AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 14, 1998
REGISTRATION NO. 333-41171
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
PC CONNECTION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW HAMPSHIRE 5961 02-0372768
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
528 ROUTE 13
MILFORD, NEW HAMPSHIRE 03055
(603) 423-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
PATRICIA GALLUP
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
PC CONNECTION, INC.
528 ROUTE 13
MILFORD, NEW HAMPSHIRE 03055
(603) 423-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
--------------
COPIES TO:
PAUL P. BROUNTAS, ESQ. PHILIP E. COVIELLO, JR., ESQ.
JAY E. BOTHWICK, ESQ. LATHAM & WATKINS
HALE AND DORR LLP 885 THIRD AVENUE
60 STATE STREET SUITE 1000
BOSTON, MASSACHUSETTS 02109 NEW YORK, NEW YORK 10022-4802
(617) 526-6000 (212) 906-1200
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
--------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT PRICE (1)(2) FEE
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Common Stock, $.01 par value
per share..................... $57,500,000 $17,425(3)
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(1) Includes shares that the Underwriters have the option to purchase from the
Company to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES
AND EXCHANGE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 14, 1998
PROSPECTUS
, 1998
SHARES
PC CONNECTION, INC.
COMMON STOCK
All the shares of Common Stock, $0.01 par value per share (the "Common
Stock"), offered hereby (the "Offering") are being sold by PC Connection, Inc.
("PC Connection" or the "Company").
Prior to the Offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial price to the public
will be between $ and $ per share. See "Underwriting" for information
relating to the factors to be considered in determining the initial price to
the public.
Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "PCCC."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
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Per Share................................ $ $ $
Total(3)................................. $ $ $
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting" for indemnification arrangements with the
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an aggregate of additional shares at the Price to the Public, less
Underwriting Discounts and Commissions, solely to cover over-allotments, if
any. If the option is exercised in full, the total Price to the Public,
Underwriting Discounts and Commissions and Proceeds to the Company will be
$ , $ and $ , respectively. See "Underwriting."
The shares of Common Stock are being offered by the several Underwriters
subject to prior sale, when, as and if issued and accepted by them, subject to
certain prior conditions, including the right of the Underwriters to reject any
order in whole or in part. It is expected that delivery of the shares of Common
Stock will be made in New York, New York on or about , 1998.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NATIONSBANC MONTGOMERY SECURITIES, INC.
WILLIAM BLAIR & COMPANY
INSIDE FRONT COVER
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FIRST PAGE OF INSIDE COVER:
- --------------------------
[ACROSS THE TOP OF THE PAGE:
PICTURE OF THE RACCOON CHARACTER(R) WITH AWARDS AROUND ITS NECK TO THE
LEFT AND THE TEXT "PC CONNECTION YOUR SOURCE FOR COMPUTERS, SOFTWARE
AND PERIPHERALS SINCE 1982"]
[IN CENTER OF PAGE:
PICTURES FROM LEFT TO RIGHT OF THE PC CONNECTION CATALOG, THE PC
CONNECTION INTERNET WEB PAGE AND THE MACCONNECTION CATALOG.]
[AT THE BOTTOM LEFT OF THE PAGE:
7-TIME WINNER BEST MAIL-ORDER COMPANY
1997 PC WORLD WORLD CLASS LOGO
1990, 1991, 1992, 1994, 1995, 1996 & 1997]
[AT THE BOTTOM RIGHT OF THE PAGE:
THE PC MAGAZINE 100 LOGO
INCLUDED IN PC MAGAZINE'S "100 MOST INFLUENTIAL COMPANIES OF 1997"]
GATEFOLD:
- --------
[AT THE TOP LEFT OF THE GATEFOLD:
PICTURE OF THE PC CONNECTION CATALOG COVER PAGE AND TWO PICTURES OF THE
CATALOG OPENED.
CAPTION: COLORFUL CATALOGS FEATURING PRODUCTS FROM COMPAQ, HEWLETT
PACKARD, TOSHIBA, IBM, MICROSOFT, SONY, HITACHI, APPLE AND MANY
OTHERS.]
[AT THE TOP RIGHT OF THE GATEFOLD:
PICTURE OF THE PC CONNECTION INTERNET WEB SITE.
CAPTION: ONLINE SUPERSTORE OFFERS ONLINE ORDERING FOR MORE THAN 15,000
PRODUCTS. FEATURES MANUFACTURER HOTLINKS, A PRODUCT SEARCH ENGINE, AND
ONLINE TECHNICAL SUPPORT. WWW.PCCONNECTION.COM]
[CENTER OF THE GATEFOLD:
PC CONNECTION(R) ACROSS THE PAGE]
[AT THE BOTTOM LEFT OF THE GATEFOLD:
PICTURE ABOVE OF A PERSON SERVICING A COMPUTER.
CAPTION: SERVICE CONNECTION(TM).
TRAINING PROGRAMS FOR OUR SERVICE AND SUPPORT PERSONNEL
EMPHASIZE PUTTING CUSTOMER NEEDS FIRST. THE COMPANY IS OPEN
24-HOURS A DAY, SEVEN DAYS A WEEK TO HANDLE ORDERS AND GENERAL
INQUIRIES.
PICTURE BELOW OF INDIVIDUALS PACKING PRODUCTS TO FILL ORDERS AT THE
DISTRIBUTION CENTER.
CAPTION: EVERYTHING OVERNIGHT(R)
CUSTOMERS CAN PLACE THEIR ORDERS AS LATE AS 2:45 A.M. ET AND
STILL GET OVERNIGHT DELIVERY.]
[AT THE BOTTOM RIGHT OF THE GATEFOLD:
PICTURE ABOVE OF ONE OF THE COMPANY'S TELEMARKETING ACCOUNT MANAGERS AT
HER COMPUTER.
CAPTION: CORPORATE TELEMARKETING ACCOUNT MANAGERS PURSUE BUYERS IN
BUSINESS, GOVERNMENT AND EDUCATION MARKETS.
PICTURE BELOW OF THE RACCOON CHARACTER(R) WITH AWARDS AROUND ITS NECK.
CAPTION: SINCE 1982 PC CONNECTION HAS EMPHASIZED CUSTOMER SERVICE, WITH
PROGRAMS SUCH AS TOLL-FREE TECHNICAL SUPPORT, ONE-MINUTE MAIL ORDER(R)
& EVERYTHING OVERNIGHT(R).]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, all information in
this Prospectus assumes no exercise of the Underwriters' over-allotment option.
THE COMPANY
PC Connection is a leading direct marketer of brand-name personal computers
and related peripherals, software, accessories and networking products. The
Company's primary target customers are small and medium-sized organizations
("SMORGS") comprised of 20 to 1,000 employees. PC Connection sells its products
through a combination of targeted direct mail catalogs, outbound telemarketing,
its Internet Web site and advertisements on the Internet and in selected
computer magazines. The Company offers a broad selection of approximately
15,000 products targeted for business use at competitive prices, including
products from Compaq, Hewlett-Packard, Toshiba, IBM, Microsoft, Sony, Hitachi
and Apple. The Company's most frequently ordered products are carried in
inventory and are typically shipped to customers the same day that the order is
received.
The Company has experienced rapid growth in sales, profitability, number of
orders and average order size as a result of: (i) a substantial increase in the
number and assortment of products carried by the Company; (ii) increases in
outbound telemarketing personnel and improvements in productivity; (iii)
increases in catalog circulation; and (iv) improvements in inbound
telemarketing productivity. The Company recorded net sales of $333.3 million
and income from operations of $7.5 million in 1996, representing increases of
32.2% and 193.4%, respectively, over 1995. In the nine months ended September
30, 1997, the Company recorded net sales of $383.5 million and income from
operations of $12.5 million, representing increases of 70.4% and 182.2%,
respectively, over the comparable period in 1996. Net sales of Microsoft
Windows or MS-DOS based personal computers ("PCs") and compatible products were
approximately 77% of net sales for the nine months ended September 30, 1997.
According to industry data published by Merrin Information Services, Inc.
("Merrin") in May 1997, domestic sales of personal computers and related
products were $77.8 billion in 1996 and are projected to be $138.2 billion in
2000, representing a compound annual growth rate of 15.4%. The Company believes
that the direct marketing channel will be among the fastest growing
distribution channels for the domestic personal computer and related products
industry. As a leading participant in the direct marketing channel, the Company
believes it is well positioned to capitalize on the expected growth in the
industry.
The Company's growth strategies are to: (i) increase penetration of its
existing customer base; (ii) broaden its product offerings to include higher
margin products such as network servers and communications equipment; and (iii)
expand its customer base. The Company plans to target a greater number of its
existing customers with outbound telemarketing, more aggressively pursue first-
to-market product offerings, provide specialized offerings to targeted segments
of its customer base and increase its investments in electronic commerce and
Internet related marketing opportunities.
Since its founding in 1982, the Company has focused on serving customer needs
by providing innovative, reliable and timely customer service and technical
support, and offering an extensive assortment of branded products, through
knowledgeable, well-trained sales and support teams. The effectiveness of this
strategy is reflected in the recognition accorded the Company, including the
Company's receipt of the PC World "World Class Award for Best Mail-Order
Company" in 1997, as voted by its readers, for the seventh time in the past
eight years, and receipt of the highest ranking of only two direct resellers
included in the first-ever ranking of the "100 Most Influential Companies in
the Computer Industry" by PC Magazine in July 1997.
3
The Company believes that its consistent customer focus has also resulted in
the development of strong brand name recognition and a broad and loyal customer
base. At September 30, 1997, the Company's mailing list consisted of
approximately 2,000,000 customers and potential customers, of which
approximately 500,000 had purchased products from the Company within the last
twelve months. Approximately 65% of the Company's orders in the nine months
ended September 30, 1997 and in the year ended December 31, 1996 were placed by
customers who had previously purchased products from the Company. The Company
believes it has also developed strong relationships with vendors, resulting in
favorable product allocations and marketing assistance.
Commencing in late 1995, the Company significantly increased its business-to-
business marketing efforts targeting SMORGS, a rapidly growing sector of the
personal computer market that the Company believes is particularly receptive to
purchases from direct marketers. To serve this growing part of its business
more effectively, the Company has increased the number of its outbound
telemarketing account managers from 48 at December 31, 1995 to 156 at September
30, 1997, including 86 new account managers with less than 12 months of
outbound telemarketing experience with the Company. Historically, outbound
account managers become significantly more productive in their second year with
the Company. In addition, in late 1995 the Company initiated programs to
increase training of inbound telemarketing personnel and to provide incentive
compensation based upon sales productivity.
The Company's two major catalogs are PC Connection(R), focused on PCs and
compatible products, and MacConnection(R), focused on Apple Macintosh personal
computers ("Macs") and compatible products. With colorful illustrations,
concise product descriptions, relevant technical information, along with
customer service benefits and toll-free telephone numbers for ordering, the
Company's catalogs are recognized as a leading source for personal computer
hardware, software and other related products. The Company distributed
approximately 24 million catalogs during the nine months ended September 30,
1997.
The Company also markets its products and services through its Internet Web
site, www.pcconnection.com, which provides customers and prospective customers
with Company and product information and enables customers to place electronic
orders for all of the Company's products. The Company believes that as the
Internet becomes a more important commercial medium, it will be well positioned
to capitalize on growth through this emerging channel.
The Company operates in a competitive industry and there can be no assurance
that the Company will sustain historical growth rates. See "Risk Factors."
The Company has a 102,000-square foot, full-service distribution and order
fulfillment center in Wilmington, Ohio and a related 25,700-square foot
warehouse in Xenia, Ohio. The Company also operates telemarketing centers in
Hudson, Keene and Milford, New Hampshire.
----------------
The Company's principal executive offices are located at 528 Route 13,
Milford, New Hampshire 03055, and its telephone number is (603) 423-2000. The
Company's Internet Web site is located at www.pcconnection.com. Neither the
information contained in the Company's Internet Web site nor Internet Web sites
linked to the Company's Internet Web site shall be deemed to be a part of this
Prospectus.
----------------
PC Connection(R), MacConnection(R) and Everything Overnight(R) are registered
trademarks of the Company. This Prospectus also includes product and company
names, trademarks and trade names of companies other than the Company.
4
REORGANIZATION OF THE COMPANY
The Company was incorporated in New Hampshire in September 1983 and expects
to amend and restate its Articles of Incorporation immediately prior to
consummation of the Offering. Pursuant to this amendment the Company will
convert all of the issued and outstanding shares of Series A Non-Voting Common
Stock, $.01 par value per share, (the "Non-Voting Common Stock") and Series B
Voting Common Stock, $.01 par value per share (the "Voting Common Stock" and
together with the Non-Voting Common Stock, the "Company Common Stock"), into a
single series of Voting Common Stock, $0.01 par value per share, on a -for-
one basis (the "Recapitalization").
For all periods described in the Prospectus, the Company has elected to be
treated as an S Corporation under Subchapter S of the Internal Revenue Code of
1986, as amended (the "Code"), and applicable state tax laws. As a result of
the S Corporation status of the Company, the stockholders of the Company were
taxed directly on the earnings of the Company. Upon the consummation of the
Offering, the status of the Company as an S Corporation will terminate and the
Company will be subject to federal and state income taxes at applicable
corporate tax rates (the "S Corporation Termination," and together with the
Recapitalization, the "Reorganization"). Prior to the consummation of the
Offering, the Company will declare a dividend (the "S Corporation Dividend") to
its then existing stockholders (the "S Corporation Stockholders") in the
aggregate amount of approximately $ million, which amount is equal to
substantially all previously taxed, but undistributed, S Corporation earnings.
After the consummation of the Offering, the Company will use a portion of the
net proceeds from the Offering to pay the S Corporation Dividend to the S
Corporation Stockholders. See "Use of Proceeds."
THE OFFERING
Common Stock offered by the
Company............................ shares
Common Stock to be outstanding after
the Offering....................... shares(1)
Use of Proceeds..................... Repayment of debt; payment of the S
Corporation Dividend; and working capital
and other general corporate purposes. See
"Use of Proceeds."
Proposed Nasdaq National Market
symbol............................. PCCC
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(1) Does not include (a) shares of Common Stock issuable upon the exercise
of stock options outstanding as of December 31, 1997 with a weighted
average exercise price of $ per share and (b) an additional shares of
Common Stock reserved for future issuance under the Company's 1993
Incentive and Non-Statutory Stock Option Plan, 1997 Stock Incentive Plan
and 1997 Employee Stock Purchase Plan.
5
SUMMARY FINANCIAL AND OPERATING DATA
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------ -----------------------
1992 1993 1994 1995 1996 1996 1997
---------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
STATEMENT OF OPERATIONS
DATA:
Net sales.............. $ 147,627 $ 163,390 $ 196,659 $ 252,217 $ 333,322 $ 225,074 $ 383,460
Gross profit........... 25,748 26,124 30,702 40,918 51,205 35,430 53,452
Income (loss) from
operations............ 1,242 (3,478) (1,951) 2,545 7,466 4,425 12,487
Net income (loss)...... 124 (3,385) (2,341) 1,273 4,756 2,101 2,452
PRO FORMA DATA(1):
Net income............................................................ $ 3,750 $ 6,967
Net income per share.................................................. $ $
=========== ===========
Weighted average number of common and common equivalent shares
outstanding(2).......................................................
=========== ===========
SELECTED OPERATING DATA:
Active customers(3).... 246,000 258,000 295,000 353,000 424,000 401,000 492,000
Catalogs distributed... 6,000,000 10,000,000 16,900,000 16,800,000 18,600,000 11,200,000 24,000,000
Orders entered(4)...... 661,000 695,000 803,000 854,000 910,000 628,000 891,000
Average order size..... $ 248 $ 264 $ 282 $ 346 $ 453 $ 445 $ 512
AS OF SEPTEMBER 30, 1997
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA(5) AS ADJUSTED(6)
------- ------------ --------------
BALANCE SHEET DATA:
Working capital............................ $16,477 $(8,202)
Total assets............................... 95,549 99,774
Short-term debt............................ 9,380 9,380
Long-term debt (less current portion)...... 3,500 3,500
Total stockholders' equity (deficit)....... 21,280 (2,220)
- --------------------
(1) The pro forma adjustments give effect to (i) the elimination of additional
stockholder/officer compensation expense of $1,139 and $8,540 for the year
ended December 31, 1996 and the nine months ended September 30, 1997,
respectively, representing amounts in excess of aggregate annual base
salaries of $600 to be in effect as of the closing date of the Offering and
(ii) the Reorganization, including the provision for income taxes at an
assumed rate of 39% based upon pro forma income of the Company as if it had
not elected to be treated as an S Corporation. Increases in taxes amounted
to $2,145 and $4,025 for the year ended December 31, 1996 and the nine
months ended September 30, 1997, respectively.
(2) The pro forma weighted average number of common and common equivalent
shares outstanding assumes that (i) all shares of stock issuable upon
exercise of all stock options granted in 1997 were outstanding and (ii) a
number of shares determined by dividing (x) the S Corporation Dividend
(which if made at September 30, 1997 would have approximated $26,000) by
(y) the mid-point of the range set forth on the cover page of this
Prospectus, were outstanding.
(3) All customers included in the Company's mailing list who have made a
purchase within the last twelve-month period.
(4)Does not reflect cancellations or returns.
(5) Reflects the declaration of the S Corporation Dividend estimated to be in
the amount of $26,000 at September 30, 1997 and establishment of net
deferred income tax assets of approximately $2,500 resulting from the
termination of the Company's S Corporation status.
(6) Adjusted to give effect to the Reorganization, the Offering and the
application of the estimated net proceeds therefrom.
6
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be carefully considered by prospective investors when
evaluating an investment in the Common Stock offered hereby.
RISKS ASSOCIATED WITH RAPID GROWTH
Net sales have grown from $147.6 million for the year ended December 31, 1992
to $383.5 million for the nine months ended September 30, 1997. This growth has
placed increasing demands on the Company's management resources and facilities.
The Company's business strategy is to pursue additional growth and expand its
customer base, which is likely to result in additional demands on the Company's
resources. The Company's future success will depend in part on the ability of
the Company to manage any future growth effectively. There can be no assurance
that the Company will realize future growth in net sales or will not experience
decreases in net sales. See "Business--Growth Strategy."
RISKS RELATED TO TRANSITION OR EXPANSION OF FACILITIES
In November 1997, the Company entered into a fifteen-year lease for a new
103,000 square foot corporate headquarters facility in Merrimack, New Hampshire
with a company controlled by the Company's principal stockholders. Significant
renovation to this facility is required prior to occupancy by the Company. The
Company expects to relocate its operations to this new facility and vacate its
current leased facility in Milford, New Hampshire in the summer of 1998. The
Company will likely incur certain moving and other costs, not expected to
exceed $500,000, relating to this relocation which would be charged to
operating results in the period incurred. Any significant delay in the
renovation of the new facility, or unanticipated expense, capital cost or
disruption of the Company's business or operations caused by the relocation to
the new facility, could have a material adverse effect on the Company's
financial position, results of operations and cash flows. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Certain Transactions--Leases."
Additional and/or alternative facilities for distribution and inventory may
be required to support significant future growth in the Company's net sales, if
realized. There can be no assurance that suitable facilities will be available,
and in the absence of such facilities, future growth could be impaired. See
"Business--Distribution" and "Business--Facilities."
If the Company is unable to generate increased sales and gross profit
sufficient to absorb increased overhead and other costs associated with its
relocation and potential expansion, the Company would likely experience lower
profit margins which could have a material adverse effect on the Company's
financial position, results of operations and cash flows.
DEPENDENCE ON MANAGEMENT INFORMATION SYSTEMS
The Company's success is dependent on the accuracy, reliability and proper
use of its management information systems, including its telephone system, and
the information generated by its management information systems. The Company
does not currently have redundant systems for all functions performed by its
management information systems or a redundant or back-up telephone system. Any
interruption in these systems or in telephone service could have a material
adverse effect on the Company's financial position, results of operations and
cash flows.
The Company recognizes the need to continually upgrade its management
information systems to most effectively manage its operations and customer data
base. The Company plans to convert its order management and fulfillment systems
to new software by the end of the second quarter of 1998. There can be no
assurance that the transition to the new software will be accomplished without
interrupting the Company's business. This new software is designed to be Year
2000 compliant, however, there can be no assurance that the software contains
all necessary data code changes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Management
Information Systems."
7
RAPID TECHNOLOGICAL CHANGE AND EXPOSURE TO INVENTORY OBSOLESCENCE
The market for personal computer products is characterized by rapid
technological change and the frequent introduction of new products and product
enhancements. The Company's success depends in part on its ability to identify
and market products that meet the needs of the marketplace. In order to
satisfy customer demand and to obtain favorable purchasing discounts, the
Company expects to carry increased inventory levels of certain products in the
future, which will subject it to increased risk of inventory obsolescence. In
the implementation of its business strategy, the Company intends, among other
things, to place larger than typical inventory stocking orders, increase its
participation in first-to-market purchase opportunities, and may in the future
participate in end-of-life-cycle purchase opportunities and market products on
a private-label basis, all of which will further increase the risk of
inventory obsolescence. Special purchase products are sometimes acquired
without return privileges and there can be no assurance that the Company will
be able to avoid losses related to obsolete inventory. In addition, some
manufacturers provide the Company with co-op advertising support in the form
of products, for which there may be no return privileges. Finally, certain
build-to-order programs currently being implemented by some computer systems
manufactures will likely include reductions in the levels of price protection
and product returns made available by such manufacturers. See "Business--
Products and Merchandising."
AVAILABILITY AND ALLOCATION OF GOODS
The Company acquires products for resale from manufacturers as well as from
distributors. Purchases of products from the five vendors supplying the
greatest amount of goods to the Company constituted 48.0% and 47.2%,
respectively, of the Company's total product purchases in the year ended
December 31, 1996 and the nine months ended September 30, 1997. Among these
five vendors, purchases from Ingram Micro, Inc. ("Ingram Micro") represented
28.4% and 29.5%, respectively, of the Company's total product purchases in the
year ended December 31, 1996, and the nine months ended September 30, 1997. No
other vendor supplied more than 10% of the Company's total product purchases
in the year ended December 31, 1996 or the nine months ended September 30,
1997. The loss of Ingram Micro could cause a short-term disruption in the
availability of products and could have a material adverse effect on the
Company's financial position, results of operations and cash flows.
Sales of products dependent on the Mac platform, including products
manufactured by Apple Computer, Inc. ("Apple"), represented 23.0% and 22.6% of
the Company's net sales in the year ended December 31, 1996 and the nine
months ended September 30, 1997, respectively. Apple has been experiencing a
decline in revenues and in its share of the worldwide and domestic personal
computer markets, as well as operating losses. In November 1997, Apple
announced that it will sell built-to-order computers directly to customers
over the Internet. The Company cannot predict whether this action by Apple
will affect the future supply of Macs to the Company. The Company's sales of
personal computers and other products manufactured by Apple may be limited if
the Company's reseller agreement with Apple is curtailed or terminated or if
product availability or financing is otherwise restricted. Any decline in the
availability of, or demand for, Macs may have a material adverse effect on the
Company's financial position, results of operations and cash flows. See
"Business--Products and Merchandising."
Substantially all of the Company's contracts and arrangements with its
vendors that supply significant quantities of products are terminable by such
vendors or the Company without notice or upon short notice. Most of the
Company's product vendors provide the Company with trade credit, of which the
net amount outstanding at September 30, 1997 was $39.1 million. Termination,
interruption or contraction of the Company's relationships with its vendors,
including a reduction in the level of trade credit provided to the Company,
could have a material adverse effect on the Company's financial position,
results of operations and cash flows. See "Business--Purchasing and Vendor
Relations."
Certain product manufacturers either do not permit the Company to sell the
full line of their products or limit the number of product units available to
direct marketers such as the Company. An element of the
8
Company's business strategy is to increase its participation in first-to-
market purchase opportunities. In the past, availability of certain desired
products, especially in the direct marketing channel, has been constrained.
The inability to source first-to-market purchase or similar opportunities, or
the reemergence of significant availability constraints, could have a material
adverse effect on the Company's financial position, results of operations and
cash flows.
RELIANCE ON VENDOR SUPPORT AND RELATIONSHIPS
Some product manufacturers and distributors provide the Company with
substantial incentives in the form of payment discounts, supplier
reimbursements, price protection and rebates. No assurance can be given that
the Company will continue to receive such incentives or that it will be able
to collect outstanding amounts relating to these incentives in a timely manner
or at all.
Most product manufacturers provide the Company with co-op advertising
support in exchange for product coverage in the Company's catalogs. This
support significantly defrays the expense of catalog production. The level of
co-op advertising support available to the Company from certain manufacturers
has declined. The level of support from some manufacturers may further decline
in the future. Such a decline could increase the Company's selling, general
and administrative expenses as a percentage of sales and have a material
adverse effect on the Company's financial position, results of operations and
cash flows. See "Business--Purchasing and Vendor Relations."
COMPETITIVE RISKS
The Company competes with many national and international direct marketers;
product manufacturers that sell directly to end users; specialty personal
computer retailers; personal computer and general merchandise superstores;
consumer electronic and office supply stores; and shopping services on
television, the Internet and commercial on-line networks. The Company competes
not only for customers, but also for co-op advertising support from personal
computer product manufacturers. Some of the Company's competitors are larger
and have substantially greater financial resources, superior operating
results, and larger catalog circulations and customer bases than the Company.
In addition, several direct marketers have recently been acquired by larger
competitors. This industry consolidation could result in short-term price-
cutting in certain markets. There can be no assurance that the Company will be
able to compete effectively with existing competitors or any new competitors
that may enter the market, or that the Company's financial position, results
of operations and cash flows will not be adversely affected by intensified
competition. See "Business--Competition."
PRICING RISKS
The personal computer industry has experienced intense price competition.
The Company believes that price competition may increase in the future and
that such competition could result in a reduction of the Company's profit
margins. Also, the Company has recently increased its sales of personal
computer hardware products that generally produce lower profit margins than
those associated with software products. Significant margin decreases could
have a material adverse effect on the Company's financial position, results of
operations and cash flows. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ECONOMIC RISKS
The market for personal computers and related products has grown rapidly in
recent years. Recent statements by industry observers have indicated that
there may be a slowdown in the growth rate of the personal computing industry.
If the growth of this market or the direct marketing channel were to cease or
decrease, the Company's financial position, results of operations and cash
flows would be materially adversely affected. Demand for many of the products
carried by the Company may be subject to economic cycles. The Company's
business and growth could be affected by the spending patterns of existing or
prospective customers, a recession or prolonged economic slowdown, the
cyclical nature of capital expenditures of businesses, continued
9
competition and pricing pressures and other trends in the general economy, any
one of which could have a material adverse effect on the Company's financial
position, results of operations and cash flows.
DEPENDENCE ON THIRD PARTY SHIPPERS
The Company ships approximately 90% of its products to customers by Airborne
Freight Corporation D/B/A "Airborne Express" ("Airborne Express"), with the
remainder being shipped by United Parcel Service of America, Inc. and other
overnight delivery and surface services. Strikes or other service
interruptions by such shippers could adversely affect the Company's ability to
market or deliver product on a timely basis and have a material adverse effect
on the Company's financial position, results of operations and cash flows. See
"Business--Distribution."
POTENTIAL INCREASES IN SHIPPING, PAPER AND POSTAGE COSTS
Shipping costs are a significant expense in the operation of the Company's
business. The Company generally invoices customers for shipping and handling
charges. There can be no assurance that the full cost, including any future
increases in the cost, of commercial delivery services can be passed on to the
Company's customers, which could have a material adverse effect on the
Company's financial position, results of operations and cash flows. See
"Business--Distribution" and "Business--Marketing and Sales."
The Company also incurs substantial paper and postage costs related to its
marketing activities, including its catalog production and mailings. Any
increases in postal or paper costs could have a material adverse effect on the
Company's financial position, results of operations and cash flows.
HISTORICAL NET LOSSES; VARIABILITY OF QUARTERLY RESULTS
The Company has experienced significant fluctuations in its operating
results, and these fluctuations may continue in the future. The Company
incurred net losses in the years ended December 31, 1993 and 1994. The
Company's results of operations are significantly affected by many factors,
including seasonal and other fluctuations in demand for personal computer
products and in profit margins on products sold, catalog timing and
circulation, product availability, and timing of releases of new and upgraded
products. Many of these factors are outside the control of the Company. The
Company's operating results are heavily dependent upon its ability to predict
sales levels, monitor and control associated expenses, and carefully manage
all aspects of its operations, including product selection and pricing,
purchasing and payables practices, inventory management, and catalog funding,
production and circulation. If revenues do not meet expectations in any given
quarter, or if the Company experiences difficulty in monitoring or controlling
associated expenses, the Company's financial position, results of operations
and cash flows may be materially adversely affected. There can be no assurance
that the Company will be profitable on a quarterly or annual basis. It is
possible that in some future quarter the expectations of public market
analysts and investors will exceed the Company's operating results. In such
event, the price of the Common Stock would likely be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Selected Quarterly Financial Results."
CHANGING METHODS OF DISTRIBUTION
The manner in which personal computers and related products are distributed
and sold is changing, and new methods of distribution and sale, such as on-
line shopping services, have emerged. Hardware and software manufacturers have
sold, and may intensify their efforts to sell, their products directly to end
users. From time to time, certain manufacturers have instituted programs for
the direct sales of large order quantities of hardware and software to certain
major corporate accounts. These types of programs may continue to be developed
and used by various manufacturers. Certain of the Company's vendors, including
Apple, Compaq Computer Corporation ("Compaq") and International Business
Machine Corporation ("IBM"), currently sell some of their products directly to
end users. In addition, manufacturers may attempt to increase the volume of
software products distributed electronically to end users. An increase in the
volume of products sold through or used by consumers of any of these
competitive programs or distributed electronically to end users could have a
material adverse effect on the Company's financial position, results of
operations and cash flows.
10
STATE SALES OR USE TAX COLLECTION UNCERTAINTIES
The Company presently collects sales tax only on sales of products to
residents of the State of Ohio. Sales to customers located within the State of
Ohio were approximately 2% of the Company's net sales during the nine months
ended September 30, 1997. Various states have sought to impose on direct
marketers the burden of collecting state sales taxes on the sales of products
shipped to their residents. The United States Supreme Court recently affirmed
its position that it is unconstitutional for a state to impose sales or use
tax collection obligations on an out-of-state mail order company whose only
contacts with the state are limited to the distribution of catalogs and other
advertising materials through the mail and the subsequent delivery of
purchased goods by United States mail or by interstate common carrier.
However, legislation that would expand the ability of states to impose sales
tax collection obligations on direct marketers has been introduced in Congress
on many occasions. Due to its presence on various forms of electronic media
and other factors, the Company's contact with many states may exceed the
contact involved in the Supreme Court case. The Company cannot predict the
level of contact that is sufficient to permit a state to impose on the Company
a sales tax collection obligation. If the Supreme Court changes its position
or if legislation is passed to overturn the Supreme Court's recent decision,
the imposition of a sales or use tax collection obligation on the Company in
states to which it ships products would result in additional administrative
expenses to the Company, could result in price increases to the customer, and
could reduce demand for the Company's products or could otherwise have a
material adverse effect on the Company's financial position, results of
operations and cash flows.
DEPENDENCE ON KEY PERSONNEL
The Company's future performance will depend to a significant extent upon
the efforts and abilities of its senior executives. The competition for
qualified management personnel in the personal computer products industry is
very intense, and the loss of service of one or more of these persons could
have an adverse effect on the Company's business. The Company's success and
plans for future growth will also depend on its ability to hire, train and
retain skilled personnel in all areas of its business, including account
managers and technical support personnel. There can be no assurance that the
Company will be able to attract, train and retain sufficient qualified
personnel to achieve its business objectives. See "Management."
CONTROL BY PRINCIPAL STOCKHOLDERS
After consummation of the Offering, Patricia Gallup and David Hall, the
principal stockholders of the Company, will beneficially own or control, in
the aggregate, approximately % of the outstanding shares of Common Stock ( %
if the Underwriters' over-allotment option is exercised in full). Because of
their beneficial stock ownership, these stockholders will be able to continue
to elect the members of the Board of Directors and decide all matters
requiring stockholder approval. The Company has entered into various
transactions with the principal stockholders. See "Principal Stockholders" and
"Certain Transactions."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price of the Common Stock will be determined by
negotiations between the Company and the Representatives of the Underwriters,
and may not be indicative of the market price for the Common Stock in the
future. See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. There can be no assurance that
an active trading market for the Common Stock will develop or be sustained
after the Offering. If a trading market develops, the market price of the
Common Stock may fluctuate widely as a result of various factors, such as
period-to-period fluctuations in the Company's operating results, sales of
Common Stock by principal stockholders, developments in the personal computer
industry or the methods of distribution of personal computer products,
competitive factors, regulatory developments, economic and other external
factors, general market conditions, and market conditions affecting stocks of
personal computer
11
products manufacturers and resellers in particular. The stock market in
general, and the stocks of personal computer product resellers in particular,
have in the past experienced extreme volatility in trading prices and volumes
that has often been unrelated to operating performance. Such market volatility
may have a significant adverse affect on the market price and marketability of
the Common Stock. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have shares of Common
Stock outstanding. The shares of Common Stock sold in the Offering will be
freely tradeable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"), unless held by an
"affiliate" of the Company, as that term is defined under Rule 144 of the
Securities Act, which shares will be subject to the resale limitations of Rule
144. In connection with the Offering, the existing stockholders and holders of
stock options exercisable within 180 days after the date of this Prospectus
have agreed not to dispose of any shares for a period of 180 days from the
date of this Prospectus, and the Company has agreed not to dispose of any
shares (other than shares sold by the Company in the Offering or issuances by
the Company of certain employee stock options and shares covered thereby) for
a period of 180 days from the date of this Prospectus, without the prior
written consent of Donaldson, Lufkin and Jenrette Securities Corporation. Upon
expiration of such 180-day period, all shares of Common Stock held by the
existing stockholders ( shares) will be eligible for sale subject to
certain volume and other limitations of Rule 144 under the Securities Act
applicable to "affiliates" of the Company and all shares of stock acquired
upon exercise of stock options may be sold pursuant to a registration
statement to be filed by the Company. No prediction can be made as to the
effect, if any, that market sales of shares of Common Stock or the
availability of shares of Common Stock for sale will have on the market price
of the Common Stock from time to time. The sale of a substantial number of
shares held by the existing stockholders, whether pursuant to a subsequent
public offering or otherwise, or the perception that such sales could occur,
could adversely affect the market price of the Common Stock and could
materially impair the Company's future ability to raise capital through an
offering of equity securities. See "Shares Eligible for Future Sale" and
"Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION
Investors in the Common Stock in the Offering will experience immediate and
substantial dilution in the net tangible book value of their shares. Assuming
an initial public offering price of $ per share, dilution to new investors
would be $ per share. Additional dilution will occur upon exercise of
outstanding stock options. If the Company seeks additional capital in the
future, the issuance of shares or convertible debt to obtain such capital may
lead to further dilution. See "Dilution."
12
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered by the Company hereby are estimated to be approximately $ ($
if the Underwriters' over-allotment option is exercised in full), after
deducting estimated underwriting discounts and commissions and estimated
offering expenses, based on an assumed initial price to the public of $ per
share (the mid-point of the range set forth on the cover page of this
Prospectus).
The Company plans to use approximately $ of the net proceeds from the
Offering to repay bank indebtedness comprising $ million of term debt and
$ million of short-term borrowings, each having a maturity date of March
31, 2002, and bearing interest at the prime rate (8.0% per annum at the date
of this Prospectus), and approximately $ of the net proceeds from the
Offering to pay the S Corporation Dividend.
The Company intends to use any remaining net proceeds for general corporate
purposes, including working capital. Pending such uses, the net proceeds of
the Offering will be invested in interest-bearing or dividend-bearing,
investment grade securities.
DIVIDEND POLICY
The Company currently intends to retain its future earnings and has no plans
to pay cash dividends in the foreseeable future, other than the declaration of
the S Corporation Dividend (estimated to be approximately $ million) prior
to the consummation of the Offering. The payment of future dividends will be
determined by the Board of Directors of the Company in light of conditions
then existing, including the Company's financial condition and requirements,
future prospects, restrictions in financing agreements, business conditions
and other factors deemed relevant by the Board of Directors. There can be no
assurance that the Company will determine to pay any cash dividends in the
future.
13
CAPITALIZATION
The following table sets forth the cash, debt and capitalization of the
Company as of September 30, 1997 (i) on an actual basis, (ii) on a pro forma
basis reflecting the S Corporation Dividend and the S Corporation Termination
and (iii) on a pro forma as adjusted basis reflecting the sale of shares of
Common Stock offered hereby and the application of the estimated net proceeds
from the Offering based on an assumed initial price to the public of $ per
share (the mid-point of the range set forth on the cover page of this
Prospectus).
AS OF SEPTEMBER 30, 1997
----------------------------------------------------
PRO PRO FORMA AS
ACTUAL FORMA(1) ADJUSTED(2)
--------------- --------------- ------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Cash.................................................... $ 723 $ 723 $
=============== =============== ==============
Short-term borrowings................................... $ 8,130 $ 8,130 $
Dividends payable....................................... -- 26,000
Long-term debt (including current portion).............. 4,750 4,750
--------------- --------------- --------------
Total debt.......................................... 12,880 38,880
--------------- --------------- --------------
Stockholders' equity (deficiency):
Common stock, $.01 par value: 7,500,000 shares of Non-
Voting Common Stock and 2,500,000 shares of Voting
Common Stock authorized, and 6,750,000 shares of Non-
Voting Common Stock and 2,250,000 shares of Voting
Common Stock issued and outstanding, actual and pro
forma; shares of Common Stock authorized, and
shares of Common Stock issued and outstanding,
pro forma as adjusted(2)............................. 90 90
Preferred stock, $.01 par value: shares authorized
and
none issued and outstanding pro forma as adjusted(2)..
Additional paid in-capital (deficiency)............... 4,037 (2,310)
Retained earnings..................................... 17,153 --
--------------- --------------- --------------
Total stockholders' equity (deficiency)............. 21,280 (2,220)
--------------- --------------- --------------
Total capitalization.................................... $ 34,160 $ 36,660 $
=============== =============== ==============
- ---------------------
(1) Reflects the declaration of the S Corporation Dividend estimated to be in
the amount of $26,000 at September 30, 1997 and establishment of net
deferred income tax assets of approximately $2,500 resulting from the
termination of the Company's S Corporation status.
(2) Gives effect to the Reorganization, the Offering and the application of
the estimated net proceeds therefrom. Excludes (a) shares of Common
Stock issuable upon the exercise of stock options outstanding as of
September 30, 1997 with a weighted average exercise price of $ per share
and (b) an additional shares of Common Stock reserved for future
issuance under the Company's 1993 Incentive and Non-Statutory Stock Option
Plan, 1997 Stock Incentive Plan and 1997 Employee Stock Purchase Plan.
14
DILUTION
At September 30, 1997, after giving effect to (i) the Reorganization and
(ii) payments of the S Corporation Dividend the Company had a pro forma net
tangible book value of approximately $ or $ per share of Common Stock.
"Net tangible book value" represents the amount of total assets less total
liabilities divided by the number of shares of Common Stock outstanding.
Without taking into account any other changes in the net tangible book value
after September 30, 1997, other than to give effect to the sale of the
shares of Common Stock offered by the Company hereby at an assumed initial
public offering price of $ per share (the mid-point of the range set forth
on the cover page of this Prospectus) after deducting estimated underwriting
discounts and offering expenses payable by the Company, the pro forma net
tangible book value of the Company as of September 30, 1997 would have been
approximately $ or $ per share. This represents an immediate increase in
net tangible book value of $ per share to the existing stockholders and an
immediate dilution of $ per share to new investors. The following table
illustrates this per share dilution:
Assumed initial public offering price....................... $
Pro forma net tangible book value as of September 30,
1997..................................................... $
Increase in net tangible book value attributable to new
investors................................................
Pro forma net tangible book value after the Offering........
------
Dilution to new investors................................... $
======
The following table summarizes on a pro forma basis, as of September 30,
1997, the differences between existing stockholders and new investors in the
Offering (at an assumed initial public offering price of $ per share) with
respect to the number of shares of Common Stock purchased from the Company,
the total consideration paid and the average price per share paid:
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------------AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ------------- -----------------------
Existing stockholders.. % $ % $
New investors.......... % % $
--------- --- ------------- ------
Total................ 100% $ 100%
========= === ============= ======
As of September 30, 1997, options to purchase shares of Common Stock
were outstanding with a weighted average exercise price of $ per share and
are not reflected in the above tables. See "Capitalization," "Management--
Stock Option Plans" and Notes 7 and 12 of the Financial Statements.
15
SELECTED FINANCIAL AND OPERATING DATA
The following selected financial and operating data should be read in
conjunction with the Company's Financial Statements and the Notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere herein. The selected data presented below
under the captions "Statement of Operations Data" and "Balance Sheet Data" for
each of the years in the five-year period ended December 31, 1996 and the nine
months ended September 30, 1997 are derived from the audited financial
statements of the Company. The financial statements as of December 31, 1995
and 1996 and September 30, 1997, and for each of the years in the three-year
period ended December 31, 1996 and for the nine months ended September 30,
1997, and the independent auditors' report thereon, are included elsewhere in
this Prospectus. The selected data presented below for the nine months ended
September 30, 1996 are derived from the unaudited financial statements of the
Company appearing elsewhere in the Prospectus. In the opinion of management,
the unaudited financial statements for the nine months ended September 30,
1996 include all adjustments, consisting only of normal recurring adjustments,
which the Company considers necessary for a fair presentation of the results
for such period. The results of operations for the nine months ended September
30, 1997 are not necessarily indicative of the results to be expected for the
year ended December 31, 1997.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- --------------------------
1992 1993 1994 1995 1996 1996 1997
---------- ----------- ----------- ----------- ----------- ----------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
STATEMENT OF OPERATIONS
DATA:
Net sales.............. $ 147,627 $ 163,390 $ 196,659 $ 252,217 $ 333,322 $ 225,074 $ 383,460
Cost of sales.......... 121,879 137,266 165,957 211,299 282,117 189,644 330,008
---------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit........... 25,748 26,124 30,702 40,918 51,205 35,430 53,452
Selling, general and
administrative
expenses.............. 24,506 29,602 32,653 38,373 43,739 31,005 40,965
---------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
operations............ 1,242 (3,478) (1,951) 2,545 7,466 4,425 12,487
Interest expense....... (76) (274) (594) (1,296) (1,269) (803) (933)
Other, net............. 90 367 80 62 70 20 (43)
Income taxes(1)........ (32) -- 124 (38) (252) (134) (429)
Additional
stockholder/officer
compensation(2)....... (1,100) -- -- -- (1,259) (1,407) (8,630)
---------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)...... $ 124 $ (3,385) $ (2,341) $ 1,273 $ 4,756 $ 2,101 $ 2,452
========== =========== =========== =========== =========== =========== ===========
PRO FORMA DATA(3):
Net income ........................................................... $ 3,750 $ 6,967
Net income per share.................................................. $ $
=========== ===========
Weighted average number of common and
common equivalent shares outstanding(4)..............................
=========== ===========
SELECTED OPERATING DATA:
Active customers(5).... 246,000 258,000 295,000 353,000 424,000 401,000 492,000
Catalogs distributed... 6,000,000 10,000,000 16,900,000 16,800,000 18,600,000 11,200,000 24,000,000
Orders entered(6)...... 661,000 695,000 803,000 854,000 910,000 628,000 891,000
Average order size..... $ 248 $ 264 $ 282 $ 346 $ 453 $ 445 $ 512
DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- -------------
1992 1993 1994 1995 1996 1997
---------- ----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA:
Working capital........ $ 10,790 $ 7,383 $ 2,770 $ 10,994 $ 14,622 $ 16,477
Total assets........... 33,404 38,313 52,911 48,615 75,238 95,549
Short-term debt........ 3,367 6,905 6,106 4,933 13,057 9,380
Long-term debt (less
current maturities)... -- -- -- 5,000 4,250 3,500
Total stockholders'
equity................ 17,088 13,702 11,687 13,057 18,043 21,280
16
- ---------------------
(1) For all periods presented, the Company has been an S Corporation and
accordingly has not been subject to federal income taxes.
(2) Represents amounts accrued or distributed in excess of aggregate annual
base salaries approved by the Board of Directors and primarily represent
Company-related federal income tax obligations payable by the
stockholders.
(3) The pro forma adjustments give effect to (i) the elimination of additional
stockholder/officer compensation expense of $1,139 and $8,540 for the year
ended December 31, 1996 and the nine months ended September 30, 1997,
respectively, representing amounts in excess of aggregate annual base
salaries of $600 to be in effect as of the closing date of the Offering
and (ii) the Reorganization, including the provision for income taxes at
an assumed rate of 39% based upon pro forma income of the Company as if it
had not elected to be treated as an S Corporation. Increases in taxes
amounted to $2,145 and $4,025 for the year ended December 31, 1996 and the
nine months ended September 30, 1997, respectively.
(4) The pro forma weighted average number of common and common equivalent
shares outstanding assumes that (i) all shares of stock issuable upon
exercise of all stock options granted in 1997 were outstanding and (ii) a
number of shares determined by dividing (x) the S Corporation Dividend
(which if made at September 30, 1997 would have approximated $26,000) by
(y) the mid-point of the range set forth on the cover page of this
Prospectus, were outstanding.
(5) All customers included in the Company's mailing list who have made a
purchase within the last twelve-month period.
(6) Does not reflect cancellations or returns.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
financial statements and unaudited pro forma financial statements included
elsewhere herein.
GENERAL
The Company was founded in 1982 as a mail order business offering a broad
range of software and accessories for IBM and IBM-compatible personal
computers. The founders' goal was to provide consumers with superior service
and high quality branded products at competitive prices. The Company initially
sought customers through advertising in magazines and the use of inbound toll
free telemarketing. Currently, the Company seeks to generate sales through (i)
outbound telemarketing by account managers focused on the business, education
and government markets and (ii) inbound calls from customers responding to the
Company's catalogs and other advertising. The Company also advertises in
selected computer industry publications and in 1996 commenced selling products
through its Internet Web site.
The Company offers both PC compatible products and Mac compatible products.
Reliance on Mac product sales has decreased over the last two years, from
26.7% of net sales in 1995 to 22.6% of net sales for the nine months ended
September 30, 1997. In November 1997, Apple announced that it will sell built-
to-order computers directly to customers over the Internet. While Apple also
indicated that it is not abandoning traditional retail and direct marketing
outlets, the Company cannot predict whether direct sales by Apple will affect
the future supply of Macs to the Company. Although net sales attributable to
Mac products increased in the nine months ended September 30, 1997, as
compared to the comparable period in 1996, the Company believes that such
sales will continue to decrease as a percentage of net sales and may decline
in dollar volume in 1998 and future years.
All of the Company's product categories experienced strong growth in the
year ended December 31, 1996 and the nine months ended September 30, 1997,
with sales of computer systems representing the fastest growing category.
Sales of computer systems result in a relatively high dollar sales order, as
reflected in the increase in the Company's average order size from $346 in the
year ended December 31, 1995 to $512 for the nine months ended September 30,
1997. Computer system sales generally provide the largest gross profit dollar
contribution per order of all of the Company's products, although they
generally yield the lowest gross margin percentage. Partially as a result of
higher system sales, the Company's gross margin has declined over the last two
years while the operating income margin has increased due to the leveraging of
selling, general and administrative expenses over a larger sales base.
The Company's profit margins are also influenced by, among other things,
industry pricing and the relative mix of inbound versus outbound sales.
Generally, pricing in the computer and related products market is very
aggressive and the Company intends to maintain prices at competitive levels.
Since outbound sales are typically to corporate accounts that purchase at
volume discounts, the gross margin on such sales is generally lower than
inbound sales, although the gross profit dollar contribution per order is
generally higher as average order sizes to corporate accounts are usually
larger. The Company believes that outbound sales will continue to represent a
larger portion of its business mix in future periods.
The direct marketing of personal computers and related products is highly
competitive. In addition to other direct marketers and manufacturers who sell
direct, such as Dell Computer Corporation and Gateway 2000, Inc.,
manufacturers of PCs sold by the Company, such as Compaq and IBM, have also
announced varying plans to sell PCs directly to end users. Separately, both
Compaq and IBM have announced plans to increase their reliance on reseller
arrangements with direct marketers such as the Company as part of their own
marketing programs designed to compete more effectively with Dell and Gateway.
The Company currently believes that direct sales by Compaq and IBM will not
have a significant adverse effect upon the Company's net sales.
18
Most product manufacturers provide the Company with co-op advertising support
in exchange for product coverage in the Company's catalogs. Although the level
of co-op advertising support available to the Company from certain
manufacturers has declined, and may decline further in the future, the overall
level of co-op advertising revenues has continued to increase consistent with
the Company's increased levels of spending for catalog and other advertising
programs. The Company believes that the overall levels of co-op advertising
revenues available over the next twelve months will be consistent with the
Company's planned advertising programs.
In connection with the Offering, the Company expects to report the following
non-recurring, non-cash items in the quarter ending March 31, 1998: (i) a
$665,000 charge to income from operations resulting from the acceleration of
the amortization of certain stock option compensation expense from seven years
to four years and (ii) an estimated $2.5 million tax benefit related to the
establishment of deferred tax assets for future tax deductions resulting from
the S Corporation Termination.
In connection with the planned relocation of its headquarters facility in the
summer of 1998, the Company will likely incur certain one-time moving and other
costs, not expected to exceed $500,000, which would be charged to operating
results in the periods incurred.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated information derived
from the Company's statements of operations expressed as a percentage of net
sales.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- ------- -------- --------
Net sales (in millions)........ $ 196.7 $ 252.2 $ 333.3 $ 225.1 $ 383.5
======= ======= ======= ======== ========
Net sales...................... 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit................... 15.6 16.2 15.4 15.7 13.9
Selling, general and
administrative expenses....... 16.6 15.2 13.1 13.8 10.7
Income (loss) from operations.. (1.0) 1.0 2.2 2.0 3.3
Interest expense............... (0.3) (0.5) (0.4) (0.4) (0.2)
Income taxes................... 0.1 (0.0) (0.1) (0.1) (0.1)
Additional stockholder/officer
compensation.................. 0.0 0.0 (0.4) (0.6) (2.2)
Net income (loss).............. (1.2) 0.5 1.4 0.9 0.6
Pro forma net income........... 1.1 1.8
The following table sets forth for the periods indicated the Company's
percentage of net sales (in dollars) of computer systems/memory, peripherals,
software and networking and communications products.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------
PRODUCT CATEGORIES 1994 1995 1996 1996 1997
------------------ ------- ------- ------- -------- --------
Computer Systems/Memory......... 11.1% 25.4% 34.8% 33.1% 41.1%
Peripherals..................... 44.8 39.4 38.0 38.4 34.8
Software........................ 30.3 23.4 17.6 18.0 16.6
Networking and Communications... 13.8 11.8 9.6 10.5 7.5
------- ------- ------- -------- --------
Total......................... 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ======== ========
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Net sales increased $158.4 million, or 70.4%, to $383.5 million for the nine
months ended September 30, 1997 from $225.1 million for the nine months ended
September 30, 1996. Growth in net sales, which included a 15.1% increase in
average order size, was primarily attributable to: (i) improvements in
merchandising and product mix, especially a greater emphasis on the stocking
and sale of computer systems; (ii) continued
19
expansion and increased productivity of the Company's outbound telemarketing
group; (iii) an increase in the number of catalog mailings; and (iv) improved
inbound sales conversion ratios. System/memory sales increased to 41.1% of net
sales for the nine months ended September 30, 1997 from 33.1% for the
comparable period in 1996. Outbound sales increased $92.1 million, or 112.2%,
to $174.2 million for the nine months ended September 30, 1997 from $82.1
million for the nine months ended September 30, 1996. The number of catalogs
mailed increased by 114.3%, from 11.2 million catalogs for the nine months
ended September 30, 1996 to 24.0 million catalogs for the comparable period in
1997.
Gross profit increased $18.1 million, or 50.9%, to $53.5 million for the
nine months ended September 30, 1997 from $35.4 million for the nine months
ended September 30, 1996. The increase in gross profit dollars was primarily
attributable to the increase in sales described above. Gross profit margin
decreased from 15.7% for the nine months ended September 30, 1996 to 13.9% for
the comparable period in 1997 due primarily to a higher rate of growth in
sales of lower margin computer systems, increased price competition and
decreases in average unit selling prices. However, the Company generated
higher gross profit dollars per order, enabling it to leverage its operating
expenses, as described below.
Selling, general and administrative expenses (excluding additional
stockholder/officer compensation) increased $10.0 million, or 32.1%, to $41.0
million for the nine months ended September 30, 1997 from $31.0 million for
the nine months ended September 30, 1996, but decreased as a percentage of
sales to 10.7% for the nine months ended September 30, 1997 from 13.8% for the
nine months ended September 30, 1996. The increase in expenses was primarily
attributable to increases in volume-sensitive costs such as sales personnel
and credit card fees. The decrease as a percentage of net sales was primarily
attributable to improved expense control and the leveraging of selling,
general and administrative expenses over a larger sales base.
Prior to the closing of the Offering, selling, general and administrative
expenses excluded additional stockholder/officer compensation paid to the
Company's two stockholders who also serve as officers and directors,
representing amounts accrued or distributed in excess of aggregate annual base
salaries ($360,000 base salaries for each of the nine-month periods) approved
by the Board of Directors of the Company and primarily represent Company-
related federal income tax obligations payable by the stockholders. Effective
upon the closing of the Offering, these stockholder/officers will be paid
annual base salaries aggregating $600,000. Selling, general and administrative
expenses on a pro forma basis were $41.1 million (or 10.7% of net sales) for
the nine months ended September 30, 1997, and $31.1 million for the nine
months ended September 30, 1996 as adjusted to give effect to $450,000 of
aggregate base salaries payable to the Company's two stockholder/officers.
Income from operations increased by $8.1 million, or 182.2%, to $12.5
million for the nine months ended September 30, 1997 from $4.4 million for the
nine months ended September 30, 1996. Income from operations as a percentage
of net sales increased from 2.0% to 3.3% for the reasons discussed above.
Additional stockholder/officer compensation represents amounts accrued or
distributed to stockholders for Company-related federal income tax obligations
payable by the stockholders. Additional stockholder/officer compensation
increased $7.2 million, or 513.4%, to $8.6 million for the nine months ended
September 30, 1997 from $1.4 million for the nine months ended September 30,
1996. This increase is attributable to increases in net income.
Interest expense for the nine months ended September 30, 1997 increased by
$130,000, or 16.2%, to $933,000 from $803,000 for the nine months ended
September 30, 1996, primarily due to higher average outstanding borrowings
under the Company's line of credit.
Net income increased $351,000, or 16.7%, to $2.5 million for the nine months
ended September 30, 1997 from $2.1 million for the comparable period in 1996
principally as a result of the increase in income from operations.
Pro forma net income is determined by (i) eliminating stockholder/officer
compensation in excess of the aggregate base salaries described above under
"selling, general and administrative expenses" and (ii) adding a
20
provision for federal income taxes that would be payable by the Company if
taxed under Subchapter C of the Code. Net income on a pro forma basis as
described above would have been $7.0 million for the nine months ended
September 30, 1997. The difference in pro forma net income compared to
historical net income represents the elimination of $8.5 million in additional
stockholder/officer compensation offset by a $4.0 million higher provision for
federal income taxes.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales increased $81.1 million, or 32.2%, to $333.3 million in 1996 from
$252.2 million in 1995. Growth in net sales, which included a 30.9% increase
in average order size, was primarily attributable to improvements in
merchandising and product mix, especially growth in computer systems, and a
significant expansion of the Company's outbound telemarketing group from 40 to
100 account managers, together with an increase in outbound sales per account
manager for those account managers with more than 12 months of service.
