-----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, P+eCYYzjpW1TAaRxRSC1ZoWw6oaenna0QFvUr2l7egPerStJfKW6s+1ioPgtuZEq c3BD0sB7WcDEdOZt4dSWBw== 0000950147-98-000059.txt : 19980202 0000950147-98-000059.hdr.sgml : 19980202 ACCESSION NUMBER: 0000950147-98-000059 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19971102 FILED AS OF DATE: 19980130 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICROAGE INC /DE/ CENTRAL INDEX KEY: 0000814249 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 860321346 STATE OF INCORPORATION: DE FISCAL YEAR END: 1103 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15995 FILM NUMBER: 98517870 BUSINESS ADDRESS: STREET 1: 2400 S MICROAGE WY MS8 CITY: TEMPE STATE: AZ ZIP: 85282 BUSINESS PHONE: 6028042000 MAIL ADDRESS: STREET 1: 2400 SOUTH MICROAGE WAY MS8 CITY: TEMPE STATE: AZ ZIP: 85282 10-K 1 ANNUAL REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES --- EXCHANGE ACT OF 1934 For the fiscal year ended November 2, 1997 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES --- EXCHANGE ACT OF 1934 For the transition period from ___________to ___________ COMMISSION FILE NUMBER 0-15995 MICROAGE, INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 86-0321346 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 2400 South MicroAge Way, Tempe, AZ 85282-1896 (Address of Principal Executive Offices) (Zip Code) (602) 366-2000 (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, $.01 Par Value Per Share (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant was $279,437,057 at December 31, 1997, based on the closing market price of the Common Stock on such date, as reported by the Nasdaq Stock Market. The number of shares of the registrant's Common Stock outstanding at December 31, 1997 was 19,422,821. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 1998 Annual Meeting of Stockholders to be held on April 1, 1998 are incorporated by reference into Part III hereof. ================================================================================ PART I ITEM 1. BUSINESS BUSINESS OVERVIEW MicroAge, Inc. (the "Company"), was incorporated in the State of Arizona in 1976 and reincorporated in the State of Delaware in 1987. The Company is a global systems integrator and a full-line distributor of information technology products and services. Information technology solutions offered by the Company include servers, desktops, mobile computing, mass storage, connectivity, imaging, peripherals, software, and component products. The Company serves large organizations, including corporations and government agencies, through a network of branches and alliances spanning 36 countries, and offers computer resellers over 20,000 products from more than 500 suppliers backed by a suite of technical, financial, logistics, and account management services. Unless the context otherwise requires, as used herein, the term the "Company" refers to MicroAge, Inc., its predecessors and subsidiaries. The Company's headquarters is located at 2400 South MicroAge Way, Tempe, Arizona 85282-1896, and its telephone number is (602) 366-2000. Certain statements contained in this Item may be "forward-looking statements" within the meaning of The Private Securities Litigation Reform Act of 1995. These forward-looking statements may include projections of revenue and net income and issues that may affect revenue or net income; projections of capital expenditures; plans for future operations; financing needs or plans; plans relating to the Company's products and services; and assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking information. Some of the important factors that could cause the Company's actual results to differ materially from those projected in forward-looking statements made by the Company include, but are not limited to, the following: intense competition; narrow margins; dependence on supplier incentive funds; product supply and dependence on key vendors; potential fluctuations in quarterly results; risks of declines in inventory values; no assurance of successful acquisitions or investments; capital intensive nature of the Company's business; dependence on information systems; year 2000 issues; dependence on independent shipping companies; rapid technological change; and possible volatility of stock price. Exhibit 99.1 to this Annual Report on Form 10-K, which is attached hereto and incorporated by reference herein, discusses these important factors in greater detail. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. 2 BUSINESS STRATEGY The Company's dual strategic focus is to pursue profit expansion and revenue growth. The Company's profit expansion strategy focuses on expense control, including the improvement of the Company's internal processes and procedures; effective asset management; and the addition and expansion of higher-margin products and services. Revenue growth is driven primarily by sales to new resellers, including newly-acquired Company-owned resellers; the Company's focus on large account sales; increased demand for the Company's major vendors' products; and the addition of new product lines. There can be no assurance that the Company will experience growth in revenue or profits. BUSINESS GROUPS The Company implements its business strategy through four principal business groups: MicroAge Distribution Group, MicroAge Integration Group, MicroAge Logistics Group, and MicroAge Services Group. In addition, the Company provides various support services to the four business groups, including financial services, through the MicroAge Headquarters Support Group. MicroAge Distribution Group General. The MicroAge Distribution Group provides more than 20,000 technology hardware and software products and value-added services (including product financing, technical support, and distribution) to reseller customers worldwide. The customer group consists of franchised resellers and non-franchised resellers, including value-added resellers ("VARs") (the "Network"). The Company provides distribution and support services targeted to the resellers' unique product and service requirements so that the Company and the resellers may realize operating efficiencies and benefit from economies of scale in product purchasing and distribution, financing, and working capital management. See "MicroAge Logistics Group" below for a discussion of certain of the Company's services to resellers and end-user customers, including distribution and integration services. See "MicroAge Services Group" and "MicroAge Headquarters Support Group" for a discussion of other services available to resellers, including integration and financial services. Resellers generally operate independently, although franchisees operate under the Company's proprietary marks. The Company generally does not require minimum purchase levels from its reseller customers. The loss of any single reseller would not have a material adverse impact on the Company. Reseller Purchasing Terms. The Company offers resellers several financing options, including the option of purchasing products on open credit terms of up to 30 days, subject to credit review and approval. If the Company is successful in achieving continued revenue growth, this reseller financing program will place increased demands on the Company's working capital requirements to fund the associated increase in accounts receivable. See "Management's Discussion and 3 Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" in Part II, Item 7 of this report. See also "MicroAge Headquarters Support Group" for a discussion of the broad range of financial services that the Company offers to resellers. Network Expansion. The Company will continue to pursue Network expansion through the recruitment of established computer resellers that can use and benefit from the products and services offered by the Company. In addition, through the MicroAge Integration Group, the Company has acquired or invested in, and intends to acquire or invest in, computer resellers. See "MicroAge Integration Group -- General" below. MicroAge Integration Group General. The MicroAge Integration Group provides distributed computing solutions to large corporations, government agencies, and educational institutions worldwide through a global network of qualified resellers (the "MIS Network"), which includes affiliated branches and Company-owned resellers. As of January 15, 1998, the Company owned and operated fifty-one locations. Large end-user customers are generally solicited by the Company's large account sales and service force in collaboration with MIS Network resellers. While the MicroAge Network of resellers encompasses thousands of affiliated resellers worldwide, MIS Network resellers must meet rigorous MIS certifications. The MIS Network offers the advantage of the local presence of the MIS Network reseller, combined with the Company's financial and operational stability, to provide consistent pricing and services to large end-user customers. See "MicroAge Services Group" and "MicroAge Headquarters Support Group" for a discussion of various services available to MIS Network resellers and large end-user customers, including integration and financial services. See also "MicroAge Logistics Group -- Distribution Services" below for a discussion of the Company's distribution services to resellers and end-user customers. Acquisitions and Investments. The Company has acquired or invested in, and intends to acquire or invest in, resellers to increase the Company's core service competencies, expand the Company's geographic coverage in key market areas, and strengthen the Company's direct relationship with end-user customers. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" in Part II, Item 7 and Notes 3 and 17 to the Company's Consolidated Financial Statements in Part II, Item 8 for additional information about the Company's acquisition activities. Selective Outsourcing Services. Selective Outsourcing Services serves as a large end-user customer's single point-of-contact for the planning, implementation, and support aspects of a project. Support Services. The MIS Network provides expertise and advanced technical support capabilities that can be accessed at the local level. Nationwide, the MIS Network currently deploys hundreds of technicians, systems engineers, 4 certified network engineers, and supplier-specific certified engineers for various applications. MIS also coordinates strategic service alliances with industry leaders that include DecisionOne Corporation, Digital, Unisys Corporation, and Comdisco, Inc., to support large-account business. In addition, MIS offers expertise in Microsoft Windows NT, Lotus Notes, Cisco, Bay Networks, and Internet-related services. Global Services. "MIS Global" coordinates global fulfillment for international clients through local in-country fulfillment, regional distribution through "MIS Europe," and centralized distribution through exports from the United States. With a global reach that extends to 36 countries, MIS Global also offers the following services and capabilities: project planning and analysis; project management; supplier relations management in export authorization, pricing, warranty, and maintenance; international configuration and transportation services; and international technical support services. MicroAge Logistics Group General. The MicroAge Logistics Group provides distribution and integration services to resellers, large organizations, and technology suppliers. Additional value-added services offered by the MicroAge Logistics Group include channel assembly services, teleservices, and contract logistics. Distribution Services. Product orders are fulfilled and shipped from distribution centers located in Tempe, Arizona, Cincinnati, Ohio, and Reno, Nevada for delivery in one to three business days to a reseller or end-user anywhere in the continental United States. In conjunction with product ordering and shipment, the Company offers various services to end-user customers and resellers, including expedited delivery, vendor direct shipment, and deferred shipment. The Company has relationships with more than 500 on-demand suppliers to quickly procure products outside of the Company's major manufacturing alliances. The Company also offers consigned storage and redistribution of customer-owned proprietary products. Integration Services. The Company's two primary Quality Integration Centers are located in Tempe, Arizona and Cincinnati, Ohio. The Quality Integration Centers are ISO 9001- 1994 certified and offer custom integration services, including systems set-up; local area network integration and testing; board-level enhancement; disk or tape drive installation; device testing; and software loading, including complex operating systems. Each integrated system is tested and inspected before delivery to ensure that manufacturer and customer specifications are met. The Quality Integration Centers can incorporate unique or highly complex system testing requirements into the integration process. The Quality Integration Centers also direct-ship configured systems to end-user customers, allowing resellers to service these customers more profitably by reducing inventory levels, carrying costs, and freight expense, and by freeing up technical staff. 5 Channel Assembly Services. The Company's Tempe and Cincinnati Quality Integration Centers include state-of-the-art Assembly Solutions Areas dedicated to supporting systems assembly and joint manufacturing projects. The Company is a recognized leader in channel assembly and is an authorized assembly provider for IBM's Authorized Assembly Partner program, Digital's Seamless Supply Chain program, Hewlett Packard's Extended Solutions Partnership Program, Compaq's Channel Configured Products Program, and channel assembly programs for Fujitsu, Panasonic, Unisys, and Toshiba. Teleservices. Through MicroAge Service Solutions, the Company offers a variety of call center services, including help desk support for manufacturers, incoming/outgoing customer service calls, and telemarketing services. MicroAge Services Group General. The MicroAge Services Group consists of several of the Company's internal business units and surveys customer needs and establishes the go-to-market strategies that provide information technology solutions ranging from mobile computing and computer telephony integration to multimedia and software licensing to client life cycle services. Electronic Commerce. The Company's electronic commerce initiatives are led by ECadvantage. Introduced in September 1996, ECadvantage is a series of integrated tools that allow MicroAge's resellers and large account customers to electronically configure systems, retrieve technical specifications, generate quotes, and place orders. ECadvantage provides access to MicroAge's extensive product catalog, including product and technical specifications, as well as capabilities for order management and checking on order status at any time. In addition to ECadvantage, the Company provides the capability for customers to order product through various other electronic means. Approximately 40% of all orders are received electronically. MicroSource. MicroSource incorporates the MicroAge Internet Department and MicroAge Multimedia Department. The Internet Department is a focal point for Internet-related projects and web-hosting services. The Multimedia Department develops custom multimedia applications for businesses. MicroAge Data Services. "MDS" is designed to capture, package, and deliver product and market information to technology manufacturers, resellers, consultants, and end-users. MDS also manages the Company's information systems infrastructure and provides help desk services to large organizations through MicroAge Information Services. In addition, MDS provides resellers and certain end-user customers with various technical services, including telephone hotline support, technical publications, on-line technical services, training programs, product evaluation, and on-site consultation. 6 MicroAge Marketing. Marketing develops, promotes, and implements high-quality marketing programs that create demand and increase sales for the Company and its suppliers and enhance the MicroAge brand. MicroAge Category Management. In an effort to maximize revenue and profitability, the Company has implemented product/service category management principles and practices, managing categories as strategic businesses, and producing enhanced business results by focusing on integrating sales, marketing, and purchasing to deliver client value. Client Services. Through client services, the Company delivers customized end-user help desk solutions for corporate clients. Global Support Services. Through Global Support Services ("GSS"), the Company offers a "Total Systems Support" program that provides a comprehensive hardware and software support solution through the entire product life cycle, from planning and design to implementation and ongoing management. GSS maintenance services are delivered through a worldwide service network of technical support professionals who are vendor certified on all major network operating systems and platforms. Network Services. The Company's Network Services Group is focused on the creation of Information Technology Services which are marketed to external customers while supporting the internal requirements of the Company. A network services product offering will provide network operations and monitoring to meet the growing demand for outsourced communication support. MicroAge Headquarters Support Group Headquarters Support provides numerous services, including financial (described below), administrative, human resources, and facilities services. The Company has developed numerous financial services that are designed to improve the ability of qualifying resellers to purchase products from the Company in a cost-effective manner. The Company also sponsors payment programs with commercial credit companies to facilitate reseller purchases of products from vendors that do not offer their own payment programs. Under these programs, the Company receives payment for product sales within three to five business days and pays the commercial credit company a fee based on a percentage of the products sold. The Company also offers a program to its resellers whereby the Company grants credit and assumes collection and administration responsibilities for large end-user customers. The continuing use of this program will provide increased revenue and profit opportunities for the Company but will continue to increase working capital requirements as accounts receivable for large end-user customers increase. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" in Part II, Item 7 of this report. 7 PRODUCTS AND SUPPLIERS Product Strategy. The Company sells a broad selection of products with a predominant focus on the products of major microcomputer and peripheral manufacturers. Three suppliers of the Company each represented more than 10% of total product sales for the year ended November 2, 1997: COMPAQ, Hewlett-Packard, and IBM. The following table sets forth the percentage of sales of these suppliers' products for the last three fiscal years: 1995 1996 1997 COMPAQ 21% 22% 23% Hewlett-Packard 20% 20% 20% IBM 15% 14% 14% Sales of these three manufacturers' products represented approximately 57% and 56% of the Company's revenue from product sales during fiscal 1997 and fiscal 1996, respectively. The Company's agreements with these suppliers generally are renewed periodically and permit termination by the vendor without cause, generally upon 30 to 90 days' notice, depending on the vendor. The Company believes that these provisions are standard in the computer reseller industry. In addition, the Company's business is dependent upon price and related terms and product availability provided by its key suppliers. Although the Company considers its relationships with COMPAQ, Hewlett-Packard, and IBM to be good, there can be no assurance that these relationships will continue as presently in effect or that changes by one or more of these key suppliers in their volume discount schedules or other marketing programs would not adversely affect the Company. Termination or nonrenewal of the Company's agreements with COMPAQ, Hewlett-Packard, or IBM would have a material adverse effect on the Company's business. The Company continually evaluates its product assortment based on technological advances, the market for information technology products, and the Network's requirements related to technological capability, product availability, and marketability. Over the last several years, the Company has expanded its product offerings in response to market conditions and has established relationships with new suppliers to distribute, service, and support both high-end, higher-priced workstation products as well as complementary computer peripheral products and software. These products generally carry higher profit margins than the Company's traditional brand name products and have historically been distributed primarily by wholesale distributors or sold directly to end-users by manufacturers. Sales of these products generally require the extension of credit by the Company, resulting in increased working capital requirements. In addition, the Company's Quality Integration Centers now include state-of-the-art Assembly Solutions Areas dedicated to supporting systems assembly and joint manufacturing projects. 8 Product Supply The computer reseller industry continues to experience product supply shortages and customer order backlogs due to the inability of certain manufacturers to supply certain products. In addition, certain suppliers have initiated new channels of distribution that increase competition for the available product supply. The backlog of orders for products distributed by the Company was approximately $100.9 million on November 2, 1997, compared to approximately $401.6 million at November 3, 1996. This decrease in backlog orders for fiscal year 1997 was due primarily to the easing of shortages in notebook computers and certain product components. Such orders are not necessarily firm since customers may place orders with several computer resellers and will accept products from the first computer reseller to provide delivery. There can be no assurance that suppliers will be able to maintain an adequate supply of products to fulfill all of the Company's customer orders on a timely basis. Although the Company has not historically encountered such conditions, the failure to obtain adequate product supplies, if competitors were able to obtain them, could have a material adverse effect on the Company's results of operations. Supplier Relationships Because of its quantity purchasing capabilities, the Company generally obtains volume discounts from its suppliers, enabling it to sell products to resellers on more favorable terms than the typical reseller could obtain on its own from such suppliers. The Company's agreements include provisions designed to protect the Company's inventory risk in the event of price reductions by its suppliers on eligible products in the Company's inventory and to permit the return of slow-moving and other products for credit (generally at cost minus a restocking fee). However, suppliers are now taking steps to reduce such price protection. Although the Company believes that it will be able to manage inventories at levels which minimize the risk of non-protected price decreases, there can be no assurance that losses from price reductions will not be incurred. Such losses could have a material adverse effect on the Company's results of operations. Subject to product availability, the Company carries inventory at levels that it believes will enable it to meet the anticipated needs of its resellers and end-user customers and, to a lesser extent, to take advantage of certain vendor discounts and promotions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for information regarding the impact of supplier incentives on the Company's gross profit percentage. Several major suppliers sponsor payment programs with commercial credit companies to facilitate product sales to and through the Network. Such programs generally provide Network resellers with payment terms ranging from 30 to 60 days, depending on the vendor. Under these programs, the Company generally receives payment for product sales within three to five business days, thus significantly reducing the Company's working capital requirements and credit exposure. See "MicroAge Headquarters Support Group" for a discussion of payment 9 programs that the Company sponsors with commercial credit companies to facilitate reseller purchases of products from suppliers that do not offer their own payment programs. COMPETITION The computer reseller industry is characterized by intense competition, based primarily on product availability, price, speed of delivery, credit availability, ability to tailor specific solutions to customer needs, quality and breadth of product lines, service and post-sale support, and quality of customer training. In addition, the Company faces competition in the recruitment and retention of resellers for the Network. The Company and Network locations compete for sales with numerous resellers, including (i) master resellers; (ii) direct resellers; (iii) wholesalers (resellers that do not sell to end-users); (iv) suppliers that sell directly to large purchasers; and (v) parties that implement other sales methods, such as direct mail, computer "superstores," and mass merchandisers. EMPLOYEES As of November 2, 1997, the Company employed approximately 4,400 persons, approximately 1,750 of whom were employed at the forty Company-owned reseller locations. None of the Company's employees are represented by labor unions. The Company considers its employee relations to be good. GOVERNMENT REGULATION Although the Company is not presently offering or selling franchises, the Company remains subject to a substantial number of state laws regulating franchise operations. In certain cases, statutes and court-created doctrines apply substantive standards to the relationship between franchisor and franchisee, including restrictions on the Company's ability to terminate or refuse to renew a franchise agreement. The Company believes it is in substantial compliance with all such regulations. See Note 2 to the Company's Consolidated Financial Statements in Part II, Item 8 for additional information regarding the Company's franchising activities. TRADEMARKS AND SERVICE MARKS The Company holds various trademarks and service marks, including, among others, MicroAge(R), The Solution Store(R), The Solution Center(R), Solutions(R), MicroSource(R), MicroAge 2000(R), ECSource(TM), ECadvantage(TM), and NetGenuity(TM). All trademarks and service marks are registered in the United States, and certain trademarks and service marks are registered in various foreign countries. The marks are not otherwise registered with any states; however, the Company also claims common law rights to the marks based on adoption and use. Management believes that the value of the Company's marks is increasing with the development of its business, but that the business of the Company as a whole is not materially dependent on such marks. 10 SEASONALITY Although the Company's financial performance has not exhibited significant seasonality in the past, the Company and the computer industry in general tend to follow a sales pattern with peaks occurring near the end of the calendar year, due primarily to special vendor promotions and year-end business purchases. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information regarding the executive officers of the Company as of January 15, 1998: NAME AGE POSITION Jeffrey D. McKeever..... 55 Chairman of the Board and Chief Executive Officer Robert G. O'Malley...... 52 President Alan P. Hald............ 51 Secretary; and President, MicroAge Enterprises, Inc. James R. Daniel......... 50 Senior Vice President, Chief Financial Officer and Treasurer; and President, Headquarters Services, MicroAge Computer Centers, Inc. John S. Lewis........... 44 President, Integration Group; and President, MicroAge Infosystems Services, Inc. Christopher J. Koziol... 37 Senior Vice President - Sales and President, Distribution Group Robert W. Mason......... 55 Chief Information Officer; and President, Services Group James G. Manton......... 50 Senior Vice President - Operations John H. Andrews......... 41 President, Logistics Group; and President, MicroAge Logistics Services, Inc. Kathleen S. Pushor ..... 40 President, ECadvantage, Inc. Raymond L. Storck....... 37 Vice President - Controller and Assistant Treasurer James H. Domaz.......... 42 Vice President, Corporate Counsel and Assistant Secretary JEFFREY D. MCKEEVER has served as Chief Executive Officer since February 1987 and as Chairman of the Board since October 1991. Mr. McKeever co-founded the Company in August 1976 and has served as a director of the Company since October 1976. He also served as President from June 1995 to January 1996, from January 1993 to February 1993, and from February 1987 to October 1991, as Chairman of 11 the Board and Secretary from October 1976 to February 1987, and as Treasurer from October 1976 to February 1983 and from February 1987 to December 1988. ROBERT G. O'MALLEY has served as President of the Company since November 1996 and as President, MicroAge Data Services, MCCI, since May 1995. He also served as Vice President Services Marketing of the Company from January 1996 to November 1996. Prior to joining the Company, he held various positions with IBM Corporation since January 1976, including General Manager, PC Desktop Systems from September 1994 to February 1995; Vice President of Marketing & Brand Management - Americas from February 1994 to September 1994; Managing Director, Asia Pacific PC Operations from January 1992 to January 1994; Vice President, National Distribution Division, from August 1990 to December 1991; and Director, US Finance and Planning, from February 1988 to July 1990. ALAN P. HALD has served as Secretary since February 1987 and as President, MicroAge Enterprises, Inc., since January 1996. He co-founded the Company in August 1976 and served as a director of the Company from October 1976 to April 1997, and as Vice-Chairman of the Board from October 1991 to April 1997. He also served as President from February 1993 to August 1993 and from October 1976 to February 1987, Chairman of the Board from February 1987 to October 1991 and Treasurer from February 1983 to February 1987. JAMES R. DANIEL has served as Senior Vice President and Chief Financial Officer of the Company since January 1993, and as Treasurer of the Company from January 1993 until December 1994, at which time he assumed the additional position of President, Headquarters Services, MicroAge Computer Centers, Inc. He reassumed the title of Treasurer in September 1995. Prior to joining MicroAge, he served as Chief Financial Officer and Treasurer of Dell Computer Corporation from 1991 to 1993. Prior to Dell, he served as Chief Financial Officer and Treasurer for SCI Systems, Inc., an electronics contract manufacturer, from 1984 to 1991. Mr. Daniel is a certified public accountant. JOHN S. LEWIS has served as President, Integration Group of the Company and as President, MicroAge Infosystems Services, Inc. since January 1997. Prior to joining the Company, he served as Executive Vice President, Division Manager of Wells Fargo Bank's Southwest Region branch network from April 1996, when Wells Fargo acquired First Interstate Bancorp, to November 1996. He also served as Chairman and Chief Executive Officer of First Interstate's Southwest Region and as Chairman of the Board and Chief Executive Officer of First Interstate Bank of Arizona from January 1995 to April 1996. Mr. Lewis joined First Interstate Bank of Arizona in August 1990 as Executive Vice President and served in a variety of positions, including Chief Operating Officer for the Southwest Region from April 1994 to December 1995. CHRISTOPHER J. KOZIOL has served as President, Distribution Group since November 1996, and as Senior Vice President - Sales of the Company since May 1996. He served as President, MicroAge Infosystems Services, Inc. from October 1995 to January 1997, as President, MicroAge Infosystems Services, MCCI, from July 1993 12 to October 1995, and as Vice President, Sales, MCCI, from January 1992 to July 1993. He joined the Company in September 1985 and served as Director-Regional Support from March 1988 to December 1991. ROBERT W. MASON has served as Chief Information Officer and as President, Services Group, since June 1997. Prior to joining the Company, he served as Vice President and CIO at Anheuser-Busch from 1994 to 1997, Manager of Information Services for GE Lighting from 1986 to 1994, and Director of Information Services for several of Johnson & Johnson's companies from 1969 to 1994. Mr. Mason's experience with the Johnson & Johnson companies included five years with Johnson & Johnson-Brazil and several years as CFO of Johnson & Johnson's Orthopaedics company. JAMES G. MANTON has served as Senior Vice President - Operations of the Company since November 1996. He also served as Group Vice President - Technical Services, MicroAge Logistics Services, Inc. from September 1993 to November 1996 and as Vice President Technical Services, MicroAge Logistics Services, MCCI from January 1993 to September 1993. Mr. Manton served as Executive Vice President from January 1987 to February 1989, at which time he left the Company to start his own companies. He served as President of Unizone, Inc., a systems integrator, from March 1989 to July 1993 and as Chairman of QualiTime Strategies, Inc., a consulting firm engaged in cycle time reduction, from July 1991 to December 1992. JOHN H. ANDREWS has served as President, Logistics Group of the Company since November 1996 and as President, MicroAge Logistics Services, MCCI, since July 1993. He also served as Vice President - Logistics of the Company from December 1995 to November 1996; Vice President - Operations from July 1993 to December 1995; Group Vice President, Operations from January 1993 to July 1993; Vice President and Chief Financial Officer from June 1990 to January 1993; and as Treasurer from June 1991 to January 1993. Mr. Andrews joined the Company in 1984 and served as Principal Accounting Officer from December 1988 to June 1990. Mr Andrews is a certified public accountant. KATHLEEN S. PUSHOR has served as President, ECadvantage, Inc. since November 1996. She also served as President, MicroAge Channel Services of MicroAge Computer Centers, Inc. from July 1993 to January 1996; as Vice President-Marketing of the Company from July 1993 to April 1997; and as Group Vice President, Product Marketing from June 1992 to July 1993. She also served as Vice President, Market Development from May 1991 to May 1992. Ms. Pushor joined the Company in 1989 and served as Director-IBM Product Management from January 1990 to April 1991. Prior to joining the Company, she served as a Director of Finance and Personnel with Coopers and Lybrand from 1979 to 1989. Ms. Pushor was previously certified as a certified public accountant in Arizona and Indiana. RAYMOND L. STORCK has served as Vice President - Controller of the Company since July 1993, and as Controller and Assistant Treasurer since October 1991. He joined the Company in 1986 and served in positions in accounting, reporting and 13 analysis, including Director of Planning and Analysis from June 1990 to July 1991. JAMES H. DOMAZ has served as Vice President since November 1997, Corporate Counsel and Assistant Secretary of the Company since November 1996, as Legal Counsel from April 1996 to November 1996, and Associate Counsel from May 1993 to April 1996. Prior to joining the Company he served as General Counsel for C&L Distributing, Inc. from May 1991 to May 1993. ITEM 2. PROPERTIES The Company's executive offices are located in Tempe, Arizona and occupy approximately 232,428 square feet of commercial office space. The Company operates automated distribution and logistics centers in Tempe, Arizona and Cincinnati, Ohio, which occupy approximately 300,000 square feet each, and in Reno, Nevada, which occupies approximately 100,000 square feet. The Company also maintains a 125,000 square foot Technical Services Center in Tempe, Arizona, adjacent to a 135,000 square foot Quality Integration Center, and an 85,000 square foot office building in Phoenix, Arizona. As of January 15, 1998 the Company operated fifty-one Company-owned reseller locations in the following cities: Anchorage, Alaska; Bellevue, Washington; Boca Raton and Miami, Florida; Burlington, Massachusetts; Cerritos, Culver City, Dublin, Irvine, and Van Nuys, California; Chesterfield, Missouri; Chicago, Illinois; Cincinnati and Columbus, Ohio; Edison, New Jersey; Exton and Pittsburgh, Pennsylvania; Frederick and Gaithersburg, Maryland; Hauppauge and New York, New York; Houston and Irving, Texas; Nashville, Tennessee; Novi, Michigan; Oklahoma City and Tulsa, Oklahoma; Phoenix and Scottsdale, Arizona; Plymouth, Minnesota; Portland, Oregon; Richmond, Virginia; Salt Lake City, Utah; Westminster, Colorado; and Wilton, Connecticut. All facilities are leased. The Company believes that its properties and equipment are well-maintained, in good operating condition, and adequate for its present foreseeable needs. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fourth quarter of fiscal 1997. 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the over-the-counter market under the symbol MICA and is quoted on the Nasdaq National Market. The following table sets forth the quarterly high and low sale prices for the common stock as reported by the Nasdaq National Market for the two most recent fiscal years: RANGE OF SALE PRICES -------------------- HIGH LOW ---- --- FISCAL 1996 - ----------- First Quarter.................................. $9 1/2 $7 1/2 Second Quarter................................. $10 5/8 $9 Third Quarter.................................. $15 3/8 $11 Fourth Quarter................................. $20 $12 7/16 FISCAL 1997 - ----------- First Quarter.................................. $24 1/4 $12 3/4 Second Quarter................................. $15 3/8 $12 1/2 Third Quarter.................................. $24 1/4 $13 7/16 Fourth Quarter................................. $29 1/4 $21 3/8 As of January 15, 1998, there were approximately 1,155 stockholders of record of the common stock. The Company believes that as of such date there were approximately 4,564 beneficial holders of the common stock. The Company has never declared or paid a cash dividend on its common stock and does not presently intend to do so. Future dividend policy will depend upon the Company's earnings, capital requirements, financial condition, and other factors deemed relevant by the Company's Board of Directors. In two separate transactions in January and July 1997, and in three separate transactions in September 1997, the Company acquired a total of five resellers. In connection with the mergers, the Company issued 640,493; 108,417; 609,779; 932,039; and 326,279 shares of its common stock, respectively, to the resellers, which became subsidiaries of the Company. Exemption from registration for the issuances of the common stock for each of the five transactions is claimed pursuant to Section 4(2) of the Securities Act of 1933, as amended, regarding transactions by an issuer not involving any public offering. 15 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data for the five fiscal year periods ended November 2, 1997 are derived from the Company's Consolidated Financial Statements. During fiscal 1997, the Company made several acquisitions, three of which have been accounted for as poolings of interest. Accordingly, the Company's consolidated financial statements have been restated to include the accounts and operations of the pooled companies for all periods presented. The selected financial data should be read in conjunction with the Company's Consolidated Financial Statements and related notes included elsewhere in this report. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations."
INCOME STATEMENT DATA: (1) Fiscal years ended ----------------------------------------------------------------------- Nov. 2, Nov. 3, Oct. 29, Oct. 30, Sept. 30, 1997 1996 1995(2) 1994 1993 ----------------------------------------------------------------------- (in thousands, except per share data) Revenue $4,446,308 $3,696,160 $3,098,976 $2,316,240 $1,558,293 Gross profit 309,680 225,151 174,324 130,913 86,399 Income before income taxes 43,337 25,009 5,100 29,076 18,577 Net income 24,965 14,110 3,634 17,999 11,441 Net income per common share $ 1.40 $ 0.84 $ 0.22 $ 1.18 $ 1.04 Weighted average common and 17,810 16,781 16,236 15,283 11,023 common equivalent shares BALANCE SHEET DATA: Nov. 2, Nov. 3, Oct. 29, Oct. 30, Sept. 30, 1997 1996 1995(2) 1994 1993 ----------------------------------------------------------------------- (in thousands) Working capital $ 142,858 $ 113,052 $ 112,017 $ 116,627 $ 86,114 Total assets 974,133 736,321 613,635 540,039 338,372 Long-term obligations 35,187 3,892 4,110 2,095 1,321 Stockholders' equity 237,954 190,050 173,751 169,592 110,537
(1) Effective for the Company's 1994 fiscal year, the Company changed its fiscal year end from September 30 to the Sunday nearest October 31 in each calendar year. (2) The fiscal year ended October 29, 1995 included $9,029,000 of restructuring and other one-time charges. See "Managements's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS During fiscal 1997, the Company made several acquisitions, three of which have been accounted for as poolings of interest. Accordingly, the Company's consolidated financial statements have been restated to include the accounts and operations of the pooled companies for all periods presented. See Note 3 to the Company's Consolidated Financial Statements in Part II, Item 8. 16 Certain statements contained in this Item may be "forward-looking statements" within the meaning of The Private Securities Litigation Reform Act of 1995. These forward-looking statements may include projections of revenue and net income and issues that may affect revenue or net income; projections of capital expenditures; plans for future operations; financing needs or plans; plans relating to the Company's products and services; and assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking information. Some of the important factors that could cause the Company's actual results to differ materially from those projected in forward-looking statements made by the Company include, but are not limited to, the following: intense competition; narrow margins; dependence on supplier incentive funds; product supply and dependence on key vendors; potential fluctuations in quarterly results; risks of declines in inventory values; no assurance of successful acquisitions or investments; the capital intensive nature of the Company's business; dependence on information systems; year 2000 issues; dependence on independent shipping companies; rapid technological change; and possible volatility of stock price. Exhibit 99.1 to this Annual Report on Form 10-K, which is attached hereto and incorporated by reference herein, discusses these important factors in greater detail. The Company undertakes no obligations to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Results of Operations The following table sets forth, for the indicated periods, data as percentages of total revenue:
Fiscal years ended ---------------------------------------------------- Nov. 2, Nov. 3, Oct. 29, 1997 1996 1995 ------------ ------------ ------------ Revenue $ 4,446,308 $ 3,696,160 $ 3,098,976 Cost of sales 93.0% 93.9% 94.3% ------------ ------------ ------------ Gross profit 7.0 6.1 5.7 Operating and other expenses Operating expenses 5.4 5.0 4.7 Restructuring and other one-time charges -- -- 0.3 ------------ ------------ ------------ Total 5.4 5.0 5.0 ------------ ------------ ------------ Operating income 1.6 1.1 .7 Other expenses - net .6 .4 .5 ------------ ------------ ------------ Income before income taxes 1.0 .7 .2 Provision for income taxes .4 .3 .1 ------------ ------------ ------------ Net income .6% .4% .1% ============ ============ ============
17 Fiscal Year Ended November 2, 1997 Versus Fiscal Year Ended November 3, 1996 The fiscal year ended November 2, 1997 included 52 weeks, while the fiscal year ended November 3, 1996 included 53 weeks. See Note 1 to the Company's Consolidated Financial Statements in Part II, Item 8. Total Revenue. Total revenue during fiscal 1997 was $4.4 billion, $2.8 billion (63%) of which was attributable to the Company's distribution business, and $1.6 billion (37%) of which was attributable to the Company's systems integration business. The Company's distribution business is conducted through the MicroAge Distribution Group, which provides more than 20,000 technology hardware and software products and value-added services to reseller customers worldwide. The Company's systems integration business is conducted through the MicroAge Integration Group, which provides distributed computing solutions to large corporations, government agencies, and educational institutions worldwide through a global network of qualified resellers, which includes affiliated branches and Company-owned resellers. See "Business -- Business Groups" in Part 1, Item 1 for additional information about the MicroAge Distribution Group, the MicroAge Integration Group, and the Company's other principal business groups. Total revenue increased $750 million, or 20%, for the fiscal year ended November 2, 1997 as compared to the fiscal year ended November 3, 1996. This revenue increase included a $633 million, or 30%, increase in distribution business revenue and a $106 million, or 7%, increase in systems integration business revenue. The increase in revenue was attributable to sales to resellers added since November 3, 1996, increased demand for the Company's major suppliers' products, improved product availability, the Company's addition of new product offerings, the growth of the microcomputer products industry and acquisitions of reseller locations. Gross Profit Percentage. The Company's gross profit percentage was 7.0% for the fiscal year ended November 2, 1997 and 6.1% for the fiscal year ended November 3, 1996. The increase in the Company's gross profit percentage results primarily from a higher service content in revenues, which generates higher margins, the growth of the Company's integration business, including acquisitions of reseller locations (which generally have higher gross margin and operating expense percentages than the Company's other business groups), and increasing supplier incentives and early pay discounts. Supplier incentives recognized by the Company in fiscal 1997 have increased significantly from 1996 levels. The Company believes that this increase is a result of suppliers attempting to be more price competitive without lowering suggested prices. For the most part, these incentives are based on sales volume. A large portion of the incentives are passed on to the Company's customers. 18 However, a portion of the incentives have positively impacted the Company's income. There can be no assurance that supplier incentive funds will continue at levels experienced in fiscal 1997. A substantial reduction in the supplier funds available to the Company would have a material adverse effect on the Company's results of operations. Future gross profit percentages may be affected by market pressures, the introduction of new Company initiatives, changes in revenue mix, future acquisitions, changes in supplier incentive funds, the Company's utilization of early payment discount opportunities, supplier pricing actions, and other competitive and economic pressures. See "Potential Fluctuations in Operating Results" below for information regarding industry trends that may affect future gross profit percentages. Operating Expense Percentage. As a percentage of revenue, operating expenses increased to 5.4% for the fiscal year ended November 2, 1997 compared to 5.0% for the fiscal year ended November 3, 1996. The increase in operating expenses as a percentage of revenue was primarily due to acquisitions of reseller locations (which generally have higher gross margin and operating expense percentages than the Company's other business groups) and to increased spending in support of electronic commerce initiatives and capacity expansion in personnel, systems and facilities. Other Expenses - Net. Other expenses - net increased to $27.4 million for the fiscal year ended November 2, 1997 from $13.8 million for the fiscal year ended November 3, 1996. The increase was primarily attributable to increases in average daily borrowings to support higher inventory and accounts receivable levels and to take advantage of early payment discount opportunities. The early pay discounts are reflected in the Company's gross profit. UPS Strike - Impact on Earnings Per Share. On August 4, 1997, Teamsters union members went on strike against United Parcel Service (UPS). The strike lasted 15 days and impacted the Company through increased delivery times, increased transportation costs and decreased call center revenue and profit. Because of the brevity of the strike, the higher transportation costs were not passed on by the Company to its customers. The UPS strike resulted in approximately a $0.03 decrease in earnings per share for fiscal 1997. Fiscal Year Ended November 3, 1996 Versus Fiscal Year Ended October 29, 1995 The fiscal year ended November 3, 1996 included 53 weeks, while the fiscal year ended October 29, 1995 included 52 weeks. See Note 1 to the Company's Consolidated Financial Statements in Part II, Item 8. Total Revenue. Total revenue increased $597 million, or 19%, to $3.7 billion for the fiscal year ended November 3, 1996 as compared to the fiscal year ended October 29, 1995. This revenue increase included a $422 million, or 25%, increase in distribution business revenue and a $236 million, or 18%, increase in systems integration business revenue, partially offset by a decrease in 19 revenue due to the sale of the Company's memory distribution business in the fourth quarter of fiscal year 1995. These revenue increases were primarily due to sales to resellers (primarily non-franchised resellers) added since October 29, 1995, the Company's focus on large account sales, increased demand for the Company's major vendors' products and the Company's addition of new product lines. Gross Profit Percentage. The Company's gross profit percentage was 6.1% for the fiscal year ended November 3, 1996 and 5.6% for the fiscal year ended October 29, 1995. This increase was primarily due to the growth of the Company's integration business. Operating Expense Percentage. As a percentage of revenue, operating expenses were 5.0% for the fiscal years ended November 3, 1996 and October 29, 1995. Operating expenses increased from $153.4 million for fiscal 1995 to $186.3 million for fiscal 1996. The increase was primarily due to increased costs as a result of higher volumes. Restructuring and Other One-Time Charges. During the fourth quarter of fiscal 1995, the Company approved and implemented actions targeted at reducing the Company's future cost structure and improving its profitability. These actions included, among other things, (i) the sale of the Company's memory distribution business, (ii) outsourcing a certain business function and (iii) a reduction in the number of the Company's employees. The Company's consolidated statement of income for fiscal 1995 includes $9.0 million of pretax charges ($5.4 million net of tax benefits, or $0.38 per share) for restructuring and other one-time charges. See Note 15 of the Company's Consolidated Financial Statements in Part II, Item 8 for additional information regarding the 1995 restructuring charges. Other Expenses - Net. Other expenses - net decreased to $13.8 million for the fiscal year ended November 3, 1996 from $15.9 million for the fiscal year ended October 29, 1995. The decrease is primarily attributable to a decrease in net financing costs during the year as a result of the Company's focus on inventory management during the 1996 fiscal year. Days cost of sales in ending inventory decreased from 38 days at October 29, 1995 to 33 days at November 3, 1996. Potential Fluctuations in Operating Results The Company's operating results may vary significantly from quarter to quarter depending on certain factors, including, but not limited to, demand for the Company's information technology products and services, the amount of supplier incentive funds received by the Company, the results of acquired businesses, product availability, competitive conditions, new product introductions, changes in customer order patterns and general economic conditions. In particular, the Company's operating results are sensitive to changes in the mix of product and service revenues, product margins, inventory adjustments, and interest rates. See "Products and Suppliers" and "Competition" in Part I, Item 1 for additional information regarding certain of these factors. Although the Company attempts to 20 control its expense levels, these levels are based, in part, on anticipated revenues. Therefore, the Company may not be able to control spending in a timely manner to compensate for any unexpected revenue shortfall. As a result, quarterly period-to-period comparisons of the Company's financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. In addition, although the Company's financial performance has not exhibited significant seasonality in the past, the Company and the computer industry in general tend to follow a sales pattern with peaks occurring near the end of the calendar year, due primarily to special vendor promotions and year-end business purchases. Liquidity and Capital Resources The Company has financed its growth and cash needs to date primarily through working capital financing facilities, bank credit lines, common stock offerings and cash generated from operations. The primary uses of cash have been to fund increases in inventory and accounts receivable resulting from increased sales. If the Company is successful in achieving continued revenue growth (see "Business Strategy" in Part I, Item 1), its working capital requirements will continue to increase. The Company has acquired or invested in, and intends to acquire or invest in, resellers to increase core service competencies, expand the Company's geographic coverage in key market areas, and strengthen the Company's direct relationships with end-user customers. During fiscal 1997, the Company completed seven acquisitions. In addition to cash and other consideration, the Company issued 2,617,007 shares of common stock in connection with the acquisitions. See Note 3 to the Company's Consolidated Financial Statements in Part II, Item 8 for additional information regarding these acquisitions. The Company has completed three additional acquisitions since the end of fiscal 1997 in exchange for 1,623,382 shares of common stock. In addition to these acquisitions, the Company made investments in or loans to companies totaling $2.4 million during fiscal 1997. See Note 13 to the Company's Consolidated Financial Statements in Part II, Item 8 for information regarding non-cash investment activities. The Company's future acquisitions or investments may be made utilizing cash, stock or a combination of cash and stock. Cash provided by operating activities was $9.4 million in 1997 as compared to $44.7 million in 1996. The decrease was primarily due to a change in cash used by inventory and accounts payable. During fiscal 1997, $5.6 million was used in operating activities for inventory and accounts payable compared to $77.3 million provided by inventory and accounts payable during 1996. The cash provided in 1996 was the result of a decrease in days cost of sales in ending inventory from 37 days at the end of 1995 to 33 days at the end of 1996, while accounts payable days increased from 47 days to 48 days for the same period. Days cost of sales in ending inventory increased from 33 days at November 3, 1996 to 35 days at November 2, 1997, while days cost of sales in ending accounts payable increased from 48 days to 49 days for the same period. 21 The change in cash provided by inventory and accounts payable was partially offset by a decrease in cash used by accounts receivable from $84.8 million for 1996 to $32.7 million for 1997. The change in cash used by accounts receivable was primarily due to an increase in receivables sold under a financing facility (see discussion below) from $190.8 million at November 3, 1996 to $278.8 million at November 2, 1997. Days sales in ending receivables adjusted for the sold receivables were 42 days at November 2, 1997 compared to 43 days at November 3, 1996. Cash used in investing activities increased from $28.9 million in 1996 to $38.3 million in 1997 due to an $11.7 million increase in purchases of property and equipment as a result of increased spending for electronic commerce initiatives and capacity expansion in systems and facilities. Cash provided by financing activities was $30.8 million in 1997 compared to cash used in 1996 of $8.0 million. The change was primarily due to increased borrowings under the Company's line of credit. The Company maintains three financing agreements (the "Agreements") with financing facilities totaling $675 million. The Agreements include an accounts receivable facility (the "A/R Facility") and inventory financing facilities (the "Inventory Facilities"). Under the A/R Facility, the Company has the right to sell certain accounts receivable from time to time, on a limited recourse basis, up to an aggregate amount of $350 million sold at any given time. At November 2, 1997, the net amount of sold accounts receivable was $278.8 million. The Inventory Facilities provide for borrowings up to $325 million. Within the Inventory Facilities, the Company has lines of credit for the purchase of inventory from selected product suppliers ("Inventory Lines of Credit") of $175 million and a line of credit for general working capital requirements ("Supplemental Line of Credit") of $150 million. Payments for products purchased under the Inventory Lines of Credit vary depending upon the product supplier, but generally are due between 45 and 60 days from the date of the advance. Amounts borrowed under the Supplemental Line of Credit may remain outstanding until the expiration date of the Agreements (August 2000). No interest or finance charges are payable on the Inventory Lines of Credit if payments are made when due. At November 2, 1997, the Company had $76.6 million outstanding under the Inventory Lines of Credit (included in accounts payable in the accompanying Balance Sheets), and $30.7 million outstanding under the Supplemental Line of Credit. Of the $675 million of financing capacity represented by the Agreements, $288.9 million was unused as of November 2, 1997. Utilization of the unused portion is dependent upon the Company's collateral availability at the time the funds would be needed. There can be no assurance that the Company will be able to borrow adequate amounts on terms acceptable to the Company. Borrowings under the Agreements are secured by substantially all of the Company's assets, and the Agreements contain certain restrictive covenants, including working capital and tangible net worth requirements, and ratios of 22 debt to tangible net worth and current assets to current liabilities. At November 2, 1997, the Company was in compliance with these covenants. In addition to the financing facilities discussed above, the Company maintains an accounts receivable purchase agreement (the "Purchase Agreement") with a commercial credit corporation (the "Buyer") whereby the Buyer agrees to purchase, from time to time at its option, on a limited recourse basis, certain accounts receivable of the Company. Under the terms of the Purchase Agreement, no finance charges are assessed if the accounts are settled within forty days. At November 2, 1997, the net amount of sold accounts receivable under the Purchase Agreement was $10.9 million. The Company also maintains trade credit arrangements with its suppliers and other creditors to finance product purchases. A few major suppliers maintain security interests in their products sold to the Company. The unavailability of a significant portion of, or the loss of, the Agreements or trade credit from suppliers would have a material adverse effect on the Company. Although the Company has no material capital commitments, the Company expects to make capital expenditures of approximately $30 to $35 million in the next fiscal year. Inflation The Company believes that inflation has generally not had a material impact on its operations or liquidity to date. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated Financial Statements of the Company listed in the index appearing under Item 14(a)(1) hereof are filed as part of this Annual Report on Form 10-K and are hereby incorporated by reference in this Item 8. See also "Index to Financial Statements" on page F-1 hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding the Company's directors is incorporated herein by reference to the information furnished under the captions "Election Of Directors" and "Section 16 Requirements" in the Company's Proxy Statement 23 relating to its 1998 Annual Meeting of Stockholders (the "1998 Proxy Statement"). Information regarding executive officers of the Company is included in Part I, Item 1 of this report, furnished under the caption "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation is incorporated herein by reference to the information furnished under the captions "Executive Compensation" and "Other Information Regarding the Board of Directors" in the 1998 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners and management of the Company is incorporated herein by reference to the information furnished under the captions "Security Ownership of Management" and "Principal Stockholders" in the 1998 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions is incorporated herein by reference to the information furnished under the caption "Certain Relationships and Related Transactions" in the 1998 Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Annual Report on Form 10-K: (1) Consolidated Financial Statements: Page No. -------- Report of Independent Accountants F-2 Consolidated Balance Sheets at November 2, 1997 and November 3, 1996 F-3 Consolidated Statements of Income for the fiscal years ended November 2, 1997, November 3, 1996, and October 29, 1995 F-4 24 Consolidated Statements of Cash Flows for the fiscal years ended November 2, 1997, November 3, 1996, and October 29, 1995 F-5 Consolidated Statements of Stockholders' Equity for the fiscal years ended November 2, 1997, November 3, 1996, and October 29, 1995 F-6 Notes to Consolidated Financial Statements F-7 (2) Consolidated Financial Statement Schedules: Schedule I - Valuation and Qualifying Accounts and Reserves S-1 All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. (3) The Exhibits which are filed with this Annual Report or which are incorporated herein by reference are set forth in the Exhibit Index which appears on page E-1 hereof, which Exhibit Index is incorporated herein by reference. E-1 (b) Reports filed on Form 8-K during the quarter ended November 2, 1997: None. (c) See Item 14(a)(3) above. (d) See "Index to Consolidated Financial Statements" included under Item 8 to this Annual Report on Form 10-K. 25 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. MICROAGE, INC. (Registrant) By:/s/ Jeffrey D. McKeever ------------------------ Jeffrey D. McKeever Chairman of the Board and Chief Executive Officer Date: January 29, 1998 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 dates indicated. Signature Title Date --------- ----- ---- /s/ Jeffrey D. McKeever Director, Chairman of the Board January 29, 1998 - ------------------------- and Chief Executive Officer Jeffrey D. McKeever (Principal Executive Officer) /s/ William H. Mallender Director January 29, 1998 - ------------------------- William H. Mallender /s/ Steven G. Mihaylo Director January 29, 1998 - ------------------------- Steven G. Mihaylo /s/ Fred Israel Director January 29, 1998 - ------------------------- Fred Israel /s/ Lynda M. Applegate Director January 29, 1998 - ------------------------- Lynda M. Applegate /s/ Roy A. Herberger, Jr. Director January 29, 1998 - ------------------------- Roy A. Herberger, Jr. 26 Director January 29, 1998 - ------------------------- Cyrus F. Freidheim, Jr. /s/ James R. Daniel Senior Vice President, Chief January 29, 1998 - -------------------------- Financial Officer and Treasurer James R. Daniel (Principal Financial Officer) /s/ Raymond L. Storck Vice President - Controller January 29, 1998 - ------------------------- and Assistant Treasurer Raymond L. Storck (Principal Accounting Officer) 27 ANNUAL REPORT ON FORM 10-K ITEM 8, ITEM 14(a)(1) AND (2), (c) AND (d) ------------------------------------------ INDEX TO FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS EXHIBITS YEAR ENDED NOVEMBER 2, 1997 MICROAGE, INC. AND SUBSIDIARIES TEMPE, ARIZONA MICROAGE, INC. INDEX TO FINANCIAL STATEMENTS Report of Independent Accountants............................................F-2 Consolidated Balance Sheets at November 2, 1997 and November 3, 1996........F-3 Consolidated Statements of Income for each of the fiscal years ended November 2, 1997, November 3, 1996, and October 29, 1995.............F-4 Consolidated Statements of Cash Flows for each of the fiscal years ended November 2, 1997, November 3, 1996, and October 29, 1995.............F-5 Consolidated Statements of Stockholders' Equity for each of the fiscal years ended November 2, 1997, November 3, 1996, and October 29, 1995.......F-6 Notes to Consolidated Financial Statements...................................F-7 Schedule I - Valuation and Qualifying Accounts and Reserves..................S-1 28 F-2 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of MicroAge, Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a) (1) and (2) present fairly, in all material respects, the financial position of MicroAge, Inc. and its subsidiaries at November 2, 1997 and November 3, 1996, and the results of their operations and their cash flows for the fiscal years ended November 2, 1997, November 3, 1996, and October 29, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Phoenix, Arizona December 9, 1997 29 MICROAGE, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data) ASSETS November 2, November 3, 1997 1996 ------------ ------------ Current assets: Cash and cash equivalents $ 24,029 $ 22,078 Accounts and notes receivable, net 330,172 290,115 Inventory, net 478,089 331,743 Other 11,560 11,495 ------------ ------------ Total current assets 843,850 655,431 Property and equipment, net 73,747 54,049 Intangible assets, net 43,766 17,499 Other 12,770 9,342 ------------ ------------ Total assets $ 974,133 $ 736,321 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 672,158 $ 511,167 Accrued liabilities 22,545 25,464 Current portion of long-term obligations 2,744 2,121 Other 3,545 3,627 ------------ ------------ Total current liabilities 700,992 542,379 Line of credit 30,650 -- Long-term obligations 4,537 3,892 Stockholders' equity: Preferred stock, par value $1.00 per share; -- -- Shares authorized: 5,000,000 Issued and outstanding: none Common stock, par value $.01 per share; Shares authorized: 40,000,000 Issued: November 2, 1997 -- 17,849,929 November 3, 1996 -- 16,578,451 178 165 Additional paid-in capital 148,201 124,332 Retained earnings 90,392 66,484 Loan to ESOT -- (207) Treasury stock, at cost; Shares: November 2, 1997 -- 80,378 November 3, 1996 -- 97,029 (817) (724) ------------ ------------ Total stockholders' equity 237,954 190,050 ------------ ------------ Total liabilities and stockholders' equity $ 974,133 $ 736,321 ============ ============ The accompanying notes are an integral part of these consolidated financial statements. F-3 MICROAGE, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) Fiscal years ended ------------------------------------- November 2, November 3, October 29, 1997 1996 1995 ----------- ----------- ----------- Revenue $4,446,308 $3,696,160 $3,098,976 Cost of sales 4,136,628 3,471,009 2,924,652 ----------- ----------- ----------- Gross profit 309,680 225,151 174,324 Operating and other expenses Operating expenses 238,977 186,387 144,341 Restructuring and other one-time charges -- -- 9,029 ----------- ----------- ----------- Total 238,977 186,387 153,370 ----------- ----------- ----------- Operating income 70,703 38,764 20,954 Other expenses - net 27,366 13,755 15,854 ----------- ----------- ----------- Income before income taxes 43,337 25,009 5,100 Provision for income taxes 18,372 10,899 1,466 ----------- ----------- ----------- Net income $ 24,965 $ 14,110 $ 3,634 =========== =========== =========== Net income per common and common equivalent share $ 1.40 $ 0.84 $ 0.22 =========== =========== =========== Weighted average common and common equivalent shares outstanding 17,810 16,781 16,236 The accompanying notes are an integral part of these consolidated financial statements. F-4 MICROAGE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents (in thousands)
Fiscal years ended ------------------------------------- November 2, November 3, October 29, 1997 1996 1995 ----------- ----------- ----------- Cash flows from operating activities: Net income $ 24,965 $ 14,110 $ 3,634 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 24,002 20,837 15,593 Provision for losses on accounts and notes receivable 9,208 8,944 6,280 Non-cash restructuring and other one-time charges -- -- 7,410 Changes in assets and liabilities net of business acquisitions: Accounts and notes receivable (32,705) (84,825) (59,159) Inventory (144,640) (24,861) 4,798 Other current assets (35) 1,933 (5,188) Other assets (5,763) (3,817) (1,722) Accounts payable 139,047 102,192 59,310 Accrued liabilities (3,979) 9,920 2,707 Other liabilities (656) 225 391 ----------- ----------- ----------- Net cash provided by operating activities 9,444 44,658 34,054 Cash flows from investing activities: Purchases of property and equipment (36,488) (24,770) (23,229) Purchases of businesses and investments in unconsolidated companies, net of cash acquired (1,810) (4,150) (6,099) ----------- ----------- ----------- Net cash used in investing activities (38,298) (28,920) (29,328) Cash flows from financing activities: Amounts received from ESOT 207 561 640 Proceeds from issuance of stock, net of issuance costs 5,886 1,856 1,004 Net borrowings under lines of credit 30,349 -- -- Shareholder distributions - pooled companies (1,057) (2,245) (1,510) Principal payments on long-term obligations (4,580) (8,156) (2,043) ----------- ----------- ----------- Net cash provided by (used in) financing activities 30,805 (7,984) (1,909) ----------- ----------- ----------- Net increase in cash and cash equivalents 1,951 7,754 2,817 Cash and cash equivalents at beginning of period 22,078 14,324 11,507 ----------- ----------- ----------- Cash and cash equivalents at end of period $ 24,029 $ 22,078 $ 14,324 =========== =========== =========== Supplemental disclosure to cash flows - See Note 13
The accompanying notes are an integral part of these consolidated financial statements. F-5 MICROAGE, INC CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share data)
For the fiscal years ended November 2, 1997, November 3, 1996 and October 29, 1995 ----------------------------------------------------------------------------------------- Additional Note-stock Total Preferred Common paid-in Retained Loan to purchase Treasury stockholders' stock stock capital earnings ESOT agreement stock equity --------- --------- --------- --------- --------- --------- --------- --------- BALANCE at October 30, 1994 $ -- $ 161 $ 121,449 $ 52,513 $ (1,408) $ (2,000) $ (1,123) $ 169,592 Options for 192,147 common shares exercised -- 2 1,035 -- -- -- -- 1,037 Contribution of 34,991 treasury shares to employee benefit plan -- -- 115 -- -- -- 261 376 Loan payments from ESOT -- -- -- -- 640 -- -- 640 Distributions to shareholders' - pooled companies -- -- -- (1,528) -- -- -- (1,528) Net income -- -- -- 3,634 -- -- -- 3,634 --------- --------- --------- --------- --------- --------- --------- --------- BALANCE at October 29, 1995 -- 163 122,599 54,619 (768) (2,000) (862) 173,751 Options for 108,861 common shares exercised -- 1 934 -- -- -- -- 935 Contribution of 18,415 treasury shares to employee benefit plan -- -- 5 -- -- -- 138 143 Issuance of 110,932 shares under the employee stock purchase plan -- 1 777 -- -- -- -- 778 Contributed capital - pooled company -- -- 17 -- -- -- -- 17 Cancellation of convertible subordinated debentures due to acquisition -- -- -- -- -- 2,000 -- 2,000 Loan payments from ESOT -- -- -- -- 561 -- -- 561 Distributions to shareholders - pooled companies -- -- -- (2,245) -- -- -- (2,245) Net income -- -- -- 14,110 -- -- -- 14,110 --------- --------- --------- --------- --------- --------- --------- --------- BALANCE at November 3, 1996 -- 165 124,332 66,484 (207) -- (724) 190,050 Options for 445,579 common shares exercised -- 5 4,050 -- -- -- -- 4,055 Contribution of 31,731 treasury shares to employee benefit plan -- -- 205 -- -- -- 262 467 Issuance of 99,703 shares under the employee stock purchase plan -- 1 1,353 -- -- -- -- 1,354 Loan payments from ESOT -- -- -- -- 207 -- -- 207 Issuance of 108,417 shares to acquire KNB, Inc. -- 1 2,002 -- -- -- -- 2,003 Issuance of 609,779 shares to acquire Access MicroSystems, Inc. -- 6 15,894 -- -- -- -- 15,900 Issuance of 8,000 restricted common shares to outside directors -- -- 122 -- -- -- -- 122 Unearned compensation - restricted common shares issued to directors -- -- (122) -- -- -- -- (122) Compensation expense- restricted common shares issued to directors -- -- 40 -- -- -- -- 40 Compensation expense-stock option excercise -- -- 325 -- -- -- -- 325 15,080 shares of treasury stock acquired through cashless stock option exercises -- -- -- -- -- -- (355) (355) Distributions to shareholders - pooled companies -- -- -- (1,057) -- -- -- (1,057) Net income -- -- -- 24,965 -- -- -- 24,965 --------- --------- --------- --------- --------- --------- --------- --------- BALANCE at November 2, 1997 $ -- $ 178 $ 148,201 $ 90,392 $ -- $ -- $ (817) $ 237,954 ========= ========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-6 MICROAGE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BUSINESS - ----------------- MicroAge, Inc. ("MicroAge") is a global systems integrator and a full-line distributor of information technology products and services. Information technology solutions offered by the Company include servers, desktops, mobile computing, mass storage, connectivity, imaging, peripherals, software, and component products. Unless the context otherwise requires, references to the "Company" include MicroAge, Inc. and its consolidated subsidiaries. During fiscal 1997, the Company made several acquisitions which have been accounted for as poolings of interest. Accordingly, the Company's consolidated financial statements have been restated to include the accounts and operations of the acquired companies for all periods presented (see Note 3 below). NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - --------------------------------------------------- Principles of consolidation - --------------------------- The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated. Fiscal year - ----------- The Company's fiscal year ends on the Sunday nearest October 31 in each calendar year. The fiscal years ended November 2, 1997 and October 29, 1995 included 52 weeks. The fiscal year ended November 3, 1996 included 53 weeks. Disclosures about fair value of financial instruments - ----------------------------------------------------- Financial instruments that are subject to fair value disclosure requirements are carried in the consolidated financial statements at amounts that approximate fair value. Cash equivalents - ---------------- For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash overdrafts - --------------- Under the Company's cash management system, checks issued but not presented to banks frequently result in overdraft balances for accounting purposes. Such amounts, aggregating $45.4 and $65.0 million at November 2, 1997 and November 3, 1996, respectively, are included as a component of accounts payable in the accompanying consolidated balance sheets. Accounts and notes receivable - ----------------------------- Accounts and notes receivable are comprised of amounts due from financing companies, end-users, and resellers and are net of an allowance for doubtful accounts of $10,933,000 and $8,731,000 at November 2, 1997 and November 3, 1996, respectively. F-7 Inventory - --------- Inventory consisting of resale merchandise is stated at lower of cost (first-in, first-out method) or market. International Business Machines Corporation ("IBM") products totaling $79,436,000 and $43,231,000 included in inventory at November 2, 1997 and November 3, 1996, respectively, are subject to a reservation of the title in IBM for the purpose of assuring that such products are sold and delivered only to IBM-authorized personal computer dealers; such reservation does not prohibit the Company from granting security interests to other parties. During the fiscal year ended November 2, 1997, sales of COMPAQ Computer Corporation, Hewlett-Packard Company and IBM products accounted for approximately 23%, 20% and 14%, respectively, of the Company's revenue from sales of merchandise. The sales of no other individual vendor's products accounted for more than 10% of such revenue during the fiscal year ended November 2, 1997. Property and equipment - ---------------------- Property and equipment are recorded at cost and are depreciated on the straight-line method over their estimated useful lives. Equipment under capital lease is recorded at the lower of fair market value or the present value of future lease payments and is amortized on the straight-line method over the estimated useful life or the term of the lease, whichever is less. The following reflects the estimated lives by category of property and equipment: Furniture, fixtures, equipment and software 3 to 7 years Equipment under capital lease 3 to 5 years Leasehold improvements 3 to 5 years Expenditures for maintenance and repairs are charged to operations in the year in which the expense is incurred. Intangible assets - ----------------- Intangible assets are amortized over their economic lives ranging from three to fifteen years using the straight-line method. For acquisitions accounted for under the purchase method, the excess of cost over the fair value of net identifiable assets acquired is classified as goodwill and is included in intangible assets. On an ongoing basis, the Company reviews the valuation and amortization of goodwill. As part of this review, the Company estimates the net realizable value of goodwill and assesses whether the unamortized balance could be recovered through expected future cash flows over the remaining life of the asset. At November 2, 1997 and November 3, 1996, no impairment was indicated. Intangible assets are net of $7,264,000 and $5,343,000 of accumulated amortization at November 2, 1997 and November 3, 1996, respectively. Revenue recognition - ------------------- Revenue from product sales is recognized at the time of shipment. Revenue associated with service contracts is deferred and recognized ratably over the service period of the contract. Supplier Incentive funds - ------------------------ In general, suppliers provide the Company with various incentive programs. The funds received under these programs are generally determined based on the Company's purchases and/or sales of the suppliers' product. The funds are earned through marketing programs or meeting purchasing or other objectives established by the suppliers. Once earned, the funds are applied against product cost or operating expenses. F-8 Accounting for stock based compensation - --------------------------------------- The Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123") in 1997. As permitted by SFAS 123, the Company continues to measure compensation cost in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") but provides pro forma disclosures of net income and earnings per share as if the fair value method (as defined in SFAS 123) had been applied beginning in 1996 (see Note 8). Income taxes - ------------ Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. Income per common share - ----------------------- Income per common and common equivalent share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options and warrants using the treasury stock method. The weighted average common and common equivalent shares consist of the following:
Fiscal years ended ------------------------------------------------------ November 2, November 3, October 29, 1997 1996 1995 ---------------- --------------- ------------- (in thousands) Weighted average common shares 16,906 16,307 16,031 Dilutive effect of stock options and warrants 904 474 205 ---------------- --------------- ------------- Weighted average common and common equivalent shares outstanding 17,810 16,781 16,236 ================ ============== =============
