data in individual customer records. Catalogs may also differ based on the customer type. The Company believes this highly targeted marketing treatment increases customer response. The Company also produces a targeted specialty catalog offering a relatively narrow but deep product line. The catalog, THE LEARNING ZONE(R), is targeted at purchasers for primary, secondary and post-secondary educational institutions. The Company intends to explore opportunities to further pursue targeted marketing efforts. Each catalog is printed with full-color photographs, detailed descriptions of product specifications, benefits and features, as well as pricing and ordering information. The catalogs are designed and produced in-house by the Company's staff of designers and production artists using a sophisticated computer-based catalog production system. The Company believes that in-house preparation of the catalogs streamlines the production process, provides for greater flexibility and creativity in catalog production, and results in significant cost savings. The Company also produces direct mail pieces for highly targeted promotions of specific products, such as software upgrades, to relevant customers. The Company's catalogs and direct mail pieces are printed and distributed commercially. INTERNET COMMERCE The Company was one of the first participants in the direct marketing channel to participate in on-line sales of computer products. The Company has built and maintains one of the largest electronic commerce sites on the Internet (zones.com). To drive traffic to the Company's Internet sites; it leverages the catalog circulation by featuring the Internet address throughout the catalogs, including the cover. The electronic stores provide the company with a lower-cost, effective way to offer the customers product information and a convenient way to purchase products. While the Company believes that printed catalogs will remain an important tool in the direct marketing of microcomputer products, it also believes that its strengths in database marketing and order fulfillment should enable it to respond effectively to new and emerging direct marketing vehicles. DATABASE MARKETING The Company maintains a proprietary database containing 3.0 million customer and inquirer records, including approximately 1.5 million customers, of which approximately 573,000 customers have purchased products from the Company during the last twelve months. The Company attracts new customers and prospective customers through advertising in major trade publications and through selective mailing of catalogs to names on mailing lists obtained from list brokers, product manufacturers, trade magazine publishers and other sources. The Company periodically analyzes and updates its database and other available information in order to enhance customer response and order rates. The Company tracks the buying patterns of its customers in an attempt to anticipate customers' needs and generate additional product orders. The Company also strives to improve the size, quality and responsiveness of its database through the use of sophisticated modeling techniques. The Company believes that by selectively targeting its catalogs to specific groups of customers with known product affinities and purchasing characteristics, the Company will be able to increase order rates from customers and enhance the effectiveness of its catalogs and their desirability as a marketing 10 11 channel for product manufacturers. The Company leverages its database marketing capabilities by providing key product manufacturers with marketing research such as price sensitivity tests, list response analyses, and database marketing consulting services. The Company believes these efforts assist it in promoting and preserving positive relationships with these manufacturers. SALES, TECHNICAL SUPPORT AND CUSTOMER SERVICE Outbound Sales. At December 31, 1997, the Company had a staff of 91 experienced account managers and support staff who pursue sales to corporate, governmental and educational accounts through outbound telemarketing. These commissioned account managers develop long-term relationships with business accounts through frequent telephone contact and by providing individual attention, quality service, and convenient one-stop shopping. In addition to outbound sales, the Company utilizes catalog mailings, fax broadcast messaging and other marketing tactics to enhance sales. Inbound Sales. The Company's staff of over 170 inbound telemarketing representatives are well-trained and knowledgeable. The Company offers toll-free numbers for inbound sales that are staffed 24 hours a day, seven days a week. Sophisticated systems allow the Company's representatives to quickly access a customer's record and billing information and review details of past purchases. For most products sold, the systems also contain an extensive on-line database of information on product specifications, benefits and features; compatibility of related products; and system requirements for software programs. In addition, the systems automatically prompt telemarketing representatives to offer customers the latest upgrades and complementary software and peripherals. Customer Service/Technical Support. The Company's customer service representatives respond to questions regarding order status and related matters as well as assist customers with product returns. Most vendors offer an unconditional 30-day return policy on their products. The Company also has a staff of dedicated technical support personnel who assist customers with the installation and operation of the products they purchase and are available toll-free during regular business hours. These personnel also offer customers support with customized configuration of their microcomputer systems. INTERNATIONAL OPERATIONS The Company has subsidiaries and licensees located in 24 countries worldwide, more than any other catalog retailer of microcomputer products. The Company's subsidiaries are located in Austria, Denmark, France, Germany, Great Britain, India, Mexico, Norway, Sweden, Switzerland and Venezuela. The Company's licensees are located in 13 other foreign countries. The Company's international sales were $70.7 million in 1997, $59.2 million in 1996 and $26.3 million in 1995, representing increases of 19.5%, 125.1% and 128.7%, respectively, over the comparable prior periods. The Company's international strategy generally has been to enter a country through a relationship with a local entrepreneur with industry experience who can provide local knowledge for the business operations. Depending on the size of the potential market and other factors, the Company may establish a license arrangement with the entrepreneur or form a subsidiary in which the entrepreneur has a minority interest. Both types of relationships have the advantage of providing significant incentives to the local entrepreneurs, which the Company believes is of critical importance to the success of the local ventures. With a license arrangement, the Company may at some point seek to convert the licensee to a controlled subsidiary, depending on the development of the market and the business. Such a conversion typically provides the operation with greater access to capital and management, enabling it to increase product selection and availability, as well as catalog circulation. The catalogs of the Company's subsidiaries and licensees are published under THE PC ZONE(R) and THE MAC ZONE(R) service marks, but are designed and produced locally in the native language, which allows them to be customized both in presentation and product mix to suit local needs. The Company's headquarters provides ongoing support in database marketing, catalog design, establishing relationships with product manufacturers, and product merchandising. The international catalogs attract manufacturers seeking broad 11 12 international exposure for marketing of their microcomputer hardware, software and peripheral products. The Company believes that a number of microcomputer product manufacturers utilize the operations of the Company and its licensees as their primary channel for international distribution. Some of the minority shareholders of the Company's subsidiaries have the right to require the Company to purchase their shares at a price calculated by a pre-determined formula based on performance of the business. Typically, a licensee will pay a one-time license fee plus a percentage royalty on ongoing sales revenues. Many of the licensees have granted the Company a right of first refusal in the event of any proposed sale of their business. SYSTEMS The Company has committed significant resources to the development of sophisticated management information, telecommunication, catalog production and other systems, which are employed in virtually all aspects of its business. The Company's primary computer systems consist of a Hewlett-Packard 3000 Model 987/200, shadowed by a redundant Hewlett-Packard 3000 Model 995 for disaster recovery, an IBM AS/400, and a widely-used mail order and catalog management software package. The primary computer systems are used for marketing, purchasing, inventory management, order processing, product distribution, accounts receivable, customer service and general accounting functions. DISTRIBUTION CENTER Airborne Logistics provides and operates a full-service warehouse and distribution center for the Company at the Airborne Commerce Park in Wilmington, Ohio under a contract that expires in March 1999. Employees of Airborne Logistics utilize the Company's systems, policies and procedures to receive, log and warehouse inventory shipments from product vendors, fill and ship domestic customer orders, and return inventory to product vendors when requested by the Company. The Company pays a flat rate for each order filled. Domestic orders received by the Company are electronically transmitted on a dedicated data line to its computer equipment at the Airborne Logistics distribution center, where a packing slip is printed out for order fulfillment and inventory availability is automatically updated on all of the Company's information systems. All inventory items are bar coded and located in computer-designated areas that are easily identified on the packing slip. All items are checked with bar code scanners prior to final packing, which helps to ensure that orders are filled correctly. Orders accepted by 1:00 a.m. Eastern Time can generally be delivered overnight via Airborne Express. Upon request, orders may also be shipped for Saturday delivery or by ground service or other overnight delivery services. COMPETITION The microcomputer products industry is highly competitive. The Company competes with other national and international direct marketers, including Micro Warehouse, Inc., CDW Computer Centers, Inc., Insight Enterprises, Inc. and Creative Computers, Inc. The Company also competes with product manufacturers that sell direct to end-users; specialty microcomputer retailers; microcomputer and general merchandise superstores; consumer electronic and office supply stores; and shopping services on television, the Internet and commercial on-line networks. Additional competition may arise if other new methods of distribution, such as interactive television, emerge in the future. The Company competes not only for customers, but also for co-op advertising support from microcomputer product manufacturers. The Company believes that product selection, availability and price are the three most important competitive factors. EMPLOYEES At December 31, 1997, the Company had 652 employees in its domestic operations, and over 180 persons were employed by the Company's foreign subsidiaries. The Company considers its employee relations 12 13 to be good. The Company has never had a work stoppage and no employees are represented by a labor organization. As a result of its growth, the Company has added a significant number of employees and has expended considerable efforts in training these new employees. The Company emphasizes the recruiting and training of high quality personnel and, to the extent possible, promotes people to positions of increased responsibility from within the Company. Each employee receives training appropriate to his or her position and a complete new hire orientation. The training programs include: New Hire Orientation, Sales Training and Management Development. New telemarketing representatives participate in an eight-week training program to introduce them to the Company's systems and familiarize them with the available products and services. TRADEMARKS The Company conducts its business in the United States primarily under the service marks THE PC ZONE(R) and THE MAC ZONE(R) registered with the United States Patent and Trademark Office. These registrations have an indefinite term, so long as the service marks are used in connection with the Company's business activities. The Company intends to obtain service mark protection for these and related marks, to the extent available, in the foreign countries where the Company does or expects to do business and where it has or expects to have licensees. The Company believes its service marks have significant value and are an important factor in the marketing of its products. The Company intends to take appropriate steps to protect and renew its service mark registrations. REGULATORY AND LEGAL MATTERS In addition to Federal, State and Local laws applicable to all corporations and employers in general, the direct marketing business as conducted by the Company is subject to the Federal Trade Commission's Merchandise Mail Order Rule and related regulations. The Company is also subject to laws and regulations relating to truth-in-advertising and other fair trade practices. The Company has implemented programs and systems to promote ongoing compliance with these laws and regulations. ITEM 2. PROPERTIES The Company currently leases approximately 132,000 square feet of space for its corporate headquarters, including its telemarketing operations, in Renton, Washington and approximately 18,000 square feet of space for its return warehouse facility in Henderson, Nevada. The Company also leases approximately 36,000 square feet of office space in Bellevue, Washington, which has been sublet. Additionally, the Company operates sales and distribution facilities in Austria, Denmark, France, Germany, Great Britain, India, Mexico, Norway, Sweden, Switzerland and Venezuela. ITEM 3. LEGAL PROCEEDINGS Various claims and actions, considered normal to the Company's business, have been asserted and are pending against the Company. The Company believes that such claims and actions should not have a material adverse effect upon the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted during the fourth quarter of 1997 to a vote of security holders. 13 14 PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The information for this item is incorporated by reference from the Company's 1997 Annual Report to Shareholders. ITEM 6. SELECTED FINANCIAL DATA The information for this item is incorporated by reference from the Company's 1997 Annual Report to Shareholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information for this item is incorporated by reference from the Company's 1997 Annual Report to Shareholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information for this item is incorporated by reference from the Company's 1997 Annual Report to Shareholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no disagreements with accountants on accounting and financial disclosure matters during the periods reported herein. PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is contained in, and incorporated by reference from, the Proxy Statement for the Company's 1998 Annual Meeting of Shareholders under the captions "Proposal No. 1: Election of Directors," and "Section 16(a) Beneficial Ownership Reporting Compliance." John E. DeFeo, age 51, has served as the Company's President, Chief Executive Officer and Vice Chairman of the Board since January 1997. Mr. DeFeo has been a member of the Company's Board of Directors since April 1996. From 1994 to 1996, Mr. DeFeo was President and Chief Executive Officer of U.S. Airwaves, Inc., an early stage wireless telecommunications company that he founded. From 1985 to 1994, Mr. DeFeo served as President and Chief Executive Officer of U.S. West NewVector Group, the domestic cellular communications subsidiary of U.S. WEST, Inc. Lorne G. Rubis, age 47, has served as the Executive Vice President of Sales since July of 1997. From 1996 to 1997 Mr. Rubis was the Vice President of Business Operations for the Los Angeles Kings Hockey Club. From 1992 to 1996, Mr. Rubis held the position of Vice President, reporting to the Chairman and CEO, at U.S. WEST, Inc., a Fortune 50 telecommunications/multimedia corporation. Peter J. Biere, age 41, was appointed Senior Vice President - Finance and Chief Financial Officer in October 1995. He joined the company as Controller in 1993 and served as Vice President - Finance, Controller and Treasurer from 1994 until his promotion. From 1989 to 1992, he held various management and finance positions with Plum Creek Timber Company, L.P., whose general partner was Burlington Resources, Inc., a natural resource company. 14 15 William P. Cortes, age 42, joined Multiple Zones in November of 1997 as the Senior Vice President of International Operations. Prior to joining Multiple Zones, Mr. Cortes served as the Executive Director of International Markets for Metapath Software Corporation and the Executive Director Business Development for Aerial Communications, Inc., a subsidiary of Telephone and Data Systems, Inc. From 1986 to 1996, Mr. Cortes held various executive roles at U.S. WEST, Inc., including Executive Director Marketing, Director New Opportunity Development and Director Business Development. Mr. Cortes is licensed by the State of Washington as an Attorney at Law and a Certified Public Accountant. Mark A. Bradley, age 33, joined Multiple Zones in January of 1998 as the Senior Vice President of Merchandising. From 1994 to 1998, Mr. Bradley held various management positions with MicroAge, Inc., most recently serving as Vice President of Hardware Strategy. Mr. Bradley was a National Account Sales Manager from 1991 to 1994 at NEC. Chris G. Hauser, age 47, was appointed Senior Vice President of MIS/Operations in January of 1998. He joined the company in June of 1996 and served as Vice President of Operations until his promotion. From 1994 to 1996, Mr. Hauser was the Director of Distribution for the Fingerhut Companies, Inc. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is contained in, and incorporated by reference from, the Proxy Statement for the Company's 1998 Annual Meeting of Shareholders under the caption "Executive Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is contained in, and incorporated by reference from, the Proxy Statement for the Company's 1998 Annual Meeting of Shareholders under the caption "Stock Ownership of Management and Certain Other Holders." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is contained in, and incorporated by reference from, the Proxy Statement for the Company's 1998 Annual Meeting of Shareholders under the caption "Certain Transactions." PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Index to Financial Statements: The following Consolidated Financial Statements of Multiple Zones International, Inc. and its subsidiaries, as contained in its 1997 Annual Report to Shareholders, are incorporated by reference in Part II, Item 8. Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 Statements of Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements Report of Independent Accountants (a) 2. Index to Financial Statements Schedule: Schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in Consolidated Financial Statements and Notes thereto. 15 16 (a) 3. Exhibits required by Securities and Exchange Commission Regulation S-K, Item 601:
Number Description - ---------- -------------------------------------------------------------------------------------------------------------------- EXHIBIT NO. 3: ARTICLES OF INCORPORATION AND BYLAWS 3.1 Restated Articles of Incorporation (incorporated by reference from exhibit 3.1 to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458)) 3.2 Amended and Restated Bylaws, as amended (incorporated by reference from exhibit 3.2 to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458)) EXHIBIT NO. 10: MATERIAL CONTRACTS Compensation Plans and Agreements 10.1 Multiple Zones International, Inc. 1993 Stock Incentive Plan, as amended (incorporated by reference from exhibit 10.1 to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458)) 10.2 Stock Option Agreement between the Registrant and Peter J. Biere for stock option granted August 9, 1994 (incorporated by reference from exhibit 10.2 to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458)) 10.3 Form of Stock Option Agreement (used for all other stock options granted to executive officers prior to April 1, 1996) (incorporated by reference from exhibit 10.3 to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458)) 10.4 Stock Option Agreement dated as of January 5, 1997 between the registrant and John E. DeFeo (incorporated by reference from exhibit 10.26 to the Registrant's Annual Report on Form 10-K filed on March 25, 1997 (File No. 000-28488)) 10.5 Form of Stock Option Agreement (used for all other stock options granted to executive officers after March 31, 1996) (incorporated by reference from exhibit 10.4 to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458)) 10.6 Form of Stock Option Agreement (used for all stock options granted to outside directors) (incorporated by reference from exhibit 10.16 to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458)) 10.7 Multiple Zones International, Inc. 401(k) Plan (incorporated by reference from exhibit 10.5 to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458)) 10.8 Multiple Zones International, Inc. Employee Stock Purchase Plan (incorporated by reference from exhibit 10.6 to the Registrant's Registration Statement on Form S- 1 filed on June 5, 1996 (File No. 333-04458)) 10.9 Multiple Zones International, Inc. Management Incentive Plan (incorporated by reference from exhibit 10.7 to the Registrant's Registration Statement on Form S- 1 filed on June 5, 1996 (File No. 333-04458)) 10.10 Form of Indemnification Agreement (entered into with each of Peter J. Biere and the Registrant's outside directors) (incorporated by reference from exhibit 10.15 to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458)) 10.11 Employment Agreement dated as of January 1, 1996 between the Registrant and Sadrudin J. Kabani (incorporated by reference from exhibit 10.12 to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458)) 10.12 Employment Agreement dated as of April 1, 1996 between the Registrant and Sadrudin J. Kabani (incorporated by reference from exhibit 10.13 to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458))
16 17 10.13 Employment Agreement dated as of July 14, 1997 between the Registrant and Lorne G. Rubis 10.14 Consulting Agreement between the Registrant and Carol L. Miltner (incorporated by reference from exhibit 10.17 to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458)) Other Material Contracts 10.15 Warrant issued to Prudential Securities Incorporated dated October 27, 1995 (incorporated by reference from exhibit 10.21 to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458)) 10.16 Standard Office Lease-Gross dated October 4, 1993 between the Registrant and Hewlett-Packard Company (incorporated by reference from exhibit 10.23 to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458)) 10.17 Office Lease dated April 1, 1996 between the Registrant and Renton Talbot Delaware, Inc. (incorporated by reference from exhibit 10.24 to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458)) 10.18 Industrial Real Estate Lease dated April 10, 1997 between the Registrant and Pacific Industrial Park LLC 10.19 Ingram Micro Resale Agreement dated April 1, 1996 between Ingram Micro and the Registrant (incorporated by reference from exhibit 10.25 to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458)) 10.20 Authorized Apple Catalog Reseller Sales Agreement between the Apple Computer, Inc. and the Registrant (incorporated by reference from exhibit 10.26 to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458)) 10.21 Storage and distribution Agreement dated September 28, 1992 between the Registrant and Advanced Logistics Services Corp., as amended (incorporated by reference from exhibit 10.27 to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458)) 10.22 Amendment to Storage and Distribution Agreement dated December 30, 1997, between the Registrant and Advanced Logistics Services Corp. 10.23 Agreement for Wholesale Financing date January 15, 1996, as amended, between the Registrant and Deutsche Financial Services Corporation (incorporated by reference from exhibit 10.19 to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458)) 10.24 Amendment to Agreement for wholesale financing dated April 23, 1997, between the Registrant and Deutsche Financial Services Corporation. 10.25 Business Loan Agreement dated April 24, 1997, between the Registrant and U.S. Bank of Washington, National Association. EXHIBIT NO. 13: ANNUAL REPORT TO SHAREHOLDERS 13.1 Portions of 1997 Annual Report to Shareholders EXHIBIT NO. 21: SUBSIDIARIES OF THE REGISTRANT 21.1 Subsidiaries of the Registrant (incorporated by reference from exhibit 21.1 to the Registrant's Registration Statement on Form S-1 filed on June 5, 1996 (File No. 333-04458)) EXHIBIT NO. 23: CONSENTS OF EXPERTS AND COUNSELS 23.1 Consent of Coopers & Lybrand L.L.P. EXHIBIT NO. 27: FINANCIAL DATA SCHEDULE 27.1 Financial Data Schedule (December 31, 1997) 27.2 (Restated December 31, 1995 through December 31, 1996) 27.3 (Restated January 1, 1997 through September 30, 1997)
17 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MULTIPLE ZONES INTERNATIONAL, INC. Date: March 27, 1998 By: /s/ JOHN E. DEFEO -------------------------------------- John E. DeFeo, Chief Executive Officer /s/ PETER J. BIERE --------------------------------------- Peter J. Biere, Chief Financial Officer Pursuant to the requirements of the Securities Exchange act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Title Date - -------------------------------- ---------- -------------- /s/ JOHN H. BAUER - -------------------------------- Director March 27, 1998 John H. Bauer /s/ JOHN T. CARLETON - -------------------------------- Director March 27, 1998 John T. Carleton /s/ SADRUDIN J. KABANI - -------------------------------- Director March 27, 1998 Sadrudin J. Kabani /s/ FIROZ H. LALJI - -------------------------------- Director March 27, 1998 Firoz H. Lalji /s/ CAROL L. MILTNER - -------------------------------- Director March 27, 1998 Carol L. Miltner /s/ PAUL E. MONSON - -------------------------------- Director March 27, 1998 Paul E. Monson
18 EX-10.13 2 EMPLOYMENT AGREEMENT WITH LORNE G. RUBIS 1 [MULTIPLE ZONES INTERNATIONAL LETTERHEAD] Lorne G. Rubis July 14, 1997 95A - 17th Street Hermosa Beach, CA 90254 RE: Revised Employment Offer Dear Mr. Rubis, I am pleased to offer you the position of Executive Vice President of Sales for Multiple Zones International, Inc. (the "Company"), reporting to Mr. John DeFeo, President/CEO/COO. This offer is made for employment at will beginning July 14, 1997, on the following terms: COMPENSATION A salary of $9,375.00 per pay period (24 per year). You will also be eligible for the Company's incentive bonus plan at the executive level -- 35 percent of your base salary. As with all company incentive plans, this is subject to change at management's discretion. In addition, you will receive 100,000 stock options under the Company's 1993 Stock Incentive Plan, as amended. The stock options will vest in equal increments over a four-year period, at a rate of 25 percent per year. You also will have an annual stock option grant opportunity equal to 40 percent of your base salary as of January 1st of such year. Annual grants are subject to approval by the Board of Directors during the Board Meeting, generally in April, that precedes the Annual Meeting of Shareholders. Stock options are generally granted at an exercise price equal to the closing price of the Company's stock on the effective date of the grant, typically the date of Board approval. Annual stock option grants are subject to a two-year equal installment vesting, and represent the long-term incentive component of your compensation. A $25,000 signing bonus will also be paid to you at the onset of your employment with the Company, but is contingent upon a commitment of 12 months continuous employment. Should you decide for any reason to terminate your employment prior to that time, other than change of control as defined on pages two & three of this letter, these funds must be repaid in full. BENEFITS The Company will provide you with medical, dental, vision and prescription insurance coverage in accordance with the Company insurance plan. There is optional coverage for spouses and immediate family members, but the cost of this additional coverage will be your responsibility. Your eligibility for benefits would begin on the first of the month following employment (i.e., August 1, 1997). VACATION You will accrue three weeks of paid vacation annually during your first two years with the Company, and four weeks annually after two years of service. 2 LORNE RUBIS Offer Letter -- Page Two RELOCATION The Company will provide you with up to $25,000 for expense reimbursement to assist you in your relocation to the Puget Sound area. These funds can be used for travel, transport of household goods, closing costs, interim living expenses, house hunting trips and other ordinary moving expenses. These funds may be subject to personal income tax as advised by our accounting firm, Coopers & Lybrand LLP. You should plan on working directly with me to coordinate use of these funds, submitting receipts for an expense reimbursement or gaining pre-approval of expenses that you would like the Company to pay directly. Per our discussions, should your expenses related to this move go beyond the relocation amount we are offering, any additional reimbursement for your relocation will be subject to John DeFeo's approval as an exception, and should not be considered as a guarantee. SEPARATION As an employee at will, the Company has the right to terminate your employment at any time, with or without "Cause." For present purposes, Cause will include (a) repeated refusals to carry out directions of the Board with regard to material matters reasonably consistent with your duties as Executive Vice President of Sales; (b) knowing violation of a state or federal law constituting a felony or involving the commission of a crime against the Company; (c) misuse of alcohol or controlled substances, misrepresentation, deception, fraud or dishonesty materially injurious to the Company; and (d) any act or omission in willful disregard of the Company's interests that substantially impairs its goodwill, business or reputation. Should the Company terminate your employment for Cause, then no salary, compensation, severance benefits or other amounts shall be paid to you with respect to any period subsequent to the effective date of such termination, or otherwise with respect to your employment by the Company. In the event, however, that the Company terminates your employment without Cause, or you terminate your employment with the Company for "Good Reason" (as defined below) within 12 months following a "Change of Control" (also defined below), the Company will provide you with severance pay equal to your base salary paid monthly for up to 12 months or until you secure other employment, whichever occurs first. If such termination (without Cause or for "Good Reason" as defined below) occurs within the first 4 years of your employment, the Company will provide you with an additional relocation reimbursement allowance of up to $25,000.00. Your medical benefits would continue under the Company plan throughout the term of your monthly severance payments. If you secure other employment within three months of your last day with the Company, in addition to the monthly severance payments during such period, you will receive an additional payment equal to two months of base salary. The Company will also provide you with two year's accelerated vesting on all stock options held as of the date of separation. You will have a period of 1 year from date of separation to exercise these options, reduced to 90 days if you elect to go to work for one of our competitors. Please note that exercising the options after 90 days from the date of separation will result in the options being treated as non-qualified rather than incentive stock options. Under tax law, non-qualified stock options are generally taxed as ordinary income, while incentive stock options are generally treated as capital gains. You will additionally receive a cash payment in lieu of any accrued but unused vacation calculated based on the rate of base compensation in effect on the effective date of such termination. 3 Lorne Rubis Offer Letter - Page Three For purposes of this Employment Offer, the term "Change of Control" is limited to the following: (a) Any sale or exchange of Common Stock of the Company, any sale or exchange of assets of the Company (other than in the ordinary course of business), or any merger, statutory share exchange or other similar transaction, as a result of which, together with all other similar transactions that have occurred during the period of eighteen (18) months ending on the date of the transaction, there has been during that period a transfer of ownership or control of more than seventy-five percent (75%) of the Company's stock, voting power, assets or business; or (b) The acquisition by any person or entity or any group of persons or entities acting in concert of the ownership of, or the power to vote, more than fifty percent (50%) of the outstanding voting securities of the Company (for which purpose, securities which are convertible into voting securities will be deemed voting securities). The term "Good Reason," for present purposes, is limited to the occurrence within the 12-month period following a Change in Control of any one of the following events without your consent: (a) A material reduction in the scope of your responsibilities for the Company immediately prior to the Change in Control and the assignment to you of any duties inconsistent with your position as Executive Vice President of Sales; (b) A material reduction in the overall level of employee benefits available to you immediately prior to the Change in Control, or your right to participate therein, unless such reduction is nondiscriminatory as to you; or (c) The Company's requiring you to be based anywhere more than fifty (50) miles from the Company's principal business location at the time of the Change of Control other than for required travel in connection with the business of the Company not significantly greater than your business travel obligations at the time of the Change of Control. *** It is my understanding that the foregoing terms and conditions of your employment represent our entire agreement and supersede all prior discussions regarding your employment with Multiple Zones International, Inc. Any questions regarding this offer of employment or Company benefits may be directed to me at (425) 430-3674. A second copy is included for your records. Please indicate your acceptance by signing and returning the signed original to my office. Thank you very much -- we are very glad to have you joining the MZI Team! Sincerely, /s/ ANNETTE GREGORICH - ---------------------------------------- Annette Gregorich Sr. Director of Human Resources Multiple Zones International, Inc. Encl./Benefits Accepted: /s/ LORNE G. RUBIS Date: 7/14/97 ----------------------------------- -------------------- Lorne G. Rubis EX-10.18 3 INDUSTRIAL REAL ESTATE LEASE 1 INDUSTRIAL REAL ESTATE LEASE (Single-Tenant Facility) Table of Contents ARTICLE ONE: BASIC TERMS Page 1 ARTICLE TWO: LEASE TERM Page 1 ARTICLE THREE: BASE RENT Page 2 ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT Page 2 ARTICLE FIVE: USE OF PROPERTY Page 6 ARTICLE SIX: CONDITION OF PROPERTY; Page 7 MAINTENANCE, REPAIRS AND ALTERATIONS ARTICLE SEVEN: DAMAGE OR DESTRUCTION Page 8 ARTICLE EIGHT: CONDEMNATION Page 9 ARTICLE NINE: ASSIGNMENT AND SUBLETTING Page 9 ARTICLE TEN: DEFAULTS: REMEDIES Page 10 ARTICLE ELEVEN: PROTECTION OF LENDERS Page 11 ARTICLE TWELVE: LEGAL COSTS Page 12 ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS Page 12 ARTICLE FOURTEEN: BROKERS Page 14 ARTICLE FIFTEEN: TOXIC AND HAZARDOUS SUBSTANCES Page 14 ARTICLE SIXTEEN: RULES AND REGULATIONS Page 15 EXHIBIT A: NET RENTABLE AREA EXHIBIT B: NOTICE OF LEASE TERM DATES EXHIBIT C: RULES AND REGULATIONS EXHIBIT D: RIGHT OF FIRST REFUSAL ON CONTIGUOUS SPACE CONSTRUCTION OF IMPROVEMENTS RIDER ENVIRONMENTAL INDEMNIFICATION RIDER