Outbound sales increased $72.2 million, or 132.6%, to $126.7 million in 1996
from $54.5 million in 1995.
Gross profit increased $10.3 million, or 25.1%, to $51.2 million in 1996
from $40.9 million in 1995. Gross profit margin decreased from 16.2% in 1995
to 15.4% in 1996 due to more competitive pricing of the Company's products and
significant growth in sales of computer systems, which carry lower gross
margins. These decreases were partially offset by the Company's ability, as a
result of its increased volume and financial position, to take advantage of
vendor discounts, rebates and bulk purchasing opportunities.
Selling, general and administrative expenses (excluding additional
stockholder/officer compensation) increased $5.4 million, or 14.0%, to $43.7
million in 1996 from $38.4 million in 1995, but decreased as a percentage of
sales to 13.1% in 1996 from 15.2% in 1995. The increase in expense was
attributable to an increase in volume-sensitive costs such as sales personnel
and credit card fees. The decrease as a percentage of net sales was primarily
attributable to management attention to expense control and the leveraging of
selling, general and administrative expenses over a larger sales base.
Selling, general and administrative expenses on a pro forma basis were $43.9
million (or 13.2% of net sales) in 1996 as adjusted to give effect to $600,000
of aggregate annual base salaries payable to the Company's two
stockholder/officers.
Income from operations increased by $5.0 million, or 193.4%, to $7.5 million
in 1996 from $2.5 million in 1995. Income from operations as a percentage of
net sales increased from 1.0% to 2.2% for the reasons discussed above.
Additional stockholder/officer compensation increased $1.3 million in 1996
from $0 in 1995. This increase is primarily attributable to distributions to
stockholders representing Company-related federal income tax obligations
payable by stockholders.
Interest expense remained unchanged at $1.3 million in 1996 and 1995. Lower
interest rates and average short-term borrowings in 1996 were offset by the
increased interest expense associated with the $5.0 million term loan obtained
in late 1995.
Net income increased $3.5 million, or 273.6%, to $4.8 million in 1996 from
$1.3 million in 1995, principally as a result of the increase in income from
operations.
Pro forma net income as described above would have been $3.8 million. The
difference in pro forma net income compared to historical net income
represents the elimination of $1.1 million in additional stockholder/officer
compensation offset by a $2.1 million higher provision for federal income
taxes.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net sales increased $55.5 million, or 28.3%, to $252.2 million in 1995 from
$196.7 million in 1994. Growth in net sales, which included a 22.7% increase
in average order size, was primarily attributable to expanded marketing
efforts and product lines, particularly in the development of computer
system/memory sales, and the
21
development and growth of the Company's outbound telemarketing group. Outbound
sales increased $40.8 million, or 298.9%, to $54.4 million in 1995 from $13.6
million in 1994.
Gross profit increased $10.2 million, or 33.3%, to $40.9 million in 1995
from $30.7 million in 1994. Gross margin increased from 15.6% in 1994 to 16.2%
in 1995 primarily as a result of a change in the Company's freight policy
which passed a larger percentage of the out-of-pocket freight charges to
customers.
Selling, general and administrative expenses increased $5.7 million, or
17.5%, to $38.4 million in 1995 from $32.7 million in 1994, but decreased as a
percent of sales to 15.2% in 1995 from 16.6% in 1994. The increase in expenses
was attributable primarily to increased volume-sensitive personnel and other
costs consistent with the growth in the outbound sales group. Selling, general
and administrative expenses in 1995 also included approximately $800,000 in
non-recurring charges, including $473,000 of costs related to an uncompleted
equity financing and $275,000 of costs associated with the termination of
certain employees. The decline as a percentage of sales was attributable to
increased economies of scale through a significant reduction in the number of
inbound sales representatives coupled with an improvement in productivity, the
leveraging of costs over a higher sales base and the reduction of more
expensive advertising in computer publications.
Income (loss) from operations increased by $4.5 million to income of $2.5
million in 1995 from a loss of $2.0 million in 1994. Income (loss) from
operations as a percentage of net sales increased from a loss of 1.0% to
income of 1.0% for the reasons discussed above.
Interest expense in 1995 increased $702,000, or 118.2%, to $1.3 million from
$594,000 in 1994, primarily as a result of increased borrowings under the
Company's line of credit.
Net income (loss) increased $3.6 million, to net income of $1.3 million in
1995 from a net loss of $2.3 million in 1994 principally as a result of the
increase in income from operations described above.
SELECTED QUARTERLY FINANCIAL RESULTS
The following table sets forth certain unaudited quarterly data of the
Company for each of the quarters since January 1, 1995. This information has
been prepared on the same basis as the audited Financial Statements and all
necessary adjustments, consisting only of normal recurring adjustments, have
been included in the amounts stated below to present fairly the selected
quarterly information when read in conjunction with the audited Financial
Statements and the Notes thereto included elsewhere in this Prospectus. The
quarterly operating results are not necessarily indicative of future results
of operations. See "Risk Factors--Historical Net Losses; Variability of
Quarterly Results."
QUARTERS ENDED
--------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995
--------- -------- --------- --------
(IN THOUSANDS)
Net sales............................... $ 62,856 $ 60,434 $ 59,802 $ 69,125
Gross profit............................ 10,247 9,736 9,737 11,198
Income (loss) from operations(1)........ (112) 130 281 2,246
QUARTERS ENDED
--------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996
--------- -------- --------- --------
(IN THOUSANDS)
Net sales............................... $ 70,108 $ 72,014 $ 82,952 $108,248
Gross profit............................ 10,995 11,381 13,054 15,775
Income from operations(1)............... 1,108 1,341 1,976 3,041
QUARTERS ENDED
-----------------------------
MARCH 31, JUNE 30, SEPT. 30,
1997 1997 1997
--------- -------- ---------
(IN THOUSANDS)
Net sales............................... $122,823 $121,500 $139,137
Gross profit............................ 17,379 16,777 19,296
Income from operations(1) .............. 3,742 3,986 4,759
- ---------------------
(1) Income from operations excludes stockholder/officer compensation in excess
of aggregate base salaries of $120,000 in each quarter ($80,000 in the
quarter ended December 31, 1995).
22
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations and capital
expenditures through cash flow from operations and bank borrowings. The
Company believes that funds generated from operations, together with the net
proceeds from the Offering and available credit under its bank line of credit,
will be sufficient to finance its working capital and capital expenditure
requirements at least through 1998. The Company plans to use the net proceeds
of the Offering to repay bank indebtedness, pay the S Corporation Dividend and
for working capital. See "Use of Proceeds." The Company's ability to continue
funding its planned growth is dependent upon its ability to generate
sufficient cash flow from operations or to obtain additional funds through
equity or debt financing, or from other sources of financing, as may be
required.
At September 30, 1997, the Company had cash of $723,000 and working capital
of $16.5 million. At December 31, 1996, the Company had working capital of
$14.6 million.
Net cash provided by operating activities was $8.4 million for the nine
months ended September 30, 1997. The Company's net cash used in operating
activities was $4.5 million for the year ended December 31, 1996 as compared
to $2.8 million used in operating activities for the year ended December 31,
1995. Net cash provided by operating activities was $5.8 million for 1994. The
primary factors historically affecting cash flows from operations are the
Company's net income and changes in the levels of accounts receivable,
inventories and accounts payable. Historically, inventories and accounts
payable have increased as a result of the sales growth of the Company.
Accounts receivable have increased primarily due to an increase in open
account purchases by commercial customers resulting from the Company's
continued efforts to increase its sales to such customers.
Capital expenditures were $3.4 million in the nine months ended September
30, 1997 and in the year ended December 31, 1996. The Company expects capital
expenditures, primarily for the purchase of computer hardware and software and
other fixed assets, to be approximately $1.6 million and $4.0 million, for the
quarter ending December 31, 1997 and the year ending December 31, 1998,
respectively.
As of September 30, 1997, the Company had a credit agreement with a bank
providing for short-term borrowings equal to the lesser of $30 million or an
amount determined by a formula based on accounts receivable and inventory
balances, and a term loan for $5 million, due in quarterly installments of
$250,000 through March 31, 2002. Short-term borrowings which totalled $8.1
million at September 30, 1997, are collateralized by the Company's accounts
receivable and inventories (other than inventories pledged to secure trade
credit arrangements) and bear interest at the bank's prime rate plus 0.5%
(8.5% at September 30, 1997) or LIBOR plus 2.5% at the Company's option. The
term loan is collateralized by all other assets of the Company and bears
interest at the prime rate plus 1.0% (9.0% at September 30, 1997). The credit
agreement includes various customary financial and operating covenants,
including restrictions on the payment of dividends, except for dividends to
stockholders in respect of income taxes, none of which the Company believes
significantly restricts the Company's operations. At September 30, 1997, the
Company had $53.7 million in outstanding accounts payable. Such accounts are
generally paid within 30 days of incurrence and will be financed by cash flows
from operations or short-term borrowings under the line of credit.
As of November 19, 1997, the Company and its banks amended the agreement to
increase the maximum level of borrowings from $30.0 million to $45.0 million
and to reduce the interest rate on borrowings under both loans to the prime
rate or LIBOR plus 2.0% at the Company's option. At December 31, 1997 short-
term borrowings under the line of credit totalled $28.3 million. The Company's
borrowings at year end are typically higher as a result of increased fourth
quarter sales levels.
INFLATION
The Company has historically offset any inflation in operating costs by a
combination of increased productivity and price increases, where appropriate.
The Company does not expect inflation to have a significant impact on its
business in the future.
23
YEAR 2000 COMPLIANT INFORMATION SYSTEMS
The Company uses software and related technologies throughout its business
that will be affected by the Year 2000 problem, which is common to most
corporations, and concerns the inability of information systems, primarily
computer software programs, to properly recognize and process date sensitive
information as the year 2000 approaches. The Company's order management and
fulfillment software system is not currently Year 2000 compliant. However, the
Company plans to replace this system in 1998 with new software that is better
suited to the Company's expected scale of operations and is designed to be
Year 2000 compliant. See "Business--Management Information Systems." The
Company currently believes it will be able to modify or replace any other
affected systems in time to minimize any detrimental effects on operations.
While it is not possible, at present, to give an accurate estimate of the cost
of this work, the Company expects that such costs will not be material to the
Company's results of operations. System maintenance or software modification
costs will be expensed as incurred, while the costs of new software (such as
the new order management and fulfillment software) will be capitalized and
amortized over the software's expected useful life.
RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD
Recent pronouncements of the Financial Accounting Standards Board ("FASB")
which are not required to be adopted at September 30, 1997, include the
following Statements of Financial Accounting Standards ("SFAS"):
SFAS No. 128, "Earnings Per Share," which will be required to be adopted by
the Company for the fiscal year ending December 31, 1997, specifies the
computation, presentation, and disclosure requirements for earnings per share
for entities with publicly-held common stock. This new accounting standard
will require presentation of basic earnings per share and diluted earnings per
share. The effect of adopting this standard would be to report pro forma basic
net income per share of $0.38 and $0.71, and pro forma diluted net income per
share of $0.36 and $0.68, for the year ended December 31, 1996 and the nine
months ended September 30, 1997, respectively.
SFAS No. 129, "Disclosure of Information about Capital Structure," which
will be effective for the Company for the year ending December 31, 1997,
consolidates existing disclosure requirements. This new standard contains no
change in disclosure requirements for the Company.
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive income (all changes in equity during a
period except those resulting from investments by and distributions to owners)
and its components in the financial statements. This new standard, which will
be effective for the Company for the year ending December 31, 1998, is not
currently anticipated to have a significant impact on the Company's financial
statements based on the current financial structure and operations of the
Company.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," which will be effective for the Company for the year ending
December 31, 1998, establishes standards for reporting information about
operating segments in the annual financial statements, selected information
about operating segments in interim financial reports and disclosures about
products and services, geographic areas and major customers. This new standard
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 financial statements than is currently required
and provided. The Company has not yet determined the effects, if any, of
implementing SFAS No. 131 on its reporting of financial information.
24
BUSINESS
GENERAL
PC Connection is a leading direct marketer of brand-name personal computers
and related peripherals, software, accessories and networking products. The
Company's primary target customers are SMORGS comprised of 20 to 1,000
employees. PC Connection sells its products through a combination of targeted
direct mail catalogs, outbound telemarketing, its Internet Web site and
advertisements on the Internet and in selected computer magazines. The Company
offers a broad selection of approximately 15,000 products targeted for
business use at competitive prices, including products from Compaq, Hewlett-
Packard Company, Toshiba Corporation, IBM, Microsoft Corporation
("Microsoft"), Sony Corporation, Hitachi Ltd. and Apple. The Company's most
frequently ordered products are carried in inventory and are typically shipped
to customers the same day that the order is received.
The Company has experienced rapid growth in sales, profitability, number of
orders and average order size as a result of: (i) a substantial increase in
the number and assortment of products carried by the Company; (ii) increases
in outbound telemarketing personnel and improvements in productivity; (iii)
increases in catalog circulation; and (iv) improvements in inbound
telemarketing productivity. The Company recorded net sales of $333.3 million
and income from operations of $7.5 million in the year ended December 31,
1996, representing increases of 32.2% and 193.4%, respectively, over the year
ended December 31, 1995. In the nine months ended September 30, 1997, the
Company recorded net sales of $383.5 million and income from operations of
$12.5 million, representing increases of 70.4% and 182.2%, respectively, over
the comparable period in 1996. Net sales of PCs and compatible products were
approximately 77% of net sales for the nine months ended September 30, 1997.
Since its founding in 1982, the Company has focused on serving customer
needs by providing innovative, reliable and timely customer service and
technical support, and offering an extensive assortment of branded products,
through knowledgeable and well-trained sales and support teams. The
effectiveness of this strategy is reflected in the recognition accorded the
Company, including the Company's receipt of the PC World "World Class Award
for Best Mail-Order Company" in 1997, as voted by its readers, for the seventh
time in the past eight years, and receipt of the highest ranking of only two
direct resellers included in the first-ever ranking of the "100 Most
Influential Companies in the Computer Industry" by PC Magazine in July 1997.
The Company believes that its consistent customer focus has resulted in the
development of strong brand name recognition and a broad and loyal customer
base. At September 30, 1997, the Company's mailing list consisted of
approximately 2,000,000 customers and potential customers, of which
approximately 500,000 had purchased products from the Company within the last
twelve months. Approximately 65% of the Company's orders in each of the nine
months ended September 30, 1997 and the year ended December 31, 1996 were
placed by customers who had previously purchased products from the Company.
The Company believes it has also developed strong relationships with vendors,
resulting in favorable product allocations and marketing assistance.
Commencing in late 1995, the Company significantly increased its business-
to-business marketing efforts targeting SMORGS, a rapidly growing sector of
the personal computer market that the Company believes is particularly
receptive to purchases from direct marketers. To serve this growing part of
its business more effectively, the Company has increased the number of its
outbound telemarketing account managers from 48 at December 31, 1995 to 156 at
September 30, 1997, including 86 new account managers with less than 12 months
of outbound telemarketing experience with the Company. Historically, outbound
account managers become significantly more productive in their second year
with the Company. In addition, in late 1995 the Company initiated programs to
increase training of inbound telemarketing personnel and to provide incentive
compensation based upon sales productivity.
The Company's two major catalogs are PC Connection(R), focused on PCs and
compatible products, and MacConnection(R), focused on Macs and compatible
products. With colorful illustrations, concise product descriptions, relevant
technical information, along with customer service benefits and toll-free
telephone numbers for ordering, the Company's catalogs are recognized as a
leading source for personal computer hardware,
25
software and other related products. The Company distributed approximately 24
million catalogs during the nine months ended September 30, 1997.
The Company also markets its products and services through its Internet Web
site, www.pcconnection.com, which provides customers and prospective customers
with Company and product information and enables customers to place electronic
orders for all of the Company's products. The Company believes that as the
Internet becomes a more important commercial medium, it will be well
positioned to capitalize on growth through this emerging channel.
INDUSTRY BACKGROUND
According to industry data published by Merrin in May 1997, United States
sales of personal computers and related products were $77.8 billion in 1996
and are expected to be $138.2 billion in 2000, representing a compound annual
growth rate of 15.4%. The Company believes that the direct marketing channel
will be among the fastest growing distribution channels for the domestic
personal computer and related products industry. As a leading participant in
the direct marketing channel, the Company believes it is well positioned to
capitalize on the expected growth in the industry.
The Company believes that the sales of personal computers and related
products have increased principally as a result of (i) technological advances
leading to significant improvements in performance, functionality and ease of
use; (ii) lower prices and improved price/performance made possible by
technological advances and driven by intense competition among manufacturers,
retailers and resellers; (iii) increased dependence upon PCs by businesses,
educational institutions and governments; and (iv) the emergence of industry
standards and component commonality. The Company believes that the higher
projected growth for the direct marketing channel is primarily based on (i)
increased user familiarity with PCs, coupled with the emergence of industry
standards and component commonality, and the resultant increase in customer
comfort with purchasing products without the need to "touch and feel" them,
and (ii) broader product offerings, lower prices and greater purchasing
convenience that direct marketers generally provide over traditional retail
stores and local dealers.
Users of personal computers range from large corporate entities focused on
business applications to individual consumers focused primarily on personal
productivity, education and entertainment applications. Historically, large
corporate resellers have served the needs of FORTUNE 1000 companies and
retailers have competed to serve the consumer market. SMORGS, the Company's
core target customers, are being served by a wide range of suppliers,
including direct marketers, large retailers, and small, independent value
added resellers ("VARs") and local dealerships. The Company believes that the
direct field sales model used by large resellers is not an efficient method of
reaching SMORGS, and that VARs, local dealerships and retailers are unable to
match the high level of customer service, extensive array of products, low
prices and efficiencies afforded to SMORGS by direct marketers. Intense
competition for market share has led manufacturers of PCs and related products
to use all available channels to distribute products, including direct
marketers. Although certain manufacturers that have traditionally used
resellers to distribute their products have established or attempted to
establish their own direct marketing operations, to the Company's knowledge
only one has replaced its traditional indirect selling channels as the
principal means of distribution. Accordingly, the Company believes these
manufacturers will continue to provide favorable product allocations and
marketing support to third-party direct marketers.
The Company believes new entrants to the direct marketing channel must
overcome a number of significant barriers to entry, including the time and
resources required to build a customer base of meaningful size, quality and
responsiveness for cost-effective circulation; costs of developing the
information and operating infrastructure required by direct marketers; the
advantages enjoyed by larger and more established competitors in terms of
purchasing and operating efficiencies; the difficulty of building
relationships with manufacturers to achieve favorable product allocations,
attractive pricing terms and cooperative advertising funds; and the difficulty
of identifying and recruiting management personnel with significant direct
marketing experience in the industry.
26
BUSINESS STRATEGIES
The Company's objective is to become the leading supplier of personal
computers and related products and services to its customers. The key elements
of the Company's business strategies include:
. AWARD-WINNING CUSTOMER SERVICE BEFORE, DURING AND AFTER THE SALE. The
Company believes that it has earned a reputation for providing superior
customer service by consistently focusing on customer needs and service
innovation. The Company has won PC World's "World Class Award for Best
Mail Order Company" in seven out of the last eight years. The Company
delivers value to its customers through high quality service and
technical support provided by knowledgeable, well-trained personnel;
efficient and innovative delivery programs; in-house service
capabilities; competitive prices; and reasonable return policies.
. STRONG BRAND NAME AND CUSTOMER FRANCHISE. Since its founding in 1982,
the Company has built a strong brand name and customer franchise. In
July 1997, the Company was one of only two direct resellers included in
the "100 Most Influential Companies in the Computer Industry" by PC
Magazine. Its mailing list includes approximately 2,000,000 names, of
which approximately 500,000 have purchased products from the Company
during the last 12 months.
. BROAD PRODUCT SELECTION AT COMPETITIVE PRICES. The Company offers its
customers a wide assortment of personal computers and related products
at competitive price points. The Company's merchandising programs
feature products that provide customers with aggressive
price/performance and the convenience of one-stop shopping for their
personal computer and related needs.
. LONG-STANDING VENDOR RELATIONSHIPS. The Company has a history of strong
relationships with vendors, being among the first direct marketers
qualified by manufacturers to market systems to end users. The Company
provides its vendors with information concerning customer preferences
and an efficient channel for the advertising and distribution of their
products.
GROWTH STRATEGIES
The Company's growth strategies are to increase penetration of its existing
customer base, broaden its product offerings and expand its customer base. The
key elements of its strategies include:
. INCREASE OUTBOUND TELEMARKETING. The Company plans to increase
significantly the number of its corporate outbound account managers and
assign them to a higher percentage of the Company's customers. Outbound
account managers focus exclusively on serving specifically assigned
customers and seek to develop a close relationship with those customers
by identifying and responding to their needs for personal computers and
related products.
. EXPAND PRODUCT OFFERINGS. The Company continually evaluates personal
computers and related products focused on business users, adding new
products as they become available or in response to customer demand. The
Company is also expanding the breadth of offered products to include
items such as network servers, telecopiers and telephone equipment. It
works closely with vendors to identify and source first-to-market
product offerings at aggressive price points, and believes that
expansion of its corporate outbound marketing program will enhance its
access to such product offerings.
. TARGET CUSTOMER SEGMENTS. Through targeted mailings, the Company seeks
to expand the number of its active customers and generate additional
sales from its existing customers on a cost-effective basis. The Company
has developed specialty catalogs, as well as standard catalogs with
special cover pages, featuring product offerings designed to address the
needs of specific customer segments. The Company plans to further focus
its product mix and catalogs to better service the needs of its existing
and prospective business customers, including new product inserts
targeted to purchasers of graphics, server and networking products.
27
. DEVELOP ELECTRONIC COMMERCE CHANNEL. The Company's Internet Web-based
catalog provides detailed product descriptions, product search
capabilities and on-line order processing. The Company believes that an
increasing number of customers and potential new customers will elect to
shop electronically in the future and therefore it plans additional
investments to further improve the on-line sales capabilities, customer
service and product information and support available on its Internet
Web site.
SERVICE AND SUPPORT
Since its founding in 1982, the Company's primary objective has been to
provide products that meet the demands and needs of customers and to
supplement those products with up-to-date product information and excellent
customer service and support. The Company believes that offering its customers
superior value, through a combination of product knowledge, consistent and
reliable service and leading products at competitive prices, differentiates it
from other direct marketers and has become the foundation for developing a
broad and loyal customer base. The Company has introduced programs such as
Toll-Free Technical Support in 1982, the Everything Overnight(R) delivery
program in 1988, Money Back Guarantees in 1989, One-Minute Mail Order(R) in
1991 and its On-line Superstore in 1997.
The Company invests heavily in training programs for its service and support
personnel, with an emphasis on putting customer needs and service first.
Customer service representatives are available 24 hours a day, seven days a
week to handle orders, product information and general inquiries (including
the most frequently asked technical support questions).
The effectiveness of the Company's strategy is reflected in the recognition
accorded the Company, including the Company's receipt of PC World's "World
Class Award for Best Mail Order Company" in 1997, as voted by its readers, for
seven of the last eight years and receipt of the highest ranking of only two
direct resellers included in the first-ever ranking of the "100 Most
Influential Companies in the Computer Industry" by PC Magazine in July 1997.
Technical Support. The Company provides toll-free technical support from 9
a.m. through 5 p.m. Monday through Friday. Product support technicians assist
callers with questions concerning compatibility, installation, determination
of defects and more difficult questions of product use. The product support
technicians authorize customers to return defective or incompatible products
to either the manufacturer or to the Company for warranty service. In house
technicians are authorized for both warranty and non-warranty repair on most
major systems and hardware products.
Innovative Delivery Programs. Using the Company's customized information
system, the Company, upon receipt of customer orders, sends them to its
distribution center for processing immediately after they are credit approved.
Through its Everything Overnight(R) service, the Company guarantees that all
orders accepted up until 2:45 a.m. (until midnight on most custom-configured
systems) will be shipped for overnight delivery via Airborne Express.
MARKETING AND SALES
The Company sells its products through the direct marketing channel,
primarily to SMORGS. The Company's marketing objectives are to be the primary
supplier of personal computers and related products to its existing customers
and to expand its customer base. The Company employs multiple marketing
approaches to reach existing and prospective customers, including outbound
telemarketing, catalogs and inbound telesales, Web and print media
advertising, and specialty marketing programs. All of its marketing approaches
emphasize the Company's broad product offerings, fast delivery, customer
support, competitive pricing and multiple payment options.
28
The Company believes that its ability to establish and maintain long-term
customer relationships and to encourage repeat purchases is largely dependent
on the strength of its telemarketing personnel and programs. Because its
customers' primary contact with the Company is through its telemarketers, the
Company is committed to maintaining a qualified, knowledgeable and motivated
sales staff with its principal focus on customer service.
Outbound Telemarketing. The Company seeks to build loyal relationships with
its potential high-volume customers by assigning them to individual account
managers. The Company believes that customers respond favorably to a one-on-
one relationship with personalized, well-trained account managers. Once
established, these one-on-one relationships are maintained and enhanced
through frequent telecommunications and targeted catalogs and other marketing
materials designed to meet each customer's specific computing needs.
Account managers focus exclusively on their managed accounts and on outbound
sales calls to prospective customers. The Company generally recruits account
managers from its inbound telemarketing staff and from other sales
organizations. All account managers must successfully complete a one-month
training program, which includes instruction in the Company's product
offerings and order management systems, as well as selling skills and account
management. Thereafter, new account managers are assigned to sales teams where
they receive intensive coaching and supervision by experienced supervisors,
and periodic refresher training from the sales training staff. Additional
training and product education programs are provided continuously through
vendor supported programs. The Company pays its account managers a base annual
salary plus incentive compensation which is tied to sales volume and gross
profit dollars produced. The Company imposes specific increases in sales
targets for incentive pay. Account managers historically have significantly
increased productivity after approximately 12 months of training and
experience. At September 30, 1997, the Company employed 156 account managers,
including 86 with less than 12 months of outbound telemarketing experience
with the Company.
Catalogs and Inbound Telesales. The Company's two principal catalogs are PC
Connection(R) for the PC market and MacConnection(R) for the Mac market. The
Company publishes twelve editions of each of these catalogs annually. The
Company distributes catalogs to purchasers on its in-house mailing list as
well as to other prospective customers. It sends its two principal catalogs to
its best customers twice each month. The initial mailing each month, labeled
an "early edition," is sent simultaneously to the best customers throughout
the United States and features special offers, such as first-to-market product
offerings, highlighted on the cover. The Company also includes a catalog with
each order shipped.
In addition, the Company mails specialty catalogs or customized versions of
its catalogs to selected customers. The Company distributes specialty catalogs
to educational customers and prospects on a periodic basis. The Company also
distributes its monthly catalogs customized with special covers and inserts,
offering a wider assortment of special offers on products in specific areas
(such as graphics, server/netcom and mobile computing) or for specific
customers (such as developers). These customized catalogs are distributed to
targeted customers included in the Company's customer database using past
identification or purchase history, as well as to outside mailing lists.
Each catalog is printed with full-color photographs, detailed product
descriptions and manufacturer specifications. The catalogs are primarily
created by in-house designers and production artists on a computer-based
desktop publishing system. The in-house preparation of most portions of the
catalog expedites the production process, providing for greater flexibility
and creativity in catalog production, allowing for last-minute changes in
pricing and format, and resulting in significant cost savings. After
completion of the design and preparation, the catalogs are outsourced for
printing by commercial printers.
The Company employs inbound sales representatives to answer customer
telephone calls generated by the Company's catalog, magazine and other
advertising programs and to assist customers in purchasing decisions, process
product orders and respond to customer inquiries on order status, product
pricing and availability. In late 1995, the Company initiated programs to
increase training of inbound telemarketing personnel and to provide incentive
compensation based upon sales productivity. The Company employs a flexible
staffing model which
29
allows it to maintain excellent customer service during periods of peak demand
while maintaining an efficient cost structure. The Company regularly monitors
calls for quality assurance purposes. It has been a pioneer in using caller
identification for the instant retrieval of customer records. Employing
proprietary information systems, sales representatives can quickly access
customer records which detail purchase history and billing and shipping
information, expediting the ordering process. In addition to receiving orders
through the Company's toll-free numbers, orders are also received via fax,
mail, and electronic mail.
Advertising. The Company advertises in selected personal computer and trade
magazines, such as PC Magazine, PC World and Macworld. These advertisements
provide product descriptions, manufacturers' specifications and pricing
information, and emphasize the Company's service and support features.
Additionally, the PC Connection(R) logo and telephone number are included in
promotions by selected manufacturers. The Company also advertises its Internet
Web site through independent content providers on commercial on-line services
such as Yahoo.
www.pcconnection.com. In November 1996, the Company launched an Internet Web
site, including a complete product catalog. In July 1997, the Company began
accepting electronic orders through its Internet Web site. Product
descriptions and prices of all products are provided on-line, with full,
updated information for over 6,200 items and on screen images available for
over 1,100 items. The Company offers, and continuously updates, selected
product offerings and other special buys. The Company believes that in the
future its Internet Web site will be an important sales source and
communication tool for improving customer service.
Specialty Marketing. The Company's specialty marketing activities include
direct mail, other inbound and outbound telemarketing services, bulletin board
services, "fax on demand" services, package inserts, fax broadcasts and
electronic mail. The Company also markets call-answering and fulfillment
services to certain of its product vendors such as Iomega Corporation.
Customers. The Company currently maintains an extensive database of
customers and prospects aggregating approximately 2,000,000 names. During the
twelve months ended September 30, 1997, the Company received orders from
approximately 500,000 customers. Approximately 65% of the Company's orders in
the nine months ended September 30, 1997 and in the year ended December 31,
1996 were placed by customers who had previously purchased products from the
Company.
PRODUCTS AND MERCHANDISING
The Company continuously focuses on expanding the breadth of its product
offerings. The Company currently offers approximately 15,000 personal computer
products designed for business applications from over 1,000 manufacturers,
including hardware and peripherals, accessories, networking products and
software. The Company offers both PCs and Macs and related products. In the
nine months ended September 30, 1997, sales of PCs and related products were
approximately 77% of the Company's net sales. The Company selects the products
that it sells based upon their technology and effectiveness, market demand,
product features, quality, price, margins and warranties. As part of its
merchandising strategy, the Company also offers new types of products related
to PCs, such as digital cameras.
Computer systems/memory are the fastest growing product category,
representing 41.1% of net sales in the nine months ended September 30, 1997,
up from 25.4% and 34.8% of net sales in the years ended December 31, 1995 and
1996, respectively. The growth in system sales has been driven primarily by
increased outbound sales efforts to business customers and the aggressive
sourcing and merchandising of new computer systems lines and products.
30
The following table sets forth the Company's percentage of net sales (in
dollars) of computer systems/memory, peripherals, software, and networking and
communications products during the years ended December 31, 1995 and 1996 and
nine months ended September 30, 1997.
PERCENTAGE OF NET SALES
---------------------------------------
YEAR YEAR NINE MONTHS
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
PRODUCT CATEGORIES 1995 1996 1997
------------ ------------ -------------
Computer Systems/Memory................. 25.4% 34.8% 41.1%
Peripherals............................. 39.4% 38.0% 34.8%
Software................................ 23.4% 17.6% 16.6%
Networking and Communications........... 11.8% 9.6% 7.5%
The Company offers a limited 30-day money back guarantee for most unopened
products and selected opened products, although selected products are subject
to restocking fees. Substantially all of the products marketed by the Company
are warranted by the manufacturer. The Company generally accepts returns
directly from the customer and then either credits the customer's account or
ships the customer a similar product from the Company's inventory.
PURCHASING AND VENDOR RELATIONS
For the nine months ended September 30, 1997, the Company purchased
approximately 50% of its products directly from manufacturers and the balance
from distributors and aggregators, all of which shipped products directly to
the Company's distribution facility in Wilmington, Ohio. During the year ended
December 31, 1996 and the nine months ended September 30, 1997, product
purchases from Ingram Micro, the Company's largest vendor, accounted for
approximately 28.4% and 29.5%, respectively, of the Company's total product
purchases. No other vendor accounted for more than 10% of the Company's total
product purchases. The Company believes that alternative sources for products
obtained from Ingram Micro are available.
Many product suppliers reimburse the Company for advertisements or other
cooperative marketing programs in the Company's catalogs or Company
advertisements in personal computer magazines that feature a manufacturer's
product. Reimbursements may be in the form of discounts, advertising
allowances and/or rebates. The Company also receives reimbursements from
certain vendors based upon the volume of purchases or sales of the vendors'
products by the Company. Historically, the Company received price protection
from its vendors on a majority of the products it sold. Protection takes the
form of rebates or credits against future purchases. The Company may
participate in the future in end-of-life-cycle and other special purchases
which may not be eligible for price protection.
The Company believes that it has excellent relationships with vendors, pays
vendors within stated terms and takes advantage of all appropriate discounts.
The Company believes that because of its volume purchases it is able to obtain
product pricing and terms that are competitive with those available to other
major direct marketers. Although brand names and individual product offerings
are important to the Company's business, the Company believes that competitive
sources of supply are available in substantially all of the merchandise
categories carried by the Company.
DISTRIBUTION
At its approximately 102,000 square foot distribution and fulfillment center
in Wilmington, Ohio, the Company receives and ships inventory, configures
computer systems and processes returned products. The Company also maintains a
related 25,700 square foot warehouse for inventory in nearby Xenia, Ohio.
Orders are transmitted electronically from the Company's New Hampshire sales
facilities to its Wilmington distribution center after credit approval, where
packing documentation is printed automatically and order fulfillment takes
place. The Company guarantees that all orders accepted up until 2:45 a.m.
(until midnight on custom-configured systems) will be shipped for overnight
delivery via Airborne Express. It ships approximately 90% of its orders
through Airborne Express. Upon request, orders may also be shipped by other
common carriers.
31
The Company configures approximately half of the computer systems it sells.
Configuration typically consists of the installation of memory, accessories
and/or software.
While the Company believes that its existing distribution facilities in
Wilmington and Xenia, Ohio will be sufficient to support the Company's
anticipated needs through the next 12 months, it is evaluating additional
and/or alternative facilities for distribution and inventory to support future
growth.
MANAGEMENT INFORMATION SYSTEMS
The Company uses management information systems, principally comprised of
applications software running on IBM AS/400 and RS6000 computers and Microsoft
NT-based servers, which the Company has customized for its use. These systems
permit centralized management of key functions, including order taking and
processing, inventory and accounts receivable management, purchasing, sales
and distribution, and the preparation of daily operating control reports on
key aspects of the business. The Company also operates advanced
telecommunications equipment to support its sales and customer service
operations. Key elements of the telecommunications systems are integrated with
the Company's computer systems to provide timely customer information to sales
and service representatives, and to facilitate the preparation of operating
and performance data. The Company believes that its customized information
systems enable the Company to improve its productivity, ship customer orders
on a same-day basis, respond quickly to changes in its industry and provide
high levels of customer service.
The Company's success is dependent in large part on the accuracy and proper
use of its information systems, including its telephone systems, to manage its
inventory and accounts receivable collections, to purchase, sell and ship its
products efficiently and on a timely basis, and to maintain cost-efficient
operations. The Company expects to continually upgrade its information systems
to more effectively manage its operations and customer database, including to
be Year 2000 compliant. In that regard, it is in the process of converting to
new software for its order management and fulfillment systems designed to be
Year 2000 compliant, which is expected to be completed by the first half of
1998.
COMPETITION
The direct marketing and sale of personal computers and related products is
highly competitive. PC Connection competes with other direct marketers of
personal computers and related products, including CDW Computer Centers, Inc.,
Insight Enterprises, Inc. and Micro Warehouse, Inc. The Company also competes
with certain product manufacturers that sell directly to customers, such as
Dell Computer Corporation and Gateway 2000, Inc., and more recently Compaq,
IBM and Apple; distributors that sell directly to certain customers, such as
MicroAge, Inc. and Vanstar Corporation; various cost-plus aggregators,
franchisers, and national computer retailers, such as CompUSA, Inc. and
Computer City; and companies with an Internet Web site and commercial on-line
networks. Additional competition may arise if other new methods of
distribution, such as broadband electronic software distribution, emerge in
the future.
The Company competes not only for customers, but also for favorable product
allocations and cooperative advertising support from product manufacturers.
Several of the Company's competitors are larger and have substantially greater
financial resources than the Company.
The Company believes that price, product selection and availability, and
service and support are the most important competitive factors in its
industry.
INTELLECTUAL PROPERTY RIGHTS
The Company conducts its business under the marks PC Connection(R) and
MacConnection(R) and their related logos. Other Company trademarks and service
marks include Everything Overnight(R), One-Minute Mail Order(R), PC & Mac
Connection(R), Systems Connection(R), The Connection(R), Raccoon Character(R),
Service Connection(TM), Graphics Connection(TM), and Memory Connection(TM).
The Company intends to use and protect these
32
and its other marks, as it deems necessary. The Company believes its
trademarks and service marks have significant value and are an important
factor in the marketing of its products. The Company does not maintain a
traditional research and development group, but works closely with computer
product manufacturers and other technology developers to stay abreast of the
latest developments in computer technology, both with respect to the products
it sells and the products it uses to conduct its business.
EMPLOYEES
As of September 30, 1997, the Company employed 824 persons, of whom 378 were
engaged in sales related activities, 75 were engaged in providing customer
service and support, 188 were engaged in purchasing and distribution related
activities, 52 were engaged in the operation and development of management
information systems, and 131 were engaged in administrative and accounting
functions. The Company considers its employee relations to be good. The
Company's employees are not represented by a labor union, and it has
experienced no work stoppages since inception.
FACILITIES
The Company's principal facilities, all of which are leased, are as follows:
Approx.
Facility Location Sq. Ft. Expiration of Lease
-------- -------------- ------- -------------------
Corporate Headquarters............... Milford, NH 84,000 July 1998(1)
Sales and Service Facility........... Keene, NH 22,000 July 2008
Sales Facility....................... Hudson, NH 8,300 August 1998(2)
Conference Center.................... Marlow, NH 15,800 May 2007
Distribution Center.................. Wilmington, OH 102,000 December 2000
Distribution Facility................ Xenia, OH 25,700 September 1998(3)
- ---------------------
(1) The Company has entered into a fifteen year lease for a new corporate
headquarters which the Company plans to occupy in the summer of 1998. See
"Certain Transactions."
(2) The Company has the option to renew the lease for this facility annually
for one-year periods through August 2002.
(3) The Company has the option to renew the lease for this facility annually
for one-year periods through September 2000.
Several of these facilities are leased from affiliated entities. See
"Certain Transactions."
While the Company believes that its existing facilities in Wilmington and
Xenia, Ohio will be sufficient to support the Company's anticipated needs
through the next 12 months, it is evaluating additional and/or alternative
facilities for distribution and inventory to support future growth.
REGULATORY AND LEGAL MATTERS
The direct response business conducted by the Company is subject to the Mail
or Telephone Order Merchandise Rule and related regulations promulgated by the
Federal Trade Commission. While the Company believes it is in compliance with
such regulations, no assurance can be given that new laws or regulations will
not be enacted or adopted that might adversely affect the Company's
operations. There are no material legal proceedings pending against the
Company.
33
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
December 31, 1997 are as follows:
NAME AGE POSITION
- ---- --- --------
Patricia Gallup................ 43 Chairman of the Board, President and Chief
Executive Officer
David Hall..................... 48 Vice Chairman of the Board
Wayne L. Wilson................ 48 Senior Vice President, Chief Operating
Officer and Chief Financial Officer
Robert F. Wilkins.............. 35 Vice President of Merchandising and Product
Management
R. Wayne Roland................ 49 Vice President of Fulfillment Operations
John L. Bomba, Jr. ............ 44 Vice President of Information Systems and
Chief Information Officer
David B. Beffa-Negrini......... 44 Director
Martin C. Murrer(1)............ 40 Director
Peter J. Baxter(1)............. 46 Director
- ---------------------
(1) Member of Compensation Committee and Audit Committee.
Patricia Gallup is a co-founder of the Company and has served as Chairman of
the Board, President and Chief Executive Officer of the Company since
September 1995. From September 1994 to September 1995, Ms. Gallup served as
Chairman of the Board and Chief Executive Officer of the Company. From August
1990 to September 1994, she served as the Company's President and Chief
Executive Officer.
David Hall is a co-founder of the Company and has served as Vice Chairman of
the Board since November 1997. From June 1997 to November 1997, Mr. Hall
served as the Vice Chairman of the Board, Executive Vice President and
Treasurer of the Company. From February 1995 to June 1997, Mr. Hall served as
the Company's Vice Chairman of the Board and Executive Vice President. From
March 1991 to February 1995, he served as the Executive Vice President of the
Company.
Wayne L. Wilson has served as Senior Vice President, Chief Operating Officer
and Chief Financial Officer of the Company since January 1996. From August
1995 to January 1996, he served as Senior Vice President of Finance and Chief
Financial Officer of the Company. Prior to joining the Company, Mr. Wilson was
a partner in the accounting and consulting firm of Deloitte & Touche LLP from
June 1986 to August 1995.
Robert F. Wilkins has served as Vice President of Merchandising and Product
Management of the Company since December 1995. From September 1994 to December
1995, Mr. Wilkins was a consultant to the Company and certain of its
affiliates. From February 1990 to September 1994, Mr. Wilkins served as
President of Mac's Place.
R. Wayne Roland has served as Vice President of Fulfillment Operations of
the Company since March 1996. From June 1995 to March 1996, he was a
consultant to the Company. From July 1990 to June 1995, Mr. Roland served as
controller and then as Director of Strategic Projects for Brookstone, Inc.
John L. Bomba, Jr. has served as Vice President of Information Systems and
Chief Information Officer of the Company since May 1997. From May 1994 to
April 1997, Mr. Bomba served as Director of Worldwide Information Systems for
Micro Warehouse, Inc. Prior to May 1994, he served as Director of Professional
Services for Innovative Information Systems, Inc.
34
David B. Beffa-Negrini has served on the Company's Board of Directors since
September 1994 and as the Director of Merchandising of the Company since
January 1992.
Martin C. Murrer has served on the Company's Board of Directors since April
1995. Since January 1997, Mr. Murrer has been a managing director of
Donaldson, Lufkin & Jenrette Securities Corporation. From June 1995 to January
1997, Mr. Murrer was a Senior Vice President of Donaldson, Lufkin & Jenrette
Securities Corporation. From June 1990 to June 1995, Mr. Murrer was a Vice
President of Goldman, Sachs & Co.
Peter J. Baxter has served on the Company's Board of Directors since
September 1997. Mr. Baxter has been the President, Chief Executive Officer and
a director of CFX Corporation, a bank holding company, since January 1989.
There are no family relationships among any of the directors and executive
officers of the Company. Officers serve at the discretion of the Board of
Directors of the Company (the "Board").
COMMITTEES OF THE BOARD
The Board has established a Compensation Committee and an Audit Committee,
each comprised of Messrs. Murrer and Baxter. The Compensation Committee makes
recommendations concerning salaries and incentive compensation for employees
of and consultants to the Company and administers the Company's incentive
plans. The Audit Committee reviews the results and scope of the audit and
other services provided by the Company's independent public accountants.
COMPENSATION OF DIRECTORS
Non-employee members of the Board and Mr. Beffa-Negrini, an employee
director of the Company, receive a $15,000 annual retainer and fees of $1,000
for each Board meeting attended and $500 for each Board committee meeting
attended on a day other than the day of the Board meeting, as well as
reimbursement for all reasonable expenses incurred in attending Board and
committee meetings. Mr. Murrer has waived payment of his director's fees and
in lieu thereof the Company has established a grant program pursuant to which
a donee selected by Mr. Murrer can purchase products having a value equal to
the amount of the waived fees.
35
EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth compensation paid to
the Chief Executive Officer and each of the four other most highly compensated
individuals who served as executive officers on December 31, 1996 and who
received over $100,000 in compensation for services rendered to the Company in
all capacities during the fiscal year ended December 31, 1996 (the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
1996 ANNUAL COMPENSATION LONG-TERM
------------------------------------ COMPENSATION
AWARDS
---------------------
NAME AND OTHER ANNUAL SECURITIES UNDERLYING ALL OTHER
PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($) OPTIONS (#) COMPENSATION($)
- ------------------ --------- -------- --------------- --------------------- ---------------
Patricia Gallup ........ $240,000 -- $629,500(1) -- $2,250(3)
Chairman of the Board, 408(4)
President and Chief
Executive Officer
David Hall.............. 240,000 -- 629,500(1) -- 2,250(3)
Vice Chairman of the 696(4)
Board, Executive Vice
President and Treasurer
Wayne L. Wilson......... 230,000 70,000(2) -- 50,000 696(4)
Senior Vice President,
Chief Operating Officer
and Chief Financial
Officer
Robert F. Wilkins....... 140,000 60,385(2) -- 20,000 216(4)
Vice President of
Merchandising and
Product Management
R. Wayne Roland......... 104,167 94,800(2) -- -- 25,360(5)
Vice President of 464(4)
Fulfillment Operations
- ---------------------
(1) Represents amounts accrued or distributed for Company-related federal
income tax obligations payable by the stockholders.
(2) Includes amounts paid in 1997 to Named Executive Officer earned in 1996.
(3) Represents the Company's 401(k) profit-sharing plan matching contribution.
(4) Represents premiums paid by the Company on life insurance with policy
amounts in excess of $50,000 for the Named Executive Officer.
(5) Represents consultant fees paid between January 1, 1996 and March 1, 1996.
Employment and Severance Agreements.
In January 1998, the Company entered into employment agreements with
Patricia Gallup as Chairman of the Board, President and Chief Executive
Officer, and with David Hall as Vice Chairman of the Board. Pursuant to these
agreements, each of Ms. Gallup and Mr. Hall has agreed to perform the duties
she or he performed prior to the execution of such agreements for an annual
base salary of $300,000 for the year ending December 31, 1998. These
agreements may be terminated by the Company or by the employee at any time.
In August 1995, the Company entered into an employment agreement with Wayne
L. Wilson, pursuant to which he is currently serving as Senior Vice President,
Chief Operating Officer and Chief Financial Officer, providing for an initial
annual base salary of $230,000. In addition, the agreement provided for (i)
deferred incentive compensation up to $70,000 a year; (ii) additional
compensation up to $12,500 in each of the first two fiscal quarters of his
employment; and (iii) the grant of options to acquire 50,000 shares of Non-
Voting Common Stock under the Company's 1993 Incentive and Non-Statutory Stock
Option Plan. See "Stock Plans." Upon termination of his employment by the
Company without cause, Mr. Wilson shall be entitled to severance payments
totaling his annual base salary as of the date of the termination of his
employment.
36
In December 1995, the Company entered into an employment agreement with
Robert F. Wilkins, pursuant to which he is currently serving as Vice President
of Merchandising and Product Management. The agreement provides for an annual
base salary of $140,000 and annual incentive compensation of up to $60,000,
based upon the achievement of certain performance goals. If Mr. Wilkins is
terminated by the Company without cause, he is entitled to severance payments
equal to one-half of his annual base salary as of the date of the termination
of his employment.
In March 1997, the Company entered into a letter agreement with R. Wayne
Roland, providing for a severance payment equal to one-half of his then
applicable annual base salary if the Company terminates his employment for any
reason other than for cause. Mr. Roland currently holds the position of Vice
President of Fulfillment Operations.
Option Grants. The following table sets forth information concerning stock
options granted in the year ended December 31, 1996 to the Named Executive
Officers.
OPTION GRANTS IN FISCAL 1996
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(2)
------------------------------------------ -----------------------
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE
OPTIONS IN FISCAL PRICE EXPIRATION
NAME GRANTED (#) YEAR ($/SH) DATE(1) 0%($) 5%($) 10%($)
- ---- ----------- ---------- -------- ---------- ------- ------- -------
Patricia Gallup......... -- -- -- -- -- -- --
David Hall.............. -- -- -- -- -- -- --
Wayne L. Wilson......... 50,000 55.6 1.00 1/1/2006 200,000 325,779 518,748
Robert F. Wilkins....... 20,000 22.2 1.00 1/1/2006 80,000 130,312 207,500
R. Wayne Roland......... -- -- -- -- -- -- --
- ---------------------
(1) Options may terminate before their expiration date if the optionee's
status as an employee or consultant is terminated or upon optionee's
death.
(2) The 5% and 10% assumed annual compound rates of stock price appreciation
are mandated by the rules of the Securities and Exchange Commission and do
not represent the Company's estimated projection of future prices of its
securities. In calculating the potential realizable value the Company used
fair market value of $5.00 per share at the date of grant as determined by
the Board.
Option Exercises and Options Outstanding. The following table sets forth the
number of shares covered by both exercisable and unexercisable stock options
as of December 31, 1996 for the Named Executive Officers. Also reported are
the values for "in the money" options, which represent the positive spread
between the exercise prices of any such existing stock options and the fair
market value of the Company's Common Stock as of December 31, 1996.
37
AGGREGATE OPTION EXERCISES IN FISCAL 1996
AND DECEMBER 31, 1996 OPTION VALUES
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED OPTIONS AT IN-THE-MONEY OPTIONS AT
ON VALUE DECEMBER 31, 1996 DECEMBER 31, 1996($)(1)
EXERCISE REALIZED ------------------------- -------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------- ----------- ------------- ----------- -------------
Patricia Gallup......... -- -- -- -- -- --
David Hall.............. -- -- -- -- -- --
Wayne L. Wilson......... -- -- -- 100,000 -- 200,000
Robert F. Wilkins....... -- -- -- 40,000 -- 80,000
R. Wayne Roland......... -- -- -- -- -- --
- ---------------------
(1) Calculated by determining the difference between the fair market value of
the securities underlying the option at December 31, 1996 ($5.00 per share
as determined by the Board of Directors) and the exercise price of the
options.
STOCK PLANS
1993 Incentive and Non-Statutory Stock Option Plan.
The Company's 1993 Incentive and Non-Statutory Stock Option Plan (the "1993
Option Plan") was approved by the Board of Directors and the stockholders in
December 1993. At October 31, 1997, options to purchase a total of 799,000
shares of Company Common Stock were outstanding at a weighted average exercise
price of $3.60 per share under the 1993 Option Plan, and 1,450,000 shares of
Company Common Stock were reserved for issuance under the 1993 Option Plan.
The 1993 Option Plan provides for the grant of incentive stock options and
non-statutory stock options to employees, consultants, directors and officers.
The exercise price of all incentive stock options granted under the 1993
Option Plan must be at least equal to the fair market value per share of
Company Common Stock on the date of grant or 110% of the fair market value for
stockholders holding greater than 10% of the Company's Common Stock. The terms
of options granted under the 1993 Option Plan may not exceed ten years and
options granted to stockholders holding greater than 10% of the Voting Common
Stock may not exceed five years. In the event of termination of an optionee's
employment or consulting arrangement, options may only be exercised, to the
extent vested as of the date of termination, for a period not to exceed 30
days (180 days, in the case of termination as a result of death) following the
date of termination. Options may not be sold or transferred other than by will
or the laws of descent and distribution, and may be exercised during the life
of the optionee only by the optionee. Effective upon the consummation of the
Offering, the Company does not intend to grant any further options under the
1993 Option Plan.
1997 Stock Incentive Plan.
The Company's 1997 Stock Incentive Plan (the "1997 Stock Plan") provides for
the grant of incentive stock options, non-statutory stock options, stock
appreciation rights, performance shares and awards of restricted stock and
unrestricted stock ("Awards"). An aggregate of shares of Common Stock may
be issued pursuant to the 1997 Stock Plan (subject to adjustment for certain
changes in the Company's capitalization).
The 1997 Stock Plan is administered by the Board and the Compensation
Committee. The Board has the authority to grant Awards under the 1997 Stock
Plan and to accelerate, waive or amend certain provisions of outstanding
Awards. The Board has authorized the Compensation Committee to administer
certain aspects of the 1997 Stock Plan and has authorized the Chief Executive
Officer of the Company to grant Awards to non-executive officer employees. The
maximum number of shares represented by such Awards may not exceed shares
in the aggregate or shares to any one employee.
38
Incentive Stock Options and Nonstatutory Options. Optionees receive the
right to purchase a specified number of shares of Common Stock at some time in
the future at an option price and subject to such terms and conditions as are
specified at the time of the grant. Incentive stock options and options that
the Board or Compensation Committee intends to qualify as performance-based
compensation under Section 162(m) of the Code may not be granted at an
exercise price less than the fair market value of the Common Stock on the date
of grant (or less than 110% of the fair market value in the case of incentive
stock options granted to optionees holding 10% or more of the voting stock of
the Company). All other options may be granted at an exercise price that may
be less than, equal to or greater than the fair market value of the Common
Stock on the date of grant.
Stock Appreciation Rights and Performance Shares. A stock appreciation right
("SAR") is based on the value of Common Stock and entitles the SAR holder to
receive consideration to the extent that the fair market value on the date of
exercise of the shares of Common Stock underlying the SAR exceeds the fair
market value of the underlying shares on the date the SAR was granted. A
performance share award entitles the recipient to acquire shares of Common
Stock upon the attainment of specified performance goals.
Restricted and Unrestricted Stock. Restricted stock awards entitle
recipients to acquire shares of Common Stock, subject to the right of the
Company to repurchase all or part of such shares at their purchase price from
the recipient in the event that the conditions specified in the applicable
stock award are not satisfied prior to the end of the applicable restriction
period established for such award. The Company may also grant (or sell at a
purchase price not less than 85% of the fair market value on the date of such
sale) to participants shares of Common Stock free of any restrictions under
the 1997 Stock Plan.
All of the employees, officers, directors, consultants and advisors of the
Company who are expected to contribute to the Company's future growth and
success are eligible to participate in the 1997 Stock Plan.
Section 162(m) of the Code disallows a tax deduction to public companies for
certain compensation in excess of $1 million paid to the company's chief
executive officer or to any of the four other most highly compensated
executive officers. Certain compensation, including "performance-based
compensation," is not included in compensation subject to the $1 million
limitation. The 1997 Stock Plan limits to the maximum number of shares of
Common Stock with respect to which Awards may be granted to any employee in
any calender year. This limitation is intended to preserve the tax deductions
to the Company that might otherwise be unavailable under Section 162(m) with
respect to certain Awards.
1997 Employee Stock Purchase Plan.
The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan")
authorizes the issuance of up to an aggregate of shares of Common Stock to
participating employees. The Company will make one or more offerings ("Plan
Offerings") to employees to purchase Common Stock under the Purchase Plan.
Plan Offerings may be six months or one year in duration and will commence on
June 1 and December 1, commencing on June 1 or December 1 immediately
following the consummation of the Offering. During each Plan Offering, the
maximum number of shares which may be purchased by a participating employee is
determined on the first day of the Plan Offering period under a formula
whereby 85% of the market value of a share of Common Stock on the first day of
the Plan Offering period is divided into an amount equal to 10% of the
employee's annualized compensation (or such lower percentage as may be
established by the Compensation Committee) for the immediately preceding
period equivalent in length to the Plan Offering. An employee may elect to
have up to 10% deducted from his or her regular salary (or such lower
percentage as may be established by the Compensation Committee for this
purpose. The price at which an employee's option is exercised is the lower of
(i) 85% of the closing price of the Common Stock on the Nasdaq National Market
on the day that the Plan Offering commences or (ii) 85% of the closing price
on the Nasdaq National Market on the day that the Plan Offering terminates.
The Purchase Plan is administered by the Board and the Compensation
Committee. With certain exceptions, all eligible employees, including
directors and officers, regularly employed by the Company for at least six
months on the applicable Plan Offering commencement date are eligible to
participate in the Purchase Plan. The
39
Purchase Plan is intended to qualify as an "employee stock purchase plan" as
defined in Section 423 of the Code.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee reviews and approves compensation and benefits
for the Company's executive officers, and grants options to executive officers
under the 1997 Stock Plan. No interlocking relationship exists between any
member of the Compensation Committee and any member of any other company's
board of directors or compensation committee.