The amounts of per share earnings on the fully diluted basis are not required to be presented in the consolidated statements of income since the additional dilution is less than 3%. Franchising Activities - ---------------------- MicroAge distributes its products and services through a network of franchised and affiliated resellers and Company-owned locations. In fiscal 1997, 231 franchised resellers were added and 110 were eliminated due to transferring to an affiliate agreement, closing or terminating their agreement or being acquired by the Company, resulting in 900 franchised reseller locations at November 2, 1997. There were 40 Company-owned locations at November 2, 1997. In fiscal 1997, total revenue and total cost of sales from Company-owned locations were $810,275,000 and $699,980,000, respectively. Reclassifications - ----------------- Certain prior year amounts have been reclassified to conform with current year financial statement presentation. F-9 Use of Estimates - ---------------- The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from these estimates. NOTE 3 - ACQUISITIONS - --------------------- Poolings of Interest - -------------------- During fiscal 1997, the Company completed three separate acquisitions of resellers that were accounted for as poolings of interest. The Company issued an aggregate 1,898,811 common shares in exchange for all of the outstanding shares of these companies (the "Pooled Enterprises"). The Company's consolidated financial statements have been restated to include the accounts and operations of the Pooled Enterprises for all periods presented. The results of operations previously reported by the Company and the Pooled Enterprises and the combined amounts presented in the accompanying consolidated financial statements are summarized below (in thousands). Pooled MicroAge, Inc. Enterprises Combined -------------- ----------- -------- Fiscal year 1996: Revenue $3,516,446 $ 179,714 $3,696,160 Net income $ 13,253 $ 857 $ 14,110 Fiscal year 1995: Revenue $2,941,100 $ 157,876 $3,098,976 Net income $ 241 $ 3,393 $ 3,634 Purchases - --------- During fiscal 1997, the Company completed four separate acquisitions that were accounted for using the purchase method of accounting. In each case, the purchase price was allocated to the assets purchased and the liabilities assumed based on fair values at the date of acquisition. These acquisitions are as follows: In December 1996, the Company acquired an imaging company for consideration of $1.2 million consisting of cash and the forgiveness of debt. The excess of the purchase price over the fair value of net assets acquired was approximately $1.3 million and is being amortized using the straight-line method over 7 years. In February 1997, the Company acquired a reseller for consideration of $4.0 million consisting of the assumption of liabilities. The excess of the purchase price over the fair value of net assets acquired was approximately $4.0 million and is being amortized using the straight-line method over 15 years. In July 1997, the Company acquired a reseller for consideration of $2.0 million consisting of 108,417 common shares. The excess of the purchase price over the F-10 fair value of net assets acquired was approximately $5.7 million and is being amortized using the straight-line method over 15 years. In September 1997, the Company acquired a reseller for consideration of $16.4 million consisting of 609,779 shares of the Company's common stock. The excess of the purchase price over the fair value of net assets acquired was approximately $16.9 million and is being amortized using the straight-line method over 15 years. NOTE 4 - PROPERTY AND EQUIPMENT - ------------------------------- Property and equipment consist of the following: November 2, November 3, 1997 1996 ----------- ----------- (in thousands) Equipment, furniture, fixtures and software $115,269 $ 84,265 Equipment under capital lease 15,948 14,179 Leasehold improvements 16,235 14,186 Land 1,839 1,839 -------- -------- 149,291 114,469 Less: accumulated depreciation and amortization 75,544 60,420 -------- -------- $ 73,747 $ 54,049 ======== ======== NOTE 5 - LEASES The following is a schedule by year of future minimum lease obligations under noncancelable leases together with the present value of the net minimum capital lease obligations as of November 2, 1997: Operating Capital leases leases -------------- ------- Fiscal year ending in: (in thousands) 1998 $11,440 $3,285 1999 10,505 2,479 2000 8,335 1,416 2001 6,856 1,024 2002 4,418 142 Thereafter 8,029 -- -------------- ------ Total minimum lease obligations $49,583 $8,346 ============== ====== Less: amount representing interest 1,065 ------ Present value of minimum lease obligations $7,281 ====== None of the leases contain significant restrictive provisions; however, some of the leases contain renewal options and provisions for payment by the Company of real estate taxes, insurance and maintenance costs. Total rent expense was (in thousands): Fiscal year ended: October 29, 1995 $ 8,333 November 3, 1996 $11,126 November 2, 1997 $15,310 F-11 NOTE 6 - FINANCING ARRANGEMENTS - ------------------------------- The Company maintains three financing agreements (the "Agreements") with financing facilities totaling $675 million. The Agreements include an accounts receivable facility (the "A/R Facility") and inventory financing facilities (the "Inventory Facilities"). Under the A/R Facility, the Company has the right to sell certain accounts receivable from time to time, on a limited recourse basis, up to an aggregate amount of $350 million sold at any given time. At November 2, 1997, the net amount of sold accounts receivable was $279 million and the effective funding rate was LIBOR plus 1.85%. The Inventory Facilities provide for borrowings up to $325 million. Within the Inventory Facilities, the Company has lines of credit for the purchase of inventory from selected product suppliers ("Inventory Lines of Credit") of $175 million and a line of credit for general working capital requirements ("Supplemental Line of Credit") of $150 million. Payments for products purchased under the Inventory Lines of Credit vary depending upon the product supplier, but generally are due between 45 and 60 days from the date of the advance. Amounts borrowed under the Supplemental Line of Credit may remain outstanding until the expiration date of the Agreements (August 2000). No interest or finance charges are payable on the Inventory Lines of Credit if payments are made when due. At November 2, 1997, the Company had $77 million outstanding under the Inventory Lines of Credit (included in accounts payable in the accompanying Balance Sheets), and $31 million outstanding under the Supplemental Line of Credit. As of November 2, 1997, the interest rate on the Supplemental Line of Credit was LIBOR plus 2%. Borrowings under the Agreements are secured by substantially all of the Company's assets, and the Agreements contain certain restrictive covenants, including working capital and tangible net worth requirements, and ratios of debt to tangible net worth and current assets to current liabilities. At November 2, 1997, the Company was in compliance with these covenants. In addition to the financing facilities discussed above, the Company maintains an accounts receivable purchase agreement (the "Purchase Agreement") with a commercial credit corporation (the "Buyer") whereby the Buyer agrees to purchase, from time to time at its option, on a limited recourse basis, certain accounts of the Company. Under the terms of the Purchase Agreement, no finance charges are assessed if the accounts are settled within forty days. At November 2, 1997, the net amount of sold accounts receivable under the Purchase Agreement was $10.9 million. The Company also maintains trade credit arrangements with its suppliers and other creditors to finance product purchases. A few major suppliers maintain security interests in their products sold to the Company. F-12 NOTE 7 - LONG-TERM OBLIGATIONS - ------------------------------ Long-term obligations consist of the following: November 2, November 3, 1997 1996 ----------- ----------- (in thousands) Capital lease obligations $7,281 $6,013 Less: current portion 2,744 2,121 ------ ------ $4,537 $3,892 ====== ====== Following are the annual maturities of long-term obligations (in thousands): Fiscal year ending in: 1998 $2,744 1999 2,163 2000 1,261 2001 973 2002 140 ------ $7,281 ====== NOTE 8 - STOCKHOLDERS' EQUITY - ----------------------------- Employee stock option and award plans - ------------------------------------- During fiscal 1994, the Board of Directors and stockholders of the Company approved the adoption of the MicroAge Inc. Long-Term Incentive Plan (the "Incentive Plan") for officers and other key employees of the Company. The Incentive Plan authorizes grants of Incentive Stock Options (ISOs), Non-Qualified Stock Options (NQSOs), Stock Appreciation Rights, Performance Shares, Restricted Stock, Dividend Equivalents and other Common Stock based awards. The total number of shares of common stock available for awards under the Incentive Plan is 1,800,000. The Company has issued NQSOs and ISOs under the Incentive Plan at prices representing the fair market value of the Company's common stock on the date of the grant. The NQSOs and ISOs are granted for terms of five years and become exercisable on a pro-rata basis on each anniversary of the grant over a five-year period as long as the holder remains an employee of the Company. NQSOs under the Incentive Plan were also granted in fiscal 1994 and fiscal 1997 to selected employees in exchange for the employees' irrevocable waiver of a specific amount of base salary or bonus otherwise payable by the Company during a specific period. The options will vest in one-third increments beginning on the January 1 which is three years following the January 1 of the calendar year in which the participant elects to waive compensation. No other awards have been made under the Incentive Plan. In addition to the Incentive Plan, stock options are available under four plans for grant to certain officers and employees of the Company at prices representing the fair market value of the Company's common stock on the date of the grant. Options under these plans are granted for terms of five years and become exercisable on a pro-rata basis on each anniversary date of the grant over a five-year period as long as the holder remains an employee of the Company. F-13 Changes during fiscal 1995, 1996 and 1997 in options outstanding under the employee stock option plans (including the Incentive Plan) were as follows: Weighted Average Number Exercise Price of Options per Share ---------- --------- Outstanding at October 30, 1994 1,776,222 $ 9.01 Granted 162,750 $ 10.90 Exercised (120,900) $ 5.31 Canceled or expired (46,174) $ 10.01 --------- Outstanding at October 29, 1995 1,771,898 $ 9.51 Granted 339,000 $ 10.29 Exercised (97,125) $ 8.61 Canceled or expired (157,630) $ 10.93 --------- Outstanding at November 3, 1996 1,856,143 $ 9.58 Granted 788,379 $ 20.12 Exercised (438,079) $ 9.44 Canceled or expired (107,474) $ 14.02 --------- Outstanding at November 2, 1997 2,098,969 $ 13.28 ========= Exercisable at November 2, 1997 352,125 ========= The following table summarizes information about the Company's stock options at November 2, 1997:
Options Outstanding Options Exercisable ------------------------------------------------- ---------------------------------- Weighted Weighted Avg. Avg. Number Contractual Exercise Number Exercise Range of Outstanding Years Price Exercisable Price Exercise Prices (in thousands) Remaining per share (in thousands) per share ----------------- ------------- ------------ ---------------- ------------ $5.33 to $9.25 995 .67 $ 8.52 157 $ 7.58 $10.42 to $17.88 703 3.25 $14.54 179 $10.97 $23.83 to $31.75 401 3.15 $22.82 16 $24.30 -------- ------ $5.33 to $31.75 2,099 2.31 $13.28 352 $10.09 ======== ======
F-14 The Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123") in 1997. As permitted by SFAS 123, the Company continues to measure compensation cost in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Had the Company determined compensation cost in accordance with SFAS No. 123, the Company's net income per share would have been reduced to the pro-forma amounts indicated below (in thousands except per share data):
Fiscal year ended -------------------------- November 2, November 3, 1997 1996 ----------- ----------- Net Income As Reported $ 24,965 $ 14,110 Pro-forma 23,142 13,114 Net income per common and common equivalent share As Reported $ 1.40 $ 0.84 Pro-forma 1.30 0.78
Pro forma net income reflects only options granted during the fiscal years ended November 3, 1996 and November 2, 1997. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro-forma net income amounts presented above because compensation cost is reflected over the options' vesting period and compensation for options granted prior to October 30, 1995 is not considered. The per share weighted-average fair value of the stock options granted under the plan for the years ended November 3, 1996 and November 2, 1997 was $5.11 and $8.35 respectively, based on the date of the grant using the Black-Scholes option pricing model with the following weighted-average assumptions for both years: expected dividend yield of 0%, expected volatility of .523, a risk free interest rate of 6.54%, and an expected life of 3.31 years. Director stock plans - -------------------- In March 1995, the Board of Directors and stockholders approved an incentive plan for those Directors who are not officers or employees of the Company or its subsidiaries (the "1995 Director Plan"). Under the 1995 Director Plan, on November 1 of each year, commencing in 1995 and ending in 2004, each eligible Director will automatically be granted (i) 1,000 shares of the Company's common stock subject to certain restrictions and (ii) options to purchase 1,000 shares of the Company's common stock. The options vest over three years and are subject to certain stock price hurdles after each vesting date. As of November 2, 1997, 13,000 options had been granted under this plan at prices ranging from $8.38 to $22.75 per share. There were 3,671 options exercisable as of November 2, 1997. The aggregate number of shares of the Company's common stock available for awards under the 1995 Director Plan is 80,000. Restricted stock plan - --------------------- In accordance with the provisions of a restricted stock plan approved in fiscal 1982, 45,000 shares of common stock were reserved for issuance. At November 2, 1997, 39,938 shares had been awarded under the plan, and 5,062 additional shares may be awarded under the plan. Preferred stock purchase rights - ------------------------------- In February 1989, as amended in November 1994, the Company's Board of Directors adopted a Stockholder Rights Agreement (the "Rights Plan") and declared a dividend distribution of one Right for each share of the Company's common stock outstanding as of the close of business on March 7, 1989 and intends to issue one Right for each share of common stock issued between March 7, 1989 and the date of the distribution of the Rights. As amended, the Rights Plan provides F-15 that when exercisable, each Right will entitle its holder to purchase from the Company one one-hundredth (.01) of a share of Series C Junior Participating Preferred stock at a price of $19.90. The Company has reserved 500,000 preferred shares for issuance upon exercise of the Rights. Generally, the Rights become exercisable on the earlier of the date a person or group of affiliated or associated persons acquires or obtains the rights to acquire securities representing fifteen percent (15%) or more of the common stock of the Company or on the tenth day following the commencement of a tender or exchange offer which would result in the offeror beneficially owning fifteen percent (15%) or more of the Company's common stock without the prior consent of the Company. In the event that an unauthorized person or group of affiliated persons becomes the beneficial owner of fifteen percent (15%) or more of the common stock of the Company, proper provision shall be made so that each holder of a Right will have the right to receive, upon exercise thereof and the payment of the exercise price, that number of shares of common stock having a market value of two times the exercise price of the Right. The Rights will expire on February 23, 1999, unless redeemed earlier by the Company pursuant to authorization by the Board of Directors. Generally, in the event that the Company is involved in a merger or other business combination transaction after the Rights become exercisable, provision shall be made so that each holder of a Right shall have the right to receive, upon the exercise thereof and the payment of the exercise price, that number of shares of common stock of the acquiring company which at the time of such transaction would have a market value of two times the exercise price of the Right. Associate Stock Purchase Plan - ----------------------------- In March 1995, the Board of Directors and stockholders approved an associate stock purchase plan (the "Associate Plan"). The Associate Plan provides a means for the Company's employees to authorize payroll deductions up to 10% of their earnings to be used for the periodic purchase of the Company's common stock. Under the Associate Plan, the Company will initially sell shares to participants at a price equal to the lesser of 85% of the fair market value of the common stock at the beginning of a six month subscription period or 85% of fair market value at the end of the subscription period. The Associate Plan is intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The maximum number of shares that may be purchased under the Associate Plan is 500,000. The initial subscription period began July 1, 1995. As of November 2, 1997, 210,635 shares had been purchased under the Associate Plan. NOTE 9 - OTHER EXPENSES - NET - ----------------------------- Other expenses - net consists of the following: Fiscal years ended --------------------------------------- November 2, November 3, October 29, 1997 1996 1995 ----------- ----------- ----------- (in thousands) Interest expense $ 5,882 $ 1,724 $ 3,672 Expenses from the sale of accounts receivable 18,769 11,438 10,468 Other 2,715 593 1,714 ------- ------- ------- $27,366 $13,755 $15,854 ======= ======= ======= F-16 NOTE 10 - INCOME TAXES - ---------------------- The provision for income taxes consists of the following: Fiscal years ended ------------------------------------------------ November 2, November 3, October 29, 1997 1996 1995 ----------- ----------- ----------- (in thousands) Current Federal $ 16,898 $ 7,621 $ 4,374 State 4,241 1,927 1,193 Deferred (2,767) 1,351 (4,101) -------- -------- -------- $ 18,372 $ 10,899 $ 1,466 ======== ======== ======== The components of deferred income tax expense (benefit) from operations are as follows: Fiscal years ended ------------------------------------------------ November 2, November 3, October 29, 1997 1996 1995 ----------- ----------- ----------- (in thousands) Allowance for doubtful accounts $ (209) 1,440 $ (2,014) Software development costs 338 433 247 Depreciation and amortization (1,075) (429) (159) Restructuring reserves 210 358 (533) Inventory valuation allowance (190) (300) (112) State deferral, net of federal benefit (488) 168 (528) All other - net (1,353) (319) (1,002) ------- ------- ------- $(2,767) $ 1,351 $ (4,101) ======= ======= ======= Deferred tax assets, which are recorded as a component of other assets or other current assets, are comprised of the following: November 2, November 3, 1997 1996 ----------- ----------- Gross deferred tax assets: (in thousands) Depreciation and amortization $ 4,887 $ 4,213 Allowance for doubtful accounts 3,736 3,482 Inventory valuation 2,945 2,589 Deferred service revenue 918 773 Other 5,581 4,504 ------- ------- Total gross deferred tax assets 18,067 15,561 ------- ------- Gross deferred tax liabilities: Software development 1,776 1,366 Other 370 1,041 ------- ------- Total gross deferred tax liabilities 2,146 2,407 ------- ------- Net deferred tax asset $15,921 $13,154 ======= ======= F-17 In light of the Company's history of profitable operations, management has concluded that it is more likely than not that the Company will ultimately realize the full benefit of its deferred tax assets related to future deductible items. Accordingly, the Company believes that no valuation allowance is required for the deferred tax assets in excess of deferred tax liabilities. The effective tax rate applied to income before income taxes differs from the expected federal statutory rate as follows:
Fiscal years ended ------------------------------------------------------------- November 2, November 3, October 29, 1997 1996 1995 ----------------- ----------------- ----------------- Federal statutory rate 35.0 % 35.0 % 34.0 % Addition (reduction) in taxes resulting from: State income taxes, net of federal tax benefit 5.5 5.6 15.7 Non-deductible meals and entertainment 0.7 0.7 13.8 Goodwill amortization 0.3 0.2 3.6 Impact of pooling of interests with subchapter S corp. (0.3) 0.9 (49.6) Other 1.2 1.2 11.2 ----------------- ----------------- ----------------- 42.4 % 43.6 % 28.7 % ================= ================= =================
NOTE 11 - COMMITMENTS - --------------------- The Company has arrangements with major vendors and certain financing companies to develop inventory and accounts receivable financing facilities for certain reseller customers. These arrangements include repurchase agreements that would require the Company to repurchase inventory which might be repossessed from a reseller by the vendor or the financing company. As of November 2, 1997, such repurchases have been insignificant. The Company also provides a program whereby the Company may guarantee an addition to a reseller's credit facility with certain finance companies. As of November 2, 1997 losses related to the guarantee program have been insignificant, and the Company's exposure for guaranteed amounts is not material. NOTE 12 - EMPLOYEE BENEFIT PLAN - ------------------------------- In July 1988, a deferred compensation plan (the "Savings Plan") became effective for all eligible employees of the Company under the provisions of Section 401(k) of the Internal Revenue Code. Employees are eligible to participate after one year of service and may contribute a percentage of their salary subject to certain limitations. Subject to certain profitability requirements, the Company has historically matched 25% of the employee contribution up to a maximum employee contribution of 6%, as defined in the Savings Plan. Participants are at all times fully vested in their contributions, and the Company contributions, if any, become fully vested to the participant after five years of employment. In addition to the Savings Plan, the Company has also adopted a supplemental deferred compensation plan (the "Supplemental Savings Plan") for employees holding key management positions or highly compensated employees for purposes of Title I of ERISA. Eligible employees may contribute a percentage of their salary subject to certain limitations as established by the Plan Administrator. The Company has historically matched 25% of the employee contribution. Participants are at all times fully vested in their contributions, and the company contributions, if any, become fully vested to the participant after five years of employment. Contributions to the Supplemental Savings Plan are held by a Trustee, however it is not qualified under the provisions of Section 401(k) of F-18 the Internal Revenue Code. All benefits payable under the Supplemental Savings Plan therefore are unsecured obligations of the Company. In April 1989, the Company amended and restated the Savings Plan to include a leveraged Employee Stock Ownership Plan and Trust (the "ESOT") for eligible employees. The ESOT used proceeds of loans from the Company to purchase 312,500 shares and 157,827 shares of the Company's common stock for $2,396,000 and $1,105,000 during the years ended September 30, 1990 and 1989, respectively. As of November 2, 1997, all loans have been repaid to the Company. The Company's stock is held by the ESOT trustee as collateral for the loans from the Company. The Company has made periodic contributions to the ESOT which were used to make loan principal and interest payments. A portion of the common stock is allocated to the accounts of participating employees annually based upon principal and interest payments. The Company, using the shares allocated method, recognized contribution expenses of $208,000, $510,000 and $675,000 during the fiscal years ended November 2, 1997, November 3, 1996 and October 29, 1995, respectively. As of November 2, 1997, all shares have been allocated under the ESOT. NOTE 13 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - ---------------------------------------------------------- The Company's non-cash investing and financing activities and cash payments for interest and income taxes were as follows: Fiscal years ended --------------------------------------- November 2, November 3, October 29, 1997 1996 1995 ----------- ----------- ----------- (in thousands) Details of acquisitions: Fair value of assets acquired $20,029 $ 2,000 $ 1,252 Liabilities assumed and acquisition- related accruals $25,894 $ -- $ 383 Cash acquired $ 76 $ -- $ -- Note forgiven $ 124 $ 2,000 $ -- Purchase obligation forgiven -- $ 1,029 $ -- Details of other financing activities: Capital lease obligations executed for equipment $ 3,834 $ 2,303 $ 4,726 Cash paid for: Interest $ 6,319 $ 3,486 $ 4,840 Income taxes $27,291 $ 6,079 $ 9,564 NOTE 14 - LITIGATION - -------------------- On July 14 through July 19, 1994, seven class action complaints were filed against the Company, certain of its officers and directors, and, in three of the lawsuits, one of the underwriters of the Company's June 16, 1994 public offering of common stock. On December 5, 1994, the Court consolidated the seven actions into a single action. On February 16, 1995, plaintiffs filed and served an amended, consolidated complaint against the Company, certain officers and directors of the Company, and three of the underwriters of the Company's June 16, 1994 public offering of common stock ("the Complaint"). On April 28, 1995, the Company filed a motion to dismiss the Complaint in its entirety. On March 25, 1996, the Court dismissed the majority of the allegations contained in the Complaint. An agreement in principle was subsequently reached to settle the litigation, subject to obtaining final court approval thereof. On August 1, 1997, the court approved the settlement and entered the Final Judgment and Order F-19 of Dismissal. The Company's contribution to the settlement, after the contributions of the Company's directors and officers insurers, was immaterial to the Company's financial statements. NOTE 15 - RESTRUCTURING AND OTHER ONE-TIME CHARGES - -------------------------------------------------- During the fourth quarter of fiscal 1995, the Company approved and implemented actions targeted at reducing expenses and improving profitability. The Company's consolidated statement of income for fiscal 1995 includes $9.0 million of pretax charges ($5.4 million net of tax benefits, or $0.38 per share) for restructuring and other one-time charges, consisting of the following (in thousands): Charges associated with the sale of a memory distribution business $5,563 Charges associated with outsourcing business function 1,517 Charges associated with staff reductions 1,170 Other one-time charges 779 ------ Total restructuring and other one-time charges $9,029 ====== The charges associated with staff reductions consist primarily of severance pay for 219 associates. The reductions occurred in virtually all areas of the Company and were completed by October 29, 1995. The amount of benefits paid and charged against the restructuring liability as of October 29, 1995 was $1.0 million. All actions related to the restructuring were implemented as of October 29, 1995, and the liability for restructuring activities at October 29, 1995 was not material. The revenue and net operating results of the activities that were not continued are as follows (in millions): 1995 ---- Revenue Memory distribution business $70.5 Outsourced business function $3.5 Pretax loss Memory distribution business $(1.7) Outsourced business function $(1.6) NOTE 16 - RECENT ACCOUNTING PRONOUNCEMENTS - ------------------------------------------ In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"). SFAS 128 is effective for financial statements for both interim and annual periods ending after December 15, 1997. SFAS replaces the current presentation of earnings per share with a dual presentation of Basic Earnings per Share and Diluted Earnings per Share. The Company believes that SFAS 128 will not have a material impact on previously reported earnings per share. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") to establish standards for reporting information about operating segments in annual financial statements, selected information about operating segments in interim financial reports and disclosures about products and services, geographic areas and major customers. SFAS 131 may require the Company to report financial information on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments, which may result in more detailed information in the notes to the Company's consolidated financial statements than is currently required and provided under FASB Statement of Financial Accounting Standards No. 14, "Financial Reporting for Segments of a Business Enterprise". SFAS 131 is effective for financial statements for periods beginning after December 15, 1997. F-20 NOTE 17 - SUBSEQUENT EVENT - -------------------------- On November 5, 1997, the Company acquired all of the oustanding shares of a reseller for consideration of $20.0 million consisting of 814,458 common shares. This acquisition will be accounted for as a purchase. In addition, the agreement contains an earnout provision, the payment of which is dependent on the achievement of certain operating results by the acquired company over the next three years. The earnout may be settled utilizing cash, common shares, or a combination thereof. The Company has not yet completed the allocation of the purchase price. On November 14, 1997, the Company completed the acquisition of a reseller. Under the terms of the agreement, to be accounted for as a pooling of interests, the Company exchanged 601,724 common shares for all of the outstanding shares of the acquired company. The financial position and results of operations of the Company and the acquired company will be combined in fiscal 1998 retroactive to November 3, 1997. In addition, all prior periods presented will be restated to give effect to the merger. The impact of the combination on the previously reported financial position and results of operations of the Company will not be material. On November 17, 1997, the Company completed the acquisition of a reseller. Prior to the acquisition, the Company maintained a 19.9% ownership position in this reseller. As consideration for the remaining outstanding shares, the Company issued 207,200 common shares valued at $5.0 million. In addition, the agreement contains an earnout provision, the payment of which is dependent on the achievement of certain operating results by the acquired company over the next three years. The earnout may be settled utilizing cash, common shares, or a combination thereof. NOTE 18 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) - ------------------------------------------------------- Consolidated quarterly financial information for fiscal 1997 and 1996, restated to reflect acquisitions accounted for as pooling of interests, is as follows (in thousands except per share data):
Fiscal 1997 ------------------------------------------------- Quarter ended February 2 May 4 August 3 November 2 ---------- ----- -------- ---------- Revenue As originally reported $ 860,319 $1,035,719 $1,093,484 $1,321,910 Pooled enterprises 30,429 50,299 54,148 -- ---------- ---------- ---------- ---------- Combined $ 890,748 $1,086,018 $1,147,632 $1,321,910 Gross profit As originally reported $ 55,952 $ 67,008 $ 73,000 $ 89,293 Pooled enterprises 6,151 8,974 9,302 -- ---------- ---------- ---------- ---------- Combined $ 62,103 $ 75,982 $ 82,302 $ 89,293 Operating Income As originally reported $ 12,888 $ 17,675 $ 18,556 $ 20,451 Pooled enterprises 524 438 171 -- ---------- ---------- ---------- ---------- Combined $ 13,412 $ 18,113 $ 18,727 $ 20,451 Net income As originally reported $ 4,668 $ 6,003 $ 6,398 $ 7,380 Pooled enterprises 189 241 86 -- ---------- ---------- ---------- ---------- Combined $ 4,857 $ 6,244 $ 6,484 $ 7,380 ========== ========== ========== ========== Net income per common and common equivalent share, combined $ 0.28 $ 0.36 $ 0.37 $ 0.40 ========== ========== ========== ==========
Fiscal 1996 --------------------------------------------------- Quarter ended January 28 April 28 July 28 November 3 ---------- -------- ------- ---------- Revenue As originally reported $ 780,318 $ 863,648 $ 842,674 $1,029,806 Pooled enterprises 41,965 42,518 41,710 53,521 ---------- ---------- ---------- ---------- Combined $ 822,283 $ 906,166 $ 884,384 $1,083,327 Gross profit As originally reported $ 39,943 $ 44,569 $ 44,770 $ 55,554 Pooled enterprises 7,725 8,430 9,904 14,256 ---------- ---------- ---------- ---------- Combined $ 47,668 $ 52,999 $ 54,674 $ 69,810 Operating Income As originally reported $ 5,928 $ 9,531 $ 8,716 $ 12,273 Pooled enterprises 503 (73) 337 1,549 ---------- ---------- ---------- ---------- Combined $ 6,431 $ 9,458 $ 9,053 $ 13,822 Net income As originally reported $ 1,557 $ 2,938 $ 3,551 $ 5,207 Pooled enterprises 319 (425) (144) 1,107 ---------- ---------- ---------- ---------- Combined $ 1,876 $ 2,513 $ 3,407 $ 6,314 ========== ========== ========== ========== Net income per common and common equivalent share, combined $ 0.12 $ 0.15 $ 0.20 $ 0.37 ========== ========== ========== ==========
F-21 MicroAge, Inc. Schedule I Valuation and Qualifying Accounts and Reserves (in thousands) Years ended November 2, 1997, November 3, 1996 and October 29, 1995
Balance at Charged to Charged to Balance at beginning costs and other Deductions/ end Description of period expenses accounts write-offs of period - -------------------------------- ---------- --------- -------- ----------- --------- Allowance for doubtful accounts: Year ended October 29, 1995 $ 6,940 $ 6,280 -- ($ 595) $12,625 ========== ========= ======== =========== ======= Year ended November 3, 1996 $ 12,625 $ 8,944 -- ($ 12,838) $ 8,731 ========== ========= ======== =========== ======= Year ended November 2, 1997 $ 8,731 $ 9,208 -- ($ 7,006) $10,933 ========== ========= ======== =========== =======
S-1 E-1 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - ----------- ----------- 3.1 Restated Certificate of Incorporation of MicroAge, Inc. (Incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended May 1, 1994) 3.2 By-Laws of MicroAge, Inc., amended and restated as of December 4, 1997. 4.1 Specimen Common Stock Certificate (reference is also made to Exhibits 3.1 and 3.2) (Incorporated by reference to Exhibit 4.1 to Registration Statement No. 33-45510) 4.2 Amended and Restated Rights Agreement, dated as of September 28, 1994, between MicroAge, Inc. and First Interstate Bank of California (Incorporated by reference to Exhibit 1.1 to the Form 8-A for MicroAge, Inc. filed January 13, 1994) 4.2.1 First Amendment, dated as of November 5, 1996, by and between MicroAge, Inc. and American Stock Transfer and Trust Company to Amended and Restated Rights Agreement, dated as of September 28, 1994, between MicroAge, Inc. and First Interstate Bank of California (Incorporated by reference to Exhibit 4.2.1 to the Annual Report on Form 10-K for year ended November 3, 1996) 10.1 MicroAge, Inc. Executive Supplemental Savings Plan(1), amended and restated as of October 31, 1997. 10.2 MicroAge, Inc. Supplemental Executive Retirement Plan, dated as of October 1, 1992(1) (Incorporated by reference to Exhibit 10.65.2 to Registration Statement No. 33-33094) 10.2.1 First Amendment to MicroAge, Inc. Supplemental Executive Retirement Plan, dated as of September 26, 1996(1) (Incorporated by reference to Exhibit 10.2.1 to the Annual Report on Form 10-K for fiscal year ended November 3, 1996) 10.3 Form of MicroAge 1994 Management Equity Program Award Agreement by and between MicroAge, Inc. and certain executives(1) (Incorporated by reference to Exhibit 10.2 to the Annual Report on Form 10-K for MicroAge, Inc. for the fiscal year ended October 30, 1994) 10.3.1 Form of First Amendment, dated as of December 14, 1995, to the MicroAge 1994 Management Equity Program Award Agreement by and between MicroAge, Inc. and certain executives(1) (Incorporated by reference to Exhibit 10.2.1 to the Annual Report on Form 10-K for MicroAge, Inc. for the year ended November 3, 1996) 1 EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.4 Form of MicroAge, Inc. 1997 Management Equity Program Award Agreement by and between MicroAge, Inc. and certain executives (1) (Incorporated by reference to Exhibit 10.4 to the Annual Report on Form 10-K for fiscal year ended November 3, 1996) 10.5 Amended and Restated Employment Agreement, dated as of November 4, 1996, by and between Jeffrey D. McKeever and the Company (1) (Incorporated by reference to Exhibit 10.5 to the Annual Report on Form 10-K for fiscal year ended November 3, 1996) 10.6 Supplemental Executive Retirement Plan, dated as of October 1, 1992, by and between Jeffrey D. McKeever and the Company(1) (Incorporated by reference to Exhibit 10.65.2 to Registration Statement No. 33-33094) 10.6.1 First Amendment to Supplemental Executive Retirement Plan, dated September 26, 1996, between Jeffrey D. McKeever and the Company (1) 10.6.2 Second Amendment to Supplemental Executive Retirement Plan, dated October 1, 1997, between Jeffrey D. McKeever and the Company (1) 10.7 Amended and Restated Split-Dollar Insurance Agreement, dated as of December 14, 1994, by and between MicroAge, Inc. and Jeffrey D. McKeever(1) (Incorporated by reference to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended July 30, 1995) 10.8 MicroAge, Inc. 1994 Management Equity Program Award Agreement, dated as of December 14, 1993, by and between MicroAge, Inc. and Jeffrey D. McKeever (1) (Incorporated by reference to Exhibit 10.5.2 to the Annual Report on Form 10-K for fiscal year ended November 3, 1996) 10.8.1 First Amendment, dated December 14, 1995, to the MicroAge, Inc. 1994 Management Equity Program Award Agreement, dated as of December 14, 1993, by and between MicroAge, Inc. and Jeffrey D. McKeever (1) (Incorporated by reference to Exhibit 10.5.3 to the Annual Report on Form 10-K for fiscal year ended November 3, 1996) 10.9 Amended and Restated Employment Agreement, dated as of November 4, 1996, by and between Alan P. Hald and the Company (1) (Incorporated by reference to Exhibit 10.6 to the Annual Report on Form 10-K for fiscal year ended November 3, 1996) 10.10 Split-Dollar Insurance Agreement, dated as of January 29, 1997, by and between MicroAge, Inc. and Alan P. Hald (1) (Incorporated by reference to Exhibit 10.6.1 to the Annual Report on Form 10-K for fiscal year ended November 3, 1996) 10.11 MicroAge, Inc. 1994 Management Equity Program Award Agreement, dated as of December 14, 1993, by and between MicroAge, Inc. and Alan P. Hald (1) (Incorporated by reference to Exhibit 10.6.2 to the Annual Report on Form 10-K for fiscal year ended November 3, 1996) 10.11.1 First Amendment, dated December 14, 1995, to the MicroAge, Inc. 1994 Management Equity Program Award Agreement, dated as of December 14, 1993, by and between MicroAge, Inc. and Alan P. Hald (1) (Incorporated by reference to Exhibit 10.6.3 to the Annual Report on Form 10-K for fiscal year ended November 3, 1996) 2 EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.12 Amended and Restated Employment Agreement, dated as of November 4, 1996, by and between James R. Daniel and the Company (1) (Incorporated by reference to Exhibit 10.7 to the Annual Report on Form 10-K for fiscal year ended November 3, 1996) 10.13 Split-Dollar Insurance Agreement, dated as of September 1, 1995, by and between James R. Daniel and the Company(1) (Incorporated by reference to Exhibit 10.5.2 to the Annual Report on Form 10-K for MicroAge, Inc. for the fiscal year ended October 29, 1995) 10.14 MicroAge, Inc. 1994 Management Equity Program Award Agreement, dated as of December 14, 1993, by and between MicroAge, Inc. and James R. Daniel (1) (Incorporated by reference to Exhibit 10.7.2 to the Annual Report on Form 10-K for fiscal year ended November 3, 1996) 10.14.1 First Amendment, dated December 14, 1995, to the MicroAge, Inc. 1994 Management Equity Program Award Agreement, dated as of December 14, 1993, by and between MicroAge, Inc. and James R. Daniel (1) (Incorporated by reference to Exhibit 10.7.3 to the Annual Report on Form 10-K for fiscal year ended November 3, 1996) 10.15 Amended and Restated Employment Agreement, dated as of November 4, 1996, by and between Robert G. O'Malley and the Company (1) (Incorporated by reference to Exhibit 10.8 to the Annual Report on Form 10-K for fiscal year ended November 3, 1996) 10.16 Split-Dollar Insurance Agreement, dated as of September 1, 1995, by and between Robert G. O'Malley and the Company (1) (Incorporated by reference to Exhibit 10.8.1 to the Annual Report on Form 10-K for MicroAge, Inc. for the fiscal year ended November 3, 1996) 10.17 Split-Dollar Insurance Agreement, dated as of January 27, 1997, by and between Robert G. O'Malley and the Company (1) (Incorporated by reference to Exhibit 10.8.2 to the Annual Report on Form 10-K for MicroAge, Inc. for the fiscal year ended November 3, 1996) 10.18 MicroAge, Inc. 1997 Management Equity Program Award Agreement by and between MicroAge, Inc. and Robert G. O'Malley (1) (Incorporated by reference to Exhibit 10.8.3 to the Annual Report on Form 10-K for MicroAge, Inc. for the fiscal year ended November 3, 1996) 10.19 Amended and Restated Employment Agreement, dated as of November 4, 1996, by and between Christopher J. Koziol and the Company (1) (Incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K for MicroAge, Inc. for the fiscal year ended November 3, 1996) 10.20 Split Dollar Insurance Agreement, dated as of September 1, 1995, by and between Christopher J. Koziol and the Company (1) (Incorporated by reference to Exhibit 10.9.1 to the Annual Report on Form 10-K for MicroAge, Inc. for the fiscal year ended November 3, 1996) 10.21 MicroAge, Inc. 1994 Management Equity Program Award Agreement, dated as of December 14, 1993, by and between MicroAge, Inc. and Christopher J. Koziol (1) (Incorporated by reference to Exhibit 10.9.2 to the Annual Report on Form 10-K for MicroAge, Inc. for the fiscal year ended November 3, 1996) 3 EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.21.1 First Amendment, dated December 14, 1995, to the MicroAge, Inc. 1994 Management Equity Program Award Agreement, dated as of December 14, 1993, by and between MicroAge, Inc. and Christopher J. Koziol (1) (Incorporated by reference to Exhibit 10.9.3 to the Annual Report on Form 10-K for fiscal year ended November 3, 1996) 10.22 Form of Employment Agreement, dated as of November 4, 1996, by and between MicroAge, Inc. and certain executives(1) (Incorporated by reference to Exhibit 10.11 to the Annual Report on Form 10-K for fiscal year ended November 3, 1996) 10.23 Form of Split-Dollar Insurance Agreement, dated September 1, 1995, by and between MicroAge, Inc. and certain executives(1) (Incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K for MicroAge, Inc. for the fiscal year ended October 29, 1995) 10.24 Resolutions of the Compensation Committee of the Board of Directors of MicroAge, Inc. approving the fiscal year 1998 bonus compensation formula for certain executives (1) 10.25 The Amended and Restated MicroAge, Inc. 1984 Incentive Stock Option Plan(1) (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended January 30, 1994) 10.26 The Amended and Restated MicroAge, Inc. 1986 Incentive Stock Option Plan(1) (Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended January 30, 1994) 10.27 The Amended and Restated MicroAge, Inc. 1988 Stock Option Plan(1) (Incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended January 30, 1994) 10.28 The Amended and Restated MicroAge, Inc. 1989 Stock Option Plan(1) (Incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended January 30, 1994) 10.29 The Amended and Restated MicroAge, Inc. Directors' Stock Option Plan(1) (Incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended January 30, 1994) 10.30 Amended and Restated MicroAge, Inc. Retirement Savings and Employee Stock Ownership Plan and Trust Agreement(1) (Incorporated by reference to Exhibit 10.14 to the Annual Report on Form 10-K for MicroAge, Inc. for the fiscal year ended October 30, 1994) 10.30.1 First Amendment to the Amended and Restated MicroAge, Inc. Retirement Savings and Employee Stock Ownership Plan and Trust Agreement(1) (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended April 30, 1995) 10.30.2 Second Amendment to the Amended and Restated MicroAge, Inc. Retirement Savings and Employee Stock Ownership Plan and Trust Agreement, dated March 14, 1996 (1) 4 EXHIBIT NO. DESCRIPTION - ----------- ----------- (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended July 28, 1996) 10.30.3 Third Amendment to the Amended and Restated MicroAge, Inc. Retirement Savings and Employee Stock Ownership Plan and Trust Agreement, dated October 28, 1996 (1) (Incorporated by reference to Exhibit 10.22.3 to the Annual Report on Form 10-K for fiscal year ended November 3, 1996) 10.30.4 Fourth Amendment to the Amended and Restated MicroAge, Inc. Retirement Savings and Employee Stock Ownership Plan and Trust Agreement, dated December 4, 1996 (1) (Incorporated by reference to Exhibit 10.23.4 to the Annual Report on Form 10-K for fiscal year ended November 3, 1996) 10.30.5 Fifth Amendment, dated January 31, 1997, to the Amended and Restated MicroAge, Inc. Retirement Savings and Employee Stock Ownership Plan and Trust Agreement (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended February 2, 1997). 10.30.6 Sixth Amendment, dated August 1, 1997, to the Amended and Restated MicroAge, Inc. Retirement Savings and Employee Stock Ownership Plan and Trust Agreement (Incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended August 3, 1997). 10.31 1988 MicroAge, Inc. Franchisee Stock Option Plan (Incorporated by reference to the Proxy Statement for the Annual Meeting of Stockholders of MicroAge, Inc. held February 9, 1988, File No. 0-15995) 10.32 1989 MicroAge, Inc. Franchisee Stock Option Plan (Incorporated by reference to the Proxy Statement for the Annual Meeting of Stockholders of MicroAge, Inc. held March 1, 1989, File No. 0-15995) 10.33 MicroAge, Inc. 1997 Long-Term Incentive Plan, dated as of September 25, 1997. 10.34 1995 MicroAge, Inc. Director Incentive Plan (Incorporated by reference to Appendix C to the Proxy Statement for the Annual Meeting of Stockholders of MicroAge, Inc. held on March 15, 1995, File No. 0-15995) 10.35 MicroAge, Inc. 1995 Associate Stock Purchase Plan (1) (Incorporated by reference to Appendix B to the Proxy Statement for the Annual Meeting of Stockholders of MicroAge, Inc. held on March 15, 1995, File No. 0-15995) 10.35.1 First Amendment to the MicroAge, Inc. 1995 Associate Stock Purchase Plan (1) (Incorporated by reference to Exhibit 99.1 to Registration Statement No. 33-58901) 10.35.2 Second Amendment to the MicroAge, Inc. 1995 Associate Stock Purchase Plan (1) (Incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for fiscal quarter ended January 28, 1996) 5 EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.36 Inventory Financing Agreement, dated as of July 9, 1993, by and between MicroAge Computer Centers, Inc. and IBM Credit Corporation (Incorporated by reference to Exhibit 10.7 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended May 1, 1994) 10.36.1 First Amendment, dated January 27, 1994, to Inventory Financing Agreement by and between MicroAge Computer Centers, Inc. and IBM Credit Corporation dated as of July 9, 1993 (Incorporated by reference to Exhibit 10.8 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended May 1, 1994) 10.37 Agreement For Wholesale Financing, dated December 17, 1993, by and between IBM Credit Corporation and MicroAge Computer Centers, Inc. (Incorporated by reference to Exhibit 10.9 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended May 1, 1994) 10.38 Second Restated Agreement for Wholesale Financing Agreement, dated as of December 17, 1993, by MicroAge Computer Centers, Inc. and Deutsche Financial Services Corporation (Incorporated by reference to Exhibit 10.3.1 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended July 30, 1995) 10.38.1 Amendment to Second Restated Agreement for Wholesale Financing, dated as of March 3, 1997, by and between MicroAge Computer Centers, Inc., et. al., and Deutsche Financial Services Corporation (Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended May 4, 1997) 10.38.2 Amendment to Second Restated Agreement for Wholesale Financing, dated as of July 31, 1997, by and between MicroAge Computer Centers, Inc., et. al., and Deutsche Financial Services Corporation (Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended August 3, 1997) 10.39 Restated and Amended Purchase Agreement, dated as of August 3, 1995, by and among MicroAge Computer Centers, Inc., et al, and Deutsche Financial Services Corporation (Incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended July 30, 1995) 10.39.1 Amendment to Restated and Amended Purchase Agreement, dated as of March 31, 1997, by and among MicroAge Computer Centers, Inc., et. al., and Deutsche Financial Services Corporation (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended May 4, 1997) 10.39.2 Amendment to Restated and Amended Purchase Agreement, dated as of July 31, 1997, by and between MicroAge Computer Centers, Inc., et. al., and Deutsche Financial Services Corporation (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended August 3, 1997) 10.40 Agreement For Wholesale Financing, dated as of December 17, 1993, by and between MicroAge Computer Centers, Inc. and IBM Credit Corporation (Incorporated by reference to Exhibit 10.9 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended May 1, 1994) 6 EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.40.1 Amendment No. 1 to Addendum, dated as of August 3, 1995, to the Agreement For Wholesale Financing dated as of December 17, 1993, by and between MicroAge Computer Centers, Inc. and IBM Credit Corporation (Incorporated by reference to Exhibit 10.4.1 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended July 30, 1995) 10.41 COMPAQ Computer Corporation Dealer Agreement, dated April 1, 1984, by and between COMPAQ Computer Corporation and MicroAge Computer Stores, Inc. (Incorporated by reference to Exhibit 10.1 to Registration Statement No. 33-14333) 10.42 COMPAQ Computer Corporation Central Purchase Agreement, dated November 21, 1983, by and between COMPAQ Computer Corporation and MicroAge Computer Stores, Inc. (Incorporated by reference to Exhibit 10.2 to Registration Statement No. 33-14333) 10.42.1 Amendment, dated June 15, 1992, to the COMPAQ Computer Corporation Central Purchase Agreement dated November 21, 1983 by and between COMPAQ Computer Corporation and MicroAge Computer Stores, Inc. (Incorporated by reference to Exhibit 10.8 to Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended March 31, 1993) 10.43 IBM Business Partner Agreement, dated April 25, 1994, by and between International Business Machines Corporation and MicroAge Computer Centers, Inc. (Incorporated by reference to Exhibit 10.23 to the Annual Report on Form 10-K for MicroAge, Inc. for the fiscal year ended October 30, 1994) 10.44 Apple Authorized Dealer Sales Agreement, dated as of April 1, 1989, by and between Apple Computer, Inc. and MicroAge Computer Stores, Inc. (Incorporated by reference to Exhibit 10.4 to the Annual Report on Form 10-K for MicroAge, Inc. for the fiscal year ended September 30, 1989) 10.44.1 Amendment, dated April 1, 1989, to the Apple Authorized Dealer Sales Agreement dated as of April 1, 1989 by and between Apple Computer, Inc. and MicroAge Computer Centers, Inc. (Incorporated by reference to Exhibit 10.4.1 to the Annual Report on Form 10-K for MicroAge, Inc. for the fiscal year ended September 30, 1990) 10.44.2 Letter Agreement, dated September 30, 1992, to the Apple Authorized Dealer Sales Agreement dated as of April 1, 1989 by and between Apple Computer, Inc. and MicroAge Computer Centers, Inc. (Incorporated by reference to Exhibit 10.9 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended March 31, 1993) 10.44.3 Letter Agreement, dated February 28, 1994, to the Apple Authorized Dealer Sales Agreement dated as of April 1, 1989 by and between Apple Computer, Inc. and MicroAge Computer Centers, Inc. (Incorporated by reference to Exhibit 10.24.3 to the Annual Report on Form 10- K for MicroAge, Inc. for the fiscal year ended October 30, 1994) 10.44.4 Letter Agreement, dated June 23, 1994, to the Apple Authorized Dealer Sales Agreement dated as of April 1, 1989 by and between Apple Computer, Inc. and MicroAge Computer Centers, Inc. (Incorporated by reference to Exhibit 10.24.4 to the Annual Report on Form 10- K for MicroAge, Inc. for the fiscal year ended October 30, 1994) 7 EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.45 Hewlett-Packard Company U.S. Agreement for Authorized Resellers, effective March 1, 1995, by and between Hewlett Packard Company and MicroAge Computer Centers, Inc. (Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended April 30, 1995) 10.46 U.S. First Tier Reseller Agreement, dated as of March 1, 1997, by and between Hewlett- Packard Company and MicroAge, Inc. 10.47 Form of Franchise Agreement, effective December 8, 1993, by and between the Company and its franchisees (Incorporated by reference to Exhibit 10.10 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended May 1, 1994) 10.47.1 Rider to Franchise Agreement, effective December 1993, by and between the Company and its existing franchisees (Incorporated by reference to Exhibit 10.26.1 to the Annual Report on Form 10-K for MicroAge, Inc. for the fiscal year ended October 30, 1994) 10.47.2 Rider to Franchise Agreement, effective December 1993, by and between the Company and its new franchisees (Incorporated by reference to Exhibit 10.26.2 to the Annual Report on Form 10-K for MicroAge, Inc. for the fiscal year ended October 30, 1994) 10.48 Form of Franchise Agreement by and between MicroAge, Inc. and its franchisees effective as to franchise agreements executed after March 1997. 10.49 Form of Purchasing Agreement, effective January 1997, by and between the Company and its Independent Computer Dealers. 10.50 Form of Purchase Agreement , effective January 1997, by and between the Company and its resellers (Incorporated by reference to Exhibit 10.38 to the Annual Report on Form 10-K for fiscal year ended November 3, 1996) 10.51 Triple Net Industrial Lease, dated as of December 21, 1993, by and between Catellus Development Corporation and MicroAge Computer Centers, Inc. (Incorporated by reference to Exhibit 10.22 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended May 1, 1994) 10.52 Triple Net Industrial Lease, dated July 28, 1993, by and between Catellus Development Corporation and MicroAge Computer Centers, Inc. (Incorporated by reference to Exhibit 10.24 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended May 1, 1994) 10.52.1 Amendment No. One, dated December 21, 1993, to Triple Net Industrial Lease dated July 28, 1993 by and between Catellus Development Corporation and MicroAge Computer Centers, Inc. (Incorporated by reference to Exhibit 10.25 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended May 1, 1994) 10.52.2 Lease Amendment, dated September 9, 1994, to Triple Net Industrial Leases dated July 16, 1985, July 28, 1993, and December 21, 1993 by and between Catellus Development Corporation and MicroAge Computer Centers, Inc. (Incorporated by reference to Exhibit 8 EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.34.2 to the Annual Report on Form 10-K for MicroAge, Inc. for the fiscal year ended October 30, 1994) 10.53 Lease, dated as of October 27, 1994, by and between Chimiarra Investments Limited and MicroAge Computer Centers, Inc. (Incorporated by reference to Exhibit 10.35 to the Annual Report on Form 10-K for MicroAge, Inc. for the fiscal year ended October 30, 1994) 10.53.1 Addendum, dated October 27, 1994, to Lease dated as of October 27, 1994 by and between Chimiarra Investments Listed and MicroAge Computer Centers, Inc. (Incorporated by reference to Exhibit 10.35.1 to the Annual Report on Form 10-K for MicroAge, Inc. for the fiscal year ended October 30, 1994) 10.54 Lease, dated March 6, 1990, by and between MicroAge Computer Centers, Inc. and Petula Associates, Ltd. and The Alameda Group, as tenants in common (Incorporated by reference to Exhibit 10.40 to Registration Statement No. 33-45510) 10.54.1 First Amendment, dated July 1, 1990, to Lease dated March 6, 1990 by and between MicroAge Computer Centers, Inc. and Petula Associates, Ltd. and The Alameda Group, as tenants in common (Incorporated by reference to Exhibit 10.40.1 to Registration Statement No. 33-45510) 10.54.2 Second Amendment, dated August 10, 1993, to Lease dated March 6, 1990 by and between MicroAge Computer Centers, Inc. and Petula Associates, Ltd. and The Alameda Group, as tenants in common (Incorporated by reference to Exhibit 10.31.2 to the Annual Report on Form 10-K for MicroAge, Inc. for the fiscal year ended September 30, 1993) 10.55 Lease, dated April 14, 1994, by and between AmberJack, Ltd. and MicroAge Computer Centers, Inc. (Incorporated by reference to Exhibit 10.32 to the Annual Report on Form 10-K for MicroAge, Inc. for the fiscal year ended October 30, 1994) 10.56 Lease Agreement, dated April 12, 1994, by and between Duke Realty Limited Partnership and MicroAge Computer Centers, Inc. (Incorporated by reference to Exhibit 10.23 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended May 1, 1994) 10.57 Lease Agreement, dated November 18, 1994, by and between Duke Realty Limited partnership and Kenco Group, Inc. (Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended July 30, 1995) 10.57.1 Assignment and Assumption of Lease Agreement, dated July 18, 1994, to Lease dated November 18, 1994 by and between Duke Realty Limited partnership and Kenco Group, Inc. (Incorporated by reference to Exhibit 10.2.1 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended July 30, 1995) 10.58 Triple Net Industrial Lease, dated as of July 16, 1985, by and between MicroAge Computer Centers, Inc. and Southern Pacific Industrial Development Company (Incorporated by reference to Exhibit 10.41 to Registration Statement No. 33-45510) 9 EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.58.1 Amendment No. 1, dated September 18, 1985, to Triple Net Industrial Lease dated as of July 16, 1985 by and between MicroAge Computer Centers, Inc. and Southern Pacific Industrial Development Company (Incorporated by reference to Exhibit 10.41.1 to Registration Statement No. 33-45510) 10.58.2 Amendment No. 2, dated September 19, 1986, to Triple Net Industrial Lease dated as of July 16, 1985 by and between MicroAge Computer Centers, Inc. and Southern Pacific Industrial Development Company (Incorporated by reference to Exhibit 10.41.2 to Registration Statement No. 33-45510) 10.58.3 Supplemental Agreement (Amendment No. 3), dated April 19, 1990, to Triple Net Industrial Lease dated as of July 16, 1985 by and between MicroAge Computer Centers, Inc. and Southern Pacific Industrial Development Company (Incorporated by reference to Exhibit 10.41.3 to Registration Statement No. 33-45510) 10.58.4 Amendment No. 4, dated July 2, 1990, to Triple Net Industrial Lease dated as of July 16, 1985 by and between MicroAge Computer Centers, Inc. Catellus Development Corporation (f/k/a Santa Fe Pacific Realty Corporation), successor by merger with Southern Pacific Industrial Development Company (Incorporated by reference to Exhibit 10.41.3 to Registration Statement No. 33-45510) 10.58.5 Lease Amendment, dated July 28, 1993, to Triple Net Industrial Lease dated as of July 16, 1985 by and between MicroAge Computer Centers, Inc. and Catellus Development Corporation (Incorporated by reference to Exhibit 10.41.3 to Registration Statement No. 33-45510) 10.58.6 Lease Amendment, dated December 21, 1993, to Triple Net Industrial Lease dated July 16, 1985 by and between Catellus Development Corporation and MicroAge Computer Centers, Inc. (Incorporated by reference to Exhibit 10.20 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended May 1, 1994) 10.59 Standard Industrial/Commercial Single-Tenant Lease, dated January 18, 1995, by and between Chamberlain Family Trust dated September 21, 1979 d/b/a Chamberlain Enterprises and MicroAge Computer Centers, Inc. (Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for MicroAge, Inc. for the quarter ended January 29, 1995) 10.60 Lease, dated September 14, 1993, by and between MicroAge Computer Centers, Inc. and Amberjack, Ltd. (Incorporated by reference to Exhibit 10.30 to the Annual Report on Form 10-K for MicroAge, Inc. for the fiscal year ended September 30, 1993) 10.61 Land Purchase and Sale Agreement, dated as of August 8, 1996, by and between CMD Southwest, Inc. and MicroAge Computer Centers, Inc. (Incorporated by reference to Exhibit 10.47 to the Annual Report on Form 10-K for fiscal year ended November 3, 1996) 10.62 Single-Tenant Lease-Net, dated March 31, 1995, by and between Chamberlain Development, L.L.C. and MicroAge Computer Centers, Inc. (Incorporated by reference to Exhibit 10.41 to the Annual Report on Form 10-K for MicroAge, Inc. for the fiscal year ended November 3, 1996) 10 EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.62.1 First Amendment, dated as of August 29, 1995, to the Single-Tenant Lease-Net dated March 31, 1995 by and between Chamberlain Development, L.L.C. and MicroAge Computer Centers, Inc. (Incorporated by reference to Exhibit 10.41.1 to the Annual Report on Form 10- K for MicroAge, Inc. for the fiscal year ended November 3, 1996) 10.63 Standard Industrial Lease, dated September 27, 1996, by and between Dermody Properties and MicroAge Logistics Services, Inc. (Incorporated by reference to Exhibit 10.49 to the Annual Report on Form 10-K for MicroAge, Inc. for the fiscal year ended November 3, 1996) 10.64 Office Lease, dated as of August 15, 1997, by and between MicroAge Computer Centers, Inc. and WHCPS Real Estate Limited Partnership. 10.64.1 First Amendment to Office Lease, dated as of September 29, 1997, by and between MicroAge Computer Centers, Inc. and WHCPS Real Estate Limited Partnership. 11 EPS Calculation 21 List of Subsidiaries of MicroAge, Inc. 23 Consent of Independent Accountants 27 Financial Data Schedule 99.1 Private Securities Litigation Reform Act of 1995 Safe Harbor Compliance Statement for Forward-Looking Statements. 99.2 Common Stock Purchase and Sale Agreement, dated as of April 27, 1990, by and among MicroAge, Inc., Olivetti Holding N.V., Banstock Company Limited, The MicroAge, Inc. Retirement Savings and Employee Stock Ownership Trust and Citizens and Southern Trust Company (Georgia), N.A., solely as Trustee of the ESOT and not in its individual capacity (Incorporated by reference to Exhibit 28.2 to the Current Report on Form 8-K for MicroAge, Inc. dated May 7, 1990) 99.3 Company and Purchasers Rights Agreement, dated as of April 27, 1990, by and between MicroAge, Inc., Banstock Company Limited and Fred Israel (Incorporated by reference to Exhibit 28.3 to the Current Report on Form 8-K for MicroAge, Inc. dated May 7, 1990) 99.4 Company and ESOT Rights Agreement, dated as of April 27, 1990, by and between MicroAge, Inc., The MicroAge, Inc. Retirement Savings and Employee Stock Ownership Trust and Citizens and Southern Trust Company (Georgia), N.A., solely as Trustee of the ESOT and not in its individual capacity (Incorporated by reference to Exhibit 28.4 to the Current Report on Form 8-K for MicroAge, Inc. dated May 7, 1990) 99.5 Parent Agreement, dated as of April 27, 1990, by and among MicroAge, Inc., Olivetti Holding N.V. and Kokudo Sangyo, Inc. (Incorporated by reference to Exhibit 28.5 to the Current Report on Form 8-K for MicroAge, Inc. dated May 7, 1990) 11 EXHIBIT NO. DESCRIPTION - ----------- ----------- 99.6 Loan Agreement, dated as of April 27, 1990, by and between MicroAge, Inc., and Citizens and Southern Trust Company Georgia), N.A., as Trustee for The MicroAge, Inc. Retirement Savings and Employee Stock Ownership Trust (Incorporated by reference to Exhibit 28.7 to the Current Report on Form 8-K for MicroAge, Inc. dated May 7, 1990) 99.7 Nonrecourse Promissory Note, dated as of April 27, 1990, made by Citizens and Southern Trust Company as Trustee on behalf of The MicroAge, Inc. Retirement Savings and Employee Stock Ownership Trust (Incorporated by reference to Exhibit 28.8 to the Current Report on Form 8-K for MicroAge, Inc. dated May 7, 1990) 99.8 Stock Pledge Agreement, dated as of April 27, 1990, by and between MicroAge, Inc. and Citizens and Southern Trust Company (Georgia), N.A., as Trustee on behalf of The MicroAge, Inc. Retirement Savings and Employee Stock Ownership Trust (Incorporated by reference to Exhibit 28.9 to the Current Report on Form 8-K for MicroAge, Inc. dated May 7, 1990) 99.9 Trust Agreement, dated December 30, 1994, by and between MicroAge, Inc. and First Interstate Bank of Arizona, N.A., as Trustee on behalf of The MicroAge, Inc. Retirement Savings and Employee Stock Ownership Plan and Trust (Incorporated by reference to Exhibit 99.8 to the Annual Report on Form 10-K for MicroAge, Inc. for the fiscal year ended October 30, 1994) (1) Management contract for compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. - -------------------------- (*) Included only in manually signed original 12 EX-3.2 2 AMENDED AND RESTATED BY-LAWS AMENDED AND RESTATED BY-LAWS OF MICROAGE, INC. ARTICLE I --------- OFFICES SECTION 1. REGISTERED OFFICE. The registered office shall be established and maintained at the office of the United States Corporation Company, in the City of Dover, in the County of Kent, in the State of Delaware and said corporation shall be the registered agent of this corporation. SECTION 2. OTHER OFFICES. The corporation may have other offices, either within or without the State of Delaware, at such place or places as the Board of Directors may from time to time appoint or the business of the corporation may require. ARTICLE II ---------- MEETINGS OF STOCKHOLDERS SECTION 1. ANNUAL MEETINGS. The annual meetings of stockholders for the election of directors shall be held at such place, within or without the State of Delaware, and at such time and on such date as may from time to time be fixed by the Board of Directors and specified in the notice of such meeting. In addition to the election of directors, any other proper business may be transacted at the annual meeting. In the event the Board of Directors fails to so determine the place of meeting, the annual meeting of stockholders shall be held at the offices of MicroAge, Inc., 2400 South MicroAge Way, Tempe, Arizona. If the date of the annual meeting shall fall upon a legal holiday, the meeting shall be held on the next succeeding business day. At each annual meeting, the stockholders entitled to vote shall elect a Board of Directors and they may transact such other corporate business as may properly come before the meeting. SECTION 2. OTHER MEETINGS. Meetings of stockholders for any purpose other than the election of directors may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting. SECTION 2.1. NOTICE OF STOCKHOLDER NOMINATIONS AND BUSINESS. (a) Nominations of persons for election to the board of directors of the Corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders: (i) pursuant to the Corporation's notice of meeting; (ii) by or at the direction of the board of directors; or (iii) by any stockholder of the Corporation who was a stockholder of record at the time of giving of notice provided for in this Section, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section. For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to this Section, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation, and such business must be a proper subject for stockholder action under the General Corporation Law of Delaware. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting; provided, 1 however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 90th day prior to such annual meeting, and not later than the close of business on the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. (b) Nominations of persons for election to the board of directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting: (i) by or at the direction of the board of directors; or (ii) by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this Section, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Section. Nominations by stockholders of persons for election to the board of directors may be made at such a special meeting of stockholders if the stockholder's notice required by this Section shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. (c) Any stockholder's notice required by this Section shall set forth: (i) as to each person whom the stockholder proposes to nominate for election or re-election as a director, (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person and (C) the class and number of shares of the Corporation owned beneficially by such person and shall include such person's written consent to being named as a nominee and to serving as a director if elected; (ii) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal, is made (A) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner, and (B) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (d) Only such persons who are nominated in accordance with the procedures set forth in this Section shall be eligible for election as directors at any meeting of stockholders. Only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with procedures set forth in this Section. The chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in this Section and, if any proposed nomination or business is not in compliance with this Section, to declare that such defective proposal shall be disregarded. (e) For purposes of this Section, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"). (f) Notwithstanding the foregoing provisions of this Section, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section. Nothing in this Section shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. 2 SECTION 3. CONDUCT OF STOCKHOLDERS' MEETINGS. The meetings of the stockholders shall be presided over by the Chairman of the Board and Chief Executive Officer, or if he is not present, by an officer designated by the Board of Directors, or if the Board of Directors fails to designate such officer, by a chairman to be elected at the meeting. The Secretary, or any Assistant Secretary as designated by the chairman of the meeting, of the Corporation shall act as secretary of such meetings; if neither the Secretary nor an Assistant Secretary is present, then a secretary shall be appointed by the chairman of the meeting. The order of business shall be as determined by the chairman of the meeting. SECTION 4. VOTING. Except as provided in the Certificate of Incorporation and these By-Laws, each stockholder entitled to vote in accordance with the terms of the Certificate of Incorporation and in accordance with the provisions of these By-Laws shall be entitled to one vote, in person or by proxy, for each share of stock entitled to be voted which is held by such stockholder, but no proxy shall be voted after three years from its date unless such proxy provides for a longer period. Upon the demand of any stockholder, the vote for directors and the vote upon any question before the meeting, shall be by ballot. All questions shall be decided by majority vote, except as otherwise provided by the Certificate of Incorporation or the laws of the State of Delaware. A complete list of the stockholders entitled to vote at the ensuing election, arranged in alphabetical order, with the address of each, and the number of shares held by each, shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. SECTION 5. QUORUM. Except as otherwise required by law, by the Certificate of Incorporation or by these By-Laws, the presence, in person or by proxy, of stockholders holding a majority of the stock of the corporation entitled to vote shall constitute a quorum at all meetings of the stockholders. In case a quorum shall not be present at any meeting, a majority in interest of the stockholders entitled to vote thereat, present in person or by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until the requisite amount of stock entitled to vote shall be present. At any such adjourned meeting at which the requisite amount of stock entitled to vote shall be represented, any business may be transacted which might have been transacted at the meeting as originally noticed; but only those stockholders entitled to vote at the meeting as originally noticed shall be entitled to vote at any adjournment or adjournments thereof. SECTION 6. ELECTION INSPECTORS. The Board of Directors shall, in advance of any meeting of stockholders, appoint one or more election inspectors to act at such meeting (and any adjournment or adjournments thereof) and make a written report thereof. The Board of Directors may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the chairman of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The election inspector or inspectors (acting through a majority of them if there be more than one) shall: (i) ascertain the number of shares outstanding and the voting power of each; (ii) determine the shares represented at a meeting and the validity of proxies and ballots; (iii) count all votes and ballots; (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors; and (v) certify and 3 announce their determination of the number of shares represented at the meeting, and their count of all votes and ballots. No such election inspector need be a stockholder of the Corporation. No person who is a candidate for office shall act as an inspector. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors. The date and time of the opening and the closing of the poles for each matter upon which the stockholders will vote at a meeting shall be announced at the meeting. No ballot, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the inspectors after the closing of the polls unless the Court of Chancery upon application by a stockholder shall determine otherwise. In determining the validity and counting of proxies and ballots, the inspectors shall be limited to an examination of the proxies, any envelopes submitted with those proxies, any information provided in accordance with section 212(c)(2) of the Delaware General Corporation Law, ballots and the regular books and records of the corporation, except that the inspectors may consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers, their nominees or similar persons which represent more votes than the holder of a proxy is authorized by the record owner to cast or more votes than the stockholder holds of record. If the inspectors consider other reliable information for the limited purpose permitted herein, the inspectors at the time they make their certification pursuant to this section shall specify the precise information considered by them including the person or persons from whom they obtained the information, when the information was obtained, the means by which the information was obtained and the basis for the inspectors' belief that such information is accurate and reliable. SECTION 7. SPECIAL MEETINGS. Special meetings of the stockholders may be held whenever and wherever called for by the Chairman of the Board and Chief Executive Officer or the Board of Directors. The business, including the election and/or removal of directors, which may be conducted at any such Special Meeting shall be limited to the purposes stated in the notice thereof. SECTION 8. NOTICE OF MEETINGS. Written notice, stating the place, date and time of the meeting, and in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given to each stockholder entitled to vote thereat at his address as it appears on the records of the corporation, not less than ten nor more than sixty days before the date of the meeting, except in the case of a meeting to consider the merger or consolidation of the corporation, notice thereof shall be given not less than twenty nor more than sixty days before the date of the meeting. Business transacted at a special meeting shall be limited to the purposes stated in the notice. SECTION 9. ACTION WITHOUT MEETING. Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of the stockholders or by the unanimous written consent of the stockholders entitled to vote on such action. ARTICLE III ----------- DIRECTORS SECTION 1. NUMBER AND TERM. The number of directors shall be seven (7). The directors, other than those who may be elected by the holders of any series of Preferred Stock then outstanding, shall be divided into three classes, with the term of the first class to expire at the 1993 annual meeting of stockholders, the term of office of the second class to expire at the 1994 annual meeting of stockholders and the term of office of the third class to expire at the 1995 annual meeting of stockholders. At each annual meeting of 4 stockholders following such initial classification and election, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election. SECTION 2. RESIGNATIONS. Any director, member of a committee or officer may resign at any time. Such resignation shall be made in writing, and shall take effect at the time specified therein, and if no time be specified, at the time of its receipt by the Chairman of the Board and Chief Executive Officer or Secretary. The acceptance of a resignation shall not be necessary to make it effective. SECTION 3. VACANCIES. If the office of any director, member of a committee or other officer becomes vacant, the remaining directors in office, though less than a quorum, by a majority vote may appoint any qualified person to fill such vacancy, who shall hold office for the unexpired term and until his successor shall be duly chosen, or until his earlier resignation or removal. SECTION 4. QUALIFICATIONS. In order to qualify as a director, a person must be the owner of one or more shares of the capital stock of the Corporation at the time of assuming office and for so long thereafter as such person remains in office. A person will cease to qualify as a director if he or she (i) is in good faith determined by a majority of the other directors then in office to be physically or mentally incapable of competent performance as a director for a period, starting with inception of the incapacity, that has extended or is likely to extend for more than six months or (ii) has failed to attend three successive regular meetings of the Board (as determined in accordance with Article III, Section 7 below) unless and to the extent such failure is waived by a majority of the other directors then in office; however, disqualification pursuant to clause (i) or (ii) of this sentence will not preclude the subsequent election or appointment of such person as a director by the shareholders or the Board if a majority of the directors in office immediately prior to the submission of such person for election or appointment shall determine that his or her prior incapacity or principal reason for prior non-attendance no longer exists. A person will not qualify for election or appointment as a director, whether initially or on re-election and whether by the shareholders at their annual meeting or by the Board of Directors as contemplated in Article III, Section 3 above, if such person's 70th birthday occurs on or has occurred before the date of such election, appointment or re-election. A person who has qualified by age for his or her most recent election as a director may serve throughout the term for which such person was elected, notwithstanding the occurrence of his or her 70th birthday between the date of such election and the end of such term, subject, however, to his or her otherwise remaining qualified for such office. SECTION 5. POWERS. The business and affairs of this corporation shall be managed by or under the direction of its Board of Directors, which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation of the corporation or by these By-Laws conferred upon or reserved to the stockholders. SECTION 6. COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of any member of such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, or in these By-Laws, shall have and may exercise all of the 5 powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the By-Laws of the corporation; and, unless the resolution, these By-Laws, or the Certificate of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. To the extent any such action is not taken by the Board of Directors, each committee may choose its own chairman and secretary, fix its own rules of procedure, and meet at such times and at such place or places as may be provided by such rules. At every meeting of the committee, the presence of a majority of all the members thereof shall be necessary to constitute a quorum and the affirmative vote of a majority of the members present shall be necessary to decide any question before the committee. SECTION 7. MEETINGS. The Board of Directors of the corporation may hold meetings, both regular and special, either within or without the State of Delaware. The first meeting of each newly elected Board of Directors shall be held immediately after the annual meeting of stockholders without any notice other than these By-Laws. The newly elected directors may hold their first meeting for the purpose of organization and the transaction of business, if a quorum be present, immediately after the annual meeting of the stockholders; or the time and place of such meeting may be fixed by consent in writing of all the directors. Regular meetings of the directors may be held without notice at such places and times as shall be determined from time to time by resolution of the directors. Special meetings of the Board of Directors may be called by the Chairman of the Board and Chief Executive Officer, and shall be called by the Chairman of the Board and Chief Executive Officer or the Secretary on the request of any two directors on at least two days' notice to each director and shall be held at such place or places as may be determined by the directors, or as shall be stated in the call of the meeting. Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. SECTION 8. QUORUM. A majority of the directors shall constitute a quorum for the transaction of business. If at any meeting of the Board of Directors there shall be less than a quorum present, a majority of those present may adjourn the meeting from time to time until a quorum is obtained, and no further notice thereof need be given other than by announcement at the meeting which shall be so adjourned. SECTION 9. COMPENSATION. Unless otherwise restricted by the Certificate of Incorporation, the Board of Directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. 6 SECTION 10. ACTION WITHOUT MEETING. Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting, if prior to such action a written consent thereto is signed by all members of the Board of Directors, or of such committee as the case may be, and such written consent is filed with the minutes of proceedings of the Board of Directors or committee. SECTION 11. VOTING. The vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors unless by provision of statute, the certificate of incorporation, or these By-Laws, the vote of a different number of directors is required, in which case such provision shall govern. SECTION 12. APPROVAL OR RATIFICATION BY STOCKHOLDERS. Any contract, transaction or act of the Corporation or of the Board of Directors or of any committee thereof or of any officer of the Corporation which shall be approved or ratified by the holders of a majority of the outstanding stock of the Corporation at any annual meeting of stockholders or any special meeting of stockholders called for such purpose shall be as valid and binding upon the Corporation and all of its stockholders as if it had been approved or ratified by all the stockholders of the Corporation. ARTICLE IV ---------- OFFICERS SECTION 1. OFFICERS. The officers of the Corporation shall be a Chairman of the Board and Chief Executive Officer, a Treasurer, and a Secretary, all of whom shall be elected by the Board of Directors and who shall hold office until their successors are elected and qualified. In addition, the Board of Directors may elect one or more Vice-Chairmen, a President, Vice Presidents and such Assistant Secretaries and Assistant Treasurers as they may deem proper. None of the officers of the Corporation need be directors. The officers shall be elected at the first meeting of the Board of Directors after each annual meeting. Any number of offices may be held by the same person unless the Certificate of Incorporation or these By-Laws otherwise provide. SECTION 2. OTHER OFFICERS AND AGENTS. The Board may appoint such other officers and agents as it may deem advisable, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. SECTION 3. CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER. The Chairman of the Board and Chief Executive Officer shall have the primary responsibility for and the general control and management of all the business and affairs of the Corporation and the performance by all of its other officers of their respective duties, under the direction of the Board. He shall be the presiding officer at all meetings of the Board of Directors and meetings of the stockholders of the Corporation. Except as the Board of Directors shall authorize the execution thereof in some other manner, he may execute contracts, deeds, mortgages, indenture, bonds, consents, guaranties, agreements or other instruments on behalf of the Corporation. Unless otherwise ordered by the Board of Directors, the Chairman of the Board and Chief Executive Officer shall have full power and authority on behalf of the Corporation to attend and to act and to vote at any meeting of stockholders of any corporation in which the Corporation may hold stock, and also to execute and deliver for and on behalf of the Corporation proxies in respect of such meetings, and at any such meeting the Chairman of the Board and Chief Executive Officer or the individual or individuals named in the proxy executed by the Chairman of the Board and Chief Executive Officer in respect of such meeting shall possess and may exercise any and all rights and powers incident to the ownership of such stock and which, as 7 the owner thereof, the Corporation might have possessed and exercised if present; provided, however, the Board of Directors, by resolution, from time to time may confer like powers upon any other person or persons, which powers may be general or confined to specific instances. SECTION 4. VICE-CHAIRMAN OF THE BOARD. The Board of Directors may elect one or more Vice-Chairman of the Board to serve as a general executive officer of the Corporation, and to be vested with such powers and duties as the Board may from time to time delegate. In the absence of the Chairman of the Board and Chief Executive Officer, he shall preside at all meetings of the Board of Directors. Except as the Board of Directors shall authorize the execution thereof in some other manner, he may execute contracts, deeds, mortgages, indentures, bonds, consents, guaranties, agreements or other instruments on behalf of the Corporation. The Vice-Chairman may represent the Corporation at any meeting of the stockholders of any other corporation in which this Corporation then holds stock, and may vote this Corporation's stock in such other corporation in person or by proxy appointed by him, provided that the Board of Directors may from time to time confer the foregoing authority upon any other person or persons. SECTION 5. PRESIDENT. The President shall have such authority and perform such duties relative to the business and affairs of the Corporation as may be delegated to him by the Board. Except as the Board of Directors shall authorize the execution thereof in some other manner, he may execute contracts, deeds, mortgages, indentures, bonds, consents, guaranties, agreements or other instruments on behalf of the Corporation. The President may represent the Corporation at any meeting of the stockholders of any other corporation in which this Corporation then holds stock, and may vote this Corporation's stock in such other corporation in person or by proxy appointed by him, provided that the Board of Directors may from time to time confer the foregoing authority upon any other person or persons. SECTION 6. VICE PRESIDENTS. Each Vice President shall have such powers and shall perform such duties as shall be assigned to him, or her, by the directors. If authorized to do so by the Board of Directors, any Vice President may represent the Corporation at any meeting of the stockholders of any other corporation in which this Corporation then holds stock, and may vote this Corporation's stock in such other corporation in person or by proxy appointed by him, provided that the Board of Directors may from time to time confer the foregoing authority upon any other person or persons. SECTION 7. TREASURER. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate account of receipts and disbursements in books belonging to the Corporation. He shall deposit all moneys and other valuables in the name and to the credit of the Corporation in such depositaries as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, the Chairman of the Board and Chief Executive Officer or the President, taking proper vouchers for such disbursements. He shall render to the Board of Directors at their regular meetings, or whenever they may request it, an account of all his transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, he shall give the Corporation a bond for the faithful discharge of his duties in such amount and with such surety as the Board shall prescribe. SECTION 8. SECRETARY. The Secretary shall give, or cause to be given, notice of all meetings of stockholders and directors, and all other notices required by law or by these By-Laws, and in case of his absence or refusal or neglect so to do, any such notice may be given by any person thereunto directed by the Chairman and Chief Executive Officer, or by the Board of Directors, upon whose request the meeting is called as provided by these By-Laws. He shall record all of the proceedings of the meetings of the Corporation and of the Board of Directors in a book to be kept for that purpose, and shall perform such other duties as may be assigned to him by the Board of Directors or the Chairman 8 of the Board and Chief Executive Officer. He shall have the custody of the seal of the Corporation and shall affix the same to all instruments requiring it, when authorized by the Board of Directors, the Chairman of the Board and Chief Executive Officer or the President, and attest the same. SECTION 9. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. Assistant Treasurers and Assistant Secretaries, if any, shall be elected and shall have such powers and shall perform such duties as shall be assigned to them, respectively, by the directors. ARTICLE V --------- MISCELLANEOUS SECTION 1. CERTIFICATES OF STOCK. Every holder of stock in the corporation shall be entitled to have a certificate certifying the number of shares owned by him in the corporation, signed by the Chairman, the President or any Vice-President, and the Treasurer or an Assistant Treasurer, or Secretary or an Assistant Secretary. Any or all the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. SECTION 2. LOST CERTIFICATES. A new certificate of stock may be issued in the place of any certificate theretofore issued by the corporation, alleged to have been lost, stolen or destroyed, and the directors may, in their discretion, require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the corporation a bond, in such sum as they may direct, sufficient to indemnify the corporation against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate, or the issuance of any such new certificate. SECTION 3. TRANSFER OF SHARES. Upon surrender to the corporation or transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Whenever any transfer of shares shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of transfer if, when the certificates are presented to the corporation for transfer, both the transferor and the transferee request the corporation to do so. SECTION 4. STOCKHOLDERS RECORD DATE. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. SECTION 5. REGISTERED STOCKHOLDERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold 9 liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. SECTION 6. DIVIDENDS. Subject to the provisions of the Certificate of Incorporation, the Board of Directors may, out of funds legally available therefor at any regular or special meeting, declare dividends upon the capital stock of the corporation as and when they deem expedient. Dividends may be paid in cash, in property, or in shares of capital stock of the corporation, subject to the provisions of the Certificate of Incorporation. Before declaring any dividend there may be set apart out of any funds of the corporation available for dividends, such sum or sums as the directors from time to time in their discretion deem proper for working capital or as a reserve fund to meet contingencies or for equalizing dividends or for such other purposes as the directors shall deem conducive to the interests of the corporation. SECTION 7. SEAL. The corporate seal shall be circular in form and shall contain the name of the corporation, the year of its creation and the words "CORPORATE SEAL DELAWARE". Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. SECTION 8. FISCAL YEAR. The fiscal year of the corporation shall be determined by resolution of the Board of Directors. SECTION 9. CHECKS. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers, agent or agents of the corporation, and in such manner as shall be determined from time to time by resolution of the Board of Directors. SECTION 10. NOTICE AND WAIVER OF NOTICE. Whenever any notice is required by these By-Laws to be given, personal notice is not meant unless expressly so stated, and any notice so required shall be deemed to be sufficient if given by depositing the same in the United States mail, postage prepaid, addressed to the person entitled thereto at his address as it appears on the records of the corporation, and such notice shall be deemed to have been given on the day of such mailing. Stockholders not entitled to vote shall not be entitled to receive notice of any meetings except as otherwise provided by statute. Whenever any notice whatever is required to be given under the provisions of any law, or under the provisions of the Certificate of Incorporation of the corporation or these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors or members of a committee of directors need be specified in any written waiver of notice. SECTION 11. ELECTION NOT TO BE SUBJECT TO ARIZONA CONTROL SHARE ACQUISI TIONS STATUTE. The Corporation elects not to be subject to Title 10, Chapter 6, Article 2 of the Arizona Revised Statutes, relating to "Control Share Acquisitions." 10 ARTICLE VI ---------- REPAYMENT OF SALARY AND EXPENSE REIMBURSEMENTS Any payments made to an officer, director, employee or other agent of the corporation in the nature of salary, wages, other compensation or expense reimbursements which shall be disallowed in whole or in part as a deductible expense by the Internal Revenue Service in any judicial or administrative proceeding, shall be repaid by such officer, director, employee, or other agent of the corporation to the full extent of such disallowance. In lieu of payment by such person or persons, subject to the determination of the Board of Directors, proportionate amounts may be withheld from his or their future compensation payments until the amount so owed to the corporation has been recovered. ARTICLE VII ----------- INDEMNIFICATION OF OFFICERS DIRECTORS, EMPLOYEES AND AGENTS SECTION 1. RIGHT TO INDEMNIFICATION. The Corporation shall to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), indemnify and hold harmless any person who was or is a party, or is threatened to be made a party to or is otherwise involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that such person is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "Indemnitee") against expenses, liabilities and losses (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such Indemnitee in connection therewith; provided, however, that except as provided in Section 3 of this Article with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such Indemnitee in connection with a proceeding (or part thereof) initiated by such Indemnitee only if such proceeding or part thereof was authorized by the board of directors of this Corporation. SECTION 2. RIGHT TO ADVANCEMENT OF EXPENSES. The right to indemnification conferred in Section 1 of this Article shall include the right to be paid by the Corporation the expenses (including attorneys' fees) incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the Delaware General Corporation Law requires, an advancement of expenses incurred by an Indemnitee in his capacity as a director or officer (and not in any other capacity in which service was or is rendered by such Indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such Indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such Indemnitee is not entitled to be indemnified for such expenses under this Section 2 or otherwise. The rights to indemnification and to the advancement of expenses conferred in this Article shall be contract rights and such rights shall continue as to an Indemnitee who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the Indemnitee's heirs, executors and administrators. 11 SECTION 3. RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under Section 1 or 2 of this Article is not paid in full by the Corporation within sixty (60) days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty (20) days, the Indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the Indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the Indemnitee to enforce a right to an advancement of expenses) it shall be a defense that and (ii) in any suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Corporation shall be entitled to recover such expenses upon a final adjudication that, the Indemnitee has not met any applicable standard for indemnification set forth in the Delaware General Corporation Law. Neither the failure of the Corporation (including its board of directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the Indemnitee is proper in the circumstances because the Indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its board of directors, independent legal counsel, or its stockholders) that the Indemnitee has not met such applicable standard of conduct, shall create a presumption that the Indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the Indemnitee, be a defense to such suit. In any suit brought by the Indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the Indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article or otherwise shall be on the Corporation. SECTION 4. NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification and advancement of expenses conferred in this Article VII shall not be exclusive of any other rights to which any person may have or hereafter acquire under any statute, the Corporation's Restated Certificate of Incorporation, these ByLaws, any agreement, vote of stockholders or disinterested directors, or otherwise. SECTION 5. INSURANCE. The Corporation shall have the power to purchase and maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise (including an employee benefit plan) against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. SECTION 6. DEFINITION OF CORPORATION. For purposes of this Article VII, references to the "Corporation" shall include any subsidiary of this Corporation from and after the acquisition thereof by this Corporation, so that any person who is a director, officer, employee or agent of such subsidiary after the acquisition thereof by this Corporation shall stand in the same position under the provisions of this Article as such person would have had such person served in such position for this Corporation. SECTION 7. INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION. The Corporation may, to the extent authorized from time to time by the board of directors, grant rights to indemnification and to the advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Article with respect to the indemnification and advancement of expenses of directors and officers of the Corporation. 12 ARTICLE VIII ------------ AMENDMENTS These By-Laws may be altered, amended or repealed or new by-laws may be adopted by the stockholders or by the Board of Directors when such power is conferred upon the Board of Directors by the Certificate of Incorporation, at any regular meeting of the stockholders or of the Board of Directors, or at any special meeting of the stockholders or of the Board of Directors if notice of such alteration, amendment, repeal or adoption of new by-laws be contained in the notice of such special meeting. 13 EX-10.1 3 EXECUTIVE SUPPLEMENTAL SAVINGS PLAN MICROAGE, INC. EXECUTIVE SUPPLEMENTAL SAVINGS PLAN MICROAGE, INC. EXECUTIVE SUPPLEMENTAL SAVINGS PLAN TABLE OF CONTENTS Page ---- SECTION 1 PREAMBLE...........................................................1 SECTION 2 DEFINITIONS........................................................1 SECTION 3 ELIGIBILITY........................................................5 SECTION 4 CONTRIBUTIONS......................................................7 SECTION 5 WITHDRAWALS.......................................................10 SECTION 6 CREDITING OF CONTRIBUTIONS AND INCOME.............................11 SECTION 7 RETIREMENT BENEFITS...............................................15 SECTION 8 DEATH BENEFITS....................................................16 SECTION 9 PAYMENT OF BENEFITS ON RETIREMENT OR DEATH........................17 SECTION 10 PAYMENT OF BENEFITS ON TERMINATION OF SERVICE.....................18 SECTION 11 ADMINISTRATION OF THE PLAN........................................20 SECTION 12 ADOPTION OF PLAN BY AFFILIATES....................................22 SECTION 13 CLAIM REVIEW PROCEDURE............................................23 SECTION 14 LIMITATION OF RIGHTS, CONSTRUCTION................................24 SECTION 15 LIMITATION ON ASSIGNMENT; PAYMENTS TO LEGALLY INCOMPETENT DISTRIBUTEE...........................................25 SECTION 16 AMENDMENT, MERGER AND TERMINATION.................................25 SECTION 17 GENERAL PROVISIONS................................................26 MICROAGE, INC. EXECUTIVE SUPPLEMENTAL SAVINGS PLAN SECTION 1 PREAMBLE -------- MICROAGE, INC., a corporation organized and existing under the laws of the State of Delaware (the "Company"), previously adopted the MicroAge, Inc. Executive Supplemental Savings Plan (the "Plan") in order to provide its key executives with an opportunity and incentive to save for retirement and other purposes. By this document, the Company wishes to amend and restate the Plan to incorporate certain changes, effective November 3, 1997. The purpose of this Plan is to provide a select group of management or highly compensated employees of the Company and certain of its affiliates with the opportunity to defer a portion of their compensation and to receive related contributions from their employers. As a result, the Plan shall be considered a "top hat plan", exempt from many of the requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"). This Plan is not intended to "qualify" for favorable tax treatment pursuant to Section 401(a) of the Internal Revenue Code of 1986 (the "Code") or any successor section or statute. SECTION 2 DEFINITIONS ----------- When a word or phrase appears in this Plan with the initial letter capitalized, and the word or phrase does not begin a sentence, the word or phrase shall generally be a term defined in this Section 2. The following words and phrases used in the Plan with the initial letter capitalized shall have the meanings set forth in this Section 2, unless a clearly different meaning is required by the context in which the word or phrase is used: 2.1 "Account" or "Accounts" means the accounts which may be maintained by the Plan Administrator to reflect the interest of a Participant under the Plan. 2.2 "Affiliate" means (a) a corporation which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as is a Plan Sponsor, (b) any other trade or business (whether or not incorporated) controlling, controlled by, or under common control (within the meaning of Section 414(c) of the Code) with a Plan Sponsor, and (c) any other corporation, partnership, or other organization which is a member of an affiliated service group (within the meaning of Section 414(m) of the Code) with a Plan Sponsor or which is otherwise required to be aggregated with a Plan Sponsor pursuant to Section 414(o) of the Code. 1 2.3 "Base Salary" means the total basic compensation paid by a Plan Sponsor to a Participant during the portion of the Plan Year in which an election by a Participant to make Deferral Contributions pursuant to Section 4.1 is in effect, calculated before contributions to this Plan or the 401(k) Plan and before any deferrals under Section 125 of the Code. 2.4 "Beneficiary" means only the person or trust that a Participant, in his most recent written designation filed with the Plan Administrator, shall have designated to receive his benefit under the Plan in the event of his death; provided that, if the Participant has failed to make a designation or if no person designated shall be alive or if no trust shall have been established by the Participant, and no successor Beneficiary shall have been designated and be alive, any death benefit payable hereunder on behalf of such Participant shall be paid to the legal representative of such deceased Participant's estate. Changes in designations of Beneficiaries may be made upon written notice to the Plan Administrator in any form as the Plan Administrator may prescribe. 2.5 "Board of Directors" means the Board of Directors of the Company. 2.6 "Bonus" means the additional cash compensation paid to a Participant by a Plan Sponsor pursuant to any incentive or bonus plan, program, or practice of the Plan Sponsor which is subject to an election to make Deferral Contributions pursuant to Section 4.1. 2.7 "Code" means the Internal Revenue Code of 1986, as amended. 2.8 "Company" means MicroAge, Inc. 2.9 "Company Stock" means the common stock of MicroAge, Inc. 2.10 "Compensation" means the sum of a Participant's Base Salary and Bonuses plus any amounts deferred under the Management Equity Plan. 2.11 "Compensation Committee" means the Compensation Committee of the Board of Directors of the Company. 2.12 "Deferral Contribution" means a contribution by a Participant pursuant to Section 4.1 of this Plan. 2.13 "Deferral Contribution Account" means the Account maintained to record the Deferral Contributions made by a Participant pursuant to Section 4.1 hereof, as adjusted to reflect the rate of return on the Investment Funds in which the Account is invested and other credits or charges called for by this Plan. 2 2.14 "Delayed Retirement Date" means the first day of the month subsequent to a Participant's Normal Retirement Date during which he actually terminates service with a Plan Sponsor. 2.15 "Discretionary Contribution" means a contribution by a Plan Sponsor pursuant to Section 4.3 of this Plan. 2.16 "Discretionary Contribution Account" means the Account maintained to record the Discretionary Contributions made by a Plan Sponsor to the Trust pursuant to Section 4.3 on behalf of a Participant, as adjusted to reflect the rate of return on the Investment Funds in which the Account is invested and other credits or charges called for by this Plan. 2.17 "Distributable Amount" means the least of (i) the maximum elective contributions that could be made to the 401(k) Plan for the Plan Year consistent with Sections 402(g) and 401(k)(3) of the Code and the provisions of the 401(k) Plan, (ii) the Participant's Deferral Contributions made pursuant to Section 4.1 above during the Plan Year, or (iii) the balance of the Participant's Employee Deferral Account. 2.18 "Effective Date" of this restated Plan with respect to the Company and any Plan Sponsor that previously adopted this Plan means November 3, 1997. With respect to each Plan Sponsor that adopts this Plan after November 3, 1997, Effective Date means the date designated by the adopting Plan Sponsor. 2.19 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. 2.20 "401(k) Plan" means the MicroAge, Inc. Retirement Savings and Employee Stock Ownership Plan, as the same may be amended from time to time. 2.21 "Income Fund" means one of the Investment Funds established by the Plan Administrator, the assets of which shall be invested by the Trustee with the objective of earning interest income without exposing the fund to significant fluctuations in value. 2.22 "Investment Fund" means the investment fund or funds established by the Plan Administrator pursuant to Section 6.4, into which Participants may direct the Trustee to invest amounts credited to their Accounts. 2.23 "Leadership Team" means the group consisting of officers of the Plan Sponsors holding the positions and titles of Vice President or higher. 3 2.24 "Matching Contribution" means a contribution by a Plan Sponsor pursuant to Section 4.2 of this Plan. 2.25 "Matching Contribution Account" means the Account maintained to record the Matching Contributions made by a Plan Sponsor to the Trust pursuant to Section 4.2 on behalf of a Participant, as adjusted to reflect the rate of return on the Investment Funds in which the Account is invested and other credits or charges called for by this Plan. 2.26 "Normal Retirement Age" means age 65. 2.27 "Normal Retirement Date" means the first day of the month coinciding with or next following the date on which the Participant attains Normal Retirement Age. 2.28 "Participant" means any individual providing services to a Plan Sponsor who has become a Participant in the Plan for as long as his benefit under the Plan has not been fully distributed pursuant to the provisions of the Plan. 2.29 "Participation Agreement" means the agreement entered into by a Plan Sponsor and a Participant as set forth in Section 3.2 or 3.3. 2.30 "Plan Administrator" means the Company or the committee designated by the Company to carry out its responsibilities under the Plan as set forth in Section 11.3. 2.31 "Plan Sponsor" means individually (i) the Company or any successor thereto and (ii) each organization which has adopted the Plan in the manner set forth in Section 12 of the Plan. 2.32 "Plan Year" means the Company's fiscal year, i.e., the Plan Year shall end on the Sunday closest to October 31. 2.33 "Plan Year Quarter" means the quarters of the Plan Year, which for convenience, shall be deemed to begin on the first day of each Plan Year and on each February 1, May 1 and August 1. 2.34 "Retirement" means termination of a Participant's service with a Plan Sponsor on his Normal Retirement Date or Delayed Retirement Date. 2.35 "Trust Agreement" means that certain trust agreement established pursuant to the Plan between the Company and the Trustee or any trust agreement hereafter established, the provisions of which are incorporated herein by reference. 2.36 "Trustee" means the Trustee under the Trust Agreement. 4 2.37 "Trust Fund" means all assets of whatsoever kind or nature held from time to time by the Trustee pursuant to the Trust Agreement and forming a part of this Plan, without distinction as to income and principal and without regard to source, i.e., Plan Sponsor or Participant contributions, earnings or forfeitures. 2.38 "Valuation Date" means the last business day of each Plan Year Quarter and such other dates as the Plan Administrator may designate. 2.39 "Years of Service" means the years of service credited to a Participant for purposes of determining such Participant's vested benefit under the 401(k) Plan, all as determined under Sections 2.66 and 6.01 of the 401(k) Plan as such provisions may be amended, superseded or replaced from time to time. All years of service credited to a Participant under the 401(k) Plan shall be considered in determining the Participant's Years of Service under this Plan. SECTION 3 ELIGIBILITY ----------- 3.1 GENERAL. Participation in the Plan shall be limited to those individuals who are members of one of the following categories: (a) Leadership Team members; (b) Individuals employed by the Company or by an Affiliate as a General Manager of any Company-owned reseller location (or any equivalent employment position); (c) Individuals employed by the Company or by an Affiliate as a Service Manager of any Company-owned reseller location (or any equivalent employment position) who are selected by the Chairman of the Board of Directors for participation in the Plan; or (d) Other individuals providing services to Plan Sponsors who are selected by the Compensation Committee for participation in the Plan. The Company has determined that all individuals designated in subparagraphs (a) and (b) above hold a key position of management and responsibility and that those individuals presently constitute a select group of management or highly compensated employees for purposes of Title I of ERISA. Neither the Chairman of the Board of Directors nor the Compensation Committee shall select any individual for participation in the Plan pursuant to subparagraph (c) or (d) above who does not hold a key position of management and responsibility with a Plan Sponsor or who does not fit within the select group of management or highly compensated employees covered by this Plan. The Compensation Committee shall have the full discretion and authority to exclude an individual from participation in the Plan if it concludes that such individual does not hold a key position of management and responsibility or is not properly included in the select group of management or highly compensated employees covered by the Plan. 5 The decision of the Compensation Committee shall be made in its discretion and shall be final and binding for all purposes under this Plan. The Plan Administrator shall have the full discretion and authority to determine the effective date of participation for any individual who is designated for participation in the Plan pursuant to the terms of this Section 3.1. The exercise of such discretion by the Plan Administrator shall be evidenced by a written notification of eligibility delivered to the individual designated for participation and shall constitute a final and binding decision. 3.2 PARTICIPATION AGREEMENT. Subsequent to an individual becoming eligible to participate in the Plan, such individual shall enter into a Participation Agreement in such form and at such time as the Plan Administrator shall require. If the individual's initial Participation Agreement is executed and delivered within thirty (30) days of the day on which the individual is notified that he is eligible to participate in the Plan, the individual's Deferral Contributions may be determined with reference to the Base Salary and Bonuses earned on or after the first day of the first full payroll period next following receipt of the Participation Agreement by the Plan Administrator or as of such other uniform date (not earlier than the first day of the next full payroll period) as may be designated by the Plan Administrator. If the individual does not execute and deliver the Participation Agreement within the initial thirty (30) day period, the individual's Deferral Contributions may be determined with reference to the Base Salary earned on or after the first day of the first payroll period in the Plan Year Quarter following the filing of the Participation Agreement. Any election made after the initial thirty (30) day period to make Deferral Contributions from any Bonus will be effective as of the first day of the first Plan Year following the filing of the Participation Agreement. In the Participation Agreement, the Participant shall designate the amount of his Deferral Contributions and shall authorize the reduction of his Compensation in an amount equal to his Deferral Contributions. The Participation Agreement also shall indicate the manner in which distributions are to be made from the Participant's Account and may set forth such other information as the Plan Administrator shall require. 3.3 REVISED PARTICIPATION AGREEMENT. A Participant may file a new Participation Agreement in order to change an election made in a previously filed Participation Agreement. If the Participant changes the amount of his Deferral Contributions, the new amount will become effective in accordance with Section 4.4. If the new Participation Agreement changes the form of payment, the new election will only be honored if payments commence no earlier than the second calendar year following the calendar year in which the new Participation Agreement is filed. In the exercise of its discretion, the Plan Administrator may allow a Participant to make a modified election on any form prescribed by the Plan Administrator for that purpose. Such forms shall be deemed to be new Participation Agreements for purposes of this Plan. 3.4 DISCONTINUANCE OF PARTICIPATION. Once an individual is designated as a Participant, he will continue as such for all future Plan Years unless and until the individual is no longer categorized as an individual entitled to participate in the Plan pursuant to Section 3.1 above, or the Compensation 6 Committee specifically acts to discontinue the individual's participation, or the Participant's participation is suspended pursuant to Section 5.2(c) hereof. The Compensation Committee may discontinue an individual's participation in the Plan at any time for any or no reason. If an individual's participation is discontinued, the individual will no longer be eligible to make Deferral Contributions. The individual will not be entitled to receive a distribution, however, until the occurrence of one of the events listed in Sections 5, 7 or 8, unless the Compensation Committee, in the exercise of its discretion, directs that a distribution be made as of an earlier date in which case the individual's Accounts shall be distributed on the same basis as if the individual's employment had been terminated. SECTION 4 CONTRIBUTIONS ------------- 4.1 PARTICIPANT CONTRIBUTIONS. For any Plan Year, a Participant may elect to defer a portion of the Base Salary and/or the Bonuses otherwise payable to him. Any such deferrals shall be made in accordance with such rules and procedures regarding Participant deferrals as may be promulgated by the Plan Administrator from time to time. Participants shall designate their elective deferrals on a Participation Agreement or any other appropriate form prescribed by the Plan Administrator. All Participant elections are subject to the Plan Administrator's authority to limit the amount of a Participant's Deferral Contributions in accordance with such uniform rules as it may adopt from time to time. All Deferral Contributions shall be transferred by the Plan Sponsor to the Trust. 4.2 MATCHING CONTRIBUTIONS. In addition to any contributions required to be made by a Plan Sponsor pursuant to Section 6.3(b), for each year in which a Plan Sponsor achieves a net profit, the Plan Sponsor may make Matching Contributions to the Trust on behalf of each of its Participants who has elected to make any Deferral Contributions during the Plan Year under Section 4.1 hereof, other than Participants who terminated service with the Plan Sponsor during the Plan Year for reasons other than death, disability or Retirement. The Matching Contribution shall equal such amount as the Company, in its sole and absolute discretion, determines, but the Matching Contribution shall not exceed ten percent (10%) of the Plan Sponsor's pre-tax income for financial reporting purposes for the year. The Matching Contribution shall be allocated to each eligible Participant's Matching Contribution Account as of the year-end Valuation Date in the ratio that each such Participant's Deferral Contributions for the Plan Year bears to the Deferral Contributions made by all of that Plan Sponsor's Participants for the Plan Year. In the exercise of its discretion, the Company may choose to disregard Deferral Contributions in excess of a ceiling (e.g., 10% of Compensation) set from time to time by the Company and may further limit allocations in its sole and absolute discretion in a uniform and nondiscriminatory manner. All Matching Contributions shall be made in the form 7 of Company Stock unless the Company affirmatively elects, for a particular Plan Year, to make the Matching Contributions in the form of cash or other property. 4.3 DISCRETIONARY CONTRIBUTIONS. In addition to any Matching Contributions made by a Plan Sponsor pursuant to Section 4.2 and any contributions required to be made by a Plan Sponsor pursuant to Section 6.3(b), a Plan Sponsor may make a Discretionary Contribution to the Plan on behalf of a particular Participant in such amount, if any, as shall be determined from time to time by the Plan Sponsor. The Company intends that Plan Sponsors shall make Discretionary Contributions only in unusual circumstances. A Plan Sponsor's decision to make a Discretionary Contribution for a particular Participant shall not in any way obligate the Plan Sponsor to make a Discretionary Contribution for any other Participant. Similarly, a Plan Sponsor's decision to make a Discretionary Contribution for a particular Participant in any Plan Year shall not obligate the Plan Sponsor to make a Discretionary Contribution for that Participant in any subsequent Plan Year. All Discretionary Contributions shall be made in the form of cash or Company Stock, as selected by the Company. 4.4 CHANGE IN CONTRIBUTIONS. A Participant may change the amount or percentage of contributions under Section 4.1 once during each Plan Year Quarter, which change shall be effective beginning with the Participant's first full payroll period beginning in the Plan Year Quarter immediately following the Plan Administrator's receipt of such written notice. Notwithstanding the preceding sentence, any change in the amount or percentage of the Deferral Contribution to be made from any Bonus shall be effective for Bonuses earned for services rendered in the first Plan Year immediately following the Plan Administrator's receipt of such written notice. Such changes shall be made pursuant to Section 3.3 or in accordance with uniform rules promulgated by the Plan Administrator. 4.5 SUSPENSION OF CONTRIBUTIONS. (a) SUSPENSION. A Participant may suspend his contributions under Section 4.1 as of the first day of the first full payroll period in any Plan Year Quarter, but in no event more than once during each Plan Year, by giving written notice to the Plan Administrator on a form prescribed by the Plan Administrator at least thirty (30) days prior to the date on which the suspension shall become effective. (b) RESUMPTION OF CONTRIBUTIONS. A Participant who has suspended his contributions pursuant to Section 4.5(a) above and who applies to the Plan Administrator in a timely manner shall be entitled to resume his contributions in accordance with Section 4.1 following the expiration of at least six (6) months from the date on which the suspension became effective (the "six (6) month suspension period"). A Participant shall be permitted to resume his deferral of his Base Salary as of the first day of any Plan Year Quarter following the expiration of the six (6) month suspension period. A Participant shall be permitted to resume his deferral of Bonuses as of the first day of the 8 Plan Year commencing after the expiration of the six (6) month suspension period. Any application to resume contributions shall be made in writing to the Plan Administrator, on a form prescribed by the Plan Administrator, at least thirty (30) days prior to the first day of the applicable Plan Year Quarter or Plan Year. 4.6 DISTRIBUTION AND TRANSFER OF PARTICIPANT DEFERRALS. (a) ELECTION. A Participant must elect either to have the Distributable Amount distributed from this Plan and contributed to the 401(k) Plan as a pre-tax contribution or to have such amount distributed to the Participant in a single lump sum payment. Elections made pursuant to the preceding sentence must be filed with the Plan Administrator prior to the first day of the applicable Plan Year. Any election made pursuant to this Section shall be irrevocable during the Plan Year covered by the election but may be changed prior to the beginning of a new Plan Year by submitting a revised election to the Plan Administrator in writing prior to the first day of the new Plan Year. (b) DETERMINATION OF 401(K) PLAN CONTRIBUTION. As soon as possible following the close of the Plan Year and, in any event, within the period of time prescribed by applicable law, regulation or administrative ruling, the Plan Administrator shall request the administrator of the 401(k) Plan to inform the Plan Administrator of the amount of elective contributions that each Participant may contribute to the 401(k) Plan for the immediately preceding Plan Year consistent with Sections 402(g) and 401(k)(3) of the Code and the provisions of the Plan. The Plan Administrator then shall compute the Distributable Amount for each Participant pursuant to Section 2.17. (c) DISTRIBUTION. The Plan Administrator will thereafter, but in no event later than two and one-half (2 1/2) months after the close of the Plan Year, distribute on behalf of each Participant an amount equal to the Distributable Amount. If the Participant has elected to transfer the Distributable Amount to the 401(k) Plan, the Plan Administrator will make a direct transfer of the Distributable Amount to the Trust Fund maintained pursuant to the 401(k) Plan. If the Participant has elected to receive the Distributable Amount, the Plan Administrator will make a single lump sum payment to the Participant and the Plan Sponsor will include the Distributable Amount in the Participant's gross income for the calendar years in which the Compensation to which the Deferral Contributions are attributable was earned. Amounts attributable to the positive or negative rate of return allocable to the Participant's Accounts will not be distributed until an event described in Sections 5, 7 or 8 has occurred. (d) TREATMENT OF MATCHING CONTRIBUTIONS. The Matching Contributions, if any, due pursuant to Section 4.2 shall be reduced by the amount of the Matching Contributions attributable to the Distributable Amount. If the Matching Contributions have already been credited to the Participant's Matching Contributions Account when the Distributable Amount is calculated and 9 distributed, the Matching Contributions Account shall be debited for the amount of the Matching Contributions attributable to the Distributable Amount. The Participant shall then be entitled to receive whatever Matching Contributions may be due pursuant to the 401(k) Plan if the Distributable Amount is transferred to the 401(k) Plan. No Matching Contributions shall be due if the Participant has elected to receive a cash distribution of the Distributable Amount. SECTION 5 WITHDRAWALS ----------- 5.1 HARDSHIP. In the event of an unforeseeable financial emergency, a Participant may make a written request to the Plan Administrator for a hardship withdrawal from his Deferral Contribution Account. The minimum hardship withdrawal shall be $500.00, unless the distribution is of the entire principal amount of the Deferral Contributions to the Participant's Deferral Contribution Account, and the maximum hardship withdrawal shall be the lesser of (a) the amount required to meet the Participant's unforeseeable financial emergency or (b) the entire balance of the Participant's Deferral Contribution Account less the difference between (1) the Participant's Deferral Contributions made during the current Plan Year and (2) the maximum elective contributions that could be made to the 401(k) Plan for the current Plan Year consistent with Section 402(g) of the Code. For purposes of this Section, the term "unforeseeable financial emergency" is defined as a severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or a dependent (as such term is defined in Section 152(a) of the Code) of the Participant, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The granting of a Participant's request for a hardship withdrawal shall be left to the absolute, unfettered discretion of the Plan Administrator and the Plan Administrator may deny such request even if an unforeseeable financial emergency clearly exists. A request for a hardship withdrawal must be made in writing at least thirty (30) days in advance, on a form provided by the Plan Administrator, and must be expressed as a specific dollar amount. A hardship withdrawal will not be permitted to the extent that the hardship is or may be relieved through reimbursement or compensation by insurance or otherwise, liquidation of the Participant's assets to the extent that such liquidation would not itself cause a severe financial hardship, by the cessation of Deferral Contributions, or by a loan from the 401(k) Plan to the extent that loans are permitted under the 401(k) Plan. 5.2 ACCELERATION OF BENEFITS. (a) GENERAL. A Participant may elect to receive an accelerated withdrawal by filing an election with the Plan Administrator on such forms as may be prescribed from time to time by the Plan Administrator. If a Participant makes such an election, except as otherwise provided below, the Participant shall receive a single lump sum payment equal to the sum of ninety-five percent (95%) of the Participant's "available Account balance." For this purpose, the Participant's "available Account balance" is equal to the 10 Participant's Deferral Contribution Account plus the Participant's vested interest in his Matching Contribution Account and the Participant's vested interest in the his Discretionary Contribution Account. For purposes of determining the amount to be distributed, the Participant's Accounts shall be valued as of the Valuation Date immediately preceding the date of the withdrawal. In calculating such value, Deferral Contributions made by the Participant during the Plan Year in which the request is made shall be disregarded as shall any Matching Contributions attributable to such Deferral Contributions. The Participant's vested interest in his Matching Contribution Account or his Discretionary Contribution Account shall be determined as of the day on which the accelerated withdrawal is paid to the Participant. The accelerated withdrawal shall be paid as soon as reasonably possible following the filing of the election by the Participant. (b) FORFEITURE. The Participant shall forfeit the remaining five percent (5%) of the "available Account balance" as well as the unvested portion of the Participant's Matching Contribution Account and the unvested portion of the Participant's Discretionary Contribution Account as of the day on which the accelerated withdrawal is distributed to the Participant. The Deferral Contributions made by the Participant during the Plan Year in which the accelerated withdrawal request is made and the Matching Contributions attributable to such Deferral Contributions (both of which are not subject to or available for withdrawal) shall not be forfeited. (c) SUSPENSION OF PARTICIPATION. If a Participant elects to receive an accelerated withdrawal, the Participant's right to make Deferral Contributions to the Plan shall be suspended for twelve (12) months from the date the accelerated withdrawal is paid to the Participant (the "twelve (12) month suspension period"). Upon expiration of the twelve (12) month suspension period, the Participant shall be permitted to execute a new Participation Agreement in accordance with Section 3.3 and to begin making Deferral Contributions. The Participant shall be permitted to resume his deferral of his Base Salary as of the first day of any Plan Year Quarter following the expiration of the twelve (12) month suspension period. A Participant shall be permitted to resume his deferral of Bonuses as of the first day of the Plan Year commencing after the expiration of the twelve (12) month suspension period. (d) REPAYMENT OF ACCELERATED BENEFITS BY PARTICIPANT. A Participant who receives an accelerated withdrawal under this Section 5.2 shall be required to repay the Trustee the full amount of the payment if the Company is or becomes subject to a pending proceeding as a debtor under the United States Bankruptcy Code within three (3) months of the date of the Participant's filing of the election to receive an accelerated withdrawal pursuant to Section 5.2(a). 5.3 CREDITING OF WITHDRAWALS. Withdrawals and other distributions shall be charged pro rata to the Investment Funds in which the Account of the Participant is invested, pursuant to his designation under Section 6.4 hereof. 11 SECTION 6 CREDITING OF CONTRIBUTIONS AND INCOME ------------------------------------- 6.1 TRANSFER TO TRUSTEE. All Deferral Contributions, Matching Contributions and Discretionary Contributions shall be transmitted to the Trustee by the Plan Sponsor as soon as reasonably practicable and shall be credited to the Deferral Contribution Account, the Matching Contribution Account and the Discretionary Contribution Account, respectively, of the Participant contemporaneously. All payments from an Account between Valuation Dates shall be charged against the Account as of the preceding Valuation Date. The Accounts are bookkeeping accounts only and the Plan Administrator is not in any way obligated to segregate assets for the benefit of any Participant. 6.2 SUBACCOUNTS. The Plan Administrator may divide any Account into such subaccounts as it deems necessary and desirable. For example, the Plan Administrator may divide the Matching Contribution Accounts and the Discretionary Contribution Accounts into Company Stock and cash subaccounts. Similarly, the Plan Administrator may divide the Discretionary Contribution Accounts into subaccounts to distinguish among contributions made by a Plan Sponsor in different Plan Years. 6.3 ADJUSTMENT OF BOOKKEEPING ACCOUNTS. (a) GENERAL. Except as otherwise provided in Section 6.3(b) of the Plan with respect to the Income Fund and except as otherwise provided elsewhere in the Plan, as of each Valuation Date the Plan Administrator shall adjust each Participant's Accounts with the positive or negative rate of return on the Investment Funds selected by the Participant pursuant to Section 6.4(b). The rate of return will be determined by the Plan Administrator pursuant to Section 6.4(c) and will be credited or charged against the "adjusted balance" of the Account, which will be the balance of the portion of the Account invested in the Investment Fund as of the preceding Valuation Date less all withdrawals, distributions and other amounts chargeable against the portion of the Account invested in the Investment Fund pursuant to any other provisions of this Plan since the prior Valuation Date. In the exercise of its discretion, the Plan Administrator also may direct that a portion of the Deferral Contributions made since the prior Valuation Date be considered in calculating the adjusted balance of the Deferral Contribution Account. Notwithstanding the foregoing, if the Participant's Distributable Amount for a Plan Year is transferred to the 401(k) Plan pursuant to Section 4.6, the Plan Administrator, in the exercise of its discretion, may elect to include all or any portion of the Distributable Amount in the adjusted balance of the Participant's Accounts for purposes of making the adjustments called for by this Section for the valuation period in which the Distributable Amount is distributed to the 401(k) Plan. The amount representing any positive rate of return on the Distributable Amount shall not be transferred to the 401(k) Plan but shall remain in this Plan. In addition, the amount representing any negative rate of return on the Distributable Amount shall not 12 serve to reduce the amount transferred to the 401(k) Plan but rather shall serve to reduce the remaining balance of the Participant's Accounts in this Plan, provided, however, that the amount representing any negative rate of return shall serve to reduce the amount transferred to the 401(k) Plan if the Participant's Account balance is less than the amount that would otherwise be transferred to the 401(k) Plan. Notwithstanding any provision hereof to the contrary, if the Participant elects to receive a distribution of the Distributable Amount pursuant to Section 4.6(a), no adjustment shall be made for any positive rate of return with respect to the Distributable Amount, but any negative rate of return shall serve to reduce the Distributable Amount. (b) INCOME FUND GUARANTEE. For each Plan Year, the Plan Sponsors shall guarantee that the Participant's "Adjusted Account Balance" that is invested in the Income Fund shall earn the "Guaranteed Annual Rate of Return" described below. For each "Quarterly Valuation Period", which is the period beginning on the day after each quarterly Valuation Date and ending on the next following Valuation Date, the Plan Administrator shall adjust the portion of each Participant's Account that is invested in the Income Fund by crediting it with twenty five percent (25%) of the "Guaranteed Annual Rate of Return" on the "Adjusted Account Balance". For purposes of this Section 6.3(b), a Participant's "Adjusted Account Balance" shall mean the portion of the Participant's Account that is invested in the Income Fund as of the first day of such Quarterly Valuation Period (or the effective date of a Participant's participation in the Plan, if such effective date is not the first day of the Quarterly Valuation Period), plus 50% of the contributions made by the Participant pursuant to Section 4.1 that are credited to the Income Fund pursuant to the Participant's direction during the applicable Quarterly Valuation Period, less all withdrawals, distributions and other amounts which occur during the Quarterly Valuation Period and which are chargeable against the portion of the Account invested in the Income Fund. The "Guaranteed Annual Rate of Return" is the total annual rate of return for any published index or any particular investment designated for that Plan Year by the Compensation Committee, or the percentage rate of return designated by the Compensation Committee, as the case may be. In the absence of any such designation, the Guaranteed Annual Rate of Return shall be ten percent (10%). If the earnings on the investments that comprise the Income Fund are less than the interest to be credited to the Accounts of the Participants pursuant to this Section 6.3(b), the Plan Sponsors may, from time to time, make a special contribution to the Trust Fund to reduce or eliminate the shortfall. If the earnings on the investments that comprise the Income Fund exceed the interest to be credited to the Participants pursuant to this Section 6.3(b), the excess will be used to reduce or eliminate any subsequent shortfall. 6.4 INVESTMENT DIRECTION. (a) INVESTMENT FUNDS. The Plan Administrator shall establish one or more Investment Funds in which each Participant shall invest amounts credited to his Account. The Investment Funds shall include an Income Fund and such other funds as may be selected from time to time by the Plan Administrator. The Investment Funds may be changed from time to time by the Plan 13 Administrator. The Plan Administrator, with the prior approval of the Compensation Committee, may make available as an Investment Fund a Company Stock Fund. If such a Company Stock Fund is established, a Participant's ability to direct investments into or out of such Fund shall be subject to such procedures as the Plan Administrator may prescribe from time to time to assure compliance with Rule 16b-3 promulgated under Section 16(b) of the Securities Exchange Act of 1934, as amended, and other applicable requirements. Such procedures also may limit or restrict a Participant's ability to make (or modify previously made) elections pursuant to Sections 3.2 or 3.3. (b) PARTICIPANT DIRECTIONS. (1) GENERAL. Upon becoming a Participant of the Plan, each Participant may direct that all of the amounts attributable to his Account be invested in a single investment fund or may direct fractional (percentage) increments of his Account to be invested in such fund or funds as he shall desire, on such forms and in accordance with such procedures, if any, as may be established by the Plan Administrator. Such designation may be changed as of the first day of any Plan Year Quarter, with respect to future contributions and transfers among Investment Funds, by filing an election with the Plan Administrator, on a form prescribed by the Plan Administrator, at least thirty (30) days (or such fewer number of days as may be prescribed by the Plan Administrator) prior to the applicable Plan Year Quarter. The designation will continue until changed by the timely submission of a new form, which change will be effective as of the first day of the next succeeding Plan Year Quarter. (2) DEFAULT SELECTION. In the absence of any designation, a Participant will be deemed to have directed the investment of his Accounts in such Investment Funds as the Trustee, in its sole and absolute discretion, shall determine. (3) IMPACT OF ELECTION. The Participant's selection of Investment Funds shall serve only as a measurement of the value of the Accounts of said Participant pursuant to Section 6.3(a) and Section 6.4(c) and the Plan Administrator and the Trustee are not required to invest a Participant's Accounts in accordance with the Participant's selections. (4) COMPANY STOCK. A Participant may not direct the investment of the portion of his Matching Contribution Account or Discretionary Contribution Account which consists of Company Stock contributed to the Plan by the Company until the Participant has a fully vested interest in the Account to which such Company Stock is allocated. After the Account is fully vested, the Participant may direct that such Account be invested in any of the Investment Funds, subject to such rules as may be adopted by the Plan Administrator from time to time. Once a Participant directs the reinvestment of Company Stock held in his Account into an Investment Fund, the Participant may not subsequently direct that such amounts be invested in Company Stock unless a Company Stock Fund is established pursuant to Section 6.4(a). 14 (5) INCOME FUND. A Participant's ability to direct the investment of his Accounts in the Income Fund will terminate as of the first day of the Quarterly Valuation Period (as such term is defined in Section 6.3(b)) following the Participant's termination of employment with all Plan Sponsors and Affiliates. In the event that the Participant is continuing to direct the investment of his Accounts subsequent to his termination of employment in accordance with Section 10.4, the Plan Administrator shall instruct the Participant to redirect the investment of any portion of his Accounts that is invested in the Income Fund into any of the remaining Investment Funds. (c) RATE OF RETURN. As soon as possible after each Valuation Date, the Plan Administrator shall determine the rate of return, positive or negative, experienced on each of the Investment Funds (other than the Income Fund). The rate of return determined by the Plan Administrator in good faith and in its discretion pursuant to this Section shall be binding and conclusive on the Participant, the Participant's Beneficiary and all parties claiming through them. (d) CHARGES. The Plan Administrator may charge each Participant's Account for the reasonable expenses of carrying out investment instructions directly related to such Account. 6.5 COMPANY STOCK ADJUSTMENTS. Any cash dividends paid on Company Stock held in the Participants' Matching Contribution Accounts or Discretionary Contribution Accounts shall be allocated to the cash subaccounts maintained within such Accounts. Any stock dividends or stock splits attributable to Company Stock held in the Participants' Matching Contribution Accounts or Discretionary Contribution Accounts, or any securities issued with respect to Company Stock held in such Accounts, shall be allocated to the Company Stock subaccounts maintained within such Accounts. 6.6 FORFEITURES. The amount forfeited from the Accounts of a Plan Sponsor's Participants pursuant to Sections 5.2(b) and 10.6 shall reduce the Matching Contribution that the Plan Sponsor would otherwise contribute to the Plan pursuant to Section 4.2. If the forfeitures exceed the Matching Contribution due from that Plan Sponsor for the Plan Year, the excess forfeitures shall be used to reduce any Discretionary Contribution that the Plan Sponsor would otherwise contribute to the Plan for that Plan Year. Any remaining forfeitures will be used to reduce the Plan Sponsor's Matching Contributions or Discretionary Contributions for later years. SECTION 7 RETIREMENT BENEFITS ------------------- 7.1 RETIREMENT DATE. The provisions of this Section 7 apply only in the event that a Participant remains in the service of a Plan Sponsor or an Affiliate until reaching a Retirement date. Wherever reference is made in this 15 Plan to a Retirement date, it shall mean the Normal Retirement Date or Delayed Retirement Date of a Participant, whichever is applicable. 7.2 NORMAL RETIREMENT. The Participant shall be entitled, as of his Normal Retirement Date, to the entire value of his Accounts. 7.3 DELAYED RETIREMENT. A Participant shall be entitled, as of his Delayed Retirement Date, to the entire value of his Accounts. 7.4 PAYMENT OF RETIREMENT BENEFIT. Any benefit payable under this Section 7 shall be paid in accordance with Section 9 after receipt by the Trustee from the Plan Administrator of notice of the Retirement of the Participant. SECTION 8 DEATH BENEFITS -------------- 8.1 DEATH BEFORE TERMINATION OF EMPLOYMENT. Upon the death of a Participant prior to the termination of his service with all Plan Sponsors and Affiliates, the Beneficiary of such Participant shall be entitled to the entire value of his Accounts. 8.2 DEATH AFTER TERMINATION OF EMPLOYMENT. Upon the death of a Participant who, at the time of his death, has terminated his service with all Plan Sponsors and Affiliates, the Beneficiary of such Participant shall be entitled to receive the vested portion of the Participant's Accounts, determined pursuant to Section 10. 8.3 ENTITLEMENT TO DEATH BENEFIT. If subsequent to the death of a Participant, the Participant's Beneficiary dies while entitled to receive benefits under this Plan, the successor Beneficiary of the Participant, if any, shall be entitled to receive the balance of the benefits of the Participant under this Plan. However, if no successor Beneficiary shall have been designated and shall be alive, the benefits shall be paid to the legal representative of the deceased Beneficiary's estate to be paid according to the deceased Beneficiary's will, or if the deceased Beneficiary has no will, by the laws of intestacy of the state in which the deceased Beneficiary resided at the date of the deceased Beneficiary's death. If the Participant is married, a designation of a person other than the Participant's spouse as his Beneficiary with respect to more than fifty percent (50%) of the amount allocated to the Participant's Accounts shall not be effective without the written consent of the Participant's spouse. Subject to the foregoing, a Beneficiary designation may be changed or revoked by a Participant at any time provided the change or revocation is filed with the Plan Administrator. 16 8.4 PAYMENT OF DEATH BENEFIT. Any benefit payable under this Section 8 shall be paid in accordance with Section 9 or Section 10 of the Plan, whichever is applicable, after receipt by the Trustee from the Plan Administrator of notice of the death of the Participant. SECTION 9 PAYMENT OF BENEFITS ON RETIREMENT OR DEATH ------------------------------------------ 9.1 COMMENCEMENT OF PAYMENTS. Upon the Retirement or death of a Participant, the value of the Accounts of such Participant shall be determined as of the Valuation Date coinciding with or next following the Participant's Retirement date or date of death, provided, however, that the Participant or, if applicable, his Beneficiary, may request that payment be made promptly after the date of Retirement or death. If such a request is made and approved by the Plan Administrator, in its sole and absolute discretion, the Accounts of the Participant shall be valued as of the Valuation Date next preceding the Participant's Retirement date or date of death. The Accounts shall then be adjusted to reflect any Deferral Contributions, Matching Contributions and Discretionary Contributions made since that Valuation Date and any amounts charged to the Accounts since such Valuation Date. Payments shall then commence, or be made, no later than sixty (60) days after the Retirement date or death of the Participant or sixty (60) days after the Participant or the Participant's Beneficiary, as the case may be, files a request for distribution, whichever is later. If the Plan Administrator does not approve early payment as described above, then payment to a Participant, or to the Beneficiary of a deceased Participant, shall be made no later than sixty (60) days after the Valuation Date coinciding with or next following the Retirement date or the death of the Participant. Notwithstanding the foregoing, if the amount of the payment required to be made on any date cannot be ascertained by that date, payment shall be made no later than sixty (60) days after the earliest date on which the amount of the payment can be ascertained. 9.2 FORM OF PAYMENT. The payment of a Participant's benefits shall be made either in a lump sum in cash, or in cash payments in annual, quarterly, or monthly installments over a period certain not exceeding ten (10) years, such method of payment to be elected by the Participant in his original Participation Agreement or in a revised Participation Agreement that is effective pursuant to Section 3.3. If installment payments are made, the unpaid balance shall continue to be invested in the Trust Fund and the Participant will continue to be entitled to make investment elections pursuant to Section 6.4(b) and to have his Accounts adjusted pursuant to Section 6.3(a). Notwithstanding the foregoing, any portion of the Participant's Accounts that consists of Company Stock shall be distributed to the Participant in the form of Company Stock, either in a lump sum or installments as elected in the original Participation Agreement or in an effective revised Participation Agreement. 17 SECTION 10 PAYMENT OF BENEFITS ON TERMINATION OF SERVICE --------------------------------------------- 10.1 TERMINATION OF SERVICE DEFINED. Transfer of a Participant from one Plan Sponsor to another Plan Sponsor or to an Affiliate shall not be deemed for any purpose under the Plan to be a termination of service by the Participant. A Participant shall be deemed to have terminated service only upon the earlier of his death, Retirement or other actual termination of service with all Plan Sponsors and Affiliates. 10.2 TERMINATION OF SERVICE BENEFITS. In the event of the termination of service of a Participant for reasons other than death or Retirement, the Participant shall be entitled to that portion of his Accounts in which he is vested, as set forth in Section 10.3 below. 10.3 VESTING OF BENEFITS. (a) DEFERRAL CONTRIBUTIONS. Each Participant shall at all times be fully vested in all amounts credited to the Participant's Deferral Contribution Account, and a Participant's rights and interest therein shall not be forfeitable for any reason. (b) MATCHING CONTRIBUTIONS. (1) FULL VESTING. Each Participant shall be fully vested in the amounts credited to his Matching Contribution Account on and after the first to occur of the following events: (A) Attainment by the Participant of the age of sixty-five (65) years; (B) The date of death of the Participant; (C) Termination of the Plan; or (D) The completion of five (5) Years of Service. (2) VESTING SCHEDULE. If a Participant terminates service with a Plan Sponsor at a time when the Participant is not fully vested in the amounts credited to his Matching Contribution Account, the Participant's vested interest shall be determined in accordance with the following vesting schedule: 18 Years of Service Percentage Vested ---------------- ----------------- Fewer than 1 Year 0% 1 but less than 2 20% 2 but less than 3 40% 3 but less than 4 60% 4 but less than 5 80% 5 or more 100% A Participant's vested interest in his Matching Contribution Account shall be determined as of the Valuation Date immediately preceding the first distribution to the Participant from his Matching Contribution Account following his termination of employment. (c) DISCRETIONARY CONTRIBUTIONS. (1) FULL VESTING. Each Participant shall be fully vested in the amounts credited to his Discretionary Contribution Account on and after the first to occur of any of the events listed in Section 10.3(b)(1)(A)-(C). (2) VESTING SCHEDULE. If a Participant terminates service with a Plan Sponsor at a time when the Participant is not fully vested in the amounts credited to his Discretionary Contribution Account, the Participant's vested interest shall be determined in accordance with this Section 10.3(c)(2). Pursuant to this Section, the Discretionary Contribution made by a Plan Sponsor for each Plan Year, adjusted as provided in Section 6.3, shall vest separately in accordance with such schedule as may be prescribed by the contributing Plan Sponsor at the time the Discretionary Contribution is made to the Plan. Such schedule shall be set forth in writing in a letter or memo addressed to the Participant and delivered to the Participant and the Plan Administrator. 10.4 AMOUNT AND FORM OF PAYMENT. The amount distributable to a Participant will be based on the value of the Participant's Accounts as of the Valuation Date immediately preceding the distribution, adjusted to reflect any contributions or charges since such Valuation Date. Payment shall be made either in a lump sum in cash, or in cash payments in annual, quarterly or monthly installments over a period certain not exceeding ten (10) years, such method of payment to be elected by the Participant in his original Participation Agreement or in a revised Participation Agreement that is effective pursuant to Section 3.3. If installment payments are made, the unpaid balance shall continue to be invested in the Trust Fund and the Participant will continue to be entitled to make investment elections pursuant to Section 6.4(b) and to have his Accounts adjusted pursuant to Section 6.3(a). Payment shall commence or be made as soon as practicable after the Participant's date of termination of service, but in no 19 event later than one year following that date. Notwithstanding the foregoing, any portion of the Participants' Accounts that consists of Company Stock shall be distributed to the Participant in the form of Company Stock, either in a lump sum or installments, as elected in the original Participation Agreement or in an effective revised Participation Agreement. 10.5 CHANGES IN VESTING SCHEDULE. In the event that an amendment to this Plan directly or indirectly changes the vesting schedules set forth in Section 10.3 of the Plan, the vested percentage for each Participant in his benefit accumulated to the date when the amendment is adopted shall not be reduced as a result of the amendment. In addition, any Participant with at least three (3) Years of Service may irrevocably elect, by written notice to the Plan Administrator within the election period hereinafter provided, to remain under the pre-amendment vesting schedule with respect to all of his benefits accrued both before and after the amendment. The election period shall begin no later than the date on which the amendment is adopted and shall end no earlier than sixty (60) days after the latest of: (i) the date on which the amendment is adopted, (ii) the date on which the amendment becomes effective, or (iii) the date on which the Participant is issued written notice of the amendment by a Plan Sponsor or the Plan Administrator. 10.6 FORFEITURES. Any portion of a Participant's Accounts in which he is not vested as provided in Section 10.3 above shall be forfeited in the Plan Year in which the Participant receives a distribution under this Section 10. SECTION 11 ADMINISTRATION OF THE PLAN -------------------------- 11.1 ADOPTION OF TRUST. The Company shall enter into a Trust Agreement with the Trustee, which Trust Agreement shall form a part of this Plan and is hereby incorporated herein by reference. 11.2 POWERS OF THE PLAN ADMINISTRATOR. (a) The Plan Administrator is the named fiduciary with respect to the administration of the Plan. (b) The Plan Administrator shall have the power and discretion to perform the administrative duties described in this Plan or required for proper administration of the Plan and shall have all powers necessary to enable it to properly carry out such duties. Without limiting the generality of the foregoing, the Plan Administrator shall have the power and discretion to construe and interpret this Plan, to hear and resolve claims relating to this Plan, and to decide all questions and disputes arising under this Plan. The Plan Administrator shall determine, in its discretion, the 20 service credited to the Participants, the status and rights of a Participant, and the identity of the Beneficiary or Beneficiaries entitled to receive any benefits payable hereunder on account of the death of a Participant. The Compensation Committee shall have the discretion to exclude an individual from participation in the Plan pursuant to Section 3.1 above and to discontinue a Participant's participation in the Plan pursuant to Section 3.4 above. (c) Except as is otherwise provided hereunder, the Plan Administrator shall determine the manner and time of payment of benefits under this Plan. All benefit disbursements by the Trustee shall be made upon the instructions of the Plan Administrator. (d) The decision of the Plan Administrator upon all matters within the scope of its authority shall be binding and conclusive upon all persons. (e) The Plan Administrator shall file all reports and forms lawfully required to be filed by the Plan Administrator and shall distribute any forms, reports or statements to be distributed to Participants and others. (f) The Plan Administrator shall keep itself advised with respect to the investment of the Trust Fund and shall report to the Plan Sponsor regarding the investment and reinvestment of the Trust Fund not less frequently than annually. 11.3 CREATION OF COMMITTEE. The Company may appoint a committee to perform its duties as Plan Administrator by the adoption of appropriate Board of Directors resolutions. The committee must consist of at least two (2) members, and they shall hold office during the pleasure of the Board of Directors. The committee members shall serve without compensation but shall be reimbursed for all expenses by the Company. The committee shall conduct itself in accordance with the provisions of this Section 11. The members of the committee may resign with thirty (30) days notice in writing to the Company and may be removed immediately at any time by written notice from the Company. 11.4 CHAIRMAN AND SECRETARY. The committee shall elect a chairman from among its members and shall select a secretary who is not required to be a member of the committee and who may be authorized to execute any document or documents on behalf of the committee. The secretary of the committee or his designee shall record all acts and determinations of the committee and shall preserve and retain custody of all such records, together with such other documents as may be necessary for the administration of this Plan or as may be required by law. 11.5 APPOINTMENT OF AGENTS. The committee may appoint such other agents, who need not be members of the committee, as it may deem necessary for the effective performance of its duties, whether ministerial or discretionary, as the committee may deem expedient or appropriate. The compensation of any 21 agents who are not employees of the Company shall be fixed by the committee within any limitations set by the Board of Directors. 11.6 MAJORITY VOTE AND EXECUTION OF INSTRUMENTS. In all matters, questions and decisions, the action of the committee shall be determined by a majority vote of its members. They may meet informally or take any ordinary action without the necessity of meeting as a group. All instruments executed by the committee shall be executed by a majority of its members or by any member of the committee designated to act on its behalf. 11.7 ALLOCATION OF RESPONSIBILITIES. The committee may allocate responsibilities among its members or designate other persons to act on its behalf. Any allocation or designation, however, must be set forth in writing and must be retained in the permanent records of the committee. 11.8 CONFLICT OF INTEREST. No member of the committee who is a Participant shall take any part in any action in connection with his participation as an individual. Such action shall be voted or decided by the remaining members of the committee. 11.9 ACTION TAKEN BY PLAN SPONSOR. Any action to be taken by a Plan Sponsor shall be taken by resolution adopted by its board of directors or an executive committee thereof; provided, however, that by resolution, the board of directors or an executive committee thereof may delegate to any committee of the board or any officer of the Plan Sponsor the authority to take any actions hereunder, other than the power to determine the basis of Plan Sponsor contributions. 11.10 FIDUCIARY AUTHORITY. All delegations of fiduciary responsibility set forth in this document regarding the determination of benefits and the interpretation of the terms of the Plan confer discretionary authority upon the named fiduciary. SECTION 12 ADOPTION OF PLAN BY AFFILIATES ------------------------------ Any Affiliate of the Company may adopt this Plan with the approval of the Plan Administrator. Any Affiliate that permits an Employee to make Deferral Contributions pursuant to Section 4.1 shall be deemed to have adopted the Plan without any further action. The Plan Administrator's acceptance of such Deferral Contributions shall evidence the consent of the Company to the adoption of the Plan by the Affiliate. Notwithstanding the foregoing, at the request of the Plan Administrator, the Affiliate shall evidence its adoption of the Plan by an appropriate resolution of its Board of Directors or in such other manner as may be authorized by the Plan Administrator. By adopting this Plan, the Affiliate shall be deemed to have agreed to make the contributions called for by Section 22 4, agreed to comply with all of the other terms and provisions of this Plan, delegated to the Plan Administrator the power and responsibility to administer this Plan with respect to the Affiliate's employees, and delegated to the Company the full power to amend or terminate this Plan with respect to the Affiliate's employees. SECTION 13 CLAIM REVIEW PROCEDURE ---------------------- 13.1 GENERAL. In the event that a Participant or Beneficiary is denied a claim for benefits under this Plan (the "claimant"), the Plan Administrator shall provide to the claimant written notice of the denial which shall set forth: (a) The specific reason or reasons for the denial; (b) Specific references to pertinent Plan provisions on which the Plan Administrator based its denial; (c) A description of any additional material or information needed for the claimant to perfect the claim and an explanation of why the material or information is needed; (d) A statement that the claimant may: (i) Request a review upon written application to the Plan Administrator; (ii) Review pertinent Plan documents; and (iii) Submit issues and comments in writing; and (e) That any appeal the claimant wishes to make of the adverse determination must be in writing to the Plan Administrator within sixty (60) days after receipt of the Plan Administrator's notice of denial of benefits. The Plan Administrator's notice must further advise the claimant that his failure to appeal the action to the Plan Administrator in writing within the sixty (60) day period will render the Plan Administrator's determination final, binding, and conclusive. 13.2 APPEALS. (a) If the claimant should appeal to the Plan Administrator, he, or his duly authorized representative, may submit, in writing, whatever issues and comments he, or his duly authorized representative, 23 feels are pertinent. The Plan Administrator shall re-examine all facts related to the appeal and make a final determination as to whether the denial of benefits is justified under the circumstances. The Plan Administrator shall advise the claimant in writing of its decision on his appeal, the specific reasons for the decision, and the specific Plan provisions on which the decision is based. The notice of the decision shall be given within sixty (60) days of the claimant's written request for review, unless special circumstances (such as a hearing) would make the rendering of a decision within the sixty (60) day period infeasible, but in no event shall the Plan Administrator render a decision regarding the denial of a claim for benefits later than one hundred twenty (120) days after its receipt of a request for review. If an extension of time for review is required because of special circumstances, written notice of the extension shall be furnished to the claimant prior to the date the extension period commences. (b) If, upon appeal, the Plan Administrator shall grant the relief requested by the claimant, then, in addition, the Plan Administrator shall award to the claimant reasonable fees and expenses of counsel, or any other duly authorized representative of claimant, which shall be paid by the Company. The determination as to whether such fees and expenses are reasonable shall be made by the Company in its sole and absolute discretion and such determination shall be binding and conclusive on all parties. 13.3 NOTICE OF DENIALS. The Plan Administrator's notice of denial of benefits shall identify the address to which the claimant may forward his appeal. SECTION 14 LIMITATION OF RIGHTS, CONSTRUCTION ---------------------------------- 14.1 LIMITATION OF RIGHTS. Neither this Plan, the Trust nor membership in the Plan shall give any employee or other person any right except to the extent that the right is specifically fixed under the terms of the Plan. The establishment of the Plan shall not be construed to give any individual a right to be continued in the service of a Plan Sponsor or as interfering with the right of a Plan Sponsor to terminate the service of any individual at any time. 14.2 CONSTRUCTION. The masculine gender, where appearing in the Plan, shall include the feminine gender (and vice versa), and the singular shall include the plural, unless the context clearly indicates to the contrary. Headings and subheadings are for the purpose of reference only and are not to be considered in the construction of this Plan. If any provision of this Plan is determined to be for any reason invalid or unenforceable, the remaining provisions shall continue in full force and effect. All of the provisions of this Plan shall be construed and enforced in accordance with the laws of the State of Delaware. 24 SECTION 15 LIMITATION ON ASSIGNMENT; PAYMENTS TO LEGALLY --------------------------------------------- INCOMPETENT DISTRIBUTEE ----------------------- 15.1 ANTI-ALIENATION CLAUSE. No benefit which shall be payable under the Plan to any person shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or otherwise dispose of the same shall be void. No benefit shall in any manner be subject to the debts, contracts, liabilities, engagements or torts of any person, nor shall it be subject to attachment or legal process for or against any person, except to the extent as may be required by law. 15.2 PERMITTED ARRANGEMENTS. Section 15.1 shall not preclude arrangements for the withholding of taxes from benefit payments, arrangements for the recovery of benefit overpayments, arrangements for the transfer of benefit rights to another plan, or arrangements for direct deposit of benefit payments to an account in a bank, savings and loan association or credit union (provided that such arrangement is not part of an arrangement constituting an assignment or alienation). 15.3 PAYMENT TO MINOR OR INCOMPETENT. Whenever any benefit which shall be payable under the Plan is to be paid to or for the benefit of any person who is then a minor or determined by the Plan Administrator to be incompetent by qualified medical advice, the Plan Administrator need not require the appointment of a guardian or custodian, but shall be authorized to cause the same to be paid over to the person having custody of the minor or incompetent, or to cause the same to be paid to the minor or incompetent without the intervention of a guardian or custodian, or to cause the same to be paid to a legal guardian or custodian of the minor or incompetent if one has been appointed or to cause the same to be used for the benefit of the minor or incompetent. SECTION 16 AMENDMENT, MERGER AND TERMINATION --------------------------------- 16.1 AMENDMENT. The Company shall have the right at any time, by an instrument in writing duly executed, acknowledged and delivered to the Plan Administrator, to modify, alter or amend this Plan, in whole or in part, prospectively or retroactively; provided, however, that the duties and liabilities of the Plan Administrator and the Trustee hereunder shall not be substantially increased without its written consent; and provided further that the amendment shall not reduce any Participant's vested interest in the Plan, calculated as of the date on which the amendment is adopted. If the Plan is amended by the Company after it is adopted by an Affiliate, unless otherwise expressly provided, it shall be treated as so amended by such Affiliate without 25 the necessity of any action on the part of the Affiliate. Any Affiliate or other corporation adopting this Plan hereby delegates the authority to amend the Plan to the Company. An Affiliate or other corporation that has adopted this Plan may terminate its future participation in the Plan at any time. 16.2 MERGER OR CONSOLIDATION OF COMPANY. The Plan shall not be automatically terminated by the Company's acquisition by or merger into any other employer, but the Plan shall be continued after such acquisition or merger if the successor employer elects and agrees to continue the Plan. All rights to amend, modify, suspend, or terminate the Plan shall be transferred to the successor employer, effective as of the date of the merger. 