2 INDUSTRIAL REAL ESTATE LEASE (Single Tenant Facility) ARTICLE ONE: BASIC TERMS This Article One contains the Basic Terms of this Lease between the Landlord and Tenant named below. Other Articles, Sections and Paragraphs of the Lease referred to in this Article One explain and define the Basic Terms and are to be read in conjunction with the Basic Terms. Section 1.01. DATE OF LEASE: April 10, 1997 Section 1.02. LANDLORD: Pacific Industrial Park, LLC, a Delaware limited liability company Address of Landlord: 1095 E. Twain Ave., 2nd Floor, Las Vegas, NV 89109 attn: Jim Stockhausen Section 1.03. TENANT: Multiple Zones International, Inc., a Washington corporation Address of Tenant: 707 S. Grady Way, Renton, WA. 98005, phone (206) 430-3000. Section 1.04. PROPERTY: The demised premises (the "Property") is commonly referred to as 170 Gallagher Crest Dr., Henderson, NV, 89014 (the "Building"), as further described on Exhibit A attached hereto and incorporated herein by reference, "Net Rentable Area" of the Property (as described on Exhibit A) is approximately 18,720 square feet. Section 1.05. LEASE TERM: 60 months, beginning on May 1, 1997 or such other date as specified in this Lease, and ending on April 30, 2002. Section 1.06. RENT AND OTHER CHARGES PAYABLE BY TENANT: a. BASE RENT: six thousand five hundred fifty-two dollars and no cents ($6,552.00) per month for the first 12 months, as provided in Section 3.01, and shall be increased every 12 months after the Commencement Date, either (i) in accordance with the increase in the United States Department of Labor, Bureau of Labor Statistics, U.S. All Cities Average, Consumer Price Index for Urban Wage Earners and Clerical Workers (for all items 1982 - 1984 = 100) [the "Index"], as provided in Section 3.02. (b) OTHER PERIODIC PAYMENTS: Tenant shall be responsible for payment of certain charges directly such as taxes (See Section 4.02), utilities (See Section 4.03), and insurance (See Section 4.04). In addition, Tenant shall be responsible for payment of Tenant's Proportionate Share of Common Area Costs (See Section 1.07 and Section 4.05). Section 1.07. TENANT'S PROPORTIONATE SHARE: (See Section 4.05) 7.95% Section 1.08. INITIAL SECURITY DEPOSIT: (See Section 3.03 and Paragraph 13.03(c)) six thousand five hundred fifty-two dollars and no cents ($6,552.00). Section 1.09. TENANT'S GUARANTEE: (If none, so state) None. Section 1.10. PERMITTED USES: (See Section 5.01)_______________________ _______________________________________________________________________________ Section 1.11. VEHICLE PARKING SPACES ALLOCATED TO TENANT: (See Section 4.05) twenty-five (25) Section 1.12. BROKERS: (See Article Fourteen) Lee & Associates Section 1.13. RIDERS: The following Riders are attached to and made a part of this lease: CONSTRUCTION OF IMPROVEMENTS RIDER, ENVIRONMENTAL INDEMNIFICATION RIDER ARTICLE TWO: LEASE TERM Section 2.01. LEASE OF PROPERTY FOR LEASE TERM. Landlord leases the Property to Tenant and Tenant leases the Property from Landlord for the Lease Term. The Lease Term is for the period stated in Section 1.05 above and shall begin and end on the dates specified in Section 1.05 above, unless the beginning or end of the Lease Term is changed under any provision of this Lease. The "Commencement Date" shall be the date specified in Section 1.05 above for the beginning of the Lease Term, unless advanced or delayed under any provision of this Lease. At such time as the Commencement Date shall have been established, Landlord and Tenant shall execute Exhibit B attached hereto and incorporated herein by reference as a confirmation of said date. Section 2.02. DELAY IN COMMENCEMENT. Landlord shall not be liable to Tenant if Landlord does not deliver possession of the Property to Tenant on the first date specified in Section 1.05 above. Landlord's non-delivery of the Property to Tenant on that date shall not affect this Lease or the obligations of Tenant under this Lease. However, unless provided otherwise in the Lease, the Commencement Date shall be delayed until possession of the Property is delivered to Tenant but in no event than the later of: (a) June 15, 1997 or (b) sixty 3 (60) days after approval by both Landlord and Tenant of the Final Plans as defined in the Construction of Improvements Rider attached hereto, unless agreed to otherwise in a written agreement between Landlord and Tenant. The Lease Term shall be extended for a period equal to the delay in delivery of possession of the Property to Tenant, plus the number of days necessary to end the Lease Term on the last day of a month. If delivery of possession of the Property to Tenant is delayed, Landlord and Tenant shall, upon such delivery, execute Exhibit B as confirmation of the Commencement Date. Section 2.03. EARLY OCCUPANCY. If Tenant occupies the Property prior to the Commencement Date with Landlord's permission, Tenant's occupancy of the Property shall be subject to all of the provisions of this Lease, including, without limitation, all insurance requirements. Early occupancy of the Property shall not advance the expiration date of this Lease. Tenant shall pay Base Rent and all other charges specified in this Lease for the early occupancy period. Section 2.04. HOLDING OVER. Tenant shall vacate the Property upon the expiration or earlier termination of this Lease. Tenant shall reimburse Landlord for and indemnify Landlord against all damages incurred by Landlord from any delay by Tenant in vacating the Property; including, without limitation, any claim made by any succeeding tenant based on or resulting from such failure to surrender. If Tenant does not vacate the Property upon the expiration or earlier termination of the Lease and Landlord thereafter accepts rent from Tenant, Tenant's occupancy of the Property shall be a "month- to-month" tenancy, subject to all of the terms of this Lease applicable to a month-to-month tenancy, except that the Base Rent then in effect shall be one hundred ten percent (110%) of the rent and all other charges due for the last month of the Lease Term. This provision shall not give Tenant any right to continue occupancy following expiration of this Lease except with the written consent of Landlord. ARTICLE THREE: BASE RENT Section 3.01. TIME AND MANNER OF PAYMENT. Upon execution of this Lease, Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph 1.06(a) above together with an estimate of Additional Rent (as hereinafter defined) for the first full month of the Lease Term. The Base Rent shall be appropriately prorated for any fractional month on the basis of a thirty (30) day month. On the first day of the second month of the Lease Term and each month thereafter, Tenant shall pay Landlord the Base Rate, in advance, without offset, deduction or prior demand. The Base Rent shall be payable at Landlord's address or at such other place as Landlord may designate in writing. Section 3.02. COST OF LIVING INCREASES. The Base Rent shall be increased at the times specified in Paragraph 1.06(a) above, in proportion to the increase in the Index which has occurred between the month three (3) months prior to the first month of the Lease Term and the month three (3) months prior to the month in which the rent is to be increased. Landlord shall notify Tenant of each increase by delivering a written statement setting forth in Indices for the appropriate months, the percentage increase between those two Indices, and the new amount of the Base Rent. The Base Rent shall not be reduced from the last previous adjusted Base Rent by reason of any decrease in the Index. Tenant shall pay the new Base Rent from its effective date until the next periodic increase. Landlord's notice may be given after the effective date of the increase since the Index for the appropriate month may be unavailable on the effective date. In such event, Tenant shall pay Landlord the necessary rental adjustment for the months elapsed between the effective date of the increase and Landlord's notice of such increase within ten (10) days after Landlord's notice. If the format or components of the Index are materially changed after the Date of Lease, Landlord shall substitute an index which is published by the Bureau of Labor Statistics or similar agency and which is most early equivalent to the Index in effect on the Date of Lease. Landlord shall notify Tenant of the substituted index, which shall be used to calculate the increase in the Base Rent. Section 3.03. SECURITY DEPOSIT INCREASES. Each time the Base Rent is increased, Tenant shall deposit additional funds with Landlord sufficient to increase the Security Deposit to an amount which bears the same relationship to the adjusted Base Rent as the initial Security Deposit bore to the initial Base Rent. Section 3.04. TERMINATION; ADVANCE PAYMENTS. Upon termination of this Lease under Article Seven (Damage or Destruction), Article Eight (Condemnation) or any other termination not resulting from Tenant's default, and after Tenant has vacated the Property in the manner required by this Lease, an equitable adjustment shall be made concerning advance rent, any other advance payments made by Tenant to Landlord, and accrued real property taxes, and Landlord shall refund any unused portion of the Security Deposit to Tenant or Tenant's successor within forty-five (45) days of such termination. ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT Section 4.01. ADDITIONAL RENT AND DEFINITIONS. (a) ADDITIONAL RENT. All charges payable by Tenant other than Base Rent are called "Additional Rent." Unless this Lease provides otherwise, all Additional Rent shall be paid with the next monthly installment of Base Rent. The term "rent" shall mean Base Rent and Additional Rent. (b) DEFINITIONS. The Property is part of a multi-tenant industrial/commercial real property development of Landlord (the "Project"). The Project includes the land, the buildings and all other improvements located thereon, and the Common Areas (as hereinafter defined). As used in this Lease, "Common Areas" shall 4 mean all areas within the Project which are available for the common use of tenants of the Project and which are not leased or held for the exclusive use of Tenant or other tenants, including, but not limited to, parking areas, driveways, sidewalks, loading areas, access roads, corridors, landscaping and planted areas. Landlord may from time to time change the size, location, nature and use of any of the Common Areas, including converting common Areas into leasable areas, constructing additional parking facilities (including parking structures) and other improvements in the Common Areas, and increasing or decreasing Common area land and/or facilities. Tenant acknowledges that such activities may result in occasional inconvenience to Tenant from time to time. Such activities and changes shall be expressly permitted if they do not materially affect Tenant's use of the Property. Section 4.02 TAXES. (a) PAYMENT. Tenant shall be liable for and shall pay at least ten (10) days before delinquency (and, upon demand by Landlord, Tenant shall furnish Landlord with satisfactory evidence of the payment thereof) all impositions (as hereinafter defined) and all taxes and assessments of whatsoever kind or nature, and penalties and interest thereon, if any, levied against the Property, Tenant's personal property and any other personal property of whatsoever kind and to whomsoever belonging situated or installed in or upon the Property, whether or not affixed to the realty. If Tenant fails to pay such sums when due, Landlord may pay the taxes and charges and Tenant shall reimburse Landlord for the amount of such payment, plus interest as set forth in Section 4.07, as Additional Rent. in lieu of Tenant paying Impositions, taxes and charges directly to the proper authority, Landlord, at its option, may notify Tenant of Landlord's choice to pay all Impositions, taxes and charges directly and Tenant shall pay such amounts to Landlord with ten (10) days after receipt of Landlord's written statement of the amounts due. If the Property is not separately assessed, Tenant's share of Impositions payable by Tenant under paragraph 4.02(a) shall be determined from assessor's worksheets or other reasonably available information. Landlord shall make a reasonable determination of Tenants proportionate share of Impositions and Tenant shall pay such share to Landlord within ten (10) days after receipt of Landlord's written statement. (b) IMPOSITIONS. For the purposes of this Section 4.02, "Impositions" means: (i) Any real estate taxes, assessments or other charges assessed against the Property and related structures and parking facilities and the land on which they are located. (ii) All personal property taxes on personal property used in connection with the Property and related structures. (iii) Any and all environmental levies or charges now in force affecting the Property or any portion thereof, or which may hereafter become effective, including, but not limited to, parking taxes, levies, or charges, employer parking regulations, and any other parking or vehicular regulations, levies, or charges imposed by any municipal, state or federal agency or authority. (iv) Any other taxes levied or assessed in addition to or in lieu of such real or personal property taxes. (c) EXCLUSION. Notwithstanding anything to the contrary contained in this Section 4.02, Tenant shall not be liable for any of the following taxes and assessments: (i) Personal property, fixture or equipment taxes assessed against the property used by Landlord in operating, managing or leasing the Project; (ii) Inheritance tax, estate taxes, gift taxes, income taxes, transfer taxes and excess profit taxes. (d) SUBSTITUTED TAXES. If any time during the term of this Lease, under the laws of the United States, Nevada or any political subdivision thereof, a tax or excise on rents or other tax (except income tax), however described, is levied or assessed by the United States, Nevada or said political subdivision against Landlord on account of any rent reserved or space leased under this Lease, all such tax or excise on rents or other taxes shall be paid by Tenant. Whenever Landlord shall receive any statement or bill for any such tax or shall otherwise be required to make any payment on account thereof, Tenant shall pay the amount due hereunder within ten (10) days after demand therefor accompanied by delivery to Tenant of a copy of such tax statement, if any. (e) RIGHT TO CONTEST. Tenant shall have the right to contest any taxes the payment of which, in whole or in part, is the obligation of Tenant hereunder. Said right to contest shall not excuse Tenant of its obligation to pay such taxes as herein provided. However, in the event that the effect of such contest is to extend or postpone the date on which such taxes are delinquent, Tenant may, instead of payment, deposit with Landlord the amount of such claimed tax payable by Tenant, together with interest and penalties thereon. Pending resolutions of such contest, and within a reasonable time, deliver to Landlord either (a) evidence satisfactory to Landlord that such claim of taxability has been withdrawn or defeated, in which event such deposit shall be returned to Tenant to the extent it exceeds any monies then payable by Tenant or (b) an instruction that such claim of taxability has not been defeated and that such deposit be applied towards payment of Tenant's obligations therefor. Such deposit shall not relieve Tenant of the obligation to make any additional payments for which Tenant would otherwise be responsible hereunder. Tenant shall indemnify, save and hold Landlord, the Building, the Project and the Property free, clear and harmless from any and all liability, loss, costs, charges, penalties, obligations, liens, expenses, reasonable attorneys' fees, litigation, judgments, damages, claims and demands of any 3 5 kind whatsoever in connection with, arising out of, or by reason of any contest of taxes pursuant to this Paragraph 4.02(c). Section 4.03. UTILITIES. Tenant shall pay, directly to the appropriate supplier, the cost of all natural gas, electricity, heat, light, power, sewer service, telephone, water, refuse disposal and other utilities and services supplied to the Property. However, if any services or utilities are jointly metered with other property within the Project, Landlord shall make a reasonable determination of Tenant's proportionate share of the cost of such utilities and services and Tenant shall pay such share to Landlord within ten (10) days after receipt of Landlord's written statement. Landlord shall not be responsible or liable for the quality, quantity, impairment, interruption, stoppage, or other interference with service involving water, waste disposal, sewer, heat, gas, electricity, telephone or other service, except to the extent of Landlord's negligence or willful misconduct. Section 4.04. INSURANCE PREMIUMS. (a) LIABILITY INSURANCE. During the Lease Term, Tenant shall maintain a policy of commercial general liability insurance, at Tenant's expense, insuring Landlord and Tenant against liability arising out of the ownership, use, occupancy or maintenance of the Property. The initial amount of such insurance shall be at least $2,000,000 combined single limit bodily injury, personal injury, death and property damage per occurrence, and shall be subject to periodic increase based upon inflation, increased liability awards, recommendation of professional insurance advisers, and other relevant factors. However, the amount of such insurance shall not limit Tenant's liability nor relieve Tenant of any obligation hereunder. The policy shall contain cross-liability endorsements, if applicable, and shall insure Tenant's performance of the indemnity provisions of Paragraphs 5.04(a), (b) and (c). Tenant shall, at Tenant's expense, maintain such other liability insurance as Tenant deems necessary to protect Tenant, including, without limitation, workers compensation insurance in the manner required by law. If Tenant fails to maintain such policy, Landlord may elect to maintain such insurance at Tenant's expense. Tenant shall have the right to provide such commercial general liability insurance coverage pursuant to blanket policies obtained by Tenant, provided that such blanket policies expressly afford coverage to the Property, Landlord and Tenant, as required under this Section 4.04. (b) HAZARD AND RENTAL INCOME INSURANCE. During the Lease Term, Landlord shall maintain policies of insurance at Tenant's expense, covering loss of or damage to the Property in the full amount of its replacement value. Such policies shall provide protection against all perils including within the classification of fire, extended coverage, vandalism, malicious mischief, special extended perils (all risk), sprinkler leakage, earthquake sprinkler leakage, and inflation guard endorsement, and any other perils (except flood and earthquake, unless required by Landlord or any lender holding a security interest in the Property) which landlord deems necessary. Landlord may, but is not obligated to, obtain insurance coverage for Tenant's fixtures, equipment or building improvements installed by Tenant in or on the Property. Tenant shall, at Tenant's expense, maintain such primary or additional insurance on its fixtures, equipment and building improvements as Tenant deems necessary to protect its interest. During the Lease Term, Landlord shall also maintain a rental income insurance policy at Tenant's expense, with loss payable to Landlord and mortgagee in an amount equal to one year's Base Rent, estimated real property taxes and insurance premiums. Tenant shall not do or permit to be done anything which invalidates any such insurance policies. (c) PAYMENT OF PREMIUMS; INSURANCE POLICIES. Tenant shall pay all premiums for the insurance policies covering the Property described in Paragraphs 4.04(a) and (b) within thirty (30) days after receipt by Tenant of a copy of the premium statement or other evidence of the amount due. If the insurance policies maintained by Landlord cover improvements or real property other than the Property, Landlord shall also deliver to Tenant a statement of the amount of the premiums applicable to the Property showing, in reasonable detail, how such amount was computed. If the Lease Term expires before the expiration of the insurance policy period, Tenant's liability for insurance premiums shall be prorated on an annual basis. All insurance shall be maintained with companies holding a "General Policyholder's Rating" of A-VI or better, as set forth in the most current issue of "Best Insurance Guide." Tenant shall be liable for the payment of any deductible amount under Landlord's insurance policies. (d) USE. Tenant shall not use or occupy, or permit the Property to be used or occupied in a manner which will increase the rates of insurance for the Property of the Project, which will make void or voidable any insurance then in force with respect thereto, which would constitute a defense to any action thereon, or will make it impossible to obtain any insurance with respect thereto. If by reason of the failure of Tenant to comply herewith, any insurance rates for the Property or the Project become higher than they otherwise would be, Tenant shall reimburse Landlord, on the first day of the calendar month next succeeding notice by Landlord to Tenant of said increase, for that part of all insurance premiums thereafter paid by Landlord which shall have been charged because of such failure of Tenant. Any policy of insurance maintained by Tenant insuring against any risk in, upon, about or in any way connected with the Property or Tenant's use thereof shall, to the extent reasonably obtainable, contain an express waiver of any and all rights of subrogation thereunder whatsoever against Landlord, its officers, agents and employees. (c) ADDITIONAL INSUREDS. Tenant and Landlord shall be named as insureds (and at Landlord's option, any other persons, firms or corporations who have an insurable interest designated by Landlord shall be additionally named insured(s) under each such policy of insurance which shall provide that Landlord, although named as an insured, shall nevertheless be entitled to recovery thereunder for any loss suffered by it, its agents, servants and employees by reason of Tenant's negligence or the negligence of its subtenant or assignee. 4 6 (f) CANCELLATION. Every policy required pursuant to this Section 4.04 shall provide that it will not be canceled or modified except after thirty (30) days' prior written notice to Landlord and any lender of Landlord requesting such notice, and that it shall not be invalidated by any act or neglect of Landlord or Tenant, nor by occupation of the Property for purposes more hazardous than permitted by such policy, nor by any foreclosure or other proceedings relating to the Property, nor by change in title to the Property or Landlord's interest therein. (g) EVIDENCE OF INSURANCE. Tenant shall deliver to Landlord and any lender of Landlord requiring the same original policies or certificates of insurers, satisfactory to Landlord and such lender, if any, evidencing the existence of all insurance which is required to be maintained by Tenant hereunder, fully paid, such delivery to be made (i) promptly after the execution and delivery hereof and (ii) within thirty (30) days prior to the expiration of any then current policies. Tenant shall not obtain or carry separate insurance concurrent in form or contributing in the event of loss with that required by this Section 4.04 unless Landlord is a named insured therein (and, at Landlord's option, any other persons, firms or corporations designated by Landlord shall be additionally named insureds). Tenant shall immediately notify Landlord whenever any such separate insurance is obtained and shall deliver to Landlord and any lender of Landlord the policies or certificates evidencing the same. (h) WAIVER OF SUBROGATION. Notwithstanding anything to the contrary in this Lease, Landlord and Tenant, for themselves and their respective insurers, agree to and do hereby release each other of and from any and all claims, demands, actions, and causes of action that each may have or claim to have against the other for loss or damage to the property of the other, both real and personal, notwithstanding that any such loss or damage may be due to or result from the negligence of either party hereto or their respective employees or agents. Section 4.04.1 LANDLORD'S LIABILITY INSURANCE. During the term of this Lease, Landlord shall insure the Property against damage with general liability insurance in the amount of $2,000,000. Landlord may, but shall not be obligated to, obtain and carry other form or forms of insurance as it or Landlord's lenders may determine advisable. Section 4.06. COMMON AREAS; USE AND COSTS. (a) PAYMENT. Throughout the term hereof, Tenant will pay to Landlord monthly in advance in addition to the Base Rent, as further Additional Rent, a pro rata portion of the Common Area Costs incurred by Landlord during each calendar year occurring during the term of this Lease. Tenant's pro rata portion of said amount shall equal the percentage which the number of net rentable square feet of the Property bears to the total number of net rentable square feet of the buildings in the Project ("Tenant's Proportionate Share"). (b) INCLUDED COSTS. "Common Area Costs" shall include all costs and expenses of every kind or nature incurred by Landlord directly in the management, operation, maintenance and repair of the Project and related Common Areas in a manner reasonable and appropriate and for the best interest of the entire Project and that are generally passed on to tenants in first class projects in the Las Vegas metropolitan area under lease provisions similar to this Section 4.05, as determined and expended in accordance with generally accepted accounting principles. Without otherwise limiting the generality of the foregoing, there shall be included in such costs and expenses, all Impositions (as hereinbefore defined) applicable solely to Common Areas, premiums with respect to public liability, property damage, workmen's compensation, fire and other insurance carried on or with respect to the Project and related Common Area structures, payroll taxes, unemployment taxes, social security taxes, cleaning of any facilities, landscaping, signs, lighting, janitorial services of Common Areas, management fees consistent with other first class projects in the Las Vegas metropolitan area, reasonable legal and accounting expenses, supervising of attendants and employment of other personnel used in such operations, maintenance and repairs, fuel, energy and utilities (not separately metered by Tenant), providing for security and fire protection services, alarm systems and equipment, materials and supplies, painting, striping, removing of rubbish or debris, depreciation or rentals of machinery and equipment, costs of replacement of paving, curbs and walkways, drainage, repair and maintenance of parking and other common areas, roof repairs. (c) PAYMENT. The Additional Rent provided to be paid in this Section 4.05 shall be estimated in advance by Landlord annually and one-twelfth (1/12) of such estimate shall be paid in advance by Tenant on the first day of each month without further demand or any deduction or set-off whatever. Within ninety (90) days after each calendar year, Landlord shall notify Tenant of Tenant's proportionate share of Additional Rent and Tenant shall pay to Landlord on demand the amount, if any, equal to the difference between the amount due for such year pursuant to this Section 4.06 and the amount previously paid hereunder. Should the estimated payments have exceeded the actual amount due, said excess shall be held by Landlord and applied to the next monthly payment of Additional Rent provided to be paid under this Section 4.06, and, if necessary, each monthly payment thereafter until fully exhausted. Tenant shall not be entitled to receive interest on any Additional Rent paid hereunder. No delay by Landlord in submitting any statement shall constitute a waiver of Landlord's right to submit such statement and/or receive any Additional Rent pursuant hereto. The Additional Rent due hereunder shall be prorated for the calendar year in which this Lease terminates. Said amount shall be calculated and paid as herein provided even though said calculation may not occur until after the end of the term hereof. (d) EXCLUDED COSTS. There shall not be included in Common Area Costs the payments (such as salaries or fees) to Landlord's executive personnel; costs for items that, by standard accounting practice, should be capitalized, unless these costs reduce operating expenses and are amortized over the reasonable life of the capital 5 7 item in accordance with generally accepted accounting principles and the yearly amortization does not exceed the actual costs reduction for the relevant year, depreciation or interest; taxes on Landlord's business (such as income, excess profits, franchise, capital stock, estate, inheritance); leasing commissions; legal fees not directly relating to the operation and maintenance of the entire Project such as landlord and tenant issues; costs to correct original construction defects; expenses paid directly by a tenant for any reason (such as excessive utility use); costs for improving any tenant's space; any repair or work necessitated by condemnation, fire, or other casualty; service or benefits or both provided to some tenants, but not to Tenant; and any costs, fines, and the like due to Landlord's violation of any government rule or authority. (c) AUDIT. Tenant shall have the right, upon 15 days' written notice to Landlord, to audit, at Tenant's expense, Landlord's books and records as they relate to the Common Area Costs. Should said Common Area Costs be five percent (5%) higher than said Common Area Costs as determined by the audit, Landlord shall be obligated to pay the cost of said audit. (f) PARKING. In addition to any parking facilities included as a part of the Property, Tenant, its employees and business invitees shall have the nonexclusive right, in common with Landlord and all others to whom Landlord has granted or may hereafter grant rights, to use Common Areas in the Project (including but not limited to, the parking lot, walkways and sidewalks) as are designated from time to time by Landlord, subject to such rules and regulations as Landlord may from time to time impose, including the designation of specific areas in which cars operated by Tenant, its employes and business invitees must be parked. Tenant shall be entitled to use the vehicle parking spaces in the Project allocated to Tenant in Section 1.11 of the Lease without paying any Additional Rent. Tenant's parking shall not be reserved and shall be limited to vehicles no larger than standard size automobiles or pickup utility vehicles. Tenant shall not cause large trucks or other large vehicles to be parked within the Project except in designated areas and spaces or on the adjacent public streets. Temporary parking of large delivery vehicles in the Project may be permitted by the rules and regulations established by Landlord. Vehicles shall be parked only in striped parking spaces and not in driveways, loading areas or other locations not specifically designated for parking. If Tenant parks more vehicles in the parking area than the number set forth in Section 1.11 of the Lease, such conduct shall be a material breach of the Lease. In addition to Landlord's other remedies under the Lease, Tenant shall pay a reasonable daily charge for each such additional vehicle. Landlord may at any time close any Common Area to make repairs or changes (provided the closure does not unreasonably impede access to the Leased Property by customers and employees of Tenant), to prevent the acquisition of public rights in such areas, or to discourage noncustomer parking. Landlord may do such other acts in and to the Common Areas as in its judgment may be desirable, including, but not limited to, the conversion of portions thereof to other uses. Tenant shall not at any time interfere with the right of Landlord, other tenants, its and their agents, employees, servants, contractors, subtenants, licensees, customers and business invitees to use any part of the parking lot or other Common Areas. Landlord assumes no responsibility to police the use of said parking areas and Landlord shall not be liable for the use thereof by Landlord's other tenants or their agents, employees, servants, contractors, subtenants, licensees, customers and/or business invitees or by any other person or persons, entity or entities whomsoever. Section 4.06. LATE CHARGES. Tenant's failure to pay rent promptly may cause Landlord to incur unanticipated costs. The exact amount of such costs are impractical or extremely difficult to ascertain. Such costs may include but are not limited to, processing and accounting charges and late charges which may be imposed on Landlord by any ground lease, mortgage or trust deed encumbering the Property. Therefore, if Landlord does not receive any rent payment within ten (10) days after it becomes due, Tenant shall pay Landlord a late charge equal to five percent (5%) of the overdue amount. The parties agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of such late payment. Section 4.07. INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by Tenant to Landlord which is not paid when due shall bear interest at the rate of twelve percent (12%) per annum from the due date of such amount. However, interest shall not be payable on late charges to be paid by Tenant under this Lease. The payment of interest on such amounts shall not excuse or cure any default by Tenant under this Lease. If the interest rate specified in this Lease is higher than the rate permitted by law, the interest rate is hereby decreased to the maximum legal interest rate permitted by law. ARTICLE FIVE: USE OF PROPERTY Section 5.01. PERMITTED USES. Tenant may use the Property only for the Permitted Uses set forth in Section 1.10 above. Section 5.02. MANNER OF USE. Tenant shall not cause or permit the Property to be used in any way which constitutes a violation of any law, ordinance, or governmental regulation or order, which annoys or interferes with the rights of tenants of the development of which the Property is part, or which constitutes a nuisance or waste. Tenant shall obtain and pay for all permits, including a Certificate of Occupancy, required for Tenant's occupancy of the Property and shall promptly take all substantial and non-substantial actions necessary to comply with all applicable statutes, ordinances, rules, regulations, orders and requirements regulating the use by Tenant of the Property, including the Occupational Safety and Health Act. Section 5.03. SIGNS AND AUCTIONS. Tenant shall not place any signs on the Property without Landlord's prior written consent. Tenant shall not conduct or permit any auctions or sheriff's sales at the Property. 6 8 Section 5.04. INDEMNIFICATION. Tenant and Landlord shall each indemnify, defend and hold the other party, its respective agents, partners, mortgagees and master ground lessors harmless from any and all claims arising from the other party's use of the Property, Building or Common Areas, or from any act, omission or negligence of the other party, or that of its respective agents, employees, sublessees, contractors, invitees or licensees in or about the Property, Building or Common Areas. Tenant shall not be obligated to indemnify Landlord for the portion of any claim or liability caused by or arising from the act, omission or negligence of any party other than Tenant, or its agents, employees, sublessees, contractors, invitees or licensees. Landlord shall not be obligated to indemnify Tenant for the portion of any claim or liability caused by or arising from the act, omission or negligence of any party other than Landlord, or its agents, employees, sublessees, contractors, invitees or licensees. Each party also shall indemnify, defend and hold the other party harmless from all costs, attorneys' fees, expenses and liability incurred in connection with any claim or proceeding for which they are responsible under this Section 5.04. Section 5.05. LANDLORD'S ACCESS. Landlord or its agents and employees may enter the Property at all reasonable times to show the Property to potential buyers, investors or tenants or other parties, inspect the property, make repairs or replacements, or for any other purpose Landlord deems necessary. Landlord shall give Tenant not less than 24 hour advance notice of such entry, except in the case of an emergency. Landlord may place customary "For Sale" or "For Lease" signs on the Property. Section 5.06. QUIET POSSESSION. If Tenant pays the rent and complies with all other terms of this lease, Tenant may occupy and enjoy the Property for the full Lease Term, subject to the provisions of this Lease. Section 5.07. FORKLIFT RESTRICTION. Asphaltic cement cannot withstand non-inflatable forklift tires. In the event the asphalt is damaged by Tenant's use of a forklift with non-inflatable tires, it will be Tenant's obligation to repair the damaged asphaltic cement at Tenant's sole expense. ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS Section 6.01. EXISTING CONDITIONS. Except as set forth in any rider requiring Landlord to perform work on the Property prior to the Commencement Date, Tenant accepts the Property in its condition as of the execution of the Lease, subject to all recorded matters, laws, ordinances, and governmental regulations and orders. Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation as to the condition of the Property or the suitability of the Property for Tenant's intended use. Without limiting the foregoing, Tenant agrees to abide by and conform to any laws, regulations, ordinances, covenants, conditions and restrictions or reciprocal easement agreements relating to the Property described as follows: the Declaration of Protective Covenants, Conditions and Restrictions, Gibson Business park, Phase One, Clark County, Nevada dated September 6, 1989 recorded in the Official Records of Clark County, Nevada, (i) as relates to Tenant's use of the Property, and (ii) any and all laws, regulations and ordinances relating to Tenant's use of the Property as more fully set forth in Section 5.02 and Exhibit C hereto. Tenant acknowledges receipt of such documents, if any. Section 6.02. EXEMPTION OF LANDLORD FROM LIABILITY. Landlord shall not be liable for any damage or injury to the person, business (or any loss of income therefrom), goods, wares, merchandise or other property of Tenant, Tenant's employees, invitees, customers or any other person in or about the Property, whether such damage or injury is caused by or results from (a) fire, steam, electricity, water, gas or rain; (b) the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures or any other cause; (c) conditions arising in or about the Property or upon other portions of any building of which the Property is a part, or from other sources or places; or (d) any act or omission of any other tenant of the Project. Landlord shall not be liable for any such damage or injury even though the cause of or the means of repairing such damage or injury are not accessible to Tenant. The provisions of this Section 6.02 shall not, however, exempt Landlord from liability for Landlord's negligence or willful misconduct. Section 6.03. TENANT'S OBLIGATIONS (a) Except as provided for elsewhere herein, Tenant shall keep the Property in good order, condition and repair during the Lease Term, including, but without limitation, all structural, non-structural, interior and exterior portions thereof, the exterior and interior portion of all doors, windows, plate glass, all plumbing and sewage facilities within the Property (including maintaining free flow up to the main sewer line); interior fixtures, sprinkler system, walls, floors and ceilings in the Property; and any work performed by or on behalf of Tenant hereunder. Tenant shall also maintain a preventive maintenance contract, at Tenant's expense, providing for the regular inspection and maintenance of the heating and air conditioning system by a licensed heating and air conditioning contractor. However, if Tenant does not perform its obligation under this Section 6.03(a) for a period in excess of ninety (90) days, Landlord shall have the right, upon written notice to Tenant, to undertake the responsibility for preventive maintenance of the heating and air conditioning system, at Tenant's expense. Tenant shall promptly replace any portion of the Property or system or equipment in the Property which cannot be fully repaired, regardless of whether the benefit of such replacement extends beyond the Lease Term. It is the intention of Landlord and Tenant that, at all times during the Lease Term, Tenant shall maintain the Property in an attractive, first-class and fully operative condition. (b) All of Tenant's obligations to maintain and repair shall be accomplished at Tenant's sole expense. If Tenant fails to maintain and repair the Property, Landlord may, on ten (10) days' prior notice (except that no notice shall be required in case of emergency) enter the Property and perform such repair and maintenance on 7 9 behalf of Tenant. In such case, Tenant shall reimburse Landlord for all costs so incurred immediately upon demand. Section 6.04. LANDLORD'S OBLIGATIONS. Subject to the provisions of Article Seven (Damage or Destruction) and Article Eight (Condemnation), and except to the extent of Landlord's negligence or willful misconduct, Landlord shall have absolutely no responsibility to repair, maintain or replace any portion of the Property at any time. Tenant waives the benefit of any present or future law which might give Tenant the right to repair the Property at Landlord's expense or to terminate the Lease due to the condition of the Property. Section 6.05. ALTERATIONS, ADDITIONS, AND IMPROVEMENTS. (a) Tenant shall not make any alterations, additions, or improvements to the Property without Landlord's prior written consent. Landlord may require Tenant to provide demolition and/or lien and completion bonds in form and amount satisfactory to Landlord. Tenant shall promptly remove any alterations, additions, or improvements constructed in violation of this Paragraph 6.05(a) upon Landlord's written request. All alterations, additions, and improvements will be accomplished in a good and workmanlike manner, in conformity with all applicable laws and regulations, and by a contractor approved by Landlord. Upon completion of any such work, Tenant shall provide Landlord with "as built" plans, copies of all construction contracts, and proof of payment for all labor and materials. (b) Tenant shall pay when due all claims for labor and material furnished to the Property. Tenant shall give Landlord at least fifteen (15) days' prior written notice of the commencement of any work on the Property. Landlord may elect to record and post notices of non-responsibility on the Property. If Tenant shall, in good faith, contest the validity of any mechanics lien, claim or demand, then Tenant shall, at its sole expense, defend and protect itself, Landlord and the Property against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Landlord or the Property. In addition, Landlord may require Tenant to pay Landlord's attorneys' fees and costs in participating in such action if Landlord shall decide it is in its best interest to do so. Section 6.06. CONDITION UPON TERMINATION. Upon the termination of the Lease, Tenant shall surrender the Property to Landlord, broom clean and in the same condition as received except for ordinary wear and tear which Tenant was not otherwise obligated to remedy under any provision of this Lease. However, Tenant shall not be obligated to repair any damage which Landlord is required to repair