40
CERTAIN TRANSACTIONS
Since inception, the Company has been privately held by the two principal
stockholders and, in all periods described in the Prospectus, has elected to
be treated as an S Corporation for federal and applicable state tax laws. As a
result, the principal stockholders have conducted activities and acquired
properties through other entities owned directly by them rather than through
the Company and such entities have entered into transactions with the Company.
The following description is a summary of the material portions of such
transactions. Following the consummation of the Offering, all transactions
described below, other than the leases of facilities, will terminate.
LEASES
The Company currently has leases for a facility in Marlow, New Hampshire and
two facilities in Keene, New Hampshire with Gallup & Hall, a partnership
("G&H") owned solely by Patricia Gallup and David Hall, the Company's
principal stockholders. The leases for the Keene, New Hampshire facilities
expire in April 2002 and July 2008 and require annual rental payments of
$45,000 (subject to annual adjustment for changes in the consumer price index)
and $99,600, respectively. The lease for the Marlow, New Hampshire facility
expires in May 2007 and requires annual rental payments of $106,200 (subject
to adjustment every three years for changes in the consumer price index).
These leases also obligate the Company to pay certain real estate taxes and
insurance premiums on the premises. Rent expense under all such leases
aggregated $260,000, $236,000 and $236,000 for the years ended December 31,
1994, 1995 and 1996, respectively, and $176,000 and $192,000 for the nine
months ended September 30, 1996 and 1997, respectively. The Company also
leased an additional facility in Marlow, New Hampshire from an entity owned
20% by David Hall, which was terminated in 1996. Lease payments for such
facility were $44,000, $25,000, ($171,000) (net of a $200,000 lease
termination payment received by the Company) and $20,000, for the years ended
December 31, 1994, 1995 and 1996, and the nine months ended September 30,
1996, respectively.
The Company also leases several other buildings from G&H on a month-to-month
basis. Rent expense under all such leases aggregated $37,000, $37,000 and
$46,000 for the years ended December 31, 1994, 1995 and 1996, respectively,
and $35,000 and $35,000 for the nine months ended September 30, 1996 and 1997,
respectively.
In November 1997, the Company entered into a fifteen-year lease for a new
103,000 square foot corporate headquarters in Merrimack, New Hampshire with
G&H Post, L.L.C., an entity owned solely by Patricia Gallup and David Hall.
The Company expects to occupy the new facility in the summer of 1998. Annual
rental expense under the terms of the lease will be $823,000, or approximately
$8.00 per square foot, for the first five years of the lease, increasing to
$926,000 for years six through ten and to $1.0 million for years 11 through
15.
While the Company believes the terms of each of these leases are fair to the
Company, their terms were not negotiated on an arms-length basis and,
accordingly, there can be no assurance that the terms of each of the leases
are as favorable to the Company as those which could have been obtained from
independent third parties.
CERTAIN STOCKHOLDER LOANS
Prior to the Offering, Patricia Gallup and David Hall made loans to the
Company to fund working capital requirements. Such indebtedness bore interest
at 6% and was payable on demand. The maximum aggregate amount owed to Patricia
Gallup and David Hall at any time during the years ended December 31, 1994 and
1995 was $1.6 million. Such indebtedness was repaid in full during 1995.
Interest payments on such indebtedness were approximately $74,000 and $4,000
for the years ended December 31, 1994 and 1995, respectively.
TRANSFER OF PATENTS, PATENT APPLICATION RIGHTS AND RELATED PROPRIETARY
MATERIALS
During 1994, the Company transferred to Patricia Gallup and David Hall
certain patents, patent application rights and related proprietary materials
to certain technologies then under development by the Company. The
41
carrying value of these assets at the time of transfer was nil as all related
costs were expensed by the Company as incurred. Research and development costs
related to these technologies and charged to expense during the year ended
December 31, 1994 totaled approximately $1.1 million. All development
activities related to these technologies were assumed, effective January 1,
1995, by a new company organized and owned solely by Patricia Gallup and David
Hall. None of the transferred intellectual property related to the Company's
business as presently conducted or as proposed to be conducted.
OTHER TRANSACTIONS WITH AFFILIATED COMPANIES
The Company purchased administrative support services from an affiliated
company owned solely by Patricia Gallup and David Hall. Amounts paid to such
company totaled $736,000 for the year ended December 31, 1996 and $377,000 and
$671,000 for the nine months ended September 30, 1996 and 1997, respectively.
Subsequent to the Offering, the Company will not purchase any services from
such affiliate.
The Company purchased television advertising from an affiliated company
owned solely by Patricia Gallup and David Hall. Amounts paid to such company
totaled $223,000, $77,000 and $0 for the years ended December 31, 1994 , 1995
and 1996, respectively, and $492,000 for the nine months ended September 30,
1997. The Company does not expect to purchase any advertising from such
affiliate subsequent to the Offering. During 1994, the Company recorded income
from the rental of certain equipment to such affiliate of $186,000. The
Company recorded no income for the use of certain equipment from such
affiliate for the years ended December 31, 1995 and 1996 and the nine months
ended September 30, 1997. The Company also made advances of funds to such
affiliate during the year ended December 31, 1994 totalling $544,000. The
Company determined that collection of such advances was uncertain, and
recorded a $544,000 expense representing an allowance for uncollectible
receivables from affiliates during the year ended December 31, 1994. The
Company subsequently wrote off the related receivable during the year ended
December 31, 1996.
The Company also purchased services from other affiliated entities
aggregating $55,000, $3,000 and $27,000 for the years ended December 31, 1994,
1995 and 1996, respectively.
The Company provided various management-related services to entities owned
solely by Patricia Gallup and David Hall, for which the Company received
$46,000 and $78,000 during the years ended December 31, 1994 and 1995. The
Company received no payments for these services during the year ended December
31, 1996 and the nine months ended September 30, 1997. The Company does not
anticipate providing such services subsequent to the Offering.
The Company sold certain property and equipment having net book values of
$77,000, $30,000, $0 and $14,000 during the years ended December 31, 1994,
1995, 1996, and the nine months ended September 30, 1997 respectively, to
affiliated companies owned solely by Patricia Gallup and David Hall. Proceeds
received with respect to these sales totaled $102,000, $33,000, $19,000 and
$1,000 in 1994, 1995, 1996 and the nine months ended September 30, 1997,
respectively.
S CORPORATION DISTRIBUTIONS AND RELATED DIVIDEND PAYABLE
The Company has made accruals or distributions of S Corporation earnings,
accounted for as additional compensation expense, to its stockholders. Such
accruals aggregated $1.3 million for the year ended December 31, 1996 and $1.4
million and $8.6 million for the nine months ended September 30, 1996 and
1997, respectively. Subsequent to September 30, 1997, the Company expects to
declare a dividend to its stockholders representing cumulative undistributed S
Corporation earnings through the date of the closing of the Offering (at which
time the Company's election to be treated as an S Corporation will terminate).
At September 30, 1997, the amount of such cumulative undistributed S
Corporation earnings was approximately $26 million. The Company expects to pay
the dividend from the net proceeds of the Offering. See "Use of Proceeds" and
Note 12 to the Financial Statements.
42
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's voting securities as of December 31, 1997, assuming
exercise of options that are vested and would be exercisable, assuming
consummation of the Offering, within 60 days of December 31, 1997, (i) by each
person who, to the knowledge of the Company, beneficially owns more than 5% of
any class of the Company's voting securities; (ii) by each director of the
Company; (iii) by each Named Executive Officer of the Company named under
"Management--Executive Compensation--Summary Compensation Table," and (iv) by
all directors and officers of the Company as a group. The address for all
executive officers and directors is c/o PC Connection, Inc., 528 Route 13,
Milford, New Hampshire 03055.
PERCENT OWNERSHIP
SHARES -----------------------
BENEFICIALLY BEFORE THE AFTER THE
NAME OWNED(1) OFFERING OFFERING (1)
- ---- ------------ ---------- ------------
Patricia Gallup(2)....................... 4,500,000 50.0%
David Hall(3)............................ 4,500,000 50.0%
Wayne L. Wilson(4)....................... 112,500 1.2%
Robert F. Wilkins(5)..................... 65,000 *
R. Wayne Roland(6)....................... 10,000 *
David Beffa-Negrini(7)................... 175,000 1.9%
Martin C. Murrer(8)...................... 50,000 *
All executive officers and directors as a
group (nine persons).................... 9,412,500 100.0%
- ---------------------
* Less than one percent
(1) Does not reflect the Reorganization.
(2) Includes 1,125,000 shares held of record by Gallup PC Connection Stock
Trust FOB Patricia Gallup.
(3) Includes 1,125,000 shares held of record by Hall PC Connection Stock Trust
FOB David Hall.
(4) Includes 112,500 shares issuable upon exercise of stock options that are
vested and would be exercisable, assuming consummation of the Offering,
within 60 days of December 31, 1997.
(5) Includes 65,000 shares issuable upon exercise of stock options that are
vested and would be exercisable, assuming consummation of the Offering,
within 60 days of December 31, 1997.
(6) Includes 10,000 shares issuable upon exercise of stock options that are
vested and would be exercisable, assuming consummation of the Offering,
within 60 days of December 31, 1997.
(7) Includes 175,000 shares issuable upon exercise of stock options that are
vested and would be exercisable, assuming consummation of the Offering,
within 60 days of December 31, 1997.
(8) Includes 50,000 shares issuable upon exercise of stock options that are
vested and would be exercisable, assuming consummation of the Offering,
within 60 days of December 31, 1997.
43
DESCRIPTION OF CAPITAL STOCK
As of December 31, 1997 (after giving effect to the Reorganization), there
were outstanding an aggregate of shares of Company Common Stock held of
record by four stockholders.
COMMON STOCK
The Company's Amended and Restated Articles of Incorporation ("the Restated
Articles") authorize the issuance of up to shares of Company Common
Stock, $.01 par value per share. Holders of Voting Common Stock are entitled
to one vote for each share held on all matters submitted to a vote of
stockholders and do not have cumulative voting rights. Accordingly, holders of
a majority of the shares of Voting Common Stock entitled to vote in any
election of directors may elect all of the directors standing for election.
Holders of Company Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board out of funds legally
available therefore, subject to any preferential dividend rights of
outstanding shares of preferred stock. Upon the liquidation, dissolution or
winding up of the Company, the holders of Company Common Stock are entitled to
receive ratably the net assets of the Company available after the payment of
all debts and other liabilities and subject to the prior rights of any
outstanding shares of preferred stock. Holders of Company Common Stock have no
preemptive, subscription, redemption or conversion rights. The outstanding
shares of Company Common Stock are, and the shares of Common Stock offered by
the Company in the Offering will be, when issued and paid for, fully paid and
nonassessable. The rights, preferences and privileges of holders of Common
Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock which the Company may
designate and issue in the future.
PREFERRED STOCK
The Restated Articles authorize the issuance of up to 7,500,000 shares of
preferred stock, $.01 par value per share (the "Preferred Stock"). Under the
terms of the Restated Articles, the Board is authorized, subject to any
limitations prescribed by law, without stockholder approval, to issue such
shares of Preferred Stock in one or more series. Each such series of Preferred
Stock shall have such rights, preferences, privileges and restrictions,
including voting rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences, as shall be determined by the Board.
The purpose of authorizing the Board to issue Preferred Stock and determine
its rights and preferences is to eliminate delays associated with a
stockholder vote on specific issuances. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from acquiring,
a majority of the outstanding voting stock of the Company. The Company has no
present plans to issue any shares of Preferred Stock.
NEW HAMPSHIRE LAW AND CERTAIN PROVISIONS OF THE RESTATED ARTICLES AND BYLAWS
Under the Restated Articles, any vacancy on the Board, however occurring,
including a vacancy resulting from an enlargement of the Board, may only be
filled by vote of a majority of the directors then in office. The Restated
Articles also provide that any action required or permitted to be taken by the
stockholders of the Company at an annual meeting or special meeting of
stockholders may only be taken if it is properly brought before such meeting
and may not be taken by written action in lieu of a meeting. The Restated
Articles further provide that special meetings of the stockholders may only be
called by a Chairman of the Board, the Board or the holders of shares
representing at least ten percent of all the votes enabled to be cast on any
issue proposed to be considered at the special meeting. Under the Company's
Bylaws, in order for any matter to be considered "properly brought" before a
meeting, a stockholder must comply with certain requirements regarding advance
notice to the Company. The foregoing provisions could have the effect of
delaying stockholder actions which are favored by the holders of a majority of
the outstanding voting securities of the Company and may also discourage
another person or entity from making a tender offer for the Company's Common
Stock, because such
44
person or entity, even if it acquired a majority of the outstanding voting
securities of the Company, would be able to take action as a stockholder (such
as electing new directors or approving a merger) only at a duly called
stockholders meeting, and not by written consent.
The Restated Articles contain certain provisions permitted under the New
Hampshire Business Corporation Act relating to the liability of directors. The
provisions eliminate a director's liability for monetary damages for a breach
of fiduciary duty, except in certain circumstances involving wrongful acts,
such as the breach of a director's duty of loyalty or acts or omissions which
involve intentional misconduct or a knowing violation of law. Further, the
Restated Articles contain provisions to indemnify the Company's directors and
officers to the fullest extent permitted by the New Hampshire Business
Corporation Act. The Company believes that these provisions will assist the
Company in attracting and retaining qualified individuals to serve as
directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is American
Stock Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect prevailing market prices.
Upon completion of the Offering (based on shares outstanding at December 31,
1997), the Company will have outstanding an aggregate of shares of Common
Stock, assuming no exercise of the Underwriters' over-allotment option and no
exercise of outstanding options. The shares sold in the Offering will be
freely tradeable without restrictions or further registration under the
Securities Act, unless such shares are purchased by an existing "affiliate" of
the Company as that term is defined in Rule 144 under the Securities Act (an
"Affiliate"). The remaining shares of Common Stock held by existing
stockholders are "restricted securities" as that term is defined in Rule 144
under the Securities Act ("Restricted Shares"). Restricted Shares may be sold
in the public market only if registered or if they qualify for an exemption
from registration, including the exemption provided by Rule 144 promulgated
under the Securities Act, which rule is summarized below.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an Affiliate) would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately shares immediately after the
Offering); or (ii) the average weekly trading volume of the Common Stock on
the Nasdaq National Market during the four calendar weeks preceding the filing
of a notice on Form 144 with respect to such sale. Sales under Rule 144 are
also subject to certain manner of sale provisions, notice requirements and the
availability of current public information about the Company. Under Rule
144(k), a person who is not deemed to have been an Affiliate of the Company at
any time during the 90 days preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years (including the holding
period of any prior owner except an Affiliate), is entitled to sell such
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Accordingly, unless otherwise
restricted, "144(k) shares" may therefore be sold immediately upon the
completion of the Offering.
All Company officers, directors and existing stockholders and holders of
stock options exercisable within 180 days after the date of this Prospectus
have entered into agreements (the "Lock-up Agreements") pursuant to which they
have agreed not to offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, or otherwise transfer, lend
45
or dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
enter into any swap or other arrangement that transfers to another, in whole
or in part, any of the economic consequences of ownership of the Common Stock
for a period of 180 days after the date of this Prospectus, without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ"), subject to certain limited exceptions.
Following the Offering, the Company intends to file registration statements
under the Securities Act covering all shares of Common Stock subject to
outstanding options or reserved for issuance under the Company's 1993 Option
Plan, 1997 Stock Plan and 1997 Purchase Plan. See "Management--Stock Plans."
Accordingly, shares registered under such registration statements will,
subject to Rule 144 volume limitations applicable to Affiliates, be available
for sale in the open market following the expiration of the Lock-up
Agreements.
The Company has agreed not to offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, or otherwise transfer, lend or
dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock,
or enter into any swap or similar agreement that transfers, in whole or in
part, the economic risk of ownership of the Common Stock, for a period of 180
days after the date of this Prospectus, without the prior written consent of
DLJ, subject to certain limited exceptions.
46
UNDERWRITING
Subject to certain conditions contained in the Underwriting Agreement (the
"Underwriting Agreement"), the underwriters named below (the "Underwriters"),
for whom DLJ, NationsBanc Montgomery Securities, Inc. and William Blair &
Company, L.L.C. are acting as representatives (the "Representatives"), have
severally agreed to purchase from the Company the number of shares of Common
Stock that each Underwriter has agreed to purchase as set forth opposite its
name below:
UNDERWRITERS NUMBER OF SHARES
Donaldson, Lufkin & Jenrette Securities Corporation.......
NationsBanc Montgomery Securities, Inc....................
William Blair & Company, L.L.C. ..........................
----
Total.....................................................
====
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered are subject to approval of certain legal matters by counsel and
certain other conditions. If any shares of Common Stock are purchased by the
Underwriters pursuant to the Underwriting Agreement, all such shares (other
than shares covered by the over-allotment option described below) must be
purchased.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make in respect thereof.
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public at the price set
forth on the cover page of this Prospectus, and to certain dealers (who may
include the Underwriters) at such price less a concession not in excess of
$ per share. The Underwriters may allow, and such dealers may reallow,
discounts not in excess of $ per share to any other Underwriter and certain
other dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The Company and the Selling Stockholders have granted an option to the
Underwriters exercisable for 30 days after the date of this Prospectus, to
purchase up to an aggregate of additional shares of Common Stock at the
initial public offering price set forth on the cover page of this Prospectus,
net of underwriting discounts and commissions. Such option may be exercised at
any time until 30 days after the date of this Prospectus. See "Principal
Stockholders." To the extent that the Representatives exercise such option,
each of the Underwriters will be committed, subject to certain conditions, to
purchase a number of option shares proportionate to such Underwriter's initial
commitment as indicated in the preceding table.
At the Company's request, the Underwriters have reserved up to shares
for sale at the initial public offering price to certain of the Company's
employees, members of their immediate families and other individuals who are
business associates of the Company in each case as such parties have expressed
an interest in purchasing such shares. The number of shares available for sale
to the general public will be reduced to the extent these
47
individuals purchase such reserved shares. Any reserved shares not purchased
will be offered by the Underwriters to the general public on the same basis as
the other shares offered hereby.
The Company, its officers, directors, stockholders and certain employees of
the Company have agreed, subject to certain exceptions, not to directly or
indirectly sell, offer to sell, grant any option for the sale of or otherwise
dispose of any shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock, without the prior written
consent of DLJ, on behalf of the Underwriters, for a period of 180 days after
the date of this Prospectus. See "Shares Eligible for Future Sale."
Prior to the Offering, there has been no public market for the Common Stock
of the Company. The initial public offering price will be determined through
negotiations between the Company and the Representatives. Among the factors
considered in determining the initial public offering price, in addition to
prevailing market conditions, are price-earnings ratios of publicly traded
companies that the Representatives believe to be comparable to the Company,
certain financial information of the Company, the history of, and the
prospects for, the Company and the industry in which it competes, and
assessment of the Company's management, its past and present operations, the
prospects for, and timing of, future revenues of the Company, the present
state of the Company's development, and the above factors in relation to
market values and various valuation measures of other companies engaged in
activities similar to the Company. There can be no assurance that an active
trading market will develop for the Common Stock or that the Common Stock will
trade in the public market subsequent to the Offering at or above the initial
public offering price.
The Company has applied to have the Common Stock quoted on the Nasdaq
National Market under the symbol "PCCC."
The Underwriters do not intend to confirm sales of the Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
Martin C. Murrer, a managing director of DLJ, is a director of the Company.
See "Management-- Executive Officers and Directors."
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Hale and Dorr LLP, Boston,
Massachusetts. Certain legal matters in connection with the Offering will be
passed upon for the Underwriters by Latham & Watkins, New York, New York.
EXPERTS
The financial statements of the Company as of December 31, 1995 and 1996 and
September 30, 1997 and for each of the three years in the period ended
December 31, 1996 and for the nine months ended September 30, 1997, included
in this Prospectus, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include all
amendments, exhibits, schedules and supplements thereto) on Form S-1 under the
Securities Act with respect to the shares of Common Stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and
regulations of the
48
Commission, to which Registration Statement reference is hereby made.
Statements made in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference. The Registration Statement
and the exhibits thereto may be inspected and copied at prescribed rates at
the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. In addition, the Company is required to
file electronic versions to these documents with the Commission through the
Commission's Electronic Data Gathering, Analysis, and Retrieval (EDGAR)
system. The Commission maintains a World Wide Web site at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
The Company intends to distribute annual reports to its stockholders
containing audited financial statements. The Company also intends to make
available to its stockholders, within 45 days after the end of each fiscal
quarter, reports for the first three quarters of each fiscal year containing
unaudited interim financial information.
49
PC CONNECTION, INC.
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report.............................................. F-2
Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997.... F-3
Statements of Operations for the years ended December 31, 1994, 1995 and
1996 and for the nine months ended September 30, 1996 (unaudited) and
1997..................................................................... F-4
Statements of Changes in Stockholders' Equity for the years ended December
31, 1994, 1995 and 1996 and for the nine months ended September 30,
1997..................................................................... F-5
Statements of Cash Flows for the years ended December 31, 1994, 1995 and
1996 and for the nine months ended September 30, 1996 (unaudited) and
1997..................................................................... F-6
Notes to Financial Statements............................................. F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
PC Connection, Inc.:
We have audited the accompanying balance sheets of PC Connection, Inc. as of
December 31, 1995 and 1996 and September 30, 1997, and the related statements
of operations, changes in stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996 and for the nine months
ended September 30, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of PC Connection, Inc. as of December 31,
1995 and 1996 and September 30, 1997, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996 and for the nine months ended September 30, 1997, in conformity with
generally accepted accounting principles.
Deloitte & Touche llp
Boston, Massachusetts
November 4, 1997
(December 29, 1997 as to the third through eighth paragraphs of Note 12)
F-2
PC CONNECTION, INC.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, PRO FORMA
--------------- SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997
ASSETS ------- ------- ------------- -------------
(UNAUDITED)
Current Assets:
Cash............................. $ 674 $ 162 $ 723 $ 723
Accounts receivable, net......... 16,096 21,043 24,541 24,541
Inventories--merchandise......... 22,262 44,419 60,745 60,745
Prepaid expenses and other
current assets.................. 2,520 1,943 1,237 4,283
------- ------- ------- -------
Total current assets........... 41,552 67,567 87,246 90,292
Property and equipment, net........ 7,063 7,671 8,303 8,303
Deferred income taxes.............. -- -- -- 1,179
------- ------- ------- -------
Total.......................... $48,615 $75,238 $95,549 $99,774
======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities:
Short-term borrowings............ $ 4,933 $12,307 $ 8,130 $ 8,130
Current maturities of long-term
debt............................ -- 750 1,250 1,250
Dividend payable................. -- -- -- 26,000
Amounts payable to stockholders.. -- -- 2,958 2,958
Accounts payable................. 22,140 36,568 53,711 53,711
Accrued expenses and other
liabilities..................... 3,485 3,320 4,720 6,445
------- ------- ------- -------
Total current liabilities...... 30,558 52,945 70,769 98,494
Term Loan, less current maturities
.................................. 5,000 4,250 3,500 3,500
------- ------- ------- -------
Total liabilities.............. 35,558 57,195 74,269 101,994
------- ------- ------- -------
Commitments and Contingencies (Note
10)
Stockholders' Equity (Deficiency):
Common stock:
Series A Non-Voting, $.01 par
value, 7,500,000 shares
authorized, 6,750,000 shares
issued and outstanding in 1995,
1996 and 1997................... 68 68 68 68
Series B Voting, $.01 par value,
2,500,000 shares authorized,
2,250,000 shares issued and
outstanding in 1995, 1996 and
1997............................ 22 22 22 22
Additional paid-in capital
(deficiency).................... 3,022 3,252 4,037 (2,310)
Retained earnings................ 9,945 14,701 17,153 --
------- ------- ------- -------
Total stockholders' equity
(deficiency).................. 13,057 18,043 21,280 (2,220)
------- ------- ------- -------
Total.......................... $48,615 $75,238 $95,549 $99,774
======= ======= ======= =======
See notes to financial statements.
F-3
PC CONNECTION, INC.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------ ----------------------
1994 1995 1996 1996 1997
-------- -------- ---------- ----------- ----------
(UNAUDITED)
Net sales............... $196,659 $252,217 $ 333,322 $225,074 $ 383,460
Cost of sales........... 165,957 211,299 282,117 189,644 330,008
-------- -------- ---------- -------- ----------
Gross profit.......... 30,702 40,918 51,205 35,430 53,452
Selling, general and
administrative
expenses............... 32,653 38,373 43,739 31,005 40,965
-------- -------- ---------- -------- ----------
Income (loss) from
operations........... (1,951) 2,545 7,466 4,425 12,487
Interest expense........ (594) (1,296) (1,269) (803) (933)
Other, net.............. 80 62 70 20 (43)
Income taxes............ 124 (38) (252) (134) (429)
Additional
stockholder/officer
compensation........... -- -- (1,259) (1,407) (8,630)
-------- -------- ---------- -------- ----------
Net income (loss)..... $ (2,341) $ 1,273 $ 4,756 $ 2,101 $ 2,452
======== ======== ========== ======== ==========
Pro forma data:
Historical income
before income taxes.. $ 5,008 $ 2,881
Pro forma other
adjustments.......... 1,139 8,540
---------- ----------
Pro forma income
before income taxes
..................... 6,147 11,421
Pro forma income
taxes................ 2,397 4,454
---------- ----------
Pro forma net income.. $ 3,750 $ 6,967
========== ==========
Pro forma net income
per common share..... $ 0.35 $ 0.66
========== ==========
Pro forma weighted
average common shares
outstanding.......... 10,597,141 10,595,625
========== ==========
See notes to financial statements.
F-4
PC CONNECTION, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
NO PAR
SERIES A SERIES B VALUE ADDITIONAL
COMMON COMMON COMMON PAID-IN RETAINED
STOCK STOCK STOCK CAPITAL EARNINGS TOTAL
-------- -------- ------ ---------- -------- -------
Balance, January 1,
1994................... $-- $-- $ 299 $2,390 $11,013 $13,702
Net loss................ -- -- -- -- (2,341) (2,341)
Compensation under non-
statutory stock option
agreements............. -- -- -- 325 -- 325
---- ---- ----- ------ ------- -------
Balance, December 31,
1994................... -- -- 299 2,715 8,672 11,686
---- ---- ----- ------ ------- -------
Recapitalization........ 68 22 (299) 209 -- --
Net income.............. -- -- -- -- 1,273 1,273
Compensation under non-
statutory stock option
agreements............. -- -- -- 98 -- 98
---- ---- ----- ------ ------- -------
Balance, December 31,
1995................... 68 22 -- 3,022 9,945 13,057
---- ---- ----- ------ ------- -------
Net income.............. -- -- -- -- 4,756 4,756
Compensation under non-
statutory stock option
agreements............. -- -- -- 230 -- 230
---- ---- ----- ------ ------- -------
Balance, December 31,
1996................... 68 22 -- 3,252 14,701 18,043
---- ---- ----- ------ ------- -------
Net income.............. -- -- -- -- 2,452 2,452
Compensation under non-
statutory stock option
agreements............. -- -- -- 785 -- 785
---- ---- ----- ------ ------- -------
Balance, September 30,
1997................... $ 68 $ 22 $ -- $4,037 $17,153 $21,280
==== ==== ===== ====== ======= =======
See notes to financial statements.
F-5
PC CONNECTION, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- --------------------
1994 1995 1996 1996 1997
-------- -------- -------- ----------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)......... $ (2,341) $ 1,273 $ 4,756 $ 2,101 $ 2,452
Adjustments to reconcile
net income to net cash
provided by (used for)
operating activities:
Depreciation and
amortization........... 2,143 2,795 2,815 1,976 2,713
Deferred state income
taxes.................. (169) (100) 48 -- (53)
Compensation under
nonstatutory stock
option agreements...... 325 98 230 162 785
Provision for doubtful
accounts............... 580 997 1,297 900 1,577
Gain (loss) on sales of
assets................. (22) (37) (53) -- 54
Changes in assets and
liabilities:
Accounts receivable..... (2,685) (5,840) (6,244) (1,437) (5,075)
Inventories --
merchandise............ (8,494) 7,993 (22,157) (12,254) (16,326)
Prepaid expenses and
other current assets... (974) (479) 529 1,063 759
Accounts payable........ 16,836 (10,501) 14,428 3,544 17,143
Amounts payable to
stockholders........... -- -- -- -- 2,958
Accrued expenses and
other liabilities...... 577 1,007 (165) 579 1,400
-------- -------- -------- ------- --------
Net cash provided by
(used for)
operating
activities......... 5,776 (2,794) (4,516) (3,366) 8,387
-------- -------- -------- ------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and
equipment................ (4,875) (945) (3,433) (2,036) (3,421)
Proceeds from sale of
property and equipment... 112 40 63 -- 22
-------- -------- -------- ------- --------
Net cash used for
investing
activities......... (4,763) (905) (3,370) (2,036) (3,399)
-------- -------- -------- ------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from short-term
borrowings............... 45,356 64,882 84,484 56,560 112,476
Repayment of short-term
borrowings............... (45,142) (65,482) (77,110) (51,308) (116,653)
Proceeds from (repayment
of) term loan............ -- 5,000 -- -- (250)
Repayment of notes
payable-- stockholders... (1,013) (573) -- -- --
-------- -------- -------- ------- --------
Net cash provided by
(used for)
financing
activities......... (799) 3,827 7,374 5,252 (4,427)
-------- -------- -------- ------- --------
Increase (decrease) in
cash..................... 214 128 (512) (150) 561
Cash, beginning of
period................... 332 546 674 674 162
-------- -------- -------- ------- --------
Cash, end of period....... $ 546 $ 674 $ 162 $ 524 $ 723
======== ======== ======== ======= ========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Interest paid............. $ 547 $ 1,197 $ 1,247 $ 782 $ 1,021
Income taxes paid......... 84 31 96 51 175
See notes to financial statements.
F-6
PC CONNECTION, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996, IS
UNAUDITED) (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PC Connection, Inc. (the "Company") is one of the leading direct marketers
of brand-name personal computers and related peripherals, software, and
networking products to business, education, government, and consumer end users
located primarily in the United States. The following is a summary of
significant accounting policies.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the amounts reported in
the accompanying financial statements. Actual results could differ from those
estimates.
Interim Results for the Nine Months Ended September 30, 1996 (unaudited)
In the opinion of management, the accompanying unaudited interim financial
statements for the nine months ended September 30, 1996 have been prepared on
the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position, results of operations and cash
flows for the interim period.
Revenue Recognition
Revenue on product sales is recognized at the time of shipment. A reserve
for product returns is established based upon historical trends.
Inventories--Merchandise
Inventories (all finished goods) consisting of software packages, computer
systems and peripheral equipment, are stated at cost (determined under the
first-in, first-out method) or market, whichever is lower.
Changes in the inventory reserve consisted of the following:
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- ------------------
1994 1995 1996 1996 1997
------- -------- -------- -------- --------
Beginning reserve............. $150 $ 800 $1,056 $1,056 $1,705
Current period provision,
charged to cost of sales..... 720 745 1,508 873 2,745
Inventory write-offs, net..... (70) (489) (859) (538) (2,765)
------ -------- -------- -------- --------
Ending reserve................ $800 $1,056 $1,705 $1,391 $1,685
====== ======== ======== ======== ========
Advertising Costs and Revenues
Costs of producing and distributing catalogs are deferred and charged to
expense over the period that each catalog remains the most current selling
vehicle (generally one to two months). Other advertising costs are expensed as
incurred. Vendors have the ability to place advertisements in the catalogs for
which the Company receives advertising allowances and incentives. These
revenues are recognized on the same basis as the catalog costs.
Advertising costs charged to expense were $15,808, $19,411, $19,878, $13,142
and $19,519 for the years ended December 31, 1994, 1995 and 1996 and for the
nine months ended September 30, 1996 and 1997,
F-7
PC CONNECTION, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
respectively. Advertising costs of $698 and $698 were deferred and are included
in prepaid expenses and other current assets at December 31, 1995 and 1996,
respectively. Deferred advertising revenues at September 30, 1997 exceeded
deferred advertising costs of $686 and, accordingly, such deferred costs are
included in accrued expenses and other liabilities.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided for both
financial and income tax reporting purposes over the estimated useful lives of
the assets ranging from 3 to 7 years. For property acquired prior to 1996,
depreciation was provided using accelerated methods. On January 1, 1996, the
Company changed its accounting policy to provide depreciation on all property
and equipment acquired after that date using the straight-line method. The
effect of this change in accounting policy was to increase 1996 income before
income taxes by approximately $330 ($.03 per share, on a pro forma basis).
Amortization of leasehold improvements is provided for by the straight-line
method for both financial and income tax reporting purposes. For financial
reporting purposes, leasehold improvements are amortized over the terms of the
related leases or their useful lives, whichever is shorter, whereas for income
tax reporting purposes, they are amortized over the applicable tax lives. The
Company periodically evaluates the carrying value of property and equipment
based upon current and anticipated net income and undiscounted cash flows, and
recognizes an impairment when it is probable that such estimated future net
income and/or cash flows will be less than the asset carrying value.
Tax Status and Income Taxes
The stockholders of the Company have elected S Corporation tax status. As a
result of this election, the taxable income of the Company is reported in the
individual federal income tax returns of the stockholders, and no provision for
federal income taxes is included in the accompanying financial statements.
The Company and certain of its affiliates (entities under common control)
file their New Hampshire business profits tax returns on a unitary basis. Each
company calculates its tax provision on a separate company basis as if it filed
a separate tax return.
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future,
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income taxes comprise the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
Effective with the closing of the Company's proposed initial public offering
("the Offering," see Note 12), the Company's S Corporation election will
automatically be terminated, and the Company will be subject to federal and
state income taxes as a C Corporation from that date forward.
Additional Stockholder/Officer Compensation
Additional stockholder/officer compensation represents amounts accrued or
distributed in excess of aggregate annual base salaries approved by the Board
of Directors and generally represents Company-related federal income tax
obligations payable by the stockholders.
Fair Value of Financial Instruments
The fair value of the Company's financial instruments, consisting of accounts
receivable, accounts payable and bank borrowings, approximates carrying value.
F-8
PC CONNECTION, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Concentration of Credit Risk
Concentrations of credit risk with respect to trade account receivables are
limited due to the large number of customers comprising the Company's customer
base. Ongoing credit evaluations of customer's financial condition are
performed.
Stock-Based Compensation
Compensation expense associated with awards of stock or options to employees
is measured using the intrinsic value method in accordance with APB Opinion No.
25. The Company's Board of Directors estimates fair value using market
valuations of comparable publicly traded companies.
Recent Pronouncements of the Financial Accounting Standards Board
Recent pronouncements of the Financial Accounting Standards Board ("FASB"),
which are not required to be adopted at September 30, 1997, include the
following Statements of Financial Accounting Standards ("SFAS"):
SFAS No. 128, "Earnings Per Share," which will be required to be adopted
by the Company for the fiscal year ending December 31, 1997, specifies the
computation, presentation, and disclosure requirements for earning per
share for entities with publicly-held common stock. This new accounting
standard will require presentation of basic earnings per share and diluted
earnings per share. The effect of adopting this standard would be to report
pro forma basic net income per share of $0.38 and $0.71, and pro forma
diluted net income per share of $0.36 and $0.68, for the year ended
December 31, 1996 and the nine months ended September 30, 1997,
respectively.
SFAS No. 129, "Disclosure of Information about Capital Structure," which
will be effective for the Company for the year ending December 31, 1997,
consolidates existing disclosure requirements. This new standard contains
no change in disclosure requirements for the Company.
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive income (all changes in equity during
a period except those resulting from investments by and distributions to
owners) and its components in the financial statements. This new standard,
which will be effective for the Company for the year ending December 31,
1998, is not currently anticipated to have a significant impact on the
Company's financial statements based on the current financial structure and
operations of the Company.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," which will be effective for the Company for the year ending
December 31, 1998, establishes standards for reporting information about
operating segments in the annual financial statements, selected information
about operating segments in interim financial reports and disclosures about
products and services, geographic areas and major customers. This new
standard 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 financial statements
than is currently required and provided. The Company has not yet determined
the effect, if any, of implementing SFAS No. 131 on its reporting of
financial information.
2. PRO FORMA INFORMATION
Results of Operations
The following pro forma adjustments have been made to the historical results
of operations to make the presentation comparable to what would have been
reported had the Company operated as a C Corporation:
(i) Elimination of stockholder/officer compensation expense in excess of
aggregate annual base salaries of $600 to be in effect during 1998 in
accordance with employment agreements; and
F-9
PC CONNECTION, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ii) Computation of income tax expense assuming an effective tax rate of
39% (see Note 8) and after adjusting stockholder/officer compensation
expense described in (i) above.
Pro forma net income per share is based upon the weighted average number of
common and common equivalent shares outstanding. The pro forma weighted average
number of common shares outstanding assumes that all stock options granted in
January 1997, February 1997 and July 1997 were outstanding for all periods
presented. Common equivalent shares are not included in the per share
calculations where the effect of their inclusion would be anti-dilutive, except
in accordance with Securities and Exchange Commission Staff Accounting Bulletin
No. 83. The Bulletin requires that all common shares issued and options to
purchase shares of common stock granted by the Company during the twelve-month
period prior to filing of a proposed initial public offering be included in the
calculation as if they were outstanding for all periods. The pro forma weighted
average number of common shares outstanding for 1996 and for the nine months
ended September 30, 1997 also assumes that shares required to pay the
stockholder dividend totalling approximately $26,000 (assuming a price per
share equal to the mid-point of the expected filing range of the Offering) were
outstanding for all of 1996 and for the nine months ended September 30, 1997.
Pro forma supplemental net income per share of $ 0.39 and $0.65 for 1996 and
the nine months ended September 30, 1997, respectively, assumes that the net
proceeds from the Offering, after payment of the $26,000 stockholder dividend,
are used to retire debt.
Financial Position (unaudited)
The following pro forma adjustments have been made to the historical balance
sheet to make the presentation comparable to what would have been reported had
the Company operated as a C Corporation:
(i) Declaration of a stockholder dividend of approximately $26,000
representing cumulative undistributed S Corporation earnings through
September 30, 1997 (see Note 12); and
(ii) Establishment of net deferred income tax assets of approximately
$2,500 resulting from the termination of the Company's S Corporation
status.
3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
DECEMBER 31, SEPTEMBER 30,
---------------- -------------
1995 1996 1997
------- ------- -------------
Trade........................................ $10,334 $16,125 $24,889
Co-op advertising............................ 3,922 3,880 3,028
Vendor returns, rebates and other............ 4,010 5,309 4,198
------- ------- -------
Total.................................... 18,266 25,314 32,115
Less allowances for:
Sales returns.............................. (1,250) (2,650) (3,800)
Doubtful accounts.......................... (920) (1,621) (3,774)
------- ------- -------
Accounts receivable, net..................... $16,096 $21,043 $24,541
======= ======= =======
Changes in the allowance for sales returns consisted of the following:
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- -------------
1994 1995 1996 1996 1997
------ ------ ------ ------ ------
Allowance for Sales Returns
Beginning balance..................... $ 800 $1,250 $1,250 $1,250 $2,650
Net adjustments, charged to sales
returns.............................. 450 -- 1,400 150 1,150
------ ------ ------ ------ ------
Ending balance........................ $1,250 $1,250 $2,650 $1,400 $3,800
====== ====== ====== ====== ======
F-10
PC CONNECTION, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Changes in the allowance for doubtful accounts consisted of the following:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- -------------------
1994 1995 1996 1996 1997
---- ------- ------- -------- ---------
Allowance for Doubtful
Accounts:
Beginning balance............ $610 $ 894 $ 920 $ 920 $ 1,621
Provision for doubtful
accounts charged to
expense..................... 580 997 1,297 900 1,577
Provision charged to other
operating accounts (i.e.,
cost of sales,
advertising)................ 479 525 456 455 2,298
Write-off of uncollectible
accounts.................... (775) (1,496) (1,052) (577) (1,722)
---- ------- ------- -------- ---------
Ending balance............... $894 $ 920 $ 1,621 $ 1,698 $ 3,774
==== ======= ======= ======== =========
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
DECEMBER 31, SEPTEMBER 30,
------------------ -------------
1995 1996 1997
-------- -------- -------------
Leasehold improvements................... $ 4,326 $ 4,093 $ 3,764
Furniture and equipment.................. 15,762 18,087 20,191
Software licenses........................ 1,007 1,060 1,415
Automobiles.............................. 271 278 175
-------- -------- --------
Total.................................. 21,366 23,518 25,545
Less accumulated depreciation and amorti-
zation.................................. (14,303) (15,847) (17,242)
-------- -------- --------
Property and equipment, net.............. $ 7,063 $ 7,671 $ 8,303
======== ======== ========
5. BANK BORROWINGS
At September 30, 1997, the Company had a revolving credit agreement with a
bank providing for short-term borrowings equal to the lesser of $30,000 or an
amount determined by a formula based on accounts receivable and inventory
balances, and a term loan for $5,000, due in quarterly installments of $250
through March 31, 2002. Short-term borrowings were collateralized by all
accounts receivable and inventories (other than inventories pledged to secure
trade credit arrangements) and bear interest at the prime rate plus 0.5% (8.5%
at September 30, 1997). The term loan is collateralized by all other assets of
the Company and bears interest at the prime rate plus 1.0% (9.0% at September
30, 1997). The revolving credit agreement includes various customary financial
and operating covenants, including working capital requirements, debt-to-net-
worth ratios, minimum net income requirements and restrictions on the payment
of dividends, except for distributions in respect of income taxes, none of
which, in the opinion of management, significantly restricts the Company's
operations.
Certain information with respect to short-term borrowings was as follows:
WEIGHTED AVERAGE MAXIMUM AMOUNT AVERAGE AMOUNT
INTEREST RATE OUTSTANDING OUTSTANDING
---------------- -------------- --------------
Year ended December 31,
1994...................... 7.9% $11,349 $6,215
1995...................... 10.0% 12,000 9,613
1996...................... 9.0% 18,999 7,921
Nine months ended September
30,
1996...................... 9.0% 10,543 5,816
1997...................... 8.6% 16,770 7,929
F-11
PC CONNECTION, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. TRADE CREDIT ARRANGEMENTS
At September 30, 1997, the Company had security agreements with two
financial institutions to facilitate the purchase of inventory from various
suppliers under certain terms and conditions. The agreements allow a
collateralized position in inventory financed by the financial institutions up
to an aggregate amount of $24,900 (with seasonal increases to $37,350 from
October 22, 1997 through January 31, 1998). The cost of such financing under
these agreements is borne by the suppliers. At September 30, 1997, accounts
payable included $10,572 owed to these financial institutions.
7. STOCKHOLDERS' EQUITY
Common Stock
On March 28, 1995, the Company amended its Articles of Incorporation to
change the par value of its stock to $.01 per share. Additionally, the Company
reclassified the 10,000,000 authorized shares of common stock to 7,500,000
shares of Series A Non-Voting Common Stock, par value $.01 per share, and
2,500,000 shares of Series B Voting Common Stock, par value $.01 per share,
with one vote per share.
1993 Incentive and Non-Statutory Stock Option Plan
In December 1993, the Board of Directors adopted and the stockholders
approved the 1993 Incentive and Non-Statutory Stock Option Plan (the "Plan").
Under the terms of the Plan, the Company is authorized to make awards of
restricted stock and to grant incentive and non-statutory options to employees
of, and consultants and advisors to, the Company to purchase shares of the
Company's common stock. A total of 1,450,000 shares of the Company's common
stock may be issued upon exercise of options granted or awards made under the
Plan. Options vest over varying periods up to four years and are restricted as
to exercise except upon the occurrence of certain events, including an initial
public offering of the Company's common stock (see Note 12). All restrictions
on options expire no more than seven years from the date of grant.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, compensation expense
for options awarded under the Plan in 1994, 1995, 1996, and the nine months
ended September 30, 1996 and 1997, has been recognized using the intrinsic
value method. The effect of recording compensation expense under the
provisions of SFAS No. 123 would have had no effect on unaudited pro forma net
income per share in any of the periods presented.
Information regarding the Plan is as follows:
WEIGHTED
AVERAGE WEIGHTED
OPTION EXERCISE AVERAGE
SHARES PRICE FAIR VALUE
-------- -------- ----------
Outstanding, January 1, 1994................... --
Granted...................................... 560,000 $2.86 $5.62
--------
Outstanding, December 31, 1994................. 560,000 2.86
Granted...................................... 240,000 3.98 2.38
Forfeited.................................... (300,000) 3.17
--------
Outstanding, December 31, 1995................. 500,000 3.21
Granted...................................... 90,000 1.89 3.76
Forfeited.................................... (140,000) 4.71
--------
Outstanding, December 31, 1996................. 450,000 2.48
Granted...................................... 349,000 5.05 3.35
--------
Outstanding, September 30, 1997................ 799,000 3.60
========
F-12
PC CONNECTION, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At September 30, 1997, no options were exercisable under the Plan. The
following table summarizes the status of outstanding stock options as of
September 30, 1997:
WEIGHTED-
AVERAGE
OPTIONS REMAINING
EXERCISE PRICE OUTSTANDING LIFE (YEARS)
-------------- ----------- ------------
$1.00 427,500 6.8
$5.00 135,000 9.2
$7.50 236,500 9.1
The fair value of options at the date of grant was estimated using the
minimum value method. Risk-free interest rates and expected lives of option
grants used in applying this pricing model were 6% and seven years,
respectively, in 1994, 1995, 1996 and the nine months ended September 30,
1997.
The minimum value pricing method was designed to value readily tradable
stock options with relatively short lives. The options granted to employees
are not tradable and have contractual lives of up to ten years. Management
believes that the assumptions used and the model applied to value the awards
yields a reasonable estimate of the fair value of the grants made under the
circumstances, given the alternatives available under SFAS No. 123.
Aggregate compensation expense, related to options granted at exercise
prices less than fair value on the dates of grant, is being charged to expense
ratably over seven years from the dates of grant (see Note 12). Compensation
expense charged to operations totaled $325, $98, $230, $162, and $785 in 1994,
1995, 1996, and the nine months ended September 30, 1996 and 1997,
respectively (net of expense reversals related to forfeitures by terminated
employees aggregating $139 and $49 in 1995 and 1996, respectively).
8. INCOME TAXES
The provision (benefit) for income taxes was ($124), $38 and $252 for the
years ended December 31, 1994, 1995 and 1996, respectively, and $134 and $429
for the nine months ended September 30, 1996 and 1997, respectively. These
provisions are based on the state income tax obligations of the Company as an
S Corporation. Certain items of income are recognized in different years for
financial reporting and income tax purposes, and the Company has recorded
deferred tax assets for the state income tax effect of these differences.
Deferred tax assets were $269, $221 and $274 at December 31, 1995 and 1996 and
September 30, 1997, respectively, and were included in prepaid expenses and
other current assets.
Effective with the closing of the Company's proposed initial public offering
(see Note 12), the Company's S Corporation election will automatically be
terminated and the Company will then record the provision for income taxes as
a C Corporation. The provision (benefit) for income taxes on a pro forma basis
consisted of the following:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
Currently payable:
Federal............................... $2,988 $5,360
State................................. 349 625
------ ------
3,337 5,985
------ ------
Deferred:
Federal............................... (842) (1,372)
State................................. (98) (159)
------ ------
(940) (1,531)
------ ------
$2,397 $4,454
====== ======
F-13
PC CONNECTION, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The components of the pro forma net deferred tax asset are as follows:
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -----------------
Provisions for bad debts.................... $ 632 $ 1,472
Inventory costs capitalized for tax
purposes................................... 371 503
Inventory reserve........................... 471 879
Accumulated depreciation.................... 379 618
Compensation under non-statutory stock
option agreements.......................... 255 561
Deductible expenses, primarily employee-
benefit related............................ 369 466
Additional stockholder/officer
compensation............................... 491 --
Other liabilities........................... (1,635) (1,725)
------- -------
Deferred tax asset--net..................... $ 1,333 $ 2,774
======= =======
The reconciliation of the Company's pro forma income tax provision to the
statutory federal tax rate is as follows:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -----------------
Statutory tax rate.......................... 35.0% 35.0%
State income taxes, net of federal benefit.. 2.6 2.6
Nondeductible expenses...................... 0.2 0.2
Other--net.................................. 1.2 1.2
------- -------
Effective income tax rate................... 39.0% 39.0%
======= =======
As of September 30, 1997, the Company had no net operating loss carry
forwards or other tax benefits available to offset future taxable income.
9. EMPLOYEE BENEFIT PLANS
The Company has a contributory profit-sharing plan covering all qualified
employees. No contributions to the profit-sharing plan were made in 1994,
1995, 1996, or the nine months ended September 30, 1997 by the Company. The
Company made matching contributions to an employee savings plan of
approximately $103, $102, $177, $143, and $148 in 1994, 1995, 1996, and the
nine months ended September 30, 1996 and 1997, respectively.
10. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases certain office facilities from its principal stockholders
under 20-year noncancelable operating leases. The lease agreement for one
facility requires the Company to pay all real estate taxes and insurance
premiums related thereto. The Company also leases several other buildings from
the its principal stockholders on a month-to-month basis.
In addition, the Company leases office and warehouse facilities from
unrelated parties with remaining terms of one to four years.
F-14
PC CONNECTION, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Future aggregate minimum annual lease payments under these leases at
September 30, 1997 are as follows:
YEAR ENDING DECEMBER 31 RELATED PARTIES OTHERS TOTAL
----------------------- --------------- ------ ------
1997 (3 months)............................... $ 63 $ 264 $ 327
1998.......................................... 251 774 1,025
1999.......................................... 251 447 698
2000.......................................... 251 447 698
2001.......................................... 251 -- 251
2002 and thereafter........................... 1,238 -- 1,238
------ ------ ------
$2,305 $1,932 $4,237
====== ====== ======
Total rent expense aggregated $852, $1,072, $1,057, $889, and $1,029 for the
years ended December 31, 1994, 1995, 1996, and the nine months ended September
30, 1996 and 1997, respectively, under the terms of the leases described
above. Such amounts included $341, $298, $111 (net of a $200 lease termination
payment received), $231 and $227 in 1994, 1995, 1996, and the nine months
ended September 30, 1996 and 1997, respectively, paid to related parties.
Contingencies
The Company is subject to various legal proceedings and claims which have
arisen during the ordinary course of business. In the opinion of management,
the outcome of such matters will not have a material effect on the Company's
financial position, results of operations and cash flows.
11. OTHER RELATED-PARTY TRANSACTIONS
Other related-party transactions include the transactions summarized below.
Related parties consist primarily of affiliated companies related to the
Company through common ownership.
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
---------------- --------------
1994 1995 1996 1996 1997
---- ---- ---- ------ -------
Revenue:
Provision of management and other
services to various affiliated
companies.............................. $49 $78 $-- $ -- $ --
Sales of various products............... 39 48 37 25 9
Rental of property and equipment to
affiliated company..................... 186 -- -- -- --
Sales of property and equipment:
Net book value........................ (77) (30) -- -- (14)
Proceeds.............................. 102 33 19 -- 1
Costs:
Purchase of services from affiliated
companies.............................. 278 80 763 377 1,163
Interest paid to stockholders........... 74 4 -- -- --
During 1994, the Company transferred to its stockholders certain patents,
patent application rights and related proprietary materials related to certain
technologies then under development by the Company. The carrying value of
these assets at the time of transfer was nil as all related costs had been
expensed as incurred. Research and development costs related to these
activities and expensed by the Company during the year ended December 31,
1994, aggregated approximately $1,065. All development activities related to
these technologies
F-15
PC CONNECTION, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
were assumed, effective January 1, 1995, by a new affiliate organized by the
Company's stockholders. The Company did not incur any research and development
costs during the years ended December 31, 1995 and 1996 and the nine months
ended September 30, 1996 and 1997.
12. SUBSEQUENT EVENTS
Initial Public Offering (unaudited)
The Company is pursuing an initial public offering of its common stock. The
Company plans to use a portion of the net proceeds of the Offering to repay
certain of the Company's bank borrowings under its revolving credit agreement
and term note payable (Note 5) and to make a distribution to current
stockholders in an amount equal to the Company's cumulative undistributed tax
basis S Corporation retained earnings at the closing date of the Offering. Had
the closing date of the Offering occurred on September 30, 1997, the dividend
payable to the stockholders would have been approximately $26,000. Such
dividend payable has been reflected in the pro forma balance sheet as of
September 30, 1997.
Recapitalization of the Company (unaudited)
The Company expects to amend and restate its Articles of Incorporation
immediately prior to the consummation of the Offering. Pursuant to this
amendment, the Company will convert all of the issued and outstanding shares of
Series A Non-Voting Common Stock, $.01 par value per share, and Series B Voting
Common Stock, $.01 par value per share, into shares of a single series of
voting Common Stock, $.01 par value.
Amendment of Revolving Credit Agreement
As of November 19, 1997, the Company and its banks amended its revolving
credit agreement to increase the maximum level of borrowings under the
agreement from $30,000 to $45,000 and to reduce the interest rate on borrowings
under both loans to the prime rate.
Operating Lease Commitment
In November 1997, the Company entered into a fifteen-year operating lease for
a new corporate headquarters with an affiliated company related to the Company
through common ownership. The Company expects to occupy the facility in the
Summer of 1998, and the lease will be effective upon the date of occupancy.
Annual rent expense under the terms of the lease, as amended on December 29,
1997, will be approximately $823 for the first five years of the lease,
increasing to $926 for years six through ten and $1,000 for years eleven
through fifteen.
Compensation Under Non-Statutory Stock Option Agreements
Upon consummation of the Offering, certain restrictions as to the exercise of
options granted under the Company's 1993 Incentive and Non-Statutory Stock
Option Plan will expire. The Company is currently recording compensation
expense for certain options granted at prices less than their fair value
ratably over seven years from the dates granted, since such options are not
exercisable except upon occurrence of certain events (see Note 7). Effective
with the consummation of the Offering, the Company will record an additional
one-time charge for stock-option compensation expense of approximately $665,
representing the cumulative effect of recording compensation expense relating
to these options over their vesting periods.
Termination of S Corporation Election
Effective with the consummation of the Offering, the Company's S Corporation
election will automatically terminate and the Company expects to record a tax
benefit of approximately $2,500 relating to the establishment of net deferred
assets for future tax deductions resulting from the termination of the S
Corporation election.
F-16
PC CONNECTION, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1997 Employee Stock Purchase Plan
On November 21, 1997, the Board of Directors adopted and the stockholders
approved the 1997 Employee Stock Purchase Plan ("the Purchase Plan"), which
becomes effective on the closing of the Offering. The Purchase Plan authorizes
the issuance of Common Stock to participating employees. Under the terms of the
Purchase Plan, the option price is an amount equal to 85% of the fair market
value per share of the Common Stock on either the first day or the last day of
the offering period, whichever is lower.
1997 Stock Incentive Plan
On November 21, 1997, the Board of Directors adopted and the stockholders
approved the 1997 Stock Incentive Plan, providing for the grant of incentive
stock options, non-statutory stock options, stock appreciation rights,
performance shares and awards of restricted stock and unrestricted stock.
* * * * *
F-17
INSIDE BACK COVER
- -----------------
[ACROSS THE TOP OF THE PAGE:
PICTURE OF THE RACCOON CHARACTER(R) WITH AWARDS AROUND ITS NECK TO THE
LEFT AND THE TEXT "PC CONNECTION YOUR SOURCE FOR COMPUTERS, SOFTWARE
AND PERIPHERALS SINCE 1982"]
[AT LEFT CENTER OF PAGE:
CAPTION ABOVE PICTURE: DISTRIBUTION CENTER
PICTURE OF INDIVIDUALS PACKING PRODUCTS TO FILL ORDERS AT THE
DISTRIBUTION CENTER.