16.3 TERMINATION OF PLAN OR DISCONTINUANCE OF CONTRIBUTIONS. It is the expectation of the Company that this Plan and the payment of contributions hereunder will be continued indefinitely. However, continuance of the Plan is not assumed as a contractual obligation of the Company, and the right is reserved at any time to terminate this Plan or to reduce, temporarily suspend or discontinue contributions hereunder. 16.4 LIMITATION OF COMPANY'S LIABILITY. The adoption of this Plan is strictly a voluntary undertaking on the part of the Company and shall not be deemed to constitute a contract between the Company and any employee or Participant or to be consideration for, an inducement to, or a condition of the employment of any employee. A Participant, employee, or Beneficiary shall not have any right to retirement or other benefits except to the extent provided herein. SECTION 17 GENERAL PROVISIONS ------------------ 17.1 STATUS OF PARTICIPANTS AS UNSECURED CREDITORS. All benefits under the Plan shall be the unsecured obligations of the Company and each Plan Sponsor, as applicable, and, except for those assets which will be placed in the Trust established in connection with this Plan, no assets will be placed in trust or otherwise segregated from the general assets of the Company or each Plan Sponsor, as applicable, for the payment of obligations hereunder. To the extent that any person acquires a right to receive payments hereunder, such right shall be no greater than the right of any unsecured general creditor of the Company and each Plan Sponsor, as applicable. 17.2 UNIFORM ADMINISTRATION. Whenever in the administration of the Plan any action is required by the Plan Administrator, such action shall be uniform in nature as applied to all persons similarly situated. 26 17.3 HEIRS AND SUCCESSORS. All of the provisions of this Plan shall be binding upon all persons who shall be entitled to any benefits hereunder, and their heirs and legal representatives. 17.4 STATUS OF TRUST FUND. All Contributions shall be transferred to the Trustee of the Trust Fund as provided above. The Trust Fund is being established to assist the Company and the adopting Affiliates in meeting their obligations to the Participants and to provide the Participants with a measure of protection in certain limited instances. In certain circumstances described in the Trust Agreement, the assets of the Trust Fund may be used for the benefit of the Company's or an Affiliate's creditors and, as a result, the Trust Fund is considered to be part of the Company's and adopting Affiliate's general assets. Benefit payments due under this Plan shall either be paid from the Trust Fund or from the Company's or Affiliate's general assets as directed by the Plan Administrator. Despite the establishment of the Trust Fund, it is intended that the Plan be considered to be "unfunded" for purposes of the Act and the Code. 17.5 NO LIABILITY FOR ACCELERATION OF PAYMENTS. Under the Plan, Participants are allowed, to a certain extent, to designate the dates on which distributions are to be made to them. The Plan Administrator, however, also has the right, in the exercise of its discretion, to accelerate payments. By accepting the benefits offered by the Plan, each Participant (and each Beneficiary claiming through a Participant) acknowledges that the Plan Administrator may override the Participant's elections and agrees that neither the Participant nor any Beneficiary shall have may claim against the Plan Administrator, the Trustee, or any Plan Sponsor if distributions are made earlier than anticipated by the Participant due to the Plan Administrator's exercise of its discretion to accelerate payments. To signify its adoption of this restated Plan document, the Company has caused this restated Plan document to be executed by a duly authorized officer of the Company on this _____ day of __________________, 1997. MicroAge, Inc. By______________________________________ Jeffrey D. McKeever Chairman of the Board and Chief Executive Officer 27 EX-10.6.1 4 1ST AMENDMENT TO SUPP. EXEC. RETIREMENT PLAN FIRST AMENDMENT TO SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN THIS FIRST AMENDMENT TO SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (the "Amendment"), is made and entered into as of September 26, 1996. R E C I T A L S - - - - - - - - WHEREAS, MicroAge, Inc. (the "Company") has previously adopted the Supplemental Executive Retirement Plan of MicroAge, Inc., dated October 1, 1992 (the "SERP"); and WHEREAS, pursuant to Section 8.01 of the SERP the Compensation Committee of the Company's Board of Directors may amend the SERP; and WHEREAS, pursuant to action taken by the Compensation Committee on September 26, the SERP was amended as follows: A M E N D M E N T - - - - - - - - - 1. Section 2.02 of the SERP is hereby amended to read in its entirety as follows: 2.02 "Average Compensation" means the average of a Participant's Compensation for the highest five calendar years out of the last fifteen calendar years ending with the calendar year in which occurs his or her Normal Retirement Date or earlier termination of his or her employment with the Company. 2. Section 2.08 of the SERP is hereby amended to read in its entirety as follows: 2.08 "Compensation" means the amount paid to the Participant which is, or in the absence of any salary or bonus deferral under any deferred compensation plan of the Company and any contributions by the Participant to the MicroAge, Inc. Retirement Savings and Employee Stock Ownership Plan would be, considered "wages" under Section 3401(a) of the Code. Notwithstanding the foregoing, the term "Compensation" shall not include the Warrant Restitution and Founder's Bonus paid to Jeffrey 1 D. McKeever and Alan P. Hald pursuant to action taken by the Company's Compensation Committee on February 22, 1995. 3. The first sentence of Section 2.14 of the SERP is hereby amended to read in its entirety as follows: 2.14 "Other Benefits" means the sum of: (i) the annual amount the Participant would receive as a primary benefit under the Social Security Act as in effect on the date of calculation if he continued to work until his Normal Retirement Date with wages for purposes of that Act equal to his most recent rate of Compensation; and (ii) the Actuarial Equivalent of the amount which would be payable to the Participant in the form of a life annuity payable monthly commencing on the Participant's Normal Retirement Date utilizing the sum of the amounts, if any, in (a) the Participant's "Employer Contribution Account" in The MicroAge, Inc. Retirement Savings and Employee Stock Ownership Plan on the date of his termination of employment; and (b) the Participant's Company contribution account in the MicroAge, Inc. Executive Supplemental Savings Plan on the date of his termination of employment; provided, however, that if any amount was previously distributed to the Participant from the Participant's Company account or the Company contribution account, proper adjustment shall be made to the annuity amount to reflect the amount of such distribution. IN WITNESS WHEREOF, the Company has adopted this First Amendment to Supplemental Executive Retirement Plan as of the day and year first above written. MICROAGE, INC. a Delaware corporation By:___________________________________ Name:_________________________________ Title:________________________________ 2 EX-10.6.2 5 2ND AMENDMENT TO SUPP. EXEC. RETIREMENT PLAN SECOND AMENDMENT TO SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN THE SECOND AMENDMENT TO SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (the "Amendment"), is made and entered into as of October 1, 1997. WHEREAS, MicroAge, Inc. (the "Company") has previously adopted the Supplemental Executive Retirement Plan of MicroAge, Inc., dated October 1, 1992 (the "SERP"), and adopted a First Amendment thereto on September 26, 1996, and WHEREAS, pursuant to Section 8.01 of the SERP, the Compensation Committee of the Company's Board of Directors may amend the SERP; and WHEREAS, pursuant to action by the Compensation Committee on September 25, 1997, the SERP will be amended as follows: A M E N D M E N T - - - - - - - - - 1. Section 2.12 is hereby amended to read in its entirety as follows: 2.12. " Life Insurance Policy" means the Life Insurance Policies issued by Northwestern Mutual Life Insurance Company and insuring the lives of the Participants pursuant to equity split dollar arrangements between the Company and the Participants. 2. Section 5.04 is hereby amended to read in its entirety as follows: 5.04. "No Death Benefits." Since the Company has made other arrangements to provide benefits for Participants should they die prior to termination of employment, no benefits should be payable under this Plan as a result of the death of a Participant while employed by the Company. 3. Section 6.01 is hereby amended to read in its entirety as follows: 6.01. "Obligation to Fund SERP Benefit." The Company shall fund the Participants' SERP Benefit by making contributions to the MicroAge, Inc. Compensation Trust ("Trust"). The assets in the Trust shall be treated as general assets of the Company, and until paid, the Participants shall be unsecured general creditors of the Company. . . . IN WITNESS WHEREOF, the Company has adopted this Second Amendment to Supplemental Executive Retirement Plan as of the day and year first above written. MICROAGE, INC., a Delaware corporation By:_____________________________________ Name:___________________________________ Title:__________________________________ 2 EX-10.24 6 RESOLUTIONS OF THE COMPENSATION COMMITTEE PROPOSED RESOLUTIONS OF THE COMPENSATION COMMITTEE OF MICROAGE, INC. TO APPROVE FISCAL YEAR 1998 BONUS COMPENSATION FORMULAS FOR CERTAIN EXECUTIVE OFFICERS December 4, 1997 WHEREAS, Jeffrey D. McKeever, Robert G. O'Malley, James R. Daniel, Robert W. Mason, and James G. Manton are Executives of the Company (the "Executives"); and WHEREAS, the Company desires to retain the Executives in the employ of the Company and affiliated companies and to encourage their incentive and personal interest in the success of the Company and to reward exceptional effort and performance. NOW, THEREFORE, BE IT RESOLVED, that if each Executive is employed by the Company for the entire Fiscal Year 1998 in the same position held by such Executive on December 4, 1997, or in a substantially equivalent line function, then, (a) in the event that the Company's Fiscal Year 1998 Plan Earnings (the "Plan") are less than FIFTY PERCENT (50%) achieved, such Executive would be awarded no bonus, and (b) in the event that the Plan is greater than FIFTY PERCENT (50%) achieved, such Executive would be awarded a bonus equal to ONE PERCENT (1%) of such Executive's Fiscal Year 1998 base salary (such Executive's "Base Salary") for each whole percentage point that the Company's Fiscal Year 1998 earnings exceed FIFTY PERCENT (50%) of Plan (e.g., (i) if the Plan is SEVENTY-FIVE PERCENT (75%) achieved, such Executive would be awarded a bonus that would be TWENTY-FIVE PERCENT (25%) of such Executive's Base Salary and (ii) if the Plan is ONE HUNDRED AND FIFTY PERCENT (150%) achieved, such Executive would be awarded a bonus that would be ONE HUNDRED PERCENT (100%) of such Executive's Base Salary); provided, however, that the Compensation Committee, in its sole discretion, and considering such factors as the Compensation Committee deems appropriate, including, without limitation, such Executive's contributions to the Company's Fiscal Year 1998 financial performance, may reduce or increase such Executive's bonus, as calculated pursuant to clause (b), in such amount as the Compensation Committee deems appropriate. WHEREAS, Alan P. Hald, John S. Lewis, Christopher J. Koziol, and John H. Andrews are Executives of the Company (the "Executives"); and WHEREAS, the Company desires to retain the Executives in the employ of the Company and affiliated companies and to encourage their incentive and personal interest in the success of the Company and to reward exceptional effort and performance. NOW, THEREFORE, BE IT RESOLVED, that if each Executive is employed by the Company for the entire Fiscal Year 1998 in the same position held by such Executive on December 4, 1997 or in a substantially equivalent line function, then, in the event that the Company's Fiscal Year 1998 Plan Earnings (the "Plan") are less than FIFTY PERCENT (50%) achieved, such Executive would be awarded no bonus (whether a MicroAge Bonus or a Business Group Bonus, as such terms are hereinafter defined); and FURTHER RESOLVED, that if each Executive is employed by the Company for the entire Fiscal Year 1998 in the same position held by such Executive on December 4, 1997 or in a substantially equivalent line function, then, in the event that the Plan is greater than FIFTY PERCENT (50%) achieved, such Executive would be awarded a bonus (the "MicroAge Bonus") equal to ONE-HALF PERCENT (1/2%) of such Executive's Fiscal Year 1998 base salary (such Executive's "Base Salary") for each whole percentage point that the Company's Fiscal Year 1998 earnings exceed FIFTY PERCENT (50%) of Plan (e.g., (i) if the Plan is EIGHTY PERCENT (80%) achieved, such Executive would be awarded a MicroAge Bonus that would be FIFTEEN PERCENT (15%) of such Executive's Base Salary and (ii) if the Plan is ONE HUNDRED AND FIFTY PERCENT (150%) achieved, such Executive would be awarded a MicroAge Bonus that would be FIFTY PERCENT (50%) of such Executive's Base Salary); provided, however, that the Compensation Committee, in its sole discretion, and considering such factors as the Compensation Committee deems appropriate, including, without limitation, such Executive's contributions to the Company's Fiscal Year financial performance, may reduce or increase such Executive's MicroAge Bonus, as calculated pursuant to this Resolution, in such amount as the Compensation Committee deems appropriate; and FURTHER RESOLVED, that if each Executive is employed by the Company for the entire Fiscal Year 1998 in the same position held by such Executive on December 4, 1997, or in a substantially equivalent line function, then, (a) in the event that the Target Goal of Income Before Taxes and Extraordinary Items (on a fully-allocated basis) of such Executive's Business Group (such Executive's "Business Group Goal") is less than FIFTY PERCENT (50%) achieved, such Executive would be awarded no Business Group Bonus (as hereinafter defined), and (b) in the event such Executive's Business Group Goal is greater than FIFTY PERCENT (50%) achieved, such Executive would be awarded a bonus (the "Business Group Bonus") equal to ONE-HALF PERCENT (1/2%) of such Executive's Base Salary for each whole percentage point that exceeds FIFTY PERCENT (50%) of such Executive's Business Group Goal (e.g., (i) if such Executive's Business Group Goal is EIGHTY PERCENT (80%) achieved, such Executive would be awarded a Business Group Bonus that would be FIFTEEN PERCENT (15%) of such Executive's Base Salary and (ii) if such Executive's Business Group Goal is ONE HUNDRED AND FIFTY PERCENT (150%) achieved, such Executive would be awarded a Business Group Bonus that would be FIFTY PERCENT (50%) of such Executive's Base Salary); provided, however, that the Compensation Committee, in its sole discretion, and considering such factors as the Compensation Committee deems appropriate, including, without limitation, such Executive's contributions to such Executive's Business Group Goal, may reduce or increase such Executive's Business Group Bonus, as calculated pursuant to clause (b), in such amount as the Compensation Committee deems appropriate; and FURTHER RESOLVED, that the Executives' Business Group Bonuses will be tied to the following Business Groups: Alan P. Hald (MicroAge Enterprises, Inc.); John S. Lewis (Integration Group); Christopher J. Koziol (Distribution Group); and John H. Andrews (Logistics Group). ***** EX-10.33 7 1997 LONG-TERM INCENTIVE PLAN MICROAGE, INC. 1997 LONG-TERM INCENTIVE PLAN ARTICLE 1 PURPOSE 1.1 GENERAL. The purpose of the MicroAge, Inc. 1997 Long-Term Incentive Plan (the "Plan") is to promote the success, and enhance the value, of MicroAge, Inc. (the "Company") by linking the personal interests of its officers, associates and independent contractors or consultants to those of Company shareholders and by providing its officers, key associates, independent contractors and consultants with an incentive for outstanding performance. The Plan is further intended to provide flexibility to the Company in its ability to motivate, attract, and retain the services of such individuals upon whose judgment, interest, and special effort the successful conduct of the Company's operation is largely dependent. Accordingly, the Plan permits the grant of incentive awards from time to time to officers, other key associates, and independent contractors and consultants. ARTICLE 2 EFFECTIVE DATE 2.1 EFFECTIVE DATE. The Plan is effective as of September 25, 1997 (the "Effective Date). Within one year after the Effective Date, the Plan shall be submitted to the shareholders of the Company for their approval. The Plan will be deemed to be approved by the shareholders if it receives the affirmative vote of the holders of a majority of the shares of stock of the Company present, or represented, and entitled to vote at a meeting duly held in accordance with applicable provisions of the Delaware General Corporation Law and the Company's By-Laws and Certificate of Incorporation. Any Awards granted under the Plan prior to shareholder approval are effective when made (unless the Committee specifies otherwise at the time of grant), but no Award may be exercised or settled and no restrictions relating to any Award may lapse before shareholder approval. If the shareholders fail to approve the Plan, any Award previously made shall be automatically canceled without any further act. ARTICLE 3 DEFINITIONS AND CONSTRUCTION. 3.1 DEFINITIONS. When a word or phrase appears in this Plan with the initial letter capitalized, and the word or phrase does not commence a sentence, the word or phrase shall generally be given the meaning ascribed to it in this Section or in Sections 1.1 or 2.1 unless a clearly different meaning is required by the context. The following words and phrases shall have the following meanings: (a) "Award" means any Option, Stock Appreciation Right, Restricted Stock Award, Performance Share Award, or Performance-Based Award granted to a Participant under the Plan. (b) "Award Agreement" means any written agreement, contract, or other instrument or document evidencing an Award. (c) "Board" means the Board of Directors of the Company. (d) "Change of Control" means and includes each of the following: (1) A change of control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of the Securities Exchange Act of 1934, as amended ("1934 Act") regardless of whether the Company is subject to such reporting requirement; (2) A change of control of the Company through a transaction or series of transactions, such that any person (as that term is used in Section 13 and 14(d)(2) of the 1934 Act), excluding affiliates of the Company as of the Effective Date, is or becomes the beneficial owner (as that term is used in Section 13(d) of the 1934 Act) directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; (3) Any consolidation or liquidation of the Company in which the Company is not the continuing or surviving corporation or pursuant to which Stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the shares of Stock immediately before the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger; (4) The shareholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company; or (5) Substantially all of the assets of the Company are sold or otherwise transferred to parties that are not within a "controlled group of corporations" (as defined in Section 1563 of the Code) in which the Company is a member. (e) "Code" means the Internal Revenue Code of 1986, as amended. (f) "Committee" means the committee of the Board described in Article 4. 2 (g) "Covered Employee" means an Employee who is a "covered employee" within the meaning of Section 162(m) of the Code. (h) "Disability shall mean any illness or other physical or mental condition of a Participant which renders the Participant incapable of performing his customary and usual duties for the Company, or any medically determinable illness or other physical or mental condition resulting from a bodily injury, disease or mental disorder which in the judgment of the Committee is permanent and continuous in nature. The Committee may require such medical or other evidence as it deems necessary to judge the nature and permanency of the Participant's condition. (i) "Fair Market Value" means, as of any given date, the fair market value of Stock or other property determined by such methods or procedures as may be established from time to time by the Committee. Unless otherwise determined by the Committee, the Fair Market Value of Stock as of any date shall be the closing price for the Stock as reported on the NASDAQ National Market System (or on any national securities exchange on which the Stock is then listed) for that date or, if no closing price is so reported for that date, the closing price on the next preceding date for which a closing price was reported. (j) "Incentive Stock Option" means an Option that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto. (k) "Non-Employee Director" means of member of the Board who qualifies as a "Non-Employee Director" as defined in Rule 16b-3(b)(3) of the Exchange Act, or any successor definition adopted by the Board. (l) "Non-Qualified Stock Option" means an Option that is not intended to be an Incentive Stock Option. (m) "Option" means a right granted to a Participant under Article 7 of the Plan to purchase Stock at a specified price during specified time periods. An Option may be either an Incentive Stock Option or a Non-Qualified Stock Option. (n) "Participant" means a person who, as an officer, key associate, independent contractor or consultant of the Company or any Subsidiary, has been granted an Award under the Plan. (o) "Performance-Based Awards" means the Restricted Stock Awards and Performance Share Awards granted to selected Covered Employees pursuant to Articles 9 and 10, but which are subject to the terms and conditions set forth in Article 11. All Performance-Based Awards are intended to qualify as "performance-based compensation" under Section 162(m) of the Code. 3 (p) "Performance Criteria" means the criteria that the Committee selects for purposes of establishing the Performance Goal or Performance Goals for a Participant for a Performance Period. The Performance Criteria that will be used to establish Performance Goals are limited to the following: pre- or after-tax net earnings, revenue growth, operating income, operating cash flow, return on net assets, return on shareholders' equity, return on assets, return on capital, Stock price growth, shareholder returns, gross or net profit margin, earnings per share, price per share of Stock, and market share, any of which may be measured either in absolute terms or as compared to any incremental increase or as compared to results of one or more companies or of a peer group. The Committee shall, within the time prescribed by Section 162(m) of the Code, define in an objective fashion the manner of calculating the Performance Criteria it selects to use for such Performance Period for such Participant. (q) "Performance Goals" means, for a Performance Period, the goals established in writing by the Committee for the Performance Period based upon the Performance Criteria. Depending on the Performance Criteria used to establish such Goal, the Goal may be expressed in terms of overall Company performance or the performance of an operating unit or the performance of the individual. The Committee, in its discretion, may, within the time prescribed by Section 162(m) of the Code, adjust or modify the calculation of Performance Goals for such Performance Period in order to prevent the dilution or enlargement of the rights of Participants, (i) in the event of, or in anticipation of, any unusual or extraordinary corporate item, transaction, event, or development; (ii) in recognition of, or in anticipation of, any other unusual or nonrecurring events affecting the Company, or the financial statements of the Company; or (iii) in response to, or in anticipation of, changes in applicable laws, regulations, accounting principles, or business conditions. (r) "Performance Period" means the one or more periods of time, which may be of varying and overlapping durations, as the Committee may select, over which the attainment of one or more Performance Goals will be measured for the purpose of determining a Participant's right to, and the payment of, a Performance-Based Award. (s) "Performance Share" means a right granted to a Participant under Article 9, to receive cash, Stock, or other Awards, the payment of which is contingent upon achieving certain performance goals established by the Committee. (t) "Plan" means the MicroAge, Inc. 1997 Long-Term Incentive Plan, as amended from time to time. (u) "Restricted Stock Award" means Stock granted to a Participant under Article 10 that is subject to certain restrictions and to risk of forfeiture. 4 (v) "Retirement" means a Participant's termination of employment with the Company after attaining any normal or early retirement age specified in any pension, profit sharing or other retirement program sponsored by the Company. (w) "Stock" means the common stock of the Company and such other securities of the Company that may be substituted for Stock pursuant to Article 13. (x) "Stock Appreciation Right" or "SAR" means a right granted to a Participant under Article 8 to receive a payment equal to the difference between the Fair Market Value of a share of Stock as of the date of exercise of the SAR over the grant price of the SAR, all as determined pursuant to Article 8. (y) "Subsidiary" means any corporation of which a majority of the outstanding voting stock or voting power is beneficially owned directly or indirectly by the Company. ARTICLE 4 ADMINISTRATION 4.1 COMMITTEE. The Plan shall be administered by a Committee that is appointed by, and shall serve at the discretion of, the Board. The Committee shall consist of at least two individuals, each of whom qualifies as (i) a Non-Employee Director, and (ii) an "outside director" under Code Section 162(m) and the regulations issued thereunder. Subject to the foregoing, the Compensation Committee of the Board shall constitute the Committee, unless the Board determines otherwise. 4.2 ACTION BY THE COMMITTEE. A majority of the Committee shall constitute a quorum. The acts of a majority of the members present at any meeting at which a quorum is present and acts approved in writing by a majority of the Committee in lieu of a meeting shall be deemed the acts of the Committee. Each member of the Committee is entitled to, in good faith, rely or act upon any report or other information furnished to that member by any officer or other associate of the Company or any Subsidiary, the Company's independent certified public accountants, or any executive compensation consultant or other professional retained by the Company to assist in the administration of the Plan. 4.3 AUTHORITY OF COMMITTEE. The Committee has the exclusive power, authority and discretion to: (a) Designate Participants to receive Awards; (b) Determine the type or types of Awards to be granted to each Participant; (c) Determine the number of Awards to be granted and the number of shares of Stock to which an Award will relate; 5 (d) Determine the terms and conditions of any Award granted under the Plan including but not limited to, the exercise price, grant price, or purchase price, any restrictions or limitations on the Award, any schedule for lapse of forfeiture restrictions or restrictions on the exercisability of an Award, and accelerations or waivers thereof, based in each case on such considerations as the Committee in its sole discretion determines; provided, however, that the Committee shall not have the authority to accelerate the vesting, or waive the forfeiture, of any Performance-Based Awards; (e) Determine whether, to what extent, and under what circumstances an Award may be settled in, or the exercise price of an Award may be paid in, cash, Stock, other Awards, or other property, or an Award may be canceled, forfeited, or surrendered; (f) Prescribe the form of each Award Agreement, which need not be identical for each Participant; (g) Decide all other matters that must be determined in connection with an Award; (h) Establish, adopt or revise any rules and regulations as it may deem necessary or advisable to administer the Plan; and (i) Make all other decisions and determinations that may be required under the Plan or as the Committee deems necessary or advisable to administer the Plan. 4.4 DECISIONS BINDING. All decisions and determinations made by the Committee with respect to any Award granted under the Plan, any Award Agreement, or the interpretation of the Plan are final, binding and conclusive on all parties. ARTICLE 5 SHARES SUBJECT TO THE PLAN 5.1 NUMBER OF SHARES. Subject to adjustment provided in Section 13.1, the aggregate number of shares of Stock reserved and available for grant under the Plan shall be 2,000,000. 5.2 LAPSED AWARDS. To the extent that an Award terminates, expires or lapses for any reason, any shares of Stock subject to the Award will again be available for the grant of an Award under the Plan and shares subject to SARs or other Awards settled in cash will be available for the grant of an Award under the Plan. 5.3 STOCK DISTRIBUTED. Any Stock distributed pursuant to an Award may consist, in whole or in part, of authorized and unissued Stock, treasury Stock or Stock purchased on the open market. 6 5.4 LIMITATION ON NUMBER OF SHARES SUBJECT TO AWARDS. Notwithstanding any provision in the Plan to the contrary, and subject to the adjustment in Section 13.1, the maximum number of shares of Stock with respect to one or more Awards that may be granted to any one Participant during any fiscal year of the Company shall be 200,000. ARTICLE 6 ELIGIBILITY AND PARTICIPATION 6.1 ELIGIBILITY. Persons eligible to participate in this Plan include all officers, key associates and independent contractors and consultants of the Company or a Subsidiary, as determined by the Committee, including associates who are also members of the Board, but excluding those Board members who are not also associates of the Company or a Subsidiary. 6.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the Committee may, from time to time, select from among all eligible associates, those to whom Awards shall be granted and shall determine the nature and amount of each Award. No associate shall have any right to be granted an Award under this Plan. ARTICLE 7 STOCK OPTIONS 7.1 GENERAL. The Committee is authorized to grant Options to Participants on the following terms and conditions: (a) EXERCISE PRICE. The exercise price per share of Stock under an Option shall be determined by the Committee and set forth in the Award Agreement. The exercise price for any Option shall not be less than the Fair Market Value as of the date of grant. (b) TIME AND CONDITIONS OF EXERCISE. The Committee shall determine the time or times at which an Option may be exercised in whole or in part. The Committee also shall determine the performance or other conditions, if any, that must be satisfied before all or part of an Option may be exercised. (c) PAYMENT. The Committee shall determine the methods by which the exercise price of an Option may be paid, the form of payment, including, without limitation, cash, shares of Stock, or other property (including broker-assisted "cashless exercise" arrangements), and the methods by which shares of Stock shall be delivered or deemed to be delivered to Participants. 7 (d) EVIDENCE OF GRANT. All Options shall be evidenced by a written Award Agreement between the Company and the Participant. The Award Agreement shall include such provisions as may be specified by the Committee. 7.2 INCENTIVE STOCK OPTIONS. The terms of any Incentive Stock Options granted under the Plan must comply with the following additional rules: (a) EXERCISE PRICE. The exercise price per share of Stock shall be set by the Committee, provided that the exercise price for any Incentive Stock Option may not be less than the Fair Market Value as of the date of the grant. (b) EXERCISE. In no event, may any Incentive Stock Option be exercisable for more than ten years from the date of its grant. (c) LAPSE OF OPTION. An Incentive Stock Option shall lapse under the following circumstances: (1) The Incentive Stock Option shall lapse ten years from the date it is granted, unless an earlier time is set in the Award Agreement. (2) The Incentive Stock Option shall lapse in accordance with the Option Agreement, but shall in no event be exercisable for a period exceeding three months after the Participant's termination of employment, other than for Disability or death, in which case the Incentive Stock Option shall lapse no later than 12 months after such Disability or death. (d) INDIVIDUAL DOLLAR LIMITATION. The aggregate Fair Market Value (determined as of the time an Award is made) of all shares of Stock with respect to which Incentive Stock Options are first exercisable by a Participant in any calendar year may not exceed $100,000.00 or such other dollar limitation as set forth in Section 422(d) of the Code or any successor provision. If for any reason Incentive Stock Options that are first exercisable for any Participant in any calendar year exceed this limitation, the excess Options shall be deemed to be Non-Qualified Stock Options. (e) TEN PERCENT OWNERS. An Incentive Stock Option shall be granted to any individual who, at the date of grant, owns stock possessing more than ten percent of the total combined voting power of all classes of Stock of the Company only if such Option is granted at a price that is not less than 110% of Fair Market Value on the date of grant and the Option is exercisable for no more than five years from the date of grant. 8 (f) EXPIRATION OF INCENTIVE STOCK OPTIONS. No Award of an Incentive Stock Option may be made pursuant to this Plan after the tenth anniversary of the Effective Date. (g) RIGHT TO EXERCISE. During a Participant's lifetime, an Incentive Stock Option may be exercised only by the Participant. 7.3 MANAGEMENT EQUITY PROGRAM (a) ELIGIBILITY. In addition to any other Award granted to a Participant under the Plan, the Committee may, in its sole and absolute discretion, select one or more Participants to participate in the Management Equity Program. Under the Management Equity Program, selected Participants may receive Awards of Options pursuant to the terms and conditions set forth in this Section 7.3 (b) RECEIPT OF AWARDS. A Participant selected to participate in the Management Equity Program shall receive Awards of Options in exchange for the Participant's irrevocable waiver of a designated amount or percentage of the Participant's base salary or any bonuses otherwise payable during the period the waiver is in effect. The receipt of the Options pursuant to the Management Equity Program shall be subject to such terms and conditions as determined by the Committee in its sole and absolute discretion and as set forth in a Management Equity Program Award Agreement. (c) FORMULA. The number of Non-Qualified Stock Options granted to the Participant pursuant to this Section 7.3 shall be determined by multiplying the total dollar amount of the base salary or bonuses waived by the Participant under a Management Equity Program Award Agreement by a leveraging factor and dividing the product by the Fair Market Value of one share of Stock as of the first day of the calendar year for which the Participant's waiver is first effective, or as of the original effective date of the waiver if the waiver is first effective as of some date other than the first day of a calendar year. (d) MANAGEMENT EQUITY PROGRAM AWARD AGREEMENT. Subsequent to a Participant being selected to participate in the Management Equity Program, such Participant shall enter into a Management Equity Program Award Agreement in such form and at such time as the Committee shall require. (e) WAIVER REQUIREMENTS AND RESTRICTIONS. In any one Management Equity Program Award Agreement, a Participant shall not be allowed to waive his base salary or any bonuses for more than a three (3) year period, except that bonuses may be waived over a longer period as may be required, up to the maximum of a ten (10) year period. The Committee shall determine, in its sole and absolute discretion, the minimum or maximum percentage of base salary or any bonuses that may be waived by a Participant, the leveraging factor to be used in the 9 formula set forth in Section 7.3(c) and all other matters the Committee deems necessary or advisable for implementing the Management Equity Program. Any and all rules or procedures adopted by the Committee pursuant to the preceding sentence shall be in writing and shall be communicated to all Participants selected by the Committee for participation in the Management Equity Program. ARTICLE 8 STOCK APPRECIATION RIGHTS 8.1 GRANT OF SARs. The Committee is authorized to grant SARs to Participants on the following terms and conditions: (a) RIGHT TO PAYMENT. Upon the exercise of a Stock Appreciation Right, the Participant to whom it is granted has the right to receive the excess, if any, of: (1) The Fair Market Value of a share of Stock on the date of exercise; over (2) The grant price of the Stock Appreciation Right as determined by the Committee, which shall not be less than the Fair Market Value of a share of Stock on the date of grant in the case of any SAR related to any Incentive Stock Option. (b) OTHER TERMS. All awards of Stock Appreciation Rights shall be evidenced by an Award Agreement. The terms, methods of exercise, methods of settlement, form of consideration payable in settlement, and any other terms and conditions of any Stock Appreciation Right shall be determined by the Committee at the time of the grant of the Award and shall be reflected in the Award Agreement. ARTICLE 9 PERFORMANCE SHARES 9.1 GRANT OF PERFORMANCE SHARES. The Committee is authorized to grant Performance Shares to Participants on such terms and conditions as may be selected by the Committee. The Committee shall have the complete discretion to determine the number of Performance Shares granted to each Participant. All Awards of Performance Shares shall be evidenced by an Award Agreement. 9.2 RIGHT TO PAYMENT. Upon the Award of a Performance Share, the Participant has the right to receive the cash, stock, or other property evidenced by the Award Agreement. The Committee shall set performance goals and other terms or conditions to payment of the Performance Shares in its discretion which, depending on the extent to which they are met, will determine the number and value of Performance Shares that will be paid to the Participant, provided that the time period during which the performance goals must be met shall, in all cases, exceed six months. 10 9.3 OTHER TERMS. Performance Shares may be payable in cash, Stock, or other property, and have such other terms and conditions as determined by the Committee and reflected in the Award Agreement. ARTICLE 10 RESTRICTED STOCK AWARDS 10.1 GRANT OF RESTRICTED STOCK. The Committee is authorized to make Awards of Restricted Stock to Participants in such amounts and subject to such terms and conditions as may be selected by the Committee. All Awards of Restricted Stock shall be evidenced by a Restricted Stock Award Agreement. 10.2 ISSUANCE AND RESTRICTIONS. Restricted Stock shall be subject to such restrictions on transferability and other restrictions as the Committee may impose (including, without limitation, limitations on the right to vote Restricted Stock or the right to receive dividends on the Restricted Stock). These restrictions may lapse separately or in combination at such times, under such circumstances, in such installments, or otherwise, as the Committee determines at the time of the grant of the Award or thereafter. 10.3 FORFEITURE. Except as otherwise determined by the Committee at the time of the grant of the Award or thereafter, upon termination of employment during the applicable restriction period, Restricted Stock that is at that time subject to restrictions shall be forfeited and reacquired by the Company, provided, however, that the Committee may provide in any Award Agreement that restrictions or forfeiture conditions relating to Restricted Stock will be waived in whole or in part in the event of terminations resulting from specified causes, and the Committee may in other cases waive in whole or in part restrictions or forfeiture conditions relating to Restricted Stock. 10.4 CERTIFICATES FOR RESTRICTED STOCK. Restricted Stock granted under the Plan may be evidenced in such manner as the Committee shall determine. If certificates representing shares of Restricted Stock are registered in the name of the Participant, certificates must bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock, and the Company shall retain physical possession of the certificate until such time as all applicable restrictions lapse. 11 ARTICLE 11 PERFORMANCE-BASED AWARDS 11.1 PURPOSE. The purpose of this Article 11 is to provide the Committee the ability to qualify the Restricted Stock Awards under Article 10 and the Performance Share Awards under Article 9 as "performance-based compensation" under Section 162(m) of the Code. If the Committee, in its discretion, decides to grant a Performance-Based Award to a Covered Employee, the provisions of this Article 11 shall control over any contrary provision contained in Articles 9 or 10. 11.2 APPLICABILITY. This Article 11 shall apply only to those Covered Employees selected by the Committee to receive Performance-Based Awards. The Committee may, in its discretion, grant Restricted Stock Awards or Performance Share Awards to Covered Employees that do not satisfy the requirements of this Article 11. The designation of a Covered Employee as a Participant for a Performance Period shall not in any manner entitle the Participant to receive an Award for the period. Moreover, designation of a Covered Employee as a Participant for a particular Performance Period shall not require designation of such Covered Employee as a Participant in any subsequent Performance Period and designation of one Covered Employee as a Participant shall not require designation of any other Covered Employees as a Participant in such period or in any other period. 11.3 DISCRETION OF COMMITTEE WITH RESPECT TO PERFORMANCE AWARDS. With regard to a particular Performance Period, the Committee shall have full discretion to select the length of such Performance Period, the type of Performance-Based Awards to be issued, the kind and/or level of the Performance Goal, and whether the Performance Goal is to apply to the Company, an operating unit of the Company, or the Participant individually. 11.4 PAYMENT OF PERFORMANCE AWARDS. Unless otherwise provided in the relevant Award Agreement, a Participant must be employed by the Company or a Subsidiary on the last day of the Performance Period to be eligible for a Performance Award for such Performance Period. Furthermore, a Participant shall be eligible to receive payment under a Performance-Based Award for a Performance Period only if the Performance Goals for such period are achieved. In determining the actual size of an individual Performance-Based Award, the Committee may reduce or eliminate the amount of the Performance-Based Award earned for the Performance Period, if in its sole and absolute discretion, such reduction or elimination is appropriate. 11.5 MAXIMUM AWARD PAYABLE. Notwithstanding any provision contained in the Plan to the contrary, the maximum Performance-Based Award payable to any one Participant under the Plan for a Performance Period is 200,000 Shares, or in the event the Performance-Based Award is paid in cash, such maximum Performance-Based Award shall be determined by multiplying 200,000 Shares by the Fair Market Value of one Share as of the date of grant of the Performance-Based Award. 12 ARTICLE 12 PROVISIONS APPLICABLE TO AWARDS 12.1 STAND-ALONE, TANDEM, AND SUBSTITUTE AWARDS. Awards granted under the Plan may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, or in substitution for, any other Award granted under the Plan. If an Award is granted in substitution for another Award, the Committee may require the surrender of such other Award in consideration of the grant of the new Award. Awards granted in addition to or in tandem with other Awards may be granted either at the same time as or at a different time from the grant of such other Awards. 12.2 EXCHANGE PROVISIONS. The Committee may at any time offer to exchange or buy out any previously granted Award for a payment in cash, Stock, or another Award (subject to Section 12.1), based on the terms and conditions the Committee determines and communicates to the Participant at the time the offer is made. 12.3 TERM OF AWARD. The term of each Award shall be for the period as determined by the Committee, provided that in no event shall the term of any Incentive Stock Option or a Stock Appreciation Right granted in tandem with the Incentive Stock Option exceed a period of ten years from the date of its grant. 12.4 FORM OF PAYMENT FOR AWARDS. Subject to the terms of the Plan and any applicable law or Award Agreement, payments or transfers to be made by the Company or a Subsidiary on the grant or exercise of an Award may be made in such forms as the Committee determines at or after the time of grant, including without limitation, cash, Stock, other Awards, or other property, or any combination, and may be made in a single payment or transfer, in installments, or on a deferred basis, in each case determined in accordance with rules adopted by, and at the discretion of, the Committee. 12.5 LIMITS ON TRANSFER. No right or interest of a Participant in any Award may be pledged, encumbered, or hypothecated to or in favor of any party other than the Company or a Subsidiary, or shall be subject to any lien, obligation, or liability of such Participant to any other party other than the Company or a Subsidiary. Except as otherwise provided by the Committee, no Award shall be assignable or transferable by a Participant other than by will or the laws of descent and distribution. 12.6 BENEFICIARIES. Notwithstanding Section 12.5, a Participant may, in the manner determined by the Committee, designate a beneficiary to exercise the rights of the Participant and to receive any distribution with respect to any Award upon the Participant's death. A beneficiary, legal guardian, legal representative, or other person claiming any rights under the Plan is subject to all terms and conditions of the Plan and any Award Agreement applicable to the Participant, except to the extent the Plan and Award Agreement otherwise provide, and to any additional restrictions deemed necessary or appropriate by the Committee. If the Participant is married, a designation of a person other 13 than the Participant's spouse as his beneficiary with respect to more than 50 percent of the Participant's interest in the Award shall not be effective without the written consent of the Participant's spouse. If no beneficiary has been designated or survives the Participant, payment shall be made to the person entitled thereto under the Participant's will or the laws of descent and distribution. Subject to the foregoing, a beneficiary designation may be changed or revoked by a Participant at any time provided the change or revocation is filed with the Committee. 12.7 STOCK CERTIFICATES. All Stock certificates delivered under the Plan are subject to any stop-transfer orders and other restrictions as the Committee deems necessary or advisable to comply with federal or state securities laws, rules and regulations and the rules of any national securities exchange or automated quotation system on with the Stock is listed, quoted, or traded. The Committee may place legends on any Stock certificate to reference restrictions applicable to the Stock. 12.8 TENDER OFFERS. In the event of a public tender for all or any portion of the Stock, or in the event that a proposal to merge, consolidate, or otherwise combine with another company is submitted for shareholder approval, the Committee may in its sole discretion declare previously granted Options to be immediately exercisable. To the extent that this provision causes Incentive Stock Options to exceed the dollar limitation set forth in Section 7.2(d), the excess Options shall be deemed to be Non-Qualified Stock Options. 12.9 ACCELERATION UPON DEATH OR DISABILITY. Notwithstanding any other provision in the Plan or any Participant's Award Agreement to the contrary, upon the Participant's death or Disability, all outstanding Options, Stock Appreciation Rights, and other Awards in the nature of rights that may be exercised shall become fully exercisable and all restrictions on outstanding Awards shall lapse. Any Option or Stock Appreciation Rights Awards shall then lapse in accordance with the other provisions of this Plan and the Award Agreement. 12.10 ACCELERATION UPON A CHANGE OF CONTROL. If a Change of Control occurs, all outstanding Options, Stock Appreciation Rights, and other Awards in the nature of rights that may be exercised shall become fully exercisable and all restrictions on outstanding Awards shall lapse. In the event that the Committee becomes aware of an event that will cause a Change of Control to occur, the Committee may give each Participant the right to exercise Awards prior to the occurrence of the event over such period as the Committee, in its sole and absolute discretion, shall determine. To the extent that this provision causes Incentive Stock Options to exceed the dollar limitation set forth in Section 7.2(d), the excess Options shall be deemed to be Non-Qualified Stock Options. ARTICLE 13 CHANGES IN CAPITAL STRUCTURE 13.1 GENERAL. In the event a stock dividend is declared upon the Stock, the shares of Stock then subject to each Award (and the number of shares subject thereto) shall be increased proportionately without any change in the aggregate purchase price therefor. In the event the Stock shall be changed into or 14 exchanged for a different number or class of shares of Stock or of another corporation, whether through reorganization, recapitalization, stock split-up, combination of shares, merger or consolidation, there shall be substituted for each such share of Stock then subject to each Award (and for each share of Stock then subject thereto) the number and class of shares of Stock into which each outstanding share of Stock shall be so exchanged, all without any change in the aggregate purchase price for the shares then subject to each Award. ARTICLE 14 AMENDMENT, MODIFICATION AND TERMINATION 14.1 AMENDMENT, MODIFICATION AND TERMINATION. With the approval of the Board, at any time and from time to time, the Committee may terminate, amend or modify the Plan. 14.2 AWARDS PREVIOUSLY GRANTED. No termination, amendment, or modification of the Plan shall adversely affect in any material way any Award previously granted under the Plan, without the written consent of the Participant. The Committee also may modify the terms of a previously granted Award; provided, however, that the Committee may not amend a previously granted Award to the detriment of the Participant without the Participant's consent. ARTICLE 15 GENERAL PROVISIONS 15.1 NO RIGHTS TO AWARDS. No Participant or employee shall have any claim to be granted any Award under the Plan, and neither the Company nor the Committee is obligated to treat Participants and associates uniformly. 15.2 NO STOCKHOLDERS RIGHTS. No Award gives the Participant any of the rights of a shareholder of the Company unless and until shares of Stock are in fact issued to such person in connection with such Award. 15.3 WITHHOLDING. The Company or any Subsidiary shall have the authority and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy Federal, state, and local taxes (including the Participant's FICA obligation) required by law to be withheld with respect to any taxable event arising as a result of this Plan. 15.4 NO RIGHT TO EMPLOYMENT. Nothing in the Plan or any Award Agreement shall interfere with or limit in any way the right of the Company or any Subsidiary to terminate any Participant's employment at any time, nor confer upon any Participant any right to continue in the employ of the Company or any Subsidiary. 15.5 UNFUNDED STATUS OF AWARDS. The Plan is intended to be an "unfunded" plan for incentive compensation. With respect to any payments not yet made to a Participant pursuant to an Award, nothing contained in the Plan or any 15 Award Agreement shall give the Participant any rights that are greater than those of a general creditor of the Company or any Subsidiary. 15.6 INDEMNIFICATION. To the extent allowable under applicable law, each member of the Committee or of the Board shall be indemnified and held harmless by the Company from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by such member in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action or failure to act under the Plan and against and from any and all amounts paid by him or her in satisfaction of judgment in such action, suit, or proceeding against him or her provided he or she gives the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Articles of Incorporation or By-Laws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless. 15.7 RELATIONSHIP TO OTHER BENEFITS. No payment under the Plan shall be taken into account in determining any benefits under any pension, retirement, savings, profit sharing, group insurance, welfare or other benefit plan of the Company or any Subsidiary. 15.8 EXPENSES. The expenses of administering the Plan shall be borne by the Company and its Subsidiaries. 15.9 TITLES AND HEADINGS. The titles and headings of the Sections in the Plan are for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control. 15.10 FRACTIONAL SHARES. No fractional shares of stock shall be issued and the Committee shall determine, in its discretion, whether cash shall be given in lieu of fractional shares or whether such fractional shares shall be eliminated by rounding up. 15.11 SECURITIES LAW COMPLIANCE. With respect to any person who is, on the relevant date, obligated to file reports under Section 16 of the 1934 Act, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the 1934 Act. To the extent any provision of the Plan or action by the Committee fails to so comply, it shall be void to the extent permitted by law and voidable as deemed advisable by the Committee. 15.12 GOVERNMENT AND OTHER REGULATIONS. The obligation of the Company to make payment of awards in Stock or otherwise shall be subject to all applicable laws, rules, and regulations, and to such approvals by government agencies as may be required. The Company shall be under no obligation to register under the Securities Act of 1933, as amended (the "1933 Act"), any of the shares of Stock paid under the Plan. If the shares paid under the Plan may in certain circumstances be exempt from registration under the 1933 Act, the 16 Company may restrict the transfer of such shares in such manner as it deems advisable to ensure the availability of any such exemption. 15.13 GOVERNING LAW. The Plan and all Award Agreements shall be construed in accordance with and governed by the laws of the State of Delaware. 17 EX-10.46 8 U.S. FIRST TIER RESELLER AGREEMENT U.S. FIRST TIER RESELLER AGREEMENT 1. APPOINTMENT A. Hewlett-Packard Company ("HP") appoints First Tier Reseller as an authorized, non-exclusive First Tier Reseller for marketing the HP Products listed on the Product Exhibits. First Tier Reseller's appointment is subject to the terms and conditions set forth in this U.S. First Tier Reseller Agreement and the associated Addenda, Product Exhibits, HP Product Categories ("Product Categories") and Operations Policy Manual (collectively, "Agreement") for the period from the effective date through the expiration date of this Agreement. First Tier Reseller accepts appointment on these terms. B. First Tier Reseller is in the business of distributing products to and supporting selling locations owned and operated by HP Authorized VARs, Second Tier Resellers who have selected First Tier Reseller as one of their Dual Source Suppliers and resellers who are not authorized directly by HP but who are permitted to resell HP Products as described in this Agreement. First Tier Reseller may also operate company- owned selling locations. First Tier Reseller desires to acquire HP Products for resale/distribution to HP Authorized VARs, Second Tier Resellers, and other resellers (collectively called "Customers") and company-owned selling locations as permitted in the Product Categories. C. HP has attached to this Agreement the U.S. Second Tier Reseller Agreement and VAR Certification which substantially represents the agreement HP will use in appointing Second Tier Resellers and VARs, and authorizing First Tier Reseller's company-owned locations to resell HP Products. 2. STATUS CHANGE A. If First Tier Reseller wishes to: 1. Change its name or that of any approved location; 2. Add, close or change an approved location; 3. Undergo a merger, acquisition, consolidation or other reorganization with the result that any entity controls 50% or more of First Tier Reseller's capital stock or assets after such transaction; or 4. Undergo a significant change in control or management of First Tier Reseller operations; then First Tier Reseller shall notify HP in writing prior to the intended date of change. B. HP agrees to promptly notify First Tier Reseller of its approval or disapproval or any proposed change, provided that First Tier Reseller has given HP all information and documents reasonably requested by HP. C. HP must approve proposed First Tier Reseller changes prior to any obligation of HP to perform under this Agreement with First Tier Reseller as changed. 3. FIRST TIER RESELLER RESPONSIBILITIES A. First Tier Reseller may sell HP Products only to Customers as permitted in the Product Categories, and may resell HP Products directly through authorized company-owned selling locations provided that they comply with all terms and conditions of the U.S. Second Tier Reseller Agreement, associated Addenda, Product Categories, Operations Policy Manual and Product Exhibits. B. If the Product Categories permit sales to Customers only who have been authorized by HP, then First Tier Reseller shall ensure that its Customers and company-owned locations meet HP's qualifications and comply with the terms and conditions for those Customers and with First Tier Reseller's standard agreements and business policies. First Tier Reseller also agrees to report violations of HP's terms and conditions to HP in a timely manner. C. Shipments of HP Products to unauthorized Customers or end-users shall constitute a breach of this Agreement and may result in the termination of this Agreement. In addition, First Tier Reseller agrees to pay HP an amount equivalent to the discount received from HP for such shipments. D. HP may prohibit First Tier Reseller from selling to terminated Second Tier Resellers or VARs, or other identified Customers whom HP does not wish to receive products. E. First Tier Reseller agrees to: 1. Represent HP Products fairly to all Customers. 2. Forward promptly to Customers all technical sales and promotional materials, suggested price lists and other information provided by HP for the purpose of reshipment to Customers. 3. Provide pre-sales support and post-sales technical support for HP Products to all Customers. 4. Provide authorized Second Tier Resellers and VARs access to the HP designated service program or other HP approved service plan. 5. Ensure that no sale, advertising, promotion, display or disclosure of any features, availability or price of any new HP Product takes place before HP's public announcement of that product. 6. Respond promptly to all Customer inquiries or requests related to HP Products. 7. Authorize HP's representatives to call on Customers for product training and other objectives. 8. Report promptly to HP all suspected defects in HP Products. 9. Ensure that its employees complete any required training courses designated by HP. E. Upon request from First Tier Reseller, at its discretion HP may grant special pricing for particular end-user-customer transactions. In good faith, HP may retract the special pricing at any time before acceptance by the end-user customer. HP may extend the pricing on an exclusive or non-exclusive basis and may condition the pricing on a pass-through of all or part of the non-standard offering extended by HP. 8. PAYMENT AND SECURITY TERMS A. First Tier Reseller will pay invoices within 30 days from the date of the invoice. HP reserves the right to change credit 2 terms at any time when in HP's opinion First Tier Reseller's financial condition or previous payment record so warrants. B. Any First Tier Reseller claim for adjustment of an invoice is agreed to be waived if First Tier Reseller fails to present it within 90 days from date of HP invoice. No claims, credits, or offsets may be deducted from any invoice. C. If First Tier Reseller fails to pay any sum due within 15 days of HP's written notice of delinquency, HP may discontinue performance under this Agreement and may revise credit terms for unshipped orders. 9. ORDERS; SHIPMENTS; CANCELLATIONS AND CHANGES A. First Tier Reseller's orders must comply with the minimum order, release, ship- to and other requirements specified in this Agreement. B. HP will honor electronic, written, fax and telephone orders from First Tier Reseller's approved locations. First Tier Reseller is responsible for ensuring that only authorized employees place, change or delete orders and that the orders conform to all requirements of this Agreement. C. First Tier Reseller's requested date for shipment must be within 90 days after order date. HP reserves the right to schedule and reschedule any order, at HP's discretion, and to decline any order for credit reasons or because the order specifies an unreasonably large quantity or makes an unreasonable shipment request. D. HP will use reasonable efforts to meet scheduled shipment dates. However, HP will not be liable for delay in meeting a scheduled shipment date. E. First Tier Reseller must own more than 50% of its business at each approved location. HP will ship HP Products to First Tier Reseller under HP's standard shipment terms and conditions but only to approved shipment locations authorized by HP on Exhibit L. Shipment locations may be the same as company-owned selling locations. All First Tier Reseller's sales, advertising and promotional activities for HP Products must be conducted from selling locations approved by HP. No sales, advertisement or promotion of HP Products may be conducted from shipment locations which are not also approved company-owned selling locations. However, HP will ship to a maximum of six approved shipment locations and will accept orders only from a single order point. An exception will be made where a Product Exhibit indicates drop shipment is available for a specific HP Product under a special program; drop shipment for those HP Products will be subject to limitations indicated in the Product Exhibits. F. Shipments are subject to availability. If HP products are in short supply, HP will allocate them equitably, at HP's discretion. G. Title to HP Products and risk of loss and damage will pass to First Tier Reseller F.O.B. Destination. 10. SOFTWARE First Tier Reseller is granted the right to distribute software materials supplied by HP only in accordance with the license terms supplied with these materials. First Tier Reseller may alternatively acquire the software materials from HP for its own demonstration purposes in accordance with the terms for use in those license terms. 3 11. TRADEMARKS A. From time to time, HP may authorize First Tier Reseller to display one or more designated HP trademarks. First Tier Reseller may display the trademarks solely to promote HP Products. Any display of the trademarks must be in good taste, in a manner that preserves their value as HP trademarks, and in accordance with standards provided by HP for their display. First Tier Reseller will not use any name or symbol in a way which may imply that First Tier Reseller is an agency or branch of HP; First Tier Reseller will discontinue any such use of a name or mark as requested by HP. Any rights or purported rights in any HP trademarks acquired through First Tier Reseller's use belong solely to HP. B. First Tier Reseller grants HP the non- exclusive, royalty-free right to display First Tier Reseller's trademarks in advertising and promotional material solely for directing prospective purchasers of HP Products to First Tier Reseller's and its Customers' selling locations. Any display of the trademarks must be in good taste, in a manner that preserves their value as First Tier Reseller trademarks, and in accordance with standards provided by First Tier Reseller for their display. Any rights or purported rights in any First Tier Reseller trademarks acquired through HP's use belong solely to First Tier Reseller. 12. WARRANTY A. USER WARRANTY 1. HP Product User Warranties are described on the Product Exhibits and apply only to end- user purchasers of HP Products. HP revisions to the User Warranties will be effective on the date specified by HP. Copies of User Warranties will be supplied with HP Products. Distributor's customers must provide a copy of the associated User Warranty for an HP Product to each end-user prior to sale. 2. HP Product Warranty begins upon purchase by the end-user customer and shall be verified by proof of acquisition by the end user or via HP's electronic warranty verification system. D. HP has no obligation for any claim of infringement arising from: 1. HP's compliance with any designs, specifications or instructions of First Tier Reseller; 2. Modification of the Product by First Tier Reseller or a third party; 3. Use of the Product in a way not specified by HP; or 4. Use of the Product with products not supplied by HP. E. This Section states HP's entire liability to First Tier Reseller and its Customers and end-users for infringement. 15. FIRST TIER RESELLER RECORD- KEEPING A. For contract compliance verification, product safety information, operational problem correction and the like, First Tier Reseller must maintain records of customer purchases of HP hardware products for one year. Records must include customer name, address, phone number, ship-to address, serial number and date of sale of the above products. HP may require monthly reporting incorporating the previous month's data for each approved location. 4 B. HP may require First Tier Reseller to provide HP or HP's designate with HP Product inventory and sales data including, but not limited to, information such as total units of selected HP Products sold and held in all inventory by month for each approved location, in a format specified by HP. HP may require monthly reporting incorporating the previous month's data for each approved location. C. In addition, First Tier Reseller must comply with any reporting requirements for HP programs. D. At HP's discretion and upon notice to First Tier Reseller, HP or HP's designate will be given prompt access during normal business hours, either on site or through other means specified by HP, to First Tier Reseller's customer records, inventory records and other books and records of account specifically related to HP Products and HP believes are reasonably necessary to verify and audit First Tier Reseller's compliance with this Agreement. E. Failure to promptly comply with HP's request will be considered a repudiation of this Agreement justifying HP's termination of this Agreement on 30 days' notice without further cause. F. HP may recover all reasonable actual costs associated with compliance verification procedures from any promotional funds, rebate funds or any other HP accrued funds due First Tier Reseller. G. HP may debit First Tier Reseller for all wrongfully claimed discounts, rebates, promotional allowances or other amounts determined as a result of HP's audit. H. HP may, from time to time, send First Tier Reseller a list of serial numbers of designated Products for which HP tracks unauthorized sales. First Tier Reseller agrees to identify to which Reseller each serial number was shipped and to forward this information to its HP representative within a period of not more than 21 days from the date of HP's notice. I. HP may, from time to time, find it necessary to audit one of First Tier Reseller's Customers for the purpose of determining its Compliance with the terms and conditions or of HP Second Tier Reseller Agreement or VAR Certification. HP will identify for First Tier Reseller: 1. The Customer(s) to be audited; 2. A list, by HP product number, of designated products of concern; 3. The period of time the audit will cover; and 4. A deadline by which HP must receive associated sell-through data from First Tier Reseller. First Tier Reseller agrees to help HP by providing HP, within a designated period of time not to be more than 10 days from the date of HP's notice, a list of the quantities and serial numbers of designated products that have been shipped to the Customer(s) during the audit period. J. First Tier Reseller agrees that HP may recover all reasonable actual costs associated with Customer compliance verification procedures from the reseller(s) HP Advantage program funds, rebate funds or any other HP accrued funds for the reseller(s). 5 16. AMENDMENTS A. From time to time, HP may add products to or delete them from the Product Exhibits or implement or change HP policies or programs at HP's discretion, after reasonable notice to First Tier Reseller. Additionally, HP may give First Tier Reseller 30 days' advance written notice of any other amendment to this Agreement. B. Any amendment will automatically become a part of this Agreement on the effective date specified in the notice. C. Each party agrees that the other has made no commitments regarding the duration or renewal of this Agreement beyond those expressly stated in this Agreement. 17. TERMINATION OF AGREEMENT A. Either party may terminate this Agreement without cause at any time upon 60 days' written notice or with cause at any time upon 30 days' written notice to the other party. B. If neither party gives the other notice of termination or advises the other of its intent not to renew this Agreement, HP may require that First Tier Reseller pay cash in advance for additional shipments during the remaining term, regardless of First Tier Reseller's previous credit status, and may withhold all such shipments until First Tier Reseller pays its outstanding balance. C. Upon termination or expiration of this Agreement for any reason, First Tier Reseller will immediately cease to be an authorized HP First Tier Reseller and will refrain from representing itself as such and from using any HP trademark or trade name. D. Upon any termination or expiration, either party may require that HP purchase from First Tier Reseller any HP products purchased under this Agreement, that are on HP's then current Product Exhibits, which are in their unopened, original packaging and marketable as new merchandise. The repurchase price shall be the lower of either the Net First Tier Reseller price on the date of termination or expiration or First Tier Reseller's original purchase price, in each case less any promotional or other discounts. 6 INTERNATIONAL AMENDMENT TO U.S. VAR CERTIFICATION 1. SCOPE A. This Amendment modifies the U.S. VAR Certification ("Certification"), the terms of which are incorporated in this Amendment by this reference. In the event of any conflict between the terms of the Certification and this Amendment, the terms of this Amendment control. B. VAR shall purchase international versions of the HP Products under its existing agreement with the Supplier, the Certification and this Amendment. 2. VAR RESPONSIBILITIES A. VAR may acquire international versions of HP Products for resale and shipment only to international end-user customers, subject to the following conditions: 1. VAR commits to a minimum annual purchase of $100,000 in U.S. versions of HP Products and $25,000 in international versions of HP Products. 2. VAR's Supplier may purchase the international version of the HP Products identified above at HP's applicable export price existing on the date of order and resell the same to VAR pursuant only to the terms and conditions of the Certification and this Amendment. 3. VAR will export the integrated systems only to end-user customers in the HP approved countries listed on the HP Approved Countries document. 4. VAR shall be responsible for all export permit requirements, export reporting, costs, duties, taxes, freight, and the like, and for conformance to all applicable U.S. export regulations. 5. VAR must integrate any international version of HP Products to be exported outside the United States as part of its value-added solution authorized by HP in its Certification. 6. Value-added integration will be performed at VAR's integration facility based in the United States. 7. WARRANTY The warranty specified for the international version of HP Product(s) purchased at export price is worldwide return to HP. HP Product warranty begins upon purchase by the VAR's end-user customer and shall be verified by proof of acquisition by the end-user. 8. POLICIES AND PROGRAMS VAR agrees that international purchases by VAR will not be entitled to accrual of HP Advantage funds or any other HP promotional funds. 9. VAR RECORD-KEEPING HP and the Supplier from whom VAR purchases the HP products shall have the right to inspect the records of VAR to verify the fulfillment of the terms and conditions of this Amendment on reasonable notice, not to be less than 10 days. 10. VAR RECORD-KEEPING A. At HP's discretion and upon notice to VAR, HP or HP's designate will be given prompt access, either on site or 7 through other means specified by HP, to VAR's customer records, inventory records and other books and records of account which HP believes are reasonably necessary to verify and audit VAR's compliance with this Agreement. Failure to comply with HP's request will be considered a repudiation of this Agreement justifying HP's termination of this Agreement. B. HP may recover all reasonable actual costs associated with compliance verification procedures from VAR's HP Advantage program funds accrued by Suppliers, or by HP, on behalf of VAR. C. HP may debit Supplier and/or VAR for all wrongfully claimed discounts, rebates, promotional allowances or other amounts determined as a result of HP's audit of the VAR. 11. TERMINATION A. Either party may terminate this Agreement without cause at any time upon 30 days' written notice or with cause at any time upon 15 days' written notice. B. Upon termination of this Agreement for any reason, VAR will immediately cease to be an authorized HP VAR and will refrain from representing itself as such and from using any HP trademark or trade name. C. Upon termination of this Agreement, or expiration without renewal of this Agreement, all rights to any accrued HP Advantage program or other promotional funds will automatically lapse. 12. RELATIONSHIP A. VAR's relationship to HP will be that of an independent contractor purchasing HP Products from Suppliers for resale to VAR's customers. VAR and HP agree that this Agreement does not establish a franchise, joint venture or partnership. B. Any commitment made by VAR to its customer with respect to price, quantities, delivery, specifications, warranties, modifications, interfacing capability or suitability will be VAR's sole responsibility and VAR will indemnify HP from liability for any such commitment by VAR. 13. POLICIES AND PROGRAMS A. HP has a co-operative marketing HP Advantage program available for VAR's benefit through authorized Suppliers. B. From time to time, HP may offer or change HP policies and programs, such as but not limited to the HP Advantage program. Premier Support program and other programs and policies, participation in which will be on the current terms and conditions of the policies and programs. 14. GENERAL CONDITIONS A. Neither party may assign any rights or obligation in this Agreement without the prior written consent of the other party. Any attempted assignment will be deemed void. B. No U.S. Government procurement regulations will be deemed included hereunder or binding or either party unless specifically accepted in writing and signed by both parties. C. This is the entire agreement between HP and VAR relating to its subject matter. 8 D. HP may amend this Agreement at any _______________ 30 days notice. E. This Agreement will be governed by the laws of the State of California. F. If any clause of this Agreement is held invalid, the remainder of the Agreement will continue unaffected. 15. MINIMUM COMMITMENT Minimum shipments to VAR for 12 months are $25,000 of HP Products, measured by Distributor's or First Tier Reseller's net price from HP. 9 STATEMENT OF OWNERSHIP: - -----------------------
Form of Organization: (i.e. Corporation, General Partnership, Limited Partnership, Sole Proprietor): ________________________ For a Corporation, specify whether: Publicly Held:___________ Privately Held: _____________________ State of Incorporation/Organization: ________________ Identify Company ownership and management structure as follows (attach additional pages if necessary): - - Sole Proprietor: Identify all owners, officers and ownership percentages held - - Trust: Identify Trustee(s), Administrators and Beneficiaries of Trust - - Partnership: Identify all General Partners, Limited Partners, Officers and ownership percentages held Specify dollar investments of limited partners - - Privately Held Corporation: Identify all shareholders with class and percentage ownership, Officers and Board of Director Members - - Publicly Held Corporation: Identify owners of 20% or more of each class of shares with class and percentage ownership, Officers and Board of Director Members NAMES TITLES OWNERSHIP INTEREST Percentage Ownership Type of Ownership Interest (Dollar Investment in (Assets, Common or Preferred Limited Partners) Shares) _______________________ _______________________ _______________________ __________________________ _______________________ _______________________ _______________________ __________________________ _______________________ _______________________ _______________________ __________________________ _______________________ _______________________ _______________________ __________________________ If Company is 100% owned by another corporation, identify the parent corporation's ownership and management structure above and the identity of the parent corporation below: - ------------------------------------------------------------------------------------------------------------------------------------ Parent/Owner, including DBA(s) - ------------------------------------------------------------------------------------------------------------------------------------ Address ( ) - ------------------------------------------------------------------------------------------------------------------------------------ City State Zip Telephone ( ) - ------------------------------------------------------------------------------------------------------------------------------------ State of Parent/Owner's Incorporation Fax AUTHORIZED SIGNATURES HEWLETT-PACKARD COMPANY - --------------------- ----------------------- - -------------------------------------------- ---------------------------------------------------------------------- Authorized Signature Susan Weatherman Reseller Contracts Manager - -------------------------------------------- Typed Name - -------------------------------------------- ------------------------ ------------------------ Title Effective Date Expiration Date
10 U.S. FIRST TIER RESELLER TABLE OF CONTENTS U.S. FIRST TIER RESELLER AGREEMENT 1. APPOINTMENT 2. STATUS CHANGE 3. FIRST TIER RESELLER RESPONSIBILITIES 4. MULTIPLE AGREEMENT DISCOUNTS 5. VOLUME COMMITMENT LEVELS 6. FIRST TIER RESELLER ORDER MILESTONES 7. PRICES 8. PAYMENT AND SECURITY TERMS 9. ORDERS, SHIPMENTS; CANCELLATIONS AND CHANGES 10. SOFTWARE 11. TRADEMARKS 12 WARRANTY 13. LIMITATION OF REMEDIES AND LIABILITY 14. INTELLECTUAL PROPERTY INDEMNITY 15. FIRST TIER RESELLER RECORD-KEEPING 16. AMENDMENTS 17. TERMINATION OF AGREEMENT 18. RELATIONSHIP 19. POLICIES AND PROGRAMS 20. GENERAL CONDITIONS 21. NOTICES 22. U.S. GOVERNMENT U.S. VAR CERTIFICATION 1. APPOINTMENT 2. VAR RESPONSIBILITIES 3. INTENTIONALLY OMITTED 4. SPECIAL PRICING 5. SOFTWARE 6. TRADEMARKS 7. WARRANTY 8. LIMITATIONS OF REMEDIES AND LIABILITY 9. INTELLECTUAL PROPERTY INDEMNITY 10. VAR RECORD-KEEPING 11. TERMINATION 12. RELATIONSHIP 13. POLICIES AND PROGRAMS 14. GENERAL CONDITIONS 15. SERVICE REQUIREMENTS INTERNATIONAL AMENDMENT TO U.S. VAR CERTIFICATION 1. SCOPE 2. VAR RESPONSIBILITIES 3. INTENTIONALLY OMITTED 4. INTENTIONALLY OMITTED 5. INTENTIONALLY OMITTED 6. INTENTIONALLY OMITTED 7. WARRANTY 8. POLICIES AND PROGRAMS 9. VAR RECORD-KEEPING 11 EXHIBIT U20D/U21D FULL LINE DISTRIBUTOR PRODUCTS DISCOUNT SCHEDULE A. Please select Reseller's volume level on the Exhibit Election section of the Signature Page. LEVEL I - $50,000,000 - 199,999,999 (Orders) LEVEL II - $200,000,000 - and up (Sell-through) B. DISCOUNT SCHEDULE ------------------------------------------ DISCOUNTS ------------------------------------------ VOLUME LEVEL A B C D E ------------------------------------------ LEVEL I 28% 28% 42% 45% 18% ------------------------------------------ LEVEL II 30% 26% 44% 47% 20% ------------------------------------------ C. The capital letter referenced left of the product number on the Product List indicates the applicable Discount column A through E above. D. The products purchased under this Exhibit shall not be included in determining whether the volume level under any other Exhibit to the U.S. First Tier Reseller Agreement or U.S. Distributor Agreement has been satisfied. 12 U.S. DISTRIBUTOR SUMMARY MATRIX January 1, 1997