under Article Seven (Damage or Destruction). In addition, Landlord may require Tenant to remove any alterations, additions or improvements (whether or not made with Landlord's consent) prior to the termination of the Lease and to restore the Property to its prior condition, all at Tenant's expense. All alterations, additions and improvements which Landlord has not required Tenant to remove shall become Landlord's property and shall be surrendered to Landlord upon the termination of the Lease, except that Tenant may remove any of Tenant's machinery or equipment which can be removed without material damage to the Property. Tenant shall repair, at Tenant's expense, any damage to the Property caused by the removal of any such machinery or equipment. In no event, however, shall Tenant remove any of the following materials or equipment without Landlord's prior written consent: any power wiring or power panels; lighting or lighting fixtures; wall coverings; drapes, blinds or other window coverings; carpets or other floor coverings; heaters, air conditioners or any other heating or air conditioning equipment; fencing or security gates; or other similar building operating equipment and decorations. ARTICLE SEVEN: DAMAGE OR DESTRUCTION Section 7.01. PARTIAL DAMAGE TO PROPERTY. Tenant shall notify Landlord in writing immediately upon the occurrence of any damage to the Property. If the Property is only partially damaged and, subject to the rights of any mortgagee in such insurance proceeds, if the proceeds received by Landlord from the insurance policies described in Paragraph 4.04(b) are sufficient to pay for the necessary repairs, this Lease shall remain in effect and Landlord shall commence the repair of the damage within ninety (90) days after the date of such partial destruction. Landlord may elect to repair any damage to Tenant's fixtures, equipment, or improvements. If the insurance proceeds received by Landlord are not sufficient to pay the entire cost of repair, or if the damage was due to a cause not covered by the insurance policies which Landlord maintains under Paragraph 4.04(b), Landlord may elect either to (a) commence the repair of the damage within ninety (90) days, in which case this Lease shall remain in full force and effect, or (b) move Tenant to another comparable space within the Project, provided that Landlord pays for all of Tenant's costs associated with said move, or (c) terminate this Lease as of the date the damage occurred. Landlord shall notify Tenant within thirty (30) days after receipt of notice of the occurrence of the damage, whether Landlord elects to repair the damage or terminate the Lease. If the damage was due to an act or omission of Tenant, the difference between the actual cost of repair and any insurance proceeds received by Landlord. If Landlord elects to terminate the Lease, Tenant may elect to continue this Lease in full force and effect, in which case Tenant shall repair any damage to the Property and any building in which the Property is located. Tenant shall pay the cost of such repairs, except that, upon satisfactory completion of such repairs, Landlord shall deliver to Tenant any insurance proceeds received by Landlord for the damage repaired by Tenant. Tenant shall give Landlord written notice of such election within ten (10) days after receiving Landlord's termination notice. If the damage to the Property occurs during the last six (6) months of the Lease Term, Landlord may elect to terminate this Lease as of the date the damage occurred regardless of the sufficiency of any insurance proceeds. In such event, Landlord shall not be obligated to repair or restore the 8 10 Property and Tenant shall have no right to continue this Lease. Landlord shall notify Tenant of its election within thirty (30) days after receipt of notice of the occurrence of the damage. Section 7.02. TOTAL OR SUBSTANTIAL DESTRUCTION. If the Property is totally or substantially destroyed by any cause whatsoever, this Lease shall terminate as of the date the destruction occurred regardless of whether Landlord receives any insurance proceeds. Section 7.03. TEMPORARY REDUCTION OF RENT. If the Property is destroyed or damaged and Landlord or Tenant repairs or restores the Property pursuant to the provisions of this Article Seven, any rent payable during the period of such damage, repair and/or restoration shall be reduced according to the degree, if any, to which Tenant's use of the Property is impaired. However, the reduction shall not exceed the sum of one year's payment of Base Rent and Additional Rent. Except for such possible reduction in Base Rent and Additional Rent, Tenant shall not be entitled to any compensation, reduction, or reimbursement from Landlord as a result of any damage, destruction, repair, or restoration of or to the Property, unless such damage or destruction was caused by Landlord's negligence or willful misconduct. Section 7.04. WAIVER. Tenant waives the protection of any statute, code or judicial decision which grants a tenant the right to terminate a lease in the event of the substantial destruction of the leased property. Tenant agrees that the provisions of Section 7.02 above shall govern the rights and obligations of Landlord and Tenant in the event of any substantial or total destruction to the Property. ARTICLE EIGHT: CONDEMNATION If, in the opinion of Landlord, the whole or any part of the Property or the Building is taken or condemned (including, without limitation, a sale in lieu of condemnation) which renders the Property untenantable or inaccessible for use by Tenant for the purposes stated in this Lease ("Substantial Taking"), then the term of this Lease shall cease and terminate from the date on which possession of the part is so taken or condemned; the full amount of any resulting condemnation award shall be paid to Landlord, and Base Rent and Additional Rent shall be adjusted as of the date of such Substantial Taking. However, if such taking or condemnation does not result in a Substantial Taking, then, subject to rights of any mortgagee in the condemnation award, Landlord shall repair any damage caused by such taking with reasonable promptness and dispatch and shall allow Tenant an abatement or reduction in Base Rent and Additional Rent hereunder for such time and for such portion of the Premises which is untenantable, and this Lease shall not be otherwise affected. Landlord reserves to itself, and Tenant assigns to Landlord, all rights to damages accruing on account of any taking or condemnation by or by reason of any act of any public or quasi-public authority for which damages are payable. Tenant agrees to execute such instruments of assignments as may be required by Landlord, to join with Landlord in any petition for the recovery of damages if requested by Landlord, and to turn over to Landlord any such damages that may be recovered in any such proceeding. Landlord does not reserve to itself, and Tenant does not assign to Landlord, any damages payable for trade fixtures installed by Tenant at its own cost and expense and which are not part of the realty. ARTICLE NINE: ASSIGNMENT AND SUBLETTING Section 9.01. LANDLORD'S CONSENT REQUIRED. No portion of the Property or of Tenant's interest in this Lease may be acquired by any other person or entity, whether by assignment, mortgage, sublease, transfer operation of law, or act of Tenant, without Landlord's prior written consent, except as provided in Section 9.02 below. Landlord shall grant or withhold its consent as provided in Section 9.04 below. Any attempted transfer without consent shall be void and shall constitute a non-curable breach of this Lease. If Tenant is a partnership, any cumulative transfer of more than 20% of the partnership interests shall require Landlord's consent. If Tenant is a corporation, any change in a controlling interest of the voting stock of the corporation shall require Landlord's consent. Section 9.02. TENANT AFFILIATE. Upon Landlord's consent, which will not be unreasonably withheld, Tenant may assign this Lease or sublease the Property to any corporation which Landlord determines controls, is controlled by or is under common control with Tenant, or to any corporation resulting from the merger of or consolidation with Tenant ("Tenant's Affiliate"). For the purposes of this Section 9.02, the following shall not be considered an assignment, sublease or other transfer; (a) any transfer of stock from Tenant to an affiliate or subsidiary corporation as a result of any merger, consolidation, or reorganization (except through bankruptcy) of Tenant or Tenant's parent corporation; or (b) any purchase or sale of currently outstanding capital stock of Tenant whether in a private placement of stock, the over-the-counter market or in a national stock exchange, or otherwise; or (c) any issuance of capital stock in an offering registered with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended. In such case, any Tenant's Affiliate shall assume in writing all of Tenant's obligations under this Lease. Section 9.03. NO RELEASE OF TENANT. No transfer permitted by this Article Nine, whether with or without Landlord's consent(1), shall release Tenant or change Tenant's primary liability to pay the rent and to perform all other obligations of Tenant under this Lease. Landlord's acceptance of rent from any other person is not a waiver of any provision of this Article Nine. Consent to one transfer is not a consent to any subsequent 9 11 transfer. If Tenant's transferee defaults under this Lease, Landlord may proceed directly against Tenant without pursuing remedies against the transferee. Landlord may consent to subsequent assignments or modifications of this Lease by Tenant's transferee, without notifying Tenant or obtaining its consent. Such action shall not relieve Tenant's liability under this Lease. Section 9.04. LANDLORD'S ELECTION. Tenant's request for consent to any transfer described in Section 9.01 above shall be accompanied by a written statement setting forth the details of the proposed transfer, including the name, business and financial condition of the prospective transferee, financial details of the proposed transfer (e.g., the term of and rent and security deposit payable under any assignment or sublease), and any other information Landlord deems relevant, except as provided under Section 9.02. Landlord shall have the right (a) to withhold consent, if reasonable; (b) to grant consent; or (c) if the transfer is a sublease of the Property or an assignment of this Lease, to terminate this Lease as of the effective date of such sublease or assignment, in which case Landlord may elect to enter into a direct lease with the proposed assignee or subtenant. Section 9.05. NO MERGER. No Merger shall result from Tenant's sublease of the Property under this Article Nine. Tenant's surrender of this Lease or the termination of this Lease in any other manner. In any such event. Landlord may terminate any of all subtenancies or succeed to the interest of Tenant or sublandlord thereunder. ARTICLE TEN: DEFAULTS; REMEDIES Section 10.01. COVENANTS AND CONDITIONS. Tenant's performance of each of Tenant's obligations under this Lease is a condition as well as a covenant. Tenant's right to continue in possession of the Property is conditioned upon such performance. Time is of the essence in the performance of all covenants and conditions. Section 10.02. DEFAULTS. Tenant shall be in material default under this Lease: (a) If Tenant abandons the Property or if Tenant's vacation of the Property results in the cancellation of any insurance described in Section 4.04; (b) If Tenant fails to pay rent or any other charge required to be paid by Tenant, as and when due and fails to cure the same within ten (10) days after the receipt of written notice of Tenant's failure to pay rent or any other charge, provided however, Landlord shall not be obligated to provide Tenant with written notice if Tenant fails to pay rent, when due, more than three (3) times in any Lease year. (c) If Tenant fails to perform any of Tenant's non-monetary obligations under this Lease for a period of thirty (30) days after receipt of written notice from Landlord; provided that if more than thirty (30) days are required to complete such performance, Tenant shall not be in default if Tenant commences such performance within the thirty (30) day period and thereafter diligently pursues its completion. However, Landlord shall not be required to give such notice if Tenant's failure to perform constitutes a non-curable breach of this Lease. The notice required by this Paragraph is intended to satisfy any and all notice requirements imposed by law on Landlord and is not in addition to any such requirement. (d) (i) If Tenant or any guarantor hereunder, or any general partner of Tenant if Tenant is a partnership makes a general assignment or general arrangement for the benefit of creditors; (ii) if a petition for adjudication of bankruptcy or for reorganization or rearrangement is filed by or against Tenant or any guarantor hereunder, or any general partner of Tenant if Tenant is a partnership and is not dismissed within thirty (30) days; (iii) if a trustee or receiver is appointed to take possession of substantially all of Tenant's assets located at the Property or of Tenant's interest in this Lease and possession is not restored to Tenant within thirty (30) days; or (iv) is substantially all of Tenant's assets located at the Property or of Tenant's interest in this Lease is subjected to attachment, execution or other judicial seizure which is not discharged within thirty (30) days. If a court of competent jurisdiction determines that any of the acts described in this subparagraph (d) is not a default under this Lease, and a trustee is appointed to take possession (or if Tenant remains a debtor in possession) and such trustee or Tenant transfers Tenant's interest hereunder, then Landlord shall receive as Additional Rent, the difference between the rent (or any other consideration) paid in connection with such assignment or sublease and the rent payable by Tenant hereunder. Section 10.03. REMEDIES. On the occurrence of any material default by Tenant, Landlord may, at any time thereafter, with or without notice or demand and without limiting Landlord in the exercise of any right or remedy which Landlord may have: (a) Terminate Tenant's right to possession of the Property by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Property to Landlord. In such event, Landlord shall be entitled to recover from Tenant all damages incurred by Landlord by reason of Tenant's default, including (i) the worth at the time of the award of the unpaid Base Rent. Additional Rent and other charges which had been earned at the time of the termination; (iii) the worth at the time of the award of the amount by which the unpaid Base Rent. Additional Rent and other charges which would have been earned after termination until the time of the award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; (iii) the worth at the time of the award of the amount by which the unpaid Base Rent, Additional Rent and other charges which would have been paid for the balance of the Lease Term after the time award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; and (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its 10 12 obligations under the Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to, any costs or expenses incurred by Landlord in maintaining or preserving the Property after such default, the cost of recovering possessions of the Property, expenses of reletting, including necessary renovation or alteration of the Property, Landlord's reasonable attorneys' fees incurred in connection therewith, and any real estate commission paid or payable. As used in subparts (i) and (ii) above, the "worth at the time of the award" is computed by allowing interest on unpaid amounts at the rate of fifteen percent (15%) per annum, or such lesser amount as may then be the maximum lawful rate. As used in subpart (iii) above, the "worth at the time of the award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award, plus 1%. If Tenant shall have abandoned the Property, Landlord shall have the option of (i) retaking possession of the Property and recovering from Tenant the amount specified in this Paragraph 10.03(a), or (ii) proceeding under Paragraph 10.03(b); (b) Maintain Tenant's right to possession, in which case this Lease shall continue in effect whether or not Tenant shall have abandoned the Property. In such event, Landlord shall be entitled to enforce all of Landlord's rights and remedies under this Lease, including the right to recover the rent as it becomes due hereunder; (c) Pursue any other remedy now or hereafter available to Landlord under the laws or judicial decisions of the state in which the Property is located. Section 10.04. ABANDONMENT REMEDY. Tenant covenants to occupy the Property throughout the term hereof. Section 10.05. RIGHT TO CURE AND CUMULATIVE REMEDIES. If Tenant fails to perform any affirmative duty or obligation of the Tenant under this Lease within thirty (30) days after written notice to Tenant (or in case of an emergency, without notice), Landlord may, at its option (but without obligation to do so), perform such duty or obligation on Tenant's behalf. The costs and expenses of any such performance by Landlord shall be due and payable by Tenant to Landlord upon invoice therefor. Landlord's exercise of any right or remedy shall not prevent it from exercising any other right or remedy. ARTICLE ELEVEN: PROTECTION OF LENDERS Section 11.01. SUBORDINATION. Landlord and any ground lessor, beneficiary of a trust deed or mortgagee shall have the right to subordinate this Lease to any ground lease, deed of trust or mortgage encumbering the Property, any advances made on the security thereof and any renewals, modifications, consolidations, replacements or extensions thereof, whenever made or recorded. However, Tenant's right to quiet possession of the Property during the Lease Term shall not be disturbed if Tenant is not in default under this Lease. If any ground lessor, beneficiary or mortgagee elects to have this Lease prior to the lien of its ground lease, deed of trust or mortgage and gives written notice thereof to Tenant, this Lease shall be deemed prior to such ground lease, deed of trust or mortgage whether this Lease is dated prior or subsequent to the date of said ground lease, deed of trust or mortgage or the date of recording thereof. Section 11.02. ATTORNMENT. If Landlord's interest in the Property is acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or purchaser at a foreclosure sale, the rights of Tenant hereunder shall survive, but Tenant shall have no claim against such mortgagee or other holder arising from Landlord's acts, omissions, representations or warranties given or occurring prior to such mortgagee's or other holder's acquisition of the Property, and Tenant shall attorn to the transferee of or successor to Landlord's interest in the Property and recognize such transferee or successor as Landlord under this Lease. Tenant waives the protection of any statute or rule of law which gives or purports to give Tenant any right to terminate this Lease or surrender possession of the Property upon the transfer of Landlord's interest. Section 11.03. SIGNING OF DOCUMENTS. Tenant shall sign and deliver any instrument or documents necessary or appropriate to evidence any such attornment or subordination or agreement to do so, provided Tenant receives a reasonable Non-Disturbance Agreement, agreeable to both Landlord and Tenant. Such subordination and attornment documents may contain such provisions as are customarily required by any ground lessor, beneficiary under a deed of trust or mortgagee. If Tenant fails to do so within thirty (30) days after written request, Tenant hereby makes, constitutes and irrevocably appoints Landlord, or any transferee or successor of Landlord, the attorney-in-fact of Tenant to execute and deliver any such instrument or document. Section 11.04. ESTOPPEL CERTIFICATES. (a) Upon the written request of Landlord or any ground lessor, beneficiary of a trust deed or mortgagee, Tenant shall execute, acknowledge and deliver to Landlord a written statement certifying: (i) that none of the terms or provisions of this Lease have been changed (or if they have been changed, stating how they have been changed); (ii) that this Lease has not been canceled or terminated; (iii) that the last date of payment of the Base Rent and other charges and the time period covered by such payment; (iv) that Landlord is not in default under this Lease (or, if Landlord is claimed to be in default, stating why); and (v) such other matters as may be reasonably required by Landlord or the holder of a mortgage, deed of trust or lien to which the Property is or becomes subject. Tenant shall deliver such statement to Landlord within ten (10) days after Landlord's request. 11 13 Any such statement by Tenant may be given by Landlord to any prospective purchaser or encumbrancer of the Property. Such purchase or encumbrancer may rely conclusively upon such statement as true and correct. (b) If Tenant does not deliver such statement to Landlord within such ten (10) day period, Tenant hereby makes, constitutes and irrevocably appoints Landlord, or any transferee or successor of Landlord, the attorney-in-fact of Tenant to execute such statement on behalf of Tenant. Tenant's failure to timely provide such statement shall not be deemed cured by Landlord's delivery of same. Section 11.05. TENANT'S FINANCIAL CONDITION. Within fifteen (15) days after written request from Landlord, Tenant shall deliver to Landlord such financial statements as are reasonably required by Landlord to verify the net worth of Tenant, or any assignee, subtenant, or guarantor of Tenant. In addition, Tenant shall deliver to any lender designated by Landlord any financial statements required by such lender to facilitate the financing or refinancing of the Property. Tenant represents and warrants to Landlord that each such financial statement is a true and accurate statement as of the date of such statement. All financial statements shall be confidential and shall be used only for the purposes set forth herein. ARTICLE TWELVE: LEGAL COSTS Section 12.01. LEGAL PROCEEDINGS. Tenant shall reimburse Landlord, upon demand, for any costs or expenses incurred by Landlord in connection with any breach or default of Tenant under this Lease. Such costs shall include reasonable legal fees and costs incurred for the negotiation of a settlement, enforcement of rights or otherwise. Furthermore, if any action for breach of or to enforce the provisions of this Lease is commenced, the court in such action shall award to the party in whose favor a judgment is entered, a reasonable sum as attorneys' fees and costs. Such attorneys' fees and costs shall be paid by the losing party in such action. Tenant shall also indemnify Landlord against and hold Landlord harmless from all costs, expenses, demands and liability incurred by Landlord if Landlord becomes or is made a party to any claim or action (a) or by any third party against Tenant, or by or against any person holding any interest under or using the Property by license of or agreement with Tenant; (b) for foreclosure of any lien for labor or material furnished to or for Tenant or such other person; (c) otherwise arising out of or resulting from any act or transaction of Tenant or such other person; or (d) necessary to protect Landlord's interest under this Lease in a bankruptcy proceeding, or other proceeding under Title 11 of the United States Code, as amended. Tenant shall defend Landlord against any such claim or action at Tenant's expense with counsel reasonably acceptable to Landlord or, at Landlord's election. Tenant shall reimburse Landlord for any legal fees or costs incurred by Landlord in any such claim or action. Section 12.02 LANDLORD'S CONSENT. Tenant shall pay Landlord's reasonable attorneys' fees incurred in connection with Tenant's request for Landlord's consent under Article Nine (Assessment and Subletting), or in connection with any other act which Tenant proposes to do and which requires Landlord's consent, but not to exceed five hundred dollars ($500). ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS Section 13.01. NON-DISCRIMINATION. Tenant promises, and it is a condition to the continuance of this Lease, that there will be no discrimination against, or segregation of, any person or groups of persons on the basis of race, color, sex, creed, national origin or ancestry in the leasing, subleasing, transferring, occupancy, tenure or use of the Property or any portion thereof. Section 13.02. LANDLORD'S LIABILITY; CERTAIN DUTIES. (a) As used in this Lease, the term "Landlord" means only the current owner or owners of the fee title to the Property or the leasehold estate under a ground lease of the Property at the time in question. Each Landlord is obligated to perform the obligations of Landlord under this Lease only during the time such Landlord owns such interest or title. Any Landlord who transfers its title or interest is relieved of all liability with respect to the obligations of Landlord under this Lease to be performed on or after the date of transfer. However, each Landlord shall deliver to its transferee all funds previously paid by Tenant if such funds have not yet been applied under the terms of this Lease. (b) Tenant shall give written notice of any failure by Landlord to perform any of its obligations under this Lease to Landlord and to any ground lessor, mortgagee or beneficiary under any deed of trust encumbering the Property whose name and address have been furnishing to Tenant in writing. Such ground lessor, mortgagee or beneficiary of a deed of trust shall have thirty (30) days from the expiration of Landlord's cure period from which to cure Landlord's default, but is under no obligation to do so. Landlord shall not be in default under this Lease unless Landlord (or such ground lessor, mortgagee or beneficiary) fails to cure such non-performance within thirty (30) days after receipt of Tenant's written notice. However, if such non-performance reasonably requires more than thirty (30) days to cure, Landlord, ground lessor, mortgagee or beneficiary under any deed of trust shall not be in default if such cure is commended within such thirty (30) day period and thereafter diligently pursued to completion. Ground lessor, mortgagee or beneficiary of a deed of trust shall be allowed such additional time period as needed to complete a foreclosure or acquisition of the Property. (c) Upon the execution of this Lease, Tenant shall deposit with Landlord a cash Security Deposit in the amount set forth in Section 1.08 above. Landlord may apply all or part of the Security Deposit to any unpaid rent or other charges due from Tenant or to cure any other defaults of Tenant. If Landlord uses any part of the 12 14 Security Deposit, Tenant shall restore the Security Deposit to its full amount within ten (10) days after Landlord's written request. Tenant's failure to do so shall be a material default under this Lease. No interest shall be paid on the Security Deposit. Landlord shall not be required to keep the Security Deposit separate from its other accounts and no trust relationship is created with respect to the Security Deposit. Section 13.03. SEVERABILITY. A determination by a court of competent jurisdiction that any provision of this Lease or any part thereof is illegal or unenforceable shall not cancel or invalidate the remainder of such provision or this Lease, which shall remain in full force and effect. Section 13.04. INTERPRETATION. The captions of the Articles or Sections of this Lease are to assist the parties in reading this Lease and are not a part of the terms or provisions of this Lease. Whenever required by the context of this Lease, the singular shall include the plural and the plural shall include the singular. The masculine, feminine and neuter genders shall each include the other. In any provision relating to the conduct, acts or omissions of Tenant, the term "Tenant" shall include Tenant's agents, employees, contractors, invitees, successors or others using the Property with Tenant's expressed or implied permission. Section 13.05. INCORPORATION OF PRIOR AGREEMENTS, MODIFICATIONS. This Lease is the only agreement between the parties pertaining to the lease of the Property and no other agreements are effective. All amendments to this Lease shall be in writing and signed by all parties. Any other attempted amendment shall be void. Section 13.06. NOTICES. All notices required or permitted under this Lease shall be in writing and shall be personally delivered or sent by certified mail, return receipt requested, postage prepaid. Notices to Tenant shall be delivered to the address specified in Section 1.03 above, except that upon Tenant's taking possession of the Property, the Property shall be Tenant's address for notice purposes. Notices to Landlord shall be delivered to the address specified in Section 1.02 above. All notices shall be effective upon delivery or attempted delivery in accordance with this Section 13.06. Either party may change its notice address upon written notice to the other party. Section 13.07. WAIVERS. All waivers must be in writing and signed by the waiving party. Landlord's failure to enforce any provision of this Lease or its acceptance of rent shall not be a waiver and shall not prevent Landlord from enforcing that provision or any other provision of this Lease in the future. No statement on a payment check from Tenant or in a letter accompanying a payment check shall be binding on Landlord. Landlord may, with or without notice to Tenant, negotiate such check without being bound to the conditions of such statement. Section 13.08. NO RECORDATION. This Lease or a memorandum thereof may not be recorded without prior written consent from Landlord. Section 13.09. BINDING EFFECT; CHOICE OF LAW. This Lease binds any party who legally acquires any rights or interest in this Lease from Landlord or Tenant. However, Landlord shall have no obligation to Tenant's successor unless the rights or interests of Tenant's successor are acquired in accordance with the terms of this Lease. The laws of the state in which the Property is located shall govern this Lease. Section 13.10. CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY. If Tenant is a corporation, each person signing this Lease on behalf of Tenant represents and warrants that he has full authority to do so and that this Lease binds the corporation. Within thirty (30) days after request by Landlord, Tenant shall deliver to Landlord a certified copy of a resolution of Tenant's Board of Directors authorizing the execution of this Lease or other evidence of such authority reasonably acceptable to Landlord. If Tenant is a partnership, each person signing this Lease for Tenant represents and warrants that he is a general partner of the partnership, that he has full authority to sign for the partnership and that this Lease binds the partnership and all general partners of the partnership. Tenant shall give written notice to Landlord of any general partner's withdrawal or addition. Within thirty (30) days after request by Landlord, Tenant shall deliver to Landlord a copy of Tenant's recorded statement of partnership or certificate of limited partnership. Section 13.11. JOINT AND SEVERAL LIABILITY. All parties signing this Lease as Tenant shall be jointly and severally liable for all obligations of Tenant. Section 13.12. FORCE MAJEURE. If Landlord cannot perform any of its obligations due to events beyond Landlord's control, the time provided for performing such obligations shall be extended by a period of time equal to the duration of such events. Events beyond Landlord's control include, but are not limited to, acts of God, war, civil commotion, labor disputes, strikes, fire, flood or other casualty, shortages of labor or material, government regulation or restriction and weather conditions. Section 3.13. EXECUTION OF LEASE. This Lease may be executed in counterparts, and, when all counterpart documents are executed, the counterparts shall constitute a single binding instrument. The delivery of this Lease by Landlord to Tenant shall not be deemed to be an offer and shall not be binding upon either party until executed and delivered by both parties. Section 13.14. LIMITATION OF LIABILITY. The obligations of Landlord under this Lease do not constitute personal obligations of the individual partners, trustees, directors, officers or shareholders of Landlord, and Tenant shall not seek recourse against the individual partners, trustees, directors, officers or shareholders of Landlord or 13 15 any of their personal assets for satisfaction of any liability arising out of this Lease. Tenant's sole remedy shall be recourse against Landlord's interest in the Property or the Project of which the Property is a part. Section 13.15. CONSENTS. Whenever the consent is either party is required hereunder such consent shall not be unreasonably withheld. Section 13.16. MODIFICATION FOR LENDER. If, in connection with obtaining construction, interim or permanent financing for the Project or the Property, the lender requests reasonable modifications to this Lease as a condition to such financing, Tenant will not unreasonably withhold, delay or defer its consent thereto, provided that such modifications do not materially increase the obligations of Tenant hereunder or materially adversely affect the leasehold interest hereby created or Tenant's rights hereunder. Section 13.17. BUILDING PLANNING. ARTICLE FOURTEEN: BROKERS The parties recognized that the brokers who negotiated this Lease are the brokers whose names are stated in Section 1.12 hereof and agree that Landlord shall be solely responsible for the payment of brokerage commissions to said brokers, and that Tenant shall have no responsibility therefore. Tenant shall indemnify and hold Landlord free and harmless against any claims, damages, costs, expenses, or liability of any nature arising from claims by any other person or real estate broker claiming a fee through dealings with Tenant arising out of this Lease. ARTICLE FIFTEEN: TOXIC AND HAZARDOUS SUBSTANCES, HAZARDOUS MATERIALS, REGULATED SUBSTANCES AND HAZARDOUS WASTE Section 15.01. DEFINITION. As used in this Section, the term "Hazardous Waste" means: (a) Those substances, chemicals and mixtures defined as "hazardous substances," "hazardous materials," "toxic substances," "imminently hazardous chemical substance or mixture," "pesticide," "heavy metal," "hazardous air pollutant," "toxic pollutant," "solid waste," "hazardous waste," "medical waste," or "radioactive waste" in the Toxic Substance Control Act, 15 U.S.C. Section 2601 et. seq., as now or hereafter amended, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, 42 U.S.C. Section 9601 et. seq., as now or hereafter amended, the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901 et. seq., as now or hereafter amended, the Federal Hazardous Substances Act, 15 U.S.C. Section 1261 et. seq., as now or hereafter amended, the Federal Water Pollution Control Act, 33 U.S.C. Section 1251 et. seq., as now or hereafter amended, the Clean Air Act, 42 U.S.C. Section 7401 et. seq., as now or hereafter amended, the Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. Section 136 et. seq., as now or hereafter amended, the Emergency Planning and Community Right to Know Act of 1986, 42 U.S.C. Section 11001 et. seq., as now or hereafter amended, the Occupational Safety and Health Act of 1970, 29 U.S.C. Section 651 et. seq., as now or hereafter amended, and the rules, orders and regulations now in effect or promulgated and effective hereafter pursuant to each respective law listed above; (b) Those substances defined as "hazardous waste," "radioactive waste," "solid waste," "toxic waste," "pollutant," "hazardous material," "regulated substance," "hazardous substance," "highly hazardous substance," "extremely hazardous substance," "petroleum," "asbestos," or "asbestos containing material" in Nev. Rev. Stat. ch. 459, Nev. Rev. Stat. ch. 445, Nev. Rev. Stat. ch. 590, Nev. Rev. Stat. Sections 618.750 - 618.850, inclusive, Nev. Rev. Stat. Section 477.045, as now or hereafter amended, or in the rules, orders and regulations now existing or hereafter promulgated pursuant thereto, or in the Uniform Fire Code as adopted by and now or hereafter in effect in the State of Nevada; (c) Those substances listed in the United States Department of Transportation table (49 CFR Section 172.101 and amendments thereto) or by the Environmental Protection Agency (or any successor agency) as hazardous substances (40 CFR Part 302 and amendments thereto); and (d) Such other substances, mixtures, materials and waste which are regulated under applicable local, state or federal law, or which are classified as hazardous or toxic under federal, state or local laws or regulations (all laws, rules and regulations referenced in paragraphs (a), (b), (c) and (d) are collectively referred to as "Environmental Laws"). Section 15.02. TENANT'S COVENANTS. Tenant does not intend to and Tenant will not, nor will Tenant allow any other person (including partnerships, corporations and joint ventures), during the term of this Lease, manufacture, process, store, distribute, use, discharge or dispose any Hazardous Waste in, under or on the Property, the Common Areas, or any property adjacent thereto. 14 16 (a) Tenant shall notify Landlord promptly in the event of any spill or release of Hazardous Waste into, on or onto the Property regardless of the source of spill or release, whenever Tenant knows or suspects that such a release occurred. (b) Tenant will not be involved in operations at or near the Property which could lead to the imposition on the Tenant or the Landlord of liability or the creation of a lien on the Property under the Environmental Laws. (c) Tenant shall, upon twenty-four (24) hour prior notice by Landlord, permit Landlord or Landlord's agent access to the Property to conduct an environmental site assessment with respect to the Property. Section 15.03. INDEMNITY. Tenant for itself and its successors and assigns undertakes to protect, indemnify, save and defend Landlord, its agents, employees, directors, officers, shareholders, affiliates, consultants, independent contractors, successors and assigns (collectively the "Indemnitees") harmless from any and all liability, loss, damage and expense, including attorneys' fees, claims, suits and judgments that Landlord or any other Indemnitee, whether as Landlord or otherwise, may suffer as a result of, or with respect to: (a) Any Environmental Law, including the assertion of any lien thereunder and any suit brought or judgment rendered regardless of whether the action was commenced by a citizen (as authorized under the Environmental Laws) or by a government agency; (b) Any spill or release of or the presence of any Hazardous Waste affecting the Property whether or not the same originates or emanates from the Property or any contiguous real estate, including any loss of value of the Property as a result of a spill or release of or the presence of any Hazardous Waste; (c) Any other matter affecting the Property within the jurisdiction of the United States Environmental Protection Agency, the Nevada State Environmental Commission, the Nevada Department of Conservation and Natural Resources, or the Nevada Department of Commerce, including costs of investigations, remedial action, or other response costs whether such costs are incurred by the United States Government, the State of Nevada, or any Indemnitee; (d) Liability for clean-up costs, fines, damages or penalties incurred pursuant to the provisions of any applicable Environmental Law; and (e) Liability for personal injury or property damage arising under any statutory or common-law tort theory, including, without limitation, damages assessed for the maintenance of a public or private nuisance, or for the carrying of an abnormally dangerous activity, and response costs. This indemnification by Tenant of Landlord shall survive the termination of the Lease. Section 15.04. REMEDIAL ACTS. In the event of any spill or release of or the presence of any Hazardous Waste affecting the Property, whether or not the same originates or emanates from the Property or any contiguous real estate, and/or if Tenant shall fail to comply with any of the requirements of any Environmental Law, Landlord may, without notice to Tenant, at its election, but without obligation so to do, gives such notices and/or cause such work to be performed at the Property and/or take any and all other actions as Landlord shall deem necessary or advisable in order to remedy said spill or release of Hazardous Waste or cure said failure of compliance and any amounts paid as a result thereof, together with interest at the rate of fifteen percent (15%) per annum, from the date of payment by Landlord, shall be immediately due and payable by Tenant to Landlord. Section 15.05. SETTLEMENT. Landlord upon giving Tenant ten (10) days prior notice, shall have the right in good faith to pay, settle or compromise, or litigate any claim, demand, loss, liability, cost, charge, suit, order, judgment or adjudication under the belief that it is liable therefor, whether liable or not, without the consent or approval of Tenant unless Tenant within said ten (10) day period shall protest in writing and simultaneously with such protest deposit with Landlord collateral satisfactory to Landlord sufficient to pay and satisfy any penalty and/or interest which may accrue as a result of such protest and any judgment or judgments as may result, together with attorney's fees and expenses, including, but not limited to, environmental consultants. Section 15.06. NO LANDLORD REPRESENTATION OR WARRANTY. Landlord makes no representations or warranty of any kind or nature with respect to the presence of Hazardous Waste in, on, under or about the Property. ARTICLE SIXTEEN: RULES AND REGULATIONS Tenant shall faithfully observe and comply with the "Rules and Regulations", a copy of which is attached hereto and marked Exhibit "C", and all reasonable and nondiscriminatory modifications thereof and additions thereto from time to time put into effect by Landlord. Landlord shall not be responsible to Tenant for the violation or nonperformance by any other tenant or occupant of the Project of any of said Rules and Regulations. ADDITIONAL PROVISIONS MAY BE SET FORTH IN A RIDER OR RIDERS ATTACHED HERETO OR IN THE BLANK SPACE BELOW. IF NO ADDITIONAL PROVISIONS ARE INSERTED, PLEASE DRAW A LINE THROUGH THE SPACE BELOW. 