CAPTION BELOW PICTURE: CUSTOMERS CAN PLACE THEIR ORDERS FOR PRODUCTS
UNTIL 2:45 A.M. ET AND STILL GET OVERNIGHT DELIVERY.]
[AT MIDDLE CENTER OF PAGE:
CAPTION ABOVE PICTURE: SALES TEAM
PICTURE OF SALES PEOPLE AT THE CALL CENTER TAKING CALLS.
CAPTION BELOW PICTURE: PC CONNECTION SERVICES CUSTOMERS FROM ITS CALL
CENTERS LOCATED IN KEENE, HUDSON AND MILFORD, NEW HAMPSHIRE.]
[AT RIGHT CENTER OF PAGE:
CAPTION ABOVE PICTURE: DATA CENTER
PICTURE OF COMPANY MANAGEMENT INFORMATION COMPUTER SYSTEMS.
CAPTION BELOW PICTURE: THE COMPANY'S MARKETING AND SALES ACTIVITIES ARE
SUPPORTED BY MULTIPLE IBM AS/400 AND RS6000 COMPUTERS, PLUS WINDOWS NT-
BASED SERVERS.]
[ACROSS THE BOTTOM OF THE PAGE:
15 YEARS OF MAIL-ORDER EXPERIENCE]
[UNDER CAPTION LEFT COLUMN LISTS THE FOLLOWING:
1982 PC CONNECTION FOUNDED EXCLUSIVELY
TO SERVE THE IBM PC CUSTOMER.
1984 MACCONNECTION DIVISION FOUNDED
EXCLUSIVELY TO SERVE THE APPLE
MACINTOSH CUSTOMER.
1987 EVERYTHING OVERNIGHT.(R) CUSTOMER
ORDERS PLACED UP TO 8 P.M. ET ARE
DELIVERED THE NEXT DAY.
1989 30-DAY MONEY-BACK GUARANTEES
OFFERED ON MOST PRODUCT LINES.]
[RIGHT COLUMN LISTS THE FOLLOWING:
1990 EVERYTHING OVERNIGHT(R) SERVICE
EXTENDED TO 2:45 A.M. ET, INCLUDING
DELIVERY ON SATURDAY.
1991 ONE-MINUTE MAIL ORDER.(R) NEW CALLER
ID APPLICATIONS SPEED ORDER TAKING.
ORDERS PLACED ON WEEKENDS ARE DELIVERED
MONDAY MORNING.
1993 COMPUTERS CUSTOM-CONFIGURED AT NO
ADDITIONAL CHARGE; ORDERS PLACED BY
MIDNIGHT ARE DELIVERED THE NEXT DAY.
1996 PC CONNECTION ONLINE SUPERSTORE DEBUTS
ON THE WEB.]
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALES PERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY,
THE COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PRO-
SPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------
TABLE OF CONTENTS
PAGE
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 13
Dividend Policy.......................................................... 13
Capitalization........................................................... 14
Dilution................................................................. 15
Selected Financial Data.................................................. 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 25
Management............................................................... 34
Certain Transactions..................................................... 41
Principal Stockholders................................................... 43
Description of Capital Stock............................................. 44
Shares Eligible for Future Sale.......................................... 45
Underwriting............................................................. 47
Legal Matters............................................................ 48
Experts.................................................................. 48
Additional Information................................................... 48
Index to Financial Statements............................................ F-1
------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SHARES
PC CONNECTION, INC.
COMMON STOCK
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NATIONSBANC MONTGOMERY
SECURITIES, INC.
WILLIAM BLAIR & COMPANY
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
----------------
PROSPECTUS
----------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the Registrant in connection with the sale
of Common Stock being registered. All amounts are estimates except the SEC
registration fee and the NASD filing fee.
AMOUNT TO BE
PAID
SEC registration fee.......................................... $17,425
NASD filing fee............................................... $ 6,250
Nasdaq National Market Listing Fee............................ $ *
Blue Sky fees and expenses.................................... $ *
Printing and engraving expenses............................... $ *
Legal fees and expenses....................................... $ *
Accounting fees and expenses.................................. $ *
Transfer agent and registrar fees............................. $ *
Miscellaneous expenses........................................ $ *
-------
Total....................................................... $
=======
---------------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article ELEVENTH of the Registrant's Amended and Restated Articles of
Incorporation (the "Restated Articles") provides that no director or officer
of the Registrant shall be personally liable to the Registrant or its
stockholders for monetary damages for any action taken, or any failure to take
any action, as a director or an officer, except with respect to: (a) the
amount of a financial benefit received by the director or officer to which he
is not entitled; (b) an intentional infliction of harm on the Registrant or
its stockholders; (c) a violation of New Hampshire Revised Statutes Annotated
("RSA") 293-A:8.33 (providing for liability for the approval of payment of
certain unlawful dividends to stockholders); or (d) an intentional violation
of criminal law.
RSA 293-A:8.51 and 8.56 empower a corporation, subject to certain
limitations, to indemnify its directors and officers against expenses
(including attorney's fees, judgments, fines and amounts paid in settlement)
actually and reasonably incurred by them in connection with any civil or
criminal suit or proceeding (other than a derivative action) to which they are
parties or threatened to be made parties by reason of being directors or
officers, if they acted in good faith and in a manner reasonably believed to
be in or not opposed to the best interests of the corporation (and with
respect to any criminal action or proceeding, had no reasonable cause to
believe their conduct was unlawful). The power to indemnify in connection with
an action or suit by or in the right of the corporation (a derivative action)
is more limited. Indemnification against expenses actually and reasonably
incurred is required if a director or officer is wholly successful in defense
of an action, suit or proceeding of the type where indemnity is permitted by
the statute. Unless ordered by a court, indemnification under the statute,
other than mandatory indemnification against expenses, may be made only if a
determination that indemnification is proper has been made by a prescribed
vote of the board of directors, special legal counsel in certain cases, by the
stockholders or by the prescribed vote of a committee duly designated by the
board of directors, in certain cases. Indemnification provided for by RSA 293-
A:8.50-8.58 is not exclusive and a corporation is empowered to maintain
insurance on behalf of its directors and officers against any liability
asserted against them in that capacity, whether or not the corporation would
have the power under the RSA to indemnify them.
Article TWELFTH of the Restated Articles provides that the Registrant shall
indemnify any director or officer to the fullest extent permitted by RSA 293-
A:8.50-8.58. The Company maintains insurance on behalf of its directors and
officers against liability asserted against them in that capacity.
II-1
Under Section 7 of the Underwriting Agreement, the Underwriters are
obligated, under certain circumstances, to indemnify the directors and
officers of the Registrant against certain liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). Reference
is made to the form of Underwriting Agreement filed as Exhibit 1.1 hereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
1.1 Form of Underwriting Agreement.
*3.1 Restated Articles of Incorporation of Registrant as currently in
effect.
**3.2 Form of Restated Articles of Incorporation of Registrant to be
filed on or immediately subsequent to the date of the closing of
the Offering contemplated by this Registration Statement.
*3.3 Bylaws of Registrant, as amended to date.
**3.4 Form of Bylaws of Registrant to be effective on or immediately
subsequent to the date of the closing of the Offering contemplated
by this Registration Statement.
**4.1 Form of Registrant's Stock Certificate.
**5.1 Opinion of Hale and Dorr LLP
*10.1 1993 Incentive and Non-statutory Stock Option Plan, as amended.
**10.2 1997 Stock Incentive Plan.
*10.3 Lease between the Registrant and Miller-Valentine Partners, dated
September 24, 1990, as amended, for property located at 2870 Old
State Route 73, Wilmington, Ohio.
*10.4 Lease between the Registrant and Lower Bellbrook Company, dated
September 26, 1997, for property located at 643-651 Lower Bellbrook
Avenue, Xenia, Ohio.
*10.5 Lease between the Registrant and Gallup & Hall partnership, dated
May 1, 1997, for property located at 442 Marlboro Street, Keene,
New Hampshire.
*10.6 Lease between the Registrant and Gallup & Hall partnership, dated
June 1, 1987, as amended, for property located in Marlow, New
Hampshire.
*10.7 Lease between the Registrant and Gallup & Hall partnership, dated
July 22, 1988, for property located at 450 Marlboro Street, Keene,
New Hampshire.
*10.8 Lease between the Registrant and Dataproducts Corporation, dated
June 22, 1993, as amended, for property located at 582 Route 13
South, Milford, New Hampshire.
*10.9 Lease between the Registrant and Century Park, LLC, dated October
1, 1997 for property located at Route 111, Hudson, New Hampshire.
10.10 Amended and Restated Lease between the Registrant and G&H Post, LLC,
dated December 29, 1997 for property located at Route 101A, Merrimack,
New Hampshire.
*10.11 Sublease between the Registrant and ABX Air Inc., dated June 7,
1995, for property located at 2870 Old State Route 73, Wilmington,
Ohio.
*10.12 Employment Agreement between the Registrant and Wayne L. Wilson,
dated August 16, 1995.
*10.13 Employment Agreement between the Registrant and Robert F. Wilkins,
dated December 23, 1995.
*10.14 Letter Agreement between the Registrant and R. Wayne Roland, dated
March 4, 1997.
*+10.15 Letter Agreement between the Registrant and Airborne Freight
Corporation D/B/A "Airborne Express," dated April 30, 1990, as
amended.
II-2
*+10.16 Agreement between the Registrant and Ingram Micro, Inc., dated
October 30, 1997, as amended.
10.17 State Street Bank and Trust Company Revolving Line of Credit and
Term Loan, dated March 31, 1997, as amended.
10.18 Employment Agreement, dated as of January 1, 1998, between the
Registrant and Patricia Gallup.
10.19 Employment Agreement, dated as of January 1, 1998, between the
Registrant and David Hall.
**11.1 Statement regarding weighted average share computation.
23.1 Consent of Deloitte & Touche LLP.
**23.2 Consent of Hale and Dorr LLP (included in Exhibit 5.1).
*24.1 Power of Attorney (see page II-4).
*27.1 Financial Data Schedule
- ---------------------
* Previously filed.
** To be filed by amendment.
+ Confidential materials omitted and filed separately with the Securities and
Exchange Commission.
(b) Financial Statement Schedules
Not applicable.
Schedules not listed have been omitted because the information required to
be set forth therein is not applicable or is shown in the financial statements
or notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Restated Articles of
Incorporation or the RSA or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The Registrant undertakes to provide to the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of a
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant, PC Connection, Inc., a corporation organized and existing under the
laws of the State of New Hampshire, has duly caused this Amendment to
Registration Statement on Form S-1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Milford, State of New
Hampshire, on this 14th day of January, 1998.
PC Connection, Inc.
/s/ Patricia Gallup
By __________________________________
Patricia Gallup
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
Chairman of the Board,
/s/ Patricia Gallup* President and Chief January 14,
_________________________________ Executive Officer 1998
Patricia Gallup (principal executive
officer)
Senior Vice President,
/s/ Wayne L. Wilson* Chief Operating Officer January 14,
_________________________________ and Chief Financial 1998
Wayne L. Wilson Officer (principal
financial and accounting
officer)
/s/ David Hall* Vice Chairman of the Board January 14,
_________________________________ 1998
David Hall
/s/ David Beffa-Negrini* Director January 14,
_________________________________ 1998
David Beffa-Negrini
/s/ Martin C. Murrer* Director January 14,
_________________________________ 1998
Martin C. Murrer
/s/ Peter J. Baxter* Director January 14,
_________________________________ 1998
Peter J. Baxter
/s/ Wayne L. Wilson
*By ________________________
Wayne L. Wilson
Attorney-in-fact
II-4
EXHIBIT INDEX
EXHIBITS PAGE
1.1 Form of Underwriting Agreement.
*3.1 Restated Articles of Incorporation of Registrant as currently in
effect.
**3.2 Form of Restated Articles of Incorporation of Registrant to be
filed on or immediately subsequent to the date of the closing of
the Offering contemplated by this Registration Statement.
*3.3 Bylaws of Registrant, as amended to date.
**3.4 Form of Bylaws of Registrant to be effective on or immediately
subsequent to the date of the closing of the Offering contemplated
by this Registration Statement.
**4.1 Form of Registrant's Stock Certificate.
**5.1 Opinion of Hale and Dorr LLP
*10.1 1993 Incentive and Non-statutory Stock Option Plan, as amended.
**10.2 1997 Stock Incentive Plan.
*10.3 Lease between the Registrant and Miller-Valentine Partners, dated
September 24, 1990, as amended, for property located at 2870 Old
State Route 73, Wilmington, Ohio.
*10.4 Lease between the Registrant and Lower Bellbrook Company, dated
September 26, 1997, for property located at 643-651 Lower Bellbrook
Avenue, Xenia, Ohio.
*10.5 Lease between the Registrant and Gallup & Hall partnership, dated
May 1, 1997, for property located at 442 Marlboro Street, Keene,
New Hampshire.
*10.6 Lease between the Registrant and Gallup & Hall partnership, dated
June 1, 1987, as amended, for property located in Marlow, New
Hampshire.
*10.7 Lease between the Registrant and Gallup & Hall partnership, dated
July 22, 1988, for property located at 450 Marlboro Street, Keene,
New Hampshire.
*10.8 Lease between the Registrant and Dataproducts Corporation, dated
June 22, 1993, as amended, for property located at 582 Route 13
South, Milford, New Hampshire.
*10.9 Lease between the Registrant and Century Park, LLC, dated October
1, 1997 for property located at Route 111, Hudson, New Hampshire.
10.10 Amended and Restated Lease between the Registrant and G&H Post, LLC,
dated December 29, 1997 for property located at Route 101A, Merrimack,
New Hampshire.
*10.11 Sublease between the Registrant and ABX Air Inc., dated June 7,
1995, for property located at 2870 Old State Route 73, Wilmington,
Ohio.
*10.12 Employment Agreement between the Registrant and Wayne L. Wilson,
dated August 16, 1995.
*10.13 Employment Agreement between the Registrant and Robert F. Wilkins,
dated December 23, 1995.
*10.14 Letter Agreement between the Registrant and R. Wayne Roland, dated
March 4, 1997.
*+10.15 Letter Agreement between the Registrant and Airborne Freight
Corporation D/B/A "Airborne Express," dated April 30, 1990, as
amended.
*+10.16 Agreement between the Registrant and Ingram Micro, Inc., dated
October 30, 1997, as amended.
10.17 State Street Bank and Trust Company Revolving Line of Credit and
Term Loan, dated March 31, 1997, as amended.
10.18 Employment Agreement, dated as of January 1, 1998, between the
Registrant and Patricia Gallup.
10.19 Employment Agreement, dated as of January 1, 1998, between the
Registrant and David Hall.
**11.1 Statement regarding weighted average share computation.
23.1 Consent of Deloitte & Touche LLP.
**23.2 Consent of Hale and Dorr LLP (included in Exhibit 5.1).
*24.1 Power of Attorney (see page II-4).
*27.1 Financial Data Schedule
- ---------------------
* Previously filed.
** To be filed by amendment.
+ Confidential materials omitted and filed separately with the Securities and
Exchange Commission.
Exhibit 1.1.
L&W REVISED DRAFT
JANUARY 12, 1998
__________ Shares
PC CONNECTION, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
___________, 1998
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NATIONSBANC MONTGOMERY SECURITIES, INC.
WILLIAM BLAIR & COMPANY, L.L.C.
As representatives (the "Representatives") of the
several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ")
277 Park Avenue
New York, New York 10172
Dear Sirs:
PC Connection, Inc., a [Delaware] corporation (the "COMPANY"),
proposes to issue and sell ______________ shares of its Common Stock, par value
$0.01 per share (the "FIRM SHARES"), to the several underwriters named in
Schedule I hereto (the "UNDERWRITERS"). The Company also proposes to issue and
sell to the several Underwriters not more than an additional _____________
shares of its Common Stock, par value $0.01 per share (the "ADDITIONAL SHARES"),
if requested by the Underwriters as provided in Section 2 hereof. The Firm
Shares and the Additional Shares are hereinafter referred to collectively as the
"SHARES". The shares of common stock of the Company to be outstanding after
giving effect to the sales contemplated hereby are hereinafter referred to as
the "COMMON STOCK".
Section 1. Registration Statement and Prospectus.
The Company has prepared and filed with the Securities and Exchange
Commission (the "COMMISSION") in accordance with the provisions of the
Securities Act of 1933, as amended, and the rules and regulations of the
Commission thereunder (collectively, the "ACT"), a registration statement on
Form S-1, including a prospectus, relating to the Shares. The registration
statement, as amended at the time it became effective, including the information
(if any) deemed to be part of the registration statement at the time of
effectiveness pursuant to Rule
430A under the Act, is hereinafter referred to as the "REGISTRATION STATEMENT";
and the prospectus in the form first used to confirm sales of Shares (whether or
not filed with the Commission pursuant to Rule 424(b) under the Act) is
hereinafter referred to as the "PROSPECTUS". If the Company has filed or is
required pursuant to the terms hereof to file a registration statement pursuant
to Rule 462(b) under the Act registering additional shares of Common Stock (a
"RULE 462(b) REGISTRATION STATEMENT"), then, unless otherwise specified, any
reference herein to the term "Registration Statement" shall be deemed to include
such Rule 462(b) Registration Statement.
Section 2. Agreements to Sell and Purchase and Lock-Up Agreements.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell, and each Underwriter agrees, severally and not jointly, to purchase
from the Company at a price per Share of $______ (the "PURCHASE PRICE") the
number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I hereto.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
the Additional Shares and the Underwriters shall have the right to purchase,
severally and not jointly, up to ______ Additional Shares from the Company at
the Purchase Price. Additional Shares may be purchased solely for the purpose
of covering over-allotments made in connection with the offering of the Firm
Shares. The Underwriters may exercise their right to purchase Additional Shares
in whole or in part at any time, from time to time, by giving written notice
thereof to the Company within 30 days after the date of this Agreement. The
Representatives shall give any such notice on behalf of the Underwriters and
such notice shall specify the aggregate number of Additional Shares to be
purchased pursuant to such exercise and the date for payment and delivery
thereof, which date shall be a business day (i) no earlier than two business
days after such notice has been given (and, in any event, no earlier than the
Closing Date (as hereinafter defined)) and (ii) no later than ten business days
after such notice has been given. If any Additional Shares are to be purchased,
each Underwriter, severally and not jointly, agrees to purchase from the Company
the number of Additional Shares (subject to such adjustments to eliminate
fractional shares as the Representatives may determine) which bears the same
proportion to the total number of Additional Shares to be purchased from the
Company as the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I bears to the total number of Firm Shares.
The Company hereby agrees not to (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, or otherwise transfer
or dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
(ii) enter into any swap or other arrangement that transfers all or a portion of
the economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, or such other securities, in
cash or otherwise), except to the Underwriters pursuant to this Agreement, for a
period of 180 days after the date of the Prospectus without the prior written
consent of DLJ. Notwithstanding the foregoing, during such period (i) the
-2-
Company may grant stock options pursuant to the Company's stock option plans and
(ii) the Company may issue shares of Common Stock upon the exercise of an option
or warrant or the conversion of a security outstanding on the date hereof. The
Company also agrees not to file any registration statement with respect to any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock for a period of 180 days after the date of the
Prospectus without the prior written consent of DLJ; provided, however, that
during such period the Company may file one or more registration statements on
Form S-8 and/or Form S-3 registering shares of Common Stock acquired or to be
acquired pursuant to the Company's stock option plans. The Company shall, prior
to or concurrently with the execution of this Agreement, deliver an agreement
executed by (i) each of the directors and officers of the Company, (ii) each
stockholder listed on Annex I hereto and (iii) each holder of stock options
listed on Annex I hereto to the effect that such person will not, during the
period commencing on the date such person signs such agreement and ending 180
days after the date of the Prospectus, without the prior written consent of DLJ,
(A) engage in any of the transactions described in the first sentence of this
paragraph or (B) make any demand for, or exercise any right with respect to, the
registration of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock.
Section 3. Terms of Public Offering.
The Company is advised by the Representatives that the Underwriters
propose (i) to make a public offering of their respective portions of the Shares
as soon after the execution and delivery of this Agreement as in their judgment
is advisable and (ii) initially to offer the Shares upon the terms set forth in
the Prospectus.
Section 4. Delivery and Payment.
Delivery to the Underwriters of and payment for the Firm Shares shall
be made at 9:00 A.M., New York City time, on ___________, 1998 (the "CLOSING
DATE") at the offices of Hale & Dorr LLP, 60 State Street, Boston,
Massachusetts. The Closing Date and the location of delivery of and payment for
the Firm Shares may be varied by agreement between the Representatives and the
Company.
Delivery to the Underwriters of and payment for any Additional Shares
to be purchased by the Underwriters shall be made at the offices of Hale & Dorr,
LLP, 60 State Street, Boston, Massachusetts or at such other place as the
Representatives shall designate at 9:00 A.M., New York City time, on the date
specified in the applicable exercise notice given by the Representatives
pursuant to Section 2 (an "OPTION CLOSING DATE"). Any such Option Closing Date
and the location of delivery of and payment for such Additional Shares may be
varied by agreement between the Representatives and the Company.
Certificates for the Shares shall be registered in such names and
issued in such denominations as the Representatives shall request in writing not
later than two full business days prior to the Closing Date or an Option Closing
Date, as the case may be. Such certificates shall be made available to the
Representatives for inspection not later than 9:30 A.M., New York City time, on
the business day prior to the Closing Date or the applicable Option Closing
Date, as the case may be. Certificates in definitive form evidencing the Shares
shall be delivered to the
-3-
Representatives on the Closing Date or the applicable Option Closing Date, as
the case may be, with any transfer taxes thereon duly paid by the Company, for
the respective accounts of the several Underwriters, against payment to the
Company of the Purchase Price therefor by wire transfer of Federal or other
funds immediately available in New York City.
Section 5. Agreements of the Company.
The Company agrees with the Representatives:
(a) To advise the Representatives promptly and, if requested by the
Representatives, to confirm such advice in writing, (i) of any request by the
Commission for amendments to the Registration Statement or amendments or
supplements to the Prospectus or for additional information, (ii) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the suspension of qualification of the Shares for
offering or sale in any jurisdiction, or the initiation of any proceeding for
such purposes, (iii) when any amendment to the Registration Statement becomes
effective, (iv) if the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, when the Rule 462(b)
Registration Statement has become effective and (v) of the happening of any
event during the period referred to in Section 5(d) below which makes any
statement of a material fact made in the Registration Statement or the
Prospectus untrue or which requires any additions to or changes in the
Registration Statement or the Prospectus in order to make the statements therein
not misleading. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, the Company will use
its best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time.
(b) To furnish to the Representatives four signed copies of the
Registration Statement as first filed with the Commission and of each amendment
to it, including all exhibits, and to furnish to the Representatives and each
Underwriter designated by the Representatives such number of conformed copies of
the Registration Statement as so filed and of each amendment to it, without
exhibits, as the Representatives may reasonably request.
(c) To prepare the Prospectus, the form and substance of which shall
be satisfactory to the Representatives, and to file the Prospectus in such form
with the Commission within the applicable period specified in Rule 424(b) under
the Act; during the period specified in Section 5(d) below, not to file any
further amendment to the Registration Statement and not to make any amendment or
supplement to the Prospectus of which the Representatives shall not previously
have been advised or to which the Representatives shall reasonably object after
being so advised; and, during such period, to prepare and file with the
Commission, promptly upon the Representatives' reasonable request, any amendment
to the Registration Statement or amendment or supplement to the Prospectus which
may be legally required or reasonably advisable in connection with the
distribution of the Shares by the Underwriters, and to use its best efforts to
cause any such amendment to the Registration Statement to become promptly
effective.
(d) Prior to 10:00 A.M., New York City time, on the first business day
after the date of this Agreement and from time to time thereafter for such
period as in the opinion of
-4-
counsel for the Underwriters a prospectus is required by law to be delivered in
connection with sales by an Underwriter or a dealer, to furnish in New York City
to each Underwriter and any dealer as many copies of the Prospectus (and of any
amendment or supplement to the Prospectus) as such Underwriter or dealer may
reasonably request.
(e) If during the period specified in Section 5(d), any event shall
occur or condition shall exist as a result of which, in the opinion of counsel
for the Underwriters, it becomes necessary to amend or supplement the Prospectus
in order to make the statements therein, in the light of the circumstances when
the Prospectus is delivered to a purchaser, not misleading, or if, in the
opinion of counsel for the Underwriters, it is necessary to amend or supplement
the Prospectus to comply with applicable law, forthwith to prepare and file with
the Commission an appropriate amendment or supplement to the Prospectus so that
the statements in the Prospectus, as so amended or supplemented, will not in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with applicable law, and to furnish to each
Underwriter and to any dealer as many copies thereof as such Underwriter or
dealer may reasonably request.
(f) Prior to any public offering of the Shares, to cooperate with the
Representatives and counsel for the Underwriters in connection with the
registration or qualification of the Shares for offer and sale by the several
Underwriters and by dealers under the state securities or Blue Sky laws of such
jurisdictions as the Underwriters may request, to continue such registration or
qualification in effect so long as required for distribution of the Shares and
to file such consents to service of process or other documents as may be
necessary in order to effect such registration or qualification; provided,
however, that the Company shall not be required in connection therewith to
qualify as a foreign corporation in any jurisdiction in which it is not now so
qualified or to take any action that would subject it to general consent to
service of process or taxation other than as to matters and transactions
relating to the Prospectus, the Registration Statement, any preliminary
prospectus or the offering or sale of the Shares, in any jurisdiction in which
it is not now so subject.
(g) To mail and make generally available to its stockholders as soon
as practicable an earnings statement covering the twelve-month period ending
____________, 1999 that shall satisfy the provisions of Section 11(a) of the
Act, and to advise the Representatives in writing when such statement has been
so made available.
(h) During the period of three years after the date of this Agreement,
to furnish to the Representatives promptly upon their becoming available copies
of all reports or other communications furnished to the record holders of Common
Stock or furnished to or filed with the Commission or any national securities
exchange on which any class of securities of the Company is listed and such
other publicly available information concerning the Company and its subsidiaries
(if any) as the Representatives may reasonably request.
(i) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of its obligations under this Agreement,
including: (i) the fees, disbursements and expenses of the Company's counsel and
the Company's accountants in connection with the registration and delivery of
the Shares under the Act and all other fees and expenses in
-5-
connection with the preparation, printing, filing and distribution of the
Registration Statement (including financial statements and exhibits), any
preliminary prospectus, the Prospectus and all amendments and supplements to any
of the foregoing, including the mailing and delivering of copies thereof to the
Underwriters and dealers in the quantities specified herein, (ii) all costs and
expenses related to the transfer and delivery of the Shares to the Underwriters,
including any transfer or other taxes payable thereon, (iii) all costs of
printing or producing this Agreement and any other agreements or documents in
connection with the offering, purchase, sale or delivery of the Shares, (iv) all
expenses in connection with the registration or qualification of the Shares for
offer and sale under the securities or Blue Sky laws of the several states and
all costs of printing or producing any Preliminary and Supplemental Blue Sky
Memoranda in connection therewith (including the filing fees and fees and
disbursements of counsel for the Underwriters in connection with such
registration or qualification and memoranda relating thereto), (v) the filing
fees and disbursements of counsel for the Underwriters in connection with the
review and clearance of the offering of the Shares by the National Association
of Securities Dealers, Inc., (vi) all fees and expenses in connection with the
preparation and filing of the registration statement on Form 8-A relating to the
Common Stock and all costs and expenses incident to the quotation of the Shares
on the Nasdaq National Market, (vii) the cost of printing certificates
representing the Shares, (viii) the costs and charges of any transfer agent,
registrar and/or depository for the Shares, and (ix) all other costs and
expenses incident to the performance of the obligations of the Company hereunder
for which provision is not otherwise made in this Section.
(j) To use its best efforts to qualify for quotation the Shares on the
Nasdaq National Market and to maintain the quotation of the Shares on the Nasdaq
National Market for a period of three years after the date of this Agreement.
(k) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior to
the Closing Date or any Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.
(l) To not issue any shares of Common Stock upon the exercise of
options issued pursuant to the Company's 1993 Incentive and Non-Statutory Stock
Option Plan (the "1993 Option Plan") for a period of 180 days after the date of
the Prospectus, unless and until the holder exercising such option shall have
delivered to the Representatives a lock-up agreement with respect to the shares
issuable upon the exercise of such option in form and substance reasonably
satisfactory to DLJ, provided, however, that the Company shall only be required
to use all commercially reasonable efforts to obtain a lock-up agreement from
Mr. Kenneth Ratcliffe if he elects to exercise all or any portion of his option
to purchase 87,500 shares of Common Stock granted to Mr. Ratcliffe under the
1993 Option Plan pursuant to the Non-Statutory Stock Option Agreement, dated
April 11, 1994, between the Company and Mr. Ratcliffe.
(m) If the Registration Statement at the time of the effectiveness of
this Agreement does not cover all of the Shares, to file a Rule 462(b)
Registration Statement with the Commission registering the Shares not so covered
in compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of
this Agreement and to pay to the Commission the filing fee for such Rule 462(b)
Registration Statement at the time of the filing thereof or to give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
-6-
Section 6. Representations and Warranties of the Company.
The Company represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective (other than any
Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement); any Rule 462(b) Registration Statement filed
after the effectiveness of this Agreement will become effective no later than
10:00 P.M., New York City time, on the date of this Agreement; and no stop order
suspending the effectiveness of the Registration Statement is in effect, and no
proceedings for such purpose are pending before or threatened by the Commission.
(b) (i) The Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement), when it became effective, did not contain and, as amended, if
applicable, will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement (other than
any Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement) and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the Act,
(iii) if the Company is required to file a Rule 462(b) Registration Statement
after the effectiveness of this Agreement, such Rule 462(b) Registration
Statement and any amendments thereto, when they become effective (A) will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading and (B) will comply in all material respects with the Act and (iv)
the Prospectus does not contain and, as amended or supplemented, if applicable,
will not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that the
representations and warranties set forth in this paragraph do not apply to
statements or omissions in the Registration Statement or the Prospectus based
upon information relating to any Underwriter furnished to the Company in writing
by such Underwriter through the Representatives expressly for use therein.
(c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act, and did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and warranties
set forth in this paragraph do not apply to statements or omissions in any
preliminary prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through the
Representatives expressly for use therein.
(d) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of its jurisdiction of incorporation
and has the corporate power and authority to carry on its business as described
in the Prospectus and to own, lease and operate its properties, and is duly
qualified and is in good standing as a foreign corporation authorized to do
business in each jurisdiction in which the nature of its business or
-7-
its ownership or leasing of property requires such qualification, except where
the failure to be so qualified would not have a material adverse effect on the
business, prospects, financial condition or results of operations of the Company
(a "MATERIAL ADVERSE EFFECT").
(e) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or issued by
the Company relating to or entitling any person to purchase or otherwise to
acquire any shares of the capital stock of the Company, except as otherwise
disclosed in the Registration Statement.
(f) All the outstanding shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid, non-assessable and
not subject to any preemptive or similar rights; and the Shares have been duly
authorized and, when issued and delivered to the Underwriters against payment
therefor as provided by this Agreement, will be validly issued, fully paid and
non-assessable, and the issuance of such Shares will not be subject to any
preemptive or similar rights.
(g) The Company has no subsidiaries.
(h) On or prior to the Closing Date, the Company will have
reincorporated as a Delaware corporation with all corporate power and authority
necessary to consummate all of the transactions contemplated by this Agreement
and the Prospectus, including, without limitation, the corporate power and
authority to duly authorize and validly issue all of the shares of capital stock
necessary to consummate the Offering in the manner contemplated by the
Prospectus
(i) The authorized capital stock of the Company conforms to the
description thereof contained in the Prospectus in all material respects.
(j) The Company is not (i) in violation of its charter or by-laws or
(ii) in default in the performance of any obligation, agreement, covenant or
condition contained in any indenture, loan agreement, mortgage, lease or other
agreement or instrument to which the Company is a party or by which the Company
or its property is bound where, in the case of this clause (ii), such default
would have a Material Adverse Effect.
(k) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not (i) except as may
be disclosed in the Prospectus, require any consent, approval, authorization or
other order of, or qualification with, any court or governmental body or agency
(except such as may be required under the securities or Blue Sky laws of the
various states), (ii) conflict with or constitute a breach of any of the terms
or provisions of, or a default under, the charter or by-laws of the Company or,
except as may be disclosed in the Prospectus, any indenture, loan agreement,
mortgage, lease or other agreement or instrument, to which the Company is a
party or by which the Company or its property is bound where such conflict,
breach or default would have a Material Adverse Effect, (iii) except as may be
disclosed in the Prospectus, violate or conflict with any applicable law or any
rule, regulation, judgment, order or decree of any court or any governmental
body or agency having jurisdiction over the
-8-
Company or its property where such violation or conflict would have a Material
Adverse Effect or (iv) result in the suspension, termination or revocation of
any Authorization (as defined below) of the Company or any other material
impairment of the rights of the holder of any such Authorization.
(l) There are no legal or governmental proceedings pending or, to the
knowledge of the Company, threatened to which the company is or is reasonably
likely to be a party or to which any of its property is or is reasonably likely
to be subject that are required to be described in the Registration Statement or
the Prospectus and are not so described; nor are there any statutes,
regulations, contracts or other documents that are required to be described in
the Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not so described or filed as required.
(m) The Company has not violated any foreign, federal, state or local
law or regulation relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS") or any provisions of the Employee Retirement
Income Security Act of 1974, as amended, or the rules and regulations
promulgated thereunder, except for such violations which, singly or in the
aggregate, would not have a Material Adverse Effect.
(n) The Company has such permits, licenses, consents, exemptions,
franchises, authorizations and other approvals (each, an "AUTHORIZATION") of,
and has made all filings with and notices to, all governmental or regulatory
authorities and self-regulatory organizations and all courts and other
tribunals, including, without limitation, under any applicable Environmental
Laws, as are necessary to own, lease, license and operate its respective
properties and to conduct its business, except where the failure to have any
such Authorization or to make any such filing or notice would not, singly or in
the aggregate, have a Material Adverse Effect. Each such Authorization is valid
and in full force and effect and the Company is in compliance in all material
respects with all the terms and conditions thereof and with the rules and
regulations of the authorities and governing bodies having jurisdiction with
respect thereto; and no event has occurred (including, without limitation, the
receipt of any notice from any authority or governing body) which allows or,
after notice or lapse of time or both, would allow, revocation, suspension or
termination of any such Authorization or results or, after notice or lapse of
time or both, would result in any other material impairment of the rights of the
holder of any such Authorization; and such Authorizations contain no
restrictions that are burdensome to the Company, except where such failure to be
valid and in full force and effect or to be in compliance, the occurrence of any
such event or the presence of any such restriction would not, singly or in the
aggregate, have a Material Adverse Effect.
(o) The Company owns or possesses all patents, patent rights,
licenses, inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information, systems
or procedures), trademarks, service marks and trade names ("intellectual
property") currently employed by it in connection with the business now operated
by it except where the failure to own or possess or otherwise be able to acquire
such intellectual property would not, singly or in the aggregate, have a
Material Adverse Effect; and the Company has not received any notice of
-9-
infringement of or conflict with asserted rights of others with respect to any
of such intellectual property which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would have a Material Adverse
Effect.
(p) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with Environmental
Laws or any Authorization, any related constraints on operating activities and
any potential liabilities to third parties) which would, singly or in the
aggregate, have a Material Adverse Effect.
(q) This Agreement has been duly authorized, executed and delivered by
the Company.
(r) Deloitte & Touche LLP are independent public accountants with
respect to the Company as required by the Act.
(s) (i) The financial statements included in the Registration
Statement and the Prospectus (and any amendment or supplement thereto), together
with related schedules and notes, present fairly the financial position, results
of operations and changes in financial position of the Company on the basis
stated therein at the respective dates or for the respective periods to which
they apply; such statements and related schedules and notes have been prepared
in accordance with generally accepted accounting principles consistently applied
throughout the periods involved, except as disclosed therein; the supporting
schedules, if any, included in the Registration Statement present fairly in
accordance with generally accepted accounting principles the information
required to be stated therein; and the other financial and statistical
information and data set forth in the Registration Statement and the Prospectus
(and any amendment or supplement thereto) are, in all material respects,
accurately presented and prepared on a basis consistent with such financial
statements and the books and records of the Company.
(ii) The pro forma financial information included in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto) has been prepared on a basis consistent with the financial statements
referred to in clause (r)(i) above, except for the pro forma adjustments
specified therein, and (A) gives effect to the assumptions set forth in the
Registration Statement, (B) presents fairly in all material respects in
accordance with generally accepted accounting principles consistently applied
throughout such periods, the historical and proposed transactions contemplated
by the Registration Statement and the Prospectus (and any amendment or
supplement thereto) and this Agreement and (C) complies in all material respects
with the requirements, if any, of Rule 11-01 and 11-02 of Regulation S-X.
(t) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds therefrom as described in
the Prospectus, will not be, an "investment company" as such term is defined in
the Investment Company Act of 1940, as amended.
-10-
(u) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company to
file a registration statement under the Act with respect to any securities of
the Company or to require the Company to include such securities with the Shares
registered pursuant to the Registration Statement.
(v) No relationship, direct or indirect, exists between or among the
Company on the one hand, and the directors, officers, stockholders, customers or
suppliers of the Company on the other hand, which is required by the Act to be
described in the Registration Statement or the Prospectus which is not so
described.
(w) Since the respective dates as of which information is given in the
Prospectus, other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there has not occurred any material adverse change or any development involving
a prospective material adverse change in the condition, financial or otherwise,
or the earnings, business, management or operations of the Company, (ii) there
has not been any material adverse change or any development involving a
prospective material adverse change in the capital stock or in the long-term
debt of the Company and (iii) the Company has not incurred any material
liability or obligation, direct or contingent.
(x) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters shall be deemed to
be a representation and warranty by the Company to the Underwriters as to the
matters covered thereby.
Section 7. Indemnification.
(a) The Company agrees to indemnify and hold harmless each
Underwriter, its directors, its officers and each person, if any, who controls
any Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), from and
against any and all losses, claims, damages, liabilities and judgments
(including, without limitation, any legal or other expenses incurred in
connection with investigating or defending any matter, including any action,
that could give rise to any such losses, claims, damages, liabilities or
judgments) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (or any amendment
thereto), the Prospectus (or any amendment or supplement thereto) or any
preliminary prospectus, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or judgments are caused by any such untrue statement or
omission or alleged untrue statement or omission (i) based upon information
relating to any Underwriter furnished in writing to the Company by such
Underwriter through the Representatives expressly for use therein or (ii)
contained in any preliminary prospectus if a copy of the Prospectus (as amended
or supplemented, if the Company shall furnish such amendment or supplement
thereto) was not sent or given by or on behalf of such underwriter to the person
asserting any such loss, claim, damage, liability or judgment, at or prior to
the written confirmation of the sale of the Shares as required by the Act and
the Prospectus (as so
-11-
amended or supplemented) would have corrected in all material respects such
untrue statement or omission.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement and each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the
same extent as the foregoing indemnity from the Company to such Underwriter but
only with reference to information relating to such Underwriter furnished in
writing to the Company by such Underwriter through the Representatives expressly
for use in the Registration Statement (or any amendment thereto), the Prospectus
(or any amendment or supplement thereto) or any preliminary prospectus.
(c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 7(a) or 7(b) (the
"INDEMNIFIED PARTY"), the Indemnified Party shall promptly notify the person
against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing
and the Indemnifying Party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the Indemnified Party and
the payment of all reasonable fees and expenses of such counsel, as incurred
(except that in the case of any action in respect of which indemnity may be
sought pursuant to both Sections 7(a) and 7(b), the Underwriters shall not be
required to assume the defense of such action pursuant to this Section 7(c), but
may employ separate counsel and participate in the defense thereof, but the fees
and expenses of such counsel, except as provided below, shall be at the expense
of such Underwriter). Any Indemnified Party shall have the right to employ
separate counsel in any such action and participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of the Indemnified
Party unless (i) the employment of such counsel shall have been specifically
authorized in writing by the Indemnifying Party, (ii) the Indemnifying Party
shall have failed to assume the defense of such action or employ counsel
reasonably satisfactory to the Indemnified Party or (iii) the named parties to
any such action (including any impleaded parties) include both the Indemnified
Party and the Indemnifying Party, and the Indemnified Party shall have been
advised by such counsel that there may be one or more legal defenses available
to it which are different from or additional to those available to the
Indemnifying Party (in which case the Indemnifying Party shall not have the
right to assume the defense of such action on behalf of the Indemnified Party).
In any such case, the Indemnifying Party shall not, in connection with any one
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the fees and expenses of more than one separate firm of attorneys (in
addition to any local counsel) for all indemnified parties and all such fees and
expenses shall be reimbursed as they are incurred. Such firm shall be
designated in writing by DLJ, in the case of parties indemnified pursuant to
Section 7(a), and by the Company, in the case of parties indemnified pursuant to
Section 7(b). The Indemnifying Party shall indemnify and hold harmless the
Indemnified Party from and against any and all losses, claims, damages,
liabilities and judgments by reason of any settlement of any action (i) effected
with its written consent or (ii) effected without its written consent if the
settlement is entered into more than twenty business days after the Indemnifying
Party shall have received a request from the Indemnified Party for reimbursement
for the fees and expenses of counsel (in any case where such fees and expenses
are at the expense of the Indemnifying Party) and, prior to the date of such
settlement, the Indemnifying Party shall have failed to comply with such
reimbursement
-12-
request (or shall have failed to contest, in good faith, all portions of such
fees and expenses not so reimbursed). No Indemnifying Party shall, without the
prior written consent of the Indemnified Party, effect any settlement or
compromise of, or consent to the entry of judgment with respect to, any pending
or threatened action in respect of which the Indemnified Party is or could have
been a party and indemnity or contribution may be or could have been sought
hereunder by the Indemnified Party, unless such settlement, compromise or
judgment (i) includes an unconditional release of the Indemnified Party from all
liability on claims that are or could have been the subject matter of such
action and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of the Indemnified Party.
(d) To the extent the indemnification provided for in this Section 7
is unavailable to an Indemnified Party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then each
Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other hand from the offering
of the Shares or (ii) if the allocation provided by clause 7(d)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 7(d)(i) above but also the
relative fault of the Company on the one hand and the Underwriters on the other
hand in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriters on the other hand shall be deemed to be in the
same proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company, and the total underwriting discounts and
commissions received by the Underwriters, bear to the total price to the public
of the Shares, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Company on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an Indemnified Party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such Indemnified Party in
connection with investigating or defending any matter, including any action,
that could have given rise to such losses, claims, damages, liabilities or
judgments. Notwithstanding the provisions of this Section 7, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged
-13-
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations to contribute pursuant to this Section 7(d) are several in
proportion to the respective number of Shares purchased by each of the
Underwriters hereunder and not joint.
(e) The remedies provided for in this Section 7 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
Indemnified Party at law or in equity.
Section 8. Conditions of Underwriters' Obligations.
The several obligations of the Underwriters to purchase the Firm
Shares under this Agreement are subject to the satisfaction of each of the
following conditions:
(a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct in all material respects on the Closing
Date with the same force and effect as if made on and as of the Closing Date.
(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New York City
time, on the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission.
(c) The Underwriters shall have received on the Closing Date a
certificate dated the Closing Date, signed by Patricia Gallup and Wayne Wilson
in their capacities as the chief executive officer and chief financial officer
of the Company, respectively, confirming the matters set forth in Sections 6(w),
8(a) and 8(b) hereof and that the Company has complied with all of the
agreements and satisfied all of the conditions herein contained and required to
be complied with or satisfied by the Company on or prior to the Closing Date.
(d) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there shall not have occurred any change or any development involving a
prospective change in the condition, financial or otherwise, or the earnings,
business, management or operations of the Company, (ii) there shall not have
been any change or any development involving a prospective change in the capital
stock or in the long-term debt of the Company and (iii) the Company shall not
have incurred any liability or obligation, direct or contingent, the effect of
which, in any such case described in Sections 8(d)(i), 8(d)(ii) or 8(d)(iii)
hereof, in the Representatives' sole judgment, is material and adverse to the
Company and, in the Representatives' sole judgment, makes it impracticable to
market the Shares on the terms and in the manner contemplated in the Prospectus.
-14-
(e) The Underwriters shall have received on the Closing Date an
opinion (satisfactory to the Underwriters and counsel for the Underwriters),
dated the Closing Date, of Hale and Dorr LLP, counsel for the Company, to the
effect that:
(i) the Company has been duly incorporated, is validly existing
as a corporation in good standing under the laws of its jurisdiction of
incorporation and has the corporate power and authority to carry on its
business and to own, lease and operate its properties, in each case as
described in the Prospectus;
(ii) the Company is duly qualified and is in good standing as a
foreign corporation authorized to do business in [New Hampshire and] Ohio;
(iii) all the outstanding shares of capital stock of the Company
have been duly authorized and validly issued and are fully paid, non-
assessable and not subject to any preemptive or similar statutory rights
or, to the knowledge of such counsel, similar contractual rights;
(iv) the Shares have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor as provided by this
Agreement, will be validly issued, fully paid and non-assessable, and the
issuance of such Shares will not be subject to any preemptive or similar
statutory rights or, to the knowledge of such counsel, similar contractual
rights;
(v) this Agreement has been duly authorized, executed and
delivered by the Company;
(vi) the Registration Statement has become effective under the
Act, and to the knowledge of such counsel, (A) no stop order suspending its
effectiveness has been issued and (B) no proceedings for that purpose are,
to such counsel's knowledge, pending before or contemplated by the
Commission;
(vii) the statements under the captions "Management--Stock
Plans", "Certain Transactions", "Description of Capital Stock", "Shares
Eligible for Future Sale" and Item 14 of Part II of the Registration
Statement, insofar as such statements constitute matters of law or legal
conclusions, are correct in all material respects;
(viii) the execution, delivery and performance of this Agreement
by the Company, the compliance by the Company with all the provisions
hereof and the consummation by the Company of the transactions contemplated
hereby will not (A) require any consent, approval, authorization or other
order of, or qualification with, any court or governmental body or agency
(except such as may be required under the securities or Blue Sky laws of
the various states or the NASD), (B) conflict with or constitute a breach
of any of the terms or provisions of, or a default under, the charter or
by-laws of the Company or any indenture, loan agreement, mortgage, lease or
other agreement or instrument filed as an exhibit to the Registration
Statement or (C) violate or conflict with any applicable law, rule or
regulation, which in the experience of such counsel is normally applicable
in transactions of the type contemplated by this
-15-
Agreement, or any judgment, order or decree identified by the Company to
such counsel, of any court or any governmental body or agency having
jurisdiction over the Company, or its property.
(ix) such counsel does not know of any material legal or
governmental proceedings pending or threatened against the Company that are
required by the Act or the rules and regulations thereunder to be described
in the Registration Statement or the Prospectus and are not so described,
or of any contracts or other documents of a character that are required by
the Act or the rules and regulations thereunder to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not so described or filed as required;
(x) the Company is not and, after giving effect to the offering
and sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be, an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended;
(xi) to such counsel's knowledge, there are no contracts,
agreements or understandings between the Company and any person granting
such person the right to require the Company to file a registration
statement under the Act with respect to any securities of the Company or to
require the Company to include such securities with the Shares registered
pursuant to the Registration Statement; and
(xii) the Registration Statement, as of its effective date, and
the Prospectus as of its date, (except for the financial statements,
including the notes and schedules thereto, and other financial and
accounting data included therein as to which no opinion need be expressed)
complied as to form with the Act in all material respects.
In addition to the matters set forth above, counsel rendering the
foregoing opinion shall also include a statement to the effect that nothing has
come to the attention of such counsel that has caused them to believe that the
Registration Statement (except as to the financial statements, including the
notes and schedules thereto, and other financial and accounting data included
therein, as to which such counsel need not express any belief) at the Effective
Date (but after giving effect to changes incorporated pursuant to Rule 430A
under the Act) contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus (except as to the
financial statements, including the notes and schedules thereto, and other
financial and accounting data included therein, as to which such counsel need
not express any belief) as of its date or at the Closing Date, contained any
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. With respect to such
statement, such counsel may state that their belief is based upon the procedures
set forth therein, but is without independent check or verification.
The opinion of Hale and Dorr LLP described in Section 8(e) above shall
be rendered to the Underwriters at the request of the Company and shall so state
therein.
-16-
(f) The Underwriters shall have received on the Closing Date an
opinion, dated the Closing Date, of Latham & Watkins, counsel for the
Underwriters, as to the matters referred to in Sections 8(e)(i), 8(e)(iv),
8(e)(v), 8(e)(vi), 8(e)(vii) (but only with respect to the statements under the
caption "Description of Capital Stock") and 8(e)(xii) (but only as of the date
of this Agreement). In giving such opinions with respect to the matters covered
by Section 8(e)(xii) Latham & Watkins may state that their opinion and belief
are based upon their participation in the preparation of the Registration
Statement and Prospectus and any amendments or supplements thereto and review
and discussion of the contents thereof, but are without independent check or
verification except as specified.
(g) The Underwriters shall have received, on each of the date hereof
and the Closing Date, a letter dated the date hereof or the Closing Date,
respectively, in form and substance satisfactory to the Underwriters, from
Deloitte & Touche LLP, independent public accountants, containing the
information and statements of the type ordinarily included in accountants'
"comfort letters" to Underwriters with respect to the financial statements and
certain financial information contained in the Registration Statement and the
Prospectus.
(h) The Company shall have delivered to the Underwriters the
agreements specified in the last sentence of Section 2 hereof which agreements
shall be in full force and effect on the Closing Date.
(i) The Shares shall have been duly approved for quotation on the
Nasdaq National Market.
(j) The Company shall not have failed on or prior to the Closing Date
to perform or comply in any material respects with any of the agreements herein
contained and required to be performed or complied with by the Company on or
prior to the Closing Date.
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to the Representatives on the
applicable Option Closing Date of such documents (including opinions of counsel
and accountants' "comfort letters" to the Underwriters) as the Representatives
may reasonably request with respect to the incorporation and good standing of
the Company, the due authorization and issuance of such Additional Shares and
other matters related to the issuance and sale of such Additional Shares.
Section 9. Effectiveness of Agreement and Termination.
This Agreement shall become effective upon the execution and delivery
of this Agreement by the parties hereto.
This Agreement may be terminated at any time on or prior to the
Closing Date by the Representatives by written notice to the Company if any of
the following has occurred: (i) any outbreak or escalation of major hostilities
or other national or international calamity or crisis or change in economic
conditions in the United States or elsewhere that, in the judgment of the
Representatives, is material and adverse and, in the judgment of the
Representatives, makes it impracticable to market the Shares on the terms and in
the manner contemplated in the Prospectus, (ii) the suspension or material
limitation of trading in securities or other instruments
-17-
on the New York Stock Exchange, the American Stock Exchange, the Chicago Board
of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade
or the Nasdaq National Market or limitation on prices for securities or other
instruments on any such exchange or the Nasdaq National Market, (iii) the
suspension of trading of any securities of the Company on any exchange or in the
over-the-counter market, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority which in the reasonable judgment of the
Representatives causes or will cause a Material Adverse Effect, (v) the
declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in the
judgment of the Representatives has a material adverse effect on the financial
markets in the United States.
If on the Closing Date or on an Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase the
Firm Shares or Additional Shares, as the case may be, which it or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters, as the case may be, agreed but failed or refused to
purchase is not more than one-tenth of the total number of Shares to be
purchased on such date by all Underwriters, each non-defaulting Underwriter
shall be obligated severally, in the proportion which the number of Firm Shares
set forth opposite its name in Schedule I bears to the total number of Firm
Shares which all the non-defaulting Underwriters, as the case may be, have
agreed to purchase, or in such other proportion as the Underwriters may specify,
to purchase the Firm Shares or Additional Shares, as the case may be, which such
defaulting Underwriter or Underwriters, as the case may be, agreed but failed or
refused to purchase on such date; provided that in no event shall the number of
Firm Shares or Additional Shares, as the case may be, which any Underwriter has
agreed to purchase pursuant to Section 2 hereof be increased pursuant to this
Section 9 by an amount in excess of one-ninth of such number of Firm Shares or
Additional Shares, as the case may be, without the written consent of such
Underwriter. If on the Closing Date any Underwriter or Underwriters shall fail
or refuse to purchase Firm Shares and the aggregate number of Firm Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Firm Shares to be purchased by all Underwriters and arrangements
satisfactory to the Representatives and the Company for purchase of such Firm
Shares are not made within 48 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter and
the Company. In any such case which does not result in termination of this
Agreement, either the Representatives or the Company shall have the right to
postpone the Closing Date, but in no event for longer than seven days, in order
that the required changes, if any, in the Registration Statement and the
Prospectus or any other documents or arrangements may be effected. If, on an
Option Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Additional Shares and the aggregate number of Additional Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Additional Shares to be purchased on such date, the non-defaulting
Underwriters shall have the option to (i) terminate their obligation hereunder
to purchase such Additional Shares or (ii) purchase not less than the number of
Additional Shares that such non-defaulting Underwriters would have been
obligated to purchase on such date in the absence of such default. Any action
taken under this paragraph shall not relieve any defaulting Underwriter from
liability in respect of any default of any such Underwriter under this
Agreement.
-18-
Section 10. Miscellaneous.
Notices given pursuant to any provision of this Agreement shall be
addressed as follows: (i) if to the Company, to PC Connection, Inc., 528 Route
13, P.O. Box 19, Milford, New Hampshire 03055, Attention: Patricia Gallup and
(ii) if to any Underwriter or to the Representatives, to the Representatives
c/o Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New
York, New York 10172, Attention: Syndicate Department, or in any case to such
other address as the person to be notified may have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company and the several Underwriters set
forth in or made pursuant to this Agreement shall remain operative and in full
force and effect, and will survive delivery of and payment for the Shares,
regardless of (i) any investigation, or statement as to the results thereof,
made by or on behalf of any Underwriter, the officers or directors of any
Underwriter, any person controlling any Underwriter, the Company, the officers
or directors of the Company or any person controlling the Company, (ii)
acceptance of the Shares and payment for them hereunder and (iii) termination of
this Agreement.
If for any reason the Shares are not delivered by or on behalf of the
Company as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 9), the Company agrees to reimburse the several
Underwriters for all out-of-pocket expenses (including the reasonable fees and
disbursements of counsel) incurred by them. Notwithstanding any termination of
this Agreement, the Company shall be liable for all expenses which it has agreed
to pay pursuant to Section 5(i) hereof.
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the
Underwriters, the Underwriters' directors and officers, any controlling persons
referred to herein, the Company's directors and the Company's officers who sign
the Registration Statement and their respective successors and assigns, all as
and to the extent provided in this Agreement, and no other person shall acquire
or have any right under or by virtue of this Agreement. The term "successors
and assigns" shall not include a purchaser of any of the Shares from any of the
several Underwriters merely because of such purchase.
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
-19-
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
PC CONNECTION, INC.
By:___________________________
Name: Patricia Gallup
Title: Chief Executive Officer
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NATIONSBANC MONTGOMERY SECURITIES, INC.
WILLIAM BLAIR & COMPANY, L.L.C.
Acting severally on behalf of
themselves and the several
Underwriters named in Schedule I hereto
By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:_______________________________
Name:
Title:
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SCHEDULE I
----------
Underwriters Number of Firm Shares
- ------------ to be Purchased
---------------------
Donaldson, Lufkin & Jenrette
Securities Corporation
NationsBanc Montgomery Securities, Inc.
William Blair & Company, L.L.C.
Total __________
-21-
ANNEX I
-------
Stockholders and Option Holders
- -------------------------------
List of stockholders and existing holders of stock options who will be required
to sign lock-ups to be finalized.