- --------------------------------------------------------------------------------------------------------------- AGGREGATORS DISTRIBUTORS CALCULATOR OFFICE MACHINE DISTRIBUTORS DISTRIBUTORS - --------------------------------------------------------------------------------------------------------------- Inacom Gates/Arrow Arrowhead Business Arrowhead Business Machines Machines - --------------------------------------------------------------------------------------------------------------- Intelligent Electronics Merisel Common-Wealth Azerty Distributors - --------------------------------------------------------------------------------------------------------------- MicroAge GBC Technologies Douglas Stewart Daisytek - --------------------------------------------------------------------------------------------------------------- Merisel/FAB Avnet/Hall-Mark El Dorado Trading Group New Age Electronics - --------------------------------------------------------------------------------------------------------------- Ingram Alliance Inacom Pro Distributors - --------------------------------------------------------------------------------------------------------------- Tech Data Elect Intelligent Electronics United Stationers - --------------------------------------------------------------------------------------------------------------- MicroAge - --------------------------------------------------------------------------------------------------------------- Neamco - --------------------------------------------------------------------------------------------------------------- Pro Distributors - --------------------------------------------------------------------------------------------------------------- S.P. Richards Company - --------------------------------------------------------------------------------------------------------------- United Stationers - --------------------------------------------------------------------------------------------------------------- Merisel/FAB - ---------------------------------------------------------------------------------------------------------------
13 EXHIBIT U20D/U21D FULL LINE DISTRIBUTOR PRODUCTS LIST --------------------------------------------- CAT QD MO PP SA AP WW W90 DR --------------------------------------------- Q1 @ @ @ @ @ @ @ --------------------------------------------- W1 @ @ @ @ @ @ --------------------------------------------- X1 @ @ @ @ @ @ --------------------------------------------- X2 @ @ @ @ @ @ --------------------------------------------- Y1 @ @ @ @ @ @ --------------------------------------------- Y2 @ @ @ @ @ --------------------------------------------- Y3 @ @ @ @ @ @ --------------------------------------------- QD: Products are designated as "Qualified Distribution Products" (QD). To purchase products from QD product categories, Reseller must have submitted the appropriate Qualified Distribution Application and received approval to order such products. MO: Minimum order is $25; minimum release and ship-to is $25. PP: Products are eligible for Price Protection. SA: Eligible products returned for stock adjustment may not exceed 15% of the previous quarter's invoiced amount of shipments. Restocking charges will apply to returns in any one quarter exceeding 5% of shipments. Such products are eligible for stock adjustment restocking charges of 3% of list price value. AP: Products are eligible for the HP Advantage program. WW: Products are covered by HP's written warranty. W90: Products are covered by HP's standard 90-day warranty. DR: Eligible defective and customer satisfaction returns may not exceed 3% of the invoiced amount of shipments during the previous quarter. (Except that if the total number of defective units exceeds the returns cap percentage, HP shall be obligated to honor the Product warranty for those units). The HP Products listed below are U.S. versions only. Products followed by an "@" symbol are eligible for drop-shipment. 14 EXHIBIT U40A ACCESSORY PRODUCTS DISCOUNT SCHEDULE A. DISCOUNT SCHEDULE --------- DISCOUNTS --------- A B --------- 38% 42% --------- B. The capital letter referenced left of the product number on the Product List indicates the applicable Discount column A through B above. C. The products purchased under this Exhibit shall be included in determining whether the volume level under Product Exhibit U20x, U5xR, U60, U62R or U8xD of the respective Addendum and/or Agreement has been satisfied. 15 EXHIBIT U40C CONSUMABLE PRODUCTS LIST ----------------------------------------------- CAT. MO PP SA AP W90 EOQ1 E0Q2 DR ----------------------------------------------- 01 @ @ @ @ @ @ ----------------------------------------------- 02 @ @ @ @ @ @ @ ----------------------------------------------- 03 @ @ @ @ @ @ @ ----------------------------------------------- MO: Minimum order is $25; minimum release and ship-to is $25. PR: Products are eligible for Price Protection. SA: Eligible products returned for stock adjustment may not exceed 15% of the previous quarter's invoiced amount of shipments. Restocking charges will apply to returns in any one quarter exceeding 5% of shipments. Such products are eligible for stock adjustment restocking charges of 3% of list price. AP: Products are eligible for the HP Advantage program. WW: Products are covered by HP's written warranty. W90: Products are covered by HP's standard 90-day warranty. EOQ1: (Economic Order Quantities) These products are offered in pricing multiples. The first quantity break has 0% discount. EOQ2: (Economic Order Quantities) These products are offered in pricing multiples. Discounts are offered at all quantity breaks. DR: Eligible defective and customer satisfaction returns may not exceed 3% of the invoiced amount of shipments during the previous quarter. (Except that if the total number of defective units exceeds the returns cap percentage, HP shall be obligated to honor the Product warranty for those units). The HP Products listed below are U.S. versions only. Products followed by an "@" symbol are eligible for drop-shipment. 16 EXHIBIT UD CALCULATOR DISTRIBUTOR PRODUCTS DISCOUNT SCHEDULE A. Distributor and HP agree that Distributor's volume level, at Net Distributor price, for HP Products on Exhibit UD for the term of this Addendum is: $1,000,000 - and up B. DISCOUNT SCHEDULE --------------------------- DISCOUNTS --------------------------- A B C D E --------------------------- 35% 40% 38% 20% 3% --------------------------- C. The capital letter referenced left of the product number on the Product List indicates the applicable Discount column A through E above. D. The products purchased under this Exhibit shall not be included in determining whether the volume level under any other Exhibit to the U.S. Reseller Agreement has been satisfied. 17 EXHIBIT U40A ACCESSORY PRODUCTS LIST --------------------------------------------- CAT. MO PP SA AP WW W90 EOQ2 DR --------------------------------------------- 01 @ @ @ @ @ @ --------------------------------------------- 02 @ @ @ @ @ --------------------------------------------- 03 @ @ @ @ @ @ --------------------------------------------- 04 @ @ @ @ @ @ @ --------------------------------------------- MO: Minimum order is $25; minimum release and ship-to is $25. PP: Products are eligible for Price Protection. SA: Eligible products returned for stock adjustment may not exceed 15% of the previous quarter's invoiced amount of shipments. Restocking charges will apply to returns in any one quarter exceeding 5% of shipments. Such products are eligible for stock adjustment restocking charges of 3% of list price. AP: Products are eligible for the HP Advantage program. WW: Products are covered by HP's written warranty. W90: Products are covered by HP's standard 90-day warranty. EOQ2: (Economic Order Quantities) These products are offered in pricing multiples. Discounts are offered at all quantity breaks. DR: Eligible defective and customer satisfaction returns may not exceed 3% of the invoiced amount of shipments during the previous quarter. (Except that if the total number of defective units exceeds the returns cap percentage, HP shall be obligated to honor the Product warranty for those units). The HP Products listed below are U.S. versions only. Products followed by an "@" symbol are eligible for drop-shipment. 18 EXHIBIT U40C CONSUMABLE PRODUCTS DISCOUNT SCHEDULE A. DISCOUNT SCHEDULE DISCOUNTS --------------- A B C --------------- 38% 42% 36% --------------- B. The capital letter referenced left of the product number on the Product List indicates the applicable Discount column A through C above. C. The products purchased under this Exhibit shall not be included in determining whether the volume level under any other Exhibit to the U.S. Reseller Agreement has been satisfied. 19 EXHIBIT UD CALCULATOR DISTRIBUTOR PRODUCTS LIST --------------------------------- CAT MO PP SA AP WW DR --------------------------------- 01 @ @ @ --------------------------------- Y1 @ @ @ @ @ --------------------------------- Z1 @ @ @ @ @ @ --------------------------------- Z2 @ @ @ @ @ @ --------------------------------- Z3 @ @ @ @ --------------------------------- Z4 @ @ @ --------------------------------- MO: Minimum order is $25; minimum release and ship-to is $25. PP: Products are eligible for Price Protection. SA: Eligible products returned for stock adjustment may not exceed 15% of the previous quarter's invoiced amount of shipments. Restocking charges will apply to returns in any one quarter exceeding 5% of shipments. Such products are eligible for stock adjustment restocking charges of 3% of list price value. AP: Products are eligible for the HP Advantage program. WW: Products are covered by HP's written warranty. DR: Eligible defective and customer satisfaction returns may not exceed 3% of the invoiced amount of shipments during the previous quarter. (Except that if the total number of defective units exceeds the returns cap percentage, HP shall be obligated to honor the Product warranty for those units). The HP Products listed below are U.S. versions only. Products followed by an "@" symbol are eligible for drop-shipment 20 EX-10.48 9 FRANCHISE AGREEMENT MicroAge Computer Centers Franchise Agreement TABLE OF CONTENTS -----------------
Section Page - ------- ---- 1. INTRODUCTION.............................................................................................1 2. GRANT OF FRANCHISE.......................................................................................1 3. DEVELOPMENT OF CENTER....................................................................................2 A. CONVERSION OF CENTER............................................................................2 B. CENTER OPENING..................................................................................2 4. COMPANY SUPPORT..........................................................................................2 A. OPERATING MANUAL................................................................................2 B. SUPPORT SERVICES................................................................................2 C. TRAINING........................................................................................3 5. MARKS....................................................................................................3 A. OWNERSHIP AND GOODWILL OF MARKS.................................................................3 B. LIMITATIONS ON FRANCHISEE'S USE OF MARKS........................................................3 C. PROHIBITED USES.................................................................................3 D. DISCONTINUANCE OF USE OF MARKS..................................................................3 6. CONFIDENTIAL INFORMATION.................................................................................4 7. EXCLUSIVE RELATIONSHIP...................................................................................4 8. RELATIONSHIP OF THE PARTIES/INDEMNIFICATION..............................................................4 9. FEES AND PAYMENTS AND SOURCE OF SUPPLY...................................................................5 A. PRODUCT PURCHASES...............................................................................5 B. PRODUCT HOLD/INTEREST ON LATE PAYMENTS..........................................................5 10. OPERATING STANDARDS......................................................................................6 A. AUTHORIZED PRODUCTS AND SERVICES................................................................6 B. PRODUCT ORDERING AND SALES......................................................................6 C. COMPLIANCE WITH LAWS............................................................................6 D. CODE OF ETHICS..................................................................................6 E. MANAGEMENT OF THE CENTER/CONFLICTING AND COMPETING INTERESTS.......................................................................................7 F. INSURANCE.......................................................................................7
i 11. ADVERTISING AND PROMOTION................................................................................7 12. ACCOUNTING, REPORTS AND FINANCIAL STATEMENTS.............................................................7 13. INSPECTIONS AND AUDITS...................................................................................8 14. TRANSFER.................................................................................................8 A. BY THE COMPANY..................................................................................8 B. YOU MAY NOT TRANSFER WITHOUT APPROVAL OF THE COMPANY............................................8 C. CONDITIONS FOR APPROVAL OF TRANSFER.............................................................8 D. TRANSFER TO A CORPORATION OR PARTNERSHIP........................................................9 E. DEATH OR DISABILITY OF FRANCHISEE..............................................................10 F. THE COMPANY'S RIGHT OF FIRST REFUSAL...........................................................10 15. RENEWAL OF FRANCHISE....................................................................................10 A. MUTUAL AGREEMENT TO RENEW......................................................................10 B. RENEWAL AGREEMENTS/RELEASES....................................................................11 16. TERMINATION OF THE FRANCHISE............................................................................11 A. TERMINATION WITHOUT CAUSE......................................................................11 B. TERMINATION BY THE COMPANY.....................................................................11 17. RIGHTS AND OBLIGATIONS UPON TERMINATION OR EXPIRATION OF THE FRANCHISE...............................................................................................12 A. PAYMENT OF AMOUNTS OWED TO THE COMPANY.........................................................12 B. MARKS..........................................................................................12 C. CONFIDENTIAL INFORMATION.......................................................................13 D. COVENANT NOT TO COMPETE........................................................................13 E. CONTINUING OBLIGATIONS.........................................................................13 18. MISCELLANEOUS PROVISIONS................................................................................14 A. JUDICIAL ENFORCEMENT, INJUNCTION AND SPECIFIC PERFORMANCE....................................................................................14 B. ARBITRATION....................................................................................14 C. SEVERABILITY AND SUBSTITUTION OF VALID PROVISIONS..............................................15 D. WAIVER OF OBLIGATIONS..........................................................................15 E. RESERVATION OF RIGHTS..........................................................................15 F. YOU MAY NOT WITHHOLD PAYMENTS DUE THE COMPANY..................................................16 G. RIGHTS OF PARTIES ARE CUMULATIVE...............................................................16 H. WAIVER OF PUNITIVE DAMAGES.....................................................................16 I. WAIVER OF JURY TRIAL...........................................................................16 J. LIMITATION OF CLAIMS...........................................................................16 K. COSTS AND ATTORNEYS' FEES......................................................................16
ii L. GOVERNING LAW..................................................................................17 M. CONSENT TO JURISDICTION AND VENUE..............................................................17 N. FORCE MAJEURE..................................................................................17 O. CONSTRUCTION...................................................................................17 19. NOTICES.................................................................................................18
Exhibits and Attachments - ------------------------ Personal Guaranty State-Specific Riders Exhibit A-2 Statement of Franchisee Exhibit A-3 Franchisee Disclosure Questionnaire (for use in Illinois only) Exhibit A-4 Code of Ethics
iii MICROAGE COMPUTER CENTERS FRANCHISE AGREEMENT ------------------- THIS AGREEMENT (the "Agreement") is made and entered into on ______________, 19___, by and between MICROAGE COMPUTER CENTERS, INC., a Delaware corporation, with its principal office at 2400 South MicroAge Way, Tempe, Arizona 85282-1896 (the "Company") and __________________________________ ________________________________________________________________________ ("you" "your" or "Owner"), a _____________ corporation, whose principal business address is _____________________________________________________________________ _______________________________________________________________________________. 1. INTRODUCTION. ------------- The MicroAge family of companies franchises and operates sales and support locations that specialize in the marketing of computer hardware and software and other high technology products, maintenance and repair services for these products, related consultation services and additional products and services introduced from time to time. These sales locations are known as "MicroAge Computer Centers." The Company owns, uses and licenses certain trademarks, service marks and commercial symbols in the operation and franchising of MicroAge Computer Centers, including the trade and service marks MicroAge(R) and The Solution Center(R), all of which are collectively referred to as the "Marks." MicroAge Computer Centers use the Marks and are operated with certain business formats, systems, methods and standards, all of which may be improved, developed or modified in the future. You own and operate an independent computer sales location and desire to convert this location to a MicroAge Computer Center. You have applied for a franchise to own and operate a MicroAge Computer Center at the location identified above as your principal business address and the application has been approved by the Company based on the representations made in the application and in the Statement of Franchisee attached as Exhibit A-2 or the Franchisee Disclosure Questionnaire attached as Exhibit A-3. 2. GRANT OF FRANCHISE. ------------------- The Company grants you a nonexclusive franchise (the "Franchise") to operate a MicroAge Computer Center at the location specified above (the "Center"), and to use the Marks in its operation for a term of 10 years starting on the date of this Agreement. You will be responsible for converting your existing computer sales location to a MicroAge Computer Center. You may not relocate the Center without the Company's prior written consent, which consent will not be unreasonably withheld, and you will pay all expenses in connection with the relocation, including any expenses incurred by the Company. Termination or expiration of this Agreement constitutes a termination or expiration of the Franchise. 3. DEVELOPMENT OF CENTER. ---------------------- A. CONVERSION OF CENTER. --------------------- The Center must meet the Company's requirements for professional appearance and must comply with all applicable Vendor requirements. You will use, in the development and operation of the Center, only those types of fixtures, equipment and signs that create and enhance the professional appearance of the Center. You will place or display at the premises of the Center (interior and exterior) only those signs, emblems, lettering and logos that are approved by the Company and meet applicable Vendor requirements. Subject to approval by the Company, you may continue to use your prior independent trade name (unless you were licensed to use this name by another franchisor or licensor) provided that the "MicroAge" Mark is always displayed in conjunction with the prior trade name. B. CENTER OPENING. --------------- You may open the Center for business as a MicroAge Computer Center only after the Center meets the Company's appearance requirements and all amounts due to the Company have been paid. 4. COMPANY SUPPORT. ---------------- A. OPERATING MANUAL. ----------------- The Company will provide you, during the term of the Franchise, at least 1 copy of the Company's operating manual (the "Operating Manual," which may be in multiple volumes or provided by electronic means), which may include the following subjects: product ordering and payment policies and procedures; product pricing and fee levels; Marks usage criteria; directory of services; and other information to assist you in the operation, promotion and management of the Center. The Operating Manual is presently published under the name the BUSINESS BUILDER RESOURCE GUIDE. The provisions of the Operating Manual, which may be modified by the Company, constitute provisions of this Agreement. If there is a dispute regarding the contents of the Operating Manual, the master copy maintained by the Company at its principal office will be controlling. The Operating Manual is the Company's property and you must return it to the Company upon termination or expiration of this Agreement. B. SUPPORT SERVICES. ----------------- The Company will provide certain services, information and assistance to you in connection with the operation of the Center: (1) a product ordering system; (2) a product information system; (3) plan and make available regional and national meetings; and (4) other services, information and assistance described in the Operating Manual. In addition, the Company may offer certain services, information and assistance on a fee basis as described in the Operating Manual. 2 C. TRAINING. --------- The Company may, at its option, furnish initial training to you in the operation of a MicroAge Computer Center during times designated by the Company. At the Company's option, training may be furnished at the Company's or your principal offices. You are responsible for any salary, travel and living expenses which you or your employee(s) incur in connection with training. 5. MARKS. ------ A. OWNERSHIP AND GOODWILL OF MARKS. -------------------------------- Your right to use the Marks arises solely from this Agreement. This right is limited to the operation of the Center in compliance with this Agreement and the Operating Manual. Any unauthorized use of the Marks by you will constitute an infringement of the rights of the Company. Your use of the Marks and the goodwill created from this usage will be for the exclusive benefit of the Company. You agree to immediately notify the Company of any apparent infringement of any Mark or claim by any person of any rights in any Mark. All provisions of this Agreement applicable to the Marks will apply to any additional trademarks, service marks and commercial symbols authorized by the Company for your use. B. LIMITATIONS ON FRANCHISEE'S USE OF MARKS. ----------------------------------------- You will use the Marks as the predominant identification of the Center, but you must identify yourself as the independent owner of the Center in the manner prescribed by the Company. You cannot use any Mark as part of any corporate or trade name or with any prefix, suffix or other modifying words, terms, designs or symbols (other than logos licensed to you under this Agreement), or in any modified form. You will display the Marks in the manner prescribed by the Company and will obtain fictitious or assumed name registrations as may be required under applicable law. C. PROHIBITED USES. ---------------- You cannot use any Mark on any product or promotional items offered, sold or distributed by you or in any other manner not expressly authorized in writing by the Company. D. DISCONTINUANCE OF USE OF MARKS. ------------------------------- If the Company decides it is advisable for the Company and/or you to modify or discontinue use of any Mark, and/or use additional or substitute trade or service marks, you must comply within a reasonable time after notice by the Company. 3 6. CONFIDENTIAL INFORMATION. ------------------------- The Company and its related companies possess certain confidential information relating to the operation of MicroAge Computer Centers (the "Confidential Information") and will disclose the Confidential Information to you in the Operating Manual and in providing information, training, services and assistance during the term of the Franchise. You will not acquire any interest in the Confidential Information other than the right to use it during the term of the Franchise and that your use in any other business constitutes an unfair method of competition. The Confidential Information is proprietary, may involve trade secrets of the Company and is disclosed to you solely on the condition that you: (a) do not use the Confidential Information in any other business or capacity; (b) maintain the confidentiality of the Confidential Information during and after the term of the Franchise; (c) do not make unauthorized copies (in written or electronic form) of the Confidential Information; and (d) adopt and implement all procedures prescribed from time to time by the Company to prevent unauthorized use or disclosure of the Confidential Information, including restrictions on disclosure to employees of the Center and the use of nondisclosure and noncompetition agreements with employees who have access to the Confidential Information. 7. EXCLUSIVE RELATIONSHIP. ----------------------- You acknowledge that you could not engage in a Competing Business (defined below) during the term of this Agreement and also faithfully perform your obligations to use your best efforts to promote and enhance the business of the Center and to protect the Confidential Information and the Marks. During the term of this Agreement neither you, nor any of your shareholders or partners (in the event you are doing business as a corporation or partnership), nor any member of your immediate family will: (a) have any direct or indirect controlling ownership interest in any business operating under a name, trademark, logo, symbol or similar identification licensed by or otherwise identifying a competitor of the Company ("Competing Business"), wherever the Competing Business is located; (b) have any other ownership interest whatsoever in any Competing Business, where the Competing Business is located or operating within 50 miles of the Center or any other MicroAge Computer Center; (c) perform services as a director, officer, manager, employee, consultant, representative, agent or otherwise for any Competing Business wherever located; or (d) have any direct or indirect interest in any entity which has granted or is granting franchises or licenses to others to operate a Competing Business. These restrictions will not apply to your ownership of other MicroAge Computer Centers nor to your ownership of securities in a Competing Business if these securities are listed on a stock exchange or traded on the over-the-counter market and represent 1% or less of that class of securities. Further, "Competing Business" shall not include lines of business which you were engaged in prior to the date of this Agreement, as confirmed in writing by you and accepted in writing by the Company. 8. RELATIONSHIP OF THE PARTIES/INDEMNIFICATION. -------------------------------------------- You and the Company are independent contractors, and nothing in this Agreement is intended to make either party an agent, partner or employee of the other party. You will conspicuously identify yourself at the premises of the 4 Center and in all dealings with third parties as the independent owner of the Center under a franchise agreement with the Company and will place other notices of independent ownership on forms, stationery, advertising and other materials as the Company may require. Neither the Company nor you will make any express or implied agreements, warranties or representations, or incur any debt, in the name of or on behalf of the other or represent that the relationship between the parties is other than franchisor and franchisee. The Company will have no liability for any taxes levied upon you, the Center or the Company, in connection with the sales made, services performed or business conducted by you. You will indemnify, defend and hold harmless the Company and its related entities and their shareholders, directors, officers, employees, agents, successors and assignees (the "Indemnified Parties") against any liability for any claims directly or indirectly arising out of the operation of the Center. For purposes of this indemnification, "claims" means and includes all claims, obligations, actual and consequential damages, taxes, attorneys' fees and costs reasonably incurred in the defense of any claim against the Indemnified Parties. The Company will have the right to defend any claims. This indemnity will continue in full force and effect after expiration or termination of this Agreement. 9. FEES AND PAYMENTS AND SOURCE OF SUPPLY. --------------------------------------- A. PRODUCT PURCHASES. ------------------ You are required to purchase from the MicroAge family of companies no less than $100,000 in products (based on invoices to you) during each calendar quarter. You will pay a mark-up or override on all products you purchase from or through the Company, which is referred to as the "Product Fee." The Product Fee may vary from product to product and will be listed in the Operating Manual or electronic price guide. Payment for products will be made no later than the shipment date or on other credit terms described in the Operating Manual and offered by the Company in its sole discretion. The Company has the right to receive commissions, cash or other items of benefit from any of the Company's vendors or other third party providers of goods or services. The Company, or its designee, shall be your primary source for purchase of products. You shall use your best efforts to purchase from the Company your requirements for products available from the Company and listed in the Company's then current price guide. B. PRODUCT HOLD/INTEREST ON LATE PAYMENTS. --------------------------------------- If you are delinquent in payment of amounts due to the Company, you may not be permitted, in the Company's sole discretion, to purchase products from the Company or to utilize the Company's support services. In addition, all amounts you owe the Company and its related companies, will bear interest after due date at the highest applicable legal rate for open account business credit, not to exceed 2% per month. The Company has sole discretion to apply any 5 payments by you to any of your past due indebtedness. This Section 9B does not constitute the Company's agreement to accept payments after they are due or a commitment by the Company to extend credit to or finance your operation of the Center. 10. OPERATING STANDARDS. -------------------- A. AUTHORIZED PRODUCTS AND SERVICES. --------------------------------- In order to maintain the image of MicroAge Computer Centers as professionally operated locations offering, selling and supporting quality computer products and related products and services, you will not offer or sell any products or services other than computer products and related products and services, nor will the Center or its premises be used for any purposes other than the operation of a MicroAge Computer Center in accordance with this Agreement. B. PRODUCT ORDERING AND SALES. --------------------------- Product ordering procedures are described in the Operating Manual. You will comply with all applicable vendor requirements. The Company cannot sell or ship any product to you for which you do not possess dealership authorization from the vendor. The Company will honor all vendor dealership authorization requirements and cannot assure or guarantee that any vendor will continue to authorize the Company's distribution or your sale of any vendor's products. You will sell product only to end-users, to third parties authorized by the applicable vendor, or to another member of the MicroAge network for the limited purpose of assisting that reseller in serving its clients, and this assistance shall not exceed the lesser of $5,000 or 3% of your gross sales per month without the prior written consent of the Company. C. COMPLIANCE WITH LAWS. --------------------- You will secure and maintain in force all required licenses, permits and certificates relating to the operation of the Center and will operate the Center in full compliance with all applicable laws, ordinances and regulations. You will notify the Company in writing within 5 days of the commencement of any action, suit or proceeding, and of the issuance of any order, injunction, award or decree of any court or agency, which may adversely affect your or the Center's operation or financial condition. D. CODE OF ETHICS. --------------- You shall abide by and cause your employees to abide by the "Code of Ethics" adopted (and as amended) by the Company. The Code of Ethics, attached as Exhibit A-4, is a statement of the Company's policies on good business practices, fair dealing, cooperative activities and other matters relating to the operation of MicroAge Computer Centers. 6 E. MANAGEMENT OF THE CENTER/ CONFLICTING AND COMPETING INTERESTS. ------------------------------------ You will at all times faithfully, honestly and diligently perform your obligations under this Agreement, will continuously exert your best efforts to promote and enhance the business of the Center, and will not engage in any other business or activity that requires substantial management responsibilities or otherwise may conflict with your obligations under this Agreement, unless you have obtained prior written approval from the Company in its sole discretion. You will not divert elsewhere any trade or business which could be transacted by you in or from the Center. F. INSURANCE. ---------- You must, at all times during the term of the Franchise, maintain in force at your sole expense, comprehensive public, product and motor vehicle liability insurance against claims for bodily and personal injury, death and property damage caused by or occurring from the operation of the Center or the conduct of business by you pursuant to the Franchise, in the policy amount specified by the Company. All liability insurance policies must name the Company as an additional insured, contain a waiver by the insurance carrier of all subrogation rights against the Company and provide that the Company receive 30 days prior written notice of termination, expiration or cancellation or modification of any policy. Upon 30 days prior notice to you, the Company may increase the minimum protection requirement as of the renewal date of any policy, and require different or additional kinds of insurance at any time. You must furnish to the Company annually a copy of the certificate of or other evidence of the renewal or extension of each insurance policy. 11. ADVERTISING AND PROMOTION. -------------------------- You will list and advertise the Center in the principal regular (White Pages) telephone directory distributed within your primary trading area. Prior to their use by you, samples of all advertising and promotional materials not prepared or previously approved by the Company must be submitted to the Company for approval, which approval will not be unreasonably withheld. If you have not received written disapproval within 5 days from the date of receipt by the Company of the materials, the Company will be deemed to have given the required approval. To safeguard against misrepresentations and to protect the integrity of the MicroAge Computer Center Ne work, and without limiting any other remedies available to the Company, the Company may require that any non-approved advertising and promotional material be changed, recalled or removed from circulation at your expense. 12. ACCOUNTING, REPORTS AND FINANCIAL STATEMENTS. --------------------------------------------- You will establish and maintain, at your own expense, an automated accounting and record keeping system conforming to the requirements and formats prescribed by the Company. Upon written request, you will furnish reports and financial statements to the Company in the formats and on a periodic basis reasonably prescribed by the Company. 7 13. INSPECTIONS AND AUDITS. ----------------------- The Company or its designated agents will have the right, at any reasonable time upon prior notice, to inspect the Center and its equipment, supplies and inventory and to audit your books and records, including inventory records, to insure conformity and compliance with the Company's standards and specifications as described in this Agreement and the Operating Manual. You shall cooperate with the Company in all inspections and audits. 14. TRANSFER. --------- A. BY THE COMPANY. --------------- This Agreement and the Franchise is fully transferable by the Company and will be for the benefit of any transferee or other legal successor to the interest of the Company in this Agreement. B. YOU MAY NOT TRANSFER WITHOUT APPROVAL OF THE COMPANY. -------------------------------- The rights and duties created by this Agreement are personal to you (or, if you are conducting business as a corporation or a partnership, to the "Owners") and the Company has granted the Franchise in reliance upon your individual or collective character, skill, aptitude, attitude, business ability and financial capacity. Accordingly, neither this Agreement, the Franchise, the Center (or any interest therein), the assets of the Center, nor any part or all of your ownership, may be transferred without the prior written approval of the Company, which approval will not be unreasonably withheld. Any transfer without approval will constitute a breach of this Agreement and be void and of no effect. As used in this Agreement, the term "transfer" means and includes the voluntary, involuntary, direct or indirect assignment, sale, gift or other transfer by you (or any of the Owners) of any interest in: (1) this Agreement; (2) the Franchise; (3) your ownership; (4) the Center; or (5) the assets of the Center, including without limitation, any dealer authorizations. C. CONDITIONS FOR APPROVAL OF TRANSFER. ------------------------------------ If you (and, if you are a corporation or partnership, the Owners) are in full compliance with this Agreement, the Company will not unreasonably withhold its approval of a transfer that meets all of the applicable requirements of this Section 14C. If the transfer is of the Franchise or a controlling interest, or is 1 of a series of transfers which, in the aggregate, constitute the transfer of the Franchise or a controlling interest, all of the following conditions must be met prior to, or concurrently with, the effective date of the transfer: (1) the transferee must meet the Company's standards for MicroAge Computer Center franchisees; 8 (2) you must pay all amounts due and owing the Company, its related companies and third-party creditors which are then due and unpaid; (3) the transferee must agree to execute the Company's then current standard franchise agreement; (4) you or the transferee must pay the Company 50% of the initial franchise fee, if any, then charged by the Company for MicroAge Computer Center franchises; (5) you (and the Owners) and the Company must execute a mutual general release, in form satisfactory to the Company, of any and all claims either party may have against the other and their respective related companies and their officers, directors, employees and agents; (6) you must provide the Company with a copy of the final purchase contract relating to the proposed transfer with all supporting documents and schedules; and (7) you and the Owners must execute a noncompetition covenant in favor of the Company and the transferee agreeing that, for a period of 6 months commencing on the effective date of the transfer, you, the Owners and members of your immediate family and each of the Owner's immediate families will not hold any direct or indirect interest as a disclosed or beneficial owner, investor, partner, director, officer, employee, consultant, representative or agent, or in any other capacity, in any Competing Business located or operating within a radius of 50 miles of the Center or of any other MicroAge Computer Center in operation or under construction on the effective date of transfer, or in any entity which is granting franchises or licenses to others to operate any Competing Business. If the proposed transfer is to or among the Owners, Subparagraph (4) of the above requirements will not apply. D. TRANSFER TO A CORPORATION OR PARTNERSHIP. ----------------------------------------- If you are in full compliance with this Agreement, the Company will not unreasonably withhold its approval of a proposed assignment or transfer of this Agreement and the Franchise to a corporation or partnership which conducts no business other than the Center and in which you maintain management control and own and control 67 % of the general partnership interest or equity and voting power of all issued and outstanding capital stock. Transfers of shares or partnership interests in the corporation or partnership will be subject to the provisions of this Section 14D. You will remain personally liable under this Agreement as if the transfer to the corporation or partnership has not occurred. 9 E. DEATH OR DISABILITY OF FRANCHISEE. ---------------------------------- Upon your death or permanent disability or, if you are a corporation or partnership, the owner of a controlling interest in you, the executor, administrator, conservator or other personal representative of such person, within a reasonable time, must assign his interest in the Franchise or you to a third party approved by the Company. The disposition of this Agreement and the Franchise must be completed within a reasonable time, not to exceed 6 months from the date of death or permanent disability and is subject to all of the terms and conditions of transfer set forth in this Section 14. Failure to so dispose of your interest or the interest of the principal Owner within said period of time will constitute a breach of this Agreement. F. THE COMPANY'S RIGHT OF FIRST REFUSAL. ------------------------------------- If you (or the Owners) at any time determine to sell an interest in this Agreement, the Franchise, the Center, the assets of the Center or an ownership interest in you, you must obtain a bona fide, executed written offer and an earnest money deposit of at least 10% of the offering price from a responsible and fully disclosed purchaser and must submit a true and correct copy of the offer to the Company. The Company will have the right, exercisable by written notice delivered to you (or the Owners) within 30 days from the date of delivery of the offer to the Company, to purchase this interest in this Agreement, the Franchise, the Center, the assets of the Center or an ownership interest in you for the price and on the terms and conditions contained in the offer (provided that the Company may substitute cash for any proposed form of payment). If the Company does not exercise its right of first refusal, you (or the Owners) may complete the sale on the terms of the offer, subject to the Company's approval of the purchaser as provided in Sections 14B and 14C. If the sale to this purchaser is not completed within 120 days after delivery of the offer to the Company, or there is a material change in the terms of the sale, the Company will again have a right of first refusal. 15. RENEWAL OF FRANCHISE. --------------------- A. MUTUAL AGREEMENT TO RENEW. -------------------------- If, upon expiration of the initial term of the Franchise, you have substantially complied with all provisions of this Agreement, you may request renewal of the Franchise for an additional term equal to the customary initial term granted under the Company's then current form of franchise agreement. Your request to renew must be in writing and received by the Company at least 180 days but no more than 270 days before the expiration of the initial term of this Agreement. The Company, in its sole discretion, may choose to accept or deny your request. If the Company chooses to accept your request for renewal, the Company will send you written notice of the acceptance within 30 days from receipt of your request. If the Company does not send you an acceptance notice, then the Company will be deemed to have denied the request for renewal. 10 B. RENEWAL AGREEMENTS/RELEASES. ---------------------------- To renew the Franchise, the Company and you (and the Owners) must execute the current form of franchise agreement and ancillary agreements as are then used by the Company in offering franchises for MicroAge Computer Centers (with appropriate modifications to reflect that it is a renewal franchise). The renewal agreements may contain provisions substantially different from this Agreement. You (and the Owners) and the Company must also execute a mutual general release, in form satisfactory to the Company, of all claims either party may have against the other and their respective related companies and their officers, directors, employees and agents. Failure by you (and the Owners) to sign the agreement(s) and release(s) within 60 days after delivery to you will be deemed an election by you not to renew the Franchise. 16. TERMINATION OF THE FRANCHISE. ----------------------------- A. TERMINATION WITHOUT CAUSE. -------------------------- Both you and the Company will have the right to terminate this Agreement, without cause, on 180 days' notice to the other party; however, if you obtained dealer status authorization from IBM, Apple, Compaq or Hewlett-Packard during the term of this Agreement, you may terminate without cause only after 12 months' prior notice. If any law, statute, regulation, code or governmental authority prohibit the Company from terminating under this Section 16A, then you will not have any right to terminate under this Section 16A. If the Agreement is terminated under this Section 16A, you (and the Owners) and the Company will execute a mutual general release, in form satisfactory to the Company and effective as of the date of termination, of any and all claims either party may have against the other and their respective related companies and their officers, directors, employees and agents. B. TERMINATION BY THE COMPANY. --------------------------- The Company will have the right to terminate this Agreement effective upon delivery of notice of termination to you, if you (or the Owners): (1) abandons or fails actively to operate the Center for 3 consecutive business days unless the Center has been closed for a purpose approved by the Company; (2) have made any material misrepresentation or omission in your application for the Franchise; (3) are convicted of, or plead, or have pleaded no contest to a felony or other crime or offense; (4) violate the restrictions on competition described in Section 7; (5) fail to meet the minimum quarterly dollar requirement for the purchase of products from the Company; (6) make an unauthorized transfer as described in Section 14; (7) make any unauthorized use or disclosure of any Confidential Information; (8) fail to make payment of any amounts due the Company or its related companies hereunder and do not correct this failure within 10 days after written notice of failure is delivered to you; (9) fail to purchase from the Company as your primary source of supply as described in Section 9A; (10) fail to comply with any other provision of this Agreement and do not: (a) correct this failure within 5 days if the failure relates to the use of any Mark, otherwise 30 days after written notice of the failure to comply is delivered to you or (b) provide proof acceptable to the 11 Company of efforts which are reasonably calculated to correct the failure if the failure cannot reasonably be corrected within 30 days after written notice of the failure to comply is delivered to you; or (11) fail on 2 or more separate occasions within any period of 12 consecutive months or on 3 occasions during the term of this Agreement to submit when due reports or other data, information or supporting records or to pay amounts due to the Company or its related companies or otherwise fail to comply with this Agreement, whether or not these failures to comply are corrected after notice is delivered to you. 17. RIGHTS AND OBLIGATIONS UPON TERMINATION OR EXPIRATION OF THE FRANCHISE. ------------------------------------------------ A. PAYMENT OF AMOUNTS OWED TO THE COMPANY. --------------------------------------- You will pay to the Company within 15 days after the effective date of termination or expiration of the Franchise, or any later date that the amounts due are determined, amounts due for products you have purchased from the Company or its related companies, interest due and all other amounts owed to the Company and its related companies which are then unpaid. B. MARKS. ------ You agree that, upon the termination or expiration of the Franchise, you will: (1) not directly or indirectly, at any time or in any manner, identify yourself or any business as a current or former MicroAge Computer Center, or as a franchisee, licensee or dealer of or as otherwise associated with the Company, or use any Mark, any colorable imitation thereof or other indicia of a MicroAge Computer Center in any manner or for any purpose, or utilize any trade name, trade or service mark or other commercial symbol that suggests or indicates a connection or association with the Company; (2) return to the Company (or destroy at the Company's direction) all signs, sign-faces, catalogues, forms, invoices and other materials containing any Mark and allow the Company to remove all of these items from the Center; (3) take any action required to cancel all fictitious or assumed name registrations relating to your use of any Mark; (4) notify the telephone company and all listing agencies of the termination or expiration of your right to use any regular, classified or other telephone directory listings associated with any Mark and to authorize transfer of same to or at the direction of the Company. If you fail to so notify the telephone company and all listing agencies, the Company has the right to notify these parties and to take whatever action necessary to change the listings; and 12 (5) furnish to the Company, within 60 days after the effective date of termination or expiration, evidence satisfactory to the Company of your compliance with the foregoing obligations. C. CONFIDENTIAL INFORMATION. ------------------------- Upon termination or expiration of the Franchise, you will immediately cease to use the Confidential Information of the Company disclosed to you pursuant to this Agreement and return to the Company all copies of the Operating Manual (whether in written form or in other media) which have been provided to you by the Company. D. COVENANT NOT TO COMPETE. ------------------------ Upon termination or expiration of this Agreement, you and the Owners agree that, for a period of 6 months commencing on the effective date of termination or the date on which you cease to conduct business, whichever is later, neither you nor the Owners will have any direct or indirect interest (through a member of your immediate family or the immediate family of the Owners or otherwise) as a disclosed or beneficial owner, investor, partner, director, officer, employee, consultant, representative or agent or in any other capacity in: (1) any Competing Business located or operating at or from the premises of the Center; (2) any Competing Business located or operating within a radius of 50 miles of the premises of the Center or any other MicroAge Computer Center in operation or under construction on the effective date of termination; or (3) any entity which is granting franchises or licenses to others to operate a Competing Business. You and the Owners acknowledge that you both possess skills and abilities of a general nature and have other opportunities for exploiting these skills and that enforcement of the covenants made in this Section 17D will not deprive any of you of your personal goodwill or ability to earn a living. This Section 17D will not apply to ownership of shares of a class of securities of a Competing Business listed on a stock exchange or traded on the over-the-counter market that represent 1% or less of the number of shares of that class of securities issued and outstanding. E. CONTINUING OBLIGATIONS. ----------------------- All obligations of the Company, you or the Owners, which expressly or by their nature survive the expiration or termination of this Agreement, will continue in full force and effect subsequent to its expiration or termination until they are satisfied in full or expire. 13 18. MISCELLANEOUS PROVISIONS. ------------------------- A. JUDICIAL ENFORCEMENT, INJUNCTION AND SPECIFIC PERFORMANCE. ------------------------- The Company will be entitled, without bond, to the entry of temporary, preliminary and permanent orders of specific performance enforcing the provisions of this Agreement or any other related agreement relating to: your use of the Marks; the non-competition restrictions applicable to you or the Owners; your obligations upon termination or expiration of this Agreement; and transfer or attempted transfer of this Agreement, the Franchise, the Center, the assets of the Center or your ownership. If the Company secures any injunction or order of specific performance, you will pay to the Company an amount equal to the aggregate of its costs of obtaining this relief, including, without limitation, reasonable attorneys' fees, costs and expenses as provided in Section 18K, and any damages incurred by the Company as a result of the breach of any provision. B. ARBITRATION. ------------ ALL CONTROVERSIES, DISPUTES OR CLAIMS ARISING BETWEEN THE COMPANY, ITS OFFICERS, DIRECTORS, AGENTS, EMPLOYEES AND ATTORNEYS (IN THEIR REPRESENTATIVE CAPACITY) AND YOU (THE OWNERS AND GUARANTORS, IF APPLICABLE) ARISING OUT OF OR RELATED TO: (1) THIS AGREEMENT OR ANY OF ITS PROVISIONS OR ANY RELATED AGREEMENT; (2) THE RELATIONSHIP OF THE PARTIES; OR (3) THE VALIDITY OF THIS AGREEMENT OR ANY RELATED AGREEMENT, WILL BE SUBMITTED FOR ARBITRATION TO BE ADMINISTERED BY THE PHOENIX OFFICE OF THE AMERICAN ARBITRATION ASSOCIATION ON DEMAND OF EITHER PARTY, UNLESS THE COMPANY ELECTS TO ENFORCE THIS AGREEMENT OR ANY OTHER RELATED AGREEMENT BY JUDICIAL PROCESS. THE ARBITRATION PROCEEDINGS WILL BE CONDUCTED IN PHOENIX, ARIZONA AND, EXCEPT AS OTHERWISE PROVIDED IN THE AGREEMENT, WILL BE CONDUCTED IN ACCORDANCE WITH THE THEN CURRENT COMMERCIAL ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION. THE ARBITRATOR WILL HAVE THE RIGHT TO AWARD OR INCLUDE IN HIS AWARD ANY RELIEF WHICH HE DEEMS PROPER IN THE CIRCUMSTANCES, INCLUDING WITHOUT LIMITATION, MONEY DAMAGES (WITH INTEREST ON UNPAID AMOUNTS FROM DATE DUE), SPECIFIC PERFORMANCE, INJUNCTIVE RELIEF, AND ATTORNEYS' FEES AND COSTS IN ACCORDANCE WITH SECTION 18K. THE AWARD AND DECISION OF THE ARBITRATOR WILL BE CONCLUSIVE AND BINDING UPON ALL PARTIES AND JUDGMENT UPON THE AWARD MAY BE ENTERED IN ANY COURT OF COMPETENT JURISDICTION. THE PARTIES FURTHER AGREE TO BE BOUND BY THE PROVISIONS OF ANY APPLICABLE LIMITATION ON THE PERIOD OF TIME IN WHICH THE CLAIMS MUST BE BROUGHT. THE PARTIES FURTHER AGREE THAT, IN CONNECTION WITH ANY ARBITRATION PROCEEDING, EACH WILL FILE ANY 14 COMPULSORY COUNTERCLAIM (AS DEFINED BY RULE 13 OF THE FEDERAL RULES OF CIVIL PROCEDURE) WITHIN 30 DAYS OF THE DATE OF THE FILING OF THE CLAIM TO WHICH IT RELATES. THIS SECTION 18B WILL CONTINUE IN FULL FORCE AND EFFECT SUBSEQUENT TO AND NOTWITHSTANDING EXPIRATION OR TERMINATION OF THIS AGREEMENT. YOU AND THE COMPANY AGREE THAT ARBITRATION WILL BE CONDUCTED ON AN INDIVIDUAL, NOT A CLASS WIDE BASIS. C. SEVERABILITY AND SUBSTITUTION OF VALID PROVISIONS. -------------------------------------------------- All provisions of this Agreement are severable and this Agreement will be interpreted and enforced as if all completely invalid or unenforceable provisions were not contained in this Agreement, and partially valid and enforceable provisions will be enforced to the extent valid and enforceable. To the extent that Section 7, Section 14C(7) or Section 17D is deemed unenforceable by virtue of its scope in terms of area or length of time but may be made enforceable by reductions of either or both you and the Company agree that same will be enforced to the fullest extent permissible under the laws and public policies applied in the jurisdiction in which enforcement is sought. If any applicable law or rule of any jurisdiction requires a greater prior notice of the termination of or refusal to renew this Agreement than is required in this Agreement or the taking of some other action not required under this Agreement or if under any applicable and binding law or rule of any jurisdiction, any provision of this Agreement is invalid or unenforceable, the prior notice and/or other action required by this law or rule shall be substituted or the invalid or unenforceable provision will be modified to the extent required to be valid and enforceable. Any modifications to this Agreement will be effective only in the applicable jurisdiction and will be enforced as originally made and entered into in all other jurisdictions. D. WAIVER OF OBLIGATIONS. ---------------------- The Company and you may by written instrument unilaterally waive any obligation of or restriction upon the other under this Agreement. No acceptance by the Company of any payment by you or any other person or entity and no failure, refusal or neglect of the Company or you to exercise any right under this Agreement or to insist upon full compliance by the other with its obligations will constitute a waiver of any provision of this Agreement. E. RESERVATION OF RIGHTS. ---------------------- The Company and its related companies retain the right to: (1) sell the products and services authorized for MicroAge Computer Centers under the Marks and other trademarks and service marks, through similar or dissimilar channels of distribution, and pursuant to any terms and conditions the Company deems appropriate; (2) sell any other products or services under the Marks; (3) own, operate or franchise MicroAge Computer Centers or other computer sales businesses at locations as the Company, in its sole discretion, deems appropriate; and (4) offer other franchise programs which may allow for purchases of differing product lines. 15 F. YOU MAY NOT WITHHOLD PAYMENTS DUE THE COMPANY. ------------------------- You will not withhold payment of any amount owed to the Company or its related companies on grounds of the alleged nonperformance by the Company of any of its obligations under this Agreement. G. RIGHTS OF PARTIES ARE CUMULATIVE. --------------------------------- All rights under this Agreement are cumulative and no exercise or enforcement of any right or remedy will preclude the exercise or enforcement by the Company or you of any other right or remedy under this Agreement or which the Company or you are entitled by law to enforce. H. WAIVER OF PUNITIVE DAMAGES. --------------------------- The Company and you hereby waive to the fullest extent permitted by law any right to or claim for any punitive or exemplary damages against the other and agree that, in the event of a dispute between them, each will be limited to the recovery of actual damages. I. WAIVER OF JURY TRIAL. --------------------- The Company and you irrevocably waive trial by jury in any action, proceeding or counterclaim, whether at law or in equity, brought by either of them. J. LIMITATION OF CLAIMS. --------------------- Any and all claims arising out of or relating to this Agreement or the relationship of the parties in connection with your operation of the Center will be barred unless an action or proceeding is commenced within 1 year from the date you or the Company knew or, by the exercise of reasonable diligence, should have known of the facts giving rise to these claims. K. COSTS AND ATTORNEYS' FEES. -------------------------- If a claim for amounts you owe the Company or its related companies is asserted in any legal proceeding before a court of competent jurisdiction or an arbitrator, or if the Company or you are required to enforce this Agreement in a judicial or arbitration proceeding, the party prevailing in the proceeding will be entitled to recover from the other its costs and expenses, including reasonable accounting, paralegal, legal, expert witness, attorneys' fees and arbitrator fees, whether incurred prior to, in preparation for or in contemplation of the filing of any proceeding. If the Company is required to engage legal counsel in connection with any failure by you to pay when due amounts due the Company or to submit when due any reports, information or supporting records, or in connection with any failure to otherwise comply with this Agreement, you will reimburse the Company for any of the above listed costs and expenses incurred by it. 16 L. GOVERNING LAW. -------------- THIS AGREEMENT, THE FRANCHISE AND THE RELATIONSHIP OF THE PARTIES WILL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ARIZONA, EXCEPT TO THE EXTENT GOVERNED BY THE UNITED STATES TRADEMARK ACT OF 1946 (LANHAM ACT, 15 U.S.C. ss.ss.1051 ET SEQ.) AND EXCEPT THAT ALL ISSUES RELATING TO ARBITRABILITY OR THE ENFORCEMENT OR INTERPRETATION OF THE AGREEMENT TO ARBITRATE DESCRIBED IN SECTION 18B WILL BE GOVERNED BY THE UNITED STATES ARBITRATION ACT (9 U.S.C. ss.1 ET. SEQ.) AND THE FEDERAL COMMON LAW RELATING TO ARBITRATION. M. CONSENT TO JURISDICTION AND VENUE. ---------------------------------- THE COMPANY MAY INSTITUTE ANY ACTION AGAINST YOU ARISING OUT OF OR RELATING TO THIS AGREEMENT (WHICH IS NOT REQUIRED TO BE ARBITRATED) IN ANY STATE OR FEDERAL COURT OF GENERAL JURISDICTION IN THE COUNTY OF MARICOPA IN THE STATE OF ARIZONA, AND YOU IRREVOCABLY SUBMIT TO THE JURISDICTION OF THESE COURTS AND WAIVE ANY OBJECTION YOU MAY HAVE TO EITHER THE JURISDICTION OR VENUE OF ANY COURT. N. FORCE MAJEURE. -------------- Neither the Company nor you will be liable for loss or damage or deemed to be in breach of this Agreement if its failure to perform its obligations results from: (1) transportation shortages, inadequate supply of labor, material or energy, or the voluntary foregoing of the right to acquire or use any of the foregoing in order to accommodate or comply with the orders, requests, regulations, recommendations or instructions of any federal, state or municipal government or any department or agency; (2) compliance with any law, ruling, order, regulation, requirement or instruction of any federal, state or municipal government or any department or agency; (3) acts of God; (4) fires, strikes, embargoes, war or riot; or (5) any other similar event or cause. Any delay resulting from any of said causes will extend performance or excuse performance, in whole or in part, as may be reasonable. O. CONSTRUCTION. ------------- The preambles are a part of this Agreement, which constitutes the entire agreement of the parties, and there are no other oral or written understandings or agreements between the Company and you relating to the subject matter of this Agreement. This Agreement may not be modified except in a writing signed by both parties. This Agreement is binding upon the parties and their respective heirs, assigns and successors in interest. The headings of the several sections and paragraphs are for convenience only and do not define, limit or construe the contents of any section or paragraph. The term "you" is applicable to one or more persons, a corporation or a partnership, as the case 17 may be, and the singular usage includes the plural and the masculine and neuter usages include the other and the feminine. References to "you" applicable to an individual or individuals means the principal owner or owners of the equity or operating control of you if you are a corporation or partnership. Reference to "immediate family" means parents, spouses, offspring and siblings, and the parents, offspring and siblings of spouses. 19. NOTICES. -------- All written notices and reports permitted or required to be delivered by this Agreement or the Operating Manual will be deemed so delivered at the time delivered by hand, 1 business day after being placed in the hands of a commercial courier service or United States Postal Service for overnight delivery or 3 days after placed in the Mail by Registered or Certified Mail, Return Receipt Requested, postage prepaid and addressed to the party to be notified at its most current principal business address of which the notifying party has been notified. 18 STATEMENT OF FRANCHISEE MicroAge Computer Centers, Inc. ("we", "us" or "our") and _____________ ______________________________________________________ ("you" or "your") plan to enter into a Franchise Agreement for the operation of a MicroAge Computer Center. It is our policy to verify that you are not relying upon any oral, written or visual statements, representations, promises or assurances relating to a MicroAge Computer Center that we have not authorized. Therefore, we want you to read the following statements and provide the necessary responses, where indicated, to the statements. 1. You understand the business risks inherent in the ownership, development and operation of any business. You also know that the success or failure of the franchise depends in large part upon your skills and abilities, as well as competition, interest rates, the economy, inflation, labor and supply costs, lease terms and the market place. You are aware that the success of the venture involves business risk and is dependent upon your ability as an independent businessman. 2. You have received and personally read and reviewed and understand the Franchise Agreement and its attachments. You agree that we have given you ample time and opportunity to consult with your advisors about the potential benefits and risks associated with operating a MicroAge Computer Center and entering into a Franchise Agreement. You have received and read and understand the Franchise Offering Circular prepared by us, and acknowledge that we have not made any oral, written or visual claims, representations, promises, agreements, contracts, commitments, understandings or statements which contradict or are inconsistent with and not contained in the Franchise Offering Circular, except for the following (if no exceptions, leave the following lines blank): ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ 3. The decision to join the MicroAge network is not as a result of any oral, written or visual representations, assurances, warranties, guarantees or promises made by us or any of our directors, officers, employees or agents (including any franchise broker) as to the likelihood of success of the franchise. 4. You agree that you have not received or relied upon, any information, representations, warranties, guarantees, inducements, promises or agreements, express or implied, orally or otherwise, made by us or any of our directors, officers, employees or agents including any franchise broker) concerning the actual, average or projected sales, revenues, profits, earnings or likelihood of success that you might expect to achieve from operating a MicroAge Computer Center that are contrary to the statements made in the Franchise Offering Circular, except as follows (if no exceptions, leave the following lines blank): ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ 5. You agree that you have not received or relied upon, any promises, agreements, contracts, commitments, representations, understandings, "side deals" or other assurances, express or implied, orally or otherwise, with respect to any matter concerning advertising, marketing, media support, market penetration, training, support service or assistance that is contrary to the statements made in the Franchise Offering Circular, except the following (if no exceptions, leave the following lines blank): ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ [The remainder of this page has been intentionally left blank.] 2 FRANCHISEE If a corporation: ---------------------------------------- By: ------------------------------------- Title: President If an individual: ---------------------------------------- , individually -------------------------- [Print Name] ---------------------------------------- , individually -------------------------- [Print Name] ---------------------------------------- , individually -------------------------- [Print Name] This Statement was received by MicroAge Computer Centers, Inc. on _______________________, 19___. MicroAge Legal Department Approval: By: ----------------------------- Title: -------------------------- 3 EX-10.49 10 PURCHASING AGREEMENT PURCHASING AGREEMENT TERMS & CONDITIONS 1. Agreement to Purchase. MICROAGE COMPUTER CENTERS, INC. (the "Company") distributes and sells to authorized customers, computer hardware and related products (collectively the "Products") supplied by various vendors ("Vendors"). The "Purchaser" (identified on the Application and below) agrees to purchase and resell the Products in accordance with the terms and conditions of this Agreement and the Company's general policies and procedures as outlined in the Price Guide and the Business Builder Resource Guide (collectively the "BBRG"), subject to, and contingent upon, availability of the Product and receipt by the Company of Vendor authorization if required. 2. Business Location and Name. The Company shall ship all Products to the address designated by the Purchaser. The Purchaser shall notify the Company of any change in Purchaser's business location or business name. Until a Vendor which requires authorization provides the Company with approval to do so, the Company shall not be obligated to ship to the new location or business name. 3. Product Ordering and Shipment Terms and Conditions. The Company's general policies and procedures as outlined in the BBRG shall contain the terms and conditions by which the Products shall be ordered and shipped. The Company shall have the right to allocate its available products among its customers in such manner as the Company deems equitable. The Purchaser shall comply with the terms of this Agreement, the general policies and procedures as outlined in the BBRG, and the standards and specifications established by its Vendors, as each may be modified from time to time. 4. Product Cost. The purchase price for the Products and other terms and conditions of sale shall be as set forth in the applicable BBRG. The Purchaser shall make payment to the Company as outlined in the BBRG. The Company may grant, modify, or revoke credit in the Company's sole discretion. Also, in its sole discretion, the Company may modify the purchase price for the Products or the time or manner of payment and/or invoicing procedures in accordance with policies and procedures announced periodically or as contained in the general policies and procedures as outlined in the BBRG. Delinquent payments shall be subject to a service charge, of the lesser of one and one-half percent (1-1/2%) or the highest applicable legal rate allowed, on the delinquent amount due per month, until paid. Should the Purchaser become delinquent in any payment due the Company or its affiliates, the Company may in its sole discretion (with or without notice) suspend acceptance of orders from, or shipments to, the Purchaser. 5. Independent Businessperson. The parties agree that each of them is an independent business and that their only relationship is by virtue of this Agreement. Neither party is liable or responsible for each other's debts or obligations. The Company and the Purchaser agree that neither of them will hold itself out to be the agent, partner, franchisee, joint venturer, employer or related party of the other. 6. Indemnification. The Purchaser shall indemnify and hold harmless the Company from all fines, suits, proceedings, claims, demands or action of any kind or nature, or from any third party whomsoever, arising or growing out of, or otherwise connected with, the Purchaser's business. 7. Price Guide. The BBRG may be published in one or more media, including printed and electronic. The Company reserves the right to change the policies and procedures outlined in the BBRG, which changes shall be effective when notice shall have been sent to the Purchaser. The master copy of the BBRG maintained by the Company at its principal office shall be controlling in the event of a dispute relative to the content of any provision therein. 8. Purchaser Criteria. The Purchaser acknowledges and represents that: (i) its execution of this Agreement does not violate the terms of any other dealer/distributor agreement it is a party to; (ii) at no time during discussions concerning this Agreement did the Company induce the Purchaser to terminate or impair any existing contract it may have; and (iii) the Purchaser represents that it possesses any authorization required by the Vendors for the sale of the Products. The Purchaser shall maintain said Vendor authorization(s) in good standing during the terms of this Agreement. 9. Proprietary Markets and Trademarks. The Purchaser acknowledges that the Company's trademarks, including without limitation, MICROAGE and ecAdvantage, are the Company's sole and exclusive property, and that the Purchaser is specifically prohibited from using the Company's trademarks in any manner or for any purpose. 10. Mutual Right to Terminate. Either party may terminate this Agreement at any time, with or without cause, and in its sole and absolute discretion, upon thirty (30) days' prior written notice to the other party. This Agreement shall terminate immediately upon the expiration or termination of the master vendor agreement between the Company and the Vendor(s). Upon any termination or expiration of the Agreement, each party shall pay to the other all amounts or accounts payable then owed and unpaid between the parties, if any, within fifteen (15) calendar days of the effective date of such termination or expiration. 11. Assignment. The Purchaser may not sell, transfer or assign this Agreement, in whole or in part, or any of the rights hereunder unless the Purchaser obtains the Company's prior written consent. 12. Confidentiality. The Purchaser shall maintain the confidentiality of all elements of the distribution system, the Agreement, the BBRG and the Company's methods of doing business. 13. Miscellaneous Provisions. 13.1 Applicable manufacturer's warranties are passed through to the Purchaser's end users. THE COMPANY HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF NON-INFRINGEMENT AND IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. TO THE GREATEST EXTENT ALLOWABLE UNDER LAW, THE COMPANY SHALL NOT BE LIABLE TO THE PURCHASER OR ANY THIRD PARTY FOR CONSEQUENTIAL, INDIRECT, SPECIAL, OR INCIDENTAL DAMAGES, INCLUDING, WITHOUT LIMITATION, LOSS OF DATA, TIME OR PROFITS EVEN IF THE COMPANY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 13.2 This Agreement may be modified only upon execution of a written agreement executed by the parties. No waiver of any condition or covenant contained in this Agreement, or failure to exercise a right or remedy of the Company or the Purchaser, shall be considered to imply or constitute a further waiver by the waiving party of the same or any other condition, covenant, right or remedy. 13.3 The validity and construction of this Agreement shall be governed by the internal laws of the State of Arizona. The 1980 U.N. Convention on Contracts for the International Sale of Goods is specifically rejected and does not apply to any transaction under this Agreement. If any of the terms of this Agreement are inconsistent with the applicable state statutes, then state statutes will supersede such terms. If a claim is asserted in any legal proceeding, the Purchaser and the Company agree to irrevocably submit to the jurisdiction of the Superior Court of the State of Arizona and the Federal District Court for the District of Arizona, and irrevocably agree that venue for any action or proceeding shall be in Maricopa County, Arizona. Both parties waive any objection to the jurisdiction of these courts or to venue in Maricopa County, Arizona. In the event an action is brought to enforce this Agreement, the prevailing party shall be entitled to its costs and reasonable attorneys' fees. 13.4 All notices required to be given under this Agreement shall be given in writing, by certified mail, return receipt requested, at the address of the parties contained in the Program Application, or to such other addresses as the Company or the Purchaser may designate in writing from time to time, and shall be effectively given five (5) business days after deposit in the United States mail, postage prepaid. 13.5 These terms and conditions contain the entire agreement between the parties and supersede any and all prior agreements, if any, between the parties concerning the subject matter hereof. The Purchaser agrees and understands that the Company shall not be liable or obligated for any verbal representations made. The Company does not authorize and will not be bound by any representation of any nature other than those expressed in this Agreement. 13.6 The undersigned certifies that the Federal Taxpayer Identification Number provided on the Application is correct and that the Purchaser is not subject to back-up withholding. 13.7 The statements provided in this Application and in the attached documents are true and complete to the best of the Purchaser's knowledge. The Company may contact any person or business outlined in this Application for the purpose of verifying the discreet information submitted; and the Purchaser agrees to authorize any such person or business to release any information to the Company which may be required to effect such verification. The individual signing this Agreement represents that the Purchaser (if applicable) is a valid corporation in good standing. By signing this Agreement, the Company and the Purchaser agree that a facsimile of the signed Agreement may be construed and accepted as valid, enforceable and binding on the parties hereto. PURCHASER ________________________________________________________________________________ (Complete name of corporation, partnership or sole proprietorship) By______________________________________________________________________________ (Signature of Corporate Officer, Partner or Owner) Print Name______________________________________________________________________ Title___________________________________________________________________________ Date____________________________________________________________________________ MICROAGE COMPUTER CENTERS, INC. By______________________________________________________________________________ Title___________________________________________________________________________ Date____________________________________________________________________________ EX-10.64 11 OFFICE LEASE CENTRAL PARK SQUARE OFFICE LEASE CENTRAL PARK SQUARE WHCPS REAL ESTATE LIMITED PARTNERSHIP, a Delaware limited partnership, as Landlord, and MICROAGE COMPUTER CENTERS, INC., a Delaware corporation, as Tenant. CENTRAL PARK SQUARE ------------------- TABLE OF CONTENTS ----------------- ARTICLE SUBJECT MATTER - ------- -------------- ARTICLE 1 REAL PROPERTY, BUILDING AND PREMISES ARTICLE 2 LEASE TERM ARTICLE 3 BASE RENT AND INTERIM RENT ARTICLE 4 ADDITIONAL RENT ARTICLE 5 USE OF PREMISES ARTICLE 6 SERVICES AND UTILITIES ARTICLE 7 REPAIRS ARTICLE 8 ADDITIONS AND ALTERATIONS ARTICLE 9 COVENANT AGAINST LIENS ARTICLE 10 INSURANCE ARTICLE 11 DAMAGE AND DESTRUCTION ARTICLE 12 NONWAIVER ARTICLE 13 CONDEMNATION ARTICLE 14 ASSIGNMENT AND SUBLETTING ARTICLE 15 SURRENDER OF PREMISES; OWNERSHIP AND REMOVAL OF TRADE FIXTURES ARTICLE 16 HOLDING OVER ARTICLE 17 ESTOPPEL CERTIFICATES ARTICLE 18 SUBORDINATION ARTICLE 19 DEFAULTS; REMEDIES ARTICLE 20 COVENANT OF QUIET ENJOYMENT ARTICLE 21 [INTENTIONALLY DELETED] ARTICLE 22 SUBSTITUTION OF OTHER PREMISES ARTICLE 23 SIGNS ARTICLE 24 COMPLIANCE WITH LAW ARTICLE 25 LATE CHARGES ARTICLE 26 RIGHT TO CURE DEFAULT; PAYMENTS ARTICLE 27 ENTRY BY LANDLORD ARTICLE 28 TENANT PARKING ARTICLE 29 MISCELLANEOUS PROVISIONS EXHIBITS - -------- EXHIBIT A OUTLINE OF FLOOR PLAN OF PREMISES EXHIBIT A-1 DEPICTION OF RESERVED PARKING SPACES EXHIBIT B TENANT WORK LETTER EXHIBIT C NOTICE OF LEASE TERM DATES EXHIBIT D RULES AND REGULATIONS (i) EXHIBIT E FORM OF TENANT'S ESTOPPEL CERTIFICATE EXHIBIT F FORM OF SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT (ii) CENTRAL PARK SQUARE ------------------- INDEX OF MAJOR DEFINED TERMS ---------------------------- LOCATION OF DEFINITION DEFINED TERMS IN OFFICE LEASE - ------------- --------------- Additional Rent 7 Alterations 14 Approved Working Drawings Exhibit B Architect Exhibit B Availability Notice 3 Availability Space 3 Base Rent 6 Base Year 7 Basic Terms 4 BOMA 11 Brokers 35 Building l Building Top Signage 28 Cabling Exhibit B Calendar Year 7 Common Areas 11 Construction Drawings Exhibit B Contract Exhibit B Contractor Exhibit B Cost Pools 8 Damage Repair Estimate 17 Direct Competitors 38 Direct Expenses 7 Early Occupancy Space 6 Election Date 3 Engineers Exhibit B Environmental Condition 38 Estimate 10 Estimate Statement 10 Estimated Excess 10 Excess 10 Expense Year 7 Final Retention Exhibit B Final Space Plan Exhibit B Final Working Drawings Exhibit B (iii) First Refusal Notice 2 First Refusal Space 2 Force Majeure 34 Hazardous Material 3 7 Holidays 12 Interest Notice 5 Interest Rate 30 Interim Rent 6 Interim Term 6 Invoice 3 1 Landlord 11 Landlord Delays Exhibit B Landlord Parties 15 Laws 37 Lease 11 Lease Commencement Date 4 Lease Expiration Date 4 Lease Notice 4 Lease Term 4 Lease Year 4 Must Take Effective Date 2 Must Take Rent Commencement Date 2 Must Take Space 2 Notices 3 5 Objectionable Name 29 Operating Expenses 7 Option Notice 4 Option Rent 5 Option Rent Notice 5 Option Term 4 Original Tenant 2 Outside Agreement Date 5 Parking Facilities 11 Partial Floor Premises 28 Permitted Transfer 19 Premises 11 Real Property 11 Renovations 36 Rent 7 Response Notice 4 Review Period 11 Rules and Regulations 11 SNDA 24 (iv) Specifications Exhibit B Standard Improvement Package Exhibit B Statement 10 Subject Space 20 Subleasing Costs 21 Summary 11 Superior Leases 2 Superior Rights 3 Systems and Equipment 8 Tax Expenses 8 Tenant 11 Tenant Improvement Allowance Exhibit B Tenant Improvement Allowance Items Exhibit B Tenant Improvements Exhibit B Tenant Representative 11 Tenant's Agents Exhibit B Tenant's Election Notice 4 Tenant's Share 9 Transfer Notice 19 Transfer Premium 21 Transferee 19 Transfers 19 (v) CENTRAL PARK SQUARE ------------------- SUMMARY OF BASIC LEASE INFORMATION ---------------------------------- The undersigned hereby agree to the following terms of this Summary of Basic Lease Information (the "Summary"). This Summary is hereby incorporated into and made a part of the attached Office Lease (this Summary and the Office Lease to be known collectively as the "Lease") which pertains to the office building (the "Building") which is located at 2020 North Central Avenue, Phoenix, Arizona 85004. Each reference in the Office Lease to any term of this Summary shall have the meaning as set forth in this Summary for such term. In the event of a conflict between the terms of this Summary and the Office Lease, the terms of the Office Lease shall prevail. Any capitalized terms used herein and not otherwise defined herein shall have the meaning as set forth in the Office Lease.