15 17 Landlord and Tenant have signed this Lease at the place and on the dates specified adjacent to their signatures below and have initialed all Riders which are attached to or incorporated by reference in this Lease. Signed on APRIL 10, 1997 PACIFIC INDUSTRIAL PARK L.L.C., a Delaware limited liability company at Las Vegas, Nevada By: Pacific Industrial Park Partnership, a Nevada limited partnership Its: member By: Pacific Properties and development Corporation, a Its: general partner By: /s/ JAMES A. HERNQUIST ------------------------------------- James A. Hernquist Its: Executive Vice President "LANDLORD" Signed on April 3, 1997 MULTIPLE ZONES INTERNATIONAL, INC. at Renton, Washington a Washington corporation By: [SIG] ------------------------------------ Its: VP Operations By: ------------------------------------ Its: ----------------------------------- "TENANT" 16 18 EXHIBIT A NET RENTABLE AREA The term "Net Rentable Area" shall mean the entire area included within the Property, being the area bounded by the outside surface of any exterior wall, (concrete, glass or other) of the Building, the inside surface of any interior demising wall and the inside surface of any common area within the Building. Landlord and Tenant hereby agree that the Net Rentable Area of the demised premises is 18,720 square feet. 17 19 EXHIBIT B NOTICE OF LEASE TERM DATES Re: Industrial Real Estate Lease dated April 10, 1997, between Pacific Industrial Park LLC, a Delaware limited liability company, Landlord, and Multiple Zones International, Inc., a Washington corporation, Tenant. In accordance with the Lease, we wish to advise and/or confirm as follows: 1. That the Property has been accepted as of ______________ by the Tenant as being substantially complete in accordance with the Lease, and that there is no deficiency in construction. 2. That the Tenant has possession of the Property and acknowledges that under the provisions of the Lease, the term of the Lease commenced as of May 1, 1997 for a term of 60 months, ending on April 30, 2002. 3. That in accordance with the Lease, rental commenced to accrue on May 1, 1997. AGREED AND ACCEPTED Signed on April 10, 1997 PACIFIC INDUSTRIAL PARK L.L.C., a Delaware limited liability company at Las Vegas, NV. By: Pacific Industrial Park Partnership, a Nevada limited partnership Its: member By: Pacific Properties and Development Corporation, a Its: general partner By: /s/ JAMES A. HERNQUIST ----------------------------------------- James A. Hernquist Its: Executive Vice President "LANDLORD" "TENANT" MULTIPLE ZONES INTERNATIONAL, INC. By: [SIG] ------------------------------ Its: VP Operations ------------------------------ Date: April 3, 1997 ------------------------------ 18 20 EXHIBIT C RULES & REGULATIONS and CC&Rs 1. No sign, placard, picture, aerial display, balloons, advertisement, name or notice shall be installed or displayed on any part of the Property or project (or within public rights-of-ways adjacent to the Project through the use of truck signs, sign trailers, or similar items) without the prior written consent of the Landlord. Landlord shall have the right to remove, at Tenant's expense and without notice, any sign installed or displayed in violation of this rule. All approved signs or lettering on doors, walls and service areas of the Property shall be printed, painted, affixed or inscribed at the expense of Tenant by a person chosen by Landlord. 2. If Landlord reasonably objects in writing to any curtains, blinds, shades, screens or hanging plants or other similar objects, attached to or used in connection with any window or door of the Property, Tenant shall immediately discontinue such use. No awning shall be permitted on any part of the Property. Tenant shall not place anything against or near glass partitions or doors or windows which may appear unsightly from outside the Property. 3. Tenant shall not obstruct any sidewalks, halls, passages, exits, entrances, elevators, escalators or stairways of the Property. The Common Areas of the Project are not for the general public, and Landlord shall in all cases retain the right to control and prevent access thereto of all persons whose presence in the judgment of Landlord would be prejudicial to the safety, character, reputation and interests of the Project and its tenants; provided that nothing herein contained shall be constructed to prevent such access to persons with whom any tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal activities. No tenant and no employee or invitee shall go upon the roof of the Property except as part of maintenance or repair work required or permitted to be done by Tenant. 4. Landlord will furnish Tenant, free of charge, with two keys to each door lock in the Property. Landlord may charge a reasonable fee for any additional keys. Tenant shall not make or have made additional keys, and Tenant shall not alter any lock or install a new additional lock or bolt on any door of the Property. Tenant, upon the termination of its tenancy, shall deliver to Landlord the keys of all doors which have been furnished to Tenant, and in the event of loss of any keys so furnished, shall pay Landlord therefor. 5. If Tenant requires telegraphic, telephonic, burglar alarm or similar services, it shall first obtain, and comply with, Landlord's reasonable instructions in their installation. 6. Tenant shall not place a load upon any floor of the Property which exceeds the load per square foot which such floor was designed to carry and which is allowed by law. Heavy objects shall, if reasonably considered necessary by Landlord, stand on such platforms as determined by Landlord to be necessary to properly distribute the weight. Business machines and mechanical equipment belonging to Tenant, which cause noise or vibration that may be transmitted to the structure of the Property or to any space therein to such a degree as to be reasonably objectionable to Landlord, shall be placed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devices sufficient to eliminate noise or vibration. The persons employed to move such equipment in or out of the Property must be reasonably acceptable to Landlord. Landlord will not be responsible for loss of, or damage to, any such equipment or other property from any cause, and all damage done to the Property by maintaining or moving such equipment or other property shall be repaired at the expense of Tenant. 7. Tenant shall not use or keep in the Property any kerosene, gasoline or inflammable or combustible fluid or material other than those limited quantities necessary for the operation or maintenance of its equipment. Tenant shall not use or permit to be used in the Property any foul or noxious gas or substance, or permit or allow the Property to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Project by reason of noise, odors or vibrations, nor shall Tenant bring into or keep in or about the Property any birds or animals, but nothing herein shall prevent or limit Tenant's use of the Property per Section 1.10, Section 5.01 and Section 5.02. 8. Tenant shall not use any method of heating or air conditioning other than that designed for the Property without the written consent of Landlord. 9. Tenant shall not waste electricity, water or air-conditioning and agrees to cooperate fully with Landlord to assure the most effective operation of the Property's heating and air-conditioning and to comply with any governmental energy-saving rules, law or regulations of which the Tenant has actual notice, and shall refrain from attempting to adjust controls other than room thermostats installed for Tenant's use. Tenant shall keep corridor doors closed and shall close window coverings at the end of each business day. 10. Landlord reserves the right, exercisable without liability to Tenant, to change the name and street address of the Property. 19 21 11. Tenant shall close and lock the doors of the Property, including any roll-up doors in any service areas, before Tenant and its employees leave the Property. Tenant shall be responsible for any damage or injuries sustained by other tenants or occupants of the Project or by Landlord for noncompliance with this rule. 12. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign or hazardous substance of any kind whatsoever shall be thrown therein. The expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the tenant who, or whose employees or invitees, shall have caused same. 13. Tenant shall not sell, or permit for sale, of newspapers, magazines, periodicals, theater tickets or any other goods or merchandise to the general public in or on the Property. Tenant shall not make any room-to-room solicitations of business from other tenants in the Project. Tenant shall not use the Property for any business activity other than that specifically provided for in Tenant's lease. 14. Tenant shall not install any radio or television antenna, satellite dish, microwave receiver, cellular telephone transmitter or receive, loudspeaker or other device on the roof or exteriors walls of the Property. Tenant shall not interfere with radio or television broadcasting or reception from or in the Project or elsewhere. 15. Tenant shall not mark, drive nails, screw or drill into the partitions, woodwork or plaster or in any way deface the Property or any part thereof. Landlord reserves the right to direct electricians as to where and how telephone and telecommunications wires are to be introduced to the Property. Tenant shall not cut or bore holes for wires. Tenant shall not affix any floor covering to the floor of the Property in any manner except as reasonable approved by Landlord. Tenant shall repair any damage resulting from noncompliance with this rule at its own expense. 16. Tenant shall not install, maintain or operate upon the Property any vending machines without the written consent of Landlord, which shall not be unreasonably withheld. 17. Canvassing, soliciting and distribution of handbills or any other written material, and peddling in the Project are prohibited, and each tenant shall cooperate to prevent same. 18. Landlord reserves the right to exclude or expel from the Project any person who, in Landlord's judgment, is intoxicated or under the influence of liquor or drugs or who is in violation of any of the Rules and Regulations of the Property or the Project. 19. Tenant shall store all its trash and garbage within the Property or within trash receptacles in the Common Areas nearest the Property. Tenant shall not place in any trash box or receptacle any material which cannot be disposed of in the ordinary and customary manner of trash and garbage disposal. All garbage and refuse disposal shall be made in accordance with directions issued from time to time by Landlord. Tenant shall be responsible for any additional charges or expenses arising from the failure to abide by this rule. 20. The Property shall not be used for the storage of merchandise held for sale to the general public, or for manufacturing of any kind except as specifically authorized in Tenant's lease, nor shall the Property be used for lodging or any improper or immoral purpose. No cooking shall be done or permitted by any tenant on the Property, except that use by Tenant of Insurance Services Office or Underwriters' Laboratory approved microwave and other equipment for heating meals and brewing coffee, tea, hot chocolate and similar beverages shall be permitted, provided that such equipment and use is in accordance with all applicable federal, state, county and city laws, codes, ordinances, rules and regulations. 21. Without the written consent of Landlord, which shall not be unreasonably withheld, Tenant shall not use the name, picture or representation of the Property in connection with or in promoting or advertising the business of Tenant except as Tenant's address. Landlord shall have the right to prohibit any advertising by Tenant which, in Landlord's opinion, tends to impair the reputation of the Project or its desirability as a location for offices, and upon written notice from Landlord, Tenant shall refrain from or discontinue such advertising. 22. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by any governmental agency or reasonably established by Landlord. 23. Tenant assumes any and all responsibility for protecting its property from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Property closed. 24. Landlord reserves the right to modify and/or adopt such other reasonable and nondiscriminatory rules and regulations for the parking areas as it deems necessary for the operation of the parking area. Landlord may refuse to permit any person who violates the rules to park in the parking area, and any violation of the rules shall subject the car to removal. 25. Cars must be parked entirely within the stall lines. All directional signs and arrows must be observed. The speed limit shall be 5 miles per hour. Parking is prohibited: (a) in areas not striped for parking, (b) in aisles, (c) where "no parking" signs are posted, (d) on ramps, (e) in cross-hatched areas, (f) in any manner which will interfere with loading or turning areas of loading dock areas, and (g) in such other areas as may be designated by Landlord as reserved for the exclusive use of others. Washing, waxing, cleaning or servicing of any 20 22 vehicle by anyone is prohibited. Tenant shall acquaint all persons to whom Tenant assigns parking spaces of these Rules and Regulations. 26. Except as otherwise set forth in the lease, at all times during the term of this Lease, at Tenant's sole cost and expense, Tenant shall cause the Property, and all Tenant alterations and improvements in the Property, Tenant's use and occupancy of the Property, and Tenant's performance of its obligations under this Lease, to comply with the requirements of Title III of the Americans with Disabilities Act of 1990, and all regulations promulgated thereunder, together with all amendments, revisions or modifications thereto now or hereafter adopted or in effect in connection therewith. 27. Tenant shall not park its vehicles in any parking areas designated by Landlord as areas for parking by visitors to the Project. Tenant shall not leave vehicles, trailers, containers, or truck-tractors in the Property or Project parking areas, Common Areas, or on adjacent streets overnight except in connection with business trips or overnight working, nor park any vehicles in the Property parking areas other than automobiles, motorcycles, motor driven or non-motor driven bicycles or four-wheeled trucks. 28. Landlord may waive any one or more of these Rules and Regulations for the benefit of Tenant or any other tenant, but no such waiver by Landlord shall be construed as a permanent waiver of such Rules and Regulations in favor of Tenant or any other tenant, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all of the tenants of the Project. 29. Landlord reserves the right to monitor and control all entrances to the Project during hours Landlord may deem advisable for the adequate protection of the Property and the Project. Use of the Project and Property before 8:00 o'clock A.M. or after 6:00 o'clock P.M. and on Saturdays, Sundays and state and federal holidays shall be subject to such reasonable, non-discriminatory rules and regulations as Landlord may from time to time prescribe. Tenant, its employees, agents or associates, or other persons entering or leaving the Project at any such time, may be required to sign a Project register, and the watchman or Landlord's agent in charge shall have the right to refuse admittance to any person into the Project without a pass or other satisfactory identification showing right of access at such time. Landlord assumes no responsibility and shall not be liable for any damage resulting from the admission or refusal to admit any authorized or unauthorized person to the Project. In case of invasion, mob, riot, public excitement or other commotion, Landlord reserves the right to prevent access to the Project during the continuance of the same by closing the doors, or otherwise. 30. These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend,in whole or part, the terms, covenants, agreements and conditions of any lease of premises in the Project. 31. Landlord reserves the right to make such other reasonable and nondiscriminatory Rules and Regulations as, in its judgment, may from time to time be needed for safety and security, for care and cleanliness of the Project and for the preservation of good order therein. Tenant agrees to abide by all such rules and Regulations hereinabove stated and any additional rules and regulations which are adopted. 32. Tenant shall be responsible for the observance of all of the foregoing rules by Tenant's employees, agents, clients, customers and guests. 21 23 EXHIBIT D RIGHT OF FIRST REFUSAL ON CONTIGUOUS SPACE As of the Date of this Lease, there are two (2) tenant spaces, each approximately 18,720 square feet, immediately contiguous to the Demised Premises which are vacant and available for lease for the first time since completion of this Building 3, 160 Mary Crest RD, Henderson, NV. ("Contiguous Space"). During the term of this Lease only, this additional space will be offered to Multiple Zones International, Inc., a Washington corporation, ("TENANT") under these terms: 1. Notice of Leasing. If at any time during the term of this Lease, Lessor negotiates an offer to lease from a third party ("Third Party") the Contiguous Space, under terms acceptable to Lessor, Lessor shall give written notice to TENANT identifying the Contiguous Space and specifying the terms and conditions upon which Lessor is willing to lease the Contiguous Space (collectively, the "Acceptable Lease Terms"). This notice shall constitute an irrevocable offer on the part of Lessor (subject to conditions described in Paragraph 4 below) to lease the Contiguous Space to TENANT upon the Acceptable Lease Terms, and Lessor and TENANT shall have a period of fifteen (15) days after Lessor's delivery of the notice within which to negotiate and agree upon the terms and conditions for the lease of the Contiguous Space to (the "Lease Negotiation Period"). 2. Acceptance of Lease. If TENANT is interested in negotiating the lease of the Contiguous Space with Lessor, TENANT shall gave Lessor written notice of such interest within forty-eight (48) hours after TENANT's receipt of Lessor's notice (the "Lease Response Period"), and Lessor and TENANT shall proceed to negotiate TENANT's lease of the Contiguous Space and the terms and conditions of a such a lease during the Lease Negotiation Period. Should the parties reach agreement on the terms and conditions of a lease of the Contiguous Space within the Lease Negotiation Period, the parties shall, within fifteen (15) days after reaching such agreement, execute a written lease agreement in substantially the same form as the Lease to which this Exhibit D is attached, but containing the terms and conditions agreed to by Lessor and TENANT. Failure on the part of TENANT either to deliver such notice within the Lease Response Period or to accept Lessor's offer to lease the Contiguous Space within the Lease Negotiation Period shall constitute TENANT's rejection of Lessor's offer to lease the Contigous Space. 3. Rejection of Lease. If (a) TENANT informs Lessor within the Lease Response Period that TENANT does not desire to negotiate the lease of the Contiguous Space, or (b) after commencing negotiation, Lessor and TENANT do not execute a mutually-acceptable lease agreement for the Contiguous Space within the Lease Negotiation Period, or (c) TENANT otherwise rejects Lessor's offer to lease he Contiguous Space, then in any such event this right to first offer shall terminate for that specific Contiguous Space, provided Landlord enters into a lease with the Third Party within ninety (90) days after the end of the Lease Negotiation Period. Upon such termination of this Right of First Offer, Lessor shall be free to enter into a lease with that specific Third Party for all or any portion of the Contiguous Space upon any terms whatsoever, including without limitation terms less favorable to Lessor than the Acceptable Lease Terms, without first offering to lease such Contiguous Space to TENANT. If Landlord fails to enter into a lease with that specific Third Party with said ninety (90) day period, TENANT's rights under this Exhibit D shall continue in full force and effect. 4. Conditions to Exercise. The effectiveness of TENANT's right of first offer to lease any Contiguous Space, as set forth in this Exhibit F, is in each instance conditioned on the following: (a) TENANT is not in monetary or other default under the terms of the Lease to which this Exhibit F is attached and (b) Total Shareholder's Equity of TENANT is not less than $10,000,000. If these conditions are not satisfied, then TENANT's acceptance of Lessor's offer to lease the Contiguous Space under this Exhibit D shall be null and void with respect to that Contiguous Space and Lessor shall be free to enter into a lease with a third party of parties for all or any portion of the Contiguous Space upon any terms whatsoever, including without limitation terms less favorable to Lessor than the Acceptable Lease Terms. 5. Effect of Transfer by Lessor. If at any time Lessor sells, exchanges, disposes of, or otherwise transfers all or any portion of the Property which contains Building 3, 160 Mary Crest RD, Henderson, NV. to a third party or third parties, then effective upon the date of such sale, exchange, disposition, or other transfer, the provisions of this Exhibit F shall cease to be of any force or effect with respect to the portion of the Property thus sold, exchanged, disposed of or otherwise transferred. 6. Rights Personal. This right of first offer is personal to TENANT and not transferable or assignable. 22 24 H. LANDLORD COVENANTS. Landlord covenants that, to the best of its actual knowledge, the Work will be designed to conform with applicable building codes and requirements of appropriate governmental agencies. The appropriate governmental agencies are responsible for inspecting the work and issuing approvals, permits and certificates of occupancy if the Work is deemed by those responsible agencies to conform to the appropriate laws, regulations and requirements. Landlord covenants that, to be best of its ability and actual knowledge, the Work will be constructed within the requirements pertaining to the health, safety or welfare of Landlord's employees or the public applicable at the time the Work is performed 1. NOTIFICATION OF COMPLETION OF WORK. Landlord shall give Tenant notice ten (10) days prior as to when that the Work will be complete. Completion of the Work is defined in Paragraph C of this Rider. Tenant shall be available to inspect the Work within two (2) days after that scheduled completion date. Tenant and Landlord's representative shall inspect the Work together. At that time, Tenant shall notify Landlord, in writing, of any deficiency of the Work compared to the Final Plans, as defined in this Construction of Improvements by Landlord Lease Rider. Any deficiency will be corrected by Landlord within ten (10) days following such written notice from Tenant. Landlord shall notify Tenant when the deficiency has been corrected and Tenant and Landlord's representative shall reinspect the Work together. If the Work is not completed within seventy-five (75) days of written approval by both Tenant and Landlord of the Final Plans (as defined in this Rider), Tenant may terminate this Lease without any liability to either Tenant or Landlord and all monies paid or advanced to Landlord shall be refunded to Tenant. 23 25 CONSTRUCTION OF IMPROVEMENTS BY LANDLORD LEASE RIDER This Rider is attached to and made part of that certain Industrial Real Estate lease dated April 10, 1997, between Pacific Industrial Park LLC, as Landlord, and Multiple Zones International, Inc., as Tenant, covering the Property commonly known as 170 Gallagher Crest Drive, Henderson, NV (the "Lease"). The terms used in this Rider shall have the same definitions as set forth in the Lease. The provisions of this Rider shall prevail over any inconsistent or conflicting provisions of the Lease. A. DESCRIPTION OF IMPROVEMENTS. Landlord shall, at Landlord's expense, construct certain improvements on or about the Property (the "Work") in accordance with certain plans and specifications attached hereto as Exhibit "1" and incorporated herein by this reference. Tenant hereby approves the plans and specifications attached hereto as Exhibit "1." B. PRELIMINARY PLANS/FINAL PLANS. If the plans and specifications attached hereto are agreed upon as final plans and specifications, (a) initial here, Landlord _______ and Tenant _________, (b) such final plans and specifications are hereinafter referred to as the "Final Plans," and (c) the remainder of this Paragraph shall be inoperative. If the plans and specifications attached hereto are preliminary plans, Landlord shall prepare final working drawings and outlined specifications for the Work and submit such plans and specifications to Tenant for its approval. Tenant shall approve or disapprove such drawings and specifications within five (5) days after receipt from Landlord. Tenant shall have the right to disapprove such drawings and specifications only if they materially differ from the plans and specifications, attached hereto. If Tenant disapproves such drawings and specifications, Landlord and Tenant shall promptly meet in an attempt to resolve any dispute regarding such drawings and specifications. If the parties are unable to agree upon the final working drawings and specifications for the work on or before _______________, Landlord may, at Landlord's option, either (1) terminate this Lease upon seven (7) days' prior written notice to Tenant, in which case neither Landlord nor Tenant shall have further liability to the other,or (2) submit the matter to conclusive and binding arbitration at the cost of Tenant in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Final working drawings and specifications prepared in accordance with this Paragraph B and approved by Landlord and Tenant are hereinafter referred to as the "Final Plans." C. COMPLETION OF THE WORK. Landlord shall use its best efforts to complete the Work described in the Final Plans prior to the scheduled Commencement Date set forth in Section 1.05 of the Lease. For the purposes of this Paragraph C, the Work shall be conclusively deemed to be substantially completed when all Work described in the Final Plans is completed, except for minor items of work (e.g., "pick-up work") which can be completed with only minor interference with Tenant's conduct of business on the Property. D. CHANGES. Landlord's obligation to prepare the Property for Tenant's occupancy is limited to the completion of the Work set forth in the plans and specifications attached hereto as Exhibit "1". Landlord shall not be required to furnish, construct or install any items not shown thereon. If Tenant requests any change, addition or alteration ("Changes") in such plans and specifications or in the construction of the Work, Landlord shall promptly give Tenant an estimate of the cost of such Changes and the resulting delay in the delivery of the Property to Tenant. Within three (3) days after receipt of such estimate, Tenant shall give Landlord written notice whether Tenant elects to proceed with such Changes. If Tenant notifies Landlord in writing that Tenant elects to proceed with such Changes and if Landlord approves such Changes, Landlord shall, at Tenant's expense, promptly make such Changes. If Tenant fails to notify Landlord of its election within the three (3) day period, Landlord may either (1) make such Changes at Tenant's expense or (2) complete the Work without making such Changes. Tenant shall pay or reimburse Landlord for the costs of such Changes within fifteen (15) days after billing. Any delay caused by Tenant's request for any Changes or from the construction of any Changes shall not, in any event, delay the Commencement Date, which shall occur on the date it would have occurred but for such Changes. The Work shall be the property of Landlord and shall remain upon and be surrendered with the Property upon the expiration of the Lease Term. E. TENANT'S WORK. All work not within the scope of the Work, such as the furnishing and installing of furniture, trade fixtures, telephone equipment and office equipment shall be furnished Initials ____________ Landlord ____________ Tenant 26 and installed by Tenant at Tenant's sole cost and expense. Tenant shall adopt a schedule which is consistent with the schedule of Landlord's contractors and conduct its work in such a manner as to maintain harmonious labor relations and not interfere with or delay the Work of Landlord's contractors. All work and labor to be performed by Tenant shall: (a) be subject to the administrative supervision of Landlord; (b) be carried out in a good and workmanlike manner; (c) comply with all governmental rules, regulations, statutes and directives; (d) not commence until proof of insurance reasonably required by Landlord is provided; and (e) not adversely affect the proper functioning of any of the mechanical, electrical, sanitary and other service systems or installations of the Property or the Project which the Property is a part. F. BUILDING PERMIT. If for any reason Landlord is not able to obtain a building permit for the Work based solely upon the Final Plans, or upon such modifications thereto as are agreed to by Tenant and Landlord, then this Lease shall be null and void and of no further force and effect. In either event, Landlord shall forthwith return any sums paid to Landlord by Tenant and Landlord and Tenant shall have no further obligations to or claims against the other arising from this Lease. G. DELAYS. In the event that Landlord is delayed in completing the Work as a result of: (a) delays in the delivery of non-building standard materials, finishes or installations requested by Tenant; (b) changes to the Final Plans requested by Tenant after approval thereof; (c) the carrying out of work on the Property by Tenant or its contractors; or (d) any other types of delays caused by Tenant, then, in such event, the Work shall be deemed to be substantially completed upon the date Landlord would have completed the Work in the absence of such delays as determined by Landlord's architect or contractor, and, if not already commenced, the Lease Term shall commence. H. LANDLORD COVENANTS. Landlord covenants that, to the best of its actual knowledge, the Work will be designed to conform with applicable building codes and requirements of appropriate governmental agencies. The appropriate governmental agencies are responsible for inspecting the work and issuing approvals, permits and certificates of occupancy if the Work is deemed by those responsible agencies to conform to the appropriate laws, regulations and requirements. Landlord covenants that, to the best of its ability and actual knowledge, the Work will be constructed within the requirements pertaining to the health, safety or welfare of Landlord's employees or the public applicable at the time the Work is performed. I. NOTIFICATION OF COMPLETION OF WORK. Landlord shall give Tenant notice ten (10) days prior as to when that the Work will be complete. Completion of the Work is defined in Paragraph C of this Rider. Tenant shall be available to inspect the Work within two (2) days after that scheduled completion date. Tenant and Landlord's representative shall inspect the Work together. At that time, Tenant shall notify Landlord, in writing, of any deficiency of the Work compared to the Final Plans, as defined in this Construction of Improvements by Landlord Lease Rider. Any deficiency will be corrected by Landlord with ten (10) days following such written notice from Tenant. Landlord shall notify Tenant when the deficiency has been corrected and Tenant and Landlord's representative shall reinspect the Work together. If the Work is not completed within seventy-five (75) days of written approval by both Tenant and Landlord of the Final Plans (as defined in this Rider), Tenant may terminate this Lease without any liability to either Tenant or Landlord and all monies paid or advanced to Landlord shall be refunded to Tenant. Initials Landlord ----------- Tenant ----------- 2 27 [FLOOR PLAN] 28 [ENLARGED FLOOR PLAN] 29 ENVIRONMENTAL INDEMNIFICATION RIDER This Rider is attached to and made part of that certain lease dated April 10, 1997 between PACIFIC INDUSTRIAL PARK, L.L.C., as Landlord, and MULTIPLE ZONES INTERNATIONAL, INC., as Tenant, covering the Property commonly known as 170 GALLAGHER CREST, HENDERSON, NV (the "Lease"). Terms with initial capital letters herein, but not otherwise defined herein, shall have the same meaning as set forth in the Lease. The provisions of this Rider shall prevail over any inconsistent or conflicting provisions of the Lease. SECTION 1.01. DEFINITIONS. "Hazardous Substance" means: (a) Those substances, chemicals and mixtures defined as "hazardous substances," "hazardous materials," "toxic substances," "imminently hazardous chemical substance or mixture," "pesticide," "heavy metal," "hazardous air pollutant," "toxic pollutant," "solid waste," "hazardous waste," "medical waste," or "radioactive waste" in the Toxic Substance Control Act, 15 U.S.C. Section 2601 et. seq., as now or hereafter amended, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, 42 U.S.C. Section 9601 et. seq., as now or hereafter amended ("CERCLA"), the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901 et. seq., as now or hereafter amended, the Federal Hazardous Substances Act, 15 U.S.C. Section 1261 et. seq., as now or hereafter amended, the Federal Water Pollution Control Act, 33 U.S.C. Section 1251 et. seq., as now or hereafter amended, the Clean Air Act, 42 U.S.C. Section 7401 et. seq., as now or hereafter amended, the Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. Section 136 et. seq., as now or hereafter amended, the Emergency Planning and Community Right to Know Act of 1986, 42 U.S.C. Section 11001 et. seq., as now or hereafter amended ("EPCRKA"), the Occupational Safety and Health Act of 1970, 29 U.S.C. Section 651 et. seq., as now or hereafter amended, and the rules, orders and regulations now in effect or promulgated and effective hereafter pursuant to each respective law listed above; (b) Those substances defined as "hazardous waste," "radioactive waste," "solid waste," "toxic waste," "pollutant," "hazardous material," "regulated substance," "hazardous substance," "highly hazardous substance," "extremely hazardous substance," "petroleum," "asbestos," or "asbestos containing material" in Nev. Rev. Stat. ch. 459, Nev. Stat. Ch. 444, Nev. Rev. Stat. ch. 445, Nev. Rev. ch. 590, Nev. Rev. Stat. Sections 618.750 - 618.850, inclusive, Nev. Rev. Stat. Section 477.045, as now or hereafter amended, or in the rules, orders and regulations now existing or hereafter promulgated pursuant thereto, or in the Uniform Fire Code as adopted by and now or hereafter in effect in the State of Nevada; (c) Those substances listed in the United States Department of Transportation table (49 CFR Section 172.101 and amendments thereto) or by the Environmental Protection Agency (or any successor agency) as hazardous substances (40 CFR Part 302 and amendments thereto); and (d) Such other substances, materials and wastes which are regulated under applicable local, state or federal law, or which are classified as hazardous or toxic under federal, state or local laws or regulations. SECTION 1.02. "Environmental Laws" means the collective laws, rules, orders and regulations described in paragraph 1.01. SECTION 2.01. Tenant's Business Activity. Tenant is in the business of manufacturing, processing and/or distributing Computer Products. SECTION 2.02. Tenant has informed Landlord that in the normal conduct of Tenant's business the following Hazardous Substance or Hazardous Substances will be placed, stored, used, processed, manufactured, treated, distributed, released or disposed in, on or from the Property: (a) NONE. Tenant estimates the quantity on the premises at any one time to be an amount less than ___________________. (b) ____________________________. Tenant estimates the quantity on the premises at any one time to be an amount less than ___________________. (c) ____________________________. Tenant estimates the quantity on the premises at any one time to be an amount less than ___________________. Initials _____ Landlord _____ Tenant 30 If additional Hazardous Substances are to be listed, see Exhibit 1 attached hereto and incorporated herein. SECTION 2.03. The use, possession, processing, manufacturing, distribution, disposal, and/or release of the Hazardous Substances listed under paragraph 2.02 are regulated pursuant to the Environmental Laws. SECTION 2.04. Landlord has consented to Tenant's business activity being conducted on the Property involving Hazardous Substances, which consent is expressly limited to the substances disclosed above, subject to each and every covenant of Tenant stated herein. SECTION 3.01. Tenant's Covenants. Tenant shall comply strictly and in all respects with the requirements of the Environmental Laws and shall notify the Landlord promptly in the event of any spill of any Hazardous Substance upon the Property, and shall promptly forward to the Landlord copies of all orders, notices, permits, applications or other communications and reports in connection with any such spill or any other matters relating to Environmental Laws, as they may affect the Property. Tenant shall be fully responsible, at its own expense, for the proper control, use, handling, storage, distribution and disposal of any and all Hazardous Substances related to Tenant's business being conducted on the Property. SECTION 3.02. Tenant has provided or will provide to Landlord prior to execution of the Lease copies of each and every license, identification number, permit, or approval that Tenant is required to possess for the conduct of its business under the Environmental Laws. If any identification number, license, permit, or approval is renewed, modified, amended, or reissued during the term of this Lease, Tenant will promptly deliver a copy of the same to Landlord. Tenant shall provide Landlord with a copy of any and all