-22-
EXHIBIT 10.10
AMENDED AND RESTATED LEASE
--------------------------
This amended and restated Lease is made this 29th day of December, 1997 by
and between G&H Post, LLC, a New Hampshire limited liability company with an
address at P.O. Box 281, Gilsum, NH 03448 (hereinafter called "Lessor"), and PC
Connection, Inc., a New Hampshire corporation with offices at 528 Route 13
South, Milford, NH 03055 (hereinafter called "Lessee"), and amends and restates
in its entirety the Lease dated November 21, 1997 by and between the Lessor and
Lessee.
1. Premises.
--------
1.1 In consideration of the rents, agreements and conditions herein
reserved and contained on the part of Lessee to be paid, performed and observed,
Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, for the
term herein set forth, approximately 102,874 square feet encompassing the
building known as Post Road Plaza, Route 101 A, Merrimack, New Hampshire, all as
more particularly shown on the floor plan attached hereto as Exhibit A
(hereinafter referred to as the "Premises" or "Post Road Plaza"). The Premises
are a portion of the property described on Exhibit B attached hereto (the
"Property"). Lessee shall also have the right to use, in common with other
tenants, the parking areas, access areas, loading docks, pedestrian walkways,
landscaped and planted areas, and other areas and facilities intended for use by
all tenants of the Property ("Common Areas").
2. Term.
----
2.1 The term of this Lease (the "Term") shall be for fifteen years (15),
commencing on the date of Lessor's completion of the Tenant Improvements
(hereinafter defined) (the "Commencement Date.") Lessor shall construct
leasehold improvements in accordance with plans and specifications prepared by
Lessor at its expense (the "Plans") ("Tenant Improvements"). The Plans shall be
subject to Lessee's approval. Once Lessee has approved the Plans, Lessor shall
construct the Tenant Improvements at Lessor's sole cost and expense. Lessor
shall not be obligated to expend more than $3,800,000 on Tenant improvements,
and Lessor shall competitively bid all such improvement work and make available
to Lessee for its review and approval all information reasonably requested by
Lessee to verify such costs. Any unused portion of the $3,800,000 allowance
shall be available to Lessee as a rent credit. Any cost approved by Lessee in
constructing the Tenant Improvements in excess of $3,800,000 shall be paid by
Lessee to Lessor as additional rent.
2.2 Notwithstanding the Lessor's failure to complete the Tenant
Improvements as described in Exhibit B attached hereto, Lessee agrees to
commence payment of rent and other payments required hereunder immediately upon
receipt by Lessee of Notice from Lessor's construction Lender that Lessor is in
default under Sections 2.4.6, 5.3, 5.4, 5.5 or 8.8 of its Loan Agreement with
Lender ("Loan Agreement") and said default remains uncured after applicable cure
periods ("Default
Notice"); and, upon said Notice, Lessee agrees to pay said rent directly to said
Lender. Lessee also hereby agrees, upon the written request of Lender to be
included in the Default Notice, to complete the Tenant Improvements at its cost
and expense and is hereby given the right by Lessor to complete the Tenant
Improvements as provided herein. Lessee shall, upon assuming, in writing, the
obligation to complete the Tenant Improvements, and so-long as it makes said
rent and other payments, have the right to request Construction Disbursements
under the Loan Agreement up to the Loan Availability (as defined in the Loan
Agreement) upon the terms and conditions thereof. Under no circumstances shall
Lender be required or obligated to complete the Tenant Improvements or otherwise
pay the cost thereof, except as provided in the Loan Agreement.
2.3 Lessor agrees to use reasonable efforts to complete the Tenant
Improvements on or before July 1, 1998 (the "Scheduled Term Commencement Date").
The Tenant Improvements shall be deemed complete when a final certificate of
occupancy has been issued and the Premises are ready for occupancy by Lessee as
certified by Lessor's architect with the exception of minor items which can be
fully completed without material interference with Lessee and other items which
because of the season or weather or the nature of the item are not practicable
to do at the time, provided that none of said items is necessary to make the
Premises tenantable for the permitted uses.
2.4 Lessor shall permit Lessee access for installing equipment and
furnishings in the Premises prior to the Term if it can be done without material
interference with completion of the Tenant Improvements. All construction work
required or permitted by this Lease shall be done in a good and workmanlike
manner and in compliance with all applicable laws and all lawful ordinances,
regulations and orders of governmental authority. Either party may inspect the
work of the other at reasonable times and promptly shall give notice of observed
defects.
2.5 Lessee's obligation to pay rent under Section 3 below shall commence
on the Commencement Date.
3. Base Rent; Taxes; CAM
---------------------
3.1 Lessee shall pay to Lessor rent for the Premises, in the amount
provided in Section 3.2, in advance, on the first day of each calendar month
during the Term, at such place as may be designated from time to time by Lessor.
3.2 The base rent ("Base Rent") for the years 1 through 5 of the term
hereof shall be the sum of Eight Dollars ($8.00) per square foot or Eight
Hundred Twenty Two Thousand Nine Hundred and Ninety Two Dollars ($822,992) per
year payable monthly, in advance, in installments of Sixty Eight Thousand Five
Hundred and Eighty Three Dollars ($68,583) (the "Base Rent"). The Base Rent for
years 6 through
-2-
10 of the term hereof shall be the sum of Nine Dollars ($9.00) per square foot
or Nine Hundred Twenty Five Thousand, Eight Hundred and Sixty Six Dollars
($925,866) per year payable monthly, in advance, in installments of Seventy
Seven Thousand, One Hundred and Fifty Six Dollars ($77,156). The Base Rent for
years 11 through 15 of the term hereof shall be the sum of Ten Dollars ($10.00)
per square foot or One Million Twenty Eight Thousand, Seven Hundred and Forty
Dollars ($1,028,740) per year payable monthly, in advance, in installments of
Eighty Five Thousand, Seven Hundred and Twenty Eight Dollars ($85,728).
3.3 In the event that any monthly installment of rent accruing under this
Lease shall not be paid when due, Lessee shall pay to Lessor any bank penalty or
late charges and mortgage interest, incurred by Lessor because of said delayed
payment of rent and in the event that said delay in payment of rent becomes a
default under Section 14, then the delayed payment of rent shall bear interest
from the date said delayed payment becomes a default at a rate of three percent
(3%) per annum over the prime rate in effect at CFX Bank, its successors or
assigns, at the time when said rent payment is due.
3.4 Security Deposit. Lessee has concurrently delivered to Lessor the sum
----------------
of Sixty Eight Thousand Five Hundred Dollars ($68,500) as security deposit (the
"Security Deposit"). The Security Deposit shall draw no interest, except to the
extent otherwise required by law. The Security Deposit may be used by Lessor to
cure any breach of Lessee hereunder, and, to the extent not so used, shall be
returned to Lessee upon termination of this Lease and redelivery of the Premises
as required hereby.
3.5 Lessee to Pay Proportionate Share of Taxes. Lessee shall pay as
------------------------------------------
additional rent, its Proportionate Share (as defined in Section 3.10 below) of
all amounts payable by Lessor with respect to real estate taxes due with respect
to the Property, including, without limitation, ad valorem taxes and
assessments, general and special taxes and assessments, taxes on real estate
rental receipts, or any other tax imposed upon or levied against real estate, or
upon owners of real estate as such rather than persons generally, extraordinary
as well as ordinary, foreseeable and unforeseeable, including taxes imposed on
leasehold improvements which are assessed against Lessor, payable with respect
to or allocable to the Property together with the reasonable cost (including
fees of attorneys, consultants and appraisers) of any negotiation, contest or
appeal pursued by Lessor in an effort to reduce any such tax, assessment or
charge, all of the above being collectively referred to herein as "Taxes."
"Taxes" shall not include any income, profit, business or gross receipt tax or
capital levy, nor any inheritance, estate, succession, transfer, gift, franchise
or corporation tax levied or imposed upon Lessor, nor any real estate transfer
tax, mortgage lien tax, documentary stamp tax, recording fees or the like.
-3-
3.6 Payment. Lessee's Proportionate Share of Taxes shall be paid by
-------
Lessee in monthly installments on the date Base Rent is paid. Monthly payments
shall be based on estimates made by Lessor from time to time. Lessor may
reestimate Lessee's proportionate share of Taxes and thereafter adjust Lessee's
monthly installments to reflect more accurately Lessee's Proportionate Share of
Taxes. Within one hundred twenty (120) days after Lessor's receipt of tax
bills, Lessor will notify Lessee of the amount of Taxes for the tax year in
question and the amount of Lessee's Proportionate Share thereof. Any
overpayment or deficiency in Lessee's payment of its proportionate share of
Taxes shall be adjusted between Lessor and Lessee, and Lessor and Lessee hereby
agree that Lessee shall pay Lessor or Lessor shall credit to Lessee's account
(or, if such adjustment is at the end of the Term, Lessor shall pay Lessee), as
the case may be, within fifteen (15) days of the aforesaid notice to Lessee,
such amounts as may be necessary to effect such adjustment. Failure of Lessor
to provide such notice within the time prescribed shall not relieve Lessor or
Lessee of their respective obligations hereunder. Lessee shall not be
responsible for any interest, fines or penalties due to the taxing authorization
arising out of Lessor's failure to pay the Taxes when due, provided that Lessee
-------------
has complied with its obligations under this Section 3.
3.7 Management and Operation of Common Areas. Lessor will operate and
----------------------------------------
maintain, or will cause to be operated and maintained, the Common Areas in a
good, clean, and neat condition, and to cause snow to be removed from the
parking lot and walkways all in a reasonable manner deemed by Lessor to be
appropriate and in the best interests of the Property, and consistent with other
similar first class office buildings. Lessor will have the right (i) to
establish, modify and enforce rules and regulations with respect to the Common
Areas which rules are commercially reasonable for Property of similar size in
similar locations; (ii) to enter into, modify and terminate easement and other
agreements pertaining to the use and maintenance of the Common Areas, (iii) to
temporarily close all or any portion of the Common Areas to such extent as may,
in the opinion of Lessor, be necessary to prevent a dedication thereof or the
accrual of any rights to any person or to the public therein; and (iv) to close
temporarily any or all portions of the Common Areas which may in the opinion of
Lessor, be necessary to perform Lessor's repairs or maintenance; and (v) to do
and perform such other acts in and to said areas and improvements as, in the
exercise of good business judgment, Lessor shall determine to be advisable and
in the best interest of the Property. In no event shall Lessor alter the Common
Areas in such a way as to reduce the number of parking spaces available to
Lessee below [750] or to otherwise materially interfere with the operation of
Lessee's business.
3.8 Lessee to Share Expense of Common Areas and Lessor's Operating Costs.
--------------------------------------------------------------------
Lessee will pay Lessor, as additional rent, its Proportionate Share of Lessor's
Operating Costs (as defined in Section 3.10 below). Such Proportionate Share
shall be paid by Lessee in monthly installments when Base Rent is due in such
amounts as are estimated and billed by Lessor. Lessor may reestimate Lessee's
Proportionate
-4-
Share of Lessor's Operating Costs and thereafter adjust Lessee's monthly
installments to reflect more accurately Lessee's Proportionate Share of Lessor's
Operating Costs. Within one hundred twenty (120) days (or such additional time
thereafter as is reasonable under the circumstances) after the end of each
twelve (12) month period, Lessor shall deliver to Lessee a statement of Lessor's
Operating Costs for such twelve (12) month period and the monthly installments
paid or payable shall be adjusted between Lessor and Lessee, and Lessee shall
pay Lessor or Lessor shall credit Lessee's account (or, if such adjustment is at
the end of the Term, Lessor shall pay Lessee), as the case may be, within
fifteen (15) days of receipt of such statement, such amounts as may be necessary
to effect such adjustment. Upon reasonable notice, Lessor shall make available
for Lessee's inspection at Lessor's office, during normal business hours,
Lessor's records relating to Lessor's Operating Costs for the preceding twenty-
four (24) month period in order to perform an audit of Lessor's records. If any
audit performed by Lessee of Lessor's Operating Costs proves that Lessor has
overstated Lessor's actual Operating Costs by more than five percent (5%),
Lessor shall reimburse Lessee for Lessee's reasonable costs in conducting said
audit.
3.9 "Lessor's Operating Costs" Defined. The term "Lessor's Operating
---------------------------------
Costs" means all costs and expenses reasonably incurred by or on behalf of
Lessor in operating, managing, insuring, securing and maintaining the Property
and the common areas pursuant to Section 5.1 including, but not limited to, all
costs and expenses of operating, maintaining, repairing, lighting, signing,
cleaning, painting, striping, policing and security of the Common Areas; alarm
and life safety systems; insurance, including, without limitation, liability
insurance for personal injury, death and property damage, all-risks casualty
insurance (including coverage against fire, flood, theft or other casualties),
worker's compensation insurance or similar insurance covering personnel,
fidelity bonds for personnel, insurance against liability for assault and
battery, defamation and claims of false arrest occurring on and about the Common
Areas, the costs and expenses of maintenance of all exterior glass; maintenance
of sprinkler systems; removal of water, snow, ice, trash and debris; installing
and renting of signs for the Property as a whole; fire protection; maintenance
and repair of utility systems serving the Property, including, but not limited
to, water, sanitary sewer and storm water lines and other utility lines, pipes
and conduits; costs and expenses of repair or replacement of awnings, paving,
curbs, walkways, landscaping, drainage, pipes, ducts, conduits and similar
items, lighting facilities; costs and expenses of planting, replanting,
replacing and displaying flowers, shrubbery and planters; costs of providing
light and power to the Common Areas; cost of water services, if any, furnished
by Lessor for the non-exclusive use of all Lessees; parcel pick-up and delivery
services. Lessor may elect to amortize any of the foregoing costs and expenses
over a useful life determined in accordance with generally accepted accounting
principles. Notwithstanding anything to the contrary in this Section 3.9,
Lessor's Operating Costs shall not include any costs or expenses incurred for
the benefit of any particular Lessee or Lessees and not the Property as a
-5-
whole, or any costs incurred for repairs or replacements which would be
classified under the Internal Revenue Code as "capital" in nature.
3.1 "Proportionate Share" defined: For purposes of this Lease, Lessee's
----------------------------
Proportionate Share shall equal the rentable area of the Premises divided by the
rentable area of all space available to lease on the Property from time to time.
Lessee's Proportionate Share shall be modified proportionately in the event
Lessee occupies additional space within.
4. Use.
---
4.1 The Premises shall be used for office, storage, retail uses,
telemarketing and storage of inventory.
4.2 Lessee shall not use or occupy or permit the property to be used or
occupied, nor do or permit anything to be done in or on the property, in a
manner which will in any way violate any certificate of occupancy affecting the
property, or make void or voidable any insurance then in force with respect
thereto, which will make it impossible to obtain fire or other insurance
required to be furnished by Lessor hereunder, or which will cause or be likely
to cause structural damage to the building or any part thereof, or which will
constitute a public or private nuisance, and shall not use or occupy or permit
the property to be used or occupied in any manner which will violate any present
or future laws or regulations of any governmental authority.
5. Obligation to Repair.
--------------------
5.1 Repairs To Be Made By Lessor. Lessor, at its expense, will make, or
----------------------------
cause to be made, structural repairs to exterior walls, structural columns,
structural girders, roof, roof deck and roof penetrations and structural floors
which collectively enclose the Premises (excluding, however, all doors, door
frames, storefronts, windows and glass). Lessor shall not be required to make
any repairs occasioned by the act or neglect of Lessee, its assignees,
sublessees, servants, agents, employees, invitees, licensees or concessionaires.
If the Premises should become in need of repairs required to be made by Lessor
hereunder, Lessee shall give immediate written notice thereof to Lessor, and
Lessor shall not be responsible in any way for failure to make any such repairs
until a reasonable time shall have elapsed after the giving of such written
notice. Lessor agrees to indemnify and hold Lessee harmless from and against
all claims, actions, damages and liability suffered by Lessee in connection with
any damage or injury sustained by any person because of the failure of
structural columns or structural girders, roof, floors or other installations
whose maintenance and repair is the responsibility of Lessor, including, but not
limited to reasonable attorneys' and other professional fees.
-6-
5.2 Repairs To Be Made By Lessee. All repairs to the Premises, or any
----------------------------
installations, equipment or facilities therein, other than those repairs
required to be made by Lessor pursuant to Section 5.1, shall be made by Lessee
at its expense. Without limiting the generality of the foregoing, Lessee will
keep the interior of the Premises, together with all electrical, plumbing and
other mechanical installations therein and the heating ventilating and air-
conditioning system, in good order and repair and will make all replacements
from time to time required thereto at its expense; provided, however, that
Lessee shall not be required to make any repairs which are capital in nature,
the cost of which shall be borne by Lessor and performed by Lessor. Lessee will
surrender the Premises at the expiration of the Term or at such other time as it
may vacate the Premises in as good condition as when received, excepting
depreciation caused by ordinary wear and tear, damage by Casualty, unavoidable
accident or Act of God. Any damage or injury sustained by any person because of
mechanical, electrical, plumbing or any other equipment or installations, whose
maintenance and repair shall be the responsibility of Lessee, shall be paid for
by Lessee, and Lessee hereby agrees to indemnify and hold Lessor harmless from
and against all claims, actions, damages and liability suffered by Lessor in
connection therewith, including, but not limited to reasonable attorneys' and
other professional fees.
5.3 Damage to Premises. Lessee will repair promptly at its expense any
------------------
damage to the Premises, and, upon demand, shall reimburse Lessor (as Additional
Rent) for the reasonable cost of the repair of any damage elsewhere in the
Property, caused by Lessee, its agents, servants, employees, or contractors,
invitees or customers. If Lessee shall fail to commence such repairs within
twenty (20) days after notice to do so from Lessor, Lessor may make or cause the
same to be made and Lessee agrees to pay Lessor promptly upon Lessor's demand,
as Additional Rent. Lessee shall not be responsible for any damage caused by
Lessor's gross negligence or misconduct.
6. Right to Alter and Improve
--------------------------
6.1 Unless prohibited by the terms of any mortgage, Lessee may make such
additions and alterations, structural or otherwise, to the Premises as Lessee
deems desirable in the conduct of its business, provided that, prior to the
commencement of any such additions, alterations or improvements, Lessor shall in
each case have reasonably approved, in writing, the plans and specifications
therefor. In any case, where any addition, alteration or improvement would
require the consent of any institution which holds any mortgage, Lessee shall
procure such consent before undertaking such addition, alteration or
improvement.
6.2 All work done in connection with any addition, improvement or
alteration shall be done in a good and workmanlike manner and in compliance with
the building and zoning laws and with all other laws, ordinances, orders, rules,
-7-
regulations, and requirements of all federal, state and municipal governments
and the appropriate departments, commissions, boards, and offices thereof, and
in accordance with the orders, rules and regulations of the board of fire
underwriters or any other body, now or hereafter constituted, exercising similar
functions and Lessee shall procure, at its own cost, certificates of occupancy
and other certificates and permits if required by law.
6.3 Lessee will not permit any mechanic's, materialmen's or other liens to
stand against the property for work or material furnished to Lessee; provided
that Lessee shall have the right to contest the validity of any lien or claim.
If Lessee has not caused such lien or liens to be dismissed within ninety (90)
days of notice thereof; Lessee shall post a bond to ensure that upon final
determination of the validity of such lien or claim and Lessee shall immediately
pay any judgment rendered against it, with all proper costs and charges, and
shall have such lien released without cost to Lessor.
6.4 Changes and Additions to Property. Lessor reserves the right at any
---------------------------------
time and from time to time to (a) make or permit changes or revisions to the
Property including additions to, subtractions from, arrangements of, alterations
of, modifications of; or supplements to, the building areas, walkways,
driveways, parking area, or other Common Areas, b) construct improvements and to
make alterations thereof or additions thereto and to build additional stories on
or in any such building(s) provided, however, that no such changes,
rearrangements or other construction shall reduce the parking available to
Lessee below [750] spaces or otherwise have a material adverse impact on the
operation of Lessee's business at the Premises.
7. Removal of Improvements. With the exception of that machinery and
-----------------------
equipment and personal property referenced in Section 8.1 and 8.2 below, all
permanent light fixtures, paneling and other wall coverings, partitions,
insulation, water system, carpets and wall to wall floor coverings, air
conditioning, heating, ceiling tiles and all other permanent improvements which
are installed by Lessee and enhance the Premises shall become the property of
Lessor at the expiration of this Lease, or at its earlier termination for any
cause herein provided for; provided, however, if Lessor shall so direct in
writing at the time Lessee requests Lessor's approval for the installation
thereof, Lessee shall remove any alterations, additions and improvements to the
Premises so specified by Lessor made by it during the term hereof, not mentioned
above, and shall restore the Premises to their condition as at the beginning of
the term hereof, reasonable wear and tear, casualty and taking by eminent domain
excepted. If Lessor shall not give such written direction to Lessee, all such
alterations, additions, and improvements shall become and remain the property of
Lessor.
-8-
8. Machinery and Equipment - Trade Fixtures.
----------------------------------------
8.1 Lessee agrees that all machinery and equipment and appurtenances
thereto, installed in the Premises by it or by any employee, agent or
subcontractor of Lessee, or by any sublessee of Lessee, which cannot be removed
from the leased Premises without permanent and substantial damage to the
Premises shall be and become part of the realty and shall be and become the
property of Lessor and shall not be removed from the Premises without the
written consent of Lessor.
8.2 All machinery and equipment and appurtenances thereto installed in the
Premises by Lessee or by any employee, agent or subcontractor of Lessee, or by
any sublessee of Lessee, which may be removed from the Premises without
permanent and substantial damage to the Premises; and,
8.3 All furniture, furnishings and movable trade fixtures, including
movable office dividers, installed in the Premises shall be deemed to remain
personal property and all such machinery, equipment, appurtenances, furniture,
furnishings and movable trade fixtures including movable office dividers, of
Lessee or of any employee, agent or subcontractor or sublessee of Lessee may be
removed prior to the expiration of this Lease or its earlier termination for any
cause herein provided for; but Lessee shall repair any damage occasioned by such
removal and shall reasonably restore the Premises to their condition as at the
beginning of the term hereof, reasonable wear and tear, taking by eminent
domain, and damage insurance under the standard New Hampshire fire insurance
policy with extended coverage excepted to the extent of such coverage.
8.4 Any such property which may be removed pursuant to subparagraphs 8.2
and 8.3, and which is not so removed prior to the expiration or earlier
termination of this Lease may be removed from the Premises by Lessor and stored
for the account of Lessee; and if Lessee shall fail to reclaim such property
within sixty (60) days following such expiration or earlier termination of this
Lease, such property shall be deemed to have been abandoned by Lessee and may be
appropriated, sold, destroyed, or otherwise disposed of by Lessor without notice
to Lessee and without obligation to account therefor. Lessee shall pay to
Lessor the costs incurred by Lessor in moving, storing, selling, destroying, or
otherwise disposing of any such property.
9. Utilities.
---------
9.1 Provision of Utilities. Lessor will provide, or cause to be provided
----------------------
to the Premises water, electricity, telephone, sanitary sewer, heat, ventilation
and air conditioning. Lessee shall arrange for the furnishing to the Premises
of such utility services as it may require, as well as for the installation of
all meters or other devices. Lessee shall be solely responsible for and shall
promptly pay, as and when the same become due and payable, all charges for
water, sewer, electricity, gas, telephone and
-9-
any other utility used or consumed in the Premises and supplied by a public
utility or public authority or any other person, firm or corporation, including
Lessor, supplying the same.
9.2 Lessor, in its sole discretion, shall have the right, from time to
time, to alter the method and source of supply to the Premises of electricity or
any other utility, and Lessee agrees to execute and deliver to Lessor such
documentation as may be required to effect such alteration, provided, however
that Lessee shall not be required to bear any portion of the cost of such
alteration or to incur any additional financial obligation as a result of such
alteration.
9.3 Lessee shall not at any time overburden or exceed the capacity of the
mains, feeders, ducts, conduits, or other facilities by which such utilities are
supplied to, distributed in or serve the Premises. If Lessee desires to install
any equipment which shall require additional utility facilities or utility
facilities of a greater capacity than the facilities provided by Lessor, such
installation shall be subject to Lessor's prior approval of Lessee's plans and
specifications therefor which approval shall not be unreasonably withheld or
delayed. If such installation is approved by Lessor, Lessee shall cause the
same to be installed in a good and workmanlike manner and in compliance with
Sections 7.3 and 12.4.
9.4 Discontinuances and Interruptions of Utility Services. Unless caused
-----------------------------------------------------
by Lessor, Lessor shall not be liable to Lessee in damages or otherwise (i) if
any utility shall become unavailable from any public utility company, public
authority or any other person or entity supplying or distributing such utility,
or (ii) for any interruption in any utility service (including, without
limitation, any heating, ventilation, air-conditioning or sprinkler) caused by
the making of any necessary repairs or improvements or by any cause beyond
Lessor's reasonable control, and the same shall not constitute a termination of
this Lease or an eviction of Lessee, provided, however, that Lessor shall use
diligent efforts to restore such utilities.
10. Insurance.
---------
10.1 Throughout the lease term, Lessee shall keep the Premises c
ontinuously insured as hereinbelow set forth paying as the same become due all
premiums in respect thereto:
10.1.a insurance to the extent of $3,000,000 per accident against
liability for bodily injury, including death resulting therefrom, and to the
extent of $3,000,000 per accident against liability for damage to property
including loss of use thereof, incurring on or in any way related to the
Premises or any part thereof;
10.1.b Contents Insurance - Lessor shall not be liable to Lessee
for loss or damage to production machinery and equipment, furnishings, fixtures,
-10-
inventory or other personal property, unless caused by Lessor's negligence or
willful misconduct;
Lessor shall maintain the following insurance coverages (the cost of which
shall be an Operating Cost):
(a) Broad Form Fire and Extended Coverage Insurance in an amount equal to
the full current replacement value of the building and improvements on the
Property, naming Lessor and the holder of any mortgage on the Premises as
insured parties; and,
(b) Rental Value Insurance covering risk of loss of rental due to the
occurrence of any of the hazards insured against by the Fire and Extended
Coverage Insurance referenced in (a) above, in an amount not less than the then
applicable Base Rent, which insurance shall name only Lessor as insured.
10.2 Additional Provisions Respecting Insurance. All insurance required
------------------------------------------
in Section 10 hereof shall be taken out and maintained in generally recognized
responsible insurance companies qualified to do business in the State of New
Hampshire. All documents evidencing such insurance carried by Lessee shall name
Lessor as an additional insured and, at the request of Lessor, shall contain
standard mortgage clauses covering any mortgages and shall contain a waiver by
the insurers against Lessor and Lessee or their agents because of any act of
negligence thereof. A certificate or certificates of the insurers that such
insurance is in force and effect shall be deposited with Lessor prior to the
expiration of any such policy. Lessee shall furnish Lessor with evidence
satisfactory to Lessor that the policy has been renewed or replaced or is no
longer required by this Lease. All insurance policies required to be procured
under Section 10 shall be in form, coverage and amounts reasonably satisfactory
to Lessor. All such policies shall provide that no policy shall be terminated,
canceled or otherwise modified unless ten (10) days' prior written notice is
given to Lessor.
10.3 Advances by Lessor. In the event Lessee shall fail to maintain the
------------------
full insurance coverage required by this Lease or shall fail to keep the
Premises in safe condition, or shall fail to keep the building in good repair
and good operating condition, Lessor may (but shall be under no obligation to)
take out the required policies of insurance and pay the premiums on the same or
make the required repairs, renewals and replacements; and all amounts so
advanced therefor by Lessor shall become additional rent due from Lessee to
Lessor, which rent, together with interest, from the date of payment by Lessor
at a rate of two percent (2%) per annum over the prime rate of interest charged
by CFX Bank, its successors or assigns, at the time of payment thereof by
Lessor, Lessee agrees to pay to Lessor on demand.
-11-
10.4 Waiver of Subrogation. Lessee and Lessor each hereby waive any and
---------------------
all rights of recovery against the other, or against the officers, employees,
agents and representatives of the other, for loss of or damage to such waiving
party or its property or the property of others under its control to the extent
that such loss or damage is insured against under any insurance policy in force
at the time of such loss or damage. Each party shall obtain clauses in the
policies of insurance required hereunder pursuant to which the insurance carrier
or carriers waive all right of subrogation against the waiving party with
respect to losses payable under such policies.
11. Damage Destruction and Condemnation.
-----------------------------------
11.1 Damage and Destruction. If the Premises shall be damaged, in whole
----------------------
or in part, by fire or casualty or action of public authority in consequence
thereof:
11.1.a The rent hereinbefore reserved, or adjust and proportional
share thereof, according to the nature and extent of the injuries sustained,
shall be suspended or abated until Lessor shall have repaired or restored the
Premises to substantially their condition at the time of their damage; or,
11.1.b If the Premises are, by such damage, rendered unsuitable for
Lessee's use for more than 180 days, this Lease shall be terminated at the
election of Lessor or Lessee, or their respective legal representatives, any
such election to be made by written notice given to Lessor or Lessee, as the
case may be, within thirty (30) days after such damage or destruction occurs,
and if any such election is made, this Lease shall terminate in accordance
therewith as of the date of such damage or destruction.
In the event of any damage or destruction, and this Lease is not to
terminate as aforesaid, Lessor shall exercise its best efforts immediately to
commence and complete such repairs or restoration; provided Lessor shall not be
required to expend more than the net proceeds of insurance in repairing such
damage, unless, if the damage is more extensive than is compensable by such net
proceeds, Lessee after receiving notice of the amount of coverage or amount of
money so due Lessor, agrees, by immediate written notice to Lessor, to furnish
the excess amount required to repair or restore.
11.2 Condemnation. If the Premises or any portion thereof are taken under
------------
the power of eminent domain, or sold under the threat of the exercise of said
power (all of which are herein called "condemnation"), this Lease shall
terminate as to the part so taken as of the date the condemning authority takes
title or possession, whichever first occurs. If more than twenty-five percent
(25%) of the floor area of the improvements on the Premises is taken by
condemnation or any material portion of the parking area available to Lessee,
Lessee may, at Lessee's option to be exercised in
-12-
writing only within ten (10) days after Lessor shall have given Lessee written
notice of such taking, terminate this Lease as of the date the condemning
authority takes such possession. If Lessee does not terminate this Lease in
accordance with the foregoing, this Lease shall remain in full force and effect
as to the portion of the Premises remaining, except that the rent shall be
reduced in the proportion that the floor area taken bears to the total floor
area of the building situated on the Premises. Any award for the taking of all
or any part of the Premises under the power of eminent domain or any payment
made under threat of the exercise of such power shall be the property of Lessor,
whether such award shall be made as compensation for diminution in value of the
leasehold or for the taking of the fee, or as severance damages;
PROVIDED, HOWEVER, that Lessee shall be entitled to any award for relocation
expenses or for loss of or damage to Lessee's trade fixtures and removable
personal property. In the event that this Lease is not terminated by reason of
such condemnation, Lessor shall, to the extent of severance damages initially
received by Lessor in connection with such condemnation, repair any damage to
the Premises caused by such condemnation except to the extent that Lessee has
been reimbursed therefor by the condemning authority. Lessor shall pay any
amount in excess of such severance damages required to complete such repair.
12. Special Covenants.
-----------------
12.1 Quiet Enjoyment and Condition of Premises. Lessor shall put Lessee
-----------------------------------------
in possession of the leased Premises at the beginning of the Term hereof, and
Lessee, upon paying the rent and observing the other covenants and herein upon
its part to be observed, shall peaceably hold and enjoy the Premises. Except
for the Lessee Improvements to be made by Lessor, Lessee hereby accepts the
Premises in their condition existing as of the date of the execution hereof;
provided, however, that Lessor shall deliver the Premises to Lessee in
compliance with all applicable zoning, municipal, county and state laws,
ordinances and regulations governing and regulating the use of the Premises
Lessee acknowledges that neither Lessor nor Lessor's agent has made any
representation or warranty as to the suitability of the Premises for the conduct
of Lessee's business and that Lessee has made an inspection of the Premises.
12.2 Lessor's Right of Access to the Premises. Lessee agrees that Lessor,
----------------------------------------
and its duly authorized agents shall have the right at all reasonable times,
with the prior consent of Lessee, which consent will not unreasonably be
withheld, to enter upon the Premises and to examine and inspect the Premises;
provided that in the event of an emergency Lessor shall have the right to enter
the Premises for any purpose connected with Lessor's rights, duties or
obligations under this Lease. Lessee further agrees that Lessor and its duly
authorized agents shall have such rights of access to the building as may be
reasonably necessary for the proper maintenance of the
-13-
building in the event of failure by Lessee to perform its obligations under
Section 5.1 hereof.
12.3 Notice of Lease. Lessor, upon the written request of Lessee, shall
---------------
at any time join in an execution of a notice or a memorandum of lease as may be
deemed necessary by Lessee, all in proper form for recording or filing in the
appropriate offices, setting forth the existence and terms of this Lease, and
Lessor and Lessee shall take all such action as may be necessary to permit such
recording or filing.
12.4 Access for Renting. During the last six (6) months of the Term,
------------------
Lessor, or any agent or employee of Lessor, shall have free access to the
Premises at all reasonable hours, with the prior consent of Lessee, which
consent will not unreasonably be withheld, to exhibit and inspect the same and
to take measurements in connection with any leasing or prospective leasing or
construction of the Premises. Lessor shall have the right to enter onto the
Premises at all reasonable hours, with the prior consent of Lessee, which
consent will not unreasonably be withheld, during the sixty (60) days prior to
the expiration of the Term and during such time may place in the windows and
doors of the building such usual "For Rent" or "For Sale" signs as may be
reasonably necessary in the advertising of the Premises.
13. Assignment and Subleasing.
-------------------------
This Lease may not be assigned by Lessee or subleased by Lessee as a whole
or in part, without the express written consent of Lessor, which written consent
shall not be unreasonably withheld, if the following conditions are met by
Lessee:
13.1 No sublease shall relieve Lessee from primary liability for any of
its obligations hereunder, and in the event of any such sublease Lessee shall
continue to remain primarily liable for payment of the rents specified above and
for performance and observance of the other covenants, warranties,
representations and agreements on its part herein provided to be performed and
observed by it to the same extent as though no sublease had been made;
13.2 The sublease shall assume the obligations of Lessee hereunder to the
extent of the interest subleased; and,
13.3 Lessee shall, within thirty (30) days prior to the delivery thereof,
furnish or cause to be furnished to Lessor a true and complete copy of each such
assumption of obligations and sublease, as the case may be in order that Lessor
may examine the same for the purpose of giving its consent as referred to
hereinabove. Not withstanding the foregoing, no consent shall be required for
an assignment or subletting to any affiliate of Lessee in connection with a
merger or a sale of substantially all of the stock or assets of Lessee.
-14-
14. Events of Default and Remedies.
------------------------------
14.1 Events of Default Defined. The following shall be "events of
-------------------------
default" under this Lease and the terms "events of default" or "default" shall
mean, whenever they are used in this Lease, any one or more of the following
events:
14.1.a failure by Lessee to pay the rents required to be paid at
the times specified therein and continuation of said failure for a period often
(10) days after written notice;
14.1.b failure by Lessee to observe and perform any covenants,
condition or agreement on its part in this Lease to be observed or performed,
other than as referred to in subsection 14.1.a, for a period of thirty (30) days
after written notice, specifying such failure and requesting that it be
remedied, given to Lessee by Lessor, or if the nature of said default is such
that a period in excess of thirty (30) days is required in order to cure it and
Lessee has, upon notice of the default as aforesaid, immediately commenced and
has continued within said thirty (30) day period to prosecute the curing of said
default with all due diligence, then said period of thirty (30) days shall be
extended for such period as shall be required by Lessee to cure same;
14.1.c filing by Lessee of a voluntary petition, or the filing
against Lessee of an involuntary petition, in bankruptcy not discharged within
sixty (60) days, or failure by Lessee promptly to lift any execution,
garnishment or attachment of such consequence as will impair its ability to
carry on its business at the Premises, or the commission by Lessee of any act of
bankruptcy, or the insolvency of Lessee, or adjudication of Lessee as a
bankrupt, or assignment by Lessee under the bankruptcy laws of the United States
of America or of any state not discharged within sixty (60) days, or the entry
by Lessee into an agreement of composition with its creditors, the institution
of any proceedings for any relief of Lessee under any bankruptcy or insolvency
laws or any laws relating to the relief of debtors, readjustment of indebtedness
arrangements, composition or extension not discharged within sixty (60) days, or
Lessee is generally not paying its debts as they become due; or,
14.1 Remedies on Default. Whenever any event of default referred to in
-------------------
Section 14.1 hereof shall have happened and be subsisting, Lessor may
immediately or at any time thereafter and without demand or notice enter upon
the leased premises or any part thereof in the name of the whole and repossess
the same as of Lessor's former estate and expel Lessee and those claiming
through or under Lessee and remove their effects forcibly if necessary, without
being deemed guilty of any manner of trespass and without prejudice to any
remedies which might otherwise be used for arrears of rent or preceding breach
of covenant, and upon such entry this Lease shall terminate, and Lessor may, at
its option, declare all installments of rent payable for the remainder of the
Term hereof to be immediately due and payable,
-15-
whereupon the same shall become immediately due and payable. Lessee covenants
that, in case of such termination under the provisions of statute by reason of
the default of Lessee, Lessee shall remain and continue liable to Lessor in an
amount equal to the total rent reserved for the balance of the Term hereof plus
all additional rent reserved for the balance of the Term hereof less the net
amounts (after deducting the reasonable expenses of reletting, repair,
renovation or demolition) which Lessor realizes from the reletting of the
Premises. As used in this Section, the term "additional rent" means the value of
all considerations other than rent agreed to be paid or performed by Lessee
hereunder, including, without limiting the generality of the foregoing, taxes,
assessments, and insurance premiums. Lessor shall have the obligation to take
reasonable steps to mitigate the damages caused by Lessee's default hereunder,
including reletting the leased premises, and shall have the right from time to
time to relet the leased premises upon such terms as it may reasonably deem fit,
provided such terms are reasonably in accordance with the general market for the
Premises in the area. If a sufficient sum shall not be thus realized to yield
the net rent required under this Lease, Lessee agrees to satisfy and pay all
deficiencies as they may become due during each month of the remaining Term of
this Lease. Nothing herein contained-shall be deemed to require Lessor to await
the date whereon this Lease, or the Term hereof, would have expired had there
been no default by Lessee, or no such termination or cancellation. Lessee
expressly waives service of any notice of intention to reenter and waives and
all right to recover or regain possession of the leased premises, or to
reinstate or redeem this Lease as may be permitted or provided for by or under
any statute or law now or hereafter in force and effect.
14.3 No Remedy Exclusive. No remedy herein conferred upon or reserved to
-------------------
Lessor is intended to be exclusive of any other available remedy or remedies,
but each and every such remedy shall be cumulative and shall be in addition to
every other remedy given under this Lease or now or hereafter existing at law or
in equity or by statute. No delay or omission to exercise any right or power
accruing upon default shall impair any such right or power or shall be construed
to be a waiver thereof, but any such right and power may be exercised from time
to time and as often as may be deemed expedient. In order to entitle Lessor to
exercise any remedy reserved to it in this Section, it shall not be necessary to
give any notice, other than such notice as may be herein expressly required.
14.4 Agreement to Pay Attorneys' Fees and Expenses. In the event Lessor
---------------------------------------------
or Lessee should default under any of the provisions of this Lease and the non-
defaulting party should employ attorneys or incur other expenses for the
collection of rent or the enforcement of performance or observance of any
obligation or agreement on the part of the defaulting party herein contained,
the defaulting party agrees that it will on demand therefor pay to the non-
defaulting party the reasonable fees of such attorneys and such other expenses
so incurred by the non-defaulting party.
-16-
14.5 No Additional Waiver Implied by One Waiver. In the event any
------------------------------------------
agreement contained in this Lease should be breached by either party and
thereafter waived by the other party, such waiver shall be limited to the
particular breach so waived and shall not be deemed to waive any other breach
hereunder.
15. Indemnity.
---------
15.1 Indemnity. Lessee shall indemnify and hold Lessor harmless from and
---------
against any and all claims arising from Lessee's use of the Premises, or from
the conduct of Lessee's business or from any activity, work or things done,
permitted or suffered by Lessee in or about the Premises or elsewhere and shall
further indemnify and hold Lessor harmless from and against any and all claims
arising from any breach or default in the performance of any obligation on
Lessee's part to be performed under the terms of this Lease, or arising from any
negligence of Lessee, or any of Lessee's agents, contractors, or employees, and
from and against all costs, reasonable attorneys' fees, expenses and liabilities
incurred in the defense of any such claim or any action or proceeding brought
thereon; and in case any action or proceeding is brought against Lessor by
reason of any such claim, Lessee, upon notice from Lessor, shall defend the same
at Lessee's expense. Lessee, as a material part of the consideration to Lessor,
hereby assumes all risk of damage to property or injury to persons, in, upon, or
about the Premises arising from any cause, except damage to property or injury
to persons caused by the actions or inactions of Lessor or any other lessee of
the property, and Lessee hereby waives all claims in respect thereof against
Lessor.
15.2 Exemption of Lessor from Liability. Lessee hereby agrees that unless
----------------------------------
caused by Lessor's negligence or willful misconduct, Lessor shall not be liable
for injury to Lessee's business or any loss of income therefrom or for damage to
the goods, wares, merchandise or other property of Lessee, Lessee's employees,
invitees, customers, or any other person in or about the Premises, nor shall
Lessor be liable for injury to the person of Lessee, Lessee's employees, agents
or contractors, whether such damage or injury is caused by or results from fire,
steam, electricity, gas, water or rain, or from the breakage, leakage,
obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing,
air conditioning or lighting fixtures, or from any other cause, whether said
damage or injury results from conditions arising upon the Premises or upon other
portions of the building of which the Premises are a part, or from other sources
or places, and regardless of whether the cause of such damage or injury or the
means of repairing the same is inaccessible to Lessee.
16. Miscellaneous.
-------------
16.1 Notices. All notices, certificates or other communications hereunder
-------
shall be sufficiently given and shall be deemed given when sent by recognized
overnight courier or mailed by registered or certified mail, postage prepaid, to
the
-17-
following addresses or to such other addresses as the parties shall, by like
notice, notify one another:
If to Lessor: G&H Post, L.L.C.
P.O Box 281
Gilsum, New Hampshire 03448
Attn: David Hall
If to Lessee: PC Connection, Inc.
528 Route 13 South
Milford, New Hampshire 03055
Attn: Wayne Wilson
16.2 Binding Effect. This Lease shall inure to the benefit of and shall
--------------
be binding upon Lessor, Lessee and their respective heirs, assigns, legal
representatives and successors.
16.3 Severability. In the event any provision of this Lease shall be held
------------
invalid or unenforceable by any court of competent jurisdiction or by any future
legislative action, such holding or such action shall not invalidate or render
unenforceable any other provisions hereof.
16.4 Entire Agreement. This lease embodies the entire agreement and
----------------
understanding between the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements and understandings relating to such
subject matter, including the Lease dated November 21, 1997, by and between the
Lessor and Lessee.
16.5 Amendments, Changes and Modifications. This Lease may be amended,
-------------------------------------
changed, modified, altered or terminated only with the written consent of the
parties hereto.
16.6 Execution Counterparts. This Lease may be executed in several
----------------------
counterparts, each of which shall be an original and all of which shall
constitute but one and the same instrument.
16.7 Applicable Law. This Lease shall be governed exclusively by the
--------------
applicable laws of the State of New Hampshire.
16.8 Surrender of the Premises. Except as otherwise provided in this
-------------------------
Lease, Lessee shall, upon the expiration or termination of this Lease for any
reason whatsoever, surrender the Premises to Lessor in good order, condition and
repair, except for reasonable wear and
-18-
tear, fire, taking or other casualty, including wear and tear resulting from the
elements and free of all lessees and personal property of Lessee.
16.9 Exhibits. Each exhibit attached to this Lease shall be incorporated
--------
into and be a part of this Lease.
16.10 Subordination.
-------------
16.10.a This Lease shall be subordinate to any mortgage, deed of
trust, or any other hypothecation for security now or hereafter placed upon the
Premises and to any and all advances made on the security thereof and to all
renewals, modifications, consolidations, replacements and extensions thereof.
Lessor shall cause any mortgage holder to provide a non-disturbance agreement to
Lessee containing commercially reasonable terms and conditions.
16.10.b Lessee agrees to execute any documents reasonably required to
effectuate such subordination or to make this Lease prior to the lien of any
mortgage or deed of trust, as the case may be.
17. Options to Renew.
----------------
Provided it be not at the time in default beyond applicable grace or cure
periods in the payment of rent or in the performance of any of its other
obligations hereunder, and provided no other event of default beyond applicable
grace or cure periods shall have occurred and not have been cured, Lessee, upon
not less than six (6) months' written notice to Lessor, may renew this Lease for
two (2) additional terms of five (5) years each. Such renewal term shall be
upon the same terms and conditions of this Lease.
18. Estoppel Certificate.
--------------------
Each party agrees, from time to time, within fifteen (15) days of receipt
of written request by the other party to execute, acknowledge and deliver to the
requesting party, a statement in writing certifying that:
18.1 this Lease is unmodified and in full force and effect; or,
18.2 if there have been modifications, that this Lease is in full force
and effect as modified and stating the modifications; and,
18.3 whether or not Lessee has any defense, offsets or counterclaims
against its obligations to pay the rent and other monies hereunder and to
perform its other covenants under this Lease; and,
-19-
18.4 the dates to which the rent has been paid and the amount of any
prepaid rent.
Any such statement, delivered pursuant to this paragraph, may be relied
upon by any prospective purchaser or mortgagee of the Premises, any prospective
assignee of any mortgage or encumbrance upon the Premises, or any prospective
assignees or sublessee of Lessee's interests under this Lease.
19. Hazardous Materials
-------------------
Lessor shall defend, indemnify and hold Lessee harmless from and against
all loss, cost, expense or damages Lessee, its stockholders, officers, directors
or employees (herein, "indemnified parties") may suffer or incur as a result of
the discharge, release, generation, storage or disposal of any Hazardous
Substances on or about the Premises or on any property adjacent thereto prior to
the commencement of the Term of this Lease.
For purposes of this Lease Hazardous Materials shall mean oil and petroleum
products and all hazardous or toxic substances, all substances which, because of
their quantitative concentration, or their chemical, radioactive, flammable,
explosive, infectious or other characteristics, constitute or may reasonably be
expected to constitute or contribute to a danger or hazard to public health,
safety or welfare or to the environment, including, without limitation, any
asbestos (whether or not friable) any asbestos-containing materials, waste oils,
solvents and chlorinated oils, polychlorinated biphenyl's (PCBs) and chemical,
biological and radioactive wastes, and any other substances or any hazardous or
toxic wastes or substances which are included under or regulated by any
Environmental Laws.
For purposes of this Lease Environmental Laws shall mean all federal, state
or local laws, rules and regulations (whether now existing or hereafter enacted
or promulgated, as they may be amended from time to time), and all judicial or
decisional law, pertaining to Hazardous Materials, environmental regulations,
contamination by Hazardous Materials, clean-up of Hazardous Materials or
disclosures relating to Hazardous Materials, and any judicial or administrative
interpretation thereof, including any judicial or administrative orders or
judgments including, without limitation: the Comprehensive Environmental
Response, Compensation and Liability Act of 1980,42 U.S.C. Section 9601 et seq.
("CERCLA"); the Federal Resource Conservation and Recovery Act, 42 U.S.C.
Section 6901 et seq. ("RCRA"); Superfund Amendments and Reauthorization Act of
1986, Public Law No. 99-499 ("SARA"): Toxic Substances Control Act, 15 U.S.C.
Section 2601 et seq. ("TSCA"); and all state superlien or environmental clean-up
or disclosure statutes in the state in which the Property is located.
-20-
IN WITNESS WHEREOF, the parties hereto have executed this Lease all as of
the date first above-written.
LESSOR: G&H POST, LLC
/s/ Dolores R. Collins By: /s/ Patricia Gallup
- --------------------------------- ---------------------------------
Witness Its: Member
LESSEE: PC CONNECTION, INC.
/s/ Helen H. Corey By: /s/ Steven Markiewicz
- --------------------------------- ---------------------------------
Witness Its: Legal Counsel and Secretary
STATE OF NEW HAMPSHIRE
COUNTY OF HILLSBOROUGH
On this the 30th day of December, 1997, before me, the undersigned officer,
personally appeared Patricia Gallup, who acknowledged him/herself to be a Member
of G&H Post, LLC, a New Hampshire limited liability company, and as such
executed the within instrument for the purposes therein contained on behalf of
the company.
/s/ Dolores R. Collins
--------------------------------------
Notary Public/Justice of the Peace
My Commission expires: 1/27/99
-21-
STATE OF NEW HAMPSHIRE
COUNTY OF CHESHIRE
On this the 30th day of December, 1997, before me, the undersigned officer,
personally appeared Steven Markiewicz, who acknowledged him/herself to be the
Legal Counsel of PC Connection, Inc. a New Hampshire corporation, and as such
executed the within instrument for the purposes therein contained on behalf of
the corporation.
/s/ Cynthia Sullivan
--------------------------------------
Notary Public/Justice of the Peace
My Commission expires:
-22-
Exhibits A and B to this Lease Agreement
may be obtained from the Registrant upon written request.
-23-
EXHIBIT 10.17
CLOSING BOOK
STATE STREET BANK AND TRUST COMPANY
REVOLVING LINE OF CREDIT
AND
TERM LOAN
TO
PC CONNECTION, INC.
("Borrower")
March 31, 1997
STATE STREET BANK AND TRUST COMPANY
REVOLVING LINE OF CREDIT
AND
TERM LOAN
TO
PC CONNECTION, INC.
("Borrower")
March 31, 1997
------------------------------------
DOCUMENTATION INDEX
-------------------
I. DUE DILIGENCE
-------------
1. Secretary's Certificate Re: Articles of Incorporation and Bylaws;
Directors' Borrowing Resolutions and Officers' and Directors' Incumbency
2. Articles of Incorporation Certified by New Hampshire Secretary of State
3. Certificate of Legal Existence
4. UCC-11 Search Results (Borrower)
- NH Secretary of State
- Milford (NH) Town Clerk
- Keene (NH) City Clerk
- Marlow (NH) City Clerk
- Ohio Secretary of State
- Clinton County (OH) Clerk
5. Insurance Certificates for Borrower (On ACCORD Forms 25-S and 27),
including property, casualty and extended coverage, comprehensive general
liability, products liability, worker's compensation, and directors and
officers liability with Bank, successors and assigns named as lender loss
payee
6. Legal Opinion of Borrower's Counsel
7. Inventory Financing Subordination Agreements, as Amended
- IBM Corporation
- Deutsch Financial Services Corporation
II. LOAN DOCUMENTS
--------------
8. Amended and Restated Commercial Loan Agreement
9. Revolving Credit Note
10. Term Note
11. Amended and Restated Security Agreement
12. UCC-1 Financing Statements
- New Hampshire Secretary of State
- Milford, NH Town Clerk
- Hillsborough County Registry of Deeds
- Cheshire County Registry of Deeds
- Ohio Secretary of State
- Clinton County Recorder (OH)
13. Borrower Collateral Assignment of Leasehold Rights and Landlord's Waiver
and Consent
- Marlow NH
- Keene NH
- Milford NH
- Wilmington NH
14. Borrower's Certificate re Milford Lease
15. Participation Agreements
- Fleet Bank - NH
- Keybank
16. Participation Certificates with Addenda
17. RSA 399-B Disclosure Statement
18. Closing Statement/Disbursement Authorization
19. Letter re Conditions of Closing
-2-
AMENDED AND RESTATED
--------------------
COMMERCIAL LOAN AGREEMENT
-------------------------
AGREEMENT dated as of March 31,1997 by and between PC CONNECTION, INC., a
New Hampshire corporation having its principal office at 528 Route 13, Milford,
New Hampshire 03055 (the "BORROWER"), and STATE STREET BANK AND TRUST COMPANY, a
Massachusetts banking corporation having its principal office at 225 Franklin
Street, Boston, Massachusetts 02110 (the "BANK").
WHEREAS, the Bank and the Borrower are parties to a certain Revolving
Credit Agreement dated as of December 10, 1993, as amended by four (4) certain
amendments to said Revolving Credit Agreement and Related Loan Documents (as
defined in the Revolving Credit Agreement, as amended) dated as of December 15,
1994, November 1, 1995, March 1, 1996 and November 14, 1996, respectively
(collectively, the "Original Loan Agreement");
WHEREAS, pursuant to the Original Loan Agreement, the Bank has extended to
the Borrower a revolving credit in the maximum principal amount of Twenty Two
Million Five Hundred Thousand Dollars ($22,500,000.00) (the "Original Revolving
Credit") and a Bullet Loan (as defined in the Original Loan Agreement) in the
principal amount of Five Million Dollars ($5,000,000.00);
WHEREAS, the Borrower has requested that the Bank (1) increase the Original
Revolving Credit in favor of the Borrower to the maximum principal amount of
Thirty Million Dollars ($30,000,000.00), to be increased to Forty Million
Dollars ($40,000,000.00) after March 1, 1998, and (2) make a five-year term loan
to Borrower in the principal amount of Five Million Dollars ($5,000,000.00)
(loans under the revolving credit and the term loan are individually a "Loan"
and collectively, the "Loans");
WHEREAS, the Bank has agreed to establish such an increased revolving
credit and term loan, subject to the terms and conditions hereof; and,
WHEREAS, this Agreement sets forth the terms and conditions of the Loans
and amends and restates in its entirety the Original Loan Agreement.
IN CONSIDERATION THEREOF, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
--------------------------------
SECTION 1.01. DEFINED TERMS. As used in this Agreement, the following
-------------
terms have the following meanings (terms defined in the singular to have the
same meaning when used in the plural and vice versa):
"Account Receivable" or "Account" means any right to payment for goods sold
------------------ -------
or leased or for services rendered which is not evidenced by an instrument or
chattel paper, whether or not it has been earned by performance.
"Agreement" means this Amended and Restated Commercial Loan Agreement, as
---------
amended, supplemented, or modified from time to time.
"Bank's Prime Rate" means the rate of interest announced by the Bank in
-----------------
Boston from time to time as its "Prime Rate".
"Borrowing Base" means as of any time the percentages set by the Bank of
--------------
the Borrower's Qualified Certified Accounts and Qualified Inventory as of such
time, all as determined by the Bank in its sole discretion, which determination
shall be final and binding upon the Borrower, against which and only against
which the Bank will make loans pursuant to Section 2.01 of this Agreement.
Until changed by the Bank, the Borrowing Base is the lesser of (i) Thirty
---------
Million Dollars ($30,000,000.00) through March 1, 1998, increasing to Forty
Million Dollars ($40,000,000.00) thereafter or (ii) the sum of (x) Seventy Five
--
Percent (75%) of the Qualified Certified Accounts and (y) Fifty Percent (50%) of
Qualified Inventory, subject to the following qualifications: In no event shall
the total amount advanced hereunder against Qualified Inventory exceed Fifteen
Million Dollars ($15,000,000.00) through March 1, 1998 and Twenty Million
Dollars ($20,000,000.00) thereafter; and in no event shall the Borrowing Base
exceed the sum of Thirty Million Dollars ($30,000,000.00) through March 1, 1998
and Forty Million Dollars ($40,000,000.00) thereafter. The Bank reserves the
right in its sole discretion and upon reasonable prior notice (i) to modify the
percentage of Qualified Inventory included in the Borrowing Base or the total
amount which may be advanced against Qualified Inventory or (ii) to eliminate
Qualified Inventory entirely from the Borrowing Base.