TERMS OF LEASE (References are to the Office Lease DESCRIPTION - ----------------------------------- ----------- 1. Date: _______________________, 1997 2. Landlord: WHCPS REAL ESTATE LIMITED PARTNERSHIP, a Delaware limited partnership 3. Address of Landlord WHCPS Real Estate Limited Partnership (Section 29.19): c/o WCB Properties 450 Newport Center Drive, Suite 304 Newport Beach, California 92660 Attention: Mr. Ronald A. Lack 4. Tenant: MICROAGE COMPUTER CENTERS, INC., a Delaware corporation. Tenant's Affiliates: MICROAGE, Inc. and any subsidiary of MICROAGE, Inc. 5. Address of Tenant and Tenant's 2400 S. MICROAGE Way Affiliates (Section 29.19): Tempe, Arizona 85282 Attention: V. P. Administration (Prior to Lease Commencement Date) (vi) and 2400 S. MICROAGE Way Tempe, Arizona 85282 Attention: V. P. Administration (After Lease Commencement Date) 6. Premises (Article 1): Initially, approximately 54,522 rentable square feet of space located on the first (1st), seventh (7th), eighth (8th) and ninth (9th) floors, as set forth in Exhibit A attached hereto. Effective on the Must Take Effective Date, the Premises will increase to include approximately 26,906 rentable square feet of space located on the third (3rd) floor, as set forth on Exhibit A attached hereto, for a total of 81,428 rentable square feet. 7. Term (Article 2). 7.1 Lease Term: Five (5) years and six (6) months. 7.2 Lease Commencement The earlier of (i) the date Tenant commences Date: business in the Premises (excluding the Early Occupancy Space), and (ii) the date that is sixty (60) days following Landlord's delivery of the Premises to Tenant. 7.3 Lease Expiration Date: Five (5) years and six (6) months following the Lease Commencement Date (however, if the Lease Commencement Date is not the first day of the month, then the foregoing time period shall commence to run on the first day of the month following the months in which the Lease Commencement Date occurs). (vii) 8. Base Rent (Article 3): Annual Monthly Rental Rate Annual Installment per Rentable Lease Year Base Rent of Base Rent Square Foot ---------- --------- ------------ ----------- Lease Commencement $1,547,132.00 $128,927.67* $19.00 Date - Lease Year 2 Lease Year 3 - Lease Year 4 $1,628,560.00 $135,713.33 $20.00 Lease Year 5 - Lease $1,709,988.00 $142,499.00 $21.00 Expiration Date *Note: Until the Must Take Rent Commencement Date, the Monthly Installment of Base Rent will be $86,326.50, based upon 54,522 rentable square feet. 9. Additional Rent (Article 4). 9.1 Base Year: Calendar year 1997. 9.2 Tenant's Share of Initially, approximately 23.82%. Upon the Must Direct Expenses: Take Effective Date, Tenant's share of Direct Expenses will increase to approximately 35.58%. 10. Security Deposit Waived. (Article 21): 11. Parking Pass Ratio Five (5) parking passes for every 1,000 rentable (Article 28): square feet of the Premises, ten percent (10%) of which will provide for reserved parking at the locations depicted on Exhibit A- 1. 12. Broker CB Commercial Real Estate Group, Inc. (Section 29.25): 13. Interim Rent $15,833.33 per month. (Section 3.1):
(viii) The foregoing terms of this Summary are hereby agreed to by Landlord and Tenant. "Landlord": WHCPS REAL ESTATE LIMITED PARTNERSHIP, a Delaware limited partnership By: WHCPS GEN-PAR, INC., a Delaware corporation General Partner By: -------------------------------- Name: --------------------------- Title: -------------------------- "Tenant": MICROAGE COMPUTER CENTERS, INC. By: ------------------------------------- Alan R. Lyons Vice President Administration (ix) CENTRAL PARK SQUARE ------------------- OFFICE LEASE ------------ This Office Lease, which includes the preceding Summary of Basic Lease Information (the "Summary") attached hereto and incorporated herein by this reference (the Office Lease and Summary to be known sometimes collectively hereafter as the "Lease"), dated as of the date set forth in Section 1 of the Summary, is made by and between WHCPS REAL ESTATE LIMITED PARTNERSHIP, a Delaware limited partnership ("Landlord"), and MICROAGE COMPUTER CENTERS, INC., a Delaware corporation ("Tenant"). ARTICLE 1 --------- REAL PROPERTY, BUILDING AND PREMISES ------------------------------------ 1.1 Real Property. Building and Premises. Upon and subject to the terms, covenants and conditions hereinafter set forth in this Lease, Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the premises set forth in Section 6 of the Summary (the "Premises"), which Premises are located in the "Building," as that term is defined in this Section 1.1. The outline of the floor plan of the Premises is set forth in Exhibit A attached hereto. The Premises are a part of the building (the "Building") located at 2020 North Central Avenue, Phoenix, Arizona 85004. The Building, the parking facilities serving the Building ("Parking Facilities"), the outside plaza areas, land and other improvements surrounding the Building which are designated from time to time by Landlord as common areas appurtenant to or servicing the Building, and the land upon which any of the foregoing are situated, are herein sometimes collectively referred to as the "Real Property." Tenant is hereby granted the right to the nonexclusive use of the common corridors and hallways, stairwells, elevators, restrooms and other public or common areas located on the Real Property ("Common Areas"); provided, however, that the manner in which such Common Areas are maintained and operated shall be at the sole discretion of Landlord and the use thereof shall be subject to such reasonable Rules and Regulations as Landlord may make from time to time. Landlord reserves the right to make alterations or additions to or to change the location of elements of the Real Property and the Common Areas. 1.2 Delivery and Condition of the Premises. Except as specifically set forth in this Lease, Landlord shall not be obligated to provide or pay for any improvement work or services related to the improvement of the Premises. Tenant also acknowledges that Landlord has made no representation or warranty regarding the condition of the Premises or the Building except as specifically set forth in this Lease. Landlord shall deliver the Premises to Tenant within two (2) business days following the full execution hereof by Tenant and Tenant's delivery to Landlord of the first month's installment of Base Rent and Interim Rent and evidence of insurance coverage required of Tenant pursuant to Article 10. The Premises shall be improved by Tenant in accordance with the Tenant Work Letter attached hereto as Exhibit B and incorporated herein by reference. 1.3 Verification of Rentable Square Feet of Premises and Building. For purposes of this Lease, "rentable square feet" shall mean "rentable area" calculated pursuant to the Standard Method for Measuring Floor Area in Office Buildings, ANSVBOMA Z65.1 - 1996 ("BOMA"), provided that the rentable square footage of the Building may include all of, and the rentable square footage of the Premises therefore may include a portion of, the square footage of the ground floor Common Areas located within the Building and the Common Area and other space in the Building dedicated to the service of the Building. At Landlord's discretion, the number of rentable square feet of the Premises and the Building shall be subject to verification from time to time by Landlord's space measurement consultant, and such verification shall be made in accordance with the provisions of this Article 1. Tenant's architect may consult with Landlord's space measurement consultant regarding verification of the number of rentable square feet of the Premises; however, the determination of Landlord's space measurement consultant shall be conclusive and binding upon the parties. In the event that Landlord's space measurement consultant determines that the amounts thereof shall be different from those set forth in this Lease, Landlord shall modify all amounts, percentages and figures appearing or referred to in this Lease to conform to such corrected rentable square footage (including, without limitation, the amount of the "Rent, " as that term is defined in Article 4 of this Lease). If such modification is made, it will be confirmed in writing by Landlord to Tenant. 1.4 Must Take Space. Tenant and Landlord agree to add to the Premises approximately 26,906 additional rentable square feet of space located on the third (3rd) floor of the Building as set forth on Exhibit A attached hereto ("Must Take Space"). The effective date of Tenant's lease of the Must Take Space (the "Must Take Effective Date") shall be the date of Landlord's delivery of the Must Take Space to Tenant. The date that Tenant's obligation to commence the payment of Rent for the Must Take Space (the "Must Take Rent Commencement Date") shall be the earlier of (i) the date Tenant commences business in the Must Take Space and (ii) sixty (60) days following the Must Take Effective Date. Tenant's lease of the Must Take Space shall be on the same terms and conditions as affect the original Premises throughout the Lease Term, including, without limitation, the same Base Rent rate (per rentable square foot) as then applies to the original Premises, provided, however, that Tenant's Share of Direct Expenses shall be increased to take into account the additional number of rentable square feet of the Must Take Space. The Must Take Space shall be improved in accordance with the Tenant Work Letter Agreement attached hereto as Exhibit B as if the Must Take Space were the original Premises. The Lease Term for the Must Take Space and Tenant's obligation to pay Rent with respect to the Must Take Space shall commence upon the Must Take Rent Commencement Date and shall expire co-terminously with the Lease Term for the original Premises. Landlord shall not be liable to Tenant or otherwise be in default hereunder in the event that Landlord is unable to deliver the Must Take Space to Tenant on the projected delivery date thereof due to the failure of any other tenant to timely vacate and surrender to Landlord such Must Take Space, or any portion thereof; provided, however, Landlord agrees to use its commercially reasonable efforts to enforce its right to possession of such Must Take Space against such other tenant. Promptly after Landlord's delivery of the Must Take Space to Tenant, Landlord and Tenant shall, at either party's election, execute an instrument acknowledging the date of the Must Take Effective Date and the Must Take Rent Commencement Date. 2 1.5 Right of First Refusal. Landlord hereby grants to the Tenant named in the Summary ("Original Tenant") a right of first refusal with respect to all remaining space located on the first (1st), second (2nd), fourth (4th), sixth (6th) and tenth (10th) floors of the Building (collectively, the "First Refusal Space"). Notwithstanding the foregoing (i) for First Refusal Space which is subject to a lease as of the date of this Lease, such first refusal right of Tenant shall commence only following the expiration or earlier termination of such existing lease (such existing leases may be collectively referred to herein as the "Superior Leases"), including any renewal of such Superior Leases, whether or not such renewal is pursuant to an express written provision in such lease, and regardless of whether any such renewal is consummated pursuant to a lease amendment or a new lease, and (ii) such first refusal right shall be subordinate and secondary to all rights of expansion, first refusal, first offer or similar rights granted to the tenant(s) of the Superior Leases or any other leases existing as of the date of this Lease (the rights described in items (i) and (ii), above to be known collectively, for purposes of this Section 1.5 only, as "Superior Rights"). Tenant's right of first refusal shall be on the terms and conditions set forth in this Section 1.5. Notwithstanding the foregoing, if any right of expansion, first refusal, first offer or other similar right is granted under any renewal of a Superior Lease or an existing lease, and if the granting of such right is not required by the terms of the Superior Lease or existing lease, then such right will not be a Superior Right. 1.5.1 Procedure for Notice. Landlord shall notify Tenant (the "First Refusal Notice") from time to time when Landlord receives a proposal or request for proposal that Landlord would seriously consider for all or any portion of the First Refusal Space, where no holder of a Superior Right desires to lease such space. The First Refusal Notice shall describe the space which is the subject of the proposal or request for proposal and shall set forth the terms and conditions (including the proposed lease term) set forth in the proposal or request for proposal (collectively, the "Terms"). Notwithstanding the foregoing, Landlord's obligation to deliver the First Refusal Notice shall not apply during the last nine (9) months of the Lease Term unless Tenant has delivered an Interest Notice to Landlord pursuant to Section 2.2.2 below nor shall Landlord be obligated to deliver the First Refusal Notice during the last six (6) months of the Lease Term unless Tenant has delivered the Option Notice to Landlord pursuant to Section 2.2.2 below. 1.5.2 Procedure for Acceptance. If Tenant wishes to exercise Tenant's right of first refusal with respect to the space described in the First Refusal Notice, then within five (5) business days after delivery of the First Refusal Notice to Tenant (the "Election Date"), Tenant shall deliver written notice to Landlord ("Tenant's Election Notice") pursuant to which Tenant shall elect either to (i) lease the entire First Refusal Space described in the First Refusal Notice upon the Terms set forth in the First Refusal Notice; (ii) refuse to lease such First Refusal Space identified in the First Refusal Notice, specifying that such refusal is not based upon the Terms set forth by Landlord in the First Refusal Notice, but upon Tenant's lack of need for such First Refusal Space, in which event Landlord may lease such First Refusal Space to any person or entity on any terms Landlord desires and Tenant's right of first refusal with respect to the First Refusal Space specified in Landlord's First Refusal Notice shall thereupon terminate and be of no further force or effect; or (iii) refuse to lease the First Refusal Space, specifying that such refusal is based upon the Terms set forth in the First Refusal Notice, in which event Tenant shall also specify in Tenant's Election Notice revised Terms upon which 3 Tenant would be willing to lease such First Refusal Space from Landlord. If Tenant does not so respond in writing to Landlord's First Refusal Notice by the Election Date, Tenant shall be deemed to have elected the option described in clause (ii) above. If Tenant timely delivers to Landlord Tenant's Election Notice pursuant to clause (iii) above, Landlord may elect either to: (a) lease such First Refusal Space to Tenant upon the revised Terms specified by Tenant in Tenant's Election Notice; or (b) lease the First Refusal Space to any person or entity upon any terms Landlord desires; provided, however, if (1) the Terms of Landlord's proposed lease to said third party are materially more favorable to the third party than those Terms proposed by Tenant in Tenant's Election Notice, or (2) the size of the First Refusal Space to be leased to such third party is less than the size of the First Refusal Space offered to Tenant, before entering into such third party lease, Landlord shall notify Tenant of such more favorable Terms (or such reduced size) and Tenant shall have the right to lease the First Refusal Space upon such more favorable Terms (or as to such reduced size) by delivering written notice thereof to Landlord within five (5) business days after Tenant's receipt of Landlord's notice. If Tenant does not elect to lease such space from Landlord within said five (5) business day period, Tenant shall be deemed to have elected the option described in clause (ii) above and Tenant's right of first refusal with respect to the First Refusal Space specified in Landlord's First Refusal Notice shall thereupon terminate and be of no further force or effect. 1.5.3 Lease of First Refusal Space. If Tenant timely exercises Tenant's right to lease the First Refusal Space as set forth herein, Landlord and Tenant shall execute an amendment to this Lease incorporating into this Lease the Terms applicable to such First Refusal Space. 1.5.4 Termination of Right of First Refusal. The rights set forth in this Section 1.5, and Landlord's obligations with respect thereto, shall be personal to the Original Tenant and Tenant's Affiliates. The right of first refusal granted herein shall terminate as to a particular First Refusal Space upon the failure by Tenant to exercise its right of first refusal with respect to such First Refusal Space as offered by Landlord but shall remain in effect for any subsequent availability of all or any portion of the remaining First Refusal Space. Tenant shall not have the right to lease the First Refusal Space if, as of the date of the attempted exercise of any right of first refusal by Tenant, or, at Landlord's option, as of the scheduled date of delivery of such First Refusal Space to Tenant, Tenant is in material default under this Lease after any applicable notice and cure periods. 1.6 Right of Availability. Tenant shall has e a right of availability with respect to any then available space in the Building that is not subject to the right of first refusal under Section 1.5 above ("Availability Space") upon the terms and conditions set forth in this Section 1.6. Tenant's right of availability shall be subject and subordinate to any then-existing expansion, extension, first offer, first refusal or similar rights granted under lease to any other tenant of the Building and any potential tenant with whom Landlord has signed or is negotiating a request for proposal or a letter of intent (collectively and for purposes of this Section 1.6 only, the "Superior Rights"). Landlord shall, every six (6) months during the Term, deliver to Tenant a notice (the "Availability Notice") indicating which of the Availability Space is then available or is expected to become available in the next six (6) months. If Tenant desires to lease any portion of the Availability Space described in the 4 Availability Notice, Tenant may so notify Landlord (the "Lease Notice"), which Lease Notice shall describe the number of square feet and location so desired by Tenant. Within ten (10) business days after Landlord's receipt of the Availability Notice, Landlord shall notify Tenant in writing ("Response Notice"), Landlord's proposed terms and conditions applicable to Tenant's lease of such space including, without limitation, the proposed rental rate, Base Year, term of such lease, rentable abatement concessions (if any) and any contribution by Landlord toward the improvement of such space (collectively, the "Basic Terms"). Within five (5) business days after Tenant's receipt of Landlord's Response Notice, Tenant shall notify Landlord in writing whether Tenant accepts such proposed Basic Terms or whether Tenant elects to negotiate, in good faith, such Basic Terms ("Tenant's Election Notice"). If, in Tenant's Election Notice, Tenant accepts such Basic Terms, then Landlord and Tenant shall promptly enter into an amendment to this Lease incorporating into this Lease the Basic Terms applicable to such space. If, in Tenant's Election Notice, Tenant elects to negotiate such Basic Terms, the parties shall enter into good faith negotiations for a period of fifteen (15) days after Landlord's receipt of Tenant's Election Notice. If Landlord and Tenant reach an agreement on the negotiated Basic Terms, then Landlord and Tenant shall enter into an amendment to this Lease incorporating into this Lease the negotiated Basic Terms applicable to such space. If Landlord and Tenant are unable to reach agreement on such Basic Terms within said fifteen (15) day period, or if Tenant fails to timely give Tenant's Election Notice, Tenant shall have no further rights to such portion of the Availability Space specified in Landlord's Response Notice, and Landlord shall be free to lease such space to anyone to whom Landlord desires on any terms Landlord desires, until the later to occur of ninety (90) days thereafter or the date of Tenant's delivery of another Lease Notice for such space. The right of availability set forth in this Section 1.5 and Landlord's obligations with respect thereto shall be personal to, and may only be exercised by, the Original Tenant and/or Tenant's Affiliates. Tenant shall not have the right to lease Availability Space if, as of the date of the attempted exercise of any such right by Tenant, or, at Landlord's option, as of the scheduled date of delivery of such space to Tenant, Tenant is in default under this Lease after any applicable notice and cure periods. Notwithstanding the foregoing, Tenant's rights and Landlord's obligation under this Section 1.6 shall not apply during the last nine (9) months of the Lease Term unless Tenant has delivered an Interest Notice to Landlord pursuant to Section 2.2.2 below nor shall Landlord be obligated to deliver the First Refusal Notice during the last six (6) months of the Lease Term unless Tenant has delivered the Option Notice to Landlord pursuant to Section 2.2.2 below. ARTICLE 2 --------- LEASE TERM ---------- 2.1 Initial Term. The terms and provisions of this Lease shall be effective as of the date of this Lease except for the provisions of this Lease relating to the payment of Rent. The term of this Lease (the "Lease Term") shall be as set forth in Section 7.1 of the Summary and shall commence on the date (the "Lease Commencement Date") set forth in Section 7.2 of the Summary (subject, however, to the terms of the Tenant Work Letter, if applicable), and shall terminate on the date (the "Lease Expiration Date" set forth in Section 7.3 of the Summary, unless this Lease is sooner terminated as hereinafter 5 provided. For purposes of this Lease, the term "Lease Year" shall mean each consecutive twelve (12) month period during the Lease Term, provided, however, that the first Lease Year shall commence on the Lease Commencement Date and end on the last day of the eleventh month thereafter and the second and each succeeding Lease Year shall commence on the first day of the next calendar month; and further provided that the last Lease Year shall end on the Lease Expiration Date. At any time during the Lease Term, Landlord may deliver to Tenant a notice of Lease Term dates in the form as set forth in Exhibit C, attached hereto, which notice Tenant shall execute and return to Landlord within ten (10) business days of receipt thereof. 2.2 Option Term. Landlord hereby grants to the Original Tenant two (2) options to extend the Lease Term for a period of five (5) years (each an "Option Term"), which options shall be exercisable only by written notice ("Option Notice") delivered by Tenant to Landlord as provided in Section 2.2.2 below, provided that, as of the date of delivery of such notice and, at Landlord's option, as of the last day of the Lease Term, Tenant is not in material default under this Lease after expiration of applicable cure periods. The right contained in this Section 2.2 shall be personal to the Original Tenant and may only be exercised by the Original Tenant or any of Tenant's Affiliates that have succeeded to the Original Tenant's interest under this Lease (and not any other assignee, sublessee or other transferee of the Original Tenant's interest in this Lease) if the Original Tenant and/or any of Tenant's Affiliates collectively occupy the entire Premises as of the date of the Option Notice. 2.2.1 Option Rent. The Rent payable by Tenant during the Option Term (the "Option Rent") shall be equal to ninety-five percent (95%) of the then prevailing fair market rent for the Premises (together with the fair market rental value of the parking rights granted under Article 28) as of the commencement date of the Option Term, but in no event may the Option Rent be less than ninety percent (90%) of the sum of Base Rent plus Tenant's Share of Direct Expenses payable by Tenant immediately prior to the Option Term. The then prevailing fair market rent shall be the rental rate, including all escalations, at which new, non-renewal tenants, as of the commencement of the Option Term, are leasing non-sublease, non-encumbered space comparable in size, location and quality to the Premises for a term of five (5) years, which comparable space is located in the Building taking into consideration the following concessions: (a) rental abatement concessions, if any, being granted such tenants in connection with such comparable space and (b) tenant improvements or allowances provided or to be provided for such comparable space, taking into account, and deducting the value of, the existing improvements in the Premises, with such value to be based upon the age, quality and layout of the improvements and the extent to which the same could be utilized by Tenant based upon the fact that the precise tenant improvements existing in the Premises are specifically suitable to Tenant. 2.2.2 Exercise of Option. The option contained in this Section 2.2 shall be exercised by Tenant, if at all, only in the following manner: (i) Tenant shall deliver written notice ("Interest Notice") to Landlord on or before the date which is nine (9) months prior to the expiration of the Lease Term, stating that Tenant is interested in exercising its option; (ii) Landlord, after receipt of Tenant's notice, shall deliver notice (the "Option Rent Notice") to Tenant not less than seven (7) months prior to the expiration of the Lease Term, 6 setting forth the Option Rent; and (iii) if Tenant wishes to exercise such option, Tenant shall, on or before the earlier of (A) the date occurring six (6) months prior to the expiration of the Lease Term, and (B) the date occurring thirty (30) days after Tenant's receipt of the Option Rent Notice, exercise the option by delivering the Option Notice to Landlord and upon, and concurrent with, such exercise, Tenant may, at its option, object to the Option Rent determined by Landlord. If Tenant exercises the option to extend but objects to the Option Rent contained in the Option Rent Notice, the parties shall follow the procedure, and the Option Rent shall be determined, as set forth in Section 2.2.3 below. Failure of Tenant to deliver the Interest Notice to Landlord on or before the date specified in (i) above or to deliver the Option Notice to Landlord on or before the date specified in (iii) above shall be deemed to constitute Tenant's failure to exercise its option to extend. If Tenant timely and properly exercises its option to extend, the Lease Term shall be extended for the Option Term upon all of the terms and conditions set forth in this Lease, except that the Rent shall be as indicated in the Option Rent Notice or as determined in accordance with Section 2.2.3 below, as applicable. 2.2.3 Determination of Option Rent. In the event Tenant exercises its option to extend but objects to Landlord's determination of the Option Rent concurrently with its exercise of the option to extend, Landlord and Tenant shall attempt to agree in good faith upon the Option Rent. If Landlord and Tenant fail to reach agreement within twenty (20) days following Tenant's delivery of the Option Notice (the "Outside Agreement Date") then each party shall make a separate determination of the Option Rent, within five (5) business days after the Outside Agreement Date, concurrently exchange such determinations and such determinations shall be submitted to arbitration in accordance with Sections 2.2.3.1 through 2.2.3.7 below. 2.2.3.1 Landlord and Tenant shall each appoint one arbitrator who shall by profession be a real estate broker or appraiser who shall have been active over the five (5) year period ending on the date of such appointment in the leasing (or appraisal, as the case may be) of commercial high-rise properties in the central corridor area of Phoenix. The determination of the arbitrators shall be limited solely to the issue area of whether Landlord's or Tenant's submitted Option Rent is the closest to the actual Option Rent, as determined by the arbitrators, taking into account the requirements of Section 2.2.1 of this Lease. Each such arbitrator shall be appointed within fifteen (15) business days after the applicable Outside Agreement Date. 2.2.3.2 The two (2) arbitrators so appointed shall within five (5) days of the date of the appointment of the last appointed arbitrator agree upon and appoint a third arbitrator who shall be qualified under the same criteria set forth hereinabove for qualification of the initial two (2) arbitrators. 2.2.3.3 The three (3) arbitrators shall within five (5) days of the appointment of the third arbitrator reach a decision as to whether the parties shall use Landlord's or Tenant's submitted Option Rent and shall notify Landlord and Tenant thereof. 7 2.2.3.4 The decision of the majority of the three (3) arbitrators shall be binding upon Landlord and Tenant. 2.2.3.5 If either Landlord or Tenant fails to appoint an arbitrator within fifteen (15) business days after the applicable Outside Agreement Date, the arbitrator appointed by one of them shall reach a decision, notify Landlord and Tenant thereof, and such arbitrator's decision shall be binding upon Landlord and Tenant. 2.2.3.6 If the two (2) arbitrators fail to agree upon and appoint a third arbitrator, or both parties fail to appoint an arbitrator, then the appointment of the third arbitrator or any arbitrator shall be dismissed and the Option Rent to be decided shall be forthwith submitted to arbitration under the provisions of the American Arbitration Association, but subject to the instruction set forth in this Section 2.2.3. 2.2.3.7 The cost of arbitration shall be paid by Landlord and Tenant equally. ARTICLE 3 --------- BASE RENT AND INTERIM RENT -------------------------- 3.1 Interim Rent. As consideration for Tenant's occupancy of, and conduct of business within, approximately 10,000 rentable square feet of the Premises (the "Early Occupancy Space") from the date of Landlord's delivery of the Premises to Tenant until the Lease Commencement Date (the "Interim Term"), Tenant shall pay to Landlord at the location designated in Section 3.2 below, rent in the monthly amount of Fifteen Thousand Eight Hundred Thirty-Three and 33/100 Dollars ($15,833.33) ("Interim Rent"), without notice, deduction or setoff, commencing upon the commencement of the Interim Term and continuing on the first day of each month thereafter during the Interim Term, provided, however, Interim Rent for the first full month shall be paid at the time of Tenant's execution of this Lease. Interim Rent for any partial month shall be prorated as set forth in Section 3.2 below. 3.2 Base Rent. Tenant shall pay, without notice or demand, to Landlord or Landlord's agent at the management office of the Building, or at such other place within the continental United States as Landlord may from time to time designate in writing, in currency or a check for currency which, at the time of payment, is legal tender for private or public debts in the United States of America, base rent ("Base Rent") as set forth in Section 8 of the Summary, payable in equal monthly installments as set forth in Section 8 of the Summary in advance on or before the first day of each and every month during the Lease Term, without any setoff or deduction whatsoever. The Base Rent for the first full month of the Lease Term, which occurs after the expiration of any free rent period, shall be paid at the time of Tenant's execution of this Lease. If any rental payment date (including the Lease Commencement Date) falls on a day of the month other than the first day of such month or if any rental payment is for a period which is shorter than one month, then the rental for any such 8 fractional month shall be a proportionate amount of a full calendar month's rental based on the proportion that the number of days in such fractional month bears to the number of days in the calendar month during which such fractional month occurs. All other payments or adjustments required to be made under the terms of this Lease that require proration on a time basis shall be prorated on the same basis. ARTICLE 4 --------- ADDITIONAL RENT --------------- 4.1 Additional Rent. In addition to paying the Base Rent specified in Article 3 of this Lease, Tenant shall pay as additional rent "Tenant's Share" of the annual "Direct Expenses," as those terms are defined in Sections 4.2.8 and 4.2.3 of this Lease, respectively, which are in excess of the amount of Direct Expenses applicable to the "Base Year," as that term is defined in Section 4.2.1 of this Lease. Such additional rent, together with any and all other amounts payable by Tenant to Landlord pursuant to the terms of this Lease, shall be hereinafter collectively referred to as the "Additional Rent." The Base Rent and Additional Rent are herein collectively referred to as the "Rent." All amounts due under this Article 4 as Additional Rent shall be payable for the same periods and in the same manner, time and place as the Base Rent. Without limitation on other obligations of Tenant which shall survive the expiration of the Lease Term, the obligations of Tenant to pay the Additional Rent provided for in this Article 4 shall survive the expiration of the Lease Term. 4.2. Definitions. As used in this Article 4, the following terms shall have the meanings hereinafter set forth: 4.2.1 "Base Year" shall mean the year set forth in Section 9.1 of the Summary. 4.2.2 "Calendar Year" shall mean each calendar year in which any portion of the Lease Term falls, through and including the calendar year in which the Lease Term expires. 4.2.3 "Direct Expenses" shall mean "Operating Expenses" and "Tax Expenses." 4.2.4 "Expense Year" shall mean each Calendar Year, provided that Landlord, upon notice to Tenant, may change the Expense Year from time to time to any other twelve (12) consecutive-month period, and, in the event of any such change, Tenant's Share of Direct Expenses shall be equitably adjusted for any Expense Year involved in any such change. 4.2.5 "Operating Expenses" shall mean all expenses, costs and amounts of every kind and nature which Landlord shall actually pay during any Expense Year because of or in direct connection with the ownership, management, maintenance, repair, restoration or operation of the Real Property, including, without limitation, any amounts paid for (i) the cost of supplying all utilities, the cost of operating, maintaining, repairing, renovating (which is not a capital expenditure unless otherwise expressly permitted herein) and 9 managing the utility systems, mechanical systems, sanitary and storm drainage systems, and any escalator and/or elevator systems, and the cost of supplies and equipment and maintenance and service contracts in connection therewith; (ii) the cost of licenses, certificates, permits and inspections and the cost of contesting the validity or applicability of any governmental enactments which may affect Operating Expenses; (iii) the cost of insurance carried by Landlord, in such amounts as Landlord may reasonably determine or as may be required by any mortgagees or the lessor of any underlying or ground lease affecting the Real Property; (iv) the cost of landscaping, relamping, and all supplies, tools, equipment and materials used in the operation, repair and maintenance of the Real Property; (v) the cost of parking area repair, restoration, and maintenance, including, but not limited to, repainting, restriping, and cleaning; (vi) fees, charges and other costs, including consulting fees, legal fees and accounting fees, of all contractors engaged by Landlord in connection with the management, operation, maintenance and repair of the Real Property; (vii) any equipment rental agreements or management agreements (including the cost of any management fee); (viii)wages, salaries and other compensation and benefits of all persons engaged in the operation, management, maintenance or security of the Real Property, and employer's Social Security taxes, unemployment taxes or insurance, and any other taxes which may be levied on such wages, salaries, compensation and benefits; provided, that if any employees of Landlord provide services for more than one building of Landlord, then a prorated portion of such employees' wages, benefits and taxes shall be included in Operating Expenses based on the portion of their working time devoted to the Real Property; (ix) payments under any easement, license, operating agreement, declaration, restrictive covenant, underlying or ground lease (excluding rent or similar charge in the nature of rent), or instrument pertaining to the sharing of costs by the Real Property; (x) operation, repair, maintenance and replacement (which is not a capital expenditure unless otherwise expressly permitted herein) of all "Systems and Equipment," as that term is defined in Section 4.2.6 of this Lease, and components thereof; (xi) the cost of janitorial service, alarm and security service, window cleaning, trash removal, replacement of wall and floor coverings, ceiling tiles and fixtures in lobbies, corridors, restrooms and other common or public areas or facilities, maintenance and replacement of curbs and walkways, repair to roofs and re-roofing; (xii) costs incurred by Landlord in connection with the operation of a concierge service (if such service is provided) and the reasonable costs of an attendant, if necessary, to operate the conference rooms of the Building; (xiii) amortization (including interest on the unamortized cost) of the cost of acquiring or the rental expense of personal property used in the maintenance, operation and repair of the Real Property; and (xiv) the cost of any capital improvements or other costs (a) which are intended as a labor-saving device or to effect other economies in the operation or maintenance of the Real Property, (b) made to the Building after the Lease Commencement Date that are required under any governmental law or regulation or (c) for the refurbishment or replacement of Real Property improvements or amenities; provided, however, that if any such cost described in (a), (b) or (c) above is a capital expenditure, such cost shall be amortized (including interest on the unamortized cost) over its useful life as Landlord shall reasonably determine in accordance with generally accepted accounting policies and treatments. If Landlord is not furnishing any particular work or service (the cost of which, if performed by Landlord, would be included in Operating Expenses) to a tenant who has undertaken to perform such work or service in lieu of the performance thereof by Landlord, Operating Expenses shall be deemed to be increased by an amount equal to the additional 10 Operating Expenses which would reasonably have been incurred during such period by Landlord if it had at its own expense furnished such work or service to such tenant. If the average occupancy of the Building during any Expense Year (including the Base Year) is less than seventy-five percent (75%), Landlord shall make an appropriate adjustment to the variable components of Operating Expenses for such year, employing sound accounting and management principles, to determine the amount of Operating Expenses that would have been paid had the Building been seventy-five percent (75%) occupied. Landlord shall have the right, from time to time, to equitably allocate some or all of the Operating Expenses among different tenants of the Building (the "Cost Pools"). Such Cost Pools may include, but shall not be limited to, the office space tenants of the Building and the retail space tenants of the Building. Notwithstanding anything to the contrary set forth in this Article 4, when calculating Direct Expenses for the Base Year, Operating Expenses shall exclude market-wide labor-rate increases due to extraordinary circumstances, including, but not limited to, boycotts and strikes, amortization of the cost of any capital improvements and utility rate increases due to extraordinary circumstances including, but not limited to, conservation surcharges, boycotts, embargoes or other shortages. As long as the athletic facility (described in Section 4.2.8) is not converted to general office space, the expenses, costs and amounts associated with, or related to, the athletic facility, shall not be included in Operating Expenses. 4.2.6 "Systems and Equipment" shall mean any plant, machinery, transformers, duct work, cable, wires, and other equipment, facilities, and systems designed to supply heat, ventilation, air conditioning and humidity or any other services or utilities, or comprising or serving as any component or portion of the electrical, gas, steam, plumbing, sprinkler, communications, alarm, security, or fire/life safety systems or equipment, or any other mechanical, electrical, electronic, computer or other systems or equipment which serve the Real Property in whole or in part. 4.2.7 "Tax Expenses" shall mean all federal, state, county, or local governmental or municipal taxes, fees, charges or other impositions of every kind and nature, whether general, special, ordinary or extraordinary (including, without limitation, real estate taxes, general and special assessments, transit taxes, leasehold taxes or taxes based upon the receipt of rent, including gross receipts or sales taxes applicable to the receipt of rent, unless required to be paid by Tenant, personal property taxes imposed upon the fixtures, machinery, equipment, apparatus, systems and equipment, appurtenances, furniture and other personal property used in connection with the Building), which Landlord shall actually pay during any Expense Year because of or in connection with the ownership, leasing and operation of the Real Property or Landlord's interest therein. 4.2.7.1 Tax Expenses shall include, without limitation: (i) Any tax on Landlord's rent, right to rent or other income from the Real Property or as against Landlord's business of leasing any of the Real Property, including transaction privilege taxes; 11 (ii) Any assessment, tax, fee, levy or charge in addition to, or in substitution, partially or totally, of any assessment, tax, fee, levy or charge previously included within the definition of real property tax. It is the intention of Tenant and Landlord that all such new and increased assessments, taxes, fees, levies, and charges and all similar assessments, taxes, fees, levies and charges be included within the definition of Tax Expenses for purposes of this Lease; (iii) Any assessment, tax, fee, levy, or charge allocable to or measured by the area of the Premises or the rent payable hereunder, including, without limitation, any gross income tax with respect to the receipt of such rent, or upon or with respect to the possession, leasing, operating, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises, or any portion thereof; and (iv) Any assessment, tax, fee, levy or charge, upon this transaction or any document to which Tenant is a party, creating or transferring an interest or an estate in the Premises. 4.2.7.2 [Intentionally Omitted] 4.2.7.3 If Tax Expenses for any period during the Lease Term or any extension thereof are increased after payment thereof by Landlord for any reason, including, without limitation, error or reassessment by applicable governmental or municipal authorities, Tenant shall pay Landlord upon demand Tenant's Share of such increased Tax Expenses. 4.2.7.4 Notwithstanding anything to the contrary contained in this Section 4.2.7 (except as set forth in Sections 4.2.7.1 and 4.2.7.2, above), there shall be excluded from Tax Expenses (i) all excess profits taxes, franchise taxes, gift taxes, capital stock taxes, inheritance and succession taxes, estate taxes, federal and state income taxes, and other taxes to the extent applicable to Landlord's general or net income (as opposed to rents, receipts or income attributable to operations at the Building), (ii) any items included as Operating Expenses, and (iii) any items paid by Tenant under Section 4.4 of this Lease. 4.2.7.5 Notwithstanding anything to the contrary set forth in this Article 4, when calculating Direct Expenses for the Base Year, such Direct Expenses shall not include any increase in Tax Expenses attributable to special assessments, charges, costs, or fees, or due to modifications or changes in governmental laws or regulations, including, but not limited to, the institution of a split tax roll. 4.2.7.6 Where commercially reasonable to do so in Landlord's good faith judgment, Landlord shall timely file and pursue an appeal, or similar objection, of annual and special real estate tax assessments and adjust the Tax Expenses accordingly, net of any actual costs incurred directly in pursuit of such appeal or objection. 12 4.2.8 "Tenant's Share" shall mean the percentage set forth in Section 9.2 of the Summary. Tenant's Share was calculated by multiplying the number of rentable square feet of the Premises by 100 and dividing the product by the total rentable square feet in the Building. The total rentable square footage of the Building, for purposes of determining Tenant's Share, as of the date hereof is 228,846 (Tenant acknowledges that the actual total rentable square footage of the Building is 247,911, but that, for purposes of determining Tenant's Share, Landlord has excluded the square footage of the athletic facility within the Building consisting of 19,065 rentable square feet. In the event that the athletic facility is converted to general office space, Landlord reserves the right to subsequently include the square footage of the athletic facility within the Building for purposes of determining Tenant's Share). In the event either the rentable square feet of the Premises and/or the total rentable square feet of the Building is changed, Tenant's Share shall be appropriately adjusted, and, as to the Expense Year in which such change occurs, Tenant's Share for such year shall be determined on the basis of the number of days during such Expense Year that each such Tenant's Share was in effect. 4.3 Calculation and Payment of Additional Rent. 4.3.1 Calculation of Excess. If for any Expense Year ending or commencing within the Lease Term, Tenant's Share of Direct Expenses for such Expense Year exceeds Tenant's Share of Direct Expenses for the Base Year, then Tenant shall pay to Landlord, in the manner set forth in Section 4.3.2, below, and as Additional Rent, an amount equal to the excess (the "Excess"). 4.3.2 Statement of Actual Direct Expenses and Payment by Tenant. Landlord shall endeavor to give to Tenant on or before the first day of April following the end of each Expense Year, a statement (the "Statement") which shall state the Direct Expenses incurred or accrued for such preceding Expense Year, and which shall indicate the amount, if any, of any Excess. Upon receipt of the Statement for each Expense Year ending during the Lease Term, if an Excess is present, Tenant shall pay, with its next installment of Base Rent due, the full amount of the Excess for such Expense Year, less the amounts, if any, paid during such Expense Year as Estimated Excess. The failure of Landlord to timely furnish the Statement for any Expense Year shall not prejudice Landlord from enforcing its rights under this Article 4; provided, however, Tenant shall have no liability for Operating Expenses not contained in a Statement given to Tenant within one (l) year after the end of the Expense Year in which the expense was incurred. Even though the Lease Term has expired and Tenant has vacated the Premises, when the final determination is made of Tenant's Share of the Direct Expenses for the Expense Year in which this Lease terminates, if an Excess is present, Tenant shall immediately pay to Landlord an amount as calculated pursuant to the provisions of Section 4.3.1 of this Lease. The provisions of this Section 4.3.2 shall survive the expiration or earlier termination of the Lease Term. 4.3.3 Statement of Estimated Direct Expenses. In addition, Landlord shall endeavor to give Tenant a yearly expense estimate statement (the "Estimate Statement") which shall set forth Landlord's reasonable estimate (the "Estimate") of what the total amount of Direct Expenses for the then-current Expense Year shall be and the estimated Excess (the "Estimated Excess") as 13 calculated by comparing Tenant's Share of Direct Expenses, which shall be based upon the Estimate, to Tenant's Share of Direct Expenses for the Base Year. The failure of Landlord to timely furnish the Estimate Statement for any Expense Year shall not preclude Landlord from enforcing its rights to collect any Estimated Excess under this Article 4, provided, however, Tenant shall have no liability for Operating Expenses not contained in a Statement given to Tenant within one (1) year after the end of the Expense Year in which the expense was incurred. If pursuant to the Estimate Statement an Estimated Excess is calculated for the then current Expense Year, Tenant shall pay, with its next installment of Base Rent due, a fraction of the Estimated Excess for the then-current Expense Year (reduced by any amounts paid pursuant to the last sentence of this Section 4.3.3). Such fraction shall have as its numerator the number of months which have elapsed in such current Expense Year to the month of such payment, both months inclusive, and shall have twelve (12) as its denominator. Until a new Estimate Statement is furnished, Tenant shall pay monthly, with the monthly Base Rent installments, an amount equal to one-twelfth (1/12) of the total Estimated Excess set forth in the previous Estimate Statement delivered by Landlord to Tenant. 4.4 Taxes and Other Charges for Which Tenant Is Directly Responsible. Tenant shall reimburse Landlord upon demand for any and all taxes or assessments required to be paid by Landlord (except to the extent included in Tax Expenses by Landlord), excluding state, local and federal personal or corporate income taxes measured by the net income of Landlord from all sources and estate and inheritance taxes, whether or not now customary or within the contemplation of the parties hereto, when: 4.4.1 Said taxes are measured by or reasonably attributable to the cost or value of Tenant's equipment, furniture, fixtures and other personal property located in the Premises, or by the cost or value of any leasehold improvements made in or to the Premises by or for Tenant, to the extent the cost or value of such leasehold improvements exceeds the cost or value of a building standard build-out as reasonably determined by Landlord regardless of whether title to such improvements shall be vested in Tenant or Landlord; 4.4.2 Said taxes are assessed upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion of the Real Property (including the Parking Facilities); 4.4.3 Said taxes are assessed upon this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises; or 4.4.4 Said assessments are levied or assessed upon the Real Property or any part thereof or upon Landlord and/or by any governmental authority or entity, and relate to the construction, operation, management, use, alteration or repair of mass transit improvements. Notwithstanding the foregoing, with respect to any of such aforementioned taxes described in Sections 4.4.1, 4.4.2 or 4.4.3 that are attributable to Tenant, Tenant's obligation to reimburse Landlord shall be conditioned upon Landlord giving Tenant written notice thereof and the opportunity to pay, or contest (in 14 good faith) to the assessment thereof. If Tenant does not give Landlord written notice of Tenant's payment of such taxes or contest of the assessment thereof within ten (10) days following Tenant's receipt of such notice, Landlord may pay the same and Tenant shall reimburse Landlord upon demand therefor. If Tenant desires to contest the assessment thereof, then Tenant may do so provided that legal procedures for the contesting of such taxes are available that will not subject Landlord or its property to a penalty or lien, and further provided that Tenant complies with such procedures. Landlord will cooperate with Tenant in contesting such assessment and Tenant shall indemnify Landlord from all liability, loss and expense (including reasonable attorneys' fees) incurred by Landlord resulting from such contest and/or failure to pay such assessment. 4.5 Landlord's Books and Records. Within one (1) year after receipt of a Statement by Tenant ("Review Period"), Tenant's employees or an accountant designated by Tenant (collectively, "Tenant Representative"), may, after reasonable notice to Landlord and during normal business hours, inspect and photocopy Landlord's records at Landlord's offices, provided that Tenant and the Tenant Representative shall, and each of them shall use their commercially reasonable efforts to cause their respective employees to, maintain all information contained in Landlord's records in strict confidence. After such inspection, Tenant may cause a certification as to the proper amount of Additional Rent, at Tenant's expense, by an independent certified public accountant (which accountant is a member of a nationally recognized accounting firm, and which firm has not provided services to Landlord or Tenant within the preceding five (5) years) selected by Landlord and approved by Tenant. The designated accountant shall review Landlord records and calculations, each parties' contentions and this Lease. Landlord shall cooperate in good faith with Tenant and the designated accountant to show Tenant and the designated accountant the information upon which the certification is to be based. Tenant shall pay the cost of the designated accountant and the cost of such certification; provided that if such certification by the designated accountant proves that the Direct Expenses set forth in the Statement were overstated by more than three percent (3%), then the cost of the designated accountant and the cost of such certification shall be paid for by Landlord. Promptly following the parties receipt of such certification, the parties shall make such appropriate payments or reimbursements, as the case may be, to each other, as are determined to be owing pursuant to such certification, together with interest at the Interest Rate from the date due until paid, in the case of payments by Tenant to Landlord, or from the date paid until reimbursed, in the case of reimbursements by Landlord to Tenant; provided, however, if Tenant is in monetary default hereunder, Landlord may credit any sums owing to Tenant under this Section 4.5 against the delinquent sums payable by Tenant. The payment by Tenant of any amounts pursuant to this Article 4 shall not preclude Tenant from questioning the correctness of any Statement delivered by Landlord, provided that the failure of Tenant to object thereto prior to the expiration of the Review Period shall be conclusively deemed Tenant's approval of the applicable Statement. 15 ARTICLE 5 --------- USE OF PREMISES --------------- 5.1 Permitted Use. Tenant shall use the Premises solely for general office purposes consistent with the character of the Building as a first-class office building, and Tenant shall not use or permit the Premises to be used for any other purpose or purposes whatsoever. 5.2 Prohibited Uses. Tenant further covenants and agrees that it shall not use, or authorize any person or persons to use the Premises, the Parking Facilities or any other Common Areas or any part thereof for any use or purpose contrary to the provisions of Exhibit D attached hereto ("Rules and Regulations"), or in violation of the laws of the United States of America, the State of Arizona, or the ordinances, regulations or requirements of the local municipal or county governing body or other lawful authorities having jurisdiction over the Building. Tenant shall, promptly upon acquiring knowledge thereof, give Landlord written notice of any person using the Premises, the Parking Facilities or any other Common Areas in violation of any laws. Tenant shall comply with all recorded covenants, conditions, and restrictions, and the provisions of all ground or underlying leases, now or hereafter affecting the Real Property which Landlord supplies to Tenant. Tenant shall not use or allow another person or entity to use any part of the Premises for the storage, use, treatment, manufacture or sale of any hazardous or toxic material except for ordinary office and janitorial supplies in quantities customarily used by office tenants. ARTICLE 6 --------- SERVICES AND UTILITIES ---------------------- 6.1 Standard Tenant Services. Landlord shall provide the following services on all days during the Lease Term, unless otherwise stated below. 6.1.1 Subject to all governmental rules, regulations and guidelines applicable thereto, Landlord shall provide heating and air conditioning when necessary for normal comfort for normal office use in the Premises, from Monday through Friday, during the period from 8:00 a.m. to 6:00 p.m., and on Saturday during the period from 8:00 a.m. to 12:00 noon, except for the date of observation of New Year's Day, Presidents' Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, Christmas Day and other nationally recognized holidays (collectively, the "Holidays"). 6.1.2 Landlord shall provide adequate electrical wiring and facilities and power for normal general office use as reasonably determined by Landlord. Tenant shall bear the cost of replacement of lamps, starters and ballasts for lighting fixtures within the Premises. 6.1.3 Landlord shall provide city water from the regular Building outlets for drinking, lavatory and toilet purposes. 16 6.1.4 Landlord shall provide janitorial services five (5) days per week, except the date of observation of the Holidays, in and about the Premises and window washing services in a manner consistent with other comparable buildings in the vicinity of the Building. 6.1.5 Landlord shall provide nonexclusive automatic passenger elevator service at all times. 6.1.6 Landlord shall provide nonexclusive freight elevator service subject to scheduling by Landlord. 6.2 Overstandard Tenant Use. Tenant shall not, without Landlord's prior written consent, which shall not be unreasonably delayed or withheld, use heat-generating machines, machines other than normal fractional horsepower office machines or normal office computer equipment, or equipment or lighting other than building standard lights in the Premises, which may affect the temperature otherwise maintained by the air conditioning system or increase the water normally furnished for the Premises by Landlord pursuant to the terms of Section 6.1 of this Lease. If such consent is given, Landlord shall have the right, where necessitated by the basis of such consent, to install supplementary air conditioning units or other facilities in the Premises, including supplementary or additional metering devices, and the cost thereof, including the cost of installation, operation and maintenance, increased wear and tear on existing equipment and other similar charges, shall be paid by Tenant to Landlord upon billing by Landlord. If Tenant uses electricity, water or heat or air conditioning in excess of that supplied by Landlord pursuant to Section 6.1 of this Lease, Tenant shall pay to Landlord, upon billing, the cost of such excess consumption, the cost of the installation, operation, and maintenance of equipment which is installed in order to supply such excess consumption, and the cost of the increased wear and tear on existing equipment caused by such excess consumption, and Landlord may install devices to separately meter any increased use and in such event Tenant shall pay the increased cost directly to Landlord, on demand, including the cost of such additional metering devices (if Landlord separately meters all of any particular utility use by Tenant, as opposed to only the increased use, then Landlord shall make an appropriate adjustment to Operating Expenses so that Tenant is not double-billed for the cost of such utility). If Tenant desires to use heat, ventilation or air conditioning during hours other than those for which Landlord is obligated to supply such utilities pursuant to the terms of Section 6.1 of this Lease, Tenant shall give Landlord such prior notice, as Landlord shall from time to time establish as appropriate, of Tenant's desired use and Landlord shall supply such utilities to Tenant at such hourly, full-floor cost to Tenant as Landlord shall from time to time reasonably establish. Amounts payable by Tenant to Landlord for such use of additional utilities shall be deemed Additional Rent hereunder and shall be billed on a monthly basis. Landlord may increase the hours or days during which air conditioning, heating and ventilation are provided to the Premises and the Building to accommodate the usage by tenants occupying two-thirds or more of the rentable square feet of the Building or to conform to practices of other buildings in the area comparable to the Building. 6.3 Interruption of Use. Tenant agrees that Landlord shall not be liable for damages, by abatement of Rent or otherwise, for failure to furnish or delay in furnishing any service (including telephone and telecommunication 17 services), or for any diminution in the quality or quantity thereof, when such failure or delay or diminution is occasioned, in whole or in part, by repairs, replacements, or improvements, by any strike, lockout or other labor trouble, by inability to secure electricity, gas, water, or other fuel at the Building after reasonable effort to do so, by any accident or casualty whatsoever, by act or default of Tenant or other parties, or by any other cause beyond Landlord's reasonable control; and such failures or delays or diminution shall never be deemed to constitute an eviction or disturbance of Tenant's use and possession of the Premises or relieve Tenant from paying Rent or performing any of its obligations under this Lease. Furthermore, Landlord shall not be liable under any circumstances for a loss of, or injury to, property or for injury to, or interference with, Tenant's business, including, without limitation, loss of profits, however occurring, through or in connection with or incidental to a failure to furnish any of the services or utilities as set forth in this Article 6, except for loss or injury that is not covered by insurance carried, or required to be carried hereunder, by Tenant and which is caused by the gross negligence or willful misconduct of Landlord. 6.4 Additional Services. Landlord shall also have the exclusive right, but not the obligation, to provide any additional services which may be required by Tenant, including, without limitation, locksmithing, lamp replacement, additional janitorial service, and additional repairs and maintenance, provided that Tenant shall pay to Landlord upon billing, the sum of all reasonable costs to Landlord of such additional services plus an administration fee not to exceed fifteen percent (15%). Charges for any service for which Tenant is required to pay from time to time hereunder, shall be deemed Additional Rent hereunder and shall be billed on a monthly basis. ARTICLE 7 --------- REPAIRS ------- Tenant shall, at Tenant's own expense, keep the Premises, including all improvements, fixtures and furnishings therein, in good order, repair and condition at all times during the Lease Term. In addition, Tenant shall, at Tenant's own expense but under the supervision and subject to the prior approval of Landlord, and within any reasonable period of time specified by Landlord, promptly and adequately repair all damage to the Premises and replace or repair all damaged or broken fixtures and appurtenances; provided however, that, at Landlord's option, or if Tenant fails to make such repairs, Landlord may, but need not, make such repairs and replacements, and Tenant shall pay Landlord the cost thereof, including a percentage of the cost thereof (to be uniformly established for the Building) sufficient to reimburse Landlord for all overhead, general conditions, fees and other costs or expenses arising from Landlord's involvement with such repairs and replacements forthwith upon being billed for same. Landlord may, but shall not be required to, enter the Premises, after reasonable notice (except in an emergency situation), at all reasonable times to make such repairs, alterations, improvements and additions to the Premises or to the Building or to any equipment located in the Building as Landlord shall desire or deem necessary or as Landlord may be required to do by governmental or quasi-governmental authority or court order or decree. Except as expressly stated in this Lease, Tenant hereby waives and releases its right to make repairs at Landlord's expense under any Arizona law, statute, or ordinance now or hereafter in effect. 18 ARTICLE 8 --------- ADDITIONS AND ALTERATIONS ------------------------- 8.1 Landlord's Consent to Alterations. Except for nonstructural alterations not affecting Building systems, the cost of which does not in each instance exceed Ten Thousand Dollars ($10,000.00), Tenant may not make any improvements, alterations, additions or changes to the Premises (collectively, the "Alterations") without first procuring the prior written consent of Landlord to such Alterations, which consent shall be requested by Tenant not less than thirty (30) days prior to the commencement thereof, and which consent shall not be unreasonably withheld or delayed by Landlord. The construction of the initial improvements to the Premises shall be governed by the terms of the Tenant Work Letter and not the terms of this Article 8. 8.2 Manner of Construction. Landlord may impose, as a condition of its consent to all Alterations or repairs of the Premises or about the Premises, such requirements as Landlord in its sole discretion may deem desirable, including, but not limited to, the requirement that upon Landlord's request, Tenant shall, at Tenant's expense, remove such Alterations upon the expiration or any early termination of the Lease Term, and/or the requirement that Tenant utilize for such purposes only contractors, materials, mechanics and materialmen selected by Landlord. In any event, a contractor of Landlord's selection shall perform all mechanical, electrical, plumbing, structural, and heating, ventilation and air conditioning work, and such work shall be performed at Tenant's cost. Tenant shall construct such Alterations and perform such repairs in conformance with any and all applicable rules and regulations of any federal, state, county or municipal code or ordinance and pursuant to a valid building permit, issued by the appropriate governmental authorities, in conformance with Landlord's construction rules and regulations. Landlord~s approval of the plans, specifications and working drawings for Tenant's Alterations shall create no responsibility or liability on the part of Landlord for their completeness, design "sufficiency, or compliance with all laws, rules and regulations of governmental agencies or authorities. All work with respect to any Alterations must be done in a good and workmanlike manner and diligently prosecuted to completion. In performing the work of any such Alterations, Tenant shall have the work performed in such manner as not to obstruct access to the Building or the common areas for any other tenant of the Building, and as not to obstruct the business of Landlord or other tenants in the Building, or interfere with the labor force working in the Building. Upon completion of any Alterations and receipt of Landlord's written request, Tenant agrees to cause a Notice of Completion to be recorded in the office of the Recorder of the County of Maricopa in accordance with the laws of the State of Arizona, and Tenant shall deliver to the Building management office a reproducible copy of the "as built" drawings of the Alterations. 8.3 Payment for Improvements. In the event Tenant orders any Alteration or repair work directly from Landlord, or from the contractor selected by Landlord, the charges for such work shall be deemed Additional Rent under this Lease, payable upon billing therefor, either periodically during construction or upon the substantial completion of such work, at Landlord's option. Upon completion of such work, Tenant shall deliver to Landlord, if payment is made directly to contractors, evidence of payment, contractors' affidavits and full 19 and final waivers of all liens for labor, services or materials. Whether or not Tenant orders any work directly from Landlord, Tenant shall pay to Landlord a percentage not to exceed ten percent (10%) of the cost of such work (such percentage, which shall vary depending upon whether or not Tenant orders the work directly from Landlord, to be established on a uniform basis for the Building) sufficient to compensate Landlord for all overhead, general conditions, fees and other costs and expenses arising from Landlord's involvement with such work. 8.4 Construction Insurance. In the event that Tenant makes any Alterations, Tenant agrees to carry "Builder's All Risk" insurance in an amount reasonably approved by Landlord covering the construction of such Alterations, and such other insurance as Landlord may reasonably require, it being understood and agreed that all of such Alterations shall be insured by Tenant pursuant to Article 10 of this Lease immediately upon completion thereof. In addition, Landlord may, in its reasonable discretion, require Tenant to obtain a lien and completion bond or some alternate form of security satisfactory to Landlord in an amount sufficient to ensure the lien-free completion of such Alterations and naming Landlord as a co-obligee. 8.5 Landlord's Property. All Alterations, improvements, fixtures and/or equipment which may be installed or placed in or about the Premises, and all signs installed in, on or about the Premises, from time to time, shall be at the sole cost of Tenant and shall be and become the property of Landlord, except that Tenant may remove any Alterations, improvements, fixtures and/or equipment which Tenant can substantiate to Landlord have not been paid for with any tenant improvement allowance funds provided to Tenant by Landlord, provided Tenant repairs any damage to the Premises and Building caused by such removal. Furthermore, if Landlord, as a condition to Landlord's consent to any Alteration, requires that Tenant remove any Alteration upon the expiration or early termination of the Lease Term, Landlord may, by written notice to Tenant prior to the end of the Lease Term, or given upon any earlier termination of this Lease, require Tenant at Tenant's expense to remove such Alterations and to repair any damage to the Premises and Building caused by such removal. If Tenant fails to complete such removal and/or to repair any damage caused by the removal of any Alterations, Landlord may do so and may charge the actual cost thereof to Tenant. ARTICLE 9 --------- COVENANT AGAINST LIENS ---------------------- Landlord shall have the right at all times to post and keep posted on the Premises any notice which it deems necessary for protection from such liens. Tenant covenants and agrees not to suffer or permit any lien of mechanics or materialmen or others to be placed against the Real Property, the Building or the Premises with respect to work or services performed for or materials furnished to Tenant or the Premises, and, in case of any such lien attaching or notice of any lien, Tenant covenants and agrees to cause it to be released and removed of record immediately following Tenant's knowledge thereof (however, Tenant may contest such lien by posting a bond in accordance with applicable law provided such bond protects Landlord's interest in the Real Property and further 20 provided that such contest does not hinder or delay any proposed sale or financing of the Real Property or cause Landlord to be in default under any loan secured by the Real Property). Notwithstanding anything to the contrary set forth in this Lease, in the event that such lien is not released, discharged or removed within fifteen (15) days after the date notice of such lien is delivered by Landlord to Tenant, Landlord, at its sole option, may immediately take all action necessary to release and remove such lien, without any duty to investigate the validity thereof, and all sums, costs and expenses, including reasonable attorneys' fees and costs, incurred by Landlord in connection with such lien shall be deemed Additional Rent under this Lease and shall immediately be due and payable by Tenant. ARTICLE 10 ---------- INSURANCE --------- 10.1 Indemnification and Waiver. To the extent not prohibited by law, Landlord, its partners and their respective officers, agents, servants, employees, and independent contractors (collectively, "Landlord Parties") shall not be liable for any damage either to person or property or resulting from the loss of use thereof, which damage is sustained by Tenant or by other persons claiming through Tenant, except for damage that is not covered by insurance carried, or required to be carried hereunder, by Tenant and which is caused by the negligence or willful misconduct of a Landlord Party. Tenant shall indemnify, defend, protect, and hold harmless Landlord Parties for, from and against any and all loss, cost, damage, expense and liability (including without limitation court costs and reasonable attorneys' fees) incurred in connection with or arising from any cause in, on or about the Premises either prior to, during, or after the expiration of the Lease Term, provided that the terms of the foregoing indemnity shall not apply to the sole negligence or willful misconduct of Landlord. The provisions of this Section 10.1 shall survive the expiration or sooner termination of this Lease with respect to any claims or liability occurring prior to such expiration or termination. 10.2 Tenant's Compliance with Landlord's Fire and Casualty Insurance. Tenant shall, at Tenant's expense, comply with all insurance company requirements pertaining to the use of the Premises of which Tenant has been given written notice. If Tenant's conduct or use of the Premises causes any increase in the premium for such insurance policies, then, after receipt of notice of such increase followed by a reasonable cure period, Tenant shall reimburse Landlord for any such increase. Tenant, at Tenant's expense, shall comply with all rules, orders, regulations or requirements of the American Insurance Association (formerly the National Board of Fire Underwriters) and with any similar body. 10.3 Tenant's Insurance. Tenant shall maintain the following coverages in the following amounts. 10.3.1 Commercial General Liability Insurance, on an occurrence basis, covering the insured against claims of bodily injury, personal injury and property damage arising out of Tenant's operations, assumed liabilities or use of the Premises, including a Broad Form Commercial General 21 Liability endorsement covering the insuring provisions of this Lease and the performance by Tenant of the indemnity agreements set forth in Section 10.1 of this Lease, for limits of liability not less than: Bodily Injury and Property Damage Liability $3,000,000 each occurrence $3,000,000 annual aggregate Personal Injury Liability $3,000,000 each occurrence $3,000,000 annual aggregate 0% Insured's participation 10.3.2 Physical Damage Insurance covering (i) all office furniture, trade fixtures, office equipment, merchandise and all other items of Tenant's property on the Premises installed by, for, or at the expense of Tenant, (ii)the Tenant Improvements, including any Tenant Improvements which Landlord permits to be installed above the ceiling of the Premises or below the floor of the Premises, and (iii) all other improvements, alterations and additions to the Premises, including any improvements, alterations or additions installed at Tenant's request above the ceiling of the Premises or below the floor of the Premises. Such insurance shall be written on an "all risks" of physical loss or damage basis, for the full replacement cost value new without deduction for depreciation of the covered items and in amounts that meet any co-insurance clauses of the policies of insurance and shall include a vandalism and malicious mischief endorsement, sprinkler leakage coverage and earthquake sprinkler leakage coverage. 10.3.3 Loss of income and extra expense insurance in such amounts as will reimburse Tenant for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent tenants or attributable to prevention of access to the Premises or to the Building as a result of such perils. 10.4 Form of Policies. The minimum limits of policies of insurance required of Tenant under this Lease shall in no event limit the liability of Tenant under this Lease. All insurance shall (i) be issued by an insurance company having a rating of not less than A-X in Best's Insurance Guide or which is otherwise acceptable to Landlord and licensed to do business in the State of Arizona; and (ii) provide that said insurance shall not be canceled or coverage changed unless thirty (30) days' prior written notice shall have been given to Landlord and any mortgagee or ground or underlying lessor of Landlord. In addition, the insurance described in Section 10.3.1 above shall (a) name Landlord, and any other party specified by Landlord, as an additional insured; (b) specifically cover the liability assumed by Tenant under this Lease including, but not limited to, Tenant's obligations under Section 10.1 of this Lease; (c) be primary insurance as to all claims thereunder and provide that any insurance required by Landlord is excess and is noncontributing with any insurance requirement of Tenant; and (d) contain a cross-liability endorsement or severability of interest clause reasonably acceptable to Landlord. In addition, the insurance described in Section 10.3.2 shall name Landlord and any other party specified by Landlord as loss-payee as to all items referred to in clauses (ii) and (iii) of Section 10.3.2. Tenant shall deliver all policies or 22 certificates thereof to Landlord on or before the Lease Commencement Date and at least thirty (30) days before the expiration dates thereof. In the event Tenant shall fail to procure such insurance, or to deliver such policies or certificate, Landlord may, at its option upon notice to Tenant, procure such policies for the account of Tenant, and the cost thereof shall be paid to Landlord as Additional Rent within five (5) days after delivery to Tenant of bills therefor. 10.5 Subrogation. Landlord and Tenant agree to have their respective insurance companies issuing property damage and loss of income and extra expense insurance waive any rights of subrogation that such companies may have against Landlord or Tenant, as the case may be. Landlord and Tenant hereby waive any right that either may have against the other on account of any loss or damage to the extent such loss or damage is insurable under such policies of insurance. 10.6 Additional Insurance Obligations. Tenant shall carry and maintain during the entire Lease Term, at Tenant's sole cost and expense, increased amounts of the insurance required to be carried by Tenant pursuant to this Article 10, and such other reasonable types of insurance coverage and in such reasonable amounts covering the Premises and Tenant's operations therein, as may be reasonably requested by Landlord. ARTICLE 11 ---------- DAMAGE AND DESTRUCTION ---------------------- 11.1 Repair of Damage to Premises by Landlord. Tenant shall promptly notify Landlord of any damage to the Premises resulting from fire or any other casualty. If the Premises or any common areas of the Building serving or providing access to the Premises shall be damaged by fire or other casualty, Landlord shall promptly and diligently, subject to reasonable delays for insurance adjustment or other matters beyond Landlord's reasonable control, and subject to all other terms of this Article 11, restore the base, shell, and core of the Premises and such common areas. Such restoration shall be to substantially the same condition of the base, shell, and core of the Premises and common areas prior to the casualty, except for modifications required by zoning and building codes and other laws or by the holder of a mortgage on the Building, or the lessor of a ground or underlying lease with respect to the Real Property and/or the Building, or any other modifications to the common areas deemed desirable by Landlord, provided access to the Premises and any common restrooms serving the Premises shall not be materially impaired. Notwithstanding any other provision of this Lease, upon the occurrence of any damage to the Premises, Tenant shall assign to Landlord (or to any party designated by Landlord) all insurance proceeds payable to Tenant for loss or repair of the base, shell and core of the Premises plus the completed Tenant Improvements under Tenant's insurance required under Section 10.3 of this Lease, and Landlord shall repair any injury or damage to the Tenant Improvements installed in the Premises and shall return such Tenant Improvements to their original condition; provided that if the cost of such repair by Landlord exceeds the amount of insurance proceeds received by Landlord from Tenant's insurance carrier, as assigned by Tenant, the cost of such repairs shall be paid by Tenant to Landlord prior to Landlord's repair of the damage. In connection with such repairs and 23 replacements, Tenant shall, prior to the commencement of construction, submit to Landlord, for Landlord's review and approval, which shall not be unreasonably withheld or delayed, all plans, specifications and working drawings relating thereto, and the contractors selected to perform such improvement work shall be subject to Landlord's approval, which shall not be unreasonably withheld or delayed. Such submittal of plans and construction of improvements shall be performed in substantial compliance with the terms of the Tenant Work Letter as though such construction of improvements were the initial construction of the Tenant Improvements. Landlord shall not be liable for any inconvenience or annoyance to Tenant or its visitors, or injury to Tenant's business resulting in any way from such damage or the repair thereof; provided however, that if such fire or other casualty shall have damaged the Premises or common areas necessary to Tenant's occupancy, and if such damage is not the result of the negligence or willful misconduct of Tenant or Tenant's employees, contractors, licensees, or invitees, Landlord shall allow Tenant a proportionate abatement of Rent, during the time and to the extent the Premises are unfit for occupancy for the purposes permitted under this Lease, and not occupied by Tenant conducting its normal business as a result thereof. 11.2 Landlord's Option to Repair. Within forty-five (45) days after the date Landlord learns of the necessity for repairs as a result of damage, Landlord shall notify Tenant ("Damage Repair Estimate") of Landlord's estimated assessment of the period of time in which the repairs will be completed, which assessment shall be based upon the opinion of a contractor reasonably selected by Landlord and experienced in comparable repairs of high-rise office buildings. Notwithstanding the terms of Section 11.1 of this Lease, Landlord may elect not to rebuild and/or restore the Premises and/or Building and instead terminate this Lease by notifying Tenant in writing of such termination within forty-five (45) days after the date Landlord learns of the necessity for repairs as the result of damage, such notice to include a termination date giving Tenant ninety (90) days to vacate the Premises, but Landlord may so elect only if the Building shall be damaged by fire or other casualty or cause, whether or not the Premises are affected, and one or more of the following conditions is present: (i) repairs are not likely to be completed within one hundred eighty (180) days after delivery of the Damage Repair Estimate to Tenant (when such repairs are made without the payment of overtime or other premiums); (ii) the holder of any mortgage on the Building or ground or underlying lessor with respect to the Real Property and/or the Building shall require that the insurance proceeds or any portion thereof be used to retire the mortgage debt, or shall terminate the ground or underlying lease, as the case may be; (iii) the damage is not fully covered, except for deductible amounts, by Landlord's insurance policies; or (iv) an election is made not to repair the damage by the parties to the Reciprocal Easement and Operating Agreement for Central Park Square recorded in the Official Records of Maricopa County on February 9, 1996, as Instrument No. 96-0091365. However, if Landlord does not elect to terminate this Lease pursuant to Landlord's termination right as provided above, and the Damage Repair Estimate indicates that repairs are not likely to be completed within one hundred eighty (180) days after Tenant's receipt of the Damage Repair Estimate, Tenant may elect, not later than thirty (30) days after Tenant's receipt of the Damage Repair Estimate, to terminate this Lease by written notice to Landlord effective as of the date specified in Tenant's notice; provided, however, Tenant may not elect to terminate this Lease if the damage was the result of the 24 negligence or willful misconduct of Tenant or its employees, contractors or licensees. 11.3 Waiver of Statutory Provisions. The provisions of this Lease, including this Article 11, constitute an express agreement between Landlord and Tenant with respect to any and all damage to, or destruction of, all or any part of the Premises, the Building or any other portion of the Real Property, and any statute, regulation or case law of the State of Arizona with respect to any rights or obligations concerning damage or destruction in the absence of an express agreement between the parties, and any other statute, regulation or case law, now or hereafter in effect, shall have no application to this Lease or any damage or destruction to all or any part of the Premises, the Building or any other portion of the Real Property. 11.4 Damage Near End of Term. In the event that the Premises or the Building is destroyed or damaged to any substantial extent during the last twenty-four (24) months of the Lease Term and the Damage Repair Estimate indicates that repairs cannot be completed within ninety (90) days after being commenced, then notwithstanding anything contained in this Article 11, Landlord and Tenant (but, as for Tenant, only with respect to damage to the Premises or common areas necessary to Tenant's occupancy and which is not the result of the negligence or willful misconduct of Tenant or its employees, contractors, licensees or invitees) shall each have the option to terminate this Lease by giving written notice to the other party of the exercise of such option within thirty (30) days after Landlord's delivery of the Damage Repair Estimate, in which event this Lease shall cease and terminate as of the date of such notice, Tenant shall pay the Base Rent and Additional Rent, properly apportioned up to such date of damage, and both parties hereto shall thereafter be freed and discharged of all further obligations hereunder, except as provided for in provisions of this Lease which by their terms survive the expiration or earlier termination of the Lease Term. ARTICLE 12 ---------- NONWAIVER --------- No waiver of any provision of this Lease shall be implied by any failure of either party to enforce any remedy on account of the violation of such provision, even if such violation shall continue or be repeated subsequently, any waiver by either party of any provision of this Lease may only be in writing, and no express waiver shall affect any provision other than the one specified in such waiver and that one only for the time and in the manner specifically stated. No receipt of monies by Landlord from Tenant after the termination of this Lease shall in any way alter the length of the Lease Term or of Tenant's right of possession hereunder or after the giving of any notice shall reinstate, continue or extend the Lease Term or affect any notice given Tenant prior to the receipt of such monies, it being agreed that after the service of notice or the commencement of a suit or after final judgment for possession of the Premises, Landlord may receive and collect any Rent due, and the payment of said Rent shall not waive or affect said notice, suit or judgment. 