inspection reports received by Tenant resulting from, or related to, an inspection of the Property conducted by any federal, state or local authority. SECTION 3.03. Tenant shall not change the quantity nor the type of Hazardous Substances described herein without the prior written consent of the Landlord. SECTION 3.04. Tenant will not hereafter cause or suffer to occur, a spill, release, discharge or disposal of any Hazardous Substances at, upon, under or within the Property, any portion thereof, or any contiguous real estate. Tenant shall not permit the discharge of any Hazardous Substance into the sanitary or storm sewer or water system serving the property or the surrounding area, or into any municipal or other governmental water system or storm and/or sanitary sewer system in violation of any Environmental Law. SECTION 3.05. Tenant shall provide Landlord annually on each anniversary date of the Lease a written certification, also signed by the manager of operations of Tenant at the Property, certifying that: (a) Tenant's business has been conducted in full compliance with the Environmental Laws; (b) All Hazardous Substances related to Tenant's business are disclosed in the Lease or said certificate; (c) The method and frequency of off-site disposal of Hazardous Substances from the Property, as described in the certificate, are in compliance with the Environmental Laws. SECTION 3.06. Tenant, promptly upon the written request of Landlord from time to time, shall provide the Landlord or the Landlord's agent with access to the property to conduct an environmental site assessment or prepare an environmental audit report with respect to the Property. In connection with such assessment Tenant shall permit Landlord or Landlord's agents to inspect, sample, and test the Property and to inspect and copy Tenant's records relating, to the use, generation, storage, processing, release and disposal of Hazardous Substances at the Property. Tenant acknowledges that the results of such an inspection may be used by Landlord, at Landlord's sole election, to determine Tenant's compliance with the covenants contained herein. SECTION 3.07. If a spill, release, discharge or accident involving one or more Hazardous Substances occurs at, under, in or on the Property, Tenant will immediately respond to such event taking prudent emergency action in compliance with the Environmental Laws. Tenant shall notify 2 Initials _______ Landlord _______ Tenant 31 Landlord of any such event as soon as reasonably practicable after the occurrence of such event by telephone (and promptly confirm such oral notice in writing) giving complete information regarding the type, amount and location of the Hazardous Substance or Hazardous Substances involved in such event. Within fifteen (15) days of the occurrence of the event Tenant shall submit a written remedial action plan, including the location for off-site disposal, to Landlord. Any remedial action plan shall be in full compliance with the Environmental Laws. SECTION 3.08. Upon Landlord's reasonable request, Tenant shall provide Landlord with a copy of an Emergency Response Plan, which shall be kept current at all times, relating to the Hazardous Substances connected with Tenant's business. If Tenant is required to file an Emergency Response Plan pursuant to EPCRKA, Tenant shall provide Landlord with a copy of such report concurrently with filing the report with the respective government agencies. SECTION 3.09. Tenant will not modify or remodel the Property, install or construct any tanks, vessels, sumps, clarifiers or any other similar structures (collectively "Tanks") above or below ground to store, mix, process, manufacture or dispose Hazardous Substances without the prior written consent of Landlord. Any request submitted to Landlord by Tenant for the installation or construction of such Tanks must be submitted together with copies of all permits, licenses or approvals required under the Environmental Laws in connection with the installation or construction of such Tanks, and copies of the plans and specifications of each such Tank. SECTION 3.10. Tenant for itself and its successors and assigns undertakes to protect, indemnify, save and defend Landlord, its agents, employees, directors, officers, shareholders, affiliates, consultants, independent contractors, successors and assigns (collectively referred to as "Indemnitees") harmless from any and all liability, loss, damage and expense, including attorneys' fees, claims, suits and judgments that Landlord or any other Indemnitee, whether as Landlord, owner of the Property or otherwise, may suffer as a result of, or with respect to: (a) The deposit, storage, disposal, burial, dumping, injecting, spilling, leaking or other placement or release in, under or on the Property of a Hazardous Substance, including, but not limited to, asbestos; (b) Any Environmental Law, including the assertion of any lien thereunder; (c) Any spill of or the presence of any Hazardous Substance affecting the Property whether or not the same originates or emanates from the Property or any contiguous real estate, including any loss of value of the Property as a result of a spill of or the presence of any Hazardous Substance; (d) Any other matter affecting the Property within the jurisdiction of the United States Environmental Protection Agency or the Nevada State Environmental Commission or the Nevada Department of Conservation and Natural Resources or the Nevada Department of Commerce; and (e) The presence in, on or under, or the release, escape, seepage, leakage, discharge, or migration to, at or from, the Property of any Hazardous Substance, where any such liability relates to any condition arising on, at or under the Property, whether such condition arose prior to, during, or after the term of the Lease, whether such condition was known or unknown to Tenant, whether or not such condition is disclosed in any report to Landlord and whether or not such condition worsens after the date hereof. SECTION 3.11. Tenant's liability hereunder shall, without however limiting the indemnity provided in Section 3.10 hereof, extend to and include: (a) All costs, expenses and attorneys' fees incurred or sustained by any Indemnitee in making any investigation on account of any claim, demand, loss, liability, cost, charge, suit, order, judgment or adjudication, in prosecuting or defending any action brought in connection therewith, in obtaining or seeking to obtain a release therefrom and in enforcing any of the agreements herein contained; (b) Liability for costs of removal or remedial action incurred by the United States Government or the State of Nevada, or response costs incurred by any other person, or damages from injury to, destruction of, or loss of natural resources, including, without limitation, the reasonable costs of assessing such injury, destruction or loss, incurred pursuant to CERCLA; Initials Landlord ------------- Tenant --------------- 3 32 (c) Liability for clean-up costs, fines, damages or penalties incurred pursuant to the provisions of any applicable Environmental Law; (d) Liability for costs and expenses of abatement, correction or clean-up, fines, damages, response costs or penalties which arise from the provisions of any other statute, state or federal; and (e) Liability for personal injury or property damage arising under any statutory or common-law tort theory, including, without limitation, damages assessed for the maintenance of a public or private nuisance, or for the carrying on of an abnormally dangerous activity, and response costs. SECTION 3.12. In the event of any spill of or the presence of any Hazardous Substance affecting the Property, whether or not the same originates or emanates from the Property or any contiguous real estate, and/or if Tenant shall fail to comply with any of the requirements of any Environmental Law, Landlord may, without notice to Tenant, at its election, but without the obligation so to do, give such notices and/or cause such work to be performed at the Property and/or take any and all other actions as Landlord shall deem necessary or advisable in order to remedy said spill of Hazardous Substance or cure said failure of compliance and any amounts paid as a result thereof, together with interest thereon at the rate of fifteen percent (15%) per annum, from the date of payment by Landlord, shall be immediately due and payable by Tenant to Landlord. SECTION 3.13. Landlord, upon giving Tenant ten (10) days prior notice, shall have the right in good faith to pay, settle or compromise, or litigate any claim, demand, loss, liability, cost, charge, suit, order, judgment or adjudication under the belief that it is liable therefor, whether liable or not, without the consent or approval of Tenant unless Tenant within said ten (10) day period shall protest in writing and simultaneously with such protest deposit with Landlord collateral satisfactory to Landlord sufficient to pay and satisfy any penalty or interest which may accrue as a result of such protest and any judgment or judgments as may result, together with attorneys' fees and expenses. SECTION 3.14. Tenant shall, at Landlord's election, post an environmental reclamation bond with Landlord, payable to Landlord, in the amount of ___________. Tenant shall keep such bond in effect during the term of this Lease. Should the nature of Tenant's business change increasing the quantity or variety of Hazardous Substances at the Property, Tenant agrees that it will post a new bond in the reasonable amount as determined by Landlord upon notice by Landlord that a bond increase is required. SECTION 4.01. GENERAL CONDITIONS. No delay or omission of Landlord in exercising any right or power shall be construed as a waiver of any default or as an acquiescence therein, nor shall any single or partial exercise thereof preclude any further exercise thereof. Landlord may, at its option, waive any of its rights hereunder and any such waiver shall not be deemed a waiver of Landlord's other rights hereunder. No waiver of any default shall be construed to be a waiver of or acquiescence in or consent to any preceding or subsequent default. SECTION 4.02. Any and all notices and demands required or desired to be given hereunder shall be given in the form and delivered in the manner as provided in Section 13.06 of the Lease. SECTION 4.03. In addition to the instruments and documents mentioned or referred to herein, Tenant will, at its own cost and expense, supply Landlord with such other instruments, documents, information and data as may, in Landlord's opinion, be reasonably necessary for the purposes hereof, all of which shall be in form and content acceptable to Landlord. SECTION 4.04. The provisions in this Rider shall inure to the benefit of Landlord, its successors and assigns and bind Tenant, its heirs, executors, administrators, successors and assigns, and no other person or persons shall have any rights or remedies under or by reason of this Rider. SECTION 4.05. The provisions of this Rider are not intended to supersede the provisions of the Lease but shall be construed as supplemental thereto. SECTION 4.06. Tenant's representations, warranties and covenants herein shall survive the expiration, termination or abandonment of the Lease relating to the Property. 4 Initials _______ Landlord _______ Tenant 33 SECTION 4.07. The various rights, options, elections and remedies of Landlord hereunder shall be cumulative and no one of them shall be construed as exclusive of any other, or of any right, option, election or remedy provided in any other agreement or by law. Landlord and Tenant have signed this Rider at the place and on the dates specified adjacent to their signatures below and have initialed all Exhibits which are attached hereto and incorporated by reference in this Rider. Signed on 4/10, 1997 LANDLORD at Las Vegas, NV PACIFIC INDUSTRIAL PARK LLC PACIFIC PROPERTIES By: [SIG] ----------------------- Its: Exec VP ---------------------- By: ----------------------- Its: ---------------------- Signed on April 3, 1997 TENANT at Renton, WA MULTIPLE ZONE INTERNATIONAL, INC. By: [SIG] ----------------------- Its: VP OPERATIONS ---------------------- By: ----------------------- Its: ---------------------- 5 Initials _______ Landlord _______ Tenant EX-10.22 4 AMENDMENT TO STORAGE AND DISTRIBUTION AGREEMENT 1 THIRD AMENDMENT TO STORAGE AND DISTRIBUTION AGREEMENT THIS THIRD AMENDMENT TO STORAGE AND DISTRIBUTION AGREEMENT is entered into this 30th day of December 1997 by and between AIRBORNE LOGISTICS SERVICES, a division of ABX Air, Inc. ("ALS") and MULTIPLE ZONES INTERNATIONAL, INC., a Washington corporation ("MZI"). RECITALS A. MZI and Airborne Freight Corporation ("Airborne") entered into that certain Storage and Distribution Agreement dated September 28, 1992 (the "Primary Agreement"). B. Airborne assigned all of its interest in and to the Agreement to ALS (the "Assignment"). C. The term of the Primary Agreement was extended pursuant to that certain Letter Agreement dated May 23, 1995 (the "Extension"). The Primary Agreement was later amended by that certain First Amendment to Storage and Distribution Agreement dated December 22, 1995 (the "First Amendment"). The Primary Agreement was additionally amended by that certain Second Amendment to Storage and Distribution Agreement dated October 3, 1996 (the "Second Amendment"). The Primary Agreement, as amended, was further amended pursuant to that certain Letter Agreement dated October 10, 1997 (the "Second Extension"). The Primary Agreement, the Assignment, the Extension, the First Amendment, the Second Amendment, and the Second Extension, are referred to collectively herein as the "Agreement." D. The parties have agreed to modify the charges for services under the Agreement and extend the Term of the Agreement, all in accordance with this Amendment. NOW THEREFORE, the parties agree to amend the Agreement as follows: 1. Except as specifically amended herein, the Agreement shall remain in full force and effect. 2. For the term of this Third Amendment (4/1/98 - 3/31/99), the provisions of the first paragraph of subparagraph 2.a and paragraph 3 of the First Amendment are hereby superseded and replaced in their entirety by Amendment 3, Schedule 1 ("Rates and Charges"), Schedule 1A ("Definitions"), Schedule 1B ("Terms and Conditions"), and Exhibit 1 ("Revised Receiving, Inventory Control and Shipping Estimates") all of which are attached hereto. Third Amendment to Storage and Distribution 12/29/97 - Page 1 2 3. PACKAGING CHARGES A packaging charge of $.28 will be applied to each package shipped. This charge will be applied in addition to all order handling fees as well as all large order handling fees. In the event of a price change by the manufacturer or delivery company, the change in price (increase or decrease) will be passed on to MZI. Any request for packaging not used in the current operation may be priced separately. 4. STORAGE CHARGES A $6.25 per sq. ft. per year charge will be assessed with a minimum requirement of 84,480 sq. ft. The space will be in building 10 and includes storage, processing and the required common area to operate the MZI fulfillment operation. The charges will be billed on a weekly basis in the fixed amount of $10,154. 4A. ADDITIONAL STORAGE CHARGES Additional Storage in building 10 may be rented at a rate negotiated at the time of the request from MZI. This space is subject to availability and will be rented in a minimum 2 bay quantity representing approximately 4,000 square feet (1 bay represents approximately 2,000 square feet). 5. CONFIGURATIONS Sales orders requiring configuration work will be separated from non-configuration orders. These orders require additional handling, control and labor compared to a nonconfiguration order. This pricing assumes the configuration process in place at the time of this agreement remains constant. 6. UPS ORDER FEE Fee added to all UPS packages for additional handling and labor requirements. Additional fees may be negotiated between ALS and MZI if UPS services currently not utilized are required. Current UPS services utilized include UPS Ground and Ground track. 7. SDS ORDER FEE Fee added to all Airborne SDS packages for additional handling and labor requirements. 8. OTHER CARRIER CHARGE Additional work is required to prepare and fulfill orders not processed through the SGA manifesting system. Such work may include, but is not limited to, manual creation of shipping label(s), preparation of required shipping documentation and operation of multiple stand alone manifesting systems. At the request of MZI additional carriers or services may be added in the future. Any additions may be priced separately depending on work requirements. 8A. INTERNATIONAL PAPERWORK Fee for processing of international paperwork. MZI is responsible for providing ALS accurate and complete information required for International documentation. This fee is a processing fee only. This fee does not include any duties, taxes, customs or related transportation fees, or fees and various tariff charges applicable to creating or processing such documents such as Certificates of Origin, Consular Legalization and other similar extra charge international documents. 9. RETURN TO VENDOR CHARGE (RTV) Additional charge for preparation of all return to vendor shipments. Third Amendment to Storage and Distribution 12/29/97 - Page 4 3 10. POSTAL MACHINE FEE Allocation of postal machine lease rate plus rate updates and supplies. Actual postage charges will be billed to MZI. 11. MANAGEMENT FEE Weekly fee to cover cost of ALS management of MZI fulfillment operations. The fee includes such expenses as administration, management salary, billing costs, customer service, human resources, supplies, security, employee safety and similar overhead. 12. SPECIAL PROJECTS Any task or activity requested by MZI, not included in the listed item prices. Such activities include, but are not limited to liquidation's, bulk moves and specified training events. Please refer to the following schedule for specific labor charges (travel and associated expenses would be in addition to labor): a. Planned Projects: Specific times, dates, and requirements must be agreed upon by MZI and ALS no later than 72 hours prior to project start time. Regular time rates applicable to work performed Monday - Saturday 0600 - 1800 only. Labor (regular time) $ 15.00 hour Labor (regular overtime) $ 22.50 hour Labor (Sundays) $ 30.00 hour b. Unplanned Projects: Projects requested with less than 72 hours notice. Labor (regular time) $ 18.00 hour Labor (regular over time)$ 27.00 hour Labor (Sundays) $ 36.00 hour c. Holiday rates will be provided upon request. Holidays are defined by the Airborne Transportation Holiday Schedule. d. Normal management hours and responsibilities are included in Overhead Charges. If additional management involvement is required to supervise a project it will be billed at a rate of $ 28.50 / hour. ALS and MZI will mutually agree that additional management involvement is required prior to assignment or billing. 13. PHYSICAL INVENTOR CHARGES All Physical Inventory Counts are billed to MZI in the following manner: a. Labor (regular time) S 18.00 hour Labor (over time) S 27.00 hour Labor (Sunday) $ 36.00 hour Labor (Supervisor) $ 28.50 hour Holiday Pay Available upon request b. Equipment Actual Cost as Needed C. Management Fee 10% added to total labor cost Third Amendment to Storage and Distribution 12/29/97 - Page 5 4 14. SYSTEMS SUPPORT ALS provides immediate on-site support of MZI systems when necessary. This is charged by the hour and billed weekly. There is a minimum charge of 30 minutes per occurrence. a. Routine Maintenance: Price $30.00 / hour Service Calls not requiring response within 30 minutes. Times Available: 9:00 a.m. - 2:00 a.m. Eastern Standard Time (M-F) b. Urgent Support: Price $50.00 / hour Service call will be made within 30 minutes of request. Times Available: 9:00 a.m. - 2:00 a.m. Eastern Standard Time (M-F) C. Weekends/After Hours/Holiday Support: Price $80.00 /hour After Hours: (2:01 a.m. - 8:59 a.m., 7 days per week) Weekends (Saturday 2:01 a.m.- Monday 8:59 a.m.) Holidays as defined by Airborne Transportation Holiday Schedule. 15. WILL CALL FEE There will be a $15.00 fee assessed to all Will Call orders. This will be applied when a customer requests to pick the order up at ALS between the 0600 - 2000, Monday-Saturday. Will Call orders have special handling and staging requirements that require additional labor and security measures. 16. NEW CAPITAL PURCHASE If volumes or order characteristics change from the forecast amounts as shown in exhibit 1, so that additional capital equipment (non - replacement) is required to effectively run the MZI operation, ALS may bill MZI the charges for such equipment. The weekly charges to be billed to MZI will be negotiated between ALS and MZI prior to the time of purchase. Third Amendment to Storage and Distribution 12/29/97 - Page 6 5 IN WITNESS WHEREOF, the parties have executed this Amendment on the date first written above. MULTIPLE ZONES INTERNATIONAL, INC. AIRBORNE LOGISTICS SERVICES, a division of ABX Air, Inc. By: [SIG] By: [SIG] ------------------------------- ------------------------------- Its: VP OPERATIONS Its: VICE PRESIDENT AND GENERAL MANAGER ------------------------------ ------------------------------ Third Amendment to Storage and Distribution 12/29/97 - Page 8 EX-10.24 5 AMENDMENT TO AGREEMENT FOR WHOLESALE FINANCING 1 AMENDMENT TO AGREEMENT FOR WHOLESALE FINANCING This Amendment is made to that certain Agreement for Wholesale Financing executed on the 15th day of January, 1996, between MULTIPLE ZONES INTERNATIONAL, INC. ("Dealer") and DEUTSCHE FINANCIAL SERVICES CORPORATION ("DFS"), as amended ("Agreement"). FOR VALUE RECEIVED, DFS and Dealer agree as follows: 1. Section 3 of the Agreement is hereby restated to read in its entirety as follows: "3. GRANT OF SECURITY INTEREST. To secure payment of all of Dealer's current and future debts to DFS, whether under this Agreement or any current or future guaranty or other agreement, Dealer grants DFS a security interest in all of Dealer's inventory and equipment, whether now owned or hereafter acquired, all discounts, incentive payments, rebates, credits (other than advertising co-ops), attachments, accessories, accessions, returns, repossessions, exchanges, substitutions and replacements thereto, and all proceeds thereof, and all accounts, contract rights, chattel paper, instruments, reserves and general intangibles, owned by or due Dealer, now or in the future, however these may be due Dealer and wherever located, arising from any of the above described inventory and equipment and all proceeds thereof. All such assets are collectively referred to herein as the "Collateral." All of such terms for which meanings are provided in the Uniform Commercial Code of the applicable state are used herein with such meanings. All Collateral financed by DFS, and all proceeds thereof, will be held in trust by Dealer for DFS, with such proceeds being payable in accordance with Section 9." 2. Section 9 of the Agreement is hereby restated to read in its entirety as it appears in the original Agreement for Wholesale Financing dated January 15, 1996, without giving effect to Section 2 of that certain Addendum dated January 15, 1996, which Section 2 is hereby deleted in its entirety. 3. Section 29 Supplemental Inventory Facility is incorporated into the Agreement as if fully set forth therein to read as follows: "29. SUPPLEMENTAL INVENTORY FACILITY. 29.1 CREDIT FACILITY. Subject to the terms of this Agreement, DFS agrees to provide to Dealer a Supplemental Inventory Facility of Twenty Million and no/100 Dollars ($20,000,000.00). DFS' decision to advance funds will not be binding until the funds are actually advanced. 29.2 SPECIAL DEFINITIONS. The following terms will have the following meanings with respect to the Supplemental Inventory Facility: "Business Day": Any day that is not a Saturday, Sunday or day on which banks in San Francisco, California, or New York, New York, are required or permitted to be closed, and on which dealings in U.S. dollar deposits are carried out in the interbank eurodollar market. "Conversion", "Convert" and "Converted": each refer to a conversion of Supplemental Inventory Loans from either LIBOR Loans to Prime Rate Loans or vice versa. 2 "Electronic Transfers": means any electronic transfer by Automated Clearing House, Federal Wire Funds Transfer or such other electronic means as DFS may announce from time to time. "Eurocurrency Liabilities': has the meaning specified in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Eurocurrency Reserve Percentage": for any Interest Period for all LIBOR Loans comprising part of the same borrowing, means the daily average reserve percentage applicable during each day of such LIBOR Loans under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including without limitation any emergency, supplemental or other marginal reserve requirement for a member bank of the Federal Reserve System in New York City) with respect to liabilities or assets consisting of or including Eurocurrency Liabilities (or with respect to any other category of liabilities that includes deposits by reference to which the interest rate on LIBOR Loans is determined) having a term equal to such Interest Period. "Funding Date": shall mean the date designated by Dealer for the making of a Supplemental Inventory Loan hereunder. "Interest Period": means, for each LIBOR Loan the period commencing on the date of such LIBOR Loan or the date of the Conversion of any Prime Rate Loan into a LIBOR Loan, and ending on the last day of the period selected by Dealer pursuant to the provisions below and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Dealer requesting a LIBOR Loan pursuant to the provisions below. The duration of each such Interest Period shall be one, two, three or six months, as Dealer may, upon notice received by DFS not later than 11:00 a.m. (San Francisco, California time) on the third Business Day prior to the first day of such Interest Period, select; provided that: (a) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day; provided that, if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next-preceding Business Day; (b) whenever the first day of any Interest Period occurs on a day of an initial calendar month for which there is no numerically corresponding day in the calendar month that succeeds such initial calendar month by the number of months equal to the number of months in such Interest Period, such Interest Period shall end on the last Business Day of such succeeding calendar month; and (c) no Interest Period may be selected that ends after the term of this Agreement. "Inventory": shall mean all of Dealer's presently owned and hereafter acquired goods which are held for sale or lease. "LIBOR Loans": shall mean Supplemental Inventory Loans bearing interest for Interest Periods at a rate determined by reference to the LIBOR Rate (Reserve Adjusted). "LIBOR Rate": means, for any Interest Period, an interest rate per annum, truncated to the nearest one-thousandth of one percent, for 2 3 deposits in U.S. dollars that appears on page 3750 of the Dow Jones Telerate Service (or any other page that may replace any such page on such service in the judgment of DFS) at 11:00 a.m. (London time) two Business Days before the first day of such Interest Period and for a period equal to such Interest Period. "LIBOR Rate (Reserve Adjusted)": shall mean, for any LIBOR Loan for any Interest Period, the rate per annum obtained by dividing the LIBOR Rate by a percentage equal to 100% minus the Eurocurrency Reserve percentage for such Interest Period. "Prime Rate": for purposes of the Supplemental Inventory Facility only, the rate of interest which Chase Manhattan Bank publicly announces from to time to time as its prime rate or reference rate; provided, however, that for purposes of the Supplemental Inventory Facility only, the interest rate charged to Dealer on Prime Rate Loans will at no time be computed on a Prime Rate of less than seven percent (7%) per annum. The Prime Rate will change and take effect for purposes of the Supplemental Inventory Facility on the day that Chase Manhattan Bank announces any change in its Prime Rate or reference rate. "Prime Rate Loans": shall mean Supplemental Inventory Loans bearing interest at a rate determined by reference to the Prime Rate. "Supplemental Inventory Facility": a credit facility extended pursuant to this Section 29. "Supplemental Inventory Loan": shall mean any advance made to or for the benefit of Dealer pursuant to the Supplemental Inventory Facility, and shall consist of LIBOR Loans and Prime Rate Loans. 29.3 LOAN OPTIONS. Each Supplemental Inventory Loan shall be either a Prime Rate Loan or a LIBOR Loan as shall be selected by Dealer, except as otherwise provided herein. During any period that any default under this Agreement or any event which with notice, the passage of time, or both, would constitute a default, shall occur and be continuing, Dealer shall no longer have the option of electing LIBOR Loans, and all Supplemental Inventory Loans made during such period shall be Prime Rate Loans only; it being understood, however, that nothing herein shall be construed to waive, amend or modify any right or power of DFS hereunder, including, without limitation, all rights to terminate the credit facilities hereunder and declare all Obligations immediately due and payable. No LIBOR Loans shall be made for less than the number of days designated for the Interest Period of any such Supplemental Inventory Loan, and in no event less than 30 days prior to the termination of this Agreement. Each LIBOR Loan shall be in an original principal amount of One Million Dollars ($1,000,000.00), or any whole multiple of One Million Dollars ($1,000,000.00) in excess thereof. All Supplemental Inventory Loans will be funded and repaid in currency of the United States. 29.3.1 BORROWING PROCEDURES. The Dealer shall give DFS written notice (which may be made by facsimile, with the original promptly delivered to DFS), not later than 11:00 a.m., San Francisco, California time, at least three (3) Business Days prior to the Funding Date in the instance of LIBOR Loans, or one (1) Business Day prior to the Funding Date in the instance of Prime Rate Loans. Each notice shall specify (i) the Funding Date, (ii) the aggregate amount of the Loans requested, (iii) whether the Supplemental Inventory Loan shall be a Prime Rate Loan or a LIBOR Loan, and (iv) with respect to LIBOR Loans, the Interest Period with respect thereto (subject to the limitations set forth in the definition of Interest Period). Any notice not specifying the type of Supplemental Inventory Loan shall be deemed a request for a Prime Rate Loan. In 3 4 the case of any LIBOR Loan, failure to deliver a timely notice shall be deemed a request for a Prime Rate Loan. 29.3.2 MATURITY OF LOANS. Each LIBOR Loan shall mature on the last day of the applicable Interest Period, but in no event later than the term of this Agreement. 29.3.3 CONVERSION AND DESIGNATION OF INTEREST PERIODS. (i) Dealer may on any Business Day, upon notice given to DFS not later than 11:00 a.m. (San Francisco, California time) on the third Business Day prior to the date of the proposed Conversion, Convert all or any portion of the Supplemental Inventory Loans; provided that: (1) any conversion of LIBOR Loans into Prime Rate Loans shall be made only on the last day of an Interest Period for such LIBOR Loans; any conversion of Prime Rate Loans into LIBOR Loans, shall be in an amount not less than the minimum amount specified in Section 29.3; (2) each Conversion of less than all Supplemental Inventory Loans comprising part of the same borrowing shall be deemed to be an additional Supplemental Inventory Loan for purposes of Section 29.3; and (3) no Prime Rate Loans may be Converted into LIBOR Loans while a default under this Agreement or any event which with notice, the passage of time, or both, would constitute a default, has occurred and is continuing. Each such notice of Conversion shall, within the restrictions specified above, specify (x) the date of such conversion, (y) the Supplemental Inventory Loans to be Converted and (z) if such conversion is into LIBOR Loans, the initial Interest Period for such Supplemental Inventory Loans. Each notice of Conversion shall be irrevocable and binding on Dealer. (ii) On the date on which the aggregate unpaid principal amount of LIBOR Loans shall be reduced, by payment or prepayment or otherwise, to less than One Million Dollars ($1,000,000.00), such LIBOR Loans shall automatically Convert into Prime Rate Loans. (iii) If Dealer shall fail to select the duration of any Interest Period for any LIBOR Loans in accordance with the provisions contained in the definition of "Interest Period", DFS will forthwith so notify Dealer, whereupon each such LIBOR Loan will automatically on the last day of the then-existing Interest Period therefor Convert into a Prime Rate Loan. 29.3.4 INTEREST; CALCULATION OF CHARGES. (a) Prime Rate Loans. (i) Interest. Dealer hereby agrees to pay interest to DFS, on the Daily Contract Balance (AS defined below) owed under Dealer's Prime Rate Loans at a per annum rate that is equal to the Prime Rate minus twenty five one-hundredths of one percent (0.25%) per annum. Interest on Prime Rate Loans prior to maturity shall be payable monthly and at maturity. 4 5 (ii) Calculation Of Charges. Such interest rate will: (i) be computed based on a 360 day year; (ii) be calculated with respect to each day by multiplying the Daily Rate (as defined below) by the Daily Contract Balance; and (iii) accrue from the date DFS authorizes any Electronic Transfer or otherwise advances a Prime Rate Loan to or for the benefit of Dealer, until DFS receives full payment of the principal debt Dealer owes DFS in good funds in accordance with DFS' payment recognition policy and DFS applies such payment to Dealer's principal debt in accordance with the terms of this Agreement. (iii) Definitions. The "Daily Rate" is the quotient of the applicable annual rate provided herein divided by 360. The "Daily Contract Balance" is the amount of outstanding principal debt which Dealer owes DFS on the Prime Rate Loans at the end of each day (including the amount of all Electronic Transfers authorized) after DFS has credited payments which it has received on the Prime Rate Loans. (b) LIBOR Loans. (i) Interest. The unpaid principal amount of the LIBOR Loans shall bear interest prior to maturity at a rate per annum equal to the LIBOR Rate (Reserve Adjusted) in effect for each Interest Period, plus two percent (2.0%) per annum. Interest on LIBOR Loans prior to maturity shall be payable monthly and at maturity. (ii) Calculation of Charges. Interest on each LIBOR Loan shall be computed on the basis of a year consisting of 360 days and paid for actual days elapsed, calculated as to each Interest Period from and including the first day thereof but excluding the last day thereof. 29.4 SUPPLEMENTAL INVENTORY LOANS. As long as Dealer's credit and financial condition are satisfactory to DFS, DFS will from time to time loan to Dealer, at Dealer's request, such amount as DFS, in its sole discretion, may deem advisable, but in any event not more than (a) the Loan Value (as defined below) of Dealer's Supplemental Inventory (as defined below), minus (b) the amount of Dealer's SPP Deficit (as defined below), if any, under Dealer's scheduled payment inventory floorplan financing program with DFS (the "SPP Program") (a) minus (b) is referred to as the "Supplemental Inventory Available Credit"). As used in this Section, the term "Supplemental Inventory" means Dealer's Inventory (a) which is aged less than one hundred fifty (150) days from the date of invoice; (b) that conforms to the representations and warranties of Sections 4 and 29.7 of this Agreement; (c) that is in Dealer's possession and control and is at all times subject to DFS' duly perfected first priority security interest; and (e) that DFS deems, in its sole discretion, to be acceptable for financing pursuant to this Section. As used in this Section, the term "Loan Value" means the lesser of (1) sixty percent (60%) of the Value (as defined below) of the Supplemental Inventory; and (2) Dealer's maximum Supplemental Inventory Facility from time to time established by DFS. 5 6 As used in this Section, the term "Value" means the sum of (i) the cost to Dealer of Dealer's Supplemental Inventory (taking into account any reduction in such cost due to price protection credits received by Dealer), with respect to all of Dealer's Supplemental Inventory other than Supplemental Inventory being financed by DFS under Dealer's SPP Program, plus (ii) the SPP Surplus (as defined below), if any, with respect to Dealer's Supplemental Inventory which consists of Inventory being financed by DFS under the SPP Program, all as determined in accordance with generally accepted accounting principles consistently applied. Dealer's "SPP Deficit" shall mean the amount, if any, by which Dealer's total current outstanding indebtedness to DFS under the SPP Program as of the date of the Inventory Report (as defined below) exceeds the SPP Inventory Value (as defined below) as determined by, and as of the date of, the Inventory Report. Dealer's "SPP Surplus" shall mean the amount, if any, by which the SPP Inventory Value, as determined by, and as of the date of, the Inventory Report, exceeds Dealer's total current outstanding indebtedness to DFS under the SPP Program as of the date of the Inventory Report. Such SPP Deficit or SPP Surplus, as applicable, will remain in effect for purposes of this Agreement until the preparation and delivery by Dealer to DFS of a new Inventory Report. The term "SPP Inventory Value" is defined herein to mean the cost to Dealer, as determined in accordance with generally accepted accounting principles consistently applied, of Dealer's Inventory financed by DFS under the SPP Program (taking into account any reduction in such cost due to price protection credits received by Dealer), that is aged less than one hundred fifty (150) days from the date of invoice, that is unsold and in Dealer's possession and control as of the date of the Inventory Report and to the extent that DFS has a first priority, fully perfected security interest therein. 29.5 INVENTORY REPORTS. Dealer will deliver to DFS weekly, upon each request for an advance and as otherwise requested by DFS, an inventory report in such detail as DFS may request from time to time, which, among other things, separately specifies the cost of all of Dealer's Inventory financed by DFS under the SPP Program and the cost of all of Dealer's Inventory not being financed under the SPP Program (taking into account any reduction in such cost due to price protection credits received by Dealer), that is unsold and in Dealer's possession and control as of the date of the Inventory Report (the "Inventory Report"). 29.6 PAYMENTS. If at any time the aggregate amount of outstanding Supplemental Inventory Loans exceeds the Supplemental Inventory Available Credit, Dealer will, immediately upon demand, repay an amount of the Supplemental Inventory Loans equal to the difference between (a) such aggregate amount of outstanding Supplemental Inventory Loans and (b) the Supplemental Inventory Available Credit. Furthermore, as an amendment to the terms of Dealer's SPP Program, in the event Dealer's SPP Deficit exceeds at any time (a) the Loan Value of Dealer's Supplemental Inventory, minus (b) the outstanding 6 7 Supplemental Inventory Loans, Dealer will immediately pay to DFS, as a reduction of Dealer's total current outstanding indebtedness to DFS under the SPP Program, the difference between (i) Dealer's SPP Deficit, and (ii) (a) the Loan Value of Dealer's Supplemental Inventory minus (b) Dealer's Outstanding Supplemental Inventory LOANS. 