"Business Day" means any day other than a Saturday, Sunday or legal holiday
------------
on which banks in Boston, Massachusetts are open for the conduct of a
substantial part of their commercial banking business, and in the case of Libor
Rate Loans (as defined below), any day that is a Business Day as described above
that is also a day for trading by and between banks in United States Dollar
deposits in the London interbank eurodollar market.
"Certificate" shall refer to the certificate as to collateral described in
-----------
Section 2.08 hereof, and shall include any accompanying certificates or
documents.
"Certified Account" means an Account Receivable which has been listed in a
-----------------
Certificate delivered by the Borrower to the Bank pursuant to the provisions of
Section 2.08 hereof.
-2-
"Collateral" means all property which is subject or is to be subject to the
----------
Lien granted by the Loan Documents.
"Commitment" means the Bank's agreement to make Loans to the Borrower under
----------
the Revolving Credit, at the Bank's discretion, in the amounts and in the manner
referred to herein.
"Debt" means (1) indebtedness or liability for borrowed money or for the
----
deferred purchase price of property or services (including trade obligations);
(2) obligations as lessee under capital leases; (3) current liabilities in
respect of unfunded vested benefits under any plan; (4) obligations under
letters of credit issued for the account of any Person; (5) all guaranties,
endorsements (other than for collection or deposit in the ordinary course of
business), and other contingent obligations to purchase, to provide funds for
payment, to supply funds to invest in any Person, or otherwise to assure a
creditor against loss, excluding any volume purchase requirements; and (6)
obligations secured by any Lien on property owned by the Borrower, whether or
not the obligations have been assumed by Borrower.
"Default" means any of the events specified in Section 8.01, whether or
-------
not any requirement for the giving of notice, the lapse of time, or both, or any
other condition, has been satisfied.
"Disqualified Account" means a Certified Account in respect of which any of
--------------------
the following events shall have occurred: (i) such Certified Account shall have
become past due under the original terms thereof on the ninety-first (91st)
day from the billing invoice date; (ii) any of the goods which gave rise thereto
shall have been returned, rejected, not accepted, repossessed, lost or damages,
or any dispute with respect to such Certified Account or to such goods shall
have arisen between the Borrower and the account debtor thereon; (iii) any
Account where the Debtor therein has become insolvent or (iv) the Bank shall
have excluded such Certified Account pursuant to the provisions of Section 2.09
hereof.
"Event of Default" means any of the events specified in Section 8.01,
----------------
provided that any requirement for the giving of notice, the lapse of time, or
both, or any other condition, has been satisfied.
"Head Office" means the principal office of the Bank at 225 Franklin
-----------
Street, Boston, Massachusetts 02110.
"Inventory" means Inventory as defined in the Security Agreement of even
---------
date between the Borrower and the Bank.
"Liens" means any mortgage, deed of trust, pledge, security interest,
-----
hypothecation, deposit arrangement, encumbrance, lien (statutory or other), pre
or
-3-
post-judgment attachment or preference, or other security agreement or
encumbrance of any kind of nature whatsoever (including, without limitation, any
conditional sale or other title retention agreement, any financing lease having
substantially the same economic effect as any of the foregoing, and the filing
of any financing statement under the Uniform Commercial Code or comparable law
of any jurisdiction to evidence any of the foregoing).
"Loan Documents" means this Agreement, the Revolving Credit Note, the Term
--------------
Note, the Amended and Restated Security Agreement and all other related
documents and instruments executed and delivered by Borrower to the Bank, as
described on Exhibit A and all of even date herewith, and all extensions and
---------
modifications thereof, and supplements thereto.
"Note" means, individually and collectively, the Revolving Credit Note and
----
the Term Note as defined in Sections 2.01 and 2.02, respectively, herein.
"Obligations" means all of Borrower's Debt to Bank and all of Borrower's
-----------
other liabilities to Bank of every kind, nature and description, direct or
indirect, secured or unsecured, joint, several, joint and several, absolute or
contingent, due or to become due, now existing or hereafter arising, regardless
of how such Debt liability arises or by what agreement or instrument it may be
evidenced, or whether evidenced by any agreement or instrument, including, but
not limited, to the Revolving Credit as defined in Section 2.01, any other Debt
or liability of Borrower under this Agreement or any other Loan Document or
under any other financing agreement between Bank and Borrower.
"Operating Account" means the primary operating account of the Borrower.
-----------------
"Permitted Exceptions" means prior liens and other Liens, which the
--------------------
Borrower is permitted to grant, either by the provisions of this Agreement or
any other Loan Document, or as described in Exhibit B.
----------
"Person" means an individual, partnership, corporation, business trust,
------
joint stock company, trust, unincorporated association, joint venture,
governmental authority, or other entity of whatever nature.
"Qualified Certified Account" means a Certified Account not disqualified
---------------------------
and not excluded pursuant to Section 2.09 below.
"Qualified Inventory" means Inventory valued at the lower of cost on a
-------------------
"first-in/first-out" basis or fair market value, which is owned and held by
Borrower at its facilities in Milford, New Hampshire or its leased warehouse
space in Keene, New Hampshire, or Wilmington, Ohio, for sale in the ordinary
course of Borrower's business as presently conducted by it and which is subject
to a valid and prior, fully
-4-
perfected security interest of the Bank, free of all security interests or liens
of any other person, and which is not disqualified and not excluded pursuant to
Section 2.12 below.
SECTION 1.02. ACCOUNTING TERMS. All accounting terms not specifically
----------------
defined herein shall be construed in accordance with Generally Accepted
Accounting Principles (GAAP) consistent with that applied in the preparation of
the financial statements referred to in Section 5.08, and utilizing the
definitions provided in Article VII, and all financial data submitted pursuant
to this Agreement shall be prepared in accordance with such principles, except
interim financial data which may be subject to year-end adjustments.
ARTICLE II
AMOUNT AND TERMS OF THE LOANS
-----------------------------
SECTION 2.01. REVOLVING CREDIT. The Bank may from time to time make loans
----------------
to the Borrower, and Borrower may borrow and re-borrow, under the Revolving
Credit and pursuant to the terms of this Agreement, and Borrower's obligations
to repay such loans shall be evidenced by the Revolving Credit Note (the
"Revolving Credit Note") of even date, in the form attached hereto as Exhibit C,
---------
in an aggregate amount not to exceed the lesser of (a) Thirty Million Dollars
($30,000,000.00) through March 1, 1998, increasing to Forty Million Dollars
($40,000,000.00) thereafter, or (b) the Borrowing Base, and as further limited
as provided in Sections 2.08,2.09 and 2.12 below (the "Revolving Credit"). The
Revolving Credit specifically includes a maximum principal amount of
$30,000,000.00 through March 1, 1998 and $40,000,000.00 thereafter under this
section. The principal amount of loans under the Revolving Credit shall be due
and payable in full, and the Bank's Commitment shall expire, on May 31, 1999.
SECTION 2.02. TERM LOAN. The Bank shall extend to the Borrower a term
---------
loan in the principal amount of Five Million Dollars ($5,000,000.00) ("Term
Loan"), which Term Loan shall be evidenced by a Term Promissory Note (the "Term
Note") of even date in the form attached hereto as Exhibit D, pursuant and
---------
subject to the terms of this Agreement.
SECTION 2.03. NOTICE AND MANNER OF BORROWING. The Borrower shall give the
------------------------------
Bank a request for borrowing (which may be by telephone or telefax and shall be
effective upon receipt) of any loans under the Revolving Credit, specifying the
date and amount thereof, which shall be in increments of not less than
$10,000.00 ($1,000,000.00 in the case of a Libor Rate Loan), provided that if
the Borrower and the Bank have implemented the Bank's Liquidity Management
Control System II respecting the Borrower's deposit and borrowing relationship
with the Bank, Loans shall be made in accordance with such system. Not later
than 2:00 P.M. on the date of such Loan and upon fulfillment of the applicable
conditions set forth in Article III,
-5-
the Bank will make such Loan available to Borrower in immediately available
funds by crediting the amount thereof to Borrower's Operating Account with the
Bank.
SECTION 2.04. INTEREST; PAYMENTS.
------------------
2.04.1 REVOLVING CREDIT. On the outstanding and unpaid principal amount of
----------------
the Revolving Credit, Borrower shall pay interest to the Bank at an interest
rate per annum equal to (i) Bank's Prime Rate in effect from time to time or
(ii) the Adjusted Libor Rate plus two and one half percent (2.5%) per annum, as
provided below. During any period in which the Bank's Prime Rate applies to any
portion of Loans under the Revolving Credit, each time the Bank's Prime Rate
changes, the interest rate on that portion of the Note shall change
contemporaneously with such change. Interest shall be calculated on the basis
of actual days elapsed and a 360-day year. That portion of the Revolving Credit
bearing interest at the Bank's Prime Rate shall be referred to as the "Prime
Rate Loan". The term "Adjusted Libor Rate" shall mean a rate, applicable to any
Interest Period, determined by the Bank as the rate of interest quoted by the
Bank as the prevailing rate per annum at which deposits in U.S. dollars are
offered to the Bank by first-class banks in the London interbank Eurodollar
market in which it regularly participates for the requested Loan amount and
Interest Period, adjusted for capital, reserves, taxes and similar assessments
against the Bank in connection with offering such a pricing option. Any portion
of the Revolving Credit bearing interest based upon the Adjusted Libor Rate,
with applicable margin, shall be referred to as the "Libor Rate Loan."
Interest on the Revolving Credit shall be paid in immediately available
funds or the Borrower's Operating Account shall be debited by the Bank on the
first business day of each month.
2.04.2 TERM LOAN. On the outstanding and unpaid principal amount of the
---------
Term Loan, Borrower shall pay interest to the Bank at an interest rate per annum
equal to (i) Bank's Prime Rate in effect from time to time plus one half of one
percent (1/2%) (the "Term Variable Rate") or (ii) the Bank's Cost of Funds Rate,
as defined below, plus three percent (3%) per annum. Each time the Prime Rate
changes, the interest rate on that portion of the Term Loan bearing interest at
the Term Variable Rate shall change contemporaneously with such change.
Interest shall be calculated on the basis of actual days elapsed and a 360-day
year. That portion of the Term Loan bearing interest at the Term Variable Rate
shall be referred to as the "Prime Rate Loan". The term "Cost of Funds Rate"
shall mean the rate quoted by the Bank as its applicable cost of funds for the
amount and Interest Period of the requested Loan, provided, however that the
determination as to the Bank's cost of funds shall be made solely by the Bank
and absent manifest error, this determination shall be binding and conclusive.
Any portion of the Term Loan bearing interest based upon the Cost of Funds Rate,
with applicable margin, shall be referred to as the "COF Rate Loan".
-6-
2.04.3 PAYMENTS. The principal balance of the Revolving Credit shall be
--------
due on the date stated in this Revolving Credit Note and principal shall be paid
in installments on the Term Loan as stated in the Term Note. Principal
outstanding on the Loans shall bear interest at the rates provided above, as
selected by the Borrower following adequate notice to the Bank, which in the
case of the making of or conversion to a Libor Rate Loan, shall not be less than
three (3) Business Days prior to the commencement of any Libor Rate Loan and in
the case of a COF Rate Loan shall not be less than one (1) Business Day prior to
the commencement of any COF Rate Loan. Interest on all Loans shall be payable
monthly in arrears on the first Business Day of each month and in the case of
Libor Rate Loans and COF Rate Loans shall also be payable at the end of the
applicable Interest Period. The Borrower, upon three (3) Business Days' prior
notice to the Bank, may elect to convert all or a portion of a Prime Rate Loan
under the Revolving Credit to a Libor Rate Loan in increments of $1,000,000.00
and upon one (1) Business Days' prior notice to the Bank, may elect to convert
all or a portion of the Term Loan to a COF Rate Loan in increments of
$1,000,000.00. Unless the Bank receives an adequate contrary election regarding
conversion of any portion of the Loan, the Bank may continue such Loan as, or
convert such principal to, a Prime Rate Loan upon the expiration of the Interest
Period.
2.04.4 INTEREST PERIOD. With respect to each Libor Rate Loan or COF Rate
---------------
Loan, "Interest Period" shall mean the period commencing on the date of the
making or continuation of or conversion to such Libor Loan or COF Rate Loan and
ending one, two, three, six or twelve months thereafter in the case of Libor
Rate Loans and at the end of the applicable Interest Period in the case of COF
Rate Loans, as the Borrower may elect in the applicable Notice of Borrowing or
Conversion provided that:
--------
(i) any Interest Period that would otherwise end on a day that it
is not a Business Day shall be extended to the next succeeding Business Day
unless, in the case of a Libor Rate Loan or COF Rate Loan, such Business
Day falls in the next calendar month, in which case such Interest Period
shall end on the immediately preceding Business Day.
(ii) any Interest Period applicable to a Libor Rate Loan or COF
Rate Loan that begins on the last Business Day of a calendar month (or on a
day for which there is no numerically corresponding day in the calendar
month at the end of such Interest Period) shall end on the last Business
Day of a calendar month;
(iii) any Interest Period which would otherwise end after the
maturity date of the applicable Note shall end on the maturity date; and
-7-
(iv) no Interest Period applicable to a Libor Rate Loan or COF Rate
Loan shall have a duration of less than one month; and if any Interest
Period applicable to such Loans would be for a shorter period, such
Interest Period shall not be available hereunder.
2.04.5 PREPAYMENT. The Borrower may prepay any Prime Rate Loan in whole or
----------
in part without premium or penalty. Any prepayment of a Libor Rate Loan or COF
Rate Loan is subject to the terms of Section 2.04.7. Prepayments of the Term
Loan shall be applied to installments of principal in the inverse order of their
due date.
2.04.6 SPECIAL PROVISIONS REGARDING LIBOR RATE LOANS. In the event that:
---------------------------------------------
(i) on any date on which Adjusted Libor Rate would otherwise be
set the Bank shall have determined in good faith (which determination shall
be final and conclusive) that adequate and fair means do not exist for
ascertaining such Adjusted Libor Rate, or
(ii) at any time the Bank shall have determined in good faith
(which determination shall be final and conclusive) that:
(a) the making or continuation of or conversion of any Loan
to a Libor Rate Loan has been made impracticable or unlawful by (1) the
occurrence of a contingency that materially and adversely affects the
London interbank Eurodollar market or (2) compliance by the Bank in good
faith with any applicable law or governmental regulation, guideline or
order or interpretation or change thereof by any governmental authority
charged with the interpretation or administration thereof or with any
request or directive of any such governmental authority (whether or not
having the force of law); or
(b) the Adjusted Libor Rate shall no longer represent the
effective cost to the Bank for U.S. dollar deposits in the London interbank
market for deposits in which it regularly participates;
then, and in any such event, the Bank shall forthwith so notify the
Borrower thereof. Until the Bank notifies the Borrower that the
circumstances giving rise to such notice no longer apply, the obligation of
the Bank to allow selection by the Borrower of the Adjusted Libor Rate
shall be suspended. If at the time the Bank so notifies the Borrower, the
Borrower has previously given the Bank notice with respect to a Libor Rate
Loan but such Loan has not yet gone into effect, such notification shall be
deemed to be void and the Borrower may borrow Prime Rate Loans.
-8-
Upon such date as shall be specified in such notice (which shall not
be earlier than the date such notice is given) the Borrower shall, with
respect to the outstanding Libor Rate Loan, prepay the same, together with
interest thereon and any amounts required to be paid pursuant to Section
2.04.7, and may borrow a Prime Rate Loan in accordance with the terms
hereof by telephone request.
All Adjusted Libor Rates shall be adjusted to reflect deposit
requirements, reserves, capital, taxes and other charges assessed against
the Bank in connection with the Bank's offering such a pricing option and
the Borrower agrees to pay to the Bank any increase in cost or reduction in
the rate of return realized by the Bank as a result of imposition of any of
the foregoing which is not reflected in adjustments to the Adjusted Libor
Rate.
2.04.7 UNSCHEDULED PAYMENTS. In the event of prepayment of any of the
--------------------
Libor Rate Loans or COF Rate Loans, including payment prior to the last day of
the applicable Interest Period, either at the Borrower's initiative or upon the
exercise by the Bank of its rights in the event of the Borrower's default, the
Borrower agrees to pay to the Bank its lost net interest income resulting from
the prepayment. Therefore, the Borrower's final prepayment to the Bank shall
consist of the principal amount being prepaid, all interest owing up to the date
of such prepayment or demand by the Bank, together with the Bank's lost net
interest income, if any, computed as described below.
As of the date of prepayment, or as of the date of demand after default,
the Bank will determine the interest rate differential between the rate stated
in the Note being prepaid and the yield on a United States Government Treasury
Note with the maturity closest to the Note as the same is reported in the The
---
Wall Street Journal of that day (reporting the previous day's activity). In the
- -------------------
event that the rate differential so determined is such that the Treasury Note
yield is greater than the Note yield, no lost net interest income shall be paid
to the Bank, nor, in any event, shall any sum be owed by the Bank to the
Borrower.
In the event that the rate differential so determined is such that the Note
yield is greater than the Treasury Note yield, the difference shall be
multiplied by the outstanding principal balance of the Note, computed monthly
for the remaining term of the Note; the present value of such monthly
computation shall be calculated and paid to the Bank as its lost net interest
income. For the purpose of computing present value, the interest rate used for
discounting shall be the bond equivalent yield of the six month United States
Treasury Bill rate as reported in the Wall Street Journal of that day (reporting
-------------------
the previous day's activity.
-9-
SECTION 2.04.8 INTEREST ON OTHER OBLIGATIONS. Any outstanding payment
-----------------------------
obligations of Borrower under the Loan Documents not covered by the Note shall
bear interest at the Term Variable Rate.
SECTION 2.05. REVOLVING CREDIT NOTE. All Loans relative to the Revolving
---------------------
Credit made by the Bank under this Agreement shall be evidenced by, and repaid
with interest in accordance with, the Revolving Credit Note. The Bank is hereby
authorized by the Borrower to endorse on any schedule attached to the Revolving
Credit Note the amount of each Loan and of each payment of principal received by
the Bank on account of the Revolving Credit or on any other schedule or record
of the Bank, which endorsement shall, in the absence of manifest error, be prima
facie evidence as to the outstanding balance of the Loans under the Revolving
Credit made by the Bank; provided, however, that the failure to make such
notation with respect to any Loan or payment shall not limit or otherwise affect
the obligations of the Borrower under this Agreement or the Revolving Credit
Note.
SECTION 2.06. COLLATERAL FOR THE LOANS. The Revolving Credit and the Term
------------------------
Loan shall be secured by the security interests granted to the Bank by the
Borrower under the Security Agreement and any of the other Loan Documents.
SECTION 2.07. METHOD OF PAYMENT. The Borrower shall make each payment
-----------------
under this Agreement and under the Note not later than 2:00 P.M. on the date
when due in lawful money of the United States to the Bank at the Head Office in
immediately available funds. The Borrower hereby authorizes the Bank, if and to
the extent payment is not made when due under this Agreement or under the Note,
to charge from time to time against any account of the Borrower with the Bank,
any amount so due. Whenever any payment to be made under this Agreement or
under the Note shall be stated to be due on a Saturday, Sunday, or a public
holiday, such payment shall be made on the next succeeding Business Day, and
such extension of time shall in such case be included in the computation of the
payment of interest.
SECTION 2.08. CERTIFICATION OF COLLATERAL. At such times as the Bank may
---------------------------
request, but in any event at least monthly, the Borrower will deliver to the
Bank a Certificate, in a form approved by the Bank: (a) listing the Borrower's
then existing Accounts Receivable having been earned by performance and the book
value of its Inventory; (b) containing such information in respect to such
Accounts Receivable, Inventory and any other Collateral as the Bank may request;
and (c) containing a calculation of the Borrowing Base as of the date of the
Certificate. With each such Certificate, the Borrower will upon request by the
Bank, furnish to the Bank such information as to each Account Receivable and
item of Inventory identified on the Certificate as the Bank may request,
together with a duplicate of the invoice, copies of the shipping documents or
other evidence of delivery, all contracts, guaranties, orders and other
documents the Bank, or, if the Bank at any time shall relieve the Borrower of
the obligation to furnish such documents with such Certificates, the
-10-
Borrower will make such documents available for inspection by the Bank and will
furnish same to the Bank upon request.
SECTION 2.09. EXCLUSION OF CERTAIN CERTIFIED ACCOUNTS FROM THE BORROWING
----------------------------------------------------------
BASE. The Bank shall have the right in its sole discretion at any time and for
- ----
any reason to exclude any Certified Accounts from the Borrowing Base. The
following is a partial listing of those types of accounts or accounts receivable
which shall be deemed to be Disqualified Accounts reducing the Borrowing Base
accordingly:
(a) Any account which is more than ninety (90) days past due from the
billing invoice date as shown on the agings of Borrower's accounts receivable
furnished to the Bank in accordance with Section 2.11 below.
(b) Any account which arises out of the sale by the Borrower of goods
consigned or delivered to the Borrower on "sale or return" terms (whether or not
compliance has been made with Section 2-326 of the Uniform Commercial Code in
force within the state in which the collateral is located).
(c) Any account which arises out of any sale made on a "bill and hold,"
"dating" or "delayed shipment" basis.
(d) Any account owed by any customer whose principal place of business is
not within the United States or the District of Columbia or the Commonwealth of
Canada.
(e) Any account owed by any corporation or other entity which is related to
the Borrower or is of common ownership with the Borrower or could be treated as
a member of the same controlled group of corporations of which the Borrower is a
member. For the purposes of this subsection the terms "Common Ownership" and
"controlled group" shall be defined as having shareholders with fifty percent
(50%) or more in interest.
(f) Any account as to which the account debtor holds or is entitled to any
claim, credit, allowance, adjustment, counterclaim, set-off or charge back
(arising out of the transaction(s) represented by the account or independently
thereof) or which included terms under which the account debtor can return to
the Borrower for credit or refund the goods giving rise to such account or
accounts receivable other than by reason of express or implied warranties
provided in the ordinary course of business or required by law.
(g) Any account which is owed by any person employed by, or a salesperson
of, the Borrower.
-11-
(h) Any so-called "co-op receivable" or other account which constitutes a
credit against payables owed by Borrower to the account debtor.
(i) Any account which the Bank in its sole commercially reasonable
discretion considers unacceptable for any reason.
SECTION 2.10 [INTENTIONALLY DELETED]
SECTION 2.11. AGING REPORTS, OFF-SET REPORTS AND INVENTORY LISTING.
----------------------------------------------------
(a) At the time the first Certificate is delivered to the Bank pursuant to
the provisions of Section 2.08 hereof, the Borrower will also deliver to the
Bank an Aging Report, in a form approved by the Bank, giving an analysis by
months (or such other periods as may be requested by the Bank) of the age of the
Accounts Receivable listed in such Certificate. Thereafter, monthly or at
shorter intervals as the Bank may request, but not more frequently than bi-
weekly, the Borrower shall furnish similar Aging Reports covering all Accounts
Receivable outstanding as of the date of such report. At such times as the Bank
shall request, the Borrower will also furnish to the Bank an Off-Set Report, in
a form approved by the Bank, setting forth all amounts owing by the Borrower to
any account debtor listed in any Aging Report. Except as the Bank may otherwise
require, such reports for a calendar month shall be delivered to the Bank not
later than the tenth business day of the succeeding calendar month.
(b) At the same time as Borrower provides the foregoing Aging Report,
Borrower shall provide to the Bank a summary inventory listing in a form
approved by the Bank, covering all Inventory as of the date of such report.
SECTION 2.12. EXCLUSION OF CERTAIN INVENTORY FROM THE BORROWING BASE. The
------------------------------------------------------
Bank shall have the right in its sole and commercially reasonable discretion at
any time and for any reason to exclude any Inventory from the Borrowing Base.
The following Inventory will not, in any event, constitute Qualified Inventory:
(a) Inventory which is obsolete, not in good condition, not of merchantable
quality or saleable in the ordinary course of business or which is subject to
defects which would affect its market value;
(b) Supplies and packaging materials and labels;
(c) Inventory which Bank, in its sole discretion exercised in good faith,
determines to be ineligible because of age, type, category, or quantity; and
(d) Inventory in the possession of any person other than the Borrower.
-12-
ARTICLE III
CONDITIONS PRECEDENT
--------------------
SECTION 3.01. Conditions Precedent to Initial Loans. The agreement of the
-------------------------------------
Bank to make the Term Loan and, at its discretion, the initial Loans under the
Revolving Credit to the Borrower are subject to the condition precedent that the
Bank shall have received on or before the day of such Loan each of the following
in form and substance satisfactory to the Bank and its counsel:
(1) Notes. The Revolving Credit Note and the Term Note executed by the
-----
Borrower;
(2) Security Agreement. Security Agreement duly executed by Borrower
------------------
together with acknowledgment copies of the Financing Statements (UCC-1) duly
filed under the Uniform Commercial Code of all jurisdictions necessary or, in
the opinion of the Bank, desirable to perfect the security interests created by
the Security Agreement, or other evidence satisfactory to the Bank indicating
that no party claims an interest in any of the Collateral except as set forth in
the Permitted Encumbrances;
(3) Evidence of all Corporate Action by the Borrower. Certified (as of the
------------------------------------------------
date of this Agreement) copies of all corporate action taken by the Borrower,
including resolutions of its Board of Directors, authorizing the execution,
delivery, and performance of the Loan Documents to which such Borrower is a
party and each other document to be delivered pursuant to this Agreement;
(4) Incumbency and Signature Certificate of the Borrower. Certificates
----------------------------------------------------
(dated as of the date of this Agreement) of the Secretary of the Borrower
certifying the names and true signatures of the officers of such Borrower
authorized to sign the Loan Documents to which it is a party and the other
documents to be delivered by the Borrower under this Agreement;
(5) Opinion(s) of Counsel for the Borrower. An opinion of Borrower's
--------------------------------------
counsel, dated as of the Closing Date in the form attached hereto as Exhibit E
---------
and as to such other matters as the Bank may reasonably request.
(6) Conditional Assignment of Lease By Tenant with Landlord's Consent.
-----------------------------------------------------------------
Conditional Assignment of Lease By Tenant with Landlord's Consent duly executed
by each Landlord owning premises in which Borrower's Inventory is located.
(7) Other Documents. Such other documents or certificates as may be
---------------
reasonably requested by the Bank, or its counsel and/or as are required under
the terms of this Agreement or any Loan Document.
-13-
ARTICLE IV
REPRESENTATION AND WARRANTIES
-----------------------------
The Borrower represents and warrants to the Bank that:
SECTION 4.01. Incorporation, Good Standing and Due Qualification. The
--------------------------------------------------
Borrower is a corporation duly incorporated, validly existing, and in good
standing under the laws of the state of its incorporation; has the corporate
power and authority to own its assets and to transact the business in which it
is now engaged or proposed to be engaged in; and is duly qualified as a foreign
corporation and is in good standing under the laws of each other jurisdiction in
which such qualification is required.
SECTION 4.02. Corporate Power and Authority. The execution, delivery, and
-----------------------------
performance by the Borrower of the Loan Documents to which it is a party have
been duly authorized by all necessary corporate action and do not and will not
(1) require any consent or approval of the stockholders of such corporation,
except such consents as have been obtained; (2) contravene such corporation's
charter or bylaws; (3) to the best of its knowledge violate any provision of any
law, rule, regulation (including, without limitation, Regulation U of the Board
of Governors of the Federal Reserve System), the violation of which would have a
material adverse effect on the business or operations of the Borrower or any
order, writ, judgment, injunction, decree, determination, or award presently in
effect having applicability to such corporation; (4) result in a breach of or
constitute a default under any indenture or loan or credit agreement or any
other agreement, lease, or instrument to which such corporation is a party or by
which it or its properties may be bound or affected; (5) result in, or require,
the creation or imposition of any Lien upon or with respect to any of the
properties now owned or hereafter acquired by such corporation, except to Bank;
and (6) to the best of its knowledge cause such corporation to be in default
under any such law, rule, regulation, or any such indenture, agreement, lease,
or instrument which default would have a material and adverse effect on the
business or operation of such corporation or under any order, writ, judgment,
injunction, decree, determination or award.
SECTION 4.03. Legally Enforceable Agreement. This Agreement is, and each
-----------------------------
of the other Loan Documents when delivered under this Agreement will be, legal,
valid, and binding obligations of the Borrower, enforceable against the Borrower
in accordance with their respective terms, except to the extent that such
enforcement may be limited by applicable bankruptcy, insolvency, and other
similar laws affecting creditors' rights generally.
SECTION 4.04. Financial Statements. No representation or statement by
--------------------
Borrower contained in the financial statements furnished by Borrower to the Bank
-14-
contains any untrue statement of material fact, or omits to state a material
fact necessary to make it not misleading.
SECTION 4.05. Labor Disputes and Acts of God. Neither the business nor
------------------------------
the properties of the Borrower have been affected by any fire, explosion,
accident, strike, lockout or other labor dispute, drought, storm, hail,
earthquake, embargo, act of God or of the public enemy, or other casualty
(whether or not covered by insurance) materially and adversely affecting such
business or properties or the operation of the Borrower.
SECTION 4.06. Compliance. To the best of its knowledge, the Borrower has
----------
not materially violated, nor is the Borrower in material violation of, any
applicable law or regulation, which violation would have a material and adverse
effect on the business or operations of the Borrower, or any order, judgment, or
decree. The Borrower is not a party to any contract or other agreement, or
subject to any restrictions under its charter documents, bylaws or other
corporate instrument, or subject to any order, judgment, rule, regulation, or
decree of any court or governmental authority, which materially and adversely
affects its business, properties, assets or financial condition or which
restricts or otherwise limits its incurring of the Loan or its performance and
observance of its Obligations. Neither the execution and delivery by Borrower,
nor the compliance by Borrower with the terms and conditions of this Agreement
or any Loan Document conflicts or will conflict with, constitutes or will
constitute a default under, or results or will result in any violation of, the
charter documents or By-laws of Borrower, any award of any arbitrator, any law,
any order, judgment, rule, regulation or decree of any court or governmental
authority, or any agreement or instrument to which Borrower is a party or any of
its property is subject; nor does the same result nor will it result in the
creation or imposition of any Lien upon any of its property except the Liens
created by this Agreement or any other Loan Document.
SECTION 4.07. Litigation. Except as shown on Schedule 4.07, there is no
----------
pending or, to the Borrower's knowledge, threatened action or proceeding against
or affecting the Borrower before any court, governmental agency, or arbitrator
which may, in any one case or in the aggregate, materially adversely affect the
financial condition, operations, properties, or business of the Borrower or the
ability of the Borrower to perform its Obligations under the Loan Documents to
which it is a party.
SECTION 4.08. No Defaults on Outstanding Judgments or Orders. The
----------------------------------------------
Borrower has satisfied all judgments and the Borrower is not in default with
respect to any judgment, writ, injunction, or decree of any court, arbitrator,
or federal, state, municipal, or other governmental authority, commission,
board, bureau, agency, or instrumentality, domestic or foreign.
-15-
SECTION 4.09. Ownership and Liens. The Borrower has good and clear record
-------------------
and marketable title to all properties and assets which it purports to own,
including those reflected in the financial statements referred to in Section
5.08, free and clear of all mortgages, liens, pledges, charges, security
interests and encumbrances, other than those being granted to the Bank, pursuant
hereto, if any; and those reflected on Exhibit B as a Permitted Exception.
---------
SECTION 4.10. Subsidiaries and Ownership of Stock. There are currently no
-----------------------------------
subsidiaries of Borrower and, except as set forth on Exhibit F, Borrower has no
---------
investments in the stock or securities of any other corporation, firm, trust or
other entity.
SECTION 4.11 Operation of Business. To the best of its knowledge, the
---------------------
Borrower possesses all licenses, permits, franchises, patents, copyrights,
trademarks, and trade names, or rights thereto, to conduct its business
substantially now as conducted and as presently proposed to be conducted, and
the Borrower is not in any material violation of any rights of others with
respect to any of the foregoing.
SECTION 4.12 Taxes. To the best of its knowledge, the Borrower has filed
-----
all income tax returns, excise tax returns and other tax returns (federal,
state, and local) required to be filed and has paid all taxes, assessments, and
governmental charges and levies thereon to be due, including interest and
penalties. To the Borrower's knowledge, no audit or investigation is presently
being conducted with regard to any tax return or tax obligation of Borrower.
SECTION 4.13 ERISA. No employee pension benefit plan or other plan
-----
(within the meaning of Section 3(2) of the Employees Retirement Income Security
Act of 1974, as amended ("ERISA") which is or was sponsored at any time, by
Borrower or any member of a controlled group of corporations within the meaning
of Section 414(b) of the Internal Revenue Code of 1986, as amended (the "CODE"),
or any member of a group of commonly controlled trades or businesses (whether or
not incorporated) within the meaning of Section 414(c) of the Code of which any
Borrower is a member ("PLAN"): (i) has incurred an "ACCUMULATED FUNDING
DEFICIENCY" (within the meaning of Section 302(a)(2) of ERISA) which could
result in a liability of Borrower under Section 409 of ERISA or Section 4975 of
the Code or pursuant to any agreement or statute with respect to liabilities
incurred by any person under such sections, which liability materially affects
the financial condition of Borrower. No material liability to the Pension
Benefit Guaranty Corporation ("PBGC"), to a Plan, or to any participant in or
beneficiary of a Plan has been or, to the present knowledge of Borrower, is
expected to be incurred with respect to any Plan by Borrower and there has been
no event or conditions which presents a risk of termination of any Plan by PBGC.
None of the following events has occurred or, to the knowledge of Borrower, is
expected to occur, with respect to any multi-employer plan (as that term is
defined in Section 3(37) of ERISA) to which any Borrower or any
-16-
member of a controlled group of corporations or any member of a group of
commonly controlled trades or businesses of which Borrower is a member,
contributes on behalf of its employees (the "CONTRIBUTING EMPLOYERS") which has
resulted or could result in any material liability of the Borrower to PBGC, to
such multi-employer plan, or to any participant in or beneficiary of such multi-
employer plan; (i) a withdrawal, either complete or partial, from any such plan
(within the meaning of Section 4203 or Section 4205, respectively, of ERISA) by
a Contributing Employer; (ii) the termination of any such plan; or (iii) the
recording of a reorganization index (as defined by Section 4241 of ERISA) in
excess of zero by any such plan.
SECTION 4.14 Hazardous Material. To the best of Borrower's knowledge,
------------------
neither the Borrower, nor any person for whose conduct the Borrower is
responsible, ever:
(a) owned, occupied, or operated a site on which any hazardous material or
oil was or is stored, transported, or disposed of (the terms "site,"
and "hazardous material" are used in this Agreement with the meanings
or context given those terms in New Hampshire Revised Statutes
Annotated Chapter 147-B), except for oil leakage from a fuel tank which
has been cleaned up and removed from the site; or
(b) directly or indirectly transported, or arranged for the transport of
any hazardous material or oil, except for photochemicals which are
transported and disposed of in accordance with applicable environmental
laws; or
(c) caused or been legally responsible for any release or threat of release
of any hazardous material or oil; or
(d) received notification from any federal, state, or other governmental
authority of any potential or known release or threat of release of any
hazardous material or oil from any site owned, occupied, or operated by
the Borrower or any person for whose conduct the Borrower is
responsible, and/or of the incurrence of any expense or loss by such
governmental entity.
SECTION 4.15 Patents/Licenses/Trademarks. Exhibit G annexed hereto is a
--------------------------- ---------
listing of all patents and/or patents pending, trademarks, licenses and similar
agreements in which the Borrower has an interest.
SECTION 4.16 Debt. Exhibit H is a complete and correct list of all credit
---- ---------
agreements, indentures, purchase agreements, guaranties, leases (requiring lease
payments in the aggregate of $250,000.00 annually), and other investments,
-17-
agreements, and arrangements presently in effect providing for or relating to
extensions of credit (including agreements and arrangements for the issuance of
letters of credit or for acceptance financing) in respect of which the Borrower
is in any manner directly or contingently obligated (other than for materials,
supplies and services entered into in the ordinary course of business); and the
maximum principal or face amounts of credit in question, which are outstanding
and which can be outstanding, are correctly stated, and all Liens of any nature
given or agreed to be given as security therefor are correctly described or
indicated in such Schedule.
ARTICLE V
AFFIRMATIVE COVENANTS
---------------------
So long as the Revolving Credit Note and/or the Term Note shall remain
unpaid or the Bank shall have any Commitment under this Agreement, the Borrower
will:
SECTION 5.01. Maintenance of Existence. Preserve and maintain its
------------------------
corporate existence and good standing in the jurisdiction of its incorporation,
and qualify and remain qualified as a foreign corporation in each jurisdiction
in which such qualification is required.
SECTION 5.02. Maintenance of Records. Keep adequate records and books of
----------------------
account, in which complete entries will be made in accordance with GAAP
consistently applied, subject to year end adjustments, reflecting all financial
transactions of the Borrower, including complete records of all accounts of
Borrower, as defined in the Massachusetts Uniform Commercial Code.
SECTION 5.03. Maintenance of Properties. Maintain, keep, and preserve all
-------------------------
of its properties (tangible and intangible) necessary or useful in the proper
conduct of its business in good working order and condition, ordinary wear and
tear and fully insured-against casualty excepted. Borrower shall maintain in
full force and effect all rights, patents, licenses, permits and privileges
necessary for the proper conduct of its business.
SECTION 5.04. Conduct of Business. Continue to engage in an efficient and
-------------------
economical manner in a business of the same general type as conducted by it on
the date of this Agreement.
SECTION 5.05. Maintenance of Insurance. Maintain insurance with
------------------------
financially sound and reputable insurance companies or associations in such
amounts and covering such risks as the Bank shall reasonably require and as are
usually carried by companies engaged in the same or a similar business and
similarly situated, which insurance may provide for reasonable deductibility
from coverage thereof.
-18-
SECTION 5.06. Compliance With Laws. Comply in all material respects with
--------------------
applicable laws, rules, regulations, and orders, such compliance to include,
without limitation, paying before the same become delinquent all taxes,
assessments, and governmental charges imposed upon it or upon its property,
noncompliance with which would have a material and adverse effect on the
business and operations of the Borrower, subject, however, to the provisions of
Section 5.13 herein.
SECTION 5.07. Right of Inspection. At any reasonable time and from time
-------------------
to time, permit the Bank or any agent or representative thereof to examine and
make copies of and abstracts from the records and books of account of and visit
the properties of the Borrower and to discuss the affairs, finances, and
accounts of the Borrower with any of their respective officers and directors and
the Borrower's independent accountants. In addition to the foregoing, field
examinations by the Bank's internal field examiners shall be conducted on an
ongoing basis and the cost of the examinations will be borne by the Borrower to
the extent of $1,500.00 annually.
SECTION 5.08. Reporting Requirements. Furnish to the Bank:
----------------------
(1) Monthly Financial Statements. As soon as available and in any event
----------------------------
within thirty (30) days after the end of each month of the Borrower, balance
sheets of the Borrower as of the end of such month, statements of income and
retained earnings, and of cash flows of the Borrower for the (i) month then
ended, and (ii) cumulative through the month then ended for all months in the
Borrower's current fiscal year, with supporting cost of sales and selling,
general and administrative expense schedules, all in reasonable detail and
stating in comparative form the respective figures for the corresponding dates
and periods in the prior fiscal year and all prepared in accordance with GAAP
consistently applied, subject to year end adjustments;
(2) Annual Financial Statements. As soon as available and in any event
---------------------------
within ninety (90) days after the end of each fiscal year of the Borrower, a
balance sheet of the Borrower as of the end of such fiscal year and a statement
of income and retained earnings of the Borrower for such fiscal year, and a
statement of cash flow of the Borrower for such fiscal year, all in reasonable
detail and stating in comparative form the respective figures for the
corresponding date and period in the prior fiscal year and all prepared in
accordance with GAAP consistently applied and certified by independent
accountants selected by the Borrower reasonably satisfactory to Bank;
(3) Notice of Litigation. Promptly after the commencement thereof, notice
--------------------
of all actions, suits, and proceedings before any court or governmental
department, commission, board, bureau, agency, or instrumentality, domestic or
foreign, affecting the Borrower, which, if determined adversely to the Borrower,
could have a material adverse effect on the financial condition, properties, or
operations of the Borrower;
-19-
(4) Notice of Defaults and Events of Default. As soon as possible and in
----------------------------------------
any event within ten (10) days after the occurrence of (i) any event or
circumstance which with the passage of time would constitute a Default or an
Event of Default or (ii) a Default or an Event of Default, a written notice
setting forth the details of such event, circumstance, Default, or Event of
Default and the action which is proposed to be taken by the Borrower with
respect thereto;
(5) General Information. Such other information respecting the condition
-------------------
or operations, financial or otherwise, of the Borrower as the Bank may from time
to time reasonably request;
(6) Monthly Aging of Receivables and Inventory Listing. The Borrower shall
--------------------------------------------------
furnish to the Bank such reports as are required pursuant to Section 2.11
herein; and
(7) Officer Certification. At the end of each quarter of Borrower's fiscal
---------------------
year, the Borrower will, at the time of delivery to the Bank of the reports
referred to in Sections 5.08(2) and (6), deliver to the Bank certificates signed
by its chief financial officer or treasurer certifying for that quarter then
ended that each such officer has reviewed the provisions of this Agreement and
stating in his opinion, if such be the fact, that the Borrower has not been and
is not in default as to any of the covenants and agreements of the Borrower
contained in this Agreement, or in the event of any such default, setting forth
the details thereof.
SECTION 5.09. Deferred Compensation Payments. Pay or cause to be paid
------------------------------
when due all amounts necessary to fund in accordance with their terms all such
deferred compensation plans, whether now in existence or hereafter created, and
the Borrower will not withdraw from participation in, permit the termination or
partial termination of, or permit the occurrence of any other event with respect
to, any deferred compensation plan maintained for the benefit of its employees
under circumstances that could result in liability to the Pension Benefit
Guaranty Corporation, or any of its successors or assigns, or to the entity
which provides funds for such deferred compensation plan.
SECTION 5.10. Additional Documents. From time to time, execute and
--------------------
deliver to the Bank all such other and further instruments or documents and take
or cause to be taken all such other and further action as the Bank may
reasonably request in order to effect and confirm or vest more securely in the
Bank all rights contemplated in this Agreement.
SECTION 5.11. Use of Proceeds. Use the proceeds of the Revolving Credit
---------------
and the Term Loan for ongoing working capital needs of the Borrower. The
Borrower acknowledges the Loans have been and shall be made available subject to
the terms hereof, based upon the financial well-being of the Borrower and that
such
-20-
credit would not be extended without the support (financial and otherwise)
of the Borrower in such amounts and to such degree as provided in this
Agreement.
SECTION 5.12. Acquisition of Equipment and Other Capital Assets. Furnish
-------------------------------------------------
written notice to the Bank, at least quarterly, and which notice may be provided
on monthly financial statements, of the purchase or other acquisition by
Borrower of any and all equipment or other assets with a purchase price or value
equal to or in excess of $100,000.00,together with such purchase and invoice
material as the Bank shall reasonably require.
SECTION 5.13 Payment of Taxes and Claims. Pay when due all taxes,
---------------------------
assessments, governmental charges or levies imposed upon it or its income for
services, labor, materials and supplies, in each of such cases which, if unpaid,
might become a Lien or charge upon any of its properties or assets; but Borrower
shall not be required to pay any such tax, assessment, charge, levy or claim so
long as (1) the validity thereof shall be contested in good faith by appropriate
proceedings, (2) no proceedings in foreclosure or for the sale of any property
of Borrower on account of any such tax, assessment, charge, levy of claim shall
have been commenced (or such proceedings shall have been stayed pending the
disposition of such contest of validity), (3) Borrower shall have set aside on
its books adequate reserves with respect thereto and (4) such tax, assessment,
charge, levy or claim shall not have caused a material, adverse effect on the
Borrower's financial condition.
SECTION 5.14 ERISA. Promptly notify Bank if at any time (i) a Plan incurs
-----
an "ACCUMULATED FUNDING DEFICIENCY" (as defined in Section 412(a) of the Code),
whether or not waived; (ii) a "REPORTABLE EVENT" (within the meaning of Section
4043(b) of ERISA) occurs with respect to a Plan; (iii) Borrower engages in any
transaction which violates Section 406 or Section 407 of ERISA or which could
result in a liability under Section 409, 501, or 502 of ERISA or Section 4975 of
the Code or pursuant to any agreement or statute with respect to liabilities
incurred by any person under such sections, which liability could materially
affect the financial condition of such Borrower; (iv) Borrower incurs a material
liability to the PBGC or to any participant in or beneficiary of a Plan with
respect to any Plan; (v) an event occurs or a condition arises which presents a
risk of termination of any Plan by the PBGC; (vi) Borrower is notified by the
Internal Revenue Service or the Department of Labor that the Plan is not or may
not be qualified under Section 401(a) of the Code or that the trust established
thereunder is not or may not be exempt from tax under Section 501(a) of the
Code; or (vii) any of the following events occurs with respect to any multi-
employer plan (as defined in Section 3(37) of ERISA) to which the Borrower or
any member of a group of commonly controlled trades or businesses within the
meaning of Section 414(c) of the Code of which any Borrower is a member or
contributes on behalf of its employees: (A) a withdrawal, either complete or
partial, from any such plan (within the meaning of Section 4204 or Section 205,
respectively, of ERISA) by a Contributing Employer or a decision by a
Contributing
-21-
Employer to withdraw completely or partially from such plan; (B) the termination
of any such plan; or (C) the recording of a reorganization index (as defined by
Section 4241 of ERISA) in excess of zero by any such plan.
SECTION 5.15 Right to Negotiate. Designate and appoint and the Borrower
------------------
hereby designates and appoints the Bank or its designee as Borrower's attorney
with power, (A) after an Event of Default to receive, endorse, assign and
deliver in the name of the Bank or such Borrower all checks, drafts and other
instruments for payment of money relating to the Collateral, and the Borrower
hereby waives notice of presentment, protest and nonpayment of any instrument so
endorsed; to endorse Borrower's name upon any notes, acceptances, checks,
drafts, money orders or other evidences of payment of Collateral that may come
into Bank's possession; and (B) to sign Borrower's name on all financing
statements or any other documents or instruments deemed necessary or appropriate
by Bank to preserve, protect or perfect Bank's security interest in the
Collateral and to file same; and to do any and all other acts and things
necessary to implement the rights granted to the Bank in this Agreement. All
acts of Bank or its designee as said attorney are hereby ratified and approved,
and said attorney shall not be liable for any acts of omission or commission,
nor for any error of judgment or mistake of fact of law, unless done maliciously
or as a result of gross negligence. The power granted herein is coupled with an
interest and is irrevocable so long as the Loan remains unpaid.
SECTION 5.16 Bank Accounts. Maintain its primary operating bank accounts,
-------------
including depository accounts, with the Bank.
SECTION 5.17 Hazardous Materials.
-------------------
(a) Provide the Bank with written notice upon the Borrower's obtaining
knowledge of any potential or known release or threat of release of any
hazardous material or oil at or from any site owned, occupied, or operated by
the Borrower or by any person for whose conduct the Borrower is responsible;
upon the Borrower's receipt of any notice to such effect from any federal,
state, or other governmental authority; and/or upon the Borrower's obtaining
knowledge of any incurrence of any expense or loss by such governmental
authority in connection with the assessment, containment, or removal of any
hazardous material or oil for which expense or loss the Borrower may be liable;
and
(b) In the event of a release of hazardous material or oil, take all such
action, including, without limitation, the conducting of engineering tests (at
the expense of the Borrower) to confirm that no hazardous material or oil is or
ever was stored on any site owned, occupied, or operated by the Borrower or by
any person for whose conduct the Borrower is responsible.
-22-
SECTION 5.18 Comply with Other Covenants and Warranties. Conform, adhere
------------------------------------------
to, and observe all covenants and warranties contained in any other agreement
between the Bank and the Borrower, or instrument furnished by the Borrower to
the Bank.
SECTION 5.19 Payment of Other Obligations. The Borrower will punctually
----------------------------
and promptly make all payments and perform all other obligations which may be
required of it with respect to any indebtedness (whether for money borrowed,
goods purchased, services rendered or however such indebtedness may otherwise
arise) owing to persons, firms or corporations other than the Bank and the
nonpayment of which would have a material adverse effect on Borrower's
operations or finances, including, without limitation, indebtedness which may be
secured by a security interest in assets of the Borrower or property of the
Borrower, and all obligations under the terms of any lease in which the Borrower
is the lessee. The provisions of this section shall not preclude the Borrower
from contesting in good faith and diligently prosecuting any such indebtedness
or obligation.
ARTICLE VI
NEGATIVE COVENANTS
------------------
So long as the Revolving Credit Note and/or the Term Note shall remain
unpaid or the Bank shall have any Commitment under this Agreement, the Borrower
will not without the Bank's prior written consent:
SECTION 6.01. Liens. Create, incur, assume, or suffer to exist, or permit
-----
any Subsidiary (if any exist) to create, incur, assume, or suffer to exist, any
Lien upon or with respect to any of its properties, now owned or hereafter
acquired, except for the following (the "Permitted Encumbrances"):
(1) Liens in favor of the Bank;
(2) Liens for taxes or assessments or other government charges or levies if
not yet due and payable or, if due and payable, if they are being contested in
good faith by appropriate proceedings and for which appropriate reserves are
maintained;
(3) Judgment and other similar Liens arising in connection with court
proceedings, provided the execution or other enforcement of such Liens is
effectively stayed and the claims secured thereby are being actively contested
in good faith and by appropriate proceedings, provided the final outcome does
not adversely affect the financial condition of the Borrower in a material way;
(4) Purchase-money Liens on any property hereafter acquired or the
assumption of any Lien on property existing at the time of such acquisition, or
a Lien
-23-
incurred in connection with any conditional sale or other title retention
agreement of a capital lease; and
(5) Permitted Exceptions, as identified in Exhibit B.
---------
SECTION 6.02. Mergers, Etc. Without the Consent of the Bank. Merge or
---------------------------------------------
consolidate with (unless it is the survivor corporation) or sell, assign, lease,
or otherwise dispose of (whether in one transaction or in a series of
transactions) all or substantially all of its assets (whether now owned or
hereafter acquired) to any Person, or acquire all or substantially all of the
assets or the business of any Person, or permit any Subsidiary (if at any time
existing) to do so, provided the Borrower may sell its PC TV Production assets;
SECTION 6.03. Leases. Without the prior written consent of the Bank,
------
create, incur, assume, or suffer to exist, or permit any Subsidiary (if at any
time existing) to create, incur, assume or suffer to exist, any obligation as
lessee for the rental or hire of any real or personal property, except: (1)
leases existing on the date of this Agreement and any extensions, amendments or
renewals thereof; (2) leases, of which the total annual obligation under any
such lease is not more than $250,000.00, with the aggregate annual obligations
of all such new leases (i.e., leases not in effect at the time of this
Agreement) not to exceed $500,000.00.
SECTION 6.04. Sale of Assets. Sell, lease, assign, transfer, or otherwise
--------------
dispose of, any of its now owned or hereafter acquired assets (including,
without limitation, shares of stock and indebtedness of Subsidiaries,
receivables, and leasehold interests), except: (1) for inventory disposed of
and accounts receivable collected in the ordinary course of business; (2) the
sale or other disposition of assets no longer used or useful in the conduct of
its business; (3) any sale of other assets, provided any such single sale does
not exceed $ 100,000.00 and the aggregate proceeds of all such sales in any one
fiscal year do not exceed $250,000.00; or (4) the sale of the PC TV Production
assets.
SECTION 6.05. Guaranties Etc. Assume, guarantee, endorse, or otherwise be
--------------
or become directly or contingently responsible or liable, or permit any
Subsidiary (if at any time existing) to assume, guarantee, endorse, or otherwise
be or become directly or contingently responsible or liable (including, but not
limited to, an agreement to purchase any obligation, stock, assets, goods, or
services, or to supply or advance any funds, assets, goods, or services, or to
maintain or cause such Person to maintain a minimum working capital or net
worth, or otherwise to assure the creditors of any Person against loss) for
obligations of any Person, except guaranties by endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary
course of business (product warranties for purposes of this section shall not be
deemed guaranties).
-24-
SECTION 6.06. Transactions With Affiliates. Enter into any transaction,
----------------------------
including, without limitation, the purchase, sale, or exchange of property or
the rendering of any service, with any affiliate, or permit any Subsidiary (if
at any time existing) to enter into any transaction, including, without
limitation, the purchase, sale, or exchange of property or the rendering of any
service, with any affiliate, or the making of advances to any affiliates except
in the ordinary course of business upon fair and reasonable terms no less
favorable to the Borrower or such subsidiary than they would obtain in a
comparable arm's length transaction with a person not an affiliate. As used
herein, an "affiliate" is any person which is under common ownership with or a
member of the same controlled group as Borrower.
SECTION 6.07. Dividends. Declare or pay any dividends; or purchase,
---------
redeem, retire, or otherwise acquire for value any of its capital stock now or
hereafter outstanding except purchase of shares of decedent shareholder pursuant
to a stock purchase agreement between Borrower and its shareholders approved by
the Bank; or make any distribution of assets to its stockholders as such whether
in cash, assets, or obligations of the Borrower; or allocate or otherwise set
apart any sum for the payment of any dividend or distribution on or for the
purchase, redemption, or retirement of, any shares of its capital stock; or make
any other distribution by reduction of capital or otherwise in respect of any
shares of its capital stock; or permit any of its Subsidiaries to purchase or
otherwise acquire for value any stock of the Borrower or another Subsidiary,
except that (1) the Borrower may declare dividends in an amount sufficient to
pay shareholders' federal income taxes for profits, if the Borrower has elected
S Corporation status, and provided, (i) no Event of Default has occurred and
remains outstanding; and (ii) such distribution does not result in the violation
of any financial covenant of Borrower contained in this Agreement or otherwise
result in the occurrence of an Event of Default; and (2) with the written
consent of the Bank, which shall not be unreasonably withheld, the Borrower may
purchase or otherwise acquire shares of its capital stock by exchange for or out
of the proceeds received from a substantially concurrent issue of new shares of
its capital stock.
SECTION 6.08. Investments. Except as permitted by Section 6.06 above,
-----------
make, or permit any Subsidiary to make, any loan or advance to any Person
(except loans to employees which, in the aggregate, shall not exceed $100,000.00
at any time), or purchase or otherwise acquire, or permit any Subsidiary to
purchase or otherwise acquire, any capital stock, assets, obligations, or other
securities of, make any capital contribution to, or otherwise invest in or
acquire any interest in any Person in excess of $100,000.00, except: (1) direct
obligations of the United States or any agency thereof with maturities of one
year or less from the date of acquisition; (2) commercial paper of a domestic
issuer rated at least "A-1" by Standard & Poor's Corporation or "P-1" by Moody's
Investor's Service, Inc.; (3) certificates of deposit with maturities of one
year or less from the date of acquisition issued by any commercial bank having
capital and surplus in excess of One Hundred Million
-25-
($100,000,000.00) Dollars; and (4) stock, obligations, or securities received in
settlement of debts (created in the ordinary course of business) owing to the
Borrower or any Subsidiary.
SECTION 6.09 Additional Debt. Except as otherwise provided above, issue
---------------
evidence of indebtedness or create, assume, become contingently liable for, or
suffer to exist bank debt in addition to Debt to the Bank; provided, however,
that the Borrower may incur liabilities which are incurred or arise in the
ordinary course of Borrower's business other than Debt arising with respect to
money borrowed or the issuance of letters of credit for the account of the
Borrower (other than letters of credit issued by the Bank) both of which shall
be prohibited.
SECTION 6.10 Stock of Subsidiary (if any). Sell or otherwise dispose of
----------------------------
any shares of capital stock of any Subsidiary, except in connection with a
transaction permitted under Section 6.02, or permit any Subsidiary to issue any
additional shares of its capital stock, except director's qualifying shares.
SECTION 6.11 Name. Change its name without prior written notification to
----
the Bank.
SECTION 6.12 Place Of Business. Without prior written notice to the Bank,
-----------------
open or operate any place of business other than those identified in Exhibit I.
---------
ARTICLE VII
FINANCIAL COVENANTS
-------------------
SECTION 7.01. Minimum Working Capital. Borrower shall maintain Working
-----------------------
Capital at the following minimum levels at all times during the fiscal quarters
and fiscal years listed below, to be tested quarterly at the end of each fiscal
quarter and fiscal year on the basis of the financial statements provided by
Borrower to the Bank pursuant to Section 5.08 of this Agreement for the reported
period (the "Financial Statements"). As used herein, "Working Capital" is
calculated by deducting Current Liabilities from Current Assets as shown on the
Financial Statements. As used herein, "Current Assets" means, at any date as of
which the amount thereof shall be determined, all assets of Borrower which
should properly be classified as current in accordance with GAAP, and "Current
Liabilities" means, at any date as of which the amount thereof shall be
determined, all liabilities of the Borrower which should properly be classified
as current in accordance with GAAP, except that the Term Loan shall not be
included in the definition of "Current Liabilities" for any period prior to
maturity of such loan.
-26-
Fiscal Quarter (FQ)
or Fiscal Year (FY) Minimum
Ending Working Capital ($)
------ -------------------
03/31/97 (FQ) 12,500,000
06/30/97 (FQ) 12,500,000
09/30/97 (FQ) 12,500,000
12/31/97 (FY) 15,000,000
03/31/98 (FQ) 15,000,000
06/30/98 (FQ) 15,000,000
09/30/98 (FQ) 15,000,000
12/31/98 (FY) 17,500,000
03/31/99 (FQ) 17,500,000
06/30/99 (FQ) 17,500,000
09/30/99 (FQ) 17,500,000
12/31/99 (FY) 20,000,000
03/31/00 (FQ) 20,000,000
06/30/00 (FQ) 20,000,000
09/30/00 (FQ) 20,000,000
12/31/00 (FY) 22,500,000
03/31/01 (FQ) 22,500,000
06/30/01 (FQ) 22,500,000
09/30/01 (FQ) 22,500,000
12/31/01 (FY) 25,000,000
03/31/02 (FQ) 25,000,000
SECTION 7.02. Leverage Ratio. Borrower at all times shall maintain a
--------------
ratio of Total Debt (as hereinafter defined) to Tangible Capital Base not
exceeding the ratios set forth for the fiscal quarters, months and fiscal years
listed below, to be tested at the end of each fiscal quarter and year on the
basis of the Financial Statements. "Total Debt" means total liabilities
(including capital leases), all as determined in accordance with GAAP from the
Financial Statements except that accounts payable corresponding to intransit
inventory shall not be included in total liabilities. "Tangible Capital Base"
means total shareholders' equity less intangible assets, all as determined in
accordance with GAAP from the Financial Statements.
-27-
FQ Mth or FY Leverage Ratio
Ending Not to Exceed
------ -------------
03/31/97 (FQ) 3.25:1
06/30/97 (FQ) 3.25:1
09/30/97 (FQ) 3.25:1
10/31/97 4.00:1
11/30/97 4.00:1
12/31/97 (FY) 3.25:1
For each subsequent year, the so-called Leverage Ratio shall remain the same as
of the end of each fiscal quarter and fiscal year, including October and
November, listed above.
SECTION 7.03. Net Income. Borrower shall have Net Income (as hereinafter
----------
defined) as of the end of each fiscal quarter and fiscal year listed below at
least in the amount indicated below for such fiscal quarter and fiscal year,
which amounts shall be cumulative with no losses for any fiscal quarter. "Net
Income" means total income from all sources for the fiscal quarter or year, less
----
cost of goods sold, taxes, depreciation and amortization expense, and such other
items treated as expenses under GAAP for such period, and less the amount
----
distributed to shareholders during such period to cover income taxes for
undistributed profits (if Borrower has elected S Corporation Status), all as
determined from the Financial Statements in accordance with GAAP.
Minimum
FQ or FY Net Income ($)
Ending (Cumulative)
------ ------------
03/31/97 (FQ) 500,000
06/30/97 (FQ) 1,500,000
09/30/97 (FQ) 2,500,000
12/31/97 (FY) 5,000,000
For each subsequent year, Borrower's Net Income shall remain the same as of the
end of each fiscal quarter and fiscal year listed above.
SECTION 7.04. Tangible Capital Base. Borrower shall maintain a Tangible
---------------------
Capital Base at least in the amounts indicated below for the fiscal quarters and
fiscal
-28-
years listed below, to be tested at the end of each such fiscal quarter
and fiscal year on the basis of the Financial Statements.
FQ or FY Minimum
Ending Capital Base ($)
------ ----------------
03/31/97 (FQ) 17,000,000
06/30/97 (FQ) 18,000,000
09/30/97 (FQ) 19,000,000
12/31/97 (FY) 21,500,000
03/31/98 (FQ) 22,000,000
06/30/98 (FQ) 23,000,000
09/30/98 (FQ) 24,000,000
12/31/98 (FY) 26,500,000
03/31/99 (FQ) 27,000,000
06/30/99 (FQ) 28,000,000
09/30/99 (FQ) 29,000,000
12/31/99 (FY) 31,500,000
03/31/00 (FQ) 32,000,000
06/30/00 (FQ) 33,000,000
09/30/00 (FQ) 34,000,000
12/31/00 (FY) 36,500,000
03/31/01 (FQ) 37,000,000
06/30/01 (FQ) 38,000,000
09/30/01 (FQ) 39,000,000
12/31/01 (FY) 41,500,000
03/31/02 (FQ) 42,000,000
SECTION 7.05. [INTENTIONALLY DELETED]
SECTION 7.06. Compliance Certificate. Borrower shall report and certify
----------------------
to Bank its compliance with the financial covenants hereinabove within thirty
(30) days of the end of each fiscal quarter and within sixty (60) days of the
end of each fiscal year on the form attached hereto as Exhibit J.
-29-
ARTICLE VIII
EVENTS OF DEFAULT
-----------------
SECTION 8.01. EVENTS OF DEFAULT. If any of the following events ("EVENTS
-----------------
OF DEFAULT") shall occur:
(1) The Borrower should fail to pay the principal of, or interest on, the
Revolving Credit Note or the Term Note as and when due and payable and which
default shall continue for ten (10) days and it shall not be required that Bank
give notice of such default; or
(2) Any material representation or warranty made or deemed made by the
Borrower in this Agreement or any of the other Loan Documents, or which is
contained in any certificate, document, opinion, or financial or other statement
furnished at any time under or in connection with any Loan Document shall prove
to have been incorrect in any material respect on or as of the date made or
deemed made; or
(3) The Borrower shall fail to perform or observe any material term,
covenant, or agreement contained in any Loan Document on its part to be
performed or observed which is not cured within thirty (30) days of Borrower
obtaining knowledge of such breach (including, but not limited to, knowledge
pursuant to notice from the Bank) without the Bank required to give any
additional notice thereof to Borrower; or
(4) The Borrower shall (a) fail to pay any indebtedness for borrowed money
or any interest or premium thereon, when due (whether by scheduled maturity,
required prepayment, acceleration, demand, or otherwise and whether or not
related to this transaction or owed to the Bank or to another) and after the
expiration of the applicable grace period, if any; (b) fail to file any tax
return or to pay or remit any tax when due (subject to rights to file extensions
and/or contest in good faith as provided in Section 5.13 above); or (c) fail to
perform or observe any material term, covenant, or condition on its part to be
performed or observed under any agreement or instrument relating to any such
indebtedness, when required to be performed or observed (after allowance for
applicable cure periods, if any), if the effect of such failure to perform or
observe is to accelerate, or to permit the acceleration after the giving of
notice or passage of time, or both, of the maturity of such indebtedness,
whether or not such failure to perform or observe shall be waived by the holder
of such indebtedness; or any such indebtedness shall be declared to be due and
payable, or required to be prepaid (other than by a regularly scheduled required
prepayment), prior to the stated maturity thereof and in any such event shall
not be cured within thirty (30) days without the Bank required to give
additional notice thereof to Borrower; or
-30-
(5) The Borrower (a) shall be unable to, or shall admit in writing its
inability to pay its debts as such debts become due; or (b) shall make an
assignment for the benefit of creditors, petition or apply to any tribunal for
the appointment of a custodian, receiver, or trustee for it or a substantial
part of its assets; or (c) shall commence any proceeding under any bankruptcy,
reorganization, arrangements, readjustment of debt, dissolution, or liquidation
law or statute of any jurisdiction, whether now or hereafter in effect; or (d)
shall have any such petition or application filed or any such proceeding
commenced against it in which an order for relief is entered or adjudication or
appointment is made and is not dismissed or stayed within sixty (60) days; or
(e) by any act or omission shall indicate its consent to, approval of, or
acquiescence in any such petition, application, or proceeding, or order for
relief, or the appointment of a custodian, receiver, or trustee for all or any
substantial part of its properties; or (f) shall suffer any custodianship,
receivership, or trusteeship and any such proceeding not instituted by Borrower
shall not be dismissed or stayed within forty-five (45) days; or
(6) One or more judgments, decrees, or orders for the payment of money in
excess of an aggregate of Two Hundred Thousand Dollars ($200,000.00) in the
aggregate shall be rendered against the Borrower and such judgments, decrees, or
orders shall continue unsatisfied and in effect for a period of sixty (60)
consecutive days without being vacated, discharged, satisfied, or stayed or
bonded pending appeal; or
(7) The Security Agreement shall at any time after execution and delivery
by the Borrower and for any reason cease (a) to create a valid and perfected
first priority security interests in and to the property purported to be subject
to such Security Agreement (other than by reason of expiration of a financing
statement which the Bank fails to continue) or (b) to be in full force and
effect or shall be declared null and void, or the validity or enforceability
thereof shall be contested by the Borrower, or the Borrower shall deny it has
any further liability or obligation under such Security Agreement, or the
Borrower shall fail to perform any of its material obligations under such
Security Agreement and such failure is not cured within the applicable grace
period, if any; or
(8) The occurrence of any change in ownership of the Borrower whereby there
is a change in fifty percent (50%) or greater of the stock ownership from the
date of this Agreement, except transfers of stock ownership between David Hall
and Patricia Gallup or their family members or related family trusts so long as
David Hall and Patricia Gallup retain voting control of the Borrower; or
(9) Any material change in the condition or affairs (financial or
otherwise) of the Borrower or any guarantor which in the reasonable opinion of
the Bank will impair its security or materially increase its risk; or
-31-
(10) Borrower shall suffer any material loss, theft, substantial damage,
sale or encumbrance to or of any property constituting collateral for the
Obligations not fully covered by insurance;
then, in any such event, the Bank may terminate the Commitment and the
Obligations of the Borrower to the Bank under this Agreement and the other Loan
Documents shall, at the Bank's option, become immediately due and payable.
ARTICLE IX
MISCELLANEOUS
-------------
SECTION 9.01. AMENDMENTS, ETC. No amendment, modification, termination,
---------------
or waiver of any provision of any Loan Document to which the Borrower is a
party, nor consent to any departure by the Borrower from any Loan Document to
which it is a party, shall in any event be effective unless the same shall be in
writing and signed by the party to be charged, and then such waiver or consent
shall be effective only in the specific instance and for the specific purpose
given.
SECTION 9.02. NOTICES, ETC. All notices and other communications provided
------------
for under this Agreement and under the other Loan Documents to which the
Borrower is a party shall be in writing and mailed or hand delivered:
If to the Borrower: PC CONNECTION, INC.
528 Route 13
Milford, New Hampshire 03055
Attn: Wayne L. Wilson
Senior Vice President and Chief Operating Officer
If to the Bank: State Street Bank and
Trust Company
225 Franklin Street, M-2
Boston, Massachusetts 02110-2804
Attn: Thomas J. Pyles, Vice President
or such other address as shall be designated by such party in a written notice
to the other party complying as to delivery with the terms of this Section 9.02.
Any demand, notice, or other correspondence to Bank or Borrower, or any other
party in connection with this Agreement shall be deemed received two (2) days
following deposit in the United States mail and sent by registered or certified
mail, postage prepaid, the day when sent if delivered by hand or transmitted by
facsimile with a copy by registered or certified mail, or the day following
deposit with a nationally recognized overnight courier with all costs prepaid,
and in each case addressed to the parties at their respective addresses set
forth above.
-32-
SECTION 9.03. CONSENT. The Borrower may take any action herein prohibited
-------
or omit to perform any act required to be performed by the Borrower if the
Borrower shall obtain the Bank's prior written consent to each such action or
omission to act. No waiver on the Bank's part on any one occasion shall be
deemed a waiver on any other occasion. The Bank shall not be deemed to have
waived any of its rights hereunder unless such waiver shall be in writing and
duly signed by an authorized officer of the Bank.
SECTION 9.04. NO WAIVER; REMEDIES. No failure on the part of the Bank to
-------------------
exercise, and no delay in exercising, any right, power, or remedy under any Loan
Document shall operate as a waiver thereof; nor shall any single or partial
exercise of any right under any Loan Document preclude any other or further
exercise thereof or the exercise of any other right. The remedies provided in
the Loan Documents are cumulative and not exclusive of any remedies provided by
law. The Bank shall not be required to have recourse to any collateral before
enforcing its rights or remedies against the Borrower. The Borrower hereby
waives presentment and protest of any instrument and any notice thereof.
SECTION 9.05. SUCCESSORS AND ASSIGNS. This Agreement shall be binding
----------------------
upon and inure to the benefit of the Borrower and the Bank and their respective
successors and assigns, except that the Borrower may not assign or transfer any
of its rights under any Loan Document to which the Borrower is a party without
the prior written consent of the Bank.
SECTION 9.06. COSTS, EXPENSES AND TAXES. The Borrower will pay or
-------------------------
reimburse the Bank, on demand, for all expenses (including, without limitation,
reasonable counsel fees and expenses) incurred or paid by the Bank in connection
with the preparation of the Loan Agreement and all related documents,
administration of the Loans, enforcement by the Bank of its rights as against
the Borrower or any other person primarily or secondarily liable to the Bank
hereunder or under any other Loan Document; the administration, supervision,
protection or realization on any collateral held by the Bank as security for any
obligation of the Borrower or any other person primarily or secondarily liable
with respect thereto; and in the defense of any action against the Bank with
respect to its rights or liabilities hereunder or under any other Loan
Documents. In addition, the Borrower shall pay document preparation costs,
including but not limited to costs associated with participating a forty percent
(40%) share in the Loan, and any and all stamp and other taxes and fees payable
or determined to be payable in connection with the execution, delivery, filing
and recording of any of the Loan Documents and the other documents to be
delivered under any such Loan Documents, and agrees to save the Bank harmless
from and against any and all liabilities with respect to or resulting from any
delay in paying or omission to pay such taxes and fees.
-33-
SECTION 9.07. RIGHT OF SETOFF. Upon the occurrence and during the
---------------
continuance of any Event of Default the Bank is hereby authorized at any time
and from time to time, without notice to the Borrower (any such notice being
expressly waived by the Borrower), to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held and
other indebtedness at any time owing by the Bank to or for the credit or the
account of the Borrower against any and all of the obligations of the Borrower
now or hereafter existing under this Agreement, the Revolving Credit Note or the
Term Note, or any other Loan Document, irrespective of whether or not the Bank
shall have made any demand under this Agreement, the Revolving Credit Note or
the Term Note, or such other Loan Document and although such obligations may be
unmatured. The Bank agrees promptly to notify the Borrower after any such
setoff and application, provided that the failure to give such notice shall not
affect the validity of such setoff and application. The rights of the Bank
under this Section 9.07 are in addition to other rights and remedies (including,
without limitation, other rights of setoff) which the Bank may have.
SECTION 9.08. WAIVER. The Borrower hereby waives notice of nonpayment,
------
demand, presentment, protest and notice thereof with respect to any and all
instruments, notice of acceptance hereof, notice of loans or advances made,
credit extended, collateral received or delivered, or any other action taken in
reliance hereon, and all other demands and notices of any description, except
such as are expressly provided for herein. No delay or omission on Bank's part
in exercising any right, remedy or option shall operate as a waiver of such or
any other right, remedy or option or of any default.
SECTION 9.09. GOVERNING LAW. This Agreement, the Revolving Credit Note,
-------------
the Term Note, and all other documents hereunder have been made and delivered in
the Commonwealth of Massachusetts and shall be governed by, and construed in
accordance with, the laws of the Commonwealth of Massachusetts and the Borrower
submits to the jurisdiction of Massachusetts for all purposes with respect to
this Agreement and all other documents hereunder and its relationship with the
Bank.
SECTION 9.10. SEVERABILITY OF PROVISIONS. Any provision of any Loan
--------------------------
Document which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions of such Loan
Documents or affecting the validity or enforceability of such provision in any
other jurisdiction.
SECTION 9.11. HEADINGS. Article and Section headings in the Loan
--------
Documents are included in such Loan Documents for the convenience of reference
only and shall not constitute a part of the applicable Loan Documents for any
other purpose.
-34-
SECTION 9.12. TERMINATION. This Agreement shall continue to be fully
-----------
operative until all transactions entered into, rights or interest created or
Obligations incurred have been fully disposed of, concluded or liquidated. The
security interests, Lien and rights granted to Bank hereunder or under any other
Loan Document shall continue in full force and effect until all Obligations have
been satisfied.
SECTION 9.13. MAXIMUM INTEREST. No provision of this Agreement, the
----------------
Revolving Credit Note or the Term Note, or any other Loan Document shall require
the payment or permit the collection of interest in excess of the maximum
permitted by law. If any such excess interest is provided for herein or in the
Revolving Credit Note or the Term Note or any other Loan Document, Borrower
shall not be obligated to pay such excess, and the right to demand the payment
of any such excess is hereby waived by Bank.
SECTION 9.14. SURVIVAL. All representations, warranties, covenants,
--------
waivers and agreements contained herein shall survive the termination hereof
unless otherwise provided.
SECTION 9.15. UNUSED LINE FEE. Borrower shall pay to the Bank quarterly
---------------
in arrears a fee equal to one-fourth of one percent (1/4 of 1%) of the average
daily amount by which the maximum commitment under the Revolving Credit exceeds
the actual principal amount outstanding thereunder on a daily basis during each
fiscal quarter, as determined by the Bank.
SECTION 9.16. PARTICIPATING LOANS. The Bank may sell, transfer or grant
-----------------------------------
participations in the Note to one or more financial institutions without the
prior written consent of the Borrower, and the Borrower agrees that any
transferee or participant shall be entitled to the benefits of Sections 2.04.5,
2.04.7, 5.07 and 9.07 to the same extent as if such transferee or participant
were the Bank hereunder, provided that (a) any such sales shall not affect the
rights and duties of the Bank hereunder to the Borrower, (b) the Bank shall
retain at all times an interest in the Loans greater than fifty percent (50%)
unless an Event of Default has occurred and is continuing, (c) the Bank shall
retain responsibility for and perform all servicing and administration functions
respecting the Loans, and (d) the Borrower may, for all purposes of this
Agreement, treat the Bank as the person entitled to exercise all rights
hereunder and under the Note and to receive all payments with respect thereto.
Notwithstanding the foregoing, the Bank may assign its interest in the Note to
any Federal Reserve Bank as collateral.
SECTION 9.17. INDEMNIFICATION. Borrower agrees to defend, indemnify and
---------------
hold harmless Bank from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses
(including attorney fees), or disbursements of any kind or nature whatsoever
which may be imposed on, incurred by or asserted against Bank in connection with
any investigative,
-35-
administrative or judicial proceeding (whether or not Bank shall be designated a
party thereto) or any other claim by a third party relating to or arising out of
the Loan Documents or any actual or proposed use of proceeds of the Loans or any
activities of the Borrower; provided that Bank shall not have the right to be
indemnified under this Section for its own gross negligence or willful
misconduct as determined by a court of competent jurisdiction.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective officers hereunto duly authorized, as of the date first
above written and shall take effect as a sealed instrument.
WITNESS: BORROWER:
PC CONNECTION, INC.
/s/ Curtis W. Little, Jr. By: /s/ Wayne L. Wilson
- --------------------------- -----------------------------
Wayne L. Wilson
Senior Vice President
BANK:
STATE STREET BANK AND TRUST
COMPANY
/s/ Curtis W. Little, Jr. By: /s/ Thomas J. Pyles
- --------------------------- -------------------------------
Thomas J. Pyles
Vice President
-36-
REVOLVING CREDIT NOTE
---------------------
$40,000,000.00 Boston, Massachusetts
March 31, 1997
For value received, PC CONNECTION, Inc. (the "Borrower") hereby promises to
pay to STATE STREET BANK AND TRUST COMPANY (the "Bank"), or order, at the head
office of the Bank at 225 Franklin Street, Boston, Massachusetts 02110, on May
31, 1999 the principal amount of up to FORTY MILLION DOLLARS ($40,000,000.00),
or such lesser amount as shall have been advanced and not have been prepaid, in
immediately available funds, together with interest on the unpaid principal
hereof. Interest shall be payable monthly in arrears on the last day of each
month beginning on April 30, 1997 at the variable rate per annum equal to the
Bank's Prime Rate, in effect from time to time. "Prime Rate" shall mean the
rate of interest announced by the Bank in Boston from time to time as its "Prime
Rate." Each change in such interest rate shall take effect simultaneously with
the corresponding change in such Prime Rate. Interest shall be computed on the
basis of a 360-day year for the actual number of days elapsed, including
holidays or other days on which the Bank is not open for the conduct of banking
business. The Borrower may also elect a LIBOR based rate of interest equal to
the Adjusted LIBOR Rate plus two and one-half percent (2.5%) per annum to apply
to all or a portion of the outstanding principal hereunder in accordance with,
and subject to the terms and conditions of, the Loan Agreement (defined below).
The "Adjusted LIBOR Rate" is defined in the Loan Agreement.
All loans hereunder and all payments on account of principal and interest
hereof shall be recorded by the Bank and prior to any transfer hereof, endorsed
on Schedule I attached hereto and incorporated herein. The entries on the
records of the Bank (including any appearing on this Note) shall be prima facie
evidence of amounts outstanding hereunder.
Overdue payments of principal (whether at stated maturity by acceleration
or otherwise), and, to the extent permitted by law, overdue interest, shall bear
interest, compounded monthly and payable on demand in immediately available
funds, at a rate per annum equal to four percent (4%) above the Bank's Prime
Rate in effect from time to time.
This Note is issued pursuant to, and entitled to the benefits of, and is
subject to, the provisions of the Amended and Restated Commercial Loan Agreement
of even date herewith by and between the Borrower and the Bank (such agreement,
as it may from time to time hereafter be amended or extended, the "Loan
Agreement"), wherein it is defined as the "Revolving Credit Note" and the
indebtedness evidenced thereby the "Revolving Credit," but neither this
reference to the Loan Agreement nor any provision thereof shall affect or impair
the absolute and unconditional obligation
of the Borrower of this Note to pay the principal of and interest on this Note
as herein provided.
The indebtedness evidenced by this Note is secured by a security interest
in all of Borrower's assets and property interests granted to the Bank pursuant
to an Amended and Restated Security Agreement of even date herewith by and
between Bank and Borrower, as the same may be from time to time amended or
extended.
In case an Event of Default (as defined in the Loan Agreement) shall occur,
the aggregate unpaid principal of plus accrued interest on this Note shall
become or may be declared to be due and payable in the manner and with the
effect provided in the Loan Agreement.
The Borrower may at its option prepay all or any part of the principal of
this Note before maturity upon the terms provided in the Loan Agreement,
including in particular Sections 2.04.5 and 2.04.7 of the Loan Agreement.
Any deposits or other sums at any time credited by or due from the Bank to
the Borrower or any endorser or guarantor hereof and any securities or other
property of the Borrower or any endorser or guarantor at any time in the
possession of the Bank may at all times be held and treated as collateral for
the payment of this Note and any and all other liabilities (direct or indirect,
absolute or contingent, sole, joint or several, secured or unsecured, due or to
become due, now existing or hereafter arising) of the Borrower to the Bank.
Regardless of the adequacy of collateral, the Bank may apply or set-off such
deposits or other sums against such liabilities at any time in the case of
makers but only with respect to matured liabilities in the case of endorsers and
guarantors.
The Borrower hereof hereby waives presentment, demand, notice, protest and
all other demands and notices in connection with the delivery, acceptance,
performance, default or enforcement hereof and consents that this Note may be
extended from time to time and that no such extension or other indulgence, and
no substitution, release or surrender of collateral and no discharge or release
of any other party primarily or secondarily liable hereon, shall discharge or
otherwise affect the liability of the Borrower, endorser or guarantor. No delay
or omission on the part of the Bank in exercising any right hereunder shall
operate as a waiver of such right or of any other right hereunder, and a waiver
of any such right on any one occasion shall not be construed as a bar to or
waiver of any such right on any future occasion.
NOTWITHSTANDING the face amount of this Note, the maximum amount of loans
which may be made under the Loan Agreement which are evidenced by this Note
shall not exceed Thirty Million Dollars ($30,000,000.00) through March 1, 1998.
-2-
This note is executed and delivered in substitution and replacement of the
Demand Note - Grid - Fluctuating Interest dated November 14, 1996, made by
Borrower to the Bank's order in the original principal amount of up to
$22,500,000.00 and does not constitute a discharge of the indebtedness evidenced
thereby or a novation of the underlying loan transaction.
This instrument shall have the effect of an instrument executed under seal
and shall be governed by and construed in accordance with the laws of The
Commonwealth of Massachusetts (without giving effect to any conflicts of laws
provisions contained therein).
WITNESS: PC CONNECTION, INC.
/s/ Curtis W. Little, Jr. By: /s/ Wayne L. Wilson
- --------------------------- ------------------------------------
Wayne L. Wilson
Senior Vice President and
Chief Operating Officer
Address:
528 Route 13, Milford NH 03055
-3-
TERM PROMISSORY NOTE
--------------------
$5,000,000.00 U.S. Boston, Massachusetts
March 31, 1997
FOR VALUE RECEIVED, the undersigned, PC CONNECTION, INC., a New Hampshire
corporation (the "Borrower"), promises to pay to the order of STATE STREET BANK
AND TRUST COMPANY (the "Bank"), at the office of the Bank located at 225
Franklin Street, Boston, Massachusetts, or such other place or places as the
holder hereof may designate in writing from time to time hereafter, the
principal sum of FIVE MILLION DOLLARS ($5,000,000.00), together with interest as
hereinafter provided, in lawful money of the United States of America.
Interest shall be calculated and charged daily on the basis of actual days
elapsed over a three hundred sixty (360) day banking year at a variable rate
equal to the Bank's Prime Rate in effect from time to time plus one half of one
percent (.5%) per annum. As used herein, "Prime Rate" means the rate of
interest announced by the Bank in Boston from time to time as its "Prime Rate."
Each time the Prime Rate changes, the interest rate hereunder shall change
contemporaneously with such change. The Prime Rate is an index only, and not
necessarily the lowest rate charged by the Bank on commercial loans. The
Borrower may also elect a Cost of Funds based rate of interest equal to the then
Cost of Funds Rate plus three percent (3%) per annum to apply to the outstanding
principal hereunder in accordance with, and subject to the terms and conditions
of, the Loan Agreement (defined below).
Principal and interest shall be paid as follows: Principal shall be paid
in twenty (20) equal quarterly installments of $250,000.00 commencing June 30,
1997, and continuing on the same date of each September, December and March
thereafter; and interest shall be paid monthly in arrears, commencing April 30,
1997 and continuing on the last day of each month thereafter until the earlier
of (i) March 31, 2002 or (ii) the date of closing of an initial public offering
by Borrower of its securities resulting in net proceeds to the Borrower of not
less than $20,000,000.00, at which time the entire unpaid principal balance plus
accrued interest thereon shall be due and payable in full.
This Note is issued under, and is subject to the Amended and Restated
Commercial Loan Agreement of even date herewith between the Borrower and the
Bank (such agreement, as it may hereafter be amended from time to time, the
"Loan Agreement") wherein it is defined as the "Term Note" and the indebtedness
evidenced hereby as the "Term Loan." The holder of this Note is entitled to all
of the benefits and rights of the Bank under the Loan Agreement. However,
neither this reference to the Loan Agreement nor any provision thereof shall
impair the absolute and unconditional obligation of the Borrower to pay the
principal and interest on this Note as herein provided. Any capitalized term
used in this Note which is not
otherwise expressly defined herein shall have the meaning ascribed thereto in
the Loan Agreement.
Except as provided in the Loan Agreement, including in particular Sections
2.04.5 and 2.04.7 of the Loan Agreement, the Borrower shall have the right, at
any time, to prepay all or any part of the outstanding principal amount hereof
without the payment of a penalty or premium, provided that any partial
prepayment may, at the Bank's option, be applied first to accrued interest, late
charges and other charges due under the Loan Documents, and thereafter to
principal installments in inverse order of their due dates.
Upon the occurrence of an Event of Default specified in the Loan Agreement
or any other Loan Document, or if any monthly installment under this Note is not
paid within ten (10) days of when due, the principal hereof and all interest
accrued and accruing hereon may be declared by the holder hereof to be
immediately due and payable.
The holder may impose upon the Borrower a delinquency charge of five
percent (5%) of the amount of any installment of principal and/or interest not
paid on or before the tenth (10th) day after such installment is due. The
entire principal balance hereof, together with accrued interest, shall,
following the occurrence of an Event of Default and Borrower's failure to cure
within the applicable grace period, if any, and in any event after maturity,
whether by demand, acceleration or otherwise, bear interest at a fluctuating
rate per annum equal to four percent (4%) above the Prime Rate in effect from
time to time.
The Borrower agrees to pay on demand all reasonable out-of-pocket costs of
collection hereof, including court costs, service fees, and reasonable
attorneys' fees, whether or not any foreclosure or other action is instituted by
the holder in its discretion.
The word "holder," as used in this Note, shall mean the payee or endorsee
of this Note who is in possession of it, or the bearer, if this Note is at the
time payable to the bearer.
The indebtedness evidenced by this Note is secured by a security interest
in all of Borrower's assets and property interests granted to the Bank pursuant
to the Security Agreement (the "Collateral").
No delay or omission on the part of the holder in exercising any right,
privilege or remedy shall impair such right, privilege or remedy or be construed
as a waiver thereof or of any other right, privilege or remedy. No waiver of
any right, privilege or remedy or any amendment to this Note shall be effective
unless made in writing and signed by the holder. Under no circumstances shall
an effective waiver
-2-
of any right, privilege or remedy on any one occasion constitute or be construed
as a bar to the exercise of or a waiver of such right, privilege or remedy on
any future occasion. The acceptance by the holder hereof of any payment after
any default hereunder shall not operate to extend the time of payment of any
amount then remaining unpaid hereunder or constitute a waiver of any rights of
the holder hereof under this Note.
All rights and remedies of the holder against the maker, whether granted
herein or otherwise, shall be cumulative and may be exercised singularly or
concurrently, and the holder shall have, in addition to all other rights and
remedies, the rights and remedies of a secured party under the Uniform
Commercial Codes of Massachusetts and other jurisdictions in which the
Collateral is located. The holder shall have no duty as to the collection or
protection of the Collateral or of any income thereon, or as to the preservation
of any rights pertaining thereto beyond the safe custody thereof. Surrender of
this Note, upon payment or otherwise, shall not affect the right of the holder
to retain the Collateral as security for the payment and performance of any
other liability of the undersigned to the holder.
The maker of this Note waives all exemption rights, valuation and
appraisement, presentment, protest and demand, demand for payment, notice of
dishonor and protest and all other demands and notices in connection with the
delivery, acceptance, performance, default or enforcement of this Note, and
assents to any extension or postponement of the time of payment or any other
indulgence, to any substitution, exchange or release of Collateral, and/or to
the addition or release of any other party or person primarily or secondarily
liable.
This Note and the provisions hereof shall be binding upon the undersigned
and the undersigned's successors, legal representatives and assigns and shall
inure to the benefit of the holder and the holder's successors, legal
representatives and assigns.
This note is executed and delivered in substitution and replacement of the
Time Promissory Note dated November 1, 1995, made by Borrower to the Bank's
order in the principal amount of $5,000,000.00, as amended, and does not
constitute a discharge of the indebtedness evidenced thereby or a novation of
the underlying loan transaction.
-3-
IN WITNESS WHEREOF, the Borrower has executed and delivered this Note as
of the day and year first above written.
IN THE PRESENCE OF:
PC CONNECTION, INC.
/s/ Curtis W. Little, Jr. By: /s/ Wayne L. Wilson
- ---------------------------------- ----------------------------------
Wayne L. Wilson
Senior Vice President and
Chief Operating Officer
Address:
528 Route 13, Milford NH 03055
-4-
AMENDED AND RESTATED SECURITY AGREEMENT
---------------------------------------
AMENDED AND RESTATED SECURITY AGREEMENT (the "Agreement"), made this 31st day
of March, 1997 by and between PC CONNECTION, INC., a New Hampshire corporation
with a principal place of business at 528 Route 13, Milford, New Hampshire 03055
(the "Debtor"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts banking
corporation with a principal place of business at 225 Franklin Street, Boston,
Massachusetts 02110 (the "Secured Party").
WITNESSETH:
----------
WHEREAS, the Bank and the Secured Party are parties to a certain Revolving
Credit Agreement dated as of December 10, 1993, as amended by four (4) certain
amendments to said Revolving Credit Agreement and Related Loan Documents (as
defined in the Revolving Credit Agreement, as amended) dated as of December 15,
1994, November 1, 1995, March 1, 1996 and November 14, 1996, respectively
(collectively, the "Original Loan Agreement");
WHEREAS, pursuant to the Original Loan Agreement, Secured Party has
extended to Debtor a $22,500,000 revolving credit and a $5,000,000.00 time loan,
secured by a first security interest in all of its assets and property interests
in addition to accounts and inventory, all as set forth in an Amended and
Restated Security Agreement dated November 1, 1995, as amended (the "Prior
Security Agreement");
WHEREAS, the Debtor has requested that the Secured Party (1) increase the
original revolving credit in favor of the Debtor to the maximum principal amount
of Thirty Million Dollars ($30,000,000.00), to be increased to Forty Million
Dollars ($40,000,000.00) after March 1, 1998, ("Revolving Credit") and (2) make
a five-year term loan to Borrower in the principal amount of Five Million
Dollars ($5,000,000.00) ("Term Loan") (collectively, the "Loans");
WHEREAS, the Bank has agreed to establish such an increased revolving
credit and term loan pursuant to the terms and conditions of an Amended and
Restated Commercial Loan Agreement of even date herewith ("Loan Agreement"), a
Revolving Credit Note in the maximum principal amount of $40,000,000.00 of
Debtor to Secured Party of even date. herewith ("Revolving Credit Note"); and a
Term Promissory Note in the principal amount of $5,000,000.00 of Debtor to
Secured Party of even date herewith ("Term Note") (Revolving Credit Note and
Term Note, collectively, the "Notes"); and
WHEREAS, this Security Agreement sets forth the terms and conditions of the
Loans and amends and restates in its entirety the Prior Security Agreement.
NOW, THEREFORE, in consideration of the willingness of the Secured Party to
make the Loans and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Security Interest. As security for the Secured Obligations described
-----------------
in Section 2 hereof, Debtor hereby grants to the Secured Party, subject to the
exceptions and qualifications expressly set forth herein, a first priority
security interest in and lien on all of the Debtor's property rights and assets,
including without limitation the property described below (hereinafter referred
to collectively as the "Collateral"):
(a) All equipment, including machinery, motor vehicles, office
equipment, furniture, fixtures, along with all other parts, tools, trade-
ins, repairs, accessories, accessions, modifications, and replacements,
whether now owned or subsequently acquired, constructed, or attached or
added to, or placed in, the foregoing (collectively, the "Equipment");
(b) All inventory, wherever located, including goods, merchandise
and other personal property, held for sale or lease or other disposition or
furnished or to be furnished under a contract of service, or constituting
raw materials, work in process or materials used or consumed in the
Debtor's business, or consigned to others or held by others for return to
the Debtor, whether now owned or subsequently acquired or manufactured and
wherever located, and including documents of title, whether negotiable or
non-negotiable, representing any of the foregoing (collectively, the
"Inventory");
(c) All accounts receivable, including, without limitation,
accounts, contracts, contract rights, chattel paper, instruments, rents,
deposits, general intangibles, and any other obligations of any kind
whether now existing or hereafter arising out of or in connection with the
sale or lease of goods or the rendering of services, and all rights now or
hereafter existing in and to all security agreements, notes, leases,
licenses, franchises, supply agreements, and other contracts securing or
otherwise relating to any such accounts, contracts, contract rights,
chattel paper, documents and instruments (whether negotiable or non-
negotiable, and regardless of their being attached to chattel paper),
rents, deposits, general intangibles, or obligations (any and all such
accounts, contracts, contract rights, chattel paper, documents and
instruments, rents, deposits, general intangibles, and obligations being
the "Receivables," and any and all such security agreements, notes, leases,
licenses, franchises, supply agreements, and other contracts being the
"Related Contracts");
-2-
(d) All general intangibles, including, but not limited to,
corporate names, trade names, trademarks, trade secrets and other
proprietary information, copyrights, books and records, customer lists,
blue prints and plans, computer programs, tapes and related electronic data
processing software, and all books and records relating to the conduct of
the Debtor's business, including without limitation those relating to its
accounts;
(e) Any and all additions, accessions, substitutions or replacements
to or for any of the foregoing;
(f) Any and all products and proceeds of any or all of the
foregoing, including, without limitation, cash, cash equivalents, tax
refunds and the proceeds of insurance policies providing coverage against
the loss or destruction of or damage to any of the Collateral, or any
indemnity, warranty, or guarantee payable by reason of loss or damage to or
otherwise with respect to any of the Collateral (whether or not the Secured
Party is the loss payee thereof);
(g) All of the Debtor's after-acquired property of the kinds and
types described in paragraphs (a)-(f) herein;
(h) All records and data relating to any of the property described
above, whether in the form of a writing, photograph, microfilm, microfiche,
or electronic media, together with all of the Debtor's right, title, and
interest in and to all computer software required to utilize, create,
maintain and process any of such records or data or electronic media; and
also in (1) all checks, money, securities, bank accounts, deposit accounts, and
other accounts in the possession of or held by the Secured Party whether in the
name of the Debtor or in the name of the Secured Party, and (2) all other
property owned by the Debtor or in which the Debtor has an interest that are now
or may hereafter be in the possession, custody, or control of the Secured Party.
The property described in (1) and (2) above are held in the possession of the
Secured Party by agreement of Debtor and Secured Party. All of the said
Collateral (which throughout this Agreement includes after-acquired Collateral)
is to secure the payment and performance of all of the Secured Obligations.
2. Secured Obligations. The security interest hereby granted shall
-------------------
secure the following (the "Secured Obligations"):
(a) The Debtor's repayment of all outstanding loans or advances
under the Revolving Credit, together with interest, late charges, and any
other applicable charges, to the Secured Party pursuant to the promissory
note evidencing such indebtedness;
-3-
(b) The Debtor's repayment of the outstanding principal balance
under the Term Loan, together with interest, late charges, and any other
applicable charges, to the Secured Party pursuant to the promissory note
evidencing such indebtedness;
(c) The Debtor's payment or performance of all of its obligations
under the Loan Agreement and under the other Loan Documents (as defined,
described and identified in the Loan Agreement, hereinafter the "Loan
Documents"), as the same may be amended, modified, extended, renewed,
replaced or restated;
(d) The payment of all other sums with interest and charges thereon
advanced in accordance herewith to protect the validity, security, and
priority of this Agreement, the Loan Agreement, or the Loan Documents; and
(e) Any other indebtedness of Debtor to Secured Party of every kind
and description, direct or indirect, absolute or contingent, due or to
become due, regardless of how they arose or were acquired, now existing or
hereafter arising.
3. Warranties and Representations of the Debtor. Debtor hereby makes the
--------------------------------------------
following representations and warranties which shall survive the execution and
delivery of this Agreement and shall be continuing representations and
warranties as long as any Secured Obligation remains outstanding:
(a) All representations and warranties made in the Loan Agreement
and the Loan Documents relating to the Debtor and the Collateral are true,
accurate and complete in all material respects;
(b) The Debtor's principal place of business is located at 528 Route
13, Milford, New Hampshire; the Debtor's executive offices and the office
where its books and records are kept and are to be kept concerning the
Receivables, Related Contracts and other Collateral are at the aforesaid
address; and the Debtor has no other places of business except those set
forth on Schedule I hereto;
----------
(c) The Debtor conducts business only under and through the
corporate, business and trade names "PC Connection" and "MAC Connection,"
and such other trade names as it deems advisable upon written notice to the
Bank;
(d) No material authorization, approval or other action by, and no
notice to or filing with, any governmental authority or other person is
required either (i) for the grant by the Debtor of the security interests
granted hereby or
-4-
for the execution, delivery or performance of this Agreement by the Debtor,
or (ii) for the perfection of or the exercise by the Secured Party of its
respective rights and remedies hereunder, except the filing of financing
statements;
(e) The Debtor has good and marketable title to all of the
Collateral pledged by it hereunder, free and clear of any liens, security
interests, encumbrances or interests or claims of any other person or
entity, except security interests held by International Business Machines
Corporation and IBM Credit Corporation (collectively "IBM") in specific IBM
and Lexmark International, Inc. inventory and equipment and by Deutsche
-------------------------------
Financial Services Corporation and other permitted encumbrances listed on
Schedule II and the Permitted Encumbrances as defined in the Loan Agreement
-----------
(all of the foregoing, "Permitted Encumbrances");
(f) Upon the filing of UCC-1 financing statements being delivered at
or prior to the execution hereof, and the advance of value, the Secured
Party will have a valid, perfected first security interest in all of the
Collateral in which Debtor now or in the future has rights, except with
respect to the Permitted Encumbrances, and except for Collateral which
requires possession or an alternate means of perfection;
(g) The Debtor has not performed any acts which might prevent the
Secured Party from enforcing any of the material terms and conditions of
this Agreement or which would limit any of them in any such enforcement;
(h) Schedule III attached hereto sets forth the description and
------------
location of all Collateral not located at the Debtor's principal place of
business, together with a list of the record owners of the real estate on
which such Collateral is located as of the date of this Agreement; and
(i) No effective financing statements or other similar instrument in
effect covering all or any part of the Collateral is on file in any
recording office, other than financing statements filed by IBM and Deutsche
Financial Services Corporation ("DFS"), and "notice" filings by certain
equipment lessors listed on Schedule II, except as may have been filed in
-----------
favor of Secured Party relating to this Agreement.
4. Affirmative Covenants of the Debtor.
-----------------------------------
(a) The Debtor shall promptly notify and provide the Secured Party
with a complete description of the opening of any new places of business,
the closing of any existing places of business, the conduct of business
under any names or through any entities other than those set forth herein,
the relocation
-5-
of any of the Collateral to any new place of business or any other act
which would affect the financing statements filed by the Secured Party;
(b) The Debtor shall continuously take all steps that are necessary
or prudent to protect the security interests of the Secured Party in the
Collateral;
(c) The Debtor shall defend the Collateral against the claims and
demands of all persons;
(d) The Debtor shall deliver and pledge to the Secured Party,
endorsed or accompanied by instruments of assignment or transfer
satisfactory to the Secured Party, any instruments, documents, and chattel
paper which the Secured Party may reasonably specify;
(e) The Debtor shall comply, in all material respects, with all
governmental regulations applicable to the Collateral or any part thereof
or to the operation of the Debtor's business, noncompliance with which
would have a material and adverse effect on the business and operations of
the Borrower; provided, however, that the Debtor may contest any
governmental regulation in any reasonable manner which shall not in the
reasonable opinion of the Secured Party adversely affect the Secured
Party's rights or the first priority of its security interest in the
Collateral;
(f) The Debtor shall pay promptly when due, all taxes, assessments
and governmental charges or levies imposed upon the Collateral or in
respect of its income or profits therefrom, as well as all claims of any
kind, except that no such charge need be paid if (i) the validity thereof
is being contested in good faith by appropriate proceedings, (ii) such
proceedings do not involve any danger of the sale, forfeiture or loss of
any of the Collateral or any interest therein; and (iii) such charge is
adequately reserved against in accordance with the generally accepted
accounting principles;
(g) The Debtor shall cause the Equipment to be maintained and
preserved in good working order and condition, reasonable wear and tear and
fully insured casualty excepted, and shall make all repairs, replacements,
additions, and other improvements necessary to maintain the Equipment in
such good condition;
(h) The Debtor shall maintain Inventory sufficient to meet the needs
of its business;
(i) The Debtor shall preserve all beneficial Related Contracts;
-6-
(j) The Debtor shall take all commercially reasonable steps
necessary to collect the Receivables;
(k) The Debtor shall furnish the Secured Party with a detailed
report (in such form and at such intervals as the Secured Party may
prescribe but no more frequently than monthly with regard to Borrowing Base
(as defined in the Loan Agreement) and monthly financial data) of all
allowances, adjustments, returns and repossessions, and all Collateral
detained from or refused entry into the United States by the appropriate
governmental authorities; and the Secured Party may at any time without
prior notice to or consent of the Debtor:
(i) require the Debtor to pay the Secured Party an amount
equal to said allowances and adjustments, or, in the case of returned,
repossessed, detained or refused inventory, equal to the amount of the
Collateral represented thereby; or
(ii) charge such amounts to any deposit account of the Debtor
with the Secured Party; or
(iii) accept the return of any Inventory;
all without discharging or in any affecting the Borrower's liability hereunder
or on the Secured Obligations.
(l) The Debtor shall assure that (i) no Receivable is or shall be
subject to any defense, offset, counterclaim, discount, or allowance, (ii)
no agreement under which any deduction, discount, credit or allowance of
any kind may be granted or allowed shall have been or shall thereafter be
made by Debtor with any account party without the consent of Secured Party,
except as expressly permitted under Section 8(b) below, (iii) all
statements made and all unpaid balances appearing in the invoices,
documents, agreements relating to each Receivable are and shall be true,
genuine, and correct in all respects, and (iv) no Receivable shall be
converted to a note or other instrument unless the same shall be delivered
to the possession of the Secured Party within ten (10) days of the date of
execution of such note or instrument;
(m) Debtor shall keep accurate and complete records listing and
describing the Collateral, and when requested by Secured Party, Debtor
shall give Secured Party a certificate listing and describing the
Collateral and setting forth the total value of the Inventory, the total
value of the Equipment, the amount of the Receivables designating how many
days the Receivables are from the date of invoice, the face value of any
instruments, and any other information Secured Party may reasonably
request. Secured Party shall have
-7-
the right at any time to inspect the Collateral and to audit and make
copies of or extracts from any records or other writings which relate to
the Collateral or the general financial conditions of Debtor;
(n) The Debtor shall advise the Secured Party promptly, in
reasonable detail, of (i) any lien, security interest, encumbrance, or
claim made or asserted against any of the Collateral other than the
security interests of the Secured Party, IBM and DFS and other Permitted
Encumbrances, (ii) any material change, substantial loss or depreciation in
the composition of the Collateral, and (iii) the occurrence of any other
material adverse effect known to Debtor on the aggregate value,
enforceability or collectibility of the Collateral or on the security
interests created hereunder;
(o) The Debtor shall give, execute, deliver and file or record in
the proper governmental offices, any instrument, paper or document,
including, but not limited to, one or more financing statements under the
Uniform Commercial Code, reasonably satisfactory to the Secured Party, or
take any action which the Secured Party may deem necessary or desirable in
order to create, preserve, perfect, extend, continue, modify, terminate or
otherwise effect any security interest granted pursuant hereto, or to
enable the Secured Party to exercise or enforce any of its rights hereunder
and in this regard Debtor authorizes the Secured Party to file any
financing or continuation statement without the Debtor's signature to the
extent permitted by applicable law; and
(p) The Debtor shall keep, and stamp or otherwise mark, any of its
documents, instruments and chattel paper and its books and records relating
to any of the Collateral in such manner as the Secured Party may reasonably
require.
5. Negative Covenants of the Debtor. Except as otherwise provided in the
--------------------------------
Loan Agreement or in this Agreement, without the prior written consent of the
Secured Party, the Debtor shall not:
(a) Transfer, sell or assign any of the Collateral other than (i)
sales of Inventory in the ordinary course of Debtor's business for cash or
on open account and on terms of payment ordinarily extended to its
customers or (ii) dispositions of Equipment that has become worn out or
obsolete or that has been replaced by other Equipment;
(b) Allow or permit any other security interest, lien, levy or
attachment, other than Permitted Encumbrances, to attach to any of the
Collateral;
-8-
(c) File, authorize, or permit to be filed in any jurisdiction any
financing statement relating to any of the Collateral unless the Secured
Party is named as sole secured party;
(d) Permit any of the Collateral to be levied upon under any legal
process;
(e) Permit anything to be done that may materially impair the value
of any of the Collateral or the security therein intended to be afforded
hereby; or
(f) Use the Collateral in violation of any law or in any manner
inconsistent with any policy of insurance thereon.
6. Fixtures. It is the intention of the parties hereto that none of the
--------
Collateral shall become fixtures. Without limiting the generality of the
foregoing, the Debtor will, if requested by the Secured Party, use its best
efforts to obtain waivers of lien, in form satisfactory to the Secured Party,
from each mortgagee or lessor of real property (other than the Secured Party) on
which any of the Collateral is or is to be located.
7. Insurance. Debtor shall, at its own expense, maintain insurance
---------
covering the Collateral against such risks, with such insurers, in such form,
and in such amounts as shall from time to time be required by Secured Party, but
in any event, in such amounts and with such coverage as is customary in Debtor's
type of business, which insurance may provide for reasonable deductibility from
coverage thereof. All insurance policies shall be written so as to be payable
in the event of loss to Secured Party as an additional insured and loss payee
and shall provide for ten (10) days' written notice to Secured Party of
cancellation or modification. At the request of Secured Party, all insurance
policies shall be furnished to and held by Secured Party. Debtor hereby assigns
to Secured Party return premiums, dividends and other amounts which may be or
become due upon cancellation of any such policies for any reason whatsoever and
directs the insurers to pay Secured Party any sums so due, provided Debtor shall
be entitled to receive such sum until such time as an Event of Default has
occurred. Secured Party is hereby appointed as attorney irrevocable to collect
return premiums, dividends and other amounts due on any insurance policy and the
proceeds of such insurance, to settle any claims with the insurers in the event
of loss or damage, to endorse settlement drafts and, upon the occurrence of an
Event of Default (as defined hereinbelow), to cancel, assign, or surrender any
insurance policies. If, while any Secured Obligations are outstanding, any
return premiums, dividends, other amounts or proceeds are paid to Secured Party
under such policies, Secured Party may, at Secured Party's option, take either
or both of the following actions:
-9-
(i) apply such return premiums, dividends, other amounts and proceeds in whole
or in part to the payment or satisfaction of any of the Secured Obligations in
whatever order Secured Party determines; or (ii) pay over such return premiums,
dividends, other amounts and proceeds in whole or in part to Debtor for the
purpose of repairing or replacing the Collateral destroyed or damaged, any
return premiums, dividends, other amounts and proceeds so paid over by Secured
Party to be secured by this Agreement.
8. Receivables.
-----------
(a) Debtor agrees that Secured Party may communicate with account
debtors in order to verify the existence, amount, and terms of any
Receivables. Secured Party may notify account debtors of the security
interests established herein and require that payments on Receivables be
made directly to Secured Party, and upon the request of Secured Party,
Debtor shall notify account debtors and indicate on all billings that
payments and returns are to be made directly to Secured Party. In
furtherance of the foregoing, Debtor hereby appoints Secured Party attorney
irrevocable with full power to collect, compromise, endorse, sell, or
otherwise deal with the Receivables or proceeds thereof and to perform the
terms of any contract in order to create Receivables in Secured Party's
name or in the name of Debtor, provided the Secured Party shall only
exercise the power granted in this sentence upon and following the
occurrence of an Event of Default. This Agreement may be, but need not be,
supplemented by separate assignments of Receivables and contract rights
and, if such assignments are given, the rights and security interests given
thereby shall be in addition to and not in limitation of the rights and
security interests granted by this Agreement.
(b) The Debtor may grant such allowances or other adjustments to
account debtors (exclusive of extending the time for payment of items in
the aggregate amount of $50,000.00 or more which shall not be done without
first obtaining the Secured Party's written consent in each instance which
consent may not be unreasonably withheld) as the Debtor may reasonably deem
to accord with sound business practice.
9. Events of Default. The following events shall be deemed "Events of
-----------------
Default" hereunder:
(a) An Event of Default under the Loan Agreement or any of the Loan
Documents;
(b) Any representation or warranty or statement of fact made to
Secured Party at any time by Debtor proves to have been false or misleading
in any material respect when made or furnished;
-10-
(c) Debtor fails to observe or perform any covenant, warranty, or
agreement required to be observed or performed by it under this Agreement;
(d) Uninsured loss, theft, damage, or destruction of any substantial
portion of any of the Collateral;
(e) Any levy, seizure, or attachment of any of the Debtor's property
in the amount of $200,000 or more and any such levy, seizure or attachment
is not removed, dissolved or bonded within sixty (60) days;
(f) Dissolution or termination of existence of the Debtor; or
(g) The calling or sufferance by the Debtor of a meeting of the
creditors of the Debtor or the occurrence of a meeting by the Debtor or a
representative thereof with a formal or informal committee of creditors of
the Borrower.
10. Rights and Remedies of Secured Party on Default. Upon the occurrence
-----------------------------------------------
of any Event of Default, Secured Party shall have, by way of example and not of
limitation, the following rights and remedies:
(a) Secured Party may declare the Secured Obligations, or any of
them, to be immediately due and payable without presentment, demand,
protest or notice of any kind, all of which are hereby expressly waived;
(b) In addition to all other rights and remedies contained in this
Agreement, the Loan Agreement, and in the Loan Documents, Secured Party may
exercise the rights and remedies accorded Secured Party by the Uniform
Commercial Code or by any other applicable law, all of which rights and
remedies shall be cumulative and non-exclusive to the extent permitted by
law;
(c) Secured Party shall have the right to enter and/or remain upon
the Premises of Debtor, or any other place or places where any of the
Collateral is located and kept, without any obligation to pay rent to
Debtor or others, and remove Collateral therefrom to the premises of the
Secured Party or any agent of Secured Party for such time as Secured Party
may desire in order to maintain, collect, sell and/or prepare the
Collateral for sale, liquidation or collection;
(d) Secured Party may require the Debtor at Debtor's cost to
assemble the Collateral and make it available to Secured Party at a place
designated by Secured Party;
-11-
(e) Secured Party may take possession of and use and operate the
Collateral in the manner and for the purposes as set forth in Section 11
hereinbelow;
(f) Secured Party may sell, lease, or otherwise dispose of the
Collateral as set forth in Section 12 hereinbelow;
(g) Secured Party shall have the right to set-off, without notice to
the Debtor, any and all deposits or other sums at any time or times
credited or due from Secured Party to Debtor, whether in a special account
or other account or represented by a certificate of deposit (whether or not
matured); which deposit and other sums shall at all times constitute
additional security for the Secured Obligations;
(h) Secured Party may perform any warranty, covenant or agreement
which Debtor has failed to perform under this Agreement; and
(i) Secured Party may take any other action which Secured Party
deems necessary or desirable to protect the Collateral or the security
interests granted herein.