25 ARTICLE 13 ---------- CONDEMNATION ------------ 13.1 Permanent Taking. If the whole or any part of the Premises or Building shall be taken by power of eminent domain or condemned by any competent authority for any public or quasi-public use or purpose, or if any adjacent property or street shall be so taken or condemned, or reconfigured or vacated by such authority in such manner as to require the use, reconstruction or remodeling of any part of the Premises or Building, or if Landlord shall grant a deed or other instrument in lieu of such taking by eminent domain or condemnation, Landlord shall have the option to terminate this Lease upon ninety (90) days' notice, provided such notice is given no later than one hundred eighty (180) days after the date of such taking, condemnation, reconfiguration, vacation, deed or other instrument. If more than twenty-five percent (25%) of the rentable square feet of the Premises is taken, or if access to the Premises is substantially impaired, Tenant shall have the option to terminate this Lease upon ninety (90) days' notice, provided such notice is given no later than one hundred eighty (180) days after the date of such taking. Landlord shall be entitled to receive the entire award or payment in connection therewith, except that Tenant shall have the right to file any separate claim available to Tenant for any taking of Tenant's personal property and fixtures belonging to Tenant and removable by Tenant upon expiration of the Lease Term pursuant to the terms of this Lease, and for moving expenses, so long as such claim does not diminish the award available to Landlord, its ground lessor with respect to the Real Property or its mortgagee, and such claim is payable separately to Tenant. All Rent shall be apportioned as of the date of such termination, or the date of such taking, whichever shall first occur. If any part of the Premises shall be taken, and this Lease shall not be so terminated, the Rent shall be proportionately abated. Tenant hereby waives any and all rights it might otherwise have under Arizona law to seek termination of this Lease because an essential part of the Premises is taken or the remainder of the Premises is no longer suitable for the purposes of this Lease, it being the intent of the parties that the provisions of Article 13 of this Lease shall govern the right of the parties in such event. 13.2 Temporary Taking. Notwithstanding anything to the contrary contained in this Article 13, in the event of a temporary taking of all or any portion of the Premises for a period of ninety (90) days or less, then this Lease shall not terminate but the Base Rent and the Additional Rent shall be abated for the period of such taking in proportion to the ratio that the number of rentable square feet of the Premises taken bears to the total number of rentable square feet of the Premises. Landlord shall be entitled to receive the entire award made in connection with any such temporary taking ARTICLE 14 ---------- ASSIGNMENT AND SUBLETTING ------------------------- 14.1 Transfers. Tenant shall not, without the prior written consent of Landlord, assign or otherwise transfer this Lease or any interest hereunder, permit any assignment or other such foregoing transfer of this Lease or any interest hereunder by operation of law, sublet the Premises or any part thereof, 26 or permit the use of the Premises by any persons other than Tenant and its employees (all of the foregoing are hereinafter sometimes referred to collectively as "Transfers" and any person to whom any Transfer is made or sought to be made is hereinafter sometimes referred to as a "Transferee"). Notwithstanding the foregoing and upon written notice to Landlord, Tenant may assign this Lease to any of Tenant's Affiliates provided that the Transferee(s) assume the obligations of Tenant hereunder pursuant to an instrument reasonably acceptable to Landlord and further provided that the Transfer is not a subterfuge by Tenant to avoid its obligations under this Lease (the foregoing is hereinafter sometimes referred to as a "Permitted Transfer"). In no event may Tenant mortgage, pledge, hypothecate, encumber, or permit any lien to attach to, this Lease. If Tenant shall desire Landlord's consent to any Transfer other than a Permitted Transfer, Tenant shall notify Landlord in writing, which notice (the "Transfer Notice") shall include (i) the proposed effective date of the Transfer, which shall not be less than forty-five (45) days nor more than one hundred eighty (180) days after the date of delivery of the Transfer Notice, (ii) a description of the portion of the Premises to be transferred (the "Subject Space"), (iii) all of the terms of the proposed Transfer and the consideration therefor, including a calculation of the "Transfer Premium," as that term is defined in Section 14.3 below, in connection with such Transfer, the name and address of the proposed Transferee, and a copy of all existing and/or proposed documentation pertaining to the proposed Transfer, including all existing operative documents to be executed to evidence such Transfer or the agreements incidental or related to such Transfer, and (iv) current financial statements of the proposed Transferee certified by an officer, partner or owner thereof, and any other information required by Landlord, which will enable Landlord to determine the financial responsibility, character, and reputation of the proposed Transferee, nature of such Transferee's business and proposed use of the Subject Space, and such other information as Landlord may reasonably require. Any Transfer made without Landlord's prior written consent shall, at Landlord's option, be null, void and of no effect, and shall, at Landlord's option, constitute a default by Tenant under this Lease. Whether or not Landlord shall grant consent, Tenant shall pay Landlord's review and processing fees, as well as any reasonable legal fees (such legal fees not to exceed One Thousand Five Hundred Dollars ($1,500.00) per Transfer) incurred by Landlord, within thirty (30) days after written request by Landlord. 14.2 Landlord's Consent. Landlord shall not unreasonably withhold or delay its consent to any proposed Transfer of the Subject Space to the Transferee on the terms specified in the Transfer Notice. The parties hereby agree that it shall be reasonable under this Lease and under any applicable law for Landlord to withhold consent to any proposed Transfer where one or more of the following apply, without limitation as to other reasonable grounds for withholding consent: 14.2.1 The Transferee is of a character or reputation or engaged in a business which is not consistent with the quality of the Building, or would be a significantly less prestigious occupant of the Building than Tenant; 14.2.2 The Transferee intends to use the Subject Space for purposes which are not permitted under this Lease; 27 14.2.3 The Transferee is either a governmental agency or instrumentality thereof; 14.2.4 The Transfer will result in more than a reasonable and safe number of occupants per floor within the Subject Space; 14.2.5 The Transferee is not a party of reasonable financial worth and/or financial stability in light of the responsibilities involved under the Lease on the date consent is requested; 14.2.6 The proposed Transfer would cause Landlord to be in violation of another lease or agreement to which Landlord is a party, or would give an occupant of the Building a right to cancel its lease; 14.2.7 The terms of the proposed Transfer will allow the Transferee to exercise a right of renewal, right of expansion, right of first offer, or other similar right held by Tenant (or will allow the Transferee to occupy space leased by Tenant pursuant to any such right); or 14.2.8 Either the proposed Transferee, or any person or entity which directly or indirectly, controls, is controlled by, or is under common control with, the proposed Transferee, (i) occupies space in the Building at the time of the request for consent, (ii) is negotiating with Landlord to lease space in the Building at such time, or (iii) has negotiated with Landlord during the twelve (12)-month period immediately preceding the Transfer Notice. If Landlord consents to any Transfer pursuant to the terms of this Section 14.2 (and does not exercise any recapture rights Landlord may have under Section 14.4 of this Lease), Tenant may within six (6) months after Landlord's consent, but not later than the expiration of said six-month period, enter into such Transfer of the Premises or portion thereof, upon substantially the same terms and conditions as are set forth in the Transfer Notice furnished by Tenant to Landlord pursuant to Section 14.1 of this Lease, provided that if there are any changes in the terms and conditions from those specified in the Transfer Notice (i) such that Landlord would initially have been entitled to refuse its consent to such Transfer under this Section 14.2, or (ii) which would cause the proposed Transfer to be more favorable to the Transferee than the terms set forth in Tenant's original Transfer Notice, Tenant shall again submit the Transfer to Landlord for its approval and other action under this Article 14 (including Landlord's right of recapture, if any, under Section 14.4 of this Lease). Notwithstanding any contrary provision of this Lease, if Tenant or any proposed Transferee claims that Landlord has unreasonably withheld or delayed its consent to a proposed Transfer or otherwise has breached its obligations under this Article 14, Tenant's and such Transferee's only remedy shall be to seek a declaratory judgment and/or injunctive relief, and Tenant, on behalf of itself and, to the extent permitted by law, such proposed Transferee waives all other remedies against Landlord, including without limitation, the right to seek monetary damages or to terminate this Lease. 28 14.3 Transfer Premium. 14.3.1 Definition of Transfer Premium. If Landlord consents to a Transfer, as a condition thereto which the parties hereby agree is reasonable, Tenant shall pay to Landlord fifty percent (50%) of any "Transfer Premium," as that term is defined in this Section 14.3, received by Tenant from such Transferee. "Transfer Premium" shall mean all rent, additional rent or other consideration paid by such Transferee in excess of the Rent and Additional Rent payable by Tenant under this Lease on a per rentable square foot basis if less than all of the Premises is transferred, after deducting the reasonable expenses incurred by Tenant for (i) any changes, alterations and improvements to the Premises in connection with the Transfer, and (ii) any brokerage commissions in connection with the Transfer (collectively, the "Subleasing Costs"). "Transfer Premium" shall also include, but not be limited to, key money and bonus money paid by Transferee to Tenant in connection with such Transfer, and any payment in excess of fair market value for services rendered by Tenant to Transferee or for assets, fixtures, inventory, equipment, or furniture transferred by Tenant to Transferee in connection with such Transfer. 14.3.2 Payment of Transfer Premiums. The determination of the amount of the Transfer Premium shall be made on an annual basis in accordance with the terms of this Section 14.3.2, but an estimate of the amount of the Transfer Premium shall be made each month and one-twelfth of such estimated amount shall be paid to Landlord promptly, but in no event later than the next date for payment of Base Rent hereunder, subject to an annual reconciliation on each anniversary date of the Transfer. If the payments to Landlord under this Section 14.3.2 during the twelve (12) months preceding each annual reconciliation exceed the amount of Transfer Premium determined on an annual basis, then Landlord shall credit the overpayment against Tenant's future obligations under this Section 14.3.2 or if the overpayment occurs during the last year of the Transfer in question, refund the excess to Tenant. If Tenant has underpaid the Transfer Premium, as determined by such annual reconciliation, Tenant shall pay the amount of such deficiency to Landlord promptly, but in no event later than the next date for payment of Basic Rent hereunder. For purposes of calculating the Transfer Premium on an annual basis, Tenant's Subleasing Costs shall be deemed to be offset against the first rent, additional rent or other consideration payable by the Transferee, until such Subleasing Costs are exhausted. 14.3.3 Calculations of Rent. In the calculation of the Rent, as it relates to the Transfer Premium calculated under Section 14.3.1 of this Lease, the Rent paid during each annual period for the Subject Space by Tenant, shall be computed after adjusting such rent to the actual effective rent to be paid, taking into consideration any and all leasehold concessions granted in connection therewith, including, but not limited to, any rent credit and tenant improvement allowance. For purposes of calculating any such effective rent, all such concessions shall be amortized on a straight-line basis over the relevant term. 14.4 Landlord's Option as to Subject Space. Notwithstanding anything to the contrary contained in this Article 14, Landlord and Tenant shall have the option, by mutual written consent within thirty (30) days after receipt of any Transfer Notice, to have Landlord (i) recapture the Subject Space, or (ii) take 29 an assignment or sublease of the Subject Space from Tenant. Such recapture, or sublease or assignment notice shall cancel and terminate this Lease, or create a sublease or assignment, as the case may be, with respect to the Subject Space as of the date stated in the Transfer Notice as the effective date of the proposed Transfer until the last day of the term of the Transfer as set forth in the Transfer Notice. In the event of a recapture by Landlord, if this Lease shall be canceled with respect to less than the entire Premises, the Rent reserved herein shall be prorated on the basis of the number of rentable square feet retained by Tenant in proportion to the number of rentable square feet contained in the Premises, and this Lease as so amended shall continue thereafter in full force and effect, and upon request of either party, the parties shall execute written confirmation of the same. If the Subject Space shall be assigned or subleased by Tenant to Landlord, the rent for the Subject Space payable by Landlord to Tenant shall be-the lesser of (i) the effective Base Rent plus the Additional Rent payable by Tenant under this Lease for the Subject Space on a prorated basis based upon the number of rentable square feet in the Subject Space, or (ii) the effective rent (taking into account all concessions made by Tenant to the Transferee) set forth in the Transfer Notice, and all other provisions of this Lease shall remain in full force and effect, and upon request of either party, the parties shall execute a written confirmation of the same. If the parties decline, or fail to elect in a timely manner to recapture, sublease or take an assignment of the Subject Space under this Section 14.4, then, provided Landlord has consented to the proposed Transfer, Tenant shall be entitled to proceed to transfer the Subject Space to the proposed Transferee, subject to provisions of the last paragraph of Section 14.2 of this Lease. 14.5 Effect of Transfer. If Landlord consents to a Transfer (including a Permitted Transfer), (i) the terms and conditions of this Lease shall in no way be deemed to have been waived or modified, (ii) such consent shall not be deemed consent to any further Transfer by either Tenant or a Transferee, (iii) Tenant shall deliver to Landlord, promptly after execution, an original executed copy of all documentation pertaining to the Transfer in form reasonably acceptable to Landlord, (iv) Tenant shall furnish upon Landlord's request a complete statement, certified by an independent certified public accountant, or Tenant's chief financial officer, setting forth in detail the computation of any Transfer Premium Tenant has derived and shall derive from such Transfer, and (v) no Transfer relating to this Lease or agreement entered into with respect thereto, whether with or without Landlord's consent, shall relieve Tenant or any guarantor of the Lease from liability under this Lease unless otherwise specified in writing by the parties to this Lease in their respective sole and absolute discretion. Landlord or its authorized representatives shall have the right at all reasonable times to audit the books, records and papers of Tenant relating to any Transfer, and shall have the right to make copies thereof. If the Transfer Premium respecting any Transfer shall be found understated, Tenant shall, within thirty (30) days after demand, pay the deficiency and Landlord's costs of such audit, and if understated by more than thirty percent (30%), Landlord shall have the right to cancel this Lease upon thirty (30) days' notice to Tenant. 14.6 Additional Transfers. The provisions of this Section 14.6. shall not apply to the Original Tenant, Tenant's Affiliates or any entity resulting from the merger, consolidation or reorganization of the Original Tenant or Tenant's Affiliates. For purposes of this Lease, the term "Transfer" shall also include (i) if Tenant is a partnership, the withdrawal or change, voluntary, 30 involuntary or by operation of law, of twenty-five percent (25%) or more of the partners, or transfer of twenty-five percent or more of partnership interests, within a twelve (12)-month period, or the dissolution of the partnership without immediate reconstitution thereof, and (ii) if Tenant is a closely held corporation (i.e., whose stock is not publicly held and not traded through an exchange or over the counter), (A) the dissolution, merger, consolidation or other reorganization of Tenant, the sale or other transfer of more than an aggregate of twenty-five percent (25%) of the voting shares of Tenant (other than to immediate family members by reason of gift or death), within a twelve (12)-month period, or (C) the sale, mortgage, hypothecation or pledge of more than an aggregate of twenty-five percent (25%) of the value of the unencumbered assets of Tenant within a twelve (12) month period. ARTICLE 15 ---------- SURRENDER OF PREMISES: OWNERSHIP AND ------------------------------------ REMOVAL OF TRADE FIXTURES ------------------------- 15.1 Surrender of Premises. No act or thing done by Landlord or any agent or employee of Landlord during the Lease Term shall be deemed to constitute an acceptance by Landlord of a surrender of the Premises unless such intent is specifically acknowledged in a writing signed by Landlord. The delivery of keys to the Premises to Landlord or any agent or employee of Landlord shall not constitute a surrender of the Premises or effect a termination of this Lease, whether or not the keys are thereafter retained by Landlord, and notwithstanding such delivery Tenant shall be entitled to the return of such keys at any reasonable time upon request until this Lease shall have been properly terminated. The voluntary or other surrender of this Lease by Tenant, whether accepted by Landlord or not, or a mutual termination hereof, shall not work a merger, and at the option of Landlord shall operate as an assignment to Landlord of all subleases or subtenancies affecting the Premises. 15.2 Removal of Tenant Property by Tenant. Upon the expiration of the Lease Term, or upon any earlier termination of this Lease, Tenant shall, subject to the provisions of this Article 15, quit and surrender possession of the Premises to Landlord in as good order and condition as when Tenant took possession and as thereafter improved by Landlord and/or Tenant, reasonable wear and tear and repairs which are specifically made the responsibility of Landlord hereunder excepted. Upon such expiration or termination, Tenant shall, without expense to Landlord, remove or cause to be removed from the Premises all debris and rubbish, and such items of furniture, equipment (including the Cabling), free-standing cabinet work, and other articles of personal property owned by Tenant or installed or placed by Tenant at its expense in the Premises, and such similar articles of any other persons claiming under Tenant, as Landlord may, in its sole discretion, require to be removed, and Tenant shall repair at its own expense all damage to the Premises and Building resulting from such removal. 31 ARTICLE 16 ---------- HOLDING OVER ------------ If Tenant holds over after the expiration of the Lease Term hereof, with or without the express or implied consent of Landlord, such tenancy shall be from month-to-month only, and shall not constitute a renewal hereof or an extension for any further term, and in such case Base Rent shall be payable at a monthly rate equal to one hundred fifty percent (150%) of the Base Rent applicable during the last rental period of the Lease Term under this Lease. Such month-to-month tenancy shall be subject to every other term, covenant and agreement contained herein. Nothing contained in this Article 16 shall be construed as consent by Landlord to any holding over by Tenant, and Landlord expressly reserves the right to require Tenant to surrender possession of the Premises to Landlord as provided in this Lease upon the expiration or other termination of this Lease. The provisions of this Article 16 shall not be deemed to limit or constitute a waiver of any other rights or remedies of Landlord provided herein or at law. If Tenant fails to surrender the Premises upon the termination or expiration of this Lease, in addition to any other liabilities to Landlord accruing therefrom, Tenant shall protect, defend, indemnify and hold Landlord harmless for, from and against all loss, costs (including reasonable attorneys' fees) and liability resulting from such failure, including, without limiting the generality of the foregoing, any claims made by any succeeding tenant founded upon such failure to surrender, and any lost profits to Landlord resulting therefrom. The foregoing indemnity is conditioned on prompt notice, tender of defense/settlement, and reasonable cooperation by Landlord. ARTICLE 17 ---------- ESTOPPEL CERTIFICATES --------------------- Within ten (10) business days following a request in writing by Landlord, Tenant shall execute and deliver to Landlord an estoppel certificate, which, as submitted by Landlord, shall be substantially in the form of Exhibit E, attached hereto, (or such other form as may be required by any prospective mortgagee or purchaser of the Real Property, or any portion thereof), indicating therein any exceptions thereto that may exist at that time, and shall also contain any other information reasonably requested by Landlord or Landlord's mortgagee or prospective mortgagee. Tenant shall execute and deliver whatever other instruments may be reasonably required for such purposes. Failure of Tenant to timely execute and deliver such estoppel certificate or other instruments shall constitute an acceptance of the Premises and an acknowledgment by Tenant that statements included in the estoppel certificate are true and correct, without exception. Notwithstanding the foregoing, Tenant's obligation to execute, or be bound under, an estoppel certificate shall not extend to any document which in any way diminishes Tenant's rights or expands Tenant's obligations relating to this Lease. 32 ARTICLE 18 ---------- SUBORDINATION ------------- This Lease is subject and subordinate to all present and future ground or underlying leases of the Real Property and to the lien of any mortgages or trust deeds, now or hereafter in force against the Real Property and the Building, if any, and to all renewals, extensions, modifications, consolidations and replacements thereof, and to all advances made or hereafter to be made upon the security of such mortgages or trust deeds, unless the holders of such mortgages or trust deeds or the lessors under such ground lease or underlying leases, require in writing that this Lease be superior thereto. Tenant covenants and agrees in the event any proceedings are brought for the foreclosure of any such mortgage, or if any ground or underlying lease is terminated, to attorn, without any deductions or set-offs whatsoever, to the purchaser upon any such foreclosure sale, or to the lessor of such ground or underlying lease, as the case may be, if so requested to do so by such purchaser or lessor, and to recognize such purchaser or lessor as the lessor under this Lease provided that such purchaser or lessor agrees to be bound as landlord under this Lease. Tenant shall, within ten (10) business days of request by Landlord, execute such further instruments or assurances as Landlord may reasonably deem necessary to evidence or confirm such attornment and/or the subordination or superiority of this Lease to any such mortgages, trust deeds, ground leases or underlying leases. Tenant waives the provisions of any current or future statute, rule or law which may give or purport to give Tenant any right or election to terminate or otherwise adversely affect this Lease and the obligations of the Tenant hereunder in the event of any foreclosure proceeding or sale. Attached hereto as Exhibit F is the form of Landlord lender's subordination, nondisturbance and attornment agreement (the "SNDA"). Concurrently with Tenant's execution hereof, Tenant shall execute the SNDA and Landlord shall deliver the same to its lender. Landlord shall exercise good faith efforts to cause its lender to execute and deliver the SNDA to Tenant within fifteen (15) days following the date hereof. If Landlord's lender fails to execute and deliver the SNDA within said fifteen (15) day period, then Tenant may terminate this Lease by giving Landlord written notice thereof within ten (10) days following the expiration of said fifteen ( 15) day period and prior to the delivery of the SNDA to Tenant. If Tenant so elects to terminate this Lease, Landlord shall return the first month of Base Rent to Tenant and neither party shall have any further obligations to the other hereunder. ARTICLE 19 ---------- DEFAULTS; REMEDIES ------------------ 19.1 Events of Default. The occurrence of any of the following shall constitute a default of this Lease by Tenant: 19.1.1 Any failure by Tenant to pay any Rent or any other charge required to be paid under this Lease, or any part thereof, after five (5) business days following written notice of non-payment; provided, however, that 33 any such notice shall be in lieu of, and not in addition to, any notice required under any Arizona law; or 19.1.2 Any failure by Tenant to observe or perform any other provision, covenant or condition of this Lease to be observed or performed by Tenant where such failure continues for thirty (30) days after written notice thereof from Landlord to Tenant; provided however, that any such notice shall be in lieu of, and not in addition to, any notice required under any Arizona law; and provided further that if the nature of such default is such that the same cannot reasonably be cured within a thirty (30)-day period, Tenant shall not be deemed to be in default if it diligently commences such cure within such period and thereafter diligently proceeds to rectify and cure said default as soon as possible, or 19.1.3 Abandonment or vacation of the Premises by Tenant. Abandonment is herein defined to include, but is not limited to, any absence by Tenant from the Premises for ten ( 10) business days or longer while in default of any provision of this Lease. 19.2 Remedies. 19.2.1 In the event of any default by Tenant, Landlord, in addition to any other rights or remedies it may have by statute or otherwise, will be entitled to pursue any one or more of the following remedies: (i) Landlord may terminate this Lease and Tenant's right to possession of the Premises by Landlord's specific written election, (ii) Landlord may reenter and retake possession of the Premises through judicial process or through self-help by lock out under A.R.S. ss. 33-361(A) and remove any or all persons or property from the Premises; (iii) Landlord may commence a forcible entry and detainer action for recovery of possession of the Premises and all due and unpaid Rent under A.R.S. ss. 33-361(A); (iv) Landlord may retain the Security Deposit and apply the Security Deposit toward accrued and accruing Rent and damages under this Lease; (v) Landlord may commence an action for ejectment under A.R.S. ss. 12-1251; (vi) Landlord may enforce any common law, statutory, or contractual Landlord's lien under Arizona law, A.R.S. ss. 33-361(D) or this Lease; (vii) Landlord may commence an action for Rent under A.R.S. ss. 12-1271; and (viii) Landlord may commence, from time to time, an action to recover any Rent, accelerated Rent, liquidated damages, or any other sums due to Landlord under this Lease. The remedies established above will be in addition to all other legal remedies available to Landlord under Arizona law and not in lieu of any other remedies. 19.2.2 Landlord and Tenant agree that, unless Landlord has made a specific written election to terminate this Lease, Landlord will not be deemed to have elected to terminate this Lease as a result of Landlord's exercise of any of its remedies outlined in Section 19.2.1. Specifically, but without limitation of the previous sentence, neither Landlord's acts nor Landlord's reentry and retaking of the Premises nor Tenant's surrender of the Premises nor Landlord's commencement of an action for future Rent will result in a termination of this Lease, absent a written election to terminate by Landlord, and the commencement by Landlord of a forcible entry and detainer action will 34 not, by itself, indicate Landlord's election to terminate this Lease absent a specific written election by Landlord in the complaint or in a separate written notice. 19.3 Reentry. 19.3.1 If Landlord elects to reenter the Premises upon Tenant's default, any personal property that belongs to Tenant may, but need not, be removed by Landlord and stored in a public warehouse or elsewhere at the cost and for the account of Tenant. Any and all property that is removed from the Premises by Landlord pursuant to the authority of this Lease or Arizona law may be handled, removed, and stored by or at the direction of Landlord at the sole risk, cost, and expense of Tenant, and Landlord will not be responsible for its value, preservation, or safekeeping. Tenant will pay to Landlord, upon Landlord's demand and as Additional Rent, any and all reasonable expenses and storage charges actually incurred in the removal. 19.3.2 If Landlord elects to reenter by giving notice of its intention to Tenant or if Landlord actually takes possession by physical act or legal proceedings, Landlord may either terminate this Lease or attempt to relet all or part of the Premises for any length of lease term (which may be for a term shorter than or extending beyond the Lease Term). Any relet by Landlord will be at a rate acceptable to Landlord and will be subject to any other terms and conditions that Landlord in the exercise of Landlord's reasonable discretion may deem advisable (including the right to change the character and use of the Premises and the right to make alterations and repairs to the Premises at Tenant's expense for the purpose of the reletting). If Landlord elects to reenter and attempts to relet the Premises, Tenant will remain fully liable for all obligations of Tenant under this Lease, and Landlord's actions in reentering or attempting to relet will not be deemed a full or partial waiver of any obligations of Tenant. Notwithstanding anything to the contrary herein, if Landlord relets the entire Premises, then this Lease shall terminate upon such reletting, and Landlord's damage remedies will be as set forth in Section 19.4. However, if Landlord relets only a portion or portions of the Premises, Landlord's damage remedies will be as set froth in Sections 19.3.3, 19.3.4 and 19.3.5 below. 19.3.3 Landlord will give notice of any reletting of a portion or portions of the Premises. Upon each such reletting, Tenant will be liable for and will pay immediately to Landlord, as Additional Rent and in addition to any other sums due under this Lease: (i) the costs and expenses of reletting (including advertising costs, brokerage fees, attorney fees, and the cost of any alterations and repairs incurred by Landlord); and (ii) the amount, discounted at a present value basis (which present value, for purposes of this Lease, shall be calculated at the then applicable discount rate of the Federal Reserve Bank of San Francisco plus one (1) percentage point), by which the Rent reserved in this Lease for the period of the reletting (up to but not beyond the Lease Term) exceeds, if at all, the amount to be paid as Rent under the relet for the Premises for the relet term. 19.3.4 At the option of Landlord and in lieu of requiring immediate payment from the Tenant under the terms of Section 19.3.3 above, rents received by Landlord from reletting will be applied: first, to the payment of any indebtedness other than Rent due under this Lease from Tenant to Landlord; 35 second, to the payment of the costs and expenses of reletting, as described above; third, to the payment of Rent and other charges due and unpaid under this Lease. After application by Landlord under the terms of the previous sentence, the residue, if any, will be held without interest to Tenant by Landlord and applied to the payment of future Rent as it becomes due and payable. 19.3.5 If Tenant has been credited with any rent to be received by reletting under the terms of Section 19.3.4 above and these rents are not promptly paid to Landlord by the new tenant, or if rent received from the reletting under the terms of Section 19.3.4 above during any month is less than that to be paid during that month by Tenant, Tenant will pay any deficiency to Landlord upon Landlord's demand. The deficiency will be fairly calculated by Landlord. If any payments are not made upon demand, Landlord may undertake legal proceedings to recover all payments, whether one or more payments are past due, and Tenant will be liable for all attorney fees incurred by Landlord in connection with attempts to recover the payments, whether or not legal proceedings are commenced. 19.4 Accelerated Rent -Termination. If Landlord terminates this Lease for any default, Landlord, in addition to any other remedy, may only recover the following damages from Tenant: (i) all actual damages and expenses that Landlord may incur by reason of the default including the cost of recovering the Premises (including attorney fees, court costs, and storage charges); (ii) the amount of unpaid Rent payment as of the date this Lease is terminated; (iii) the present value, at the time of termination of this Lease, of the excess, if any, of the amount of Rent reserved in this Lease for the remainder of the Lease Term less the fair rental value of the Premises for the remainder of the Term; and (iv) any other amount necessary to compensate Landlord for damages actually incurred by Landlord arising out of Tenant's failure to perform Tenant's obligations under this Lease or for damages that, in the ordinary course of events, would be likely to result to Landlord from the failure of performance. All amounts described in this Section 19.4 will be immediately due and payable from Tenant to Landlord upon demand. 19.5 Future Rents - No Termination. 19.5.1 Upon Tenant's default under this Lease, Landlord, without terminating this Lease, may elect to: (i) bring actions at various times during the remainder of the Lease Term to collect all then-accrued and unpaid Rent and other actual damages (without waiving any right to receive future Rents); (ii) bring an action upon the expiration of the Lease Term for all unpaid Rent and other damages; or (iii) as provided in Section 19.3.3 above, bring an action upon the reletting of the Premises for unpaid Rent and other actual damages through the date of reletting plus the present value of the difference between the Rent specified in this Lease and the rent paid by any new tenant or tenants. 19.5.2 In addition to the remedies described elsewhere in this Lease, if Tenant is in default of this Lease, Landlord without terminating this Lease, may recover from Tenant all Rent and other sums due and payable by Tenant under this Lease as of the date of entry of a judgment against Tenant plus the 36 difference between: (i) the Rent due for the remainder of the Lease Term; less (ii) the fair rental value of the Premises for the remainder of the Lease Term. 19.5.3 Any acceleration and full recovery of Rent will not restrict in any way the right of Landlord to exercise any other remedy or remedies set forth in this Article 19 in the event Tenant defaults in the performance of any other obligations of Tenant in this Lease. 19.6 Calculation of Additional Rent. Whenever under this Article 19 Tenant is liable for the payment of any Additional Rent to Landlord, and the amount of the Additional Rent that would have accrued for a specific period is not known, then Additional Rent may be estimated by Landlord on the basis of past Additional Rent. If this Lease continues in effect after any payment of Additional Rent calculated on the basis of estimates or averages as above provided, Tenant's actual liability for these charges will be adjusted as any Additional Rent from tenants to whom the Premises are relet is received or as the actual amount of Additional Rent due from Tenant is known. These adjustments will be made periodically as Landlord deems appropriate, but not less often than yearly, and Landlord will give Tenant notice of these adjustments and of any amounts due from Tenant to Landlord, which amounts will be payable on demand. 19.7 Sublessees of Tenant. Whether or not Landlord elects to terminate this Lease on account of any default by Tenant, as set forth in this Article 19, Landlord shall have the right to terminate any and all subleases, licenses, concessions or other consensual arrangements for possession entered into by Tenant and affecting the Premises or may, in Landlord's sole discretion, succeed to Tenant's interest in such subleases, licenses, concessions or arrangements. In the event of Landlord's election to succeed to Tenant's interest in any such subleases, licenses, concessions or arrangements, Tenant shall, as of the date of notice by Landlord of such election, have no further right to or interest in the rent or other consideration receivable thereunder. 19.8 Form of Payment After Default. Following the occurrence of an event of default by Tenant, Landlord shall have the right to require that any or all subsequent amounts paid by Tenant to Landlord hereunder, whether in the cure of the default in question or otherwise, be paid in the form of cash, money order, cashier's or certified check drawn on an institution acceptable to Landlord, or by other means approved by Landlord, notwithstanding any prior practice of accepting payments in any different form. 19.9 Waiver of Default. No waiver by Landlord or Tenant of any violation or breach of any of the terms, provisions and covenants herein contained shall be deemed or construed to constitute a waiver of any other or later violation or breach of the same or any other of the terms, provisions, and covenants herein contained. Forbearance by Landlord or Tenant in enforcement of one or more of the remedies herein provided upon an event of default shall not be deemed or construed to constitute a waiver of such default. The acceptance of any Rent hereunder by Landlord following the occurrence of any default, whether or not known to Landlord, shall not be deemed a waiver of any such default, except only a default in the payment of the Rent so accepted. 37 19.10 Efforts to Relet. For the purposes of this Article 19, Tenant's right to possession shall not be deemed to have been terminated by efforts of Landlord to relet the Premises, by its acts of maintenance or preservation with respect to the Premises, or by appointment of a receiver to protect Landlord's interests hereunder. The foregoing enumeration is not exhaustive, but merely illustrative of acts which may be performed by Landlord without terminating Tenant's right to possession. In the event Tenant has defaulted under this Lease and no longer occupies the Premises, Landlord shall use commercially reasonable efforts to relet the Premises, but Tenant acknowledges that Landlord may give preference to reletting space that is not subject to a lease over reletting the Premises. ARTICLE 20 ---------- COVENANT OF QUIET ENJOYMENT --------------------------- Landlord covenants that Tenant, on paying the Rent, charges for services and other payments herein reserved and on keeping, observing and performing all the other terms, covenants, conditions, provisions and agreements herein contained on the part of Tenant to be kept, observed and performed, shall, during the Lease Term, peaceably and quietly have, hold and enjoy the Premises subject to the terms, covenants, conditions, provisions and agreements hereof without interference by any persons lawfully claiming by or through Landlord. The foregoing covenant is in lieu of any other covenant express or implied. ARTICLE 21 ---------- [INTENTIONALLY DELETED] ----------------------- ARTICLE 22 ---------- SUBSTITUTION OF OTHER PREMISES ------------------------------ If any contiguous portion of the Premises is located on less than one-half (1/2) of a floor ("Partial Floor Premises"), Landlord shall have the right to move Tenant from the Partial Floor Premises to other space in the Building comparable to the Premises, and all terms hereof shall apply to the new space with equal force; provided, however, Landlord may only exercise this right once during the initial Lease Term and once during each Option Term. In such event, Landlord shall give Tenant prior notice of Landlord's election to so relocate Tenant, and shall move Tenant's effects from the Partial Floor Premises to the new space at Landlord's sole cost and expense at such time and in such manner as to inconvenience Tenant as little as reasonably practicable and Landlord shall immediately pay to Tenant all other reasonable out-of-pocket costs and reasonable and actual internal costs (but not lost productivity or lost profits) incurred by Tenant as a direct result of such relocation, including without limitation the cost of data and voice lines, stationery, business cards and telephone directories; provided, however, prior to incurring internal costs for which Tenant desires reimbursement, Tenant shall first obtain Landlord's approval thereof, which approval shall not be unreasonably withheld 38 or delayed. The new space shall be delivered to Tenant with improvements substantially similar to those improvements existing in the Partial Floor Premises at the time of Landlord's notification to Tenant of the relocation. Simultaneously with such relocation of the Partial Floor Premises, the parties shall execute an amendment to this Lease stating the relocation of the Partial Floor Premises. ARTICLE 23 ---------- SIGNS ----- 23.1 In General. Tenant shall be entitled, at Landlord's sole cost and expense, to Building-standard identification signage outside of Tenant's Premises on the floor on which Tenant's Premises are located. The location, quality, design, style, and size of such signage shall be consistent with the Landlord's Building standard signage program 23.2 Building Directory. Tenant shall be entitled to twenty (20) lines on the Building directory to display Tenant's name and locations in the Building. 23.3 Prohibited Signage and Other Items. Any signs, notices, logos, pictures, names or advertisements which are installed and that have not been individually approved by Landlord may be removed by Landlord at the sole expense of Tenant provided Landlord has given Tenant ten (10) business days' notice and Tenant has failed to remove such items within said time period. Except as otherwise in permitted in Section 23.4, Tenant may not install any signs on the exterior or roof of the Building or the common areas of the Building or the Real Property. Any signs, window coverings, or blinds (even if the same are located behind the Landlord approved window coverings for the Building), or other items visible from the exterior of the Premises or Building are subject to the prior approval of Landlord, in its sole discretion. 23.4 Top of the Building Signage. 23.4.1 Description of Building Top Signage. Tenant shall be entitled to install two (2) signs identifying Tenant at the top of the Building, which signs are to be located on the sides of the Building facing North and South (the "Building Top Signage"). The graphics, materials, color, design, lettering, lighting, size, specifications and exact location of the Building Top Signage shall be subject to the prior written approval of Landlord, which approval shall not be unreasonably withheld or delayed. In addition, such signage shall be subject to Tenant's receipt of all required governmental permits and approvals and shall be subject to all applicable governmental laws and ordinances. Landlord makes no representation that such permits and approvals are available for the Building Top Signage. The cost of installation of the Building Top Signage as well as all costs of design and construction of such signage and all other costs associated with such signage, including, without limitation, utility charges and hook-up fees, permits, maintenance and repair, shall be the sole responsibility of Tenant. Tenant further acknowledges that any repairs necessitated as a result of window washing equipment cabling passing-over such signage in the normal course of cleaning the exterior windows 39 of the Building shall be the sole responsibility of Tenant. During the Lease Term, Tenant may, at its sole cost and expense, install substitute Building Top Signage in accordance with this Article 23 or remove the Building Top Signage. If Tenant does not install the Building Top Signage within two (2) years following the Lease Commencement Date, Tenant's rights under this Section 23.4 shall terminate. 23.4.2 Transfer of Building Top Signage. In connection with any assignment of Tenant's interest under this Lease or any single sublease of the entire Premises, which assignment or sublease is permitted pursuant to the provisions of Article 14 of this Lease, the Building Top Signage may be assigned to the assignee or sublessee with Landlord's prior consent, which consent shall not be unreasonably withheld by Landlord so long as the name of the assignee/sublessee is not an "Objectionable Name," as that term is defined below. Should the name of the Original Tenant change, Tenant shall be entitled to modify, at Tenant's sole cost and expense, the Building Top Signage to reflect Tenant's new name, but only if Tenant's new name is not an "Objectionable Name." The term "Objectionable Name" shall mean any name which relates to an entity that (i) is of a character or reputation that is materially inconsistent with the quality of the Building, (ii) is of a political orientation, (iii) would otherwise reasonably offend a landlord of a comparable building taking into consideration the level and visibility of signage rights inherent in the Building Top Signage, (iv) would conflict with any covenants in leases of space in the Building, or (v) is a competitor of any tenant of the Building. 23.4.3 Termination of Building Top Signage. Notwithstanding anything to the contrary contained herein, in the event that at any time after the Must Take Effective Date, Tenant or any entity with Building Top Signage rights fails to occupy at least 50,000 rentable square feet in the Building, Tenant's rights to the Building Top Signage shall thereupon terminate and Landlord shall have the right to remove, at Tenant's expense, the Building Top Signage. 23.4.4 Maintenance of Building Top Signage. Should the Building Top Signage require maintenance or repairs as determined in Landlord's reasonable judgment, Landlord shall have the right to provide written notice thereof to Tenant and Tenant shall cause such repairs and/or maintenance to be performed within thirty (30) days after receipt of such notice from Landlord, at Tenant's sole cost and expense; provided, however, if such repairs and/or maintenance are reasonably expected to require longer than thirty (30) days to perform, Tenant shall commence such repairs and/or maintenance within such thirty (30) day period and shall diligently prosecute such repairs and maintenance to completion. Should Tenant fail to perform such maintenance and repairs within the periods described in the immediately preceding sentence, Landlord shall have the right to cause such work to be performed and to charge Tenant as Additional Rent for the costs of such work plus interest at the Interest Rate from the date of Landlord's payment of such costs to the date of Tenant's reimbursement to Landlord. Upon the expiration or earlier termination of this Lease, Tenant shall, at Tenant's sole cost and expense, cause the Building Top Signage to be removed from the exterior of the Building and shall cause the exterior of the Building to be restored to the condition existing prior to the placement of such signage. If Tenant fails to remove such signage and to restore the exterior of the Building as provided in the immediately preceding sentence within thirty (30) days following the expiration or earlier 40 termination of this Lease, then Landlord may perform such work, and all costs and expenses incurred by Landlord in so performing plus interest at the Interest Rate from the date of Landlord's payment of such costs to the date of Tenant's reimbursement to Landlord shall be reimbursed by Tenant to Landlord within ten (10) days after Tenant's receipt of invoice therefor. The immediately preceding sentence shall survive the expiration of earlier termination of this Lease. ARTICLE 24 ---------- COMPLIANCE WITH LAW ------------------- Tenant shall not do anything or suffer anything to be done in or about the Premises which will in any way conflict with any law, statute, ordinance or other governmental rule, regulation or requirement now in force or which may hereafter be enacted or promulgated. At its sole cost and expense, Tenant shall promptly comply with all such governmental measures directly related to Tenant's use of the Premises, other than the making of structural changes or changes to the Building's life safety system. Should any standard or regulation now or hereafter be imposed on Landlord or Tenant by a state, federal or local governmental body charged with the establishment, regulation and enforcement of occupational, health or safety standards for employers, employees, landlords or tenants, then Tenant agrees, at its sole cost and expense, to comply promptly with such standards or regulations directly related to Tenant's use of the Premises. The judgment of any court of competent jurisdiction or the admission of Tenant in any judicial action, regardless of whether Landlord is a party thereto, that Tenant has violated any of said governmental measures, shall be conclusive of that fact as between Landlord and Tenant. Landlord represents and warrants to Tenant as follows: (i) To Landlord's actual knowledge, the Real Property is currently zoned C-2, HRI, which allows Tenant to use the Premises for the permitted uses described in this Lease; (ii) To Landlord's actual knowledge, Landlord has received no notice from any governmental authority that the Real Property (inclusive of the Building and the Premises) is not in compliance with the Americans With Disabilities Act and/or any comparable state statute; and (iii) To Landlord's actual knowledge, the Real Property (inclusive of the Building and the Premises) is not in violation of any applicable laws, rules, regulations, ordinances and local laws (excepting the Americans With Disabilities Act and any comparable state statutes, which are the subject of the representation set forth in clause (ii) above, and except for Environmental Conditions, which are the subject of the representation set forth in Section 29.31.6). 41 ARTICLE 25 ---------- LATE CHARGES ------------ If any installment of Rent or any other sum due from Tenant shall not be received by Landlord or Landlord's designee within five (5) days after said amount is due, then Tenant shall pay to Landlord a late charge equal to five percent (5%) of the amount due plus any attorneys' fees incurred by Landlord by reason of Tenant's failure to pay Rent and/or other charges when due hereunder. The late charge shall be deemed Additional Rent and the right to require it shall be in addition to all of Landlord's other rights and remedies hereunder or at law and shall not be construed as liquidated damages or as limiting Landlord's remedies in any manner. In addition to the late charge described above, any Rent or other amounts owing hereunder which are not paid within three (3) days after the date they are due shall thereafter bear interest until paid at a rate equal to the discount rate of the Federal Reserve Bank of San Francisco at the time of accrual plus five percent (5%) per annum, provided that in no case shall such rate be higher than the highest rate permitted by applicable law (the "Interest Rate"). ARTICLE 26 ---------- RIGHT TO CURE DEFAULT; PAYMENTS ------------------------------- 26.1 Landlord's Cure. All covenants and agreements to be kept or performed by Tenant under this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any reduction of Rent except as specified in this Lease. If Tenant shall fail to perform any of its obligations under this Lease, within a reasonable time after such performance is required by the terms of this Lease, Landlord may, but shall not be obligated to, after reasonable prior written notice to Tenant, make any such payment or perform any such act on Tenant's part without waiving its right based upon any default of Tenant and without releasing Tenant from any obligations hereunder. 26.2 Tenant's Reimbursement. Except as may be specifically provided to the contrary in this Lease, Tenant shall pay to Landlord, within fifteen (15) days after delivery by Landlord to Tenant of statements therefor: (i) sums equal to expenditures reasonably made and obligations actually paid by Landlord in connection with the remedying by Landlord of Tenant's defaults pursuant to the provisions of Section 26.1; (ii) sums equal to all actual losses, costs, liabilities, damages and expenses referred to in Article 10 of this Lease; and (iii) sums equal to all expenditures made and obligations actually paid by Landlord in collecting or attempting to collect the Rent or in enforcing or attempting to enforce any rights of Landlord under this Lease or pursuant to law, including, without limitation, all legal fees and other amounts so expended. Tenant's obligations under this Section 26.2 shall survive the expiration or sooner termination of the Lease Term. Should Tenant bring an action to enforce any provision, or collect damages, under this Lease, Tenant shall be entitled to its reasonable attorneys' fees and costs associated with such action. 42 26.3 Tenant's Cure Rights. If Tenant provides written notice to Landlord of the need for repairs and/or maintenance which are Landlord's obligation under this Lease, and Landlord fails to undertake such repairs and/or maintenance within a reasonable period of time, given the circumstances, after the receipt of such written notice, but in no event earlier than ten (10) days after receipt of such written notice, and if such failure continues after five (5) days following an additional notice to Landlord specifying that Tenant intends to undertake such repairs and/or maintenance, then Tenant may proceed to undertake such repairs and/or maintenance and if such action was required under the terms of this Lease to be taken by Landlord, then Tenant shall be entitled to reimbursement by Landlord for Tenant's reasonable costs and expenses in taking such action within thirty (30) days following delivery of an invoice therefor containing a reasonably particularized breakdown of such costs and expenses (the "Invoice"). In the event Tenant undertakes such repairs and/or maintenance, and such work will affect the Building's life safety system, heating, ventilating and air conditioning systems or elevator systems, Tenant shall use only those contractors used by Landlord in the Building for work on such systems. If (i) the amount set forth in the Invoice is less than or equal to Two Thousand Dollars ($2,000.00) and Landlord does not pay the amount within thirty (30) days following receipt of the Invoice (regardless of whether Landlord has delivered a written objection to Tenant) or (ii) the amount set forth in the Invoice is greater than Two Thousand Dollars ($2,000.00) and Landlord has neither paid the amount within thirty (30) days following Landlord's receipt of the Invoice nor delivered a written objection to Tenant within thirty (30) days after receipt of the Invoice, then Tenant shall be entitled to deduct from Base Rent payable by Tenant under this Lease, the amount set forth in such Invoice, together with interest thereon at the Interest Rate, in monthly installments not to exceed twenty percent (20%) of monthly Base Rent, until fully reimbursed. If the amount set forth in the Invoice is less than or equal to Two Thousand Dollars ($2,000.00) and Tenant elects to deduct such amount against Base Rent as set forth above, and if Landlord delivers to Tenant within thirty (30) days following receipt of the Invoice, a written objection on the basis that such repair and/or maintenance was not required to be undertaken by Landlord pursuant to the terms of this Lease, then Landlord may elect to have the determination of the issue of whether such repair and/or maintenance was Landlord's responsibility resolved pursuant to the manner described below, and if it is determined that Landlord was not responsible for such repair and/or maintenance, Tenant shall, within thirty (30) days following such determination, pay to Landlord the amount of such deduction from Base Rent, together with interest thereon at the Interest Rate from the date of such deduction until paid. If, however, the amount of the Invoice is greater than Two Thousand Dollars ($2,000.00) and Landlord delivers to Tenant within thirty (30) days after receipt of the Invoice, a written objection to the payment of such Invoice, setting forth with reasonable particularity Landlord's reasons for its claim that such repairs and/or maintenance was not to have been undertaken by Landlord pursuant to the terms of this Lease, then Tenant shall not be entitled to such deduction from Base Rent but as Tenant's sole remedy, Tenant may proceed to claim a default by Landlord or, if elected by either Landlord or Tenant, the matter shall proceed to resolution by the selection of an arbitrator to resolve the dispute, which arbitrator shall be selected and qualified pursuant to the rules of the American Arbitration Association, and whose costs shall be paid for by the losing party unless it is not clear that there is a "losing" party in which event the costs of arbitration shall be shared equally. The purpose of the use of an arbitrator to resolve such dispute is to avoid the delays incident to the court calendar system of the jurisdiction within which the Premises are 43 located. Therefore, the parties agree that if the issue in dispute between Landlord and Tenant under this Section 26.3 may be expected to be resolved under the then current calendar of the court of appropriate jurisdiction within a period not exceeding six (6) months from the date the issue is raised by Landlord's objection to Tenant's invoice, then the arbitration process described hereinabove shall not be utilized and the matter shall proceed through the judicial process in the court of appropriate jurisdiction. ARTICLE 27 ---------- ENTRY BY LANDLORD ----------------- Landlord reserves the right at all reasonable times and upon reasonable notice to the Tenant to enter the Premises to (i) inspect them; (ii) show the Premises to prospective purchasers, mortgagees or tenants (but, as to tenants, only during the last nine (9) months of Lease Term), or to the ground or underlying lessors; (iii) post notices of nonresponsibility; or (iv) alter, improve or repair the Premises or the Building if necessary to comply with current building codes or other applicable laws, or for structural alterations, repairs or improvements to the Building. Notwithstanding anything to the contrary contained in this Article 27, Landlord may enter the Premises at any time to (A) perform services required of Landlord at reasonable times and upon reasonable notice (except in an emergency); (B) take possession due to any breach of this Lease in the manner provided herein; and (C) perform any covenants of Tenant which Tenant fails to perform at reasonable times and upon reasonable notice (except in an emergency). Any such entries shall be without the abatement of Rent and shall include the right to take such reasonable steps as required to accomplish the stated purposes. Tenant hereby waives any claims for damages or for any injuries or inconvenience to or interference with Tenant's business, lost profits, any loss of occupancy or quiet enjoyment of the Premises, and any other loss directly occasioned by such entry. For each of the above purposes, Landlord shall at all times have a key with which to unlock all the doors in the Premises, excluding Tenant's vaults, safes and special security areas designated in advance by Tenant. In an emergency, Landlord shall have the right to use any means that Landlord may deem proper to open the doors in and to the Premises. Any entry into the Premises in the manner hereinbefore described shall not be deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an actual or constructive eviction of Tenant from any portion of the Premises. ARTICLE 28 ---------- TENANT PARKING -------------- Landlord shall provide parking passes on a monthly basis throughout the Lease Term in the amount set forth in Section 11 of the Summary to park in the Parking Facilities. During the Lease Term (including the Option Term), such parking passes will be provided to Tenant at no charge, except that Landlord may require a reasonable security deposit for each parking pass. Tenant's continued right to use the parking passes is conditioned upon Tenant abiding by all Rules And Regulations which are prescribed from time to time for the orderly operation and use of the Parking Facilities and upon Tenant's cooperation in seeing that 44 Tenant's employees and visitors also comply with such Rules and Regulations. Landlord specifically reserves the right to (i) change the size, configuration, design, layout, location and all other aspects of the Parking Facilities and/or (ii) perform repairs to the Parking Facilities, and Tenant acknowledges and agrees that Landlord may, without incurring any liability to Tenant and without any abatement of Rent under this Lease, from time to time, for a period not to exceed ninety (90) days (unless due to Force Majeure) close-off or restrict access to the Parking Facilities, or relocate Tenant's parking passes to other parking structures and/or surface parking areas within a reasonable distance of the Premises, for purposes of permitting or facilitating any such construction, alteration, improvements or repairs with respect to the Parking Facilities or to accommodate or facilitate renovation, alteration, construction or other modification of other improvements or structures located on the Real Property. Landlord may delegate its responsibilities hereunder to a parking operator in which case such parking operator shall have all the rights of control attributed hereby to the Landlord and such owner. ARTICLE 29 ---------- MISCELLANEOUS PROVISIONS ------------------------ 29.1 Terms. The necessary grammatical changes required to make the provisions hereof apply either to corporations or partnerships or individuals, men or women, as the case may require, shall in all cases be assumed as though in each case fully expressed. 29.2 Binding Effect. Each of the provisions of this Lease shall extend to and shall, as the case may require, bind or inure to the benefit not only of Landlord and of Tenant, but also of their respective successors or assigns, provided this clause shall not permit any assignment by Tenant contrary to the provisions of Article 14 of this Lease. 29.3 No Air Rights. No rights to any view or to light or air over any property, whether belonging to Landlord or any other person, are granted to Tenant by this Lease. If at any time any windows of the Premises are temporarily darkened or the light or view therefrom is obstructed by reason of any repairs, improvements, maintenance or cleaning in or about the Building, the same shall be without liability to Landlord and without any reduction or diminution of Tenant's obligations under this Lease. 29.4 Modification of Lease. Should any current or prospective mortgagee or ground lessor for the Building require a modification or modifications of this Lease, which modification or modifications will, in Tenant's reasonable discretion, not cause an increased cost or expense to Tenant or in any other way adversely change the rights and obligations of Tenant hereunder, then and in such event, Tenant agrees that this Lease may be so modified and agrees to execute whatever documents are required therefor and deliver the same to Landlord within ten (10) business days following the request therefor. Should Landlord or any such current or prospective mortgagee or ground lessor require execution of a short form of Lease for recording, accurately reflecting the terms of this Lease and containing, among other customary provisions, the names of the parties, a description of the Premises and the Lease Term, Tenant agrees 45 to execute such short form of Lease and to deliver the same to Landlord within ten (10) business days following the request therefor. 29.5 Transfer of Landlord's Interest. Tenant acknowledges that Landlord has the right to transfer all or any portion of its interest in the Real Property and Building and in this Lease, and Tenant agrees that in the event of any such transfer, and provided notice of such transfer is given to Tenant within ten (10) days following the effective date of such transfer, Tenant agrees to look solely to such transferee for the performance of Landlord's obligations hereunder accruing after the date of transfer. Tenant further acknowledges that Landlord may assign its rights to payments under this Lease to a mortgage lender as additional security and agrees that such an assignment shall not release Landlord from its obligations hereunder and that Tenant shall continue to look to Landlord for the performance of its obligations hereunder. 29.6 Prohibition Against Recording. Except as provided in Section 29.4 of this Lease, neither this Lease, nor any memorandum, affidavit or other writing with respect thereto, shall be recorded by Tenant or by anyone acting through, under or on behalf of Tenant. 29.7 Landlord's Title. Landlord's title is and always shall be paramount to the title of Tenant: Nothing herein contained shall empower Tenant to do any act which can, shall or may encumber the title of Landlord. 29.8 Captions. The captions of Articles and Sections are for convenience only and shall not be deemed to limit, construe, affect or alter the meaning of such Articles and Sections. 29.9 Relationship of Parties. Nothing contained in this Lease shall be deemed or construed by the parties hereto or by any third party to create the relationship of principal and agent, partnership, joint venturer or any association between Landlord and Tenant, it being expressly understood and agreed that neither the method of computation of Rent nor any act of the parties hereto shall be deemed to create any relationship between Landlord and Tenant other than the relationship of landlord and tenant. 29.10 [Intentionally Deleted]. 29.11 Time of Essence. Time is of the essence of this Lease and each of its provisions. 29.12 Partial Invalidity. If any term, provision or condition contained in this Lease shall, to any extent, be invalid or unenforceable, the remainder of this Lease,. or the application of such term, provision or condition to persons or circumstances other than those with respect to which it is invalid or unenforceable, shall not be affected thereby, and each and every other term, provision and condition of this Lease shall be valid and enforceable to the fullest extent possible permitted by law. 46 29.13 No Warranty. In executing and delivering this Lease, Tenant has not relied on any representation, including, but not limited to, any representation whatsoever as to the amount of any item comprising Additional Rent or the amount of the Additional Rent in the aggregate or that Landlord is furnishing the same services to other tenants, at all, on the same level or on the same basis, or any warranty or any statement of Landlord which is not set forth herein or in one or more of the exhibits attached hereto. 29.14 Landlord Exculpation. It is expressly understood and agreed that notwithstanding anything in this Lease to the contrary, and notwithstanding any applicable }aw to the contrary, the liability of Landlord and the Landlord Parties hereunder (including any successor landlord) and any recourse by Tenant against Landlord or the Landlord Parties shall be limited solely and exclusively to an amount which is equal to the interest of Landlord in the Building and neither Landlord, nor any of the Landlord Parties shall have any personal liability therefor, and Tenant hereby expressly waives and releases such personal liability on behalf of itself and all persons claiming by, through or under Tenant. Notwithstanding the foregoing, the limitation of liability and waiver in favor of Landlord under this Section 29.14 shall not apply to claims of fraud or malicious acts. 29.15 Entire Agreement. It is understood and acknowledged that there are no oral agreements between the parties hereto affecting this Lease and this Lease supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements and understandings, if any, between the parties hereto or displayed by Landlord to Tenant with respect to the subject matter thereof, and none thereof shall be used to interpret or construe this Lease. This Lease and any side letter or separate agreement executed by Landlord and Tenant in connection with this Lease and dated of even date herewith contain all of the terms, covenants, conditions, warranties and agreements of the parties relating in any manner to the rental, use and occupancy of the Premises, shall be considered to be the only agreement between the parties hereto and their representatives and agents, and none of the terms, covenants, conditions or provisions of this Lease can be modified, deleted or added to except in writing signed by the parties hereto. All negotiations and oral agreements acceptable to both parties have been merged into and are included herein. 29.16 Right to Lease. Except as otherwise provided in Section 29.33, Landlord reserves the absolute right to effect such other tenancies in the Building as Landlord in the exercise of its sole business judgment shall determine to best promote the interests of the Building. Tenant does not rely on the fact, nor does Landlord represent, that any specific tenant or type or number of tenants shall, during the Lease Term, occupy any space in the Building. 29.17 Force Majeure. Any prevention, delay or stoppage due to strikes, lockouts, labor disputes, acts of God, inability to obtain services, labor, or materials or reasonable substitutes therefor, governmental actions, civil commotions, fire or other casualty, and other causes beyond the reasonable control of the party obligated to perform, except with respect to the obligations imposed with regard to Rent and other charges to be paid by Tenant pursuant to this Lease (collectively, the "Force Majeure"), notwithstanding anything to the contrary contained in this Lease, shall excuse the performance of such party for a period equal to any such prevention, delay or stoppage and, 47 therefore, if this Lease specifies a time period for performance of an obligation of either party, that time period shall be extended by the period of any delay in such party's performance caused by a Force Majeure. 29.18 Waiver of Redemption by Tenant. Tenant hereby waives for Tenant and for all those claiming under Tenant all right now or hereafter existing to redeem by order or judgment of any court or by any legal process or writ, Tenant's right of occupancy of the Premises after any termination of this Lease. 29.19 Notices. All notices, demands, statements or communications (collectively, "Notices") given or required to be given by either party to the other hereunder shall be in writing, shall be sent by United States certified or registered mail, postage prepaid, return receipt requested, or delivered personally (i) to Tenant at the appropriate address set forth in Section 5 of the Summary, or to such other place as Tenant may from time to time designate in a Notice to Landlord; or (ii) to Landlord at the addresses set forth in Section 3 of the Summary, or to such other firm or to such other place as Landlord may from time to time designate in a Notice to Tenant. Any Notice will be deemed given five (5) days after the date it is mailed as provided in this Section 29.19 or upon the date personal delivery is made. If Tenant is notified of the identity and address of Landlord's mortgagee or ground or underlying lessor, Tenant shall concurrently give to such mortgagee or ground or underlying lessor written notice of any default by Landlord under the terms of this Lease by registered or certified mail, and such mortgagee or ground or underlying lessor shall be given the same opportunity to cure such default as permitted by Landlord prior to Tenant's exercising any remedy available to Tenant. 29.20 Joint and Several. If there is more than one Tenant, the obligations imposed upon Tenant under this Lease shall be joint and several. 29.21 Authority. If Tenant is a corporation or partnership, each individual executing this Lease on behalf of Tenant hereby represents and warrants that Tenant is a duly formed and existing entity qualified to do business in Arizona and that Tenant has full right and authority to execute and deliver this Lease and that each person signing on behalf of Tenant is authorized to do so. 29.22 Attorneys' Fees. If either party commences litigation against the other for the specific performance of this Lease, for damages for the breach hereof or otherwise for enforcement of any remedy hereunder, the parties hereto agree to and hereby do waive any right to a trial by jury and, in the event of any such commencement of litigation, the prevailing party shall be entitled to recover from the other party such costs and reasonable attorneys' fees as may have been incurred, including any and all costs incurred in enforcing, perfecting and executing such judgment. 29.23 Governing Law. This Lease shall be construed and enforced in accordance with the laws of the State of Arizona. 48 29.24 Submission of Lease. Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or an option for lease, and it is not effective as a lease or otherwise until execution and delivery by both Landlord and Tenant. 29.25 Brokers. Landlord and Tenant hereby warrant to each other that they have had no dealings with any real estate broker or agent in connection with the negotiation of this Lease, excepting only the real estate brokers or agents specified in Section 12 of the Summary (the "Brokers"), and that they know of no other real estate broker or agent who is entitled to a commission in connection with this Lease. Each party agrees to indemnify and defend the other party against and hold the other party harmless for, from and against any and all claims, demands, losses, liabilities, lawsuits, judgments, and costs and expenses (including without limitation reasonable attorneys' fees) with respect to any leasing commission or equivalent compensation alleged to be owing on account of the indemnifying party's dealings with any real estate broker or agent other than the Brokers. 29.26 Independent Covenants. This Lease shall be construed as though the covenants herein between Landlord and Tenant are independent and not dependent and Tenant hereby expressly waives the benefit of any statute to the contrary and, except as stated in this Lease, agrees that if Landlord fails to perform its obligations set forth herein, Tenant shall not be entitled to make any repairs or perform any acts hereunder at Landlord's expense or to any setoff of the Rent or other amounts owing hereunder against Landlord; provided, however, that the foregoing shall in no way impair the right of Tenant to commence a separate action against Landlord for any violation by Landlord of the provisions hereof so long as notice is first given to Landlord and any holder of a mortgage or deed of trust covering the Building, Real Property or any portion thereof, of whose address Tenant has theretofore been notified, and an opportunity is granted to Landlord and such holder to correct such violations as provided above. 29.27 Building Name and Signage. Landlord shall have the right at any time to change the name of the Building and to install, affix and maintain any and all signs on the exterior and on the interior of the Building as Landlord may, in Landlord's sole discretion, desire. Tenant shall not use the name of the Building or use pictures or illustrations of the Building in advertising or other publicity, without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. 29.28 Transportation Management. Tenant shall use commercially reasonable efforts to fully comply with all present or future programs intended to manage parking, transportation or traffic in and around the Building, and in connection therewith, Tenant shall take responsible action for the transportation planning and management of all employees located at the Premises by working directly with Landlord, any governmental transportation management organization or any other transportation-related committees or entities. Such programs may include, without limitation: (i) restrictions on the number of peak-hour vehicle trips generated by Tenant, (ii) increased vehicle occupancy; (iii) implementation of an in-house ridesharing program and an employee transportation coordinator; (iv) working with employees and any Building or area-wide ridesharing program manager; (v) instituting employer-sponsored 49 incentives (financial or in-kind) to encourage employees to rideshare; and (vi) utilizing flexible work shifts for employees. 29.29 Confidentiality. Tenant acknowledges that the content of this Lease and any related documents are confidential information. Tenant shall exercise commercially reasonable efforts to keep such confidential information strictly confidential and shall exercise commercially reasonable efforts to not disclose such confidential information to any person or entity other than Tenant's financial, legal, and space planning consultants or as otherwise required by law. 29.30 Landlord Renovations. It is specifically understood and agreed that Landlord has no obligation and has made no promises to alter, remodel, improve, renovate, repair or decorate the Premises, Building, or any part thereof and that no representations respecting the condition of the Premises or the Building have been made by Landlord to Tenant except as specifically set forth herein or in the Tenant Work Letter. However, Tenant acknowledges that Landlord may during the Lease Term renovate, improve, alter, or modify (collectively, the "Renovations") the Building, Premises, and/or Real Property, including without limitation the Parking Facilities, common areas, systems and equipment, roof, and structural portions of the same, which Renovations may include, without limitation, (i) modifying the common areas and tenant spaces to comply with applicable laws and regulations, including regulations relating to the physically disabled, seismic conditions, and building safety and security, and (ii) installing new carpeting, lighting, and wall coverings in the Building common areas, and in connection with such Renovations, Landlord may, among other things, erect scaffolding or other necessary structures in the Building, limit or eliminate access to portions of the Real Property, including portions of the common areas, or perform work in the Building, which work may create noise, dust or leave debris in the Building. Tenant hereby agrees that such Renovations and Landlord's actions in connection with such Renovations shall in no way constitute a constructive eviction of Tenant nor entitle Tenant to any abatement of Rent. Landlord shall have no responsibility or for any reason be liable to Tenant for any direct or indirect injury to or interference with Tenant's business arising from the Renovations, nor (except for injury not covered by insurance carried, or required to be carried by Tenant hereunder, and which is caused by Landlord's negligence or willful misconduct) shall Tenant be entitled to any compensation or damages from Landlord for loss of the use of the whole or any part of the Premises or of Tenant's personal property or improvements resulting from the Renovations or Landlord's actions in connection with such Renovations, or for any inconvenience or annoyance occasioned by such Renovations or Landlord's actions in connection with such Renovations. 29.31 Hazardous Material. 29.31.1 Except for ordinary office and janitorial supplies in quantities customarily used by office tenants, Tenant shall not cause or authorize any Hazardous Material (as defined in Section 29.31.4 below) to be brought, kept or used in or about the Real Property by Tenant, its agents, employees, contractors, or invitees. Tenant indemnifies Landlord for, from and against any breach by Tenant of the obligations stated in the preceding sentence, and agrees to defend and hold Landlord harmless from and against any and all claims, judgments, damages, penalties, fines, costs, liabilities, or 50 losses (including, without limitation, diminution in value of the Real Property, damages for the loss or restriction or use of rentable or usable space or of any amenity of the Real Property, damages arising from any adverse impact or marketing of space in the Real Property, and sums paid in settlement of claims, attorneys' fees, consultant fees, and expert fees) which arise during or after the Lease Term as a result of such breach. This indemnification of Landlord by Tenant includes, without limitation, costs incurred in connection with any investigation of site conditions or any cleanup, remedial, removal, or restoration work required by any federal, state, or local governmental agency or political subdivision because of Hazardous Material present in the soil or ground water on or under the Real Property. Without limiting the foregoing, if the presence of any Hazardous Material on the Real Property caused or authorized by Tenant results in any contamination of the Real Property and subject to the provisions of Articles 8 and 9 hereof, Tenant shall promptly take all actions at its sole expense as are necessary to return the Real Property to the condition existing prior to the introduction of any such Hazardous Material and the contractors to be used by Tenant for such work must be approved by Landlord, which approval shall not be unreasonably withheld or delayed so long as such actions would not potentially have any material adverse long-term or short-term effect on the Real Property and so long as such actions do not materially interfere with the use and enjoyment of the Real Property by the other tenants thereof. Tenant's indemnity under this Section 29.31.1 is strictly conditioned on prompt notice, tender of defense/settlement, and reasonable cooperation by Landlord. 29.31.2 [Intentionally Omitted] 29.31.3 It shall not be unreasonable for Landlord to withhold its consent to any proposed Transfer if (i) the proposed transferee's anticipated use of the Premises involves the generation, storage, use, treatment, or disposal of Hazardous Material other than ordinary office and janitorial supplies in quantities customarily used by office tenants; (ii) the proposed Transferee has been required by any prior landlord, lender, or governmental authority to take remedial action in connection with Hazardous Material contaminating a property if the contamination resulted from such Transferee's actions or use of the property in question; or (iii) the proposed Transferee is subject to an enforcement order issued by any governmental authority in connection with the use, disposal, or storage of a Hazardous Material. 29.31.4 As used herein, the term "Hazardous Material" means any hazardous or toxic substance, material, or waste which is or becomes regulated by any local governmental authority, the State of Arizona or the United States Government. The term "Hazardous Material" includes, without limitation, any material or substance which is (i) designated as a "Hazardous Substance" pursuant to Section 311 of the Federal Water Pollution Control Act (33 U.S.C. ss. 1317), (ii) defined as a "Hazardous Waste" pursuant to Section 1004 of the Federal Resource Conservation and Recovery Act, 42 U.S.C. ss. 6901 et seq. (42 U.S.C. ss. 6903), (iii) defined as a "Hazardous Substance" pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. ss. 9601 et seq. (42 U.S.C. ss. 9601) or (iv) identified in the Arizona Environmental Quality Act, including provisions on aquifer protection (A.R.S. ss.ss. 49-241 et seq.), remedial action (A.R.S. ss.ss. 49-281 et seq.), air quality (A.R.S. ss.ss. 49-401 et seq.), solid waste 51 management (A.R.S. ss.ss. 49-701 et seq.), hazardous waste disposal (A.R.S. ss.ss. 49-901 et seq.), and underground storage tank regulation (A.R.S. ss.ss. 49-1001 et seq.). 29.31.5 As used herein, the term "Laws" mean any applicable federal, state or local laws, ordinances, or regulations relating to any Hazardous Material affecting the Real Property, including, without limitation, the laws, ordinances, and regulations referred to in Section 29.31.4 above. 29.31.6 Landlord hereby represents that, to its actual knowledge, no Environmental Condition (as defined below) presently exists or has existed prior to the Lease Commencement Date on, under, or within the Real Property except as disclosed in that certain Phase One Environmental Site Assessment prepared by Envirotest Inc. dated February 1997. Landlord shall indemnify, protect, defend (by counsel reasonably acceptable to Tenant) and hold harmless Tenant and Tenant's Affiliates, and all of their directors, officers, employees, shareholders, lenders, agents, contractors and each of their respective successors and assigns, from and against (i) any and all claims, judgments, causes of action, damages, penalties, fines, taxes, costs, liabilities, losses and expenses arising at any time during or after the Lease Term as a result of any Environmental Condition which (A)constitutes a breach of the representation set forth in this Section 29.31.6, or (B) was authorized or caused by Landlord, its employees, agents or contractors and (ii) any and all orders, penalties, fines, administrative actions, or other proceedings commenced by any governmental agency including, without limitation, the United States Environmental Protection Agency as a result of an Environment Condition that was authorized or caused by Landlord, its employees, agents or contractors. Landlord's obligations pursuant to the foregoing indemnity shall survive the expiration or termination of this Lease (including any extension hereof), and shall be strictly conditioned upon prompt notice, tender of defense/settlement and reasonable cooperation by Tenant. The phrase "Environmental Condition" shall mean the existence of any Hazardous Materials on, under or within the Real Property in violation of Laws. 29.32 Conference Facility. Landlord shall provide Tenant up to a total of forty (40) hours per month of free usage for the two (2) conference facilities in the Building. Tenant's use of the conference facilities will be subject to the reservation procedures established by Landlord from time to time. If Tenant does not utilize all forty (40) free hours in a month, any unused amount will expire and will not be carried forward to future months. Nothing in this Lease shall be construed to obligate Landlord to continue the operation of the conference facilities. 