29.7 WARRANTIES, REPRESENTATIONS AND COVENANTS. Dealer warrants and represents to DFS and covenants and agrees with DFS that (except as otherwise specified in this Agreement: (a) Inventory will be at all times subject to DFS' duly perfected first priority security interest; (b) Inventory will be kept only at the following locations: ______________________________________________________ ______________________________; (c) on or before the 10th day of each month and, in any event, immediately upon each demand by DFS therefor, Dealer will execute and deliver to DFS schedules specifying Dealer's cost of Inventory, the selling price thereof and such other matters and information relating to Inventory as DFS may from time to time request: (d) Dealer now keeps and will keep correct and accurate records itemizing and describing the kind, type, quality and quantity of Inventory, Dealer's cost therefor and the selling price thereof, the daily withdrawals therefrom and the additions thereto: (e) Inventory is not and will not be stored with a bailee, repairman, warehouseman or similar party without DFS' prior written consent, and Dealer will, concurrently with delivery to such party, cause any such party to issue and deliver to DFS, in form acceptable to DFS, warehouse receipts, in DFS' name evidencing the storage Of such Inventory, and waivers of warehouseman's liens in favor of DFS; (f) DFS and its agents and representatives may, from time to time upon demand, during Dealer's usual business hours and upon 24 hour advance written notice to dealer and any warehouseman, inspect and examine Inventory and check and test the same as to quality, quantity, Value and condition, and any collection by DFS of any amounts Dealer owes DFS under this Agreement at or during DFS' examination of the Inventory will not relieve Dealer of its continuing obligation to pay its obligations owed to DFS in strict accordance with the terms of this Agreement; (g) Dealer will pay all taxes, rents, business taxes, and the like on the premises where the Inventory is located; and (h) Dealer will not rent, lease, lend, demonstrate, pledge, transfer or secrete any of the Inventory or use any of the Inventory for any purpose other than exhibition and sale to buyers in the ordinary course of business, without DFS' prior written consent. 29.8 REVISIONS. Dealer agrees that the percentage of Value advanced, the acceptability and Value of Inventory and the period during which such advances are to remain outstanding are and will be entirely in DFS' sole discretion and that DFS has the right at any time to revise any limit placed by DFS on the amount of such advances or on the valuation of Inventory or DFS may, in its sole discretion, refuse to make further advances. If Inventory remains in stock for a period of time which DFS in its sole judgment deems excessive, such Inventory may, at DFS' option, be considered to be of no value for the purpose of loans or advances although the same remains in stock and DFS shall retain its security interest therein according to the terms and provisions of this Agreement. 7 8 29.9 (a) INCREASED COSTS. If, as a result of any law, regulation, treaty OR directive, or any change therein, or in the interpretation or application thereof or compliance by DFS with any request or directive (whether or not having the force of law) from any court or governmental authority, agency or instrumentality: (i) the basis of taxation of payments to DFS (for purposes of this Section 29.9, "DFS" shall also refer to any affiliates of DFS engaged in the funding of the lending obligations hereunder) of the principal of or interest on any LIBOR Loan (other than taxes imposed on the overall net income of DFS by the jurisdiction in which DFS has its principal office) is changed; (ii) any reserve, special deposit or similar requirements against assets of, deposits with or for the account of, or credit extended by, DFS are imposed, modified or deemed applicable; or (iii) any other condition affecting this Agreement or the LIBOR Loans is imposed on DFS or the interbank eurodollar market; and DFS determines that, by reason thereof, the cost to DFS of making or maintaining any of the LIBOR Loans is increased, or the amount of any sum receivable by DFS hereunder in respect of any of the LIBOR Loans is reduced; then, Dealer shall pay to DFS upon demand (which demand shall be accompanied by a statement setting forth the basis for the calculation thereof but only to the extent not theretofore provided to Dealer) such additional amount or amounts as will compensate DFS for such additional cost or reduction (provided such amount has not been compensated for in the calculation of the Eurocurrency Reserve Percentage). Determinations by DFS for purposes of this Section of the additional amounts required to compensate DFS in respect of the foregoing shall be conclusive, absent manifest error. (b) EURODOLLAR DEPOSITS UNAVAILABLE OR INTEREST RATE UNASCERTAINABLE. If Dealer has any LIBOR Loan outstanding, or has notified DFS of the intention to borrow a LIBOR Loan as provided herein, then in the event that prior to any Interest Period DFS shall have determined (which determination shall be conclusive and binding on the parties hereto) that deposits of the necessary amount for that relevant Interest Period are not available to DFS in the interbank eurodollar market or that, by reason of circumstances affecting such market, adequate and reasonable means do not exist for ascertaining the LIBOR Rate applicable to such period or term, as the case may be, DFS shall promptly give notice of such determination to Dealer, and any notice of new LIBOR Loans previously given by Dealer and not yet borrowed or Converted shall be deemed a notice to make a Prime Rate Loan to the extent of DFS' proposed LIBOR Loan. (c) CHANGES IN LAW RENDERING LIBOR LOANS UNLAWFUL. If at any time due to any new law, treaty or regulation, or any change of any existing law, treaty or regulation, or any interpretation thereof by any governmental or other regulatory authority charged with the administration thereof, or for any other reason arising subsequent to the date hereof, it shall become unlawful for DFS to fund any LIBOR Loan which it is committed to make hereunder, the obligation of DFS to provide LIBOR Loans shall, upon the 8 9 happening of such event, forthwith be suspended for the duration of such illegality. If any such change shall make it unlawful to continue LIBOR Loans previously made by it hereunder, DFS shall, upon the happening of such event, notify Dealer thereof in writing stating the reasons therefor, and Dealer shall, if required by such law, regulation or interpretation, on such date as shall be specified in such notice, either Convert such unlawful LIBOR Loans to Prime Rate Loans, or prepay all such LIBOR Loans, without any penalty or premium whatsoever (except as provided in Section 29.9(e), to DFS in full. Any prepayment made pursuant to this Section 29.9(c) shall be deemed to reduce the aggregate credit available under the Supplemental Inventory Facility by the principal amount so prepaid. Any such prepayment shall be subject to the provisions of Section 29.9(e). (d) CAPITAL ADEQUACY. If DFS shall determine at any time that the adoption of any law, rule, guideline or regulation regarding capital adequacy, or compliance with any law, rule, guideline or regulation regarding capital adequacy, or any change therein or in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by DFS with any request or directive or compliance with any law, rule, guideline or regulation regarding capital adequacy (whether or not having the force of law) from any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on DFS' capital as a consequence of its obligations hereunder to a level below that which DFS could have achieved but for such adoption, change or compliance (taking into consideration DFS' policies with respect to capital adequacy) by an amount deemed by DFS to be material, then Dealer shall pay to DFS upon demand such amount or amounts, in addition to the amounts payable under the other provisions of this Agreement, as will compensate DFS for such reduction. Any such demand by DFS hereunder shall be in writing, and shall set forth the reasons for such demand and copies of all documentation reasonably relevant in support thereof. Determinations by DFS for purposes of this Section 29.9(d) of the additional amount or amounts required to compensate DFS in respect of the foregoing shall be conclusive in the absence of manifest error. In determining such amount or amounts, DFS may use any reasonable averaging and attribution methods. (e) INDEMNITY; PREPAYMENT FEE. (i) Dealer will indemnify DFS against any loss or expense which DFS may sustain or incur, including without limitation, any loss or expense sustained or incurred in obtaining, liquidating or employing deposits or other funds acquired to effect, fund or maintain a Supplemental Inventory Loan (a) as a consequence of any failure by Dealer to make any payment when due of any amount due hereunder in connection with a LIBOR Loan, (b) due to any failure of Dealer to borrow on a date specified therefor in a notice thereof, or (c) due to any payment or prepayment of any LIBOR Loan on a date other than the last day of the Interest Period for such Loan. (ii) In the event Dealer prepays any LIBOR Loan for any reason, in addition to paying any amounts for which Dealer may be obligated under Section 29-9(eHi) above, and in addition to paying all interest owed on such LIBOR Loan, Dealer agrees to pay DFS a prepayment fee in an amount equal to the difference, if any, between (a) the interest which would have been payable by Dealer to DFS if such LIBOR Loan had been a Prime Rate Loan made by DFS on the same day DFS made such LIBOR Loan and repaid on the date of prepayment, 9 10 minus (b) the interest payable by Dealer on such LIBOR Loan through the date of prepayment. Such prepayment fee will be due and payable in accordance with DFS' billing statement. (f) DISCRETION AS TO MANNER OF FUNDING. Notwithstanding any provision of the Supplemental Inventory Facility to the contrary, DFS shall be entitled to fund and maintain its funding of all or any part of its LIBOR Loans in any manner it elects, it being understood, however, that for the purposes of the Supplemental Inventory Facility all determinations hereunder shall be made as if DFS had actually funded and maintained each LIBOR Loan through the purchase of deposits having a maturity corresponding to the maturity of each LIBOR Loan and bearing an interest rate equal to the LIBOR Rate. DFS may, if it so elects, fulfill any commitment to make LIBOR Loans by causing a foreign affiliate to make or continue such LIBOR Loans, provided, however, that in such event such Supplemental Inventory Loans shall be deemed for the purposes of the Supplemental Inventory Facility to have been made by DFS, and the obligation of the Dealer to repay such Supplemental Inventory Loans shall nevertheless be to DFS and shall be deemed held by DFS, to the extent of such Supplemental Inventory Loans, for the account of such branch or affiliate. 29.10 CONTINUING REQUIREMENTS. Advances under the Supplemental Inventory Facility will be made by DFS, at Dealer's direction, by paper check or Electronic Transfer. If Dealer does not request advances be made in a specific method of transfer, DFS may determine from time to time in its sole discretion what method of transfer to use. 29.11 CERTAIN CHARGES. Dealer will pay DFS' fees for transfers of funds to or from the Dealer. DFS may, from time to time, announce in writing to Dealer its policies and procedures regarding its administration of this facility, including, without limitation, DFS' fees for transfers of funds to or from Dealer, including Electronic Transfers; any subsequent use by Dealer of this facility following any such announcement shall constitute Dealer's acceptance of such revised policies and procedures. 29.12 DEFAULT INTEREST RATE. In the event of a default under this Agreement and Dealer's failure to cure same within the applicable cure period, if any, DFS may without prior demand, raise the rate of interest accruing on the disbursed unpaid principal balance of any Supplemental Inventory Loan by three percentage points (3%) above the rate of interest otherwise applicable, whether or not DFS elects to accelerate the unpaid principal balances as a result of a default. 29.13 BILLING STATEMENT. In accordance with and pursuant and subject to the terms of Section 11 of this Agreement, DFS will send Dealer a monthly billing statement identifying all interest, fees and other charges due on the Supplemental Inventory Facility. 29.14 INCORPORATION OF OTHER TERMS. To the extent consistent with the terms of the Supplemental Inventory Facility, the other terms of this Agreement shall apply to the Supplemental Inventory Facility. Except as expressly stated above, the terms of the Supplemental Inventory Facility will not apply to Dealer's SPP Program. 10 11 4. The following paragraph is incorporated into the Agreement as if fully set forth therein: "Dealer will at all times maintain: (a) a Tangible Net Worth and Subordinated Debt in the combined amount of not less than Thirty-Five Million Dollars ($35,000,000.00); (b) a ratio of Debt minus Subordinated Debt to Tangible Net Worth and Subordinated Debt of not more than three and one half to one (3.5:1); and (c) Working Capital of not less than Thirty Million Dollars ($30,000,000.00). For purposes of this paragraph: (i) "Tangible Net Worth" means the book value of Dealer's assets less liabilities, excluding from such assets all Intangibles; (ii) "Intangibles" means and includes general intangibles (as that term is defined in the Uniform Commercial Code); accounts receivable and advances due from officers, directors, employees, stockholders and affiliates; leasehold improvements net of depreciation; licenses; good will; prepaid expenses; escrow deposits; covenants not to compete; the excess of cost over book value of acquired assets; franchise fees; organizational costs; finance reserves held for recourse obligations; capitalized research and development costs; and such other similar items as DFS may from time to time determine in DFS' sole discretion; (iii) "Debt" means all of Dealer's liabilities and indebtedness for borrowed money of any kind and nature whatsoever, whether direct or indirect, absolute or contingent, and including obligations under capitalized leases, guaranties, or with respect to which Dealer has pledged assets to secure performance, whether or not direct recourse liability has been assumed by Dealer; (iv) "Subordinated Debt" means all of Dealer's Debt which is subordinated to the payment of Dealer's liabilities to DFS by an agreement in form and substance satisfactory to DFS; (v) "Working Capital" means Current Tangible Assets less current liabilities; and (v) "Current Tangible Assets" means Dealer's current assets less, to the extent otherwise included herein, all Intangibles. The foregoing terms shall be determined in accordance with generally accepted accounting principles consistently applied, and, if applicable, on a consolidated basis." 5. In addition to the events of default set forth in the Agreement, Dealer will be in default to DFS under the Agreement upon the occurrence of a default by Dealer to U.S. Bank of Washington, N.A. (or any successor bank or lending institution to the loan facility currently in effect between Dealer and U.S. Bank of Washington, N.A.), and the expiration of any applicable cure period granted by such bank to Dealer. Dealer will not be entitled to any cure period under the Agreement with respect to any such default. 6. Attached hereto as Exhibit A is a list of all of Dealer's subsidiaries and affiliates, their respective principal places of business and states or registries of incorporation. Upon the creation of any NEW subsidiaries or affiliates, Dealer will promptly provide DFS with a revised Exhibit A which reflects such new subsidiaries and affiliates. 11 12 All other terms and provision of the Agreement, to the extent consistent with the foregoing, are hereby ratified and will remain unchanged and in full force and effect. IN WITNESS WHEREOF, Dealer and DFS have both read this Amendment to the Agreement for Wholesale Financing, understand all the terms and provisions hereof and agree to be bound thereby and subject thereto as of this 23rd day of April, 1997. MULTIPLE ZONES INTERNATIONAL, INC. Attest: By: [SIG] [SIG] ------------------------------- - -------------------------------- Title: SVP Finance, CFO (Assistant) Secretary --------------------------- DEUTSCHE FINANCIAL SERVICES CORPORATION By: [SIG] ------------------------------- Title: Regional Vice President --------------------------- 12 13 SECRETARY'S CERTIFICATE OF RESOLUTION I certify that I am the Secretary or Assistant Secretary of the corporation named below, and that the following completely and accurately sets forth certain resolutions of the Board of Directors of the corporation adopted at a special meeting thereof held on due notice (and with shareholder approval, if required by law), at which meeting there was present a quorum authorized to transact the business described below, and that the proceedings of the meeting were in accordance with the certificate of incorporation, charter and by-laws of the corporation, and that they have not been revoked, annulled or amended in any manner whatsoever. Upon motion duly made and seconded, the following resolution was unanimously adopted after full discussion: "RESOLVED, That the several officers, directors, and agents of this corporation, or any one or more of them, are hereby authorized and empowered on behalf of this corporation: to obtain financing from Deutsche Financial Services Corporation ("DFS") in such amounts and on such terms as such officers, directors or agents deem proper; to enter into financing, security, pledge and other agreements with DFS relating to the terms upon which such financing may be obtained and security and/or other credit support is to be furnished by this corporation therefor; from time to time to supplement or amend any such agreements; execute and deliver any and all assignments, loan requests and schedules; and from time to time to pledge, assign, mortgage, grant security interests, and otherwise transfer, to DFS as collateral security for any obligations of this corporation to DFS, whenever and however arising, any assets of this corporation, whether now owned or hereafter acquired; the Board of Directors hereby ratifying, approving and confirming all that any of said officers, directors or agents have done or may do with respect to the foregoing." I do further certify that the following are the names and specimen signatures of the officers and agents of said corporation so empowered and authorized, namely: President: ------------------------ ------------------------------- (Print Name) (Signature) Vice-President: Peter J. Biere [SIG] ------------------------ ------------------------------- (Print Name) (Signature) Secretary: Robert L. Hines, Jr. [SIG] ------------------------ ------------------------------- (Print Name) (Signature) Agent: Paul Kerwin [SIG] ------------------------ ------------------------------- (Print Name) (Signature) Agent: Barbara Fastiggi [SIG] ------------------------ ------------------------------- (Print Name) (Signature) IN WITNESS WHEREOF, I have executed and affixed the seal of the corporation on the date stated below. Dated: 4/23/97 ,1997 [SIG] ------------------- ------------------------------- (Assistant) Secretary MULTIPLE ZONES INTERNATIONAL, INC. (SEAL) 13 14 EXHIBIT A SUBSIDIARIES AND AFFILIATES [To be provided by Dealer.] 14 EX-10.25 6 BUSINESS LOAN AGREEMENT 1 [U.S.BANK LOGO] LOAN AGREEMENT PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS $30,000,000.00 04-24-1997 06-30-1998 391-208 365 6057628480 39159 TL References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. BORROWER: MULTIPLE ZONES INTERNATIONAL, INC. LENDER: U.S. BANK OF WASHINGTON, 707 SOUTH GRADY WAY NATIONAL ASSOCIATION RENTON, WA 98055 EKC CORPORATE BANKING 10800 NE 8TH STREET, SUITE 1000 BELLEVUE, WA 98004 ====================================================================================================================================
THIS LOAN AGREEMENT BETWEEN MULTIPLE ZONES INTERNATIONAL, INC. ("BORROWER") AND U.S. BANK OF WASHINGTON, NATIONAL ASSOCIATION ("LENDER") IS MADE AND EXECUTED ON THE FOLLOWING TERMS AND CONDITIONS. BORROWER HAS RECEIVED PRIOR COMMERCIAL LOANS FROM LENDER OR HAS APPLIED TO LENDER FOR A COMMERCIAL LOAN OR LOANS AND OTHER FINANCIAL ACCOMMODATIONS, INCLUDING THOSE WHICH MAY BE DESCRIBED ON ANY EXHIBIT OR SCHEDULE ATTACHED TO THIS AGREEMENT. ALL SUCH LOANS AND FINANCIAL ACCOMMODATIONS, TOGETHER WITH ALL FUTURE LOANS AND FINANCIAL ACCOMMODATIONS FROM LENDER TO BORROWER, ARE REFERRED TO IN THIS AGREEMENT INDIVIDUALLY AS THE "LOAN" AND COLLECTIVELY AS THE "LOANS." BORROWER UNDERSTANDS AND AGREES THAT: (A) IN GRANTING, RENEWING, OR EXTENDING ANY LOAN, LENDER IS RELYING UPON BORROWER'S REPRESENTATIONS, WARRANTIES, AND AGREEMENTS, AS SET FORTH IN THIS AGREEMENT; (B) THE GRANTING, RENEWING, OR EXTENDING OF ANY LOAN BY LENDER AT ALL TIMES SHALL BE SUBJECT TO LENDER'S SOLE JUDGMENT AND DISCRETION; AND (C) ALL SUCH LOANS SHALL BE AND SHALL REMAIN SUBJECT TO THE FOLLOWING TERMS AND CONDITIONS OF THIS AGREEMENT. TERM. This Agrement shall be effective as of APRIL 24, 1997, and shall continue thereafter until all Indebtedness of Borrower to Lender has been performed in full and the parties terminate this Agreement in writing. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. AGREEMENT. The word "Agreement" means this Loan Agreement, as this Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Loan Agreement from time to time. ACCOUNT. The word "Account" means a trade account, account receivable, or other right to payment for goods sold or services rendered owing to Borrower (or to a third party grantor acceptable to Lender). ACCOUNT DEBTOR. The words "Account Debtor" mean the person or entity obligated upon an Account. ADVANCE. The word "Advance" means a disbursement of Loan funds under this Agreement. BORROWER. The word "Borrower" means MULTIPLE ZONES INTERNATIONAL, INC.. The word "Borrower" also includes, as applicable, all subsidiaries and affiliates of Borrower as provided below in the paragraph titled "Subsidiaries and Affiliates." BORROWING BASE. The words "Borrowing Base" mean, as determined by Lender from time to time, the lesser of (a) $30,000,000.00; or (b) 80.000% of the aggregate amount of Eligible Accounts. BUSINESS DAY. The words "Business Day" mean a day on which commercial banks are open for business in the State of Washington. CERCLA. The word "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended. CASH FLOW. The words "Cash Flow" mean net income after taxes, and exclusive of extraordinary gains and income, plus depreciation and amortization. COLLATERAL. The word "Collateral" means and includes without limitation all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. The word "Collateral" includes without limitation all collateral described below in the section titled "COLLATERAL." DEBT. The word "Debt" means all of Borrower's liabilities excluding Subordinated Debt. ELIGIBLE ACCOUNTS. The words "Eligible Accounts" mean, at any time, all of Borrower's Accounts which contain selling terms and conditions acceptable to Lender. The net amount of any Eligible Account against which Borrower may borrow shall exclude all returns, discounts, credits, and offsets of any nature. Unless otherwise agreed to by Lender in writing, Eligible Accounts do not include: (a) Accounts with respect to which the Account Debtor is an officer, an employee or agent of Borrower. (b)Accounts with respect to which the Account Debtor is a subsidiary of, or affiliated with or related to Borrower or its shareholders, officers, or directors. (c) Accounts with respect to which goods are placed on consignment, guaranteed sale, or other terms by reason of which the payment by the Account Debtor may be conditional. (d) Accounts with respect to which the Account Debtor is not a resident of the United States, except to the extent such Accounts are supported by Insurance, bonds or other assurances satisfactory to Lender. (e) Accounts with respect to which Borrower is or may become liable to the Account Debtor for goods sold or services rendered by the Account Debtor to Borrower. (f) Accounts which are subject to dispute, counterclaim, or setoff. (g) Accounts with respect to which the Goods have not been shipped or delivered, or the services have not been rendered, to the Account Debtor. (h) Accounts with respect to which Lender, in its sole discretion, deems the creditworthiness or financial condition of the Account Debtor to be unsatisfactory. (i) Accounts of any Account Debtor who has filed or has had filed against it a petition in bankruptcy or an application for relief, under any provision of any state or federal bankruptcy, insolvency, or debtor-in-relief acts; or who has had appointed a trustee, custodian, or receiver for the assets of such Account Debtor; or who has made an assignment for the benefit of creditors or has become insolvent or fails generally to pay its debts (including its payrolls) as such debts become due. (j) Accounts with respect to which the Account Debtor is the United States government or any department or agency of the United States. (k) Accounts which have not been paid in full within 60 DAYS PAST DUE from the invoice date. The entire balance of any Account of any single Account debtor will be ineligible whenever the portion of the Account which has not been paid within 60 DAYS PAST DUE from the invoice date is in excess of 25.000% of the total amount outstanding on the Account. (l) DATINGS, PROGRESS BILLINGS, RETAINAGES, CASH SALES, COD, SERVICES CHARGES. ERISA. The word "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. EVENT OF DEFAULT. The words "Event of Default" mean and include without limitation any of the Events of Default set forth below in the section titled "EVENTS OF DEFAULT." EXPIRATION DATE. THE WORDS "EXPIRATION DATE" MEAN THE DATE OF TERMINATION OF LENDER'S COMMITMENT TO LEND UNDER THIS AGREEMENT. GRANTOR. The word "Grantor" means and includes without limitation each and all of the persons or entities granting a Security Interest in any Collateral for the Indebtedness, including without limitation all Borrowers granting such a Security Interest. GUARANTOR. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with any Indebtedness. INDEBTEDNESS. The word "Indebtedness" means and includes without limitation all Loans, together with all other obligations, debts and liabilities of Borrower to Lender, or any one or more of them, as well as all claims by Lender against Borrower, or any one or more of them; whether now or hereafter existing, voluntary or involuntary, due or not due, absolute or contingent, liquidated or unliquidated; whether Borrower may be liable individually or jointly with others; whether Borrower may be obligated as a guarantor, surety, or otherwise; whether recovery upon such 2 04-24-1997 LOAN AGREEMENT Page 2 Loan No 391-208 (Continued) ================================================================================ Indebtedness may be or hereafter may become barred by any statute of limitations; and whether such Indebtedness may be or hereafter may become otherwise unenforceable. LENDER. The word "Lender" means U.S. BANK OF WASHINGTON, NATIONAL ASSOCIATION, its successors and assigns. LINE OF CREDIT. The words "Line of Credit" mean the credit facility described in the Section titled "LINE OF CREDIT" below. LIQUID ASSETS. The words "Liquid Assets" mean Borrower's cash on hand plus Borrower's readily marketable securities. LOAN. The word "Loan" or "Loans" means and includes without limitation any and all commercial loans and financial accommodations from Lender to Borrower, whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time. NOTE. The word "Note" means and includes without limitation Borrower's promissory note or notes, if any, evidencing Borrower's Loan obligations in favor of Lender, as well as any substitute, replacement or refinancing note or notes therefor. PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and security interests securing Indebtedness owed by Borrower to Lender; (b) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (c) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (d) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure Indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled "Indebtedness and Liens"; (e) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (f) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower's assets. RELATED DOCUMENTS. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. SECURITY AGREEMENT. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. SECURITY INTEREST. The words "Security Interest" mean and include without limitation any type of collateral security, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. SARA. The words "SARA" means the Superfund Amendments and Reauthorization Act of 1986 as now or hereafter amended. SUBORDINATED DEBT. The words "Subordinated Debt" mean indebtedness and liabilities of Borrower which have been subordinated by written agreement to indebtedness owed by Borrower to Lender in form and substance acceptable to Lender. TANGIBLE NET WORTH. The words "Tangible Net Worth" mean Borrower's total assets excluding all intangible assets (i.e., goodwill, trademarks, patents, copyrights, organizational expenses, and similar intangible items, but including leaseholds and leasehold improvements) less total Debt. WORKING CAPITAL. The words "Working Capital" mean Borrower's current assets, excluding prepaid expenses, less Borrower's current liabilities. LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time from the date of this Agreement to the Expiration Date, provided the aggregate amount of such Advances outstanding at any time does not exceed the Borrowing Base. Within the foregoing limits, Borrower may borrow, partially or wholly prepay, and reborrow under this Agreement as follows. CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make any Advance to or for the account of Borrower under this Agreement is subject to the following conditions precedent, with all documents, instruments, opinions, reports, and other items required under this Agreement to be in form and substance satisfactory to Lender: (a) Lender shall have received evidence that this Agreement and all Related Documents have been duly authorized, executed, and delivered by Borrower to Lender. (b) Lender shall have received such opinions of counsel, supplemental opinions, and documents as Lender may request. (c) The security interests in the Collateral shall have been duly authorized, created, and perfected with first lien priority and shall be in full force and effect. (d) All guaranties required by Lender for the Line of Credit shall have been executed by each Guarantor, delivered to Lender, and be in full force and effect. (e) Lender, at its option and for its sole benefit, shall have conducted an audit of Borrower's Accounts, books, records, and operations, and Lender shall be satisfied as to their condition. (f) Borrower shall have paid to Lender all fees, costs, and expenses specified in this Agreement and the Related Documents and are then due and payable. (g) There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement, and Borrower shall have delivered to Lender the compliance certificate called for in the paragraph below titled "Compliance Certificate." MAKING LOAN ADVANCES. Advances under the Line of Credit may be requested either orally or in writing by authorized persons. Lender may, but need not, require that all oral requests be confirmed in writing. Each Advance shall be conclusively deemed to have been made at the request of and for the benefit of Borrower (a) when credited to any deposit account of Borrower maintained with Lender or (b) when advanced in accordance with the instructions of an authorized person. Lender, at its option, may set a cutoff time, after which all requests for Advances will be treated as having been requested on the next succeeding Business Day. MANDATORY LOAN REPAYMENTS. If at any time the aggregate principal amount of the outstanding Advances shall exceed the applicable Borrowing Base, Borrower, immediately upon written or oral notice from Lender, shall pay to Lender an amount equal to the difference between the outstanding principal balance of the Advances and the Borrowing Base. On the Expiration Date, Borrower shall pay to Lender in full the aggregate unpaid principal amount of all Advances then outstanding and all accrued unpaid interest, together with all other applicable fees, costs and charges, if any, not yet paid. LOAN ACCOUNT. Lender shall maintain on its books a record of account in which Lender shall make entries for each Advance and such other debits and credits as shall be appropriate in connection with the credit facility. Lender shall provide Borrower with periodic statements of Borrower's account, which statements shall be considered to be correct and conclusively binding on Borrower unless Borrower notifies Lender to the contrary within thirty (30)days after Borrower's receipt of any such statement which Borrower deems to be incorrect. COLLATERAL. To secure payment of the Line of Credit and performance of all other Loans, obligations and duties owed by Borrower to Lender, Borrower (and others, if required) shall grant to Lender Security Interests in such property and assets as Lender may require (the "Collateral"), including without limitation Borrower's present and future Accounts and general intangibles. Lender's Security Interests in the Collateral shall be continuing liens and shall include the proceeds and products of the Collateral, including without limitation the proceeds of any insurance. With respect to the Collateral, Borrower agrees and represents and warrants to Lender. PERFECTION OF SECURITY INTERESTS. Borrower agrees to execute such financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's Security Interests in the Collateral. Upon request of Lender, Borrower will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Borrower will note Lender's Interest upon any and all chattel paper if not delivered to Lender for possession by Lender. Contemporaneous with the execution of this Agreement, Borrower will execute one or more UCC financing statements and any similar statements as may be required by applicable law, and will file such financing statements and all such similar statements in the appropriate location or locations. Borrower hereby appoints Lender as its irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue any Security Interest. Lender may at any time, and without further authorization from Borrower, file a carbon, photograph, facsimile, or other reproduction of any financing statement for use as a financing statement. Borrower will reimburse Lender for all expenses for the perfection, termination, and the continuation of the perfection of Lender's security interest in the Collateral. Borrower promptly will notify Lender of any change in Borrower's name including any change to the assumed business names of Borrower. Borrower also promptly will notify Lender of any change in Borrower's Social Security Number or Employer Identification Number. Borrower further agrees to notify Lender in writing prior to any change in address or location of Borrower's principal governance office or should Borrower merge or consolidate with any other entity. COLLATERAL RECORDS. Borrower does now, and at all times hereafter shall, keep correct and accurate records of the Collateral, all of which records shall be available to Lender or Lender's representative upon demand for inspection and copying at any reasonable time. With respect to the Accounts, Borrower agrees to keep and maintain such records as Lender may require, including without limitation information concerning Eligible Accounts and Account balances and agings 3 04-24-1997 LOAN AGREEMENT Page 3 Loan No 391-208 (Continued) ============================================================================== COLLATERAL SCHEDULES. Concurrently with the execution and delivery of this Agreement, Borrower shall execute and deliver to Lender a schedule of Accounts and Eligible Accounts, in form and substance satisfactory to the Lender. Thereafter Borrower shall execute and deliver to Lender such supplemental schedules of Eligible Accounts and such other matters and information relating to Borrower's Accounts as Lender may request. Supplemental schedules shall be delivered according to the following schedule: BORROWER AGREES TO SUBMIT TO LENDER MONTHLY ACCOUNTS PAYABLE AGING AND ACCOUNTS RECEIVABLE AGING WITHIN TWENTY (20) DAYS AFTER THE END OF EACH MONTH. THE FORMAT OF AGING WILL BE SIXTY (60) DAYS PAST DUE FROM INVOICE DATE. REPRESENTATIONS AND WARRANTIES CONCERNING ACCOUNTS. With respect to the Accounts, Borrower represents and warrants to Lender: (a) Each Account represented by Borrower to be an Eligible Account for purposes of this Agreement conforms to the requirements of the definition of an Eligible Account; (b) All Account information listed on schedules delivered to Lender will be true and correct, subject to immaterial variance; and (c) Lender, its assigns, or agents shall have the right at any time and at Borrower's expense to inspect, examine, and audit Borrower's records and to confirm with Account Debtors the accuracy of such Accounts. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of Loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists: ORGANIZATION. Borrower is a corporation which is duly organized, validly existing, and in good standing under the laws of the state of Borrower's incorporation and is validly existing and in good standing in all states in which Borrower is doing business. Borrower has the full power and authority to own its properties and to transact the businesses in which it is presently engaged or presently proposes to engage. Borrower also is duly qualified as a foreign corporation and is in good standing in all states in which the failure to so qualify would have a material adverse effect on its businesses or financial condition. AUTHORIZATION. The execution, delivery, and performance of this Agreement and all Related Documents by Borrower, to the extent to be executed, delivered or performed by Borrower, have been duly authorized by all necessary action by Borrower; do not require the consent or approval of any other person, regulatory authority or governmental body; and do not conflict with, result in a violation of, or constitute a default under (a) any provision of its articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (b) any law, governmental regulation, court decree, or order applicable to Borrower. FINANCIAL INFORMATION. Each financial statement of Borrower supplied to Lender truly and completely disclosed Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements. LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement required hereunder to be given by Borrower when delivered will constitute, legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. PROPERTIES. Except for Permitted Liens, Borrower owns and has good title to all of Borrower's properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used, or filed a financing statement under, any other name for at least the last five (5) years. HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous substance," "disposal," "release," and "threatened release," as used in this Agreement, shall have the same meanings as set forth in the "CERCLA," "SARA," the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other applicable state or Federal laws, rules, or regulations adopted pursuant to any of the foregoing. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (a) During the period of Borrower's ownership of the properties, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any hazardous waste or substance by any person on, under, about or from any of the properties. (b) Borrower has no knowledge of, or reason to believe that there has been (i) any use, generation, manufacture, storage, treatment, disposal, release, or threatened release of any hazardous waste or substance on, under, about or from the properties by any prior owners or occupants of any of the properties, or (ii) any actual or threatened litigation or claims of any kind by any person relating to such matters. (c) Neither Borrower nor any tenant, contractor, agent or other authorized use of any of the properties shall use, generate, manufacture, store, treat, dispose of, or release any hazardous waste or substance on, under, about or from any of the properties; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation those laws, regulations and ordinances described above. Borrower authorizes Lender and its agents to enter upon the properties to make such inspections and tests as Lender may deem appropriate to determine compliance of the properties with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower's expense and for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower's due diligence in investigating the properties for hazardous waste and hazardous substances. Borrower hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release occurring prior to Borrower's ownership or interest in the properties, whether or not the same was or should have been known to Borrower. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the indebtedness and the termination or expiration of this Agreement and shall not be affected by Lender's acquisition of any interest in any of the properties, whether by foreclosure or otherwise. LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. TAXES. To the best of Borrower's knowledge, all tax returns and reports of Borrower that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered in to or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral. BINDING EFFECT. This Agreement, the Note, all Security Agreements directly or indirectly securing repayment of Borrower's Loan and Note and all of the Related Documents are binding upon Borrower as well as upon Borrower's successors, representatives and assigns, and are legally enforceable in accordance with their respective terms. COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for business or commercial related purposes. EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower may have any liability complies in all material respects with all applicable requirements of law and regulations, and (i) no Reportable Event nor Prohibited Transaction (as defined in ERISA) has occurred with respect to any such plan, (ii) Borrower has not withdrawn from any such plan or initiated steps to do so, (iii) no steps have been taken to terminate any such plan, (iv) there are no unfunded liabilities other than those previously disclosed to Lender in writing. LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business, or Borrower's Chief executive office, if Borrower has more than one place of business, is located at 707 SOUTH GRADY WAY, RENTON, WA 98055. Unless Borrower has designated otherwise in writing this location is also the office or offices where Borrower keeps its records concerning the Collateral. INFORMATION. All information heretofore or contemporaneously herewith furnished by Borrower to Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all information hereafter furnished by or on behalf of Borrower to Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified; and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and agrees that Lender, without independent investigation, is relying upon the above representations and warranties in extending Loan Advances to Borrower. Borrower further agrees that the foregoing representations and warranties shall be continuing in nature and shall remain in full force and effect until such time as Borrower's Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will: LITIGATION. Promptly inform Lender in writing of (a) all material adverse changes in Borrower's financial condition, and (b) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor. FINANCIAL RECORDS. Maintain its books and records in accordance with generally accepted accounting principles, applied on a consistent basis, and permit Lender to examine and audit Borrower's books and records at all reasonable times. 4 04-24-1997 LOAN AGREEMENT PAGE 4 LOAN NO. 391-208 (CONTINUED) FINANCIAL STATEMENTS. Furnish Lender with, as soon as available, but in no event later than one hundred twenty (120) days after the end of each fiscal year, Borrower's balance sheet and income statement for the year ended, audited by a certified public accountant satisfactory to Lender, and, as soon as available, but in no event later than forty five (45) days after the end of each fiscal quarter, Borrower's balance sheet and profit and loss statement for the period ended, prepared and certified as correct to the best knowledge and belief by Borrower's chief financial officer or other officer or person acceptable to Lender. All financial reports required to be provided under this Agreement shall be prepared in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. ADDITIONAL INFORMATION. Furnish such additional information and statements, lists of assets and liabilities, agings of receivables and payables, inventory schedules, budgets, forecasts, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may request from time to time. FINANCIAL COVENANTS AND RATIOS. Comply with the following covenants and ratios: NET WORTH RATIO. Maintain a ratio of Total Liabilities to Tangible Net Worth of less than 2.50 to 1.00. The following provisions shall apply for purpose of determining compliance with the foregoing financial covenants and ratios: BORROWER UNDERSTANDS AND AGREES THAT ALL COVENANTS AND RATIOS WILL BE MONITORED QUARTERLY. Except as provided above, all computations made to determine compliance with the requirements contained in this paragraph shall be made in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. INSURANCE. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies reasonably acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days' prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such loss payable or other endorsements as Lender may require. INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy (d) the properties insured; (e) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (f) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower. OTHER AGREEMENTS. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business operations, unless specifically consented to the contrary by Lender in writing. TAXES, CHARGES AND LIENS. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income, or profits. Provided however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claim so long as (a) the legality of the same shall be contested in good faith by appropriate proceedings, and (b) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien, or claim in accordance with generally accepted accounting practices. Borrower, upon demand of Lender, will furnish to Lender evidence of payment of the assessments, taxes, charges, levies, liens and claims and will authorize the appropriate governmental official to deliver to Lender at any time a written statement of any assessments, taxes, charges, levies, liens and claims against Borrower's properties, income, or profits. PERFORMANCE. Perform and comply with all terms, conditions, and provisions set forth in this Agreement and in the Related Documents in a timely manner, and promptly notify Lender if Borrower learns of the occurrence of any event which constitutes an Event of Default under this Agreement or under any of the Related Documents. OPERATIONS. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner and in compliance with all applicable federal, state and municipal laws, ordinances, rules and regulations respecting its properties, charters, businesses and operations, including without limitation, compliance with the Americans With Disabilities Act and with all minimum funding standards and other requirements of ERISA and other laws applicable to Borrower's employee benefit plans. INSPECTION. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender NOT REQUIRED and at the time of each disbursement of Loan proceeds with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement. ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects with all environmental protection federal, state and local laws, statutes, regulations and ordinances; not cause or permit to exist, as a result of an intentional or unintentional action or omission on its part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law, rule, regulation or guideline, or the interpretation or application of any thereof by any court or administrative or governmental authority (including any request or policy not having the force of law) shall impose, modify or make applicable any taxes (except U.S. federal, state or local income or franchise taxes imposed on Lender), reserve requirements, capital adequacy requirements or other obligations which would (a) increase the cost to Lender for extending or maintaining the credit facilities to which this Agreement relates, (b) reduce the amounts payable to Lender under this Agreement or the Related Documents, or (c) reduce the rate of return on Lender's capital as a consequence of Lender's obligations with respect to the credit facilities to which this Agreement relates, then Borrower agrees to pay Lender such additional amounts as will compensate Lender therefor, within five (5) days after Lender's written demand for such payment, which demand shall be accompanied by an explanation of such imposition or charge and a calculation in reasonable detail of the additional amounts payable by Borrower, which explanation and calculations shall be conclusive in the absence of manifest error. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender: INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (b) except as allowed as a Permitted Lien, sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower's assets, or (c) sell with recourse any of Borrower's accounts, except to Lender. CONTINUITY OF OPERATIONS. (a) Engage in any business activities substantially different than those in which Borrower is presently engaged, (b) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change ownership, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, (c) pay any dividends on Borrower's stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue code of 1986, as amended) Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders 5 04-24-1997 LOAN AGREEMENT Page 5 Loan No 391-208 (Continued) ================================================================================ of a Subchapter S Corporation because of their ownership of shares of stock of Borrower, or (d) purchase or retire any of Borrower's outstanding shares or alter or amend Borrower's capital structure. LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money or assets, (b) purchase, create or acquire any interest in any other enterprise or entity, or (c) incur any obligation as surety or guarantor other than in the ordinary course of business. CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (a) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt: (c) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender; or (e) Lender in good faith deems itself insecure, even though no Event of Default shall have occurred. STATUTE OF FRAUDS DISCLOSURE. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW. ADDITIONAL PROVISION. BORROWER AGREES TO SUBMIT TO LENDER MONTHLY A COMPLETE DEBTOR AND ADDRESS LIST. BORROWER AGREES TO SUBMIT TO LENDER A BORROWER'S CERTIFICATE MONTHLY. BORROWER AGREES TO SUBMIT TO ONE COLLATERAL AUDIT PER YEAR TO BE PERFORMED BY LENDER'S INTERNAL STAFF OR LENDER APPROVED EXTERNAL EXAMINERS. DIRECT VERIFICATIONS SHALL BE REQUIRED. BORROWER AGREES TO PAY ALL LENDER'S EXPENSES INCURRED IN CONNECTION WITH THE COLLATERAL AUDIT. TANGIBLE NET WORTH. MAINTAIN TANGIBLE NET WORTH AT A MINIMUM OF $46,000,000.00 UNTIL 12/31/97 WHEN IT INCREASES TO $60,000.00. WORKING CAPITAL. WORKING CAPITAL SHALL BE MAINTAINED AT A MINIMUM OF $30,000,000.00 UNTIL 12/31/97 WHEN IT INCREASES TO $45,000,000.00. RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the Indebtedness against any and all such accounts. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: DEFAULT OF INDEBTEDNESS. Failure of Borrower to make any payment when due on the Loans. OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to perform when due any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents, or failure of Borrower to comply with or to perform any other term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender by or on behalf of Borrower or any Grantor under this Agreement or the Related Documents is false or misleading in any material respect at the time made or furnished, or becomes false or misleading at any time thereafter. DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any Security Agreement to create a valid and perfected Security Interest) at any time and for any reason. INSOLVENCY. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower, any creditor of any Grantor against any collateral securing the Indebtedness, or by any governmental agency. This includes a garnishment, attachment, or levy on or of any of Borrower's deposit accounts with Lender. EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. ADVERSE CHANGE. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. INSECURITY. Lender, in good faith, deems itself insecure. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make Loan Advances or disbursements), and, at Lender's option, all Indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: AMENDMENTS. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. APPLICABLE LAW. THIS AGREEMENT HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF WASHINGTON. IF THERE IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF KING COUNTY, THE STATE OF WASHINGTON. SUBJECT TO THE PROVISIONS ON ARBITRATION, THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF WASHINGTON. ARBITRATION. LENDER AND BORROWER AGREE THAT ALL DISPUTES, CLAIMS AND CONTROVERSIES BETWEEN THEM, WHETHER INDIVIDUAL, JOINT, OR CLASS IN NATURE, ARISING FROM THIS AGREEMENT OR OTHERWISE, INCLUDING WITHOUT LIMITATION CONTRACT AND TORT DISPUTES, SHALL BE ARBITRATED PURSUANT TO THE RULES OF THE AMERICAN ARBITRATION ASSOCIATION, UPON REQUEST OF EITHER PARTY. No act to take or dispose of any Collateral shall constitute a waiver of this arbitration agreement or be prohibited by this arbitration agreement. This includes, without limitation, obtaining injunctive relief or a temporary restraining order; invoking a power of sale under any deed of trust or mortgage; obtaining a writ of attachment or imposition of a receiver; or exercising any rights relating to personal property, including taking or disposing of such property with or without judicial process pursuant to Article 9 of the Uniform Commercial Code. Any disputes, claims, or controversies concerning the lawfulness or reasonableness of any act, or exercise of any right, concerning any Collateral, including any claim to rescind, reform, or otherwise modify any agreement relating to the Collateral, shall also be arbitrated, provided however that no arbitrator shall have the right or the power to enjoin or restrain any act of any party. Judgment upon any award rendered by any arbitrator may be entered in any court having jurisdiction. Nothing in this Agreement shall preclude any party from seeking equitable relief from a court of competent jurisdiction. The statute of limitations, estoppel, waiver, laches, and similar doctrines which would otherwise be applicable in an action brought by a party shall be applicable in any arbitration proceeding, and the commencement of an arbitration proceeding shall be deemed the commencement of an action for these purposes. The Federal Arbitration Act shall apply to the construction, interpretation, and enforcement of this arbitration provision. CAPTION HEADINGS. Caption Headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loans to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter 6 04-24-1997 LOAN AGREEMENT PAGE 6 LOAN NO 391-208 (CONTINUED) ============================================================================== relating to the Loan, and Borrower hereby waives any rights to privacy it may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loans and will have all the rights granted under the participation agreement or agreements governing the sale of such participation Interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower's obligation under the Loans irrespective of the failure or insolvency of any holder of any interest in the Loans. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender. COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's expenses, including without limitation attorney's fees, incurred in connection with the preparation, execution, enforcement, modification and collection of this Agreement or in connection with the Loans made pursuant to this Agreement. Lender may pay someone else to help collect the Loans and to enforce this Agreement, and Borrower will pay that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fees for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. NOTICES. All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimile, and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Borrower, notice to any Borrower will constitute notice to all Borrowers. For notice purposes, Borrower will keep Lender informed at all times of Borrower's current address(es). SEVERABILILTY. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word "Borrower" as used herein shall include all subsidiaries and affiliates of Borrower. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any subsidiary or affiliate of Borrower. SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on behalf of Borrower shall bind its successors and assigns and shall insure to the benefit of Lender, its successors and assigns. Borrower shall not, however, have the right to assign its rights under this Agreement or any Interest therein, without the prior written consent of Lender. SURVIVAL. All warranties, representations, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement shall be considered to have been relied upon by Lender and will survive the making of the Loan and delivery to Lender of the Related Documents, regardless of any investigation made by Lender or on Lender's behalf. WAIVER. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any obligations of Borrower or of any Grantor as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent in subsequent instances where such consent is required, and in all cases such consent may be granted or withheld in the sole discretion of Lender. BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF APRIL 24, 1997. BORROWER: MULTIPLE ZONES INTERNATIONAL, INC. BY: [SIGNATURE ILLEGIBLE] ------------------------------------------ TITLE: SVP FINANCE, CFD LENDER: U.S. BANK OF WASHINGTON, NATIONAL ASSOCIATION BY: /s/ TONY W. CHALFANT, V.P. ------------------------------------------ AUTHORIZED OFFICER ================================================================================ EX-13.1 7 ANNUAL REPORT TO SHAREHOLDERS 1 SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA (in thousands, except per share and selected operating data)
Year Ended December 31, ------------------------------------------------------------------------ 1997 1996 1995 1994 1993 ------------ ------------ ------------ ------------ ------------ STATEMENT OF OPERATIONS DATA: Net sales ................................ $ 490,025 $ 457,007 $ 242,587 $ 113,456 $ 80,515 Cost of sales ............................ 431,905 393,998 211,037 98,211 69,298 ------------ ------------ ------------ ------------ ------------ Gross profit ............................. 58,120 63,009 31,550 15,245 11,217 Selling, general and administrative expenses .............................. 62,910 44,613 25,425 14,411 10,586 ------------ ------------ ------------ ------------ ------------ Income (loss) from operations ............ (4,790) 18,396 6,125 834 631 Other (income) expense: Interest expense ...................... 1,096 1,500 1,149 277 213 Other income .......................... 414 (298) (132) (78) (44) Minority interest ..................... 108 195 69 16 8 ------------ ------------ ------------ ------------ ------------ Income (loss) before income taxes ........ (6,408) 16,999 5,039 619 454 Provision for (benefit from) income taxes. (965) 6,125 1,847 207 3 ------------ ------------ ------------ ------------ ------------ Net income (loss)(1),(2) ................. $ (5,443) $ 10,874 $ 3,192 $ 412 $ 451 ============ ============ ============ ============ ============ Diluted earnings (loss) per share ........ $ (0.42) $ 0.91 $ 0.32 $ 0.04 ============ ============ ============ ============ Shares used in computation of diluted earnings (loss) per share.............. 12,965 11,912 9,460 9,431 ============ ============ ============ ============ SELECTED OPERATING DATA(4): Catalogs distributed ..................... 50,500,000 44,000,000 29,000,000 15,000,000 8,000,000 Number of shipments(5) ................... 1,266,000 1,229,000 859,000 522,000 415,000 Average order size(5) .................... $ 358 $ 352 $ 273 $ 212 $ 201 Customer and inquirer database(6) ........ 2,970,000 2,504,000 1,908,000 1,626,000
Year Ended December 31, 1997 1996 1995 1994 1993 ------------------------------------------------------------ BALANCE SHEET DATA: Working capital ...................... $ 35,075 $ 39,809 $ 7,750 $ 525 $ 217 Total assets ......................... 104,810 149,801 79,392 25,705 17,681 Short-term debt ...................... 3,045 3,960 12,757 3,617 1,303 Long-term debt, net of current portion 892 1,748 1,665 791 732 Series B preferred stock ............ 6,461 Total shareholders' equity ........... 44,971 49,469 4,736 1,705 1,287
- ---------- (1) During 1997, the Company recorded charges related to the write-off of goodwill, accounts receivable, inventory and the closure of three international subsidiaries. Excluding the effect of these charges, the Company would have reported net income of $2,713,000 or $0.21 per share. (2) During the period from its inception through June 5, 1993, the Company elected to be treated as an S Corporation for federal income tax purposes. Accordingly the Company made no provision for federal income taxes on income earned, and derived no federal income tax benefit from any losses incurred, during that period. If the Company had been subject to federal income taxes for all of 1993 at the statutory rates in effect for that year, its pro forma net income for 1993 would have been $299,600. (3) In February of 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"), which specifies the computation, presentation, and disclosure requirements for earnings per share. The Company adopted SFAS 128 in the fourth quarter of 1997 and has restated all previously reported per share amounts to conform to the new presenation. (4) Selected operating data exclude international operations. 21 2 (5) Number of shipments is the number of domestic outbound shipments to customers from the third-party distribution center utilized by the Company. Average order size is calculated by dividing domestic gross sales by the number of domestic shipments. (6) The database includes customer and inquirer records. Customers are people who have purchased or received products from the Company. Inquirers are people who have requested a catalog or product information from the Company. Due to a change in the Company's customer and inquirer database, data for 1993 is not comparable to the data for more recent periods and accordingly has been omitted. 22 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the Company's financial condition and results of operations contains certain forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects" and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the Company's actual results to differ materially from those indicated by any such forward-looking statements. These factors include, without limitation, those set forth under the caption "Risk Factors" of the Company's Annual Report on Form 10-K. The following discussion and analysis should be read in conjunction with the Company's Selected Consolidated Financial and Operating Data and the Consolidated Financial Statements and Notes included in this Annual Report. GENERAL Multiple Zones International, Inc. together with its majority owned subsidiaries (collectively the "Company") is a leading international direct marketer of brand name microchip-based hardware, software, accessories and peripheral products for users of both the PC/Wintel ("PC") and Macintosh ("Mac") operating systems. The Company markets products through its two flagship catalogs, THE PC ZONE(R) and THE Mac ZONE(R). The Company began operations in 1988 by advertising in national trade publications. Catalog circulation commenced with The Mac Zone in 1990, followed by The PC Zone in 1992. International subsidiary operations and licensing activities commenced in 1992, and outbound telemarketing operations, principally to business accounts, were added in 1993. The Company distributed over 50 million catalogs domestically in 1997, with additional circulation by its subsidiaries and licensees through operations in 24 other countries worldwide. The Company's revenues consist primarily of sales of microcomputer hardware, software, peripherals and accessories, as well as license fees and royalties from foreign licensees. Net sales reflect the effects of product returns. Gross profit consists of net sales less product and freight costs. Selling, general and administrative ("SG&A") expenses include advertising expense net of co-op advertising recovery, warehousing, selling commissions, order processing, telephone and credit card fees and other costs such as administrative salaries, depreciation, rent and general overhead expenses. Other expense represents interest expense net of non-operating income and minority interests in the Company's foreign subsidiaries. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, selected items from the Company's Consolidated Statements of Operations expressed as a percentage of net sales.
YEAR ENDED DECEMBER 31, ----------------------------- 1997 1996 1995 ----- ----- ----- Net sales 100.0% 100.0% 100.0% Cost of sales 88.1 86.2 87.0 ----- ----- ----- Gross profit 11.9 13.8 13.0 SG&A expenses 12.8 9.8 10.5 ----- ----- ----- Income from operations (0.9) 4.0 2.5 Other expense 0.3 0.3 0.4 ----- ----- ----- Income (loss) before income taxes (1.2) 3.7 2.1 Provision for (benefit from) income taxes (0.2) 1.3 0.8 ----- ----- -----
23 4 Net income (loss) (1.0)% 2.4% 1.3% ===== ===== =====
Second and Third Quarter Adjustments The Company analyzes its inventory and vendor co-op receivables monthly by age, platform and product category. During the second quarter ended June 30, 1997, as a result of market weakness in sales, the Company recorded additional inventory allowances of $2.5 million for obsolete, slow-moving and excess inventory, and allowances for uncollectible vendor co-op receivables of $2.5 million. The Company plans to work aggressively to grow its PC sales base aggressively in order to lessen its dependence on the Mac platform. Many of the Company's international subsidiaries are dependent on the sale of Mac products. During the second quarter of 1997 the Company reevaluated the carrying value of goodwill and other assets in its subsidiaries in Australia, Germany, Mexico and Holland. Based upon its analysis of expected future sales mix, margins, operating results and cash flows, the Company recorded a $1.4 million charge to income representing all of the goodwill relating to these subsidiaries, and $347,000 for the write-off of other assets relating to the international Mac marketplace. During the third quarter ended September 30, 1997, the Company further evaluated the prospects for growing the PC business in its international operations and decided to exit Belgium, Australia and Holland. As a result, during the third quarter, the Company recorded charges totaling $2.1 million related to closing of these operations. Comparison of Years Ended December 31, 1997 and 1996 Net Sales. Net sales increased 7.2% to $490.0 million in 1997 from $457.0 million in 1996. The increase resulted primarily from an increase in domestic PC product sales partially offset by a decrease in domestic Mac product sales. Net domestic PC product sales increased to $191.4 million in 1997 from $120.0 million in 1996. The increase is due to an increase in PC catalog circulation, in addition to growth in sales to business, education, and government accounts. PC catalog circulation increased to 20.0 million in 1997 from 14.0 million in the comparable period. Sales to business, education, and government accounts increased 53.9% to $153.5 million in 1997 from $99.7 million in 1996. PC product sales represent 57.3% and 42.6% of the sales to business, education, and government accounts in each of the respective periods. Net domestic Mac product sales decreased to $228.0 million in 1997 from $277.9 million in the comparable period, a decrease of 18.0%. The decrease in the domestic Mac product sales reflects the declining overall demand for Mac products. International subsidiary net sales in 1997 were $70.7 million, an increase of 19.5% over the comparable period. The increase in international subsidiary net sales resulted primarily from the addition of subsidiaries in Sweden, Venezuela and India, as well as sales growth in the Company's operations in France, and Mexico. Gross Profit. Gross profit decreased to $58.1 million in 1997 from $63.0 million in 1996, and decreased to 11.9% of net sales in 1997 from 13.8% in 1996. During the second quarter of 1997, the Company recorded inventory allowances totaling $2.5 million in connection with slow moving and excess inventories. During the third quarter of 1997, the Company recorded $356,000 of inventory write-downs related to its Belgium, Australia, and Holland subsidiaries. In addition to these adjustments, gross margin declined due to increased price competition, lower average unit selling prices, and an increase in PC product sales and sales to business, education and government accounts which generally carry a lower average gross margin. 24 5 Selling, General and Administrative Expenses. SG&A expenses increased to $62.9 million in 1997 from $44.6 million in 1996, and increased as a percentage of net sales between periods to 12.8% from 9.8%. During the second quarter of 1997, the Company recorded several charges to income, including $2.5 million related to allowances for uncollectible vendor co-op receivables, $1.4 million related to the write-off of international goodwill, severance expense of $490,000, write-off of other assets totaling $378,000, write-off of $234,000 related primarily to asset valuation adjustments for the Company's subsidiary in Holland and additional professional fees of $243,000. During the third quarter of 1997, the Company recorded a $1.6 million charge to income related to the closure of its Belgium, Australia, and Holland subsidiaries. The charges related to the write-off of accounts receivable, legal expenses, and other operating expenses. In addition to these adjustments, SG&A expense increased due to costs of focusing on growing the PC and outbound sales businesses, higher salary costs, professional fees, and depreciation. Other Expense. Other expense increased to $1.6 million in 1997 from $1.4 million in 1996, primarily as a result of the $284,000 loss on disposal of assets recorded in the second and third quarter of 1997. Income Tax (Benefit) Expense. The income tax benefit for 1997 was $965,000. The income tax expense for 1996 was $6.1 million. As of December 31, 1997, the Company has deferred tax assets attributable to foreign subsidiaries. As the realization of these deferred tax assets is uncertain, the Company established a valuation allowance of $1.4 million. The valuation allowance has decreased the income tax benefit Net Income. As a result of the above factors, a net loss of $5.4 million or 1.0% of net sales was incurred in 1997. Net income for 1996 was $10.9 million or 2.4% of net sales. Comparison of Years Ended December 31, 1996 and 1995 Net Sales. Net sales increased 88.4% to $457.0 million in 1996 from $242.6 million in 1995. The increase resulted primarily from an increase in orders due primarily to higher catalog circulation, which grew 51.7% to 44 million in 1996 from 29 million in 1995. The increase in net sales was also due in part to an increase in hardware sales to 81.8% of gross sales in 1996 from 71.0% in 1995, which contributed to a 28.9% increase in average order size to $352 in 1996 from $273 in 1995. International subsidiary net sales in 1996 were $59.2 million, an increase of 125.1% over 1995, primarily resulting from sales growth in the Company's operations in Denmark and France and the addition of subsidiaries in Germany, Mexico, Australia and Belgium. Gross Profit. Gross profit increased to $63.0 million in 1996 from $31.6 million in 1995, and increased to 13.8% of net sales in 1996 from 13.0% in 1995. Gross profit dollars increased due to higher sales volumes generated by increases in orders and average order size. The increase in gross margin percentage resulted from enhanced recovery of domestic freight costs, improved mix of higher-margin product offerings and increased purchases directly from manufacturers. Partially offsetting the increase in gross margin percentage was an increase in sales to business accounts, which generally carry a lower average gross margin percentage. Selling, General and Administrative Expenses. SG&A expenses increased to $44.6 million in 1996 from $25.4 million in 1995, but decreased as a percentage of net sales to 9.8% in 1996 from 10.5% in 1995. The dollar increase in SG&A expenses was primarily attributable to an increase in transaction costs associated with higher sales volumes, as well as to increased administrative salaries. The decline in SG&A expenses as a percentage of net sales resulted primarily from improved co-op advertising recovery and the leveraging of SG&A expenses over a larger sales base. Other Expense. Other expense increased to $1.4 million in 1996 from $1.1 million in 1995, primarily as a result of higher interest expense related to higher levels of borrowing on the Company's primary bank line of credit during first and second quarters of 1996. 25 6 Income Taxes. Income tax expense increased in 1996 to $6.1 million from $1.8 million in 1995, due to the significant increase in profitability during 1996. Net Income. As a result of the above factors, net income increased to $10.9 million or 2.4% of net sales in 1996 from $3.2 million or 1.3% of net sales in 1995. TRENDS In 1997, the Company increased its focus on PC product sales and sales to business, education and government accounts. PC product sales have grown to 49.7% of domestic net sales for the fourth quarter from 45.3% and 34.4% in the third quarter of 1997 and fourth quarter of 1996, respectively. Additionally, domestic net PC product sales increased 51.7% to $61.3 million for the fourth quarter of 1997 from $40.4 million in the fourth quarter of 1996. The increased sales are the result of the Company's focus on increasing PC sales and sales to business, education and government accounts along with the results of the historically higher fourth quarter sales due to the seasonal factors discussed below. Domestic net sales to business, education, and government accounts were $49.9 million in the fourth quarter of 1997 compared to $38.2 million and $32.2 million in the third quarter of 1997 and fourth quarter of 1996, respectively. During the three month periods ended December 31, 1997, September 30, 1997, and December 31, 1996, PC sales represented 65.2%, 56.9%, and 45.0%, respectively, of the sales to business, education, and government accounts. The number of outbound telemarketing staff has decreased to 91 as of December 31, 1997 as the Company has focused on increasing productivity, compared to 103 at September 30,1997 and increased from 89 at December 31, 1996. PC product sales and sales to business accounts tend to carry a lower average gross margin percentage and have contributed to a decrease in the gross margin percentage as compared to the prior year. The Company's gross margin percentage decreased to 12.2% in the fourth quarter of 1997 from 13.4% in the fourth quarter of 1996. Net domestic Mac product sales decreased to $62.0 million in the fourth quarter of $77.0 million in the fourth quarter of 1996. Even with weakness in the Mac market the company has been able to maintain its Mac sales due to new product introductions. A further decline in the demand for Mac products could have a material adverse effect on the Company's future results of operations. The market for microcomputer products is characterized by rapid changes and frequent introductions of new products and product enhancements. These changes result in rapid price fluctuations. Typically, prices of microcomputer products initially increase with improvements in features, such as processing speed and storage capacity. Prices subsequently decrease as manufacturers pass on savings from lower-cost components and reduce their inventory of older models. In order to remain competitive, the Company may be required to reduce its prices. Such a reduction in prices could have a material adverse effect on the Company's future results of operations. SEASONAL FACTORS Seasonal factors cause sales of microcomputer software and hardware products through the direct marketing channel to be somewhat stronger in the fourth calendar quarter than in the other periods. Sales during the fourth quarter tend to be stronger as manufacturers make year-end introductions of new products and increase marketing activities related to the holiday season, and as corporate purchasing activities increase at the end of budgetary cycles. 26 7 INFLATION The Company does not believe that inflation has had a material impact on its results of operations. However, there can be no assurance that inflation will not have such an effect in future periods. LIQUIDITY AND CAPITAL RESOURCES On July 2, 1996, the Company completed an initial public offering of its Common Stock resulting in net proceeds to the Company of $27.2 million. The Company paid off bank debts totaling $20.8 million by using funds generated by its initial public offering. The remaining proceeds were used to finance ongoing working capital requirements. The Company had total assets of $104.8 million at December 31, 1997, of which $91.8 million were current assets. At December 31, 1997 and 1996, the Company had cash and cash equivalents of $1.6 million and $976,000 respectively, and working capital of $35.1 million and $39.8 million, respectively. Net cash provided by operating activities was $13.4 million in 1997 compared to net cash used by operating activities of $11.2 million and $14.4 million in 1996 and 1995, respectively. The cash inflows during 1997 were primarily due to lower inventory, prepaid expenses and other assets, and accounts receivable offset by decreased accounts payable. Cash outflows in 1996 and 1995 were primarily due to higher accounts receivable resulting from growing sales to business accounts, and to investment in increased inventories necessary to support rapidly growing sales. In 1996 and 1995, accounts receivable increased by $26.7 million and $12.5 million, respectively, and inventories increased by $35.3 million and $28.2 million, respectively. Cash outlays for capital expenditures were $5.7 million in 1997 and 1996, respectively, and $1.4 million in 1995. In addition, the Company incurred capital lease obligations during 1997, 1996 and 1995 of $420,000, $1.1 million and $1.8 million respectively. These expenditures were primarily for leasehold improvements, information and telecommunication system enhancements and furniture and equipment. The Company has a domestic revolving line of credit of $30.0 million from a commercial bank collateralized by accounts receivable. At December 31, 1997, there were no borrowings outstanding under the facility. The facility contains certain restrictive covenants related to leverage, current ratios and subsidiary investments. Additionally, at December 31, 1997, the Company had $2.7 million of unused letters of credit. In May 1997, the Company obtained an additional $20.0 million line of credit from a commercial lender collateralized by inventory. The net amount of vendor credit outstanding at December 31, 1997 was $44.1 million of which $8.1 million was drawn from a $35.0 million inventory financing facility between the Company and a commercial lender, which provides financing for, and is collateralized by, inventory purchased from certain participating vendors. The facility contains various restrictive covenants relating to profitability, tangible net worth, leverage, dispositions and use of collateral, other asset dispositions, and merger and consolidation of the Company. The Company believes that its existing available cash and cash equivalents, operating cash flow and existing credit facilities will be sufficient to satisfy its operating cash needs for at least the next 12 months. However, if working capital or other capital requirements are greater than currently anticipated, the Company could be required to seek additional funds through sales of equity, debt or convertible securities or increased credit facilities. There can be no assurance that additional financing will be available or that, if available, the financing will be on terms favorable to the Company and its shareholders. 27 8 OTHER MATTERS The Company is currently working to resolve the potential impact of the year 2000 on the processing of date-sensitive information by the Company's computerized information systems. The year 2000 problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. If the Company, its customers or vendors are unable resolve such processing issues in a timely manner, it could result in a material financial risk. Accordingly, the Company plans to devote the necessary resources to resolve all significant year 2000 issues in a timely manner. In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Comprehensive Income". This statement establishes standards for reporting and display of comprehensive income and its components in a full set of financial statements. Comprehensive income includes items such as foreign currency translation adjustments that are currently being presented by the Company as a component of shareholders' equity. The Company will adopt the statement for the year ending December 31, 1998. In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," which changes the way public companies report information about operating segments. The Company will adopt the statement in 1998. This statement, which is based on the management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report entity-wide disclosures about products and services, major customers and the major countries in which the company holds assets and reports revenues. The Company is currently assessing how it will present its segments and believes that it will present additional information. Management believes that the adoption of these new standards will not have a material impact on the Company's financial position or results of operations. 28 9 MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ------------------------ 1997 1996 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 1,645 $ 976 Receivables, net 42,944 49,975 Inventories, net 40,169 77,501 Prepaid expenses 4,012 7,149 Income taxes receivable 1,127 Deferred income taxes 1,889 1,216 --------- --------- Total current assets 91,786 136,817 Property and equipment, net 12,417 9,759 Other assets 607 3,225 --------- --------- Total assets $ 104,810 $ 149,801 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank lines of credit $ 2,084 $ 3,026 Accounts payable 44,067 83,848 Accrued liabilities and other 9,059 8,405 Current portion of capital lease obligations 961 934 Income taxes payable 540 795 --------- --------- Total current liabilities 56,711 97,008 Capital lease obligations, net of current portion 892 1,748 Deferred income taxes 249 Other 1,608 858 --------- --------- Total liabilities 59,211 99,863 --------- --------- Minority interest 628 469 --------- --------- Commitments and contingencies Shareholders' equity: Common stock, no par value, 45,000,000 authorized, 13,041,464 shares issued and outstanding at December 31, 1997 and 12,876,616 shares at December 31, 1996 37,751 36,988 Retained earnings 7,256 12,564 Foreign currency translation adjustment (36) (83) --------- --------- Total shareholders' equity 44,971 49,469 --------- --------- Total liabilities and shareholders' equity $ 104,810 $ 149,801 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 29 10 MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Year ended December 31, --------------------------------------- 1997 1996 1995 --------- --------- --------- Net sales $ 490,025 $ 457,007 $ 242,587 Cost of sales 431,905 393,998 211,037 --------- --------- --------- Gross profit 58,120 63,009 31,550 Selling, general and administrative 62,910 44,613 25,425 --------- --------- --------- Income (loss) from operations (4,790) 18,396 6,125 --------- --------- --------- Interest expense 1,096 1,500 1,149 Other (income) expense 414 (298) (132) Minority interest 108 195 69 --------- --------- --------- 1,618 1,397 1,086 --------- --------- --------- Income (loss) before taxes (6,408) 16,999 5,039 Provision (benefit) for income taxes (965) 6,125 1,847 --------- --------- --------- Net income (loss) $ (5,443) $ 10,874 $ 3,192 ========= ========= ========= Net income (loss) attributable to basic $ $ 10,415 $ 3,038 earnings per share $ (5,443) Basic earnings (loss) per share $ (0.42) $ 0.94 $ 0.32 12,965 11,104 9,375 Shares used in computing basic earnings (loss) per share Diluted earnings (loss) per share $ (0.42) $ 0.91 $ 0.32 Shares used in computing diluted earnings 12,965 11,912 9,460 (loss) per share