11. Rights of Secured Party to Use and Operate Collateral. Upon the
-----------------------------------------------------
occurrence of any Event of Default, but subject to the provisions of the Uniform
Commercial Code or other applicable law, the Secured Party shall have the right
and power to take possession of all or any part of the Collateral, and to
exclude the Debtor and all persons claiming under the Debtor wholly or partly
therefrom, and thereafter to hold, store, and/or use, operate, manage and
control the same. Upon any such taking of possession, the Secured Party may,
from time to time, at the expense of the Debtor, make all such repairs,
replacements, alterations, additions and improvements to and of the Collateral
as the Secured Party may reasonably deem proper. In any such case, subject as
aforesaid, the Secured Party shall have the right to manage and control the
Collateral and to carry on the business and to exercise all rights and powers of
the Debtor in respect thereto as the Secured Party shall deem best, including
the right to enter into any and all such agreements with respect to the leasing
and/or operation of the Collateral or any part thereof as the Secured Party may
see fit; and the Secured Party shall be entitled to collect and receive all
rents, issues, profits, fees, revenues and other income of the same and every
part thereof. Such rents, issues, profits, fees, revenues and other income shall
be applied to pay the expenses of holding and operating the Collateral and of
conducting the business thereof, and of all maintenance, repairs, replacements,
alterations, additions and repairs, replacements, alterations, additions and
improvements, and to make all payments which the Secured Party may be required
or may elect to make, if any, for taxes, assessments, insurance and other
charges upon the Collateral or any part thereof, and all other payments which
the Secured Party may be required or
-12-
authorized to make under any provision of this Agreement (including reasonable
legal costs and attorneys' fees). The remainder of such rents, issues, profits,
fees, revenues and other income shall be applied to the payment of the Secured
Obligations in such order of priority as the Secured Party may determine in its
sole discretion and any surplus shall be returned to the Debtor. Without
limiting the generality of the foregoing, the Secured Party shall have the right
to apply for and have a receiver appointed by a court of competent jurisdiction
in any action taken by the Secured Party to enforce their rights and remedies
hereunder in order to manage, protect and preserve the Collateral and continue
the operation of the business of the Debtor and to collect all revenues and
profits thereof and apply the same to the payment of all expenses and other
charges of such receivership including the compensation of the receiver and to
the payment of the Secured Obligations as aforesaid until a sale or other
disposition of such Collateral shall be finally made and consummated.
12. Rights of Secured Party to Sell Collateral. Upon five (5) days, prior
------------------------------------------
written notice by registered or certified mail by Secured Party to Debtor at the
address of the Debtor set forth above (or at such other address or addresses as
the Debtor shall specify in writing by like notice to the Secured Party) of the
time and place of any intended disposition of Collateral, the Secured Party
shall have the right and power to sell, assign, lease, or otherwise dispose of
the Collateral from any business premises of the Debtor, either at public
auction or private sale, by liquidation sale or other disposition, or as if the
sale was being made in the ordinary course of Debtor's business, with or without
notice to the public that the said sale or disposition is for the benefit of the
Secured Party; provided, however, that if the Collateral is perishable or
threatens to decline speedily in value or is of a type customarily sold on a
recognized market, then Secured Party shall have the right and power to dispose
of the Collateral without prior notice to Debtor and Debtor expressly waives any
rights to notice under such circumstances. The notices described above shall be
deemed to meet any requirement hereunder or under any applicable law (including
the Uniform Commercial Code) that reasonable notification be given of the time
and place of such sale or other disposition. After deducting all costs and
expenses of collection, storage, custody, sale or other disposition and delivery
(including reasonable legal costs and attorneys' fees) and all other charges
against the Collateral, the residue of the proceeds of any such sale or
disposition shall be applied to the payment of the Secured Obligations in such
order of priority as the Secured Party may determine in its sole discretion and
any surplus shall be returned to the Debtor. In the event the proceeds of any
sale, lease or other disposition of the Collateral hereunder are insufficient to
pay all of the Secured Obligations in full, the Debtor will be liable for the
deficiency, together with interest thereon at the maximum rate provided in the
Loan Agreement and the cost and expenses of collection of such deficiency,
including, without limitation, reasonable fees of attorneys, experts, and
agents, expenses and disbursements.
-13-
13. Attorney-in-Fact. The Secured Party is hereby appointed the attorney-
----------------
in-fact, with full power of substitution, of the Debtor for the purpose of
carrying out the provisions of this Agreement and taking any action and
executing any instruments (including, without limitation, financing or
continuation statements, conveyances, assignments, and transfers) which the
Secured Party may deem necessary or advisable to accomplish the purposes hereof,
which appointment as attorney-in-fact is coupled with an interest and is
irrevocable, (provided that Secured Party shall not exercise the power of
attorney granted herein except upon and following the occurrence of an Event of
Default). The Debtor shall indemnify and hold harmless the Secured Party from
and against any liability or damage which it may incur in the exercise and
performance, in good faith, of the Secured Party's powers and duties as such
attorney-in-fact.
14. Waiver, etc. The Debtor waives notice of nonpayment, demand,
-----------
presentment, protest or notice of protest of the Collateral, and all other
notices, consents to any renewals or extensions of time of payment thereof, and
generally waives any and all suretyship defenses and defenses in the nature
thereof. No delay or omission of the Secured Party in exercising or enforcing
any of its rights, powers, privileges, remedies, immunities or discretions (all
of which are hereinafter collectively referred to as "the Secured Party's rights
and remedies") hereunder shall constitute a waiver thereof; and no waiver by the
Secured Party of any default of the Debtor hereunder shall operate as a waiver
of any other default hereunder. No term or provision hereof shall be waived,
altered or modified except with the prior written consent of the Secured Party,
which consent makes explicit reference to this Agreement. Except as provided in
the preceding sentence, no other agreement or transaction, of whatsoever nature,
entered into between the Secured Party and the Debtor at any time (whether
before, during or after the effective date or term of this Agreement), shall be
construed in any particular way as a waiver, modification of limitation of any
of the Secured Party's rights and remedies under this Agreement (nor shall
anything in this Agreement be construed as a waiver, modification or limitation
of any of the Secured Party's rights and remedies under any such other agreement
or transaction with the Debtor) but all the Secured Party's rights and remedies
against the Debtor not only under the provisions of this Agreement but also
under any such other agreement or transaction shall be cumulative and not
alternative or exclusive, and may be exercised by the Secured Party at such time
or times and in such order of preference as the Secured Party in its sole
discretion may determine. In the event of an inconsistency between the terms
and conditions of this Agreement and the Loan Agreement, the terms and
conditions of the Loan Agreement shall prevail.
15. Invalid Provisions. If any provision of this Agreement or portion of
------------------
such provision or the application thereof to any person or circumstance shall to
any extent be held invalid or unenforceable, the remainder of this Agreement (or
the
-14-
remainder of such provision) and the application thereof to other persons or
circumstances shall not be affected thereby.
16. Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the respective heirs, executors, administrators, legal
representatives, successors and assigns of the parties hereto, and shall remain
in full force and effect (and the Secured Party shall be entitled to rely
thereon, notwithstanding payment of all Secured Obligations of the Debtor to the
Secured Party at any time or times) until terminated as to future transactions
by written notice from either party to the other party of the termination
hereof; provided that any such termination shall not release or affect any
Collateral in which the Secured Party already has a security interest or any
Secured Obligations incurred or rights accrued hereunder prior to the effective
date of such termination. Notwithstanding any such termination, the Secured
Party shall have a security interest in all Collateral to secure the payment and
performance of Secured Obligations arising after such termination as a result of
commitments or undertakings made or entered into by the Secured Party prior to
such termination. The Secured Party may transfer and assign this Agreement as
provided in the Loan Agreement and deliver the Collateral to the assignee, who
shall thereupon have all of the rights of the Secured Party; and the Secured
Party shall then be relieved and discharged of any future responsibility or
liability with respect to this Agreement and the Collateral.
17. Governing Law. This Agreement is intended to take effect as a sealed
-------------
instrument and has been executed or completed and is to be performed in
Massachusetts, and it and all transactions thereunder or pursuant thereto shall
be governed as to interpretation, validity, effect, rights, duties and remedies
of the parties thereunder and in all other respects by the domestic laws of
Massachusetts, except that with respect to the creation, perfection and
enforcement of security interests in Collateral located outside Massachusetts,
the internal laws of the jurisdiction in which such Collateral is located shall
apply.
18. Notices. Any notices under or pursuant to this Agreement shall be
-------
given and be deemed effective as provided in Section 9.02 of the Loan Agreement.
19. Uniform Commercial Code. All references herein to the Uniform
-----------------------
Commercial Code shall mean such code as adopted by the Commonwealth of
Massachusetts, except that with respect to the creation, perfection and
enforcement of security interests in Collateral located in other jurisdictions,
the Uniform Commercial Code as adopted in such other jurisdictions shall apply.
All terms used herein, unless expressly defined herein, shall have the meanings
given in the Uniform Commercial Code as adopted by the Commonwealth of
Massachusetts.
20. No Duty Imposed on Secured Party. The powers conferred on the Secured
--------------------------------
Party hereunder are solely to protect its interest in the Collateral and shall
-15-
not impose any duty upon it to exercise any such powers. Except for the safe
custody of any Collateral in its possession and the accounting for monies
actually received by it hereunder, and except as may be otherwise stated herein,
the Secured Party shall not have any duty as to any Collateral or as to the
taking of any necessary steps to preserve any right of it or of the Debtor
against other parties pertaining to any Collateral.
21. Existing Financing Statements. This Security Agreement amends and
-----------------------------
restates the Prior Security Agreement in its entirety and does not terminate the
security interests granted thereunder. Furthermore, the security interests
granted to the Secured Party by the Debtor pursuant to the Prior Security
Agreement and perfected by previously filed UCC-l financing statements continue
in full force and effect notwithstanding the filing of additional UCC- 1
financing statements in connection with this Security Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective officers thereunto duly authorized, as of the date first
above written.
WITNESS: PC CONNECTION, INC.
/s/ Curtis W. Little, Jr. By: /s/ Wayne L. Wilson
- --------------------------- --------------------------
Wayne L. Wilson,
Sr. Vice President
STATE STREET BANK AND
TRUST COMPANY
/s/ Curtis W. Little, Jr. By: /s/ Thomas J. Pyles
- --------------------------- --------------------------
Vice President
-16-
Schedules Certificates, Collateral Assignments and Exhibits
may be obtained from the Registrant upon written request.
-17-
AMENDMENT
TO
AMENDED AND RESTATED
COMMERCIAL LOAN AGREEMENT
AND RELATED LOAN DOCUMENTS
THIS AMENDMENT to Amended and Restated Commercial Loan Agreement and
Related Loan Documents is made as of the 19th day of November, 1997, by and
between STATE STREET BANK AND TRUST COMPANY, a Massachusetts banking corporation
having its principal office at 225 Franklin Street, Boston, Massachusetts (the
"Bank"), and PC CONNECTION, INC., a New Hampshire corporation having its
principal place of business at 528 Route 13, Milford, New Hampshire (the
"Borrower").
WITNESSETH:
----------
WHEREAS, the Bank and the Borrower are parties to a certain Amended and
Restated Commercial Loan Agreement dated as of March 31, 1997 (the "Loan
Agreement"), and certain Loan Documents (as defined in the Loan Agreement);
WHEREAS, pursuant to the Loan Agreement, the Bank has extended to the
Borrower (1) a revolving line of credit in the maximum principal amount of
$30,000,000 (to be increased to $40,000,000 after March 1, 1998) (the "Revolving
Credit") and (2) a term loan in the principal amount of $5,000,000 (the "Term
Loan"); and
WHEREAS, the Borrower has requested, and the Bank has agreed to, (1)
increase the maximum principal amount available under the Revolving Credit to
$45,000,000, (2) reduce the interest rate on Libor Rate Loans under the
Revolving Credit and both the Prime Rate Loan and COF Loans under the Term Loan
by one-half percent (1/2%) per annum, (3) increase the cap on Qualified
Inventory includable within Borrower's Borrowing Base to $25,000,000, and (4)
revise the definition of "Net Income" for purposes of the Borrower's financial
covenants contained in the Loan Agreement, all of the foregoing changes to be
upon and subject to the terms and conditions of the Loan Agreement and the Loan
Documents, as the same are amended hereby;
NOW, THEREFORE, in consideration of the premises contained herein, the
Borrower and the Bank hereby agree as follows (all capitalized terms not
otherwise defined herein shall have the meaning ascribed to them in the Loan
Agreement):
I. AMENDMENT OF LOAN AGREEMENT.
---------------------------
A. Increase of Revolving Line of Credit. Section 2.01 of the Loan
------------------------------------
Agreement shall be and hereby is amended by increasing the maximum amount of
the Revolving Credit as set forth therein from Thirty Million ($30,000,000.00)
Dollars (increasing to Forty Million ($40,000,000) Dollars after March 1, 1998)
to Forty-Five Million ($45,000,000.00) Dollars, effective as of the date hereof
subject to and limited by the provisions regarding availability under such
Section 2.01, as well as Sections 2.08, 2.09, 2.11 and 2.12, and further subject
to the other provisions of the Loan Agreement and the terms and conditions of
the Revolving Credit Note. The Borrower shall execute and deliver to Bank a
replacement Revolving Credit Note in the form attached hereto as Exhibit A
---------
contemporaneously herewith to reflect the increase of the maximum principal
amount of the Revolving Credit and the reduction in the interest rate on Libor
Rate Loans as provided below, and hereafter all references to "Revolving Credit
Note" or "Note" in the Loan Agreement or any other Loan Documents shall mean
such promissory note. All references in the Loan Agreement to the maximum
principal amount of the Revolving Credit or the principal amount of the Note or
Revolving Credit Note are amended to read $45,000,000.00.
B. Interest Rate Reductions.
------------------------
(1) The first sentence of Section 2.04.1 of the Loan Agreement is
amended to read as follows:
On the outstanding and unpaid principal amount of the Revolving
Credit, Borrower shall pay interest to the Bank at an interest rate
per annum equal to (i) Bank's Prime Rate in effect from time to time
or (ii) the Adjusted Libor Rate plus two percent (2.0%) per annum, as
provided below.
(2) The first sentence of Section 2.04.2 of the Loan Agreement is
amended to read as follows:
On the outstanding and unpaid principal amount of the Term Loan,
Borrower shall pay interest to the Bank at an interest rate per annum
equal to (i) Bank's Prime Rate in effect from time to time (the "Term
Variable Rate") or (ii) the Bank's Cost of Funds Rate, as defined
below, plus two and one-half percent (2.5%) per annum.
The Borrower shall execute and deliver to the Bank contemporaneously herewith a
Note Modification Agreement in the form attached hereto as Exhibit B which shall
---------
implement the foregoing interest rate reductions for the Term Loan.
C. Increase in Cap on Qualified Inventory includable in Borrowing Base.
-------------------------------------------------------------------
The definition of "Borrowing Base" contained in Section 1.01 of the Loan
Agreement is amended to read in its entirety as follows:
2
"BORROWING BASE" means as of any time the percentages set by the Bank
---------------
of the Borrower's Qualified Certified Accounts and Qualified Inventory as
of such time, all as determined by the Bank in its sole discretion, which
determination shall be final and binding upon the Borrower, against which
and only against which the Bank will make loans pursuant to Section 2.01 of
this Agreement. Until changed by the Bank, the Borrowing Base is the
lesser of (i) Forty-Five Million Dollars ($45,000,000.00), or (ii) the sum
--------- --
of (x) Seventy Five Percent (75%) of the Qualified Certified Accounts and
(y) Fifty Percent (50%) of Qualified Inventory, subject to the following
qualifications: In no event shall the total amount advanced hereunder
against Qualified Inventory exceed Twenty-Five Million Dollars
($25,000,000.00); and in no event shall the Borrowing Base exceed the sum
of Forty-Five Million Dollars ($45,000,000.00). The Bank reserves the
right in its sole discretion and upon reasonable prior notice (i) to modify
the percentage of Qualified Inventory included in the Borrowing Base or the
total amount which may be advanced against Qualified Inventory or (ii) to
eliminate Qualified Inventory entirely from the Borrowing Base.
D. Change in Definition of "Net Income." The definition of "Net Income"
-------------------------------------
contained in Section 7.03 of the Loan Agreement is amended to read in its
entirety as follows:
"Net Income" means total income from all sources for the fiscal
quarter or year, less cost of goods sold, taxes, depreciation and
----
amortization expense, and such other items treated as expenses under GAAP
for such period, but excluding expense charges respecting compensation
recognized for stock options granted under employee stock option plans
recorded pursuant to APB Opinion No. 25, and less the amount distributed to
----
shareholders during such period to cover income taxes for undistributed
profits (if Borrower has elected S Corporation status), all as determined
from the Financial Statements in accordance with GAAP.
II. AMENDMENT OF OTHER LOAN DOCUMENTS.
---------------------------------
Each of the other Loan Documents, whether or not specifically referenced
herein, shall be and hereby is amended to reflect the terms and conditions of
this Amendment and to include within the scope of such Loan Documents and the
description of Loans and Notes therein, and the obligations secured thereby, the
Revolving Credit as hereby increased. Without limiting the generality of the
foregoing, all references in the Amended and Restated Security Agreement
included among the Loan Documents to the Revolving Credit shall mean the
Revolving Credit as increased this date to Forty-Five Million Dollars
($45,000,000).
3
III. REAFFIRMATION OF REPRESENTATIONS AND WARRANTIES.
-----------------------------------------------
Except as set forth in Schedule I attached hereto, or otherwise consented
to or acknowledged by the Bank in writing, Borrower hereby confirms, reasserts,
and restates all of the representations and warranties under the Loan Agreement
and the Loan Documents, as amended hereby, as of the date hereof, including
without limitation, the representations and warranties set forth in Article IV
of the Loan Agreement.
IV. REAFFIRMATION OF AFFIRMATIVE COVENANTS.
--------------------------------------
Except as set forth in Schedule II attached hereto, or otherwise consented
to or acknowledged by the Bank in writing, Borrower hereby confirms, reasserts,
and restates its affirmative covenants as set forth in the Loan Agreement and
the Loan Documents, as amended hereby, as of the date hereof, including without
limitation the Affirmative Covenants set forth in Article V of the Loan
Agreement.
V. REAFFIRMATION OF NEGATIVE COVENANTS.
-----------------------------------
Except as set forth in Schedule III attached hereto, or otherwise consented
to or acknowledged by the Bank in writing, Borrower hereby confirms, reasserts,
and restates its negative covenants as set forth in the Loan Agreement and the
Loan Documents, as amended hereby, as of the date hereof, including without
limitation the Negative Covenants set forth in Article VI of the Loan Agreement.
VI. FURTHER REPRESENTATION AND WARRANTIES.
-------------------------------------
The Borrower represents and warrants to the Bank as follows:
A. The execution, delivery and performance of this Amendment and the
documents relating hereto (the "Amendment Documents") are within the power of
the Borrower and are not in contravention of law, the Borrower's Articles of
Incorporation, By-laws or the terms of any other documents, agreements or
undertaking to which the Borrower is a party or by which the Borrower is bound.
No approval of any person, corporation, governmental body or other entity not
provided herewith is required as a prerequisite to the execution, delivery and
performance by Borrower of the Amendment Documents or any of the documents
submitted to the Bank in connection with the Amendment Documents to ensure the
validity or enforceability thereof.
B. All necessary corporate action has been taken by the Borrower to
authorize the execution, delivery and performance of the Amendment Documents
which, when executed on behalf of the Borrower, will constitute the legally
binding obligations of the Borrower, enforceable in accordance with their
respective terms.
4
VII. NO FURTHER EFFECT.
-----------------
Except as specifically amended hereby, the terms and conditions of the Loan
Agreement and each of the Loan Documents as set forth therein shall remain in
full force and effect.
IN WITNESS WHEREOF, the Bank and the Borrower have executed and delivered
this Amendment all as of the date and year first above written.
WITNESS: BANK:
-----
STATE STREET BANK AND TRUST COMPANY
/s/ By: /s/ Thomas J. Pyles
- ---------------------------- --------------------------------------
Thomas J. Pyles
Vice President
WITNESS: BORROWER:
--------
PC CONNECTION, INC.
/s/ Paul Drahnak By: /s/ Wayne L. Wilson
- ----------------------------- -------------------------------------
Wayne L. Wilson
Senior Vice President and
Chief Operating Officer
5
NOTE MODIFICATION AGREEMENT
(ALLONGE)
THIS NOTE MODIFICATION AGREEMENT is dated as of November 19th, 1997 between
PC CONNECTION, INC., a New Hampshire corporation (the "Borrower") and STATE
STREET BANK AND TRUST COMPANY, a Massachusetts banking corporation (the "Bank").
PREAMBLE
--------
The Borrower executed and delivered to the Bank its Term Note dated March
31, 1997, in the original principal amount of Five Million and 00/100 DOLLARS
($5,000,000.00) (the "Note"). The Borrower has requested a reduction in (1) the
Term Variable Rate from the Bank's Prime Rate plus one-half of one percent
(0.5%) per annum to the Bank's Prime Rate per annum, and (2) the rate based on
the Bank's Cost of Funds Rate from the Bank's Cost of Funds Rate plus three
percent (3%) per annum to the Bank's Cost of Funds Rate plus two and one-half
percent (2.5%) per annum. The Bank has agreed to such request, upon and subject
to the terms and conditions set forth herein.
Accordingly, in consideration for the premises contained herein and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Borrower and the Bank agree as follows (all terms used herein
shall have the meanings given in the Note unless expressly defined herein):
1. Interest Rate. The second paragraph of the Note is amended to read in
-------------
its entirety as follows:
Interest shall be calculated and charged daily on the basis of actual
days elapsed over a three hundred sixty (360) day banking year at a
variable rate equal to the Bank's Prime Rate in effect from time to
time. As used herein, "Prime Rate" means the rate of interest
announced by the Bank in Boston from time to time as its "Prime Rate."
Each time the Prime Rate changes, the interest rate hereunder shall
change contemporaneously with such change. The Prime Rate is an index
only, and not necessarily the lowest rate charged by the Bank on
commercial loans. The Borrower may also elect a Cost of Funds based
rate of interest equal to the then Cost of Funds Rate plus two and
one-half percent (2.5%) per annum to apply to the outstanding
principal hereunder in accordance with, and subject to the terms and
conditions of, the Loan Agreement (defined below).
2. No other Change. Except as expressly and specifically modified
---------------
herein, the terms of the Note remain unchanged and are in full force and effect.
In no event
shall this Note Modification Agreement constitute a novation or discharge of the
Note or the indebtedness evidenced thereby.
3. References. All references to the "Note" or the "Term Note" in the
----------
Loan Agreement or in any other agreements, mortgages, or instruments securing or
otherwise pertaining to the indebtedness evidenced by the Note or otherwise
referring to the Note shall be deemed to refer to the Note as hereby modified.
4. Collateral. The Note, as hereby modified, continues to be secured by
----------
the Collateral (as defined in the Loan Agreement) and such other collateral for
the Loan as has been granted to the Bank by the Borrower, including without
limitation the security interests granted by Borrower to the Bank pursuant to
the Amended and Restated Security Agreement dated as of March 31, 1997 between
the Borrower and the Bank.
5. Allonge. An original counterpart of this Agreement has been attached
-------
to the Note and shall constitute an allonge to the Note such that the Note and
this Agreement shall constitute a single instrument.
IN WITNESS WHEREOF, the Bank and the Borrower have executed and delivered
this Note Modification Agreement as of the day and year first above written.
WITNESS: BORROWER:
--------
PC CONNECTION, INC.
/s/ Paul Drahnak By: /s/ Wayne L. Wilson
- -------------------------- ----------------------------------
Wayne L. Wilson
Senior Vice President and
Chief Operating Officer
Address:
528 Route 13, Milford, NH 03055
BANK:
----
STATE STREET BANK AND TRUST COMPANY
/s/ By: /s/ Thomas J. Pyles
- ------------------------- ----------------------------------
Thomas J. Pyles
Vice President
2
PC CONNECTION, INC.
DIRECTORS ACTION BY CONSENT
NOW COME David Hall, Patricia Gallup, David Beffa-Negrini, Martin Murrer,
and Peter Baxter, being all of the Directors of PC Connection, Inc. and in
accordance with R.S.A. 293-A:8.21 hereby consent to the following resolutions:
Resolved,
That the corporation amend its Revolving Line of Credit with State Street Bank
and Trust Co. by increasing the limit on the revolving credit to $45 million;
and
That Wayne Wilson, Senior Vice President, CFO and COO shall have authority to
execute on behalf of the corporation any notes and documents necessary to amend
the Credit and close the transaction with the bank.
Dated: November 3, 1997
/s/ David Hall
-------------------------------------
David Hall
/s/ Patricia Gallup
------------------------------------
Patricia Gallup
/s/ David Beffa-Negrini
---------------------------------
David Beffa-Negrini
/s/ Martin Murrer
----------------------------------
Martin Murrer
/s/ Peter Baxter
------------------------------------
Peter Baxter
REVOLVING CREDIT NOTE
---------------------
$45,000,000.00 Boston, Massachusetts
November 19, 1997
For value received, PC CONNECTION, INC. (the "Borrower") hereby promises to
pay to STATE STREET BANK AND TRUST COMPANY (the "Bank"), or order, at the head
office of the Bank at 225 Franklin Street, Boston, Massachusetts 02110, on May
31, 1999 the principal amount of up to FORTY-FIVE MILLION DOLLARS
($45,000,000.00), or such lesser amount as shall have been advanced and not have
been prepaid, in immediately available funds, together with interest on the
unpaid principal hereof. Interest shall be payable monthly in arrears on the
last day of each month beginning on November 30, 1997 at the variable rate per
annum equal to the Bank's Prime Rate, in effect from time to time. "Prime Rate"
shall mean the rate of interest announced by the Bank in Boston from time to
time as its "Prime Rate." Each change in such interest rate shall take effect
simultaneously with the corresponding change in such Prime Rate. Interest shall
be computed on the basis of a 360-day year for the actual number of days
elapsed, including holidays or other days on which the Bank is not open for the
conduct of banking business. The Borrower may also elect a LIBOR based rate of
interest equal to the Adjusted LIBOR Rate plus two percent (2.0%) per annum to
apply to all or a portion of the outstanding principal hereunder in accordance
with, and subject to the terms and conditions of, the Loan Agreement (defined
below). The "Adjusted LIBOR Rate" is defined in the Loan Agreement.
All loans hereunder and all payments on account of principal and interest
hereof shall be recorded by the Bank and prior to any transfer hereof, endorsed
on Schedule I attached hereto and incorporated herein. The entries on the
records of the Bank (including any appearing on this Note) shall be prima facie
evidence of amounts outstanding hereunder.
Overdue payments of principal (whether at stated maturity by acceleration
or otherwise), and, to the extent permitted by law, overdue interest, shall bear
interest, compounded monthly and payable on demand in immediately available
funds, at a rate per annum equal to four percent (4%) above the Bank's Prime
Rate in effect from time to time.
This Note is issued pursuant to, and entitled to the benefits of, and is
subject to, the provisions of the Amended and Restated Commercial Loan Agreement
dated as of March 31, 1997, as amended by amendment of even date herewith, by
and between the Borrower and the Bank (such agreement, as it may from time to
time hereafter be amended or extended, the "Loan Agreement"), wherein it is
defined as the "Revolving Credit Note" and the indebtedness evidenced thereby
the "Revolving Credit," but neither this reference to the Loan Agreement nor any
provision thereof
shall affect or impair the absolute and unconditional obligation of the Borrower
of this Note to pay the principal of and interest on this Note as herein
provided.
The indebtedness evidenced by this Note is secured by a security interest
in all of Borrower's assets and property interests granted to the Bank pursuant
to an Amended and Restated Security Agreement dated March 31, 1997 herewith by
and between Bank and Borrower, as the same may be from time to time amended or
extended.
In case an Event of Default (as defined in the Loan Agreement) shall occur,
the aggregate unpaid principal of plus accrued interest on this Note shall
become or may be declared to be due and payable in the manner and with the
effect provided in the Loan Agreement.
The Borrower may at its option prepay all or any part of the principal of
this Note before maturity upon the terms provided in the Loan Agreement,
including in particular Sections 2.04.5 and 2.04.7 of the Loan Agreement.
Any deposits or other sums at any time credited by or due from the Bank to
the Borrower or any endorser or guarantor hereof and any securities or other
property of the Borrower or any endorser or guarantor at any time in the
possession of the Bank may at all times be held and treated as collateral for
the payment of this Note and any and all other liabilities (direct or indirect,
absolute or contingent, sole, joint or several, secured or unsecured, due or to
become due, now existing or hereafter arising) of the Borrower to the Bank.
Regardless of the adequacy of collateral, the Bank may apply or set-off such
deposits or other sums against such liabilities at any time in the case of
makers but only with respect to matured liabilities in the case of endorsers and
guarantors.
The Borrower hereof hereby waives presentment, demand, notice, protest and
all other demands and notices in connection with the delivery, acceptance,
performance, default or enforcement hereof and consents that this Note may be
extended from time to time and that no such extension or other indulgence, and
no substitution, release or surrender of collateral and no discharge or release
of any other party primarily or secondarily liable hereon, shall discharge or
otherwise affect the liability of the Borrower, endorser or guarantor. No delay
or omission on the part of the Bank in exercising any right hereunder shall
operate as a waiver of such right or of any other right hereunder, and a waiver
of any such right on any one occasion shall not be construed as a bar to or
waiver of any such right on any future occasion.
This note is executed and delivered in substitution and replacement of the
Revolving Credit Note dated March 31, 1997, made by Borrower to the Bank's order
in the original principal amount of up to $40,000,000.00, and does not
constitute a
2
discharge of the indebtedness evidenced thereby or a novation of the underlying
loan transaction.
This instrument shall have the effect of an instrument executed under seal
and shall be governed by and construed in accordance with the laws of The
Commonwealth of Massachusetts (without giving effect to any conflicts of laws
provisions contained therein).
WITNESS: PC CONNECTION, INC.
/s/ Paul Drahnak By: /s/ Wayne L. Wilson
- ------------------------- -----------------------------
Wayne L. Wilson
Senior Vice President and
Chief Operating Officer
Address:
528 Route 13, Milford, NH 03055
3
STATE STREET BANK AND TRUST COMPANY
-----------------------------------
RSA 399-B STATEMENT OF FINANCE CHARGES
--------------------------------------
In connection with a loan transaction consummated this 19th day of
November, 1997, involving a certain revolving credit loan in the maximum
availability of $45,000,000.00 (the "Revolving Credit") and a certain term loan
in the principal amount of $5,000,000.00 (the "Term Loan") (collectively, the
Revolving Credit and the Term Loan are referred to as the "Loan") made by STATE
STREET BANK AND TRUST COMPANY ("Bank") to PC CONNECTION, INC. ("Borrower"),
pursuant and subject to the Amended and Restated Commercial Loan Agreement of
even date herewith between the Bank and the Borrower, as amended this date (the
"Loan Agreement"), the Borrower is hereby informed and advised pursuant to New
Hampshire RSA 399-B that Borrower shall be liable for and shall pay the
following charges (all capitalized terms not defined herein shall have the
meanings ascribed to them in the Loan Agreement or the Revolving Credit Note or
the Term Note evidencing the Loan) in connection with such Loan:
1. Interest.
--------
A. Revolving Credit: The Borrower shall pay interest on the outstanding
----------------
principal balance of the Revolving Credit as follows: A variable rate equal to
the Bank's Prime Rate in effect from time to time. The Prime Rate shall be the
rate of interest announced by the Bank in Boston from time to time as its Prime
Rate. Each time the Prime Rate changes, the interest rates on the Note shall
change contemporaneously with such change. The Prime Rate is an index only, and
is not necessarily the lowest rate charged by the Bank to its commercial
customers. The Borrower may also elect a LIBOR based rate of interest equal to
the Adjusted LIBOR Rate plus two percent (2.0%) per annum to apply to all or a
portion of the outstanding principal under the Revolving Credit Loan in
accordance with, and subject to the limitations of, the Loan Agreement.
Interest shall be calculated and charged daily on the basis of actual days
elapsed over a three hundred sixty (360) day banking year.
B. Term Loan: The Borrower shall pay interest on the outstanding
---------
principal balance of the Term Loan as follows: A variable rate equal to the
Bank's Prime Rate in effect from time to time. The Borrower may also elect a
Cost of Funds based rate equal to the then Cost of Funds rate plus two and one-
half percent (2.5%) per annum to apply to outstanding principal under the Term
Loan in accordance with, and subject to the limitations of, the Loan Agreement.
Interest shall be calculated and charged daily on the basis of actual days
elapsed over a three hundred sixty (360) day banking year.
2. Costs and Expenses of Closing. The Borrower shall pay all closing costs
-----------------------------
incurred by the Bank in connection with the amendment this date of the Revolving
Credit and the Term Loan, including, without limitation, document preparation
costs,
costs associated with the forty percent (40%) participation in the Loan,
attorneys' fees and costs, recording and filing fees, and any other expenses
incurred by the Bank in the closing of the amendment of the Loan.
3. Unused Revolving Credit Fee. Borrower shall continue to be obligated to
---------------------------
pay to the Bank quarterly in arrears a fee equal to one-quarter of one percent
(.25%) of the average daily amount by which the maximum commitment under the
Revolving Credit exceeds the actual principal amount outstanding thereunder on a
daily basis during each fiscal quarter, as determined by the Bank.
4. Other Charges. Late Charges, Default Rate and other fees shall be charged
-------------
as provided in the Loan Agreement, the Notes and the other Loan Documents, all
as modified this date.
The Borrower hereby acknowledges receipt of a copy of this Statement at or
before the closing of even date, and confirms that this transaction involves a
commercial loan not subject to federal truth-in-lending laws and regulations.
Disclosed by Bank and acknowledged by Borrower this 19th day of November,
1997.
WITNESS: PC CONNECTION, INC.
/s/ Paul Drahnak By: /s/ Wayne L. Wilson
- ------------------------- -------------------------------
Duly Authorized
2
INCUMBENCY CERTIFICATE
I, Steven Markiewicz, Secretary of PC Connection, Inc. ("Corporation") certify
as follows:
1. The Restated Articles of Incorporation of the Corporation filed with the
New Hampshire Secretary of State on March 30, 1995 have not been amended.
2. The bylaws of the Corporation, attached as Exhibit B to the Incumbency
Certificate delivered to State Street Bank & Trust Co. on March 24, 1997, are
unchanged except pursuant to a resolution passed during a meeting of the
Shareholders and Directors on September 26, 1997, which states as follows: The
shareholders and directors voted unanimously to amend the bylaws to increase the
number of directors to five (5) and the shareholders voted unanimously to elect
Peter J. Baxter as a director of the corporation to serve until the next annual
meeting.
3. Attached hereto as Exhibit A is the resolution adopted by the Corporation
to increase the amount of the Revolving Credit to a maximum of $45 million,
which has not been rescinded and is in full force and effect.
4. The directors and officers named below have been duly elected and qualified
to hold their respective offices set opposite their names:
Members of the Board of Directors:
Patricia Gallup Chairman Martin Murrer
David Hall Vice Chairman Peter J. Baxter
David Beffa-Negrini
Officers:
Patricia Gallup President & CEO
David Hall Executive Vice President and Treasurer
Wayne Wilson Senior Vice President, CFO and COO
Robert Wilkins Vice President of Merchandising/Product Management
Wayne Roland Vice President of Fulfillment Operations
John Bomba Vice President of Information Services and CIO
Jack Ferguson Assistant Treasurer
Steven Markiewicz Secretary
Thomas Hemnes Assistant Secretary
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the
Corporation to this Certificate this 7th day of November, 1997.
3
/s/ Helena M. Corey /s/ Steven Markiewicz
- -------------------------- ----------------------------
Steven Markiewicz
The undersigned, duly elected COO of the Corporation, certifies that Steven
Markiewicz is the duly elected and acting Secretary of the Corporation and that
set forth above is his true signature.
IN WITNESS WHEREOF, the undersigned has executed this Certificate this 7th day
of November, 1997.
/s/ Wayne L. Wilson
----------------------------
Wayne Wilson
4
To Registry of Deeds: Please also index this under property owner: CENTURY PARK,
LLC
COLLATERAL ASSIGNMENT OF
------------------------
LEASEHOLD INTEREST
------------------
COLLATERAL ASSIGNMENT OF LEASEHOLD INTEREST, made this 19th day of
November, 1997, by PC CONNECTION, INC, a New Hampshire corporation with a
principal place of business at 528 Route 13, Milford, New Hampshire 03055
(individually and collectively the "Assignor"), to STATE STREET BANK AND TRUST
COMPANY, a Massachusetts banking corporation with an address of 225 Franklin
Street, Boston, Massachusetts 02110 (the "Assignee").
WITNESSETH:
----------
1. Assignment of Leasehold Interests. For value received, and for other
---------------------------------
good and valuable consideration, the receipt of which is hereby acknowledged by
the Assignor, the Assignor hereby grants, transfers and assigns to the Assignee,
its successors and assigns, all right, title and interest of the Assignor, as
Lessee, in and to those certain Leases referenced on Exhibit A attached hereto,
---------
with such Lease being incorporated by reference herein, together with any
modifications, extensions or renewals thereof, and all benefits accruing to the
Assignor thereunder including any purchase options thereunder (said Leases,
together with all such modifications, extensions, renewals and benefits being
hereinafter referred collectively as the "Lease"). The within assignment is for
the purpose of securing payment and performance of all debts, liabilities and
obligations of the Assignor to the Assignee of every kind and description,
direct or indirect, absolute or contingent, due or to become due, now existing
or hereafter arising pursuant to, without limitation, an Amended and Restated
Commercial Loan Agreement dated as of March 31, 1997 by and between the Assignor
and the Assignee, as amended as of the date hereof and as may be amended from
time to time hereafter (the "Loan Agreement"), under the Revolving Credit Note
of even date of Assignor payable to the order of Assignee in the principal
amount of up to Forty-Five Million Dollars ($45,000,000.00), the Term Note dated
March 31, 1997, as modified by a Note Modification Agreement of even date of the
Assignor payable to the Assignee in the principal amount of Five Million Dollars
($5,000,000.00) (collectively, as the foregoing notes may be amended, modified
or extended, the "Note"), or under any agreements or documents given as security
for the Note (all hereinafter called "Obligations"). Terms not otherwise
defined herein shall have the meanings ascribed to them in the Loan Agreement.
The Assignee, by acceptance hereof, agrees:
a. Not to take any action to assert its rights to possession of the
premises demised under the Lease (the "Premises") unless and until there
shall
exist or occur a default hereunder, an Event of Default (as defined
in any Loan Document) or any default respecting any Obligation.
b. Upon payment and performance in full of all Obligations, this
Assignment shall be void and of no effect. However, the affidavit,
certificate, or other written statement of any officer of the Assignee
indicating that any of the Obligations remain unpaid or unperformed shall
be and constitute conclusive evidence of the continuing validity and
effectiveness of this Assignment, and any person may, and is hereby
authorized to, rely thereon.
2. Warranties of the Assignor. The Assignor warrants that:
--------------------------
a. The Assignor has not executed any prior assignment of any of its
rights under the Lease or encumbered its leasehold interest in the Lease in
any manner whatsoever.
b. The Assignor has not done anything which might prevent the
Assignee from, or limit the Assignee in, operating under any of the
provisions hereof or of the Lease.
c. There is no default, and no event has occurred which with the
giving of notice or the passage of time or both would constitute a default,
by the Assignor under the Lease.
d. The Lease is in full force and effect and has not been modified in
any respect.
e. The Assignor has delivered to the Assignee a true, accurate, and
complete copy of the Lease.
f. The Assignor has the right to assign said Lease to the Assignee
hereunder and all necessary consents to assignment, if any, have been
obtained.
g. The Assignor has the right, power, legal capacity, and authority
to enter into and perform its obligations under this Assignment, and no
approval, consent, order or authorization of or registration or filing with
any governmental authority or any other person or entity is necessary or
required in connection with this Assignment, and this Assignment will not
result in the breach of any document to which the Assignor is a party or
any decree or order to which the Assignor is subject.
-2-
3. Agreements of the Assignor. The Assignor agrees that:
--------------------------
a. The Assignee may, in its sole discretion and at the expense of the
Assignor, record or cause to be recorded this Assignment.
b. The Assignor will, at its sole cost and expense, observe, fulfill
and perform on a timely basis each and every condition and covenant of the
Lease by the Assignor to be observed, fulfilled or performed, including the
payment of all rents accruing at the time they shall become due; give
prompt notices to the Assignee of any notice received by the Assignor of
default by the Assignor under the Lease, together with a complete copy of
any such notice; not modify, extend or in any way alter the terms of the
Lease other than in the ordinary course of business; not terminate the term
of the Lease or accept a surrender thereof unless required to do so by the
terms of the Lease; not waive, or release the lessor from, any obligations
or conditions to be performed by the lessor under the Lease; not sublease
any portion of the premises demised under the Lease or assign the Lease or
encumber or transfer Assignor's interest in the Lease in any manner
whatsoever.
4. Terms and Conditions.
--------------------
a. The Assignor grants to the Assignee the right, upon or at any time
or times after the occurrence or existence of a default by the Assignor
under any of the Lease, to cure any such default(s) if the Assignee so
elects.
b. At the Assignor's sole cost and expense, the Assignor will appear
in and defend any action growing out of or in any manner connected with the
Lease or the obligations or liabilities of the lessor, the Assignor or any
guarantor thereunder.
c. Should the Assignor fail to do any act as herein provided, then,
upon written notice, the Assignee may, but without obligation to do so,
make or do the same, including specifically, without limitation, appearing
in and defending any action purporting to affect the security hereof or the
rights or powers of the Assignee and performing any obligation of the
Assignor contained in the Lease, and in exercising any such powers paying
necessary court costs, reasonable attorneys' fees, and expenses; and the
Assignor will pay immediately upon demand all sums expended by the Assignee
under the authority hereof, together with highest rate of interest thereon
at the rate from time to time applicable under the Note, and the same shall
be included as Obligations and shall be secured hereby and by any and all
other collateral at any time given by the Assignor to the Assignee to
secure the Obligations.
-3-
d. After the occurrence of any default under the Loan Documents or
respecting any Obligations, the Assignee, at its option, without notice,
and without regard to the adequacy of security for the Obligations, either
in person or by agent, with or without bringing any action or proceeding,
the Assignee shall have the option to take possession of the Premises, and
to hold the same as lessee under the Lease; and, with or without taking
physical possession of the Premises: (i) to collect income and profits from
operation of the Premises and to apply such income and profits, in such
priority as Assignee in its sole discretion may determine, to payment of
all expenses of operating, managing and maintaining the Premises,
specifically including rent and additional rent under the Lease, and then
to payment of the principal, interest and other indebtedness due to the
Assignee, together with costs and attorneys' fees; (ii) to execute all
options to extend the Lease; (iii) to further assign the rights of the
lessee under the Lease, without any right of redemption by the Assignor;
and (iv) in general, do any acts which the Assignee deems proper to protect
the security hereof or which the lessee under the Lease shall have the
right to do; provided, however, that the Assignee must assume the
-------- -------
Assignor's obligations on a prospective basis under the Lease if the
Assignee assumes the Assignor's rights under the Lease; provided, further,
-------- -------
that such assumption shall not relieve the Assignor of its obligations
under the Lease, and the Assignor shall remain primarily liable for such
obligations.
e. The Assignee shall not be obligated to perform or discharge any
obligation under the Lease or by reason of this Assignment and the Assignor
hereby agrees to indemnify and hold harmless the Assignee from and against
any and all liability, loss, damage, cost, or expense which the Assignee
may or might incur under the Lease or under or by reason of this
Assignment, and from and against any and all claims and demands whatsoever
which may be asserted against the Assignee by reason of any alleged
obligations or undertaking on its part to perform or discharge any of the
terms of the Lease, excepting only those actions actually taken by Assignee
under this Assignment. Without limitation of the foregoing, it is further
understood that this Assignment shall not at any time operate to place
responsibility upon the Assignee for the control, care, management or
repair of the Premises, nor for the carrying out of any of the provisions
of the Lease, nor shall it operate to make the Assignee responsible or
liable for any waste committed on the Premises by the Assignor or any other
parties, or for any dangerous or defective condition of said Premises, or
for any negligence in the management, upkeep, repair or control of the
Premises resulting in loss or injury or death to any person, excepting only
those actions actually taken by Assignee under this Assignment. Should the
Assignee incur any such liability, loss or damage under the Lease or under
or by reason of this Assignment, or in defense against any such claims or
demands, the amount thereof, including costs, expenses, and attorneys'
fees, together with interest thereon at the highest rate
-4-
from time to time applicable under the Note, shall be included as
Obligations and shall be secured hereby and by any and all collateral at
any time given by the Assignor to the Assignee to secure the Obligations,
and the Assignor shall reimburse the Assignee there for immediately upon
demand.
5. Miscellaneous.
-------------
a. The rights of the Assignee hereunder shall not be affected by any
extensions, renewals, indulgences, settlements, or compromises
respecting any obligations; by the release of any party primarily or
secondarily liable respecting any Obligations; or by the taking or release
by the Assignee of any security for any Obligations or for the performance
by any party primarily or Secondarily liable respecting any Obligations.
b. No delay or omission on the part of the Assignee in exercising any
right or remedy shall operate as a waiver of such right or remedy or any
other right or remedy. A waiver on any one occasion shall not be construed
as a bar to or waiver of any right or remedy on any future occasion.
c. All the Assignee's rights and remedies, whether evidenced hereby
or by any other agreement or instrument, or whether otherwise available,
shall be cumulative.
d. Any demand or notice which any party may be required to or may
elect to give shall be given as provided in the Loan Agreement.
e. All rights of the Assignee hereunder shall inure to the benefit of
the successors and assigns of the Assignee, and this Assignment shall bind
the Assignor's successors and assigns.
f. If any provision hereof shall be invalid or unenforceable in any
respect, the remaining provisions hereof shall remain in full force and
effect and shall be enforceable to the maximum extent Permitted by law.
g. No consent, approval, or waiver shall be binding on the Assignee
unless in writing.
h. This Assignment and all rights and obligations hereunder,
including matters of construction, validity, and performance, shall be
governed by the laws of the State of New Hampshire and shall be construed
liberally in favor of the Assignee.
-5-
WITNESS the execution hereof, as a sealed instrument, on this the 19th day
of November, 1997.
PC CONNECTION, INC.
/s/ Paul Drahnak By: /s/ Wayne L. Wilson
- --------------------------------- ----------------------------------
Witness Wayne L. Wilson, Senior Vice
President
/s/ Jack L. Ferguson
- ---------------------------------
Witness
STATE STREET BANK AND TRUST COMPANY
/s/ By /s/ Thomas J. Pyles
- --------------------------------- -------------------------------
Witness Thomas J. Pyles, Vice President
/s/ Dawn R. Miller
- ---------------------------------
Witness
STATE OF NEW HAMPSHIRE
COUNTY OF HILLSBOROUGH, SS.
On this the 19th day of NOVEMBER, 1997, before, me, the undersigned notary
or justice, personally appeared Thomas J. Pyles, who acknowledged himself to be
a Vice President of State Street Bank and Trust Company, a bank, and that he, as
such authorized officer, being authorized so to do, executed the foregoing
instrument for the purposes therein contained, by signing the name of the
corporation by himself as such authorized officer.
/s/ Wayne Bruce LeBlanc
-------------------------------------
Notary Public
My commission expires: June 19, 2003
STATE OF NEW HAMPSHIRE
COUNTY OF HILLSBOROUGH, SS.
On this the 19th day of November, 1997, before me, the undersigned notary
or justice, personally appeared Wayne L. Wilson, who acknowledged himself to be
a
-6-
Senior Vice President of PC Connection, Inc., a corporation, and that he, as
such authorized officer, being authorized so to do, executed the foregoing
instrument for the purposes therein contained, by signing the name of the
corporation by himself as such authorized officer.
/s/ Dolores R. Collins
--------------------------------------
Dolores R. Collins,
Notary Public
My commission expires: January 27, 1999
-7-
Xenia, Ohio
COLLATERAL ASSIGNMENT OF
------------------------
LEASEHOLD INTEREST
------------------
COLLATERAL ASSIGNMENT OF LEASEHOLD INTEREST, made this 19th day of
November, 1997, by PC CONNECTION, INC, a New Hampshire corporation with a
principal place of business at 528 Route 13, Milford, New Hampshire 03055
(individually and collectively the "Assignor"), to STATE STREET BANK AND TRUST
COMPANY, a Massachusetts banking corporation with an address of 225 Franklin
Street, Boston, Massachusetts 02110 (the "Assignee").
WITNESSETH:
----------
1. Assignment of Leasehold Interests. For value received, and for other
---------------------------------
good and valuable consideration, the receipt of which is hereby acknowledged by
the Assignor, the Assignor hereby grants, transfers and assigns to the Assignee,
its successors and assigns, all right, title and interest of the Assignor, as
Lessee, in and to those certain Leases referenced on Exhibit A attached hereto,
---------
with such Lease being incorporated by reference herein, together with any
modifications, extensions or renewals thereof; and all benefits accruing to the
Assignor thereunder including any purchase options thereunder (said Leases,
together with all such modifications, extensions, renewals and benefits being
hereinafter referred collectively as the "Lease"). The within assignment is for
the purpose of securing payment and performance of all debts, liabilities and
obligations of the Assignor to the Assignee of every kind and description,
direct or indirect, absolute or contingent, due or to become due, now existing
or hereafter arising pursuant to, without limitation, an Amended and Restated
Commercial Loan Agreement dated as of March 31, 1997 by and between the Assignor
and the Assignee, as amended as of the date hereof and as may be amended from
time to time hereafter (the "Loan Agreement"), under the Revolving Credit Note
of even date of Assignor payable to the order of Assignee in the principal
amount of up to Forty-Five Million Dollars ($45,000,000.00), the Term Note dated
March 31, 1997, as modified by a Note Modification Agreement of even date of the
Assignor payable to the Assignee in the principal amount of Five Million Dollars
($5,000,000.00) (collectively, as the foregoing notes may be amended, modified
or extended, the "Note"), or under any agreements or documents given as security
for the Note (all hereinafter called "Obligations"). Terms not otherwise
defined herein shall have the meanings ascribed to them in the Loan Agreement.
The Assignee, by acceptance hereof; agrees:
a. Not to take any action to assert its rights to possession of the
premises demised under the Lease (the "Premises") unless and until there
shall exist or occur a default hereunder, an Event of Default (as defined
in any Loan Document) or any default respecting any Obligation.
b. Upon payment and performance in full of all Obligations, this
Assignment shall be void and of no effect. However, the affidavit,
certificate, or other written statement of any officer of the Assignee
indicating that any of the Obligations remain unpaid or unperformance shall
be and constitute conclusive evidence of the continuing validity and
effectiveness of this Assignment, and any person may, and is hereby
authorized to, rely thereon.
2. Warranties of the Assignor. The Assignor warrants that:
--------------------------
a. The Assignor has not executed any prior assignment of any of its
rights under the Lease or encumbered its leasehold interest in the Lease in
any manner whatsoever.
b. The Assignor has not done anything which might prevent the
Assignee from, or limit the Assignee in, operating under any of the
provisions hereof or of the Lease.
c. There is no default, and no event has occurred which with the
giving of notice or the passage of time or both would constitute a default,
by the Assignor under the Lease.
d. The Lease is in full force and effect and has not been modified in
any respect.
e. The Assignor has delivered to the Assignee a true, accurate, and
complete copy of the Lease.
f. The Assignor has the right to assign said Lease to the Assignee
hereunder and all necessary consents to assignment, if any, have been
obtained.
g. The Assignor has the right, power, legal capacity, and authority
to enter into and perform its obligations under this Assignment, and no
approval, consent, order or authorization of or registration or filing with
any government authority or any other person or entity is necessary or
required in connection with this Assignment, and this Assignment will not
result in the breach of any document to which the Assignor is party or any
decree or order to which the Assignor is subject.
3. Agreements of the Assignor. The Assignor agrees that:
--------------------------
a. The Assignee may, in its sole discretion and at the expense of the
Assignor, record or cause to be recorded this Assignment.
-2-
b. The Assignor will, at its sole cost and expense, observe, fulfill
and perform on a timely basis each and every condition and covenant of the
Lease by the Assignor to be observed, fulfilled or performed, including the
payment of all rents accruing at the time they shall become due; give
prompt notices to the Assignee of any notice received by the Assignor of
default by the Assignor under the Lease, together with a complete copy of
any such notice; not modify, extend or in any way alter the terms of the
Lease other than in the ordinary course of business; not terminate the term
of the Lease or accept a surrender thereof unless required to do so by the
terms of the Lease; not waive, or release the lessor from, any obligations
or conditions to be performed by the lessor under the Lease; not sublease
any portion of the premises demised under the Lease or assign the Lease or
encumber or transfer Assignor's interest in the Lease in any manner
whatsoever.
4. Terms and Conditions.
--------------------
a. The Assignor grants to the Assignee the right, upon or at any time
or times after the occurrence or existence of a default by the Assignor
under any of the Lease, to cure any such default(s) if the Assignee so
elects.
b. At the Assignor's sole cost and expense, the Assignor will appear
in and defend any action growing out of or in any manner connected with the
Lease or the obligations or liabilities of the lessor, the Assignor or any
guarantor thereunder.
c. Should the Assignor fail to do any act as herein provided, then,
upon written notice, the Assignee may, but without obligation to do so,
make or do the same, including specifically, without limitation, appearing
in and defending any action purporting to affect the security hereof or the
rights or powers of the Assignee and performing any obligation of the
Assignor contained in the Lease, and in exercising any such powers paying
necessary court costs, reasonable attorneys' fees, and expenses; and the
Assignor will pay immediately upon demand all sums expended by the Assignee
under the authority hereof; together with highest rate of interest thereon
at the rate from time to time applicable under the Note, and the same shall
be included as Obligations and shall be secured hereby and by any and all
other collateral at any time given by the Assignor to the Assignee to
secure the Obligations.
d. After the occurrence of any default under the Loan Documents or
respecting any Obligations, the Assignee, at its option, without notice,
and without regard to the adequacy of security for the Obligations, either
in person or by agent, with or without bringing any action or proceeding,
the Assignee shall have the option to take possession of the Premises, and
to hold the same as lessee under the Lease; and, with or without taking
physical possession of the Premises:
-3-
(i) to collect income and profits from operation of the Premises and to
apply such income and profits, in such priority as Assignee in its sole
discretion may determine, to payment of all expenses of operating, managing
and maintaining the Premises, specifically including rent and additional
rent under the Lease, and then to payment of the principal, interest and
other indebtedness due to the Assignee, together with costs and attorneys'
fees; (ii) to execute all options to extend the Lease; (iii) to further
assign the rights of the lessee under the Lease, without any right of
redemption by the Assignor; and (iv) in general, do any acts which the
Assignee deems proper to protect the security hereof or which the lessee
under the Lease shall have the right to do; provided, however, that the
-----------------
Assignee must assume the Assignor's obligations on a prospective basis
under the Lease if the Assignee assumes the Assignor's rights under the
Lease; provided, further, that such assumption shall not relieve the
-----------------
Assignor of its obligations under the Lease, and the Assignor shall remain
primarily liable for such obligations.
e. The Assignee shall not be obligated to perform or discharge any
obligation under the Lease or by reason of this Assignment and the Assignor
hereby agrees to indemnify and hold harmless the Assignee from and against
any and all liability, loss, damage, cost, or expense which the Assignee
may or might incur under the Lease or under or by reason of this
Assignment, and from and against any and all claims and demands whatsoever
which may be asserted against the Assignee by reason of any alleged
obligations or undertaking on its part to perform or discharge any of the
terms of the Lease, excepting only those actions actually taken by Assignee
under this Assignment. Without limitation of the foregoing, it is further
understood that this Assignment shall not at any time operate to place
responsibility upon the Assignee for the control, care, management or
repair of the Premises, nor for the carrying out of any of the provisions
of the Lease, nor shall it operate to make the Assignee responsible or
liable for any waste committed on the Premises by the Assignor or any other
parties, or for any dangerous or defective condition of said Premises, or
for any negligence in the management, upkeep, repair or control of