29.33 Tenant's Exclusive. Landlord shall not, from and after the date hereof, enter into a lease for space in the Building to any of Tenant's Direct Competitors. "Direct Competitors" mean only the following entities: Tech Data, Inacom, Ingram Micro, Merisel, Intelligent Electronics, Ikon, Vanstar, Entex and GE Systems, and any subsidiary, affiliate or successor of such entities but only if Landlord had, at the time of entering into such lease, actual knowledge that the tenant was a subsidiary, affiliate or successor of any such entity (if any 52 proposed tenant's primary business is providing personal computer products and services to resellers or end-user clients, Landlord will endeavor to inquire whether such proposed tenant is a subsidiary, affiliate or successor of the foregoing named entities, but Landlord's failure to do so will not constitute a default hereunder by Landlord). This exclusive shall not apply to any existing leases in the Building or to any assignments under any existing leases or future leases in the Building, nor shall it apply to an attornment by a subtenant to Landlord upon the termination of any existing or future lease. This exclusive right shall terminate upon the first to occur of (i) the date the Original Tenant or any of Tenant's Affiliates cease to occupy and conduct business in at least 50,000 rentable square feet of the Premises in the aggregate, or (ii) a default by Tenant under this Lease that is not cured within the applicable notice and cure period, or (iii) nine (9) months prior to the expiration of the Lease Term unless Tenant has delivered an Interest Notice to Landlord pursuant to Section 2.2.2, or (iv) six (6) months prior to the expiration of the Lease Term unless Tenant has delivered an Option Notice to Landlord pursuant to Section 2.2.2. Tenant shall indemnify, defend, protect and hold harmless the Landlord Parties for, from and against any and all loss, cost, damage, expense and liability (including, without limitation, court costs and reasonable attorneys' fees) incurred in connection with or arising from any claim or action alleging that the provisions of this Section 29.33 constitute a restraint of trade or violate federal or state anti-trust laws or similar laws, which obligation shall survive the expiration or earlier termination of this Lease. IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be executed the day and date first above written. "Landlord": WHCPS REAL ESTATE LIMITED PARTNERSHIP, a Delaware limited partnership By: WHCPS GEN-PAR, INC., a Delaware corporation General Partner By: -------------------------------- Name: ------------------------- Title: ------------------------ "Tenant": MICROAGE COMPUTER CENTERS, INC. By: --------------------------------------- Alan R. Lyons Vice President Administration 53 EXHIBIT B --------- CENTRAL PARK SQUARE ------------------- TENANT WORK LETTER ------------------ This Tenant Work Letter shall set forth the terms and conditions relating to the construction of the tenant improvements in the Premises. This Tenant Work Letter is essentially organized chronologically and addresses the issues of the construction of the tenant improvements in the Premises, in sequence, as such issues will arise during the actual construction of the Premises. All references in this Tenant Work Letter to Articles or Sections of "this Lease" shall mean the relevant portions of Articles I through 29 of this Lease to which this Tenant Work Letter is attached as Exhibit B, and all references in this Tenant Work Letter to Sections of "this Tenant Work Letter" shall mean the relevant portions of Sections I through 5 of this Tenant Work Letter. SECTION 1 --------- DELIVERY OF THE PREMISES AND BASE, SHELL AND CORE ------------------------------------------------- Upon the full execution and delivery of this Lease by Landlord and Tenant, Landlord shall deliver the Premises to Tenant, and Tenant shall accept the Premises from Landlord, in their presently existing, "as-is" condition. SECTION 2 --------- TENANT IMPROVEMENTS ------------------- 2.1 Tenant Improvement Allowance. Tenant shall be entitled to a one-time tenant improvement allowance (the "Tenant Improvement Allowance") in the amount of $8.60 per usable square foot (as calculated in accordance with BOMA) of the Premises for the costs relating to the initial design and construction of Tenant's improvements, which are permanently affixed to the Premises (the "Tenant Improvements") and the acquisition and installation costs of computer cabling (the "Cabling"). In no event shall Landlord be obligated to make disbursements pursuant to this Tenant Work Letter in a total amount which exceeds the Tenant Improvement Allowance. 2.2 Disbursement of the Tenant Improvement Allowance. 2.2.1 Tenant Improvement Allowance Items. Except as otherwise set forth in this Tenant Work Letter, the Tenant Improvement Allowance shall be disbursed by Landlord only for the following items and costs (collectively the "Tenant Improvement Allowance Items"): EXHIBIT B - Page 1 2.2.1.1 Payment of the fees of the "Architect" and the "Engineers," as those terms are defined in Section 3.1 of this Tenant Work Letter, which fees shall, notwithstanding anything to the contrary contained in this Tenant Work Letter, not exceed an aggregate amount equal to $1.25 per usable square foot of the Premises, and payment of the fees incurred by, and the cost of documents and materials supplied by, Landlord and Landlord's consultants, architects and engineers in connection with the preparation and review of the "Construction Drawings," as that term is defined in Section 3.1 of this Tenant Work Letter and attending the design and construction meetings referred to in Section 4.2.5 of this Tenant Work Letter; 2.2.1.2 The payment of plan check, permit and license fees relating to construction of the Tenant Improvements; 2.2.1.3 The cost of construction of the Tenant Improvements, including, without limitation, testing and inspection costs, hoisting and trash removal costs, and contractors' fees and general conditions; 2.2.1.4 The cost of any changes in the Building when such changes are required by the Construction Drawings, such cost to include all direct architectural and/or engineering fees and expenses incurred in connection therewith; 2.2.1.5 The cost of any changes to the Construction Drawings or Tenant Improvements required by applicable code; 2.2.1.6 The Cabling, and 2.2.1.7 Sales and use taxes and Title 24 fees. 2.2.2 Disbursement of Tenant Improvement Allowance. During the construction of the Tenant Improvements, Landlord shall make monthly disbursements of the Tenant Improvement Allowance for Tenant Improvement Allowance Items for the benefit of Tenant and shall authorize the release of monies for the benefit of Tenant as follows. 2.2.2.1 Monthly Disbursements. On or before the first day of each calendar month during the construction of the Tenant Improvements (or such other date as Landlord may designate), Tenant shall deliver to Landlord: (i) a request for payment of the "Contractor," as that term is defined in Section 4.1 of this Tenant Work Letter, approved by Tenant, in a form to be provided by Landlord, showing the schedule, by trade, of percentage of completion of the Tenant Improvements in the Premises, detailing the portion of the work completed and the portion not completed; (ii) invoices from all of "Tenant's Agents," as that term is defined in Section 4.1.2 of this Tenant Work Letter, for labor rendered and materials delivered to the Premises; (iii) properly executed mechanic's lien releases from Contractor and/or all of Tenant's Agents (as applicable) in form and substance reasonably acceptable to Landlord; and (iv) all other information reasonably requested by Landlord. Thereafter, within thirty (30) days, Landlord shall deliver a check to Tenant EXHIBIT B - Page 2 in payment of the lesser of: (A) the amounts so requested by Tenant, less a ten percent (10%) retention (the aggregate amount of such retentions to be known as the "Final Retention"), and (B) the balance of any remaining available portion of the Tenant Improvement Allowance (not including the Final Retention), provided that Landlord does not dispute any request for payment based on non-compliance of any work with the "Approved Working Drawings," as that term is defined in Section 3.4 below, or due to any substandard work, or for any other reason. Landlord's payment of such amounts shall not be deemed Landlord's approval or acceptance of the work furnished or materials supplied as set forth in Tenant's payment request. 2.2.2.2 Final Retention. Subject to the provisions of this Tenant Work Letter, a check for the Final Retention payable to Tenant shall be delivered by Landlord to Tenant following the completion of construction of the Premises, provided that (i) Tenant delivers to Landlord properly executed mechanics lien releases from Contractor and/or all Tenant's Agents (as applicable) in form and substance acceptable to Landlord, (ii) Landlord has reasonably determined (which determination shall be made within thirty(30) days following Landlord's receipt of all the items required to be delivered to Landlord pursuant to this Section 2.2.2.2) that no substandard work exists which adversely affects the mechanical, electrical, plumbing, heating, ventilating and air conditioning, life-safety or other systems of the Building, the curtain wall of the Building, the structure or exterior appearance of the Building, or any other tenant's use of such other tenant's leased premises in the Building, (iii) Architect delivers to Landlord a certificate, in a form reasonably acceptable to Landlord, certifying that the construction of the Tenant Improvements in the Premises has been substantially completed and (iv) the requirements of Section 4.3 have been satisfied. 2.2.2.3 Other Terms. Landlord shall only be obligated to make disbursements from the Tenant Improvement Allowance to the extent costs are incurred by Tenant for Tenant Improvement Allowance Items. All Tenant Improvement Allowance Items for which the Tenant Improvement Allowance has been made available (except for the Cabling) shall be deemed Landlord's property. If there is any balance remaining in the Tenant Improvement Allowance after disbursement pursuant to Sections 2.2.2.1 and 2.2.2.2 above, Landlord shall, within thirty (30) days following request therefor from Tenant and provided that Tenant is not then in default under this Lease, either pay the remaining balance to Tenant or permit Tenant to deduct such amount against the next installment(s) of Base Rent, at Landlord's election. 2.3 Standard Tenant Improvement Package. Landlord has established specifications (the "Specifications") for the Building standard components to be used in the construction of the Tenant Improvements in the Premises (collectively, the "Standard Improvement Package"). The quality of Tenant Improvements shall be equal to or of greater quality than the quality of the Specifications, provided that the Tenant Improvements shall comply with certain Specifications as designated by Landlord. Landlord may make changes to the Specifications for the Standard Improvement Package from time to time. EXHIBIT B - Page 3 SECTION 3 --------- CONSTRUCTION DRAWINGS --------------------- 3.1 Selection of Architect/Construction Drawings. Tenant shall retain KRAUSETHOMAS as the architect/space planner (the "Architect") to prepare the "Construction Drawings," as that term is defined in this Section 3.1 Tenant shall retain the engineering consultants designated by Landlord (the "Engineers") to prepare all plans and engineering working drawings relating to the structural, mechanical, electrical, plumbing, HVAC and lifesafety work in the Premises. The plans and drawings to be prepared by Architect and the Engineers hereunder shall be known collectively as the "Construction Drawings." All Construction Drawings shall be subject to Landlord's approval. Tenant, Architect and Engineers shall verify, in the field, the dimensions and conditions as shown on the relevant portions of the base building plans, and Tenant, Architect and Engineers shall be solely responsible for the same, and Landlord shall have no responsibility in connection therewith. Landlord's review of the Construction Drawings as set forth in this Section 3, shall be for its sole purpose and shall not imply Landlord's review of the same, or obligate Landlord to review the same, for quality, design, Code compliance or other like matters. Accordingly, notwithstanding that any Construction Drawings are reviewed by Landlord or its space planner, architect, engineers and consultants, and notwithstanding any advice or assistance which may be rendered to Tenant by Landlord or Landlord's space planner, architect, engineers, and consultants, Landlord shall have no liability whatsoever in connection therewith and shall not be responsible for any omissions or errors contained in the Construction Drawings, and Tenant's waiver and indemnity set forth in Section 10.1 of this Lease shall specifically apply to the Construction Drawings. 3.2 Final Space Plan. Tenant shall supply Landlord with two (2) copies signed by Tenant of its final space plan for the Premises before any architectural working drawings or engineering drawings have been commenced. The final space plan (the "Final Space Plan") shall include a layout and designation of all offices, rooms and other partitioning, their intended use, and equipment to be contained therein. Landlord may request clarification or more specific drawings for special use items not included in the Final Space Plan. Landlord shall advise Tenant within five (5) business days after Landlord's receipt of the Final Space Plan for the Premises if the same is unsatisfactory or incomplete in any respect. If Tenant is so advised, Tenant shall promptly cause the Final Space Plan to be revised to correct any deficiencies or other matters Landlord may reasonably require. 3.3 Final Working Drawings. After the Final Space Plan has been approved by Landlord, Tenant shall supply the Engineers with a complete listing of standard and non-standard equipment and specifications, including, without limitation, B.T.U. calculations, electrical requirements and special electrical receptacle requirements for the Premises, to enable the Engineers and the Architect to complete the "Final Working Drawings" (as that term is defined below) in the manner as set forth below. Upon the approval of the Final Space Plan by Landlord and Tenant, Tenant shall promptly cause the Architect and the Engineers to complete the architectural and engineering drawings for the Premises, and Architect shall compile a fully coordinated set of architectural, structural, mechanical, electrical and plumbing working drawings in a form which EXHIBIT B - Page 4 is complete to allow subcontractors to bid on the work and to obtain all applicable permits (collectively, the "Final Working Drawings") and shall submit the same to Landlord for Landlord's approval. Tenant shall supply Landlord with two (2) copies signed by Tenant of such Final Working Drawings. Landlord shall advise Tenant within five (5) business days after Landlord's receipt of the Final Working Drawings for the Premises if the same is unsatisfactory or incomplete in any respect. If Tenant is so advised, Tenant shall immediately revise the Final Working Drawings in accordance with such review and any disapproval of Landlord in connection therewith. 3.4 Approved Working Drawings. The Final Working Drawings must be approved by Landlord (the "Approved Working Drawings") prior to the commencement of construction of the Premises by Tenant. After approval by Landlord of the Final Working Drawings, Tenant may submit the same to the appropriate municipality for all applicable building permits. Tenant hereby agrees that neither Landlord nor Landlord's consultants shall be responsible for obtaining any building permit or certificate of occupancy for the Premises and that obtaining the same shall be Tenant's responsibility; provided,. however, that Landlord shall cooperate with Tenant in executing permit applications and performing other ministerial acts reasonably necessary to enable Tenant to obtain any such permit or certificate of occupancy. No changes, modifications or alterations in the Approved Working Drawings may be made without the prior written consent of Landlord, which consent may not be unreasonably withheld or delayed. SECTION 4 --------- CONSTRUCTION OF THE TENANT IMPROVEMENTS --------------------------------------- 4.1 Tenant's Selection of Contractors. 4.1.1 The Contractor. A general contractor shall be retained by Tenant to construct the Tenant Improvements. Such general contractor ("Contractor") shall be acceptable to Landlord. Landlord hereby approves Tenant's selection of Avalon Construction, Inc. as Contractor. 4.1.2 Tenant's Agents. All subcontractors, laborers, materialmen, and suppliers used by Tenant (such subcontractors, laborers, materialmen, and suppliers, and the Contractor to be known collectively as "Tenant's Agents") must be approved in writing by Landlord, which approval shall not be unreasonably withheld or delayed. If Landlord does not approve any of Tenant's proposed subcontractors, laborers, materialmen or suppliers, Tenant shall submit other proposed subcontractors, laborers, materialmen or suppliers for Landlord's written approval, which shall not be unreasonably withheld or delayed. EXHIBIT B - Page 5 4.2 Construction of Tenant Improvements by Tenant's Agents. 4.2.1 Construction Contract. Prior to Tenant's execution of the construction contract and general conditions with Contractor (the "Contract"), Tenant shall submit the Contract to Landlord for its approval, which approval shall not be unreasonably withheld or delayed. 4.2.2 Tenant's Agents. 4.2.2.1 Landlord's General Conditions for Tenant's Agents and Tenant Improvement Work. Tenant's and Tenant's Agent's construction of the Tenant Improvements shall comply with the following: (i) the Tenant Improvements shall be constructed in strict accordance with the Approved Working Drawings; (ii) Tenant's Agents shall submit schedules of all work relating to the Tenant's Improvements to Contractor and Contractor shall, within five (5) business days of receipt thereof, inform Tenant's Agents of any changes which are necessary thereto, and Tenant's Agents shall adhere to such corrected schedule; and (iii) Tenant shall abide, and shall cause Tenant's Agents to abide, by all rules, including the rules attached hereto as Schedule 1, made by Landlord with respect to the use of freight, loading dock and service elevators, storage of materials, coordination of work with the contractors of other tenants, and any other matter in connection with this Tenant Work Letter, including, without limitation, the construction of the Tenant Improvements. 4.2.2.2 Indemnity. Tenant's indemnity of Landlord as set forth in Section 10.1 of this Lease shall also apply with respect to any and all costs, losses, damages, injuries and liabilities (including damage to the Building or its systems) related in any way to any act or omission of Tenant or Tenant's Agents (or anyone directly or indirectly employed by any of them) in connection with the performance of Tenant's obligations under this Tenant Work Letter, or in connection with Tenant's non-payment of any amount arising out of the Tenant Improvements and/or Tenant's disapproval of all or any portion of any request for payment. Such indemnity by Tenant, as set forth in Section 10.1 of this Lease, shall also apply with respect to any and all costs, Tosses, damages, injuries and liabilities related in any way to Landlord's performance of any ministerial acts reasonably necessary and requested by Tenant (i) to permit Tenant to complete the Tenant Improvements, and (ii) to enable Tenant to obtain any building permit or certificate of occupancy for the Premises. Tenant's indemnity obligations under this Section 4.2.2.2 are subject to the waiver under Section 10.5 of the Lease. 4.2.2.3 Requirements of Tenant's Agents. Tenant shall cause each of Tenant's Agents to guarantee to Tenant and for the benefit of Landlord that the portion of the Tenant Improvements for which it is responsible shall be free from any defects in workmanship and materials for a period of not less than one (1) year from the date of completion thereof. Tenant shall cause each of Tenant's Agents to replace or repair, without additional charge, of all work done or furnished in accordance with its contract that shall become defective within one (1) year after the later to occur of (i) completion of the work performed by such contractor or subcontractors and (ii) the Lease Commencement Date or Must Take Rent Commencement Date, as applicable. The correction of such work shall include, without additional charge, all additional expenses and damages incurred in connection with such removal or replacement of EXHIBIT B - Page 6 all or any part of the Tenant Improvements, and/or the Building and/or common areas that may be damaged or disturbed thereby. All such warranties or guarantees as to materials or workmanship of or with respect to the Tenant Improvements shall be contained in the Contract or subcontract and shall be written such that such guarantees or warranties shall inure to the benefit of both Landlord and Tenant, as their respective interests may appear, and can be directly enforced by either. Tenant covenants to give to Landlord any assignment or other assurances which may be necessary to effect such right of direct enforcement. 4.2.2.4 Insurance Requirements. 4.2.2.4.1 General Coverages. All of Tenant's Agents shall carry worker's compensation insurance covering all of their respective employees, and shall also carry public liability insurance, including property damage, all with limits, in form and with companies as are required to be carried by Tenant as set forth in Article 10 of this Lease. 4.2.2.4.2 Special Coverages. Tenant shall carry "Builder's All Risk" insurance in an amount approved by Landlord covering the construction of the Tenant Improvements, and such other insurance as Landlord may require, it being understood and agreed that the Tenant Improvements shall be insured by Tenant pursuant to Article 10 of this Lease. Such insurance shall be in amounts and shall include such extended coverage endorsements as may be reasonably required by Landlord including, but not limited to, the requirement that all of Tenant's Agents shall carry excess liability and Products and Completed Operation Coverage insurance, each in amounts not less than $500,000 per incident, $1,000,000 in aggregate, and in form and with companies as are required to be carried by Tenant as set forth in Article 10 of this Lease. 4.2.2.4.3 General Terms. Certificates for all insurance carried pursuant to this Section 4.2.2.4 shall be delivered to Landlord before the commencement of construction of the Tenant Improvements and before the Contractor's equipment is moved onto the site. All such policies of insurance must contain a provision that the company writing said policy will give Landlord thirty (30) days prior written notice of any cancellation or lapse of the effective date or any reduction in the amounts of such insurance. In the event that the Tenant Improvements are damaged by any cause during the course of the construction thereof, Tenant shall immediately repair the same at Tenant's sole cost and expense, except to the extent such damage is caused by Landlord or its agents, employees or subcontractors and such damage is of a type not covered by insurance carried, or required to be carried hereunder, by Tenant or Tenant's Agents. Tenant's Agents shall maintain all of the foregoing insurance coverage in force until the Tenant Improvements are fully completed and accepted by Landlord. All policies carried under this Section 4.2.2.4 shall insure Landlord and Tenant, as their interests may appear, as well as Contractor and Tenant's Agents. All insurance maintained by Tenant's Agents shall preclude subrogation claims by the insurer against anyone insured thereunder. Such insurance shall provide that it is primary insurance as respects the owner and that any other insurance maintained by owner is excess and noncontributing with the insurance required hereunder. The requirements for the foregoing insurance shall not derogate from the provisions for indemnification of Landlord by Tenant under EXHIBIT B - Page 7 Section 4.2.2.2 of this Tenant Work Letter. Landlord may, in its discretion, require Tenant to obtain a lien and completion bond or some alternate form of security satisfactory to Landlord in an amount sufficient to ensure the lien-free completion of the Tenant Improvements and naming Landlord as a co-obligee. 4.2.3 Governmental Compliance. The Tenant Improvements shall comply in all respects with the following: (i) all applicable codes and other state, federal, city or quasi-governmental laws, codes, ordinances and regulations, as each may apply according to the rulings of the controlling public official, agent or other person; (ii) applicable standards of the American Insurance Association (formerly, the National Board of Fire Underwriters) and the National Electrical Code; and (iii) building material manufacturer's specifications. 4.2.4 Inspection by Landlord. Landlord shall have the right to inspect the Tenant Improvements at all reasonable times, provided however, that Landlord's failure to inspect the Tenant Improvements shall in no event constitute a waiver of any of Landlord's rights hereunder nor shall Landlord's inspection of the Tenant Improvements constitute Landlord's approval of the same. Should Landlord disapprove any portion of the Tenant Improvements, Landlord shall promptly notify Tenant in writing of such disapproval and shall specify the items disapproved. Any defects or deviations in, and/or disapproval by Landlord of, the Tenant Improvements shall be rectified by Tenant at no expense to Landlord; provided however, that in the event Landlord determines that a defect or deviation exists or disapproves of any matter in connection with any portion of the Tenant Improvements and such defect, deviation or matter might adversely affect the mechanical, electrical, plumbing, heating, ventilating and air conditioning or life-safety systems of the Building, the structure or exterior appearance of the Building or any other tenant's use of such other tenant's leased premises, and if Tenant fails to cure such default, deviation or matter within a reasonable period of time following Tenant's receipt of written notice thereof, then Landlord may take such action as Landlord deems necessary, at Tenant's expense and without incurring any liability on Landlord's part, to correct any such defect, deviation and/or matter, including, without limitation, causing the cessation of performance of the construction of the Tenant Improvements until such time as the defect, deviation and/or matter is corrected to Landlord's satisfaction. 4.2.5 Meetings. Commencing upon the execution of this Lease, Tenant shall hold weekly meetings at a reasonable time, with the Architect and the Contractor regarding the progress of the preparation of Construction Drawings and the construction of the Tenant Improvements, which meetings shall be held at the Real Property or another location acceptable to Landlord and Tenant, and Landlord and/or its agents shall receive prior notice of, and shall have the right to attend, all such meetings, and, upon Landlord's request, certain of Tenant's Agents shall attend such meetings. In addition, minutes shall be taken at all such meetings, a copy of which minutes shall be promptly delivered to Landlord. One such meeting each month shall include the review of Contractor's current request for payment. 4.3 Notice of Completion; Copy of Record Set of Plans. Within ten (10) days after completion of construction of the Tenant Improvements, Tenant shall cause a Notice of Completion to be recorded in the office of the Recorder of the EXHIBIT B - Page 8 appropriate County in accordance with applicable law, and shall furnish a copy thereof to Landlord upon such recordation. If Tenant fails to do so, Landlord may execute and file the same on behalf of Tenant as Tenant's agent for such purpose, at Tenant's sole cost and expense. At the conclusion of construction, (i)Tenant shall cause the Architect and Contractor (A) to update the Approved Working Drawings as necessary to reflect all changes made to the Approved Working Drawings during the course of construction, (B) to certify to the best of their knowledge that the "record-set" of as-built drawings are true and correct, which certification shall survive the expiration or termination of this Lease, and (C) to deliver to Landlord a copy of such record set of drawings (on CAD disk) within thirty (30) days following issuance of a certificate of occupancy for the Premises, and (ii) Tenant shall deliver to Landlord a copy of all warranties, guaranties, and operating manuals and information relating to the improvements, equipment, and systems in the Premises. SECTION 5 --------- MISCELLANEOUS ------------- 5.1 Tenant's Representative. Tenant has designated Alan R. Lyons or Chuck Freegard as its sole representative with respect to the matters set forth in this Tenant Work Letter, who shall have full authority and responsibility to act on behalf of the Tenant as required in this Tenant Work Letter. 5.2 Landlord's Representative. Landlord has designated Carol Taylor as its sole representatives with respect to the matters set forth in this Tenant Work Letter, who, until further notice to Tenant, shall have full authority and responsibility to act on behalf of the Landlord as required in this Tenant Work Letter. 5.3 Time of the Essence in This Tenant Work Letter. Time is of the essence in this Work Letter and each of its provisions. Unless otherwise indicated, all references herein to a "number of days" shall mean and refer to calendar days. If any item requiring approval is timely disapproved by Landlord, the procedure for preparation of the document and approval thereof shall be repeated until the document is approved by Landlord. 5.4 Tenant's Lease Default. Notwithstanding any provision to the contrary contained in this Lease, if an event of default as described under the Lease or this Tenant Work Letter has occurred at any time on or before the completion of the Tenant Improvements, then (i) in addition to all other rights and remedies granted to Landlord pursuant to this Lease, Landlord shall have the right to withhold payment of all or any portion of the Tenant Improvement Allowance and/or Landlord may cause Contractor to cease the construction of the Tenant Improvements (in which case, Tenant shall be responsible for any delay in the substantial completion of the Tenant Improvements caused by such work stoppage), and (ii) all other obligations of Landlord under the terms of this Tenant Work Letter shall be forgiven until such time as such default is cured pursuant to the terms of this Lease (in which case, Tenant shall be responsible EXHIBIT B - Page 9 for any delay in the substantial completion of the Tenant Improvements caused by such inaction by Landlord). 5.5 Landlord Delays. If there shall be a delay or there are delays in the completion of the Tenant Improvements, as a direct or total result of any of the following (collectively, "Landlord Delays"): 5.5.1 Landlord's failure to timely approve or disapprove any matter requiring Landlord's approval; 5.5.2 A breach by Landlord of the terms of this Tenant Work Letter or the Lease; 5.5.3 Changes in any of the Final Space Plans or Final Working Drawings requested by Landlord after Landlord's approval thereof, unless such change is requested because the same do not comply with Code or other applicable laws; or 5.5.4 The failure of an Engineer designed by Landlord to complete its engineering drawings within ten (10) business days following receipt of all information necessary to complete the same; Then, provided Tenant has given Landlord written notice specifying in reasonable detail the nature of such delay within two (2) business days following the occurrence thereof and such delay is not cured within two (2) business days following Landlord's receipt of such notice, the sixty (60) day period specified in Section 7.2 of the Summary shall be extended by one day for each day of such delay. 5.6 Must Take Space. The provisions of this Tenant Work Letter will govern the design and construction of the Must Take Space as well. Accordingly, all references in this Tenant Work Letter to the Premises will include the Must Take space, except that for purposes of Sections I. I and 2, reference to the Premises will mean either the original Premises or the Must Take Space, as applicable. EXHIBIT B - Page 10 SCHEDULE I ---------- TO -- EXHIBIT B --------- CONSTRUCTION RULES AND REGULATIONS ---------------------------------- 1. Daytime work is allowed, but only to the extent that it will not cause inconvenience to tenants in the building. Activities causing odors or noise that can be detected in other suites (above, below or same floor) must be performed before 7:00 a.m. or after 6:00 p.m. For remodels of existing tenant space, the amount of work allowed during business hours will be determined by the tenant. If access tot he surrounding occupied space is required, building management must be notified 24 hours in advance so arrangements can be made with the tenants that are affected. 2. Parking is allowed only in areas designated by management. Parking in garage - Level I after 6:00 p.m. and before 6:00 a.m. (The garage elevators close at 9:30 p.m. and open at 5:25 a.m.). If contractors are in the building after 6:00 a.m., they must move their vehicles to Level B2, middle section, where it is marked "Authorized Personnel." Loading dock is to be used only for deliveries and those trucks that are too high for garage. Notify building management for access to load/unload trucks, as required. If a parking ticket is issued, write the name of the general contractor on the parking ticket to receive free parking. 3. Each subcontractor will remove any trash he creates from the job site, and leave floor in a clean-swept condition for the next trade. Common areas of the building are to be kept clean at all times (lobby, corridors, elevators, restrooms). 4. Upon job completion, contractor will promptly remove any "left-over" materials, tools, gang boxes, etc. 5. Contractor's employees shall only use the loading dock restroom, unless otherwise directed by management. 6. Contractor will use freight elevator only for bringing materials into the building. It is available upon request (24-hour notice), except during heavy tenant traffic times (i.e. 7:30 - 9:00 a.m., 11:30 a.m. - 1:30 p.m., 4:30 - 5:30 p.m.) SCHEDULE I TO EXHIBIT B - Page 1 7. Stairwells are off limits for use, except in the event of an emergency. If roof access is required, it will be done from the 11th floor. 8. Working area shall be maintained in a neat and orderly condition at all times. All material must be kept orderly and debris removed as soon as accumulated. No materials, supplies, etc. are to be left in the common areas at any time. 9. All tools and equipment provided by contractor shall be of the property type, be safe for the performance of work being performed, and comply with the applicable codes and laws (i.e. OSHA). 10. Areas in which work is being performed must be posted and roped off, as necessary. Corridor and lobby doors will need to be protected with masonite while materials are being brought in or out of the building. 11. A responsible supervisor shall be present at all times, and his duties shall include the prevention of fires and accidents. 12. Contractor will notify the building management office on a weekly basis or before 3:00 p.m. each day of which subcontractors will be in the building that night. (By 3:00 p.m. Friday, for weekend access). Contractor should also indicate whether they will need access to the freight elevator and loading dock. (Security will not allow access without prior notification.) 13. Contractor/subcontractors will sign in at the security desk upon entering the building. 14. Contractor will notify security when they are finished for the day/night. 15. All wood staining will be done off the property. 16. Security is to be notified of any problems/emergencies. They will contact the appropriate personnel (i.e. building engineers). 17. Sprinkler System Modification - contractor must give building maintenance personnel minimum 24-hour notice of work to be performed. Building maintenance personnel will be responsible for disabling fire alarms and sprinkler systems prior to work being performed. The system must e operational by 4:00 p.m. and building maintenance notified to refill and reactivate the system. Contractor must check for leaks each day If a job involves multiple floors, only one floor can be disabled at any one time. SCHEDULE I TO EXHIBIT B - Page 2 18. If there is any work involving an open flame (i.e. welding, pipe sweating, etc.) the contractor is required to have a fire extinguisher available in the immediate vicinity, and must perform a minimum 30-minute fire watch after completion. 19. All combustible materials are to be removed from the job site each day when the work is completed for the day. 20. This building is a "Non-Smoking" building. Therefore, no smoking is allowed in the building. 21. The playing of radios is not allowed. SCHEDULE I TO EXHIBIT B - Page 3 EXHIBIT C --------- CENTRAL PARK SQUARE ------------------- NOTICE OF LEASE TERM DATES -------------------------- To: -------------------- -------------------- -------------------- -------------------- Re: Office Lease dated ______________, 19____, between WHCPS REAL ESTATE LIMITED PARTNERSHIP, a Delaware limited partnership ("Landlord"), and __________________________________, a _______________ ("Tenant") concerning Suite _____________ on floor(s) ______ of the Office Building located at ________________________. Gentlemen: In accordance with the Office Lease (the "Lease"), we wish to advise you and/or confirm as follows: 1. That the Premises are Ready for Occupancy, and that the Lease Term shall commence as of _________________ for a term of ______________ ending on _______________. 2. That in accordance with the Lease, Rent commenced to accrue on ___________________. 3. If the Lease Commencement Date is other than the first day of the month, the first billing will contain a pro rata adjustment. Each billing thereafter, with the exception of the final billing, shall be for the full amount of the monthly installment as provided for in the Lease. 4. Rent is due and payable in advance on the first day of each and every month during the Lease Term. Your rent checks should be made payable to ________________ at ___________________. 5. The exact number of rentable square feet within the Premises is ________ square feet. 6. Tenant's Share as adjusted based upon the exact number of rentable square feet within the Premises is _______%. EXHIBIT C - Page 1 "Landlord": WHCPS REAL ESTATE LIMITED PARTNERSHIP, a Delaware limited partnership By: WHCPS GEN-PAR, INC., a Delaware corporation General Partner By: -------------------------------- Name: ------------------------- Title: ------------------------ Agreed to and Accepted as of ________, 19___. "Tenant": - ---------------------------, a -------------------------- By: -------------------------------- Name: ------------------------- Title: ------------------------ EXHIBIT C - Page 2 EXHIBIT D --------- CENTRAL PARK SQUARE ------------------- RULES AND REGULATIONS --------------------- Tenant shall faithfully observe and comply with the following Rules and Regulations. Landlord shall not be responsible to Tenant for the nonperformance of any of said Rules and Regulations by or otherwise with respect to the acts or omissions of any other tenants or occupants of the Building. 1. Tenant shall not alter any lock or install any new or additional locks or bolts on any doors or windows of the Premises without obtaining Landlord's prior written consent. Tenant shall bear the cost of any lock changes or repairs required by Tenant. Two keys will be furnished by Landlord for the Premises. 2. All doors opening to public corridors shall be kept closed at all times except for normal ingress and egress to the Premises, unless electrical hold backs have been installed. 3. Landlord reserves the right to close and keep locked all entrance and exit doors of the Building during such hours as are customary for comparable buildings in the vicinity of the Building. Tenant, its employees and agents must be sure that the doors to the Building are securely closed and locked when leaving the Premises if it is after the normal hours of business for the Building. Any tenant, its employees, agents or any other persons entering or leaving the Building at any time when it is so locked, or any time when it is considered to be after normal business hours for the Building, may be required to sign the Building register when so doing. Access to the Building may be refused unless the person seeking access has proper identification or has a previously arranged pass for access to the Building. The Landlord and its agents shall in no case be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. In case of invasion, mob, riot, public excitement, or other commotion, Landlord reserves the right to prevent access to the Building during the continuance of same by any means it deems appropriate for the safety and protection of life and property. 4. Landlord shall have the right to prescribe the weight, size and position of all safes and other heavy property brought into the Building. Safes and other heavy objects shall, if considered necessary by Landlord, stand on supports of such thickness as is necessary to properly distribute the weight. Landlord will not be responsible for loss of or damage to any such safe or property in any case. All damage done to any part of the Building, its contents, occupants or visitors by moving or maintaining any such safe or other property shall be the sole responsibility of Tenant and any expense of said damage or injury shall be borne by Tenant. EXHIBIT D - Page 1 5. No furniture, freight, packages, supplies, equipment or merchandise will be brought into or removed from the Building or carried up or down in the elevators, except upon prior notice to Landlord, and in such manner, in such specific elevator, and between such hours as shall be designated by Landlord. Tenant shall use reasonable efforts to provide Landlord with not less than 24 hours prior notice of the need to utilize an elevator for any such purpose, so as to provide Landlord with a reasonable period to schedule such use and to install such padding or take such other actions or prescribe such procedures as are appropriate to protect against damage to the elevators or other parts of the Building. In no event shall Tenant's use of the elevators for any such purpose be permitted during the hours of 7 00 a.m.-9:00 a.m., 11:30 a.m.-1:30 p.m. and 4:30 p.m.-6:30 p.m. 6. Landlord shall have the right to control and operate the public portions of the Building, the public facilities, the heating and air conditioning, and any other facilities furnished for the common use of tenants, in such manner as is customary for comparable buildings in the vicinity of the Building. 7. The requirements of Tenant will be attended to only upon application at the Office of the Building or at such office location designated by Landlord. Employees of Landlord shall not perform any work or do anything outside their regular duties unless under special instructions from Landlord. 8. Tenant shall not disturb, solicit, or canvass any occupant of the Building and shall cooperate with Landlord or Landlord's agents to prevent same. 9. The toilet rooms, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed, and no foreign 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 agents, shall have caused it. 10. Tenant shall not overload the floor of the Premises, nor mark, drive nails or screws, or drill into the partitions, woodwork or plaster or in any way deface the Premises or any part thereof without Landlord's consent first had and obtained. 11. Except for vending machines intended for the sole use of Tenant's employees and invitees, no vending machine or machines of any description other than fractional horsepower office machines shall be installed, maintained or operated upon the Premises without the written consent of Landlord. 12. Tenant shall not use or keep in or on the Premises or the Building any kerosene, gasoline or other inflammable or combustible fluid or material other than ordinary office and cleaning supplies in quantities customarily used by office tenants. EXHIBIT D - Page 2 13. Tenant shall not use any method of heating or air conditioning other than that which may be supplied by Landlord, without the prior written consent of Landlord. 14. Tenant shall not use, keep or permit to be used or kept, any foul or noxious gas or substance in or on the Premises, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors, or vibrations, or interfere in any way with other Tenants or those having business therein. 15. Tenant shall not bring into or keep within the Building or the Premises any animals, birds, bicycles or other vehicles. 16. No cooking shall be done or permitted by any tenant on the Premises, nor shall the Premises be used for the storage of merchandise for lodging. Notwithstanding the foregoing, Underwriters' laboratory-approved equipment and microwave ovens may be used in the Premises for heating or cooking food and brewing coffee, tea, hot chocolate and similar beverages, provided that such use is in accordance with all applicable federal, state and city laws, codes, ordinances, rules and regulations, and does not cause odors which are objectionable to Landlord and other Tenants. 17. Landlord will approve where and how telephone and telegraph wires are to be introduced to the Premises. No boring or cutting for wires shall be allowed without the consent of Landlord. The location of telephone, call boxes and other office equipment affixed to the Premises shall be subject to the approval of Landlord. 18. Landlord reserves the right to exclude or expel from the Building any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in major violation of any of these Rules and Regulations. 19. Tenant, its employees and agents shall not loiter in the entrances or corridors, nor in any way obstruct the sidewalks, lobby, halls, stairways or elevators, and shall use the same only as a means of ingress and egress for the Premises. 20. Tenant shall not waste electricity, water or air conditioning and agrees to cooperate reasonably with Landlord to promote effective operation of the Building's heating and air conditioning system, and shall refrain from attempting to adjust any controls. 21. Tenant shall store all its trash and garbage within the interior of the Premises. No material shall be placed in the trash boxes or receptacles if such material is of such nature that it may not be disposed of in the ordinary and customary manner of removing and disposing of trash and garbage in the Downtown Phoenix area without violation of any law or ordinance governing such disposal. All trash, garbage and refuse disposal shall be made only through entry-ways and elevators provided for such purposes at such times as Landlord shall designate. EXHIBIT D - Page 3 22. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency. 23. Tenant shall assume any and all responsibility for protecting the Premises from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Premises closed, when the Premises are not occupied. 24. Landlord may waive any one or more of these Rules and Regulations for the 'benefit of any particular tenant or tenants, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of any other tenant or tenants, nor prevent Landlord from thereafter enforcing any such Rules or Regulations against any or all tenants of the Building. 25. No awnings or other projection shall be attached to the outside walls of the Building without the prior written consent of Landlord. No curtains, blinds, shades or screens shall be attached to or hung in, or used in connection with, any window or door of the Premises without the prior written consent of Landlord. All electrical ceiling fixtures hung in offices or spaces along the perimeter of the Building must be fluorescent and/or of a quality, type, design and bulb color approved by Landlord. 26. The sashes, sash doors, skylights, windows, and doors that reflect or admit light and air into the halls, passageways or other public places in the Building shall not be covered or obstructed by Tenant, nor shall any bottles, parcels or other articles be placed on the windowsills. 27. The washing and/or detailing of or, the installation of windshields, radios, telephones in or general work on, automobiles shall not be allowed on the Real Property. 28. Food vendors shall be allowed in the Building upon receipt of a written request from the Tenant. The food vendor shall service only the tenants that have a written request on file in the Building Management Office. Under no circumstance shall the food vendor display their products in a public or common area including corridors and elevator lobbies. Any failure to comply with this rule shall result in immediate permanent withdrawal of the vendor from the Building. 29. Tenant must comply with requests by the Landlord concerning the informing of their employees of items of importance to the Landlord. 30. Tenant shall comply with any non-smoking ordinance adopted by any applicable governmental authority. 31. Tenant and Tenant's employees, agents, contractors and other invitees shall not be permitted to bring firearms into the Building or surrounding areas at any time. 32. Landlord reserves the right at any time to change or rescind any one or more of these Rules and Regulations, or to make such other and further reasonable Rules and Regulations as in Landlord's judgment may from time to time be necessary for the management, safety, care and cleanliness of the Premises EXHIBIT D - Page 4 and Building, and for the preservation of good order therein, as well as for the convenience of other occupants and tenants therein. Landlord shall not be responsible to Tenant or to any other person for the nonobservance of the Rules and Regulations by another tenant or other person. Tenant shall be deemed to have read these Rules and Regulations and to have agreed to abide by them as a condition of its occupancy of the Premises. EXHIBIT D - Page 5 EXHIBIT E --------- CENTRAL PARK SQUARE ------------------- FORM OF TENANT'S ESTOPPEL CERTIFICATE ------------------------------------- The undersigned as Tenant under that certain Office Lease (the "Lease") made and entered into as of ______________, 19___ and between WHCPS REAL ESTATE LIMITED PARTNERSHIP, a Delaware limited partnership, as Landlord, and the undersigned as Tenant, for Premises on the ________________ floor(s) of the Office Building located at ________________________________ certifies as follows: 1. Attached hereto as Exhibit A is a true and correct copy of the Lease and all amendments and modifications thereto. The documents contained in Exhibit A represent the entire agreement between the parties as to the Premises. 2. The undersigned has commenced occupancy of the Premises described in the Lease, currently occupies the Premises, and the Lease Term commenced on _____________. 3. The Lease is in full force and effect and has not been modified, supplemented or amended in any way except as provided in Exhibit A. 4. Tenant has not transferred, assigned, or sublet any portion of the Premises nor entered into any license or concession agreements with respect thereto except as follows: 5. Tenant shall not modify the documents contained in Exhibit A or prepay any amounts owing under the Lease to Landlord in excess of thirty (30) days without the prior written consent of Landlord's mortgagee. 6. Base Rent became payable on _______________. 7. The Lease Term expires on _________________. 8. To Tenant's knowledge, all conditions of the Lease to be performed by Landlord necessary to the enforceability of the Lease have been satisfied and Landlord is not in default thereunder. 9. No rental has been paid in advance and no security has been deposited with Landlord except as provided in the Lease. EXHIBIT E - Page 1 10. To Tenant's knowledge, as of the date hereof, there are no existing defenses or offsets that the undersigned has, which preclude enforcement of the Lease by Landlord 11. All monthly installments of Base Rent, all Additional Rent and all monthly installments of estimated Additional Rent have been paid when due through _______________________. The current monthly installment of Base Rent is $__________. 12. The undersigned acknowledges that this Estoppel certificate may be delivered to Landlord's prospective mortgagee, or a prospective purchaser, and acknowledges that it recognizes that if same is done, said mortgagee, prospective mortgagee, or prospective purchaser will be relying upon the statements contained herein in making the loan or acquiring the property of which the Premises are a part, and in accepting an assignment of the Lease as collateral security, and that receipt by it of this certificate is a condition of making of the loan or acquisition of such property. 13. If Tenant is a corporation or partnership, each individual executing this Estoppel Certificate on behalf of Tenant hereby represents and warrants that Tenant is a duly formed and existing entity qualified to do business in Arizona and that Tenant has full right and authority to execute and deliver this Estoppel Certificate and that each person signing on behalf of Tenant is authorized to do so. Executed at ________________________ on the_______day of____________, 19___. "Tenant": ------------------------------------ a ---------------------------------- By: -------------------------------- Name: ------------------------- Title: ------------------------ By: -------------------------------- Name: ------------------------- Title: ------------------------ EXHIBIT E - Page 2 EXHIBIT F --------- CENTRAL PARK SQUARE ------------------- FORM OF SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT ---------------------------------------- RECORDING REQUESTED BY AND | WHEN RECORDED RETURN TO: | | Sullivan & Cromwell | 125 Broad Street | New York, New York 10004 | Attn: Anthony J. Colletta, Esq. | - -------------------------------------------------------------------------------- Space above this line for Recorder's use only SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT This Subordination, Non-Disturbance and Attornment Agreement, made and entered into as of the ______ day of ____________ 1997, between WH VII-2 ACQUISITION FINANCE, L.P., a Delaware limited partnership ("Lender"), and MICROAGE COMPUTER CENTERS, ENC., a Delaware corporation ("Tenant"). R E C I T A L S : - - - - - - - - A. WHCPS Real Estate Limited Partnership, a Delaware limited partnership ("Landlord"), and Tenant are parties to a certain Lease dated __________, 1997, (the "Lease"), demising the premises more particularly described in the Lease (the "Premises"); B. Lender has made a mortgage loan (the "Loan") to Landlord, secured by a First Deed of Trust, dated April 22, 1997, encumbering the real estate on which the Premises are located and recorded April 24, 1997 as document #97-0271748, Official Records, Maricopa County, State of Arizona (the "Mortgage"); C. The parties hereto desire to enter into this Agreement on the terms and conditions hereinafter provided. NOW, THEREFORE, for and in consideration of the premises and the mutual covenants contained herein, the parties hereto covenant and agree as follows: EXHIBIT F - Page 1 1. The parties acknowledge that the Lease is subject and subordinate to the Mortgage and is hereby made subject and subordinate to all renewals, modifications, consolidations, replacements and extensions of the Mortgage, so that all rights of Tenant under the Lease shall be subject and subordinate to the rights of Lender under all renewals, modifications, consolidations, replacements and extensions of the Mortgage, as fully as if all such instruments had been executed, delivered and recorded prior to the Lease. 2. Upon receipt of written notice, and conditioned on Lender or any such purchaser as appropriate agreeing in writing to become Landlord under the Lease, Tenant agrees to recognize Lender or any purchaser at a foreclosure sale involving the Mortgage as its landlord under the Lease without the necessity of any other or further attornment than in this paragraph contained. Provided the purchaser at a foreclosure sale involving the Mortgage agrees in writing to become Landlord under the Lease, Tenant hereby waives any and all rights to terminate the Lease by reason of the foreclosure of the Mortgage, and, under the same proviso, if any court holds the Lease to be terminated by reason of a foreclosure of the Mortgage, this Agreement shall be deemed to be a new lease between the purchaser at such foreclosure, as landlord, and Tenant, as tenant, for the balance of the term of the Lease for the same Premises at the same rental and upon the same terms and conditions as therein provided. Also, in the event of such holding, at the written request of Tenant or the purchaser at foreclosure, Tenant and such purchaser at foreclosure shall execute and deliver to each other a new lease for the balance of the term of the Lease for the same Premises at the same rental and upon the same terms and conditions as therein provided. 3. Lender agrees that so long as Tenant shall not be in default under the Lease, Tenant's right of possession and enjoyment of the Premises shall be and remain undisturbed and unaffected by any foreclosure or other proceedings involving the Mortgage; provided, however, that Lender or any purchaser at foreclosure shall not be: (a) liable for any act or omission of a prior landlord (including Landlord); or (b) subject to any offsets or defenses which the Tenant might have against any prior landlord (including Landlord) which relate to periods before the foreclosure; or (c) bound by any rent or additional rent which the Tenant might have paid in advance to any prior landlord (including Landlord) for any period beyond the month in which the foreclosure occurs; (d) liable for any security deposit paid to Landlord, not actually turned over to Lender. 4. This Agreement shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and assigns, heirs, executors and administrators. EXHIBIT F - Page 2 IN WITNESS WHEREOF, the undersigned have executed and delivered this Agreement as of the date and year first above written. LENDER: WH VII-2 ACQUISITION FINANCE, L.P., a Delaware limited partnership By: WH VII-2 Acquisition Finance, Gen-Par, Inc., a Delaware corporation, as sole general partner By: -------------------------------------- Printed Name: ------------------------ Title: ------------------------------ TENANT: ATTEST: MICROAGE COMPUTER CENTER, INC., a Delaware corporation By: - --------------------- ------------------------------------------ Secretary Printed Name: ----------------------------- Title: ------------------------------------ (Seal) EXHIBIT F - Page 3 STATE OF_____________________) ) ss. COUNTY OF____________________) On ________________________, before me,______________________, a Notary Public in and for said state, personally appeared __________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument, the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. ---------------------------------------------------- Notary Public in and for said State STATE OF_____________________) ) ss. COUNTY OF____________________) On ____________________, before me, ______________________, a Notary Public in and for said state, personally appeared ___________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument, the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. ---------------------------------------------------- Notary Public in and for said State EXHIBIT F - Page 4 EX-10.64.1 12 FIRST AMENDMENT TO OFFICE LEASE FIRST AMENDMENT TO OFFICE LEASE ------------------------------- THIS FIRST AMENDMENT TO OFFICE LEASE ("Amendment") is entered into as of September 29, 1997, by and between WHCPS REAL ESTATE LIMITED PARTNERSHIP, a Delaware limited partnership ("Landlord"), and MICROAGE COMPUTER CENTERS, INC., a Delaware corporation ("Tenant"). R E C I T A L S: - - - - - - - - A. Landlord and Tenant have entered into that certain Office Lease dated August 15, 1997, for certain premises located in the office building at 2020 North Central Avenue, Phoenix, Arizona (the "Lease"). All capitalized terms not otherwise defined herein shall have the same meanings as set forth in the Lease. B. Landlord and Tenant desire to amend the Lease to (i) exclude from the Premises all space located on the first (1st) floor of the Building (the "First Floor Space"), (ii) add to the Premises that certain space located on the plaza level of the Building referred to as Suite L150 containing approximately 5,268 rentable square feet (the "Plaza Level Space"), and (iii) amend various other provisions of the Lease to reflect such exclusion and addition. A G R E E M E N T: - - - - - - - - - NOW, THEREFORE, in consideration of the foregoing, the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Premises. Section 6 of the Summary is deleted in its entirety and the following is substituted therefor: "6. Premises (Article 1): Initially, approximately 57,308 rentable square feet of space located on the plaza level and the seventh (7th), eighth (8th) and ninth (9th) floors, as set forth on Exhibit A attached hereto. Effective on the Must Take Effective Date, the Premises will increase to include approximately 26,906 rentable square feet of space located on the third (3rd) floor, as set forth on Exhibit A attached hereto, for a total of 84,214 rentable square feet." 2. Base Rent. Section 8 of the Summary is deleted in its entirety and the following is substituted therefor: "8. Base Rent (Article 3):
Annual Monthly Rental Rate Annual Installment per Rentable Lease Year Base Rent of Base Rent Square Foot ---------- --------- ------------ ----------- Lease Commencement $1,600,066.00 $133,338.83* $19.00 Date - Lease Year 2 Lease Year 3 - Lease Year 4 $1,684,280.00 $140,356.67 $20.00 Lease Year 5 - Lease $1,768,494.00 $147,374.50 $21.00 Expiration Date
*Note: Until the Must take Rent Commencement Date, the Monthly Installment of Base Rent will be $90,737.67, based upon 57,308 rentable square feet." EX-11 13 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 - CALCULATION OF NET INCOME PER COMMON SHARE MICROAGE, INC NET INCOME PER COMMON SHARE CALCULATION (in thousands, except per share data)
Fiscal years ended --------------------------------------- November 2, November 3, October 29, 1997 1996 1995 ----------- ----------- ----------- Primary Weighted average common shares 16,906 16,307 16,031 Dilutive effect of stock options and warrants 904 474 205 Weighted average common and common ------- ------- ------- equivalent shares outstanding - primary 17,810 16,781 16,236 Fully Diluted (1) Weighted average shares from primary calculation 17,810 16,781 16,236 ======= ======= ======= Additional dilutive effect of stock options and warrants 126 514 4 Weighted average common and common ------- ------- ------- equivalent shares outstanding - fully diluted 17,936 17,295 16,240 ======= ======= ======= Net income $24,965 $14,110 $ 3,634 Net income per common and common equivalent share: Primary $ 1.40 $ 0.84 $ 0.22 Fully Diluted $ 1.39 $ 0.82 $ 0.22
(1) Fully diluted share information is presented in accordance with Regulation S-K of the Securities Exchange Act of 1934. The amounts of per share earnings on the fully diluted basis are not required to be presented in the consolidated statements of income under the provisions of APB No. 15 since the additional dilution is less than 3%. EX-21 14 SUBSIDIARIES OF THE REGISTRANT [GRAPHIC OMITTED] SUBSIDIARIES 1. MicroAge Computer Centers, Inc. Subsidiaries: A. MCSA, Inc., a Delaware corporation B. MCSZ, Inc., a Delaware corporation C. ConnectWorks, Inc., a Delaware corporation Subsidiary: 1. Phoenix Connections, Inc., a Delaware corporation D. 153000 Canada Limited, a Canadian corporation 2. MicroAge Solutions, Inc., a Delaware corporation Subsidiaries: A. MCSJ, Inc., a Delaware corporation B. MCSP, Inc., a Delaware corporation C. MCSQ, Inc., a Delaware corporation D. MCSR, Inc., a Delaware corporation E. MCSS, Inc., a Delaware corporation F. MCST, Inc., a Delaware corporation G. MCSY, Inc., a Delaware corporation H. MCSX, Inc., a Delaware corporation 3. Advanced Information Services, Inc., an Alaska corporation A. Margre, Inc., an Oregon corporation B. Plus Fours, Inc., an Alaska corporation C. Integrated Solutions Incorporated, an Alaska corporation D. WASH Data, Inc., an Alaska corporation E. N Corporation, an Alaska corporation F. CAL Data, Inc., an Alaska corporation 4. Gaines Computer Service, Inc., a New York corporation 5. Microretailing, Inc., a Florida corporation 6. Cass Marketing Services, Inc., a California corporation 7. Access MicroSystems, Inc., a California corporation 8. Pride Technologies Incorporated, a New Jersey corporation 9. KNB Incorporated, a Pennsylvania corporation 10. Advanced Systems Consultants, Inc.. an Arizona corporation 11. Complete Distribution, Inc., a Delaware corporation 12. ECadvantage, Inc., a Delaware corporation 13. PCClearance, Inc., a Delaware corporation 14. MicroAge Logistics Services, Inc., a Delaware corporation 15. MicroAge Infosystems Services, Inc., a Delaware corporation 16. MicroAge Technologies, Inc., a Delaware corporation 17. MicroSource Technologies, Inc., a Delaware corporation 18. MicroAge Enterprises, Inc., a Delaware corporation Subsidiary: A. Image Choice, Inc., a Delaware corporation 19. MIS Europe Ltd., Inc.,a United Kingdom corporation 20. MicroAge Government, Inc., a Delaware corporation 21. BMUS Corporation, a Delaware corporation 22. Intracom Marketing, Inc., a Delaware corporation 23. MicroAge International, Inc., a Delaware corporation 24. ECSource, Inc., a Delaware corporation 25. MicroAge Administration, Inc. a Delaware corporation 26. MicroAge Ventures, Inc., a Delaware corporation 27. MicroAge Infinity, Inc., a Delaware corporation 28. MicroAge Integration Management, Inc., a Delaware corporation 29. MicroAge Europe Limited, a United Kingdom corporation EX-23 15 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S- 8 (No. 33-18967, No. 33-26351, No. 33-26565, No. 33-33370, No. 33-51978, No. 33-58899, No. 33-58901, No. 33-81040, No. 333-26247 and No. 333-42939). We also consent to the incorporation by reference in the Prospectus constituting part of the Registration Statements on Form S-3 (No. 33-35674, No. 333-27349, No. 333-35613, No. 333-36281, No. 333-40007 and No. 333-41145) and Form S-2 (No. 33-38764 and No. 33-33094) of MicroAge, Inc. of our report dated December 9, 1997 appearing on page F-2 of this Form 10-K. /s/ Price Waterhouse LLP Price Waterhouse LLP Phoenix, Arizona January 28, 1998 EX-27 16 ARTICLE 5 FDS FOR FISCAL 1997 FORM 10-K
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheets as of November 2, 1997 and November 3, 1996 and the Consolidated Statements of Income for the fiscal years ended November 2, 1997, November 3, 1996, and October 29,1995 contained in the Form 10-K and is qualified in its entirety by reference to such financial statements. 1,000 U.S. DOLLARS YEAR NOV-02-1997 NOV-04-1996 NOV-02-1997 1 24,029 0 341,105 (10,933) 478,089 843,850 149,291 (75,544) 974,133 700,992 0 0 0 178 237,776 974,133 4,446,308 4,446,308 4,136,628 4,136,628 260,461 0 5,882 43,337 18,372 24,965 0 0 0 24,965 1.40 1.39
EX-99.1 17 FORWARD LOOKING STATEMENTS EXHIBIT 99.1 PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS In passing the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), Congress encouraged public companies to make "forward-looking statements" by creating a safe harbor to protect companies from securities law liability in connection with forward-looking statements. MicroAge, Inc. ("MicroAge" or the "Company") intends to qualify both its written and oral forward-looking statements for protection under the Reform Act and any other similar safe harbor provisions. "Forward-looking statements" are defined by the Reform Act. Generally, forward-looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected. Due to those and other uncertainties and risks, the investment community is urged not to place undue reliance on written or oral forward-looking statements of MicroAge. The Company undertakes no obligation to update or revise this Safe Harbor Compliance Statement for Forward-Looking Statements to reflect future developments. In addition, MicroAge undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes to future operating results over time. MicroAge provides the following risk factor disclosure in connection with its continuing effort to qualify its written and oral forward-looking statements under the safe harbor protection of the Reform Act and any other similar safe harbor provisions. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include the disclosures contained in the Annual Report on Form 10-K to which this statement is appended as an exhibit and also include the following: RISK FACTORS Intense Competition The computer reseller industry is characterized by intense competition, based primarily on product availability, price, speed of delivery, credit availability, ability to tailor specific solutions to customer needs, quality and breadth of product lines, service and post-sale support, and quality of customer training. In addition, the Company faces competition in the recruitment and retention of franchised and non-franchised resellers. The Company and its reseller locations compete for sales with numerous other computer resellers, including (i) master resellers; (ii) direct resellers; (iii) wholesalers (resellers that do not sell to end-users); (iv) vendors that sell directly to large purchasers; and (v) parties that implement other sales methods, such as direct mail, computer "superstores," and mass merchandisers. There can be no assurance that the Company will not lose market share, or that it will not be forced in the future to reduce its prices in response to the actions of its competitors and thereby experience a reduction in its gross margins. Narrow Margins The Company has experienced low operating and gross profit margins caused by intense price competition within its industry. The Company has partially offset the effect of the low margins by achieving increased revenue and reduced operating expenses as a percentage of revenue; however, there can be no assurance that the Company will maintain or increase revenue or further reduce expenses (as a percentage of revenue) in the future. Future operating and gross profit margins may be adversely affected by market pressures, the introduction of new Company initiatives, changes in revenue mix, the Company's utilization of early payment discount opportunities, vendor pricing actions, changes in supplier incentive funds, and other competitive and economic pressures. Dependence on Supplier Incentive Funds The Company receives funds from certain suppliers which are earned through marketing programs or meeting purchasing, sales, or other objectives established by the supplier. There can be no assurance that these programs will be continued by the suppliers. A substantial reduction in the supplier funds available to the Company would have a material adverse effect on the Company's business, financial condition, and results of operations. Product Supply; Dependence on Key Vendors The computer reseller industry continues to experience product supply shortages and customer order backlogs due to the inability of certain manufacturers to supply certain products. In addition, certain vendors have initiated new channels of distribution that increase competition for the available product supply. There can be no assurance that vendors will be able to maintain an adequate supply of products to fulfill all of the Company's customer orders on a timely basis. Although the Company has not historically encountered such conditions, the failure to obtain adequate product supplies, if competitors were able to obtain them, could have a material adverse effect on the Company's business, financial condition, and results of operations. Three vendors of the Company each represented more than 10% of total product sales for the fiscal year ended November 3, 1996. They were COMPAQ Computer Corporation ("COMPAQ"), Hewlett-Packard Company ("Hewlett- Packard"), 2 and International Business Machines Corporation ("IBM"). In fiscal 1997, sales of products from COMPAQ, Hewlett-Packard, and IBM represented 23%, 20%, and 14%, respectively, of the Company's total product sales. During fiscal 1997 and fiscal 1996, sales of these three manufacturers' products represented approximately 57% and 56%, respectively, of the Company's revenue from product sales. The Company's agreements with these vendors generally are renewed periodically and permit termination by the vendor without cause, generally upon 30 to 90 days' notice, depending on the vendor. In addition, the Company's business is dependent upon price and related terms and product availability provided by its key vendors. Although the Company considers its relationships with COMPAQ, Hewlett-Packard, and IBM to be good, there can be no assurance that these relationships will continue as presently in effect or that changes by one or more of these key vendors in their volume discount schedules or other marketing programs would not adversely affect the Company. Termination or nonrenewal of the Company's agreements with COMPAQ, Hewlett-Packard, or IBM would have a material adverse effect on the Company's business, financial condition, and results of operations. Potential Fluctuations in Quarterly Results The Company's operating results may vary significantly from quarter to quarter depending on certain factors, including, but not limited to, demand for the Company's information technology products and services; the amount of supplier incentive funds received by the Company (see "Dependence on Supplier Incentive Funds" above); the results of acquired businesses; product availability; competitive conditions; new product introductions; changes in customer order patterns; and general economic conditions. In particular, the Company's operating results are sensitive to changes in the mix of product and service revenues, product margins, inventory adjustments, and interest rates. Although the Company attempts to control its expense levels, these levels are based, in part, on anticipated revenues. Therefore, the Company may not be able to control spending in a timely manner to compensate for any unexpected revenue shortfall. As a result, quarterly period-to-period comparisons of the Company's financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. In addition, although the Company's financial performance has not exhibited significant seasonality in the past, the Company and the computer industry in general tend to follow a sales pattern with peaks occurring near the end of the calendar year, due primarily to special vendor promotions and year-end business purchases. 3 Risk of Declines in Inventory Value The Company's business is subject to the risk that the value of its inventory will be adversely affected by price reductions by suppliers or by technological changes affecting the usefulness or desirability of the products comprising the inventory. It is the policy of most suppliers of the Company's products to protect distributors such as the Company, who purchase directly from such suppliers, from the loss in value of inventory due to technological change or the supplier's price reductions. Under the terms of many of the Company's distribution agreements, suppliers will credit the Company for inventory losses resulting from the supplier's price reductions if the Company complies with certain conditions. However, suppliers are taking steps to reduce such price protection. In addition, under many of the Company's agreements, the Company has the right to return for credit or exchange for other products a portion of the inventory items purchased, within a designated period of time. Since the Company can return only a portion of its inventory, the Company could be forced to liquidate nonreturnable aged inventory at prices below the Company's cost. A supplier who elects to terminate a distribution agreement may repurchase from the distributor the supplier's products carried in the distributor's inventory. The industry practices discussed above are sometimes not embodied in written agreements and do not protect the Company in all cases from declines in inventory value. No assurance can be given that such practices will continue, that unforeseen new product developments will not materially adversely affect the Company, or that the Company will be able to successfully manage its existing and future inventories. The Company establishes reserves for estimated losses due to obsolete inventory in the normal course of business. Historically, the Company has not experienced losses due to obsolete inventory materially in excess of established inventory reserves. However, significant declines in inventory value in excess of established inventory reserves could have a material adverse affect on the Company's business, financial condition, or results of operations. No Assurance of Successful Acquisitions or Investments The Company has acquired or invested in, and intends to acquire or invest in, local or regional resellers to expand the Company's service offerings and its reach into certain geographic areas. As a result, the Company is continually evaluating potential acquisition and investment opportunities, which may be material in size and scope. Any acquisitions or investments by the Company may result in potentially dilutive issuances of equity securities, the incurrence of additional debt, and amortization of expenses related to goodwill and intangible assets, all of which could adversely effect the Company's profitability. Acquisitions involve numerous risks, such as the diversion of the attention of the Company's management from other business concerns, the entrance of the Company into markets in which it has had no or only limited experience, the integration of the acquired companies' management information systems with those of the Company, and the potential loss of key employees of the acquired companies, all of which could have a material adverse effect on the Company's business, financial condition, or results of operations. 4 Capital Intensive Nature of Business The Company's business requires significant levels of capital to finance accounts receivable and product inventory that is not financed by trade creditors. The Company has financed its growth and cash needs to date primarily through working capital financing facilities, bank credit lines, common stock offerings, and cash generated from operations. The primary uses of cash have been to fund increases in inventory and accounts receivable resulting from increased sales. If the Company is successful in achieving continued revenue growth, its working capital requirements will continue to increase. The Company maintains three primary financing agreements (the "Financing Agreements") with an aggregate borrowing capacity of $675 million. The Financing Agreements expire in August 2000, but any of the Financing Agreements may be terminated 90 days after either party gives the other party notice of termination. At November 2, 1997, the Company had approximately $386 million outstanding under the Financing Agreements. Of the $675 million of borrowing capacity represented by the Financing Agreements, $289 million was unused as of November 2, 1997. Utilization of the unused $289 million is dependent upon, among other things, the Company's collateral availability at the time the funds would be needed. Borrowings under the Financing Agreements are secured by substantially all of the Company's assets, and the Financing Agreements contain certain restrictive covenants, including working capital and tangible net worth requirements and ratios of debt to tangible net worth and current assets to current liabilities. At November 2, 1997, the Company was in compliance with these covenants. The unavailability of a significant portion of, or the loss of, the Financing Agreements or trade credit from vendors would have a material adverse effect on the Company's business, financial condition, and results of operations. There can be no assurance that the Company will be able to borrow adequate amounts on terms acceptable to the Company. Dependence on Information Systems The Company depends on a variety of information systems for its operations, particularly its centralized information processing system which supports, among other things, inventory management, order processing, shipping, receiving, and accounting. Although the Company has not in the past experienced significant failures or down time of its centralized information processing system or any of its other information systems, any such failure or significant down time could prevent the Company from taking customer orders, printing product pick-lists, and/or shipping product and could prevent customers from accessing price and product availability information from the Company. In such event, the Company could be at a severe disadvantage in determining appropriate product pricing or the adequacy of inventory levels or in reacting to rapidly changing market conditions. A failure of the Company's information systems which 5 impacts any of these functions could have a material adverse effect on the Company's business, financial condition, or results of operations. In addition, the inability of the Company to attract and retain the highly-skilled personnel required to implement, maintain, and operate its centralized information processing system and the Company's other information systems could have a material adverse effect on the Company's business, financial condition, or results of operations. In order to react to changing market conditions, the Company must continuously expand and improve its centralized information processing system and its other information systems. There can be no assurance that the Company's information systems will not fail, that the Company will be able to attract and retain qualified personnel necessary for the operation of such systems, or that the Company will be able to expand and improve its information systems. Year 2000 Issues Many currently installed computer systems and software products, including several used by the Company, are coded to accept only two digit entries in the date code field. Beginning in the year 2000, these date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. Therefore, the Company's date critical functions related to the year 2000 and beyond, such as sales, distribution, purchasing, inventory control, merchandise, planning and replenishment, facilities, and financial systems may be adversely affected unless these computer systems are or become year 2000 compliant. The Company began work several years ago to prepare its computer-based systems for the year 2000 and is utilizing both internal and external resources to identify, correct, or reprogram, and test its systems for year 2000 compliance. The Company is in the final stages of implementing the required changes to its internal computer systems and has recently begun a review of the computer systems used in recently acquired businesses and operations. The Company continues to evaluate the estimated costs associated with these efforts based on actual experience and does not expect the future costs of resolving its internal year 2000 issues to materially exceed the year 2000 related costs incurred in recent years. However, no assurance can be given that the Company's computer systems will be year 2000 compliant in a timely manner or that the Company will not incur significant additional expenses pursuing year 2000 compliance. Furthermore, even if the Company's systems are year 2000 compliant, there can be no assurance that the Company will not be adversely affected by the failure of others to become year 2000 compliant or by the failure of the Company's vendors to provide year 2000 compliant products for resale or configuration by the Company. For example, the Company may be adversely affected by, among other things, warranty and other claims made by the Company's customers related to product failures caused by the year 2000 problem, the disruption or inaccuracy of data provided to the Company by non-year 2000 compliant third parties, and the failure of the Company's service providers, such as security, data processing, and independent shipping companies to become year 2000 compliant. In an effort to evaluate and reduce its exposure in this area, the Company has inquired of its vendors and other partners about their progress in identifying and addressing problems that their computer systems may face in correctly processing date information related to the year 2000. In particular, the Company has obtained written statements from a substantial majority of its suppliers that certain of their products are year 2000 6 compliant, can be upgraded to meet year 2000 demands, or do not affect "date sensitive" information. However, despite the Company's efforts to date, there can be no assurance that the year 2000 problem will not have a material adverse effect on the Company in the future. Dependence on Independent Shipping Companies The Company relies almost entirely on arrangements with independent shipping companies for the delivery of its products. Products are shipped from suppliers to the Company through a variety of independent common carriers. Currently, United Parcel Service ("UPS") delivers a majority of the Company's products to its reseller customers. The termination of the Company's arrangements with UPS or other independent shipping companies, or the failure or inability of one or more of these independent shipping companies to deliver products from suppliers to the Company, or products from the Company to its reseller customers or their end-user customers could have a material adverse effect on the Company's business, financial condition, or results of operations. For instance, an employee work stoppage or slow-down at one or more of these independent shipping companies could materially impair that shipping company's ability to perform the services required by the Company. There can be no assurance that the services of any of these independent shipping companies will continue to be available to the Company on terms as favorable as those currently available or that these companies will choose or be able to perform their required shipping services for the Company. Technological Change The Company's industry is subject to rapid technological change, new and enhanced product specification requirements, and evolving industry standards. These changes may cause inventory and stock to decline substantially in value or to become obsolete. In addition, suppliers may give the Company limited or no access to new products being introduced. Although the Company believes that it has adequate price protection and other arrangements with its suppliers to avoid bearing the costs associated with these changes, no assurance can be given that future technological or other changes will not have a material adverse effect on the Company's business, financial condition, or results of operations. See "Risk of Declines in Inventory Value." 7 Possible Volatility of Stock Price The market price of the Common Stock could be subject to wide fluctuations in response to quarterly variations in the Company's results of operations, changes in earnings estimates by research analysts, conditions in the computer industry, or general market or economic conditions, among other factors. In addition, in recent years the stock market has experienced significant price and volume fluctuations. These fluctuations have had a substantial effect on the market prices of many technology companies, often unrelated to the operating performance of the specific companies. Such market fluctuations could materially adversely affect the market price for the Common Stock. 8 -----END PRIVACY-ENHANCED MESSAGE-----