The accompanying notes on an integral part of the consolidated financial statements. 30 11 MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
Retained Preferred Stock Common Stock Earnings Shares Amount Shares Amount (Deficit) ------- ----------- --------- ----------- ----------- Balance, January 1, 1995 625,000 $ 2,000 7,500,000 $ 750 $ (1,051) Conversion of Series A Convertible Preferred Stock to common stock (625,000) (2,000) 1,874,999 2,000 Accretion of Series Redeemable Convertible Preferred Stock (153) Net income 3,192 Translation adjustment ------- ----------- --------- ----------- ----------- Balance, December 31, 1995 9,374,999 2,750 1,988 Accretion of Series B Redeemable Convertible Preferred Stock (459) Issuance of common stock 2,537,106 27,303 Conversion of Series B Redeemable Convertible Preferred Stock 918,711 6,920 Exercise of stock options 45,800 15 Net income 10,874 Tax effect of stock options exercised 161 Translation adjustments ------- ----------- --------- ----------- ----------- Balance, December 31, 1996 12,876,616 36,988 12,564 Issuance of common stock 33,748 196 Exercise of stock options 131,100 567 Net loss (5,443) Tax effect of stock options exercised 135 Translation adjustments ------- ----------- ---------- ----------- ----------- Balance, December 31, 1997 13,041,464 $ 37,751 $ 7,256 ======= =========== ========== =========== =========== Foreign Currency Translation Adjustment Total ----------- ----------- Balance, January 1, 1995 $ 6 $ 1,705 Conversion of Series A Convertible Preferred Stock to common stock Accretion of Series Redeemable Convertible Preferred Stock (153) Net income 3,192 Translation adjustment (8) (8) ----------- ----------- Balance, December 31, 1995 (2) 4,736 Accretion of Series B Redeemable Convertible Preferred Stock (459) Issuance of common stock 27,303 Conversion of Series B Redeemable Convertible Preferred Stock 6,920 Exercise of stock options 15 Net income 10,874 Tax effect of stock options exercised 161 Translation adjustments (81) (81) ----------- ----------- Balance, December 31, 1996 (83) 49,469 Issuance of common stock 196 Exercise of stock options 567 Net loss (5,443) Tax effect of stock options exercised 135 Translation adjustments 47 47 ----------- ----------- Balance, December 31, 1997 $ (36) $ 44,971 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 31 12 MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, --------------------------------------- 1997 1996 1995 --------- --------- --------- Cash flows from operating activities: Net income (loss) $ (5,443) $ 10,874 $ 3,192 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 2,943 1,651 1,001 Allowance for inventory and receivables 3,528 669 478 Write off of goodwill 1,233 Deferred income taxes (1,246) (567) (226) Loss on disposal of assets 376 Minority interest 108 229 69 Tax effect of stock options exercised 135 161 Changes in assets and liabilities excluding effect of acquisitions: Accounts receivable 4,626 (26,734) (12,465) Inventory 35,157 (35,251) (28,218) Prepaid expenses and other assets 5,016 (1,968) (5,690) Accounts payable (33,429) 37,039 24,268 Accrued liabilities 1,807 3,068 2,401 Income taxes payable (1,387) (371) 802 --------- --------- --------- Net cash provided by (used in) operating 13,424 (11,200) (14,388) activities Cash flows from investing activities: Purchases of property and equipment (5,664) (5,725) (1,397) Acquisitions of subsidiaries (479) (690) Other 51 13 --------- --------- --------- Net cash used in investing activities (5,613) (6,204) (2,074) Cash flows from financing activities: Payments under line of credit agreement (76,215) (110,918) (56,665) Borrowings under line of credit agreement 75,372 101,853 65,408 Net change in book overdrafts (5,600) (260) 2,755 Payments on capital leases (1,250) (769) (549) Net proceeds from sale of common stock 763 27,317 Net proceeds from sale of preferred stock 6,308 Other (264) 12 (87) --------- --------- --------- Net cash provided by (used in) financing (7,194) 17,235 17,170 activities Effect of exchange rate on cash and cash equivalents 52 (70) (7) Net increase (decrease) in cash and cash equivalents 669 (239) 701 Cash and cash equivalents at beginning of period 976 1,215 514 --------- --------- --------- Cash and cash equivalents at end of period $ 1,645 $ 976 $ 1,215 ========= ========= ========= Supplemental cash flow information: Cash paid during the period for interest $ 1,095 $ 1,500 $ 1,111 Cash paid for income taxes $ 992 $ 6,796 $ 1,251 Noncash investing and financing activity: Capital leases to finance purchases of equipment $ 420 $ 1,064 $ 1,804
The accompanying notes are an integral part of the consolidated financial statements. 32 13 MULTIPLE ZONES INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS Multiple Zones International, Inc. and its majority owned subsidiaries (collectively the "Company") are international direct marketers of microchip-based hardware, software, peripherals and accessories for users of both the PC/Wintel ("PC") and Macintosh ("Mac") operating systems. The Company has licensed its trade name to independent licensees that operate in a number of countries worldwide. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and of its majority owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. Cash Equivalents Cash equivalents are all highly liquid investments with initial maturities of three months or less. Concentration of Credit Risk Cash balances subject to credit risk consist of cash balances held in one financial institution in the United States and cash balances held in foreign financial institutions. The Company has not experienced any losses associated with cash balances and believes that there is minimal risk associated with the cash balances. Concentration of credit risk with respect to trade receivables is limited due to the Company's diverse customer base. The Company closely monitors extensions of credit but does not require collateral. Inventories Inventories consist primarily of computer software and hardware. Inventories are valued at the lower of first-in, first-out (FIFO) cost or market. Balances at December 31, 1997 and 1996 are net of allowances of approximately $2,400,000 and $700,000 respectively. Property and Equipment Property and equipment is recorded at cost. Depreciation is based on the straight-line method over the estimated useful lives of the related assets. Depreciation for computer hardware and software is generally over 3 to 5 years. Other property and equipment is depreciated over 3 to 10 years. Amortization of capital leases is based on the straight-line method over the estimated useful lives of the related assets or lease life, whichever is shorter, generally 3 to 10 years. Expenditures for maintenance and repairs are charged to expense as incurred, while additions, renewals and betterments are capitalized. Gains or losses from sales or retirements are included in other income and expense. The Company evaluates the carrying value of long-lived assets based upon current and anticipated undiscounted cash flows, and recognizes an impairment when it is probable that such estimated future net income and/or cash flows will be less than the asset carrying value. During the year ended December 31, 1997, the Company evaluated the carrying value of goodwill on its foreign subsidiaries and deemed the assets impaired. The Company's foreign subsidiaries are heavily dependent on the Mac marketplace and with the weakness and uncertainty in this market it was determined that the goodwill should be written off. The Company recorded a charge of $1,400,000, included in Selling, general and administrative expenses, to eliminate the goodwill. Income Taxes Deferred income taxes are provided based on the estimated future tax effects of temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 33 14 Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Foreign Currency Translation Assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars at the exchange rate in effect at the balance sheet date and revenues and expenses are translated at weighted average rates during the period. The resulting translation adjustment is reflected as a separate component of shareholders' equity on the balance sheet. Computation of Earnings Per Share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"), which specifies the computation, presentation, and disclosure requirements for earnings per share ("EPS"). It replaces primary and fully diluted EPS with basic and diluted EPS. Basic EPS excludes all dilution. It is based upon the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. The Company adopted SFAS 128 in the fourth quarter of 1997 and has restated all previously reported per share amounts to conform to the new presentation. Revenue Recognition Revenue on product sales is recognized at the time of shipment. The Company generally allows its customers to return products within 30 days of purchase. An allowance for product returns is established based on experience. License Fees and Royalties The Company records revenues from license fees in net sales when licenses are granted. Royalty income from licensees is recorded in net sales based on a percentage of the licensees' gross sales in the period sales are made. Catalog Costs and Revenues The Company produces and distributes catalogs at various intervals throughout the year. Costs to produce and distribute individual catalogs, including paper, printing, postage, production and design costs, are capitalized and amortized to selling expense during the period in which the catalogs are generating substantial sales (generally one month). At December 31, 1997 and 1996 $2,294,000 and $4,013,000, respectively, of capitalized advertising costs were included with prepaid expenses. The Company receives market development funds and cooperative advertising revenues from most vendors who have placed advertisements in the Company's catalogs. These revenues are recognized as a reduction of selling expense in the same period in which the corresponding catalog cost is recognized as selling expense. Advertising expense net of co-op advertising recovery is included in selling, general and administrative expenses and totaled $3,852,000 and $2,026,000 for the years ended December 31, 1997 and 1996, respectively. The Company provides advertising in its catalogs in exchange for products or services to be received from its vendors. These transactions are reported at the estimated fair market value of the advertising provided by the Company which approximates the value of products or services received in exchange. Barter 34 15 revenues are recorded when the catalogs are published and receivables are recorded for the products or services to be received. Barter expenses are recorded when the products or services are used. Dependence on Sales of Mac Products The Company is largely dependent on sales of Mac products manufactured by a broad variety of vendors, including Apple. A decline in the demand for, or availability of, Apple or other Mac products would likely have a material adverse effect on the Company's business, financial condition and results of operations. Although the Company intends to pursue increased sales of PC products to reduce its dependence on sales of Mac products, there can be no assurance that the Company will be successful in doing so. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Comprehensive Income". This statement establishes standards for reporting and display of comprehensive income and its components in a full set of financial statements. Comprehensive income includes items such as foreign currency translation adjustments that are currently being presented by the Company as a component of shareholders' equity. The Company will adopt the statement for the year ending December 31, 1998. In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," which changes the way public companies report information about operating segments. The Company will adopt the statement in 1998. This statement, which is based on the management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report entity-wide disclosures about products and services, major customers and the major countries in which the company holds assets and reports revenues. Management believes that the adoption of these new standards will not have a material impact on the Company's financial position or results of operations. 3. FAIR VALUE OF FINANCIAL INSTRUMENTS For certain financial instruments, including cash, cash equivalents and bank lines of credit, the carrying value approximates fair value. 4. RECEIVABLES Receivables consist of the following (in thousands):
DECEMBER 31, --------------------------- 1997 1996 -------- -------- Trade $ 32,381 $ 31,113 Co-op advertising 4,510 5,896 Licensees 506 690 Returns, rebates and other 8,423 13,423 -------- -------- 45,820 51,122 Less allowances (2,876) (1,147) -------- -------- $ 42,944 $ 49,975 ======== ========
35 16 5. PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands):
DECEMBER 31, ---------------------- 1997 1996 -------- -------- Equipment $ 5,169 $ 3,536 Computer hardware and software under capital leases 6,773 6,471 Computer software 3,995 499 Furniture and fixtures 805 721 Leasehold improvements 2,849 2,836 -------- -------- 19,591 14,063 Less accumulated depreciation and Amortization (7,174) (4,304) -------- -------- Property and equipment, net $ 12,417 $ 9,759 ======== ========
Included in accumulated depreciation and amortization is accumulated amortization associated with capital leases at December 31, 1997 and 1996 of $3,020,000 and $2,082,000, respectively. 6. BANK LINES OF CREDIT At December 31, 1997, the Company had a $30,000,000 revolving bank line of credit expiring June 30, 1998. Interest is charged at the prime lending rate 8.5% and 8.25% at December 31, 1997 and 1996, respectively. At December 31, 1997 no borrowings were outstanding. At December 31, 1996, $2,000,000, was borrowed on the line. The line is collateralized by the Company's accounts receivable. In May 1997 the company obtained an additional $20,000,000 bank line of credit. This line is collaterized by the Company's inventories. No amounts were outstanding at December 31, 1997. The line of credit agreement contains certain covenants and restrictions requiring, among other things, a minimum tangible net worth and certain other financial ratios and restrictions. The Company has complied with the restrictive covenants contained in the agreements. Bank lines of credit also included $2,084,000 and $1,060,000 of borrowings by the Company's foreign subsidiaries at December 31, 1997 and 1996, respectively. The lines of credit are used by the Company under its cash management system to cover checks presented for payment in excess of cash balances. As of December 31, 1997 and 1996 the Company had book overdrafts of $368,000 and $5,968,000, respectively, which are included with accounts payable. 7. TRADE CREDIT ARRANGEMENT In 1996, the Company entered into agreements with Deutsche Financial Services ("Deutsche") to facilitate the purchase of inventory from various suppliers under certain terms and conditions. The agreement allows a collateralized position in inventory financed by Deutsche up to an aggregate of $35,000,000. At December 31, 1997, accounts payable included $8,165,000 owed to Deutsche. Amounts purchased under these agreements generally require payment within a period of 45 days, and no interest is charged. Interest will accrue on amounts not paid by the end of this period at variable rates. 36 17 8. INCOME TAXES The income tax provision consists of the following (in thousands):
YEAR ENDED DECEMBER 31, --------------------------------- 1997 1996 1995 ------- ------- ------- Current $ 281 $ 6,692 $ 2,073 Deferred (2,671) (567) (226) Valuation allowance for deferred tax asset 1,425 ------- ------- ------- Total $ (965) $ 6,125 $ 1,847 ======= ======= =======
The components of deferred taxes were as follows (in thousands):
DECEMBER 31, --------------------- 1997 1996 ------- ------- Assets: Allowance for doubtful accounts $ 738 $ 422 Inventory allowances 643 254 Inventory capitalization 63 99 Deferred rent 593 189 Accrued liabilities and other 445 237 Net operating losses 1,579 204 Valuation allowance (1,391) ------- ------- $ 2,670 $ 1,405 ------- ------- Liabilities: Property and equipment depreciation $ (423) $ (313) Other (125) ------- ------- $ (423) $ (438) ------- ------- Net deferred tax asset $ 2,247 $ 967 ======= ======= The net deferred tax asset is recognized in the accompanying balance sheet as follows (in thousands): Current deferred tax asset $ 1,889 $ 1,216 Non-current deferred income tax asset (liability), net of 358 (249) ------- ------- valuation allowance of $1,391 in 1997 Net deferred tax asset $ 2,247 $ 967 ======= =======
The deferred tax asset valuation allowance is primarily related to deferred tax assets of foreign operations, including net operating loss carryforwards in several foreign markets. Although realization is not assured, management believes it is more likely than not that the unreserved deferred asset will be realized through future taxable income or taxable loss carrybacks. The Company's foreign net operating losses begin expiring in 2002. In certain countries the losses never expire. A reconciliation of the effective income tax rate on income before taxes with the federal statutory rate follows:
YEAR ENDED DECEMBER 31, ---- ---- ---- 1997 1996 1995 ---- ---- ---- Statutory rate 35.0% 35.0% 34.0% State income tax (net of federal income tax benefit) 1.4 1.4 1.5 Other 0.9 (0.4) 1.2 Reserve of deferred tax assets (22.2) ---- ---- ---- Effective tax rate 15.1% 36.0% 36.7% ==== ==== ====
37 18 9. COMMITMENTS AND CONTINGENCIES Operating Leases The Company leases its office and returns warehouse space under noncancelable operating leases which expire through 2003. Under the terms of certain leases, the Company is responsible for its share of taxes, insurance and common area charges. At December 31, 1997, future minimum payments under operating leases were as follows (in thousands): 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,828 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,127 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,859 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,817 2002 and thereafter. . . . . . . . . . . . . . . . . . . . . . . . 2,756 ------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . $10,387 =======
Rental expense totaled $2,522,000, $1,532,000 and $608,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Obligations Under Capital Leases The Company leases equipment and software under long-term capital leases. Future lease payments as of December 31, 1997 were as follows (in thousands): 1998 $ 1,097 1999 763 2000 127 2001 33 ------- Total future minimum lease payments $ 2,020 Less amount representing interest (167) ------- Present value of net minimum lease payments $ 1,853 Less current portion (961) ------- Noncurrent portion $ 892 =======
Distribution Center The Company has contracted with a freight company to provide and operate its primary distribution center under a contract which expires March 31, 1999. Under this contract, the Company pays a flat rate for each order filled. Letters of Credit The Company had unused letters of credit totaling $2,686,000 at December 31, 1997. Acquisitions Certain of the purchase agreements relating to the Company's acquisitions of foreign subsidiaries allow the minority owners to sell their remaining interests to the Company at the end of three years. The purchase price for the remaining interests is based on a multiple of the subsidiaries' net income during the three-year period. Legal Proceedings Various claims and actions, considered normal to the Company's business, have been asserted and are pending against the Company. The Company believes that such claims and actions should not have a material adverse effect upon the Company's financial position or results of operations. 10. SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK On October 27, 1995, the Company completed a sale of 612,476 shares of Series B Preferred Stock for $7,000,000. Each share of Series B Preferred Stock was entitled to a cumulative annual dividend of $1.14 per share, payable only to the extent that dividends were declared to common shareholders. Voluntary and 38 19 involuntary liquidation value of each preferred share was $11.43 plus accrued and unpaid dividends. Offering costs related to the sale were $691,992. In connection with the offering, the Company also issued a warrant for the purchase of 45,310 shares of common stock exercisable at $7.62 per share. Upon consummation of the initial public offering all outstanding shares of Series B Preferred Stock converted to 918,711 shares of common stock. Prior to the conversion of the Series B Preferred Stock to Common Stock the difference between the issuance price, net of offering costs, of the Series B Preferred Stock and the redemption value was accreted periodically by a charge to retained earnings. The carrying value of the Series B Preferred Stock was also increased for accrued but unpaid dividends. 11. SHAREHOLDERS' EQUITY Common Stock On January 2, 1996, the number of authorized shares of common stock was increased to 45,000,000. On June 3, 1996, the Company declared a common stock split which had the effect of increasing the shares issued and outstanding to 9,374,999. All share amounts have been restated to give effect to these stock splits. On July 2, 1996, the Company issued 2,200,000 shares of Common Stock at $12.00 per share in an initial public offering. On July 12, 1996, an additional 330,000 shares were issued pursuant to the underwriters' over-allotment option. The proceeds to the Company were $27,237,000, net of the underwriting discount and other direct expenses of $3,123,000. Upon consummation of the offering, all outstanding shares of Series B Preferred Stock converted to 918,711 shares of Common Stock. Stock Options In 1993, the Company adopted a Stock Incentive Plan (the "Plan") whereby the Company may issue incentive or nonqualified stock options, restricted shares, stock units or stock appreciation rights to key employees. As of December 31, 1997, only stock options have been granted under the plan. Stock options are granted solely at the discretion of the Board of Directors and are generally issued at a price equal to the estimated fair market value of the stock at the date of grant. The term of each option granted is for such period as determined by the Board of Directors, but not more than ten years from date of grant. Options may generally be exercised based on a vesting schedule determined by the Board of Directors, and the plan provides for acceleration of outstanding options under certain conditions, including certain changes in control of the Company. Grants are nontransferable, and shares acquired upon exercise of options may be subject to repurchase at the option of the Company under certain conditions. The maximum number of shares to be granted under the Plan was 1,650,000 at December 31, 1997. In addition to options granted under the Plan, the Company has granted options under two separate plans to the CEO and the Board of Directors. Options outstanding to these individuals at December 31, 1997, were 713,957 shares at option prices of $0.17 - $25.88 per share. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date of the awards, consistent with the provisions of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share data): 39 20
----------------------------------------------------------------------------- 1997 1996 ----------------------------------------------------------------------------- Net earnings (loss) - as reported $ (5,443) $ 10,874 ========= ========== Net earnings (loss) - pro forma $ (6,816) $ 10,200 ========= ========== Diluted earnings (loss) per share - as reported $ (0.42) $ 0.91 ========= ========== Diluted earnings (loss) per share - pro forma $ (0.53) $ 0.86 ========= ==========
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted- average assumptions used for grants in 1997 and 1996: expected volatility of 75% and 66%; risk-free interest rate of 6.2% and 6.5%; and expected lives of 4 years. Information regarding the stock option plans is as follows:
---------------------------------------------------------------------------- Weighted- Average Options Exercise Price ------- -------------- ---------------------------------------------------------------------------- Outstanding, January 1, 1995 121,500 $ 0.22 Granted 335,250 4.65 Cancelled (750) 4.00 --------- ------------ Outstanding, December 31, 1995 456,000 3.48 Granted 789,500 11.66 Exercised (45,800) 0.32 Cancelled (104,940) 3.77 --------- ------------ Outstanding, December 31, 1996 1,094,760 9.21 Granted 1,422,816 9.43 Exercised (131,100) 4.33 Cancelled (717,851) 10.29 --------- ------------ Outstanding, December 31, 1997 1,668,625 $ 9.32 ========= ============ -------------------------------------------------------------------------- 1997 option price range for exercised shares $0.33 - $6.67 1997 weighted-average fair value of options granted during the year $5.47 --------------------------------------------------------------------------
The following tables summarize information about fixed-price stock options outstanding at December 31, 1997.
-------------------------------------------------------------------------- Options Outstanding -------------------------------------------------------------------------- Weighted- Number average Weighted- range of outstanding remaining Average exercise prices at 12/31/97 contractual years Exercise price -------------------------------------------------------------------------- $ 0.17 - $ 6.67 437,610 8.79 $ 5.23 $ 8.38 - $12.67 1,211,830 8.97 10.59 $ 17.75 - $25.88 19,185 8.82 22.23 ----------------- --------------- ---------------- ----------------- $ 0.17 - $25.88 1,668,625 8.92 $ 9.32
----------------------------------------------------- Options Exercisable ----------------------------------------------------- Range of Number Weighted-average Exercise prices at 12/31/97 Exercise price ----------------- --------------- ----------------- $ 0.17 - $ 6.67 117,115 $ 4.09 $ 8.38 - $ 12.67 268,099 11.58 $ 17.75 - $ 25.88 6,456 23.71 ----------------- --------------- ----------------- $ 0.17 - $ 25.88 391,670 $ 9.54 ================= =============== =================
40 21 Employee Stock Purchase Plan In December 1995, the Company adopted an Employee Stock Purchase Plan (the "Purchase Plan") which was effective upon the completion of the public offering. Under the terms of the Purchase Plan, employees other than officers and employees of the Company's subsidiaries may purchase a total of up to 450,000 shares of common stock. The purchase price per share is 85% of the lower of the market value per share of common stock determined as of the beginning or end of the quarterly purchase period specified in the Purchase Plan. 12. EARNINGS PER SHARE In the fourth quarter of 1997, the Company adopted the provisions of Statement of Finacial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). The accretion relating to the Series B Redeemable Convertible Preferred Stock ("Series B Preferred Stock") prior to the conversion to common stock is deducted from income only in the calculation of basic earnings per share. For the year ended December 31, 1996, diluted earnings per share is computed using the weighted average effect of the conversion of Series B Preferred Stock to Common Stock. The calculation uses the treasury stock method in determining the resulting incremental weighted average equivalent shares outstanding (in thousands, except per share data).
INCOME PER SHARE (LOSS) SHARES AMOUNT -------- ------ --- ---- YEAR ENDED DECEMBER 31, 1997 Income (loss) from operations $ (5,443) BASIC AND DILUTED EPS $ (5,443) 12,965 $ ( 0.42) YEAR ENDED DECEMBER 31, 1996 Income from operations $ 10,874 Less: Series B accretion and dividends (459) -------- BASIC EPS $ 10,415 11,104 $ 0.94 EFFECT OF DILUTIVE SECURITIES Series B Preferred Stock 459 461 Stock options and warrants 347 -------- ------ DILUTED EPS $ 10,874 11,912 $ 0.91 YEAR ENDED DECEMBER 31, 1995 Income from operations $ 3,192 Less: Series B accretion and dividends (154) -------- ------ BASIC EPS $ 3,038 9,375 $ 0.32 EFFECT OF DILUTIVE SECURITIES Stock options and warrants 85 -------- ------ DILUTED EPS $ 3,038 9,460 $ 0.32
All options to purchase common stock were excluded from the computation of diluted earning per share for the year ended December 31, 1997 because the effect of the options' on the calculation would have been antidilutive. 41 22 13. DEFERRED INCOME 401(K) PLAN The Company offers a deferred income 401(k) plan to substantially all full time employees with a minimum of six months of service. Participants may make tax-deferred contributions of up to 15% of annual compensation subject to certain limitations specified by the Internal Revenue Code. 14. RELATED PARTY TRANSACTIONS Related party transactions for 1997, 1996 and 1995 were as follows (in thousands):
YEAR ENDED DECEMBER 31, ---------------------------- 1997 1996 1995 ------ ------ ------ Sales to licensees $1,660 $2,586 $1,274 Sales to affiliates 88 Purchases from affiliates 882 Accounts Payable to affiliates 21 Accounts receivable from affiliates 17
15. OPERATIONS BY GEOGRAPHIC AREA The Company operates primarily in one industry segment, the distribution of computer hardware and software. Information about the Company's operations in different geographic areas for 1997, 1996 and 1995 is presented below. International activities are principally concentrated in Europe. Corporate assets consist of cash held by the international subsidiaries. A summary of the Company's operations by geographic area follows (in thousands):
UNITED STATES INTERNATIONAL ELIMINATIONS TOTAL --------- --------- --------- --------- YEAR ENDED DECEMBER 31, 1997 Net sales $ 419,360 $ 70,665 $ $ 490,025 Income from operations (1,616) (3,174) (4,790) Identifiable assets 88,964 16,412 (2,211) $ 103,165 Corporate assets 1,645 --------- Total assets $ 104,810 ========= YEAR ENDED DECEMBER 31, 1996 Net sales $ 397,853 $ 59,154 $ $ 457,007 Income from operations 16,972 1,424 18,396 Identifiable assets 137,916 16,033 (5,124) $ 148,825 Corporate assets 976 --------- Total assets $ 149,801 ========= YEAR ENDED DECEMBER 31, 1995 Net sales $ 216,261 $ 26,326 $ $ 242,587 Income from operations 5,575 550 6,125 Identifiable assets 71,359 8,735 (1,916) $ 78,178 Corporate assets 1,214 --------- Total assets $ 79,392 =========
42 23 16. SELECTED QUARTERLY FINANCIAL DATE (UNAUDITED) The following information is for the years ended December 31, 1997 and 1996:
(in thousands, except per share data) First Second Third Fourth DECEMBER 31, 1997 Quarter Quarter Quarter Quarter --------- --------- --------- --------- Net sales $ 122,755 $ 108,043 $ 115,725 $ 143,502 Cost of sales 106,208 97,057 102,694 125,946 --------- --------- --------- --------- Gross profit 16,547 10,986 13,031 17,556 SG&A expenses 12,928 18,285 15,279 16,418 --------- --------- --------- --------- Income (loss) from operations 3,619 (7,299) (2,248) 1,138 Other expense 389 317 326 586 --------- --------- --------- --------- Income (loss) before income taxes 3,230 (7,616) (2,574) 552 Provision (benefit from) for income taxes 1,164 (1,979) (236) 86 --------- --------- --------- --------- Net income (loss) $ 2,066 $ (5,637) $ (2,338) $ 466 ========= ========= ========= ========= Diluted earnings (loss) per share $ 0.16 $ (0.44) $ (0.18) $ 0.04 ========= ========= ========= =========
First Second Third Fourth DECEMBER 31, 1996 Quarter Quarter Quarter Quarter --------- --------- --------- --------- Net sales $ 100,927 $ 111,411 $ 109,396 $ 135,273 Cost of sales 86,964 95,980 93,875 117,179 --------- --------- --------- --------- Gross profit 13,963 15,431 15,521 18,094 SG&A expenses 10,078 11,044 10,436 13,055 --------- --------- --------- --------- Income from operations 3,885 4,387 5,085 5,039 Other expense 468 518 157 254 --------- --------- --------- --------- Income before income taxes 3,417 3,869 4,928 4,785 Provision for income taxes 1,244 1,427 1,726 1,728 --------- --------- --------- --------- Net income $ 2,173 $ 2,442 $ 3,202 $ 3,057 ========= ========= ========= ========= Diluted earnings per share $ 0.21 $ 0.23 $ 0.24 $ 0.23 ========= ========= ========= =========
43 24 REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors Multiple Zones International, Inc. Renton, Washington We have audited the accompanying consolidated balance sheets of Multiple Zones International, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Multiple Zones International, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Seattle, Washington February 10, 1998 45 EX-23.1 8 CONSENT OF COOPERS & LYBRAND L.L.P. 1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Multiple Zones International, Inc. on form S-8 (File No. 333- 06961, File No. 333-13501 and File No. 333-25859) of our report dated February 10, 1998, on our audits of the consolidated financial statements of Multiple Zones International, Inc. as of December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996 and 1995, which report is incorporated by reference in this Form 10-K. COOPERS & LYBRAND L.L.P Seattle, Washington March 25, 1998 44 EX-27.1 9 FINANCIAL DATA SCHEDULE (DECEMBER 31, 1997)
5 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1,645 0 45,820 2,876 40,169 91,786 19,591 7,174 104,810 56,711 0 0 0 37,751 7,220 104,810 490,025 490,025 431,905 431,905 64,528 0 0 (6,408) (965) (5,443) 0 0 0 (5,443) (0.42) (0.42)
EX-27.2 10 FINANCIAL DATA SCHEDULE (DECEMBER 31, 1996)
5 1000 YEAR 9-MOS 6-MOS 3-MOS YEAR DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1995 JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1995 DEC-31-1996 SEP-30-1996 JUN-30-1996 MAR-31-1996 DEC-31-1995 976 1,571 523 994 1,215 0 0 0 0 0 51,122 34,484 34,991 32,083 23,718 1,147 1,051 1,039 986 606 77,501 50,292 47,053 47,822 42,031 136,817 90,297 86,484 85,258 73,344 14,063 11,833 8,687 7,643 7,168 4,304 3,787 3,348 2,992 2,649 149,801 100,778 94,230 92,701 79,392 97,008 52,028 76,063 76,760 65,594 0 0 0 0 0 0 0 6,920 6,691 6,461 0 0 0 0 0 36,988 36,912 2,750 2,750 2,750 12,481 9,249 6,114 3,955 1,986 149,801 100,778 94,230 92,701 79,392 457,007 321,734 212,338 100,927 242,587 457,007 321,734 212,338 100,927 242,587 393,998 276,819 182,944 86,964 211,037 393,998 276,819 182,944 86,964 211,037 46,010 32,701 22,108 10,546 26,511 0 0 0 0 0 0 0 0 0 0 16,999 12,214 7,286 3,417 5,039 6,125 4,397 2,671 1,244 1,847 10,874 7,817 4,615 2,173 3,192 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 10,874 7,817 4,615 2,173 3,192 .94 0.66 0.44 0.21 0.32 .91 0.65 0.44 0.21 0.32
EX-27.3 11 FINANCIAL DATA SCHEDULE (SEPTEMBER 30, 1997)
5 1,000 9-MOS 6-MOS 3-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 SEP-30-1997 JUN-30-1997 MAR-31-1997 11,675 1,028 846 0 0 0 41,106 39,121 40,500 4,806 3,848 1,397 41,568 35,140 47,980 95,702 78,066 94,544 18,735 16,714 15,738 6,359 5,645 5,101 108,736 90,558 107,924 61,106 41,152 53,210 0 0 0 0 0 0 0 0 0 37,689 37,381 37,196 6,450 8,798 14,409 108,736 90,558 107,924 346,523 230,798 100,927 346,523 230,798 100,927 305,959 203,265 106,208 305,959 203,265 106,208 47,524 31,919 13,317 0 0 0 0 0 0 (6,960) (4,386) 3,230 (1,051) (815) 1,164 (5,909) (3,571) 2,066 0 0 0 0 0 0 0 0 0 (5,909) (3,571) 2,066 (0.46) (0.28) 0.21 (0.46) (0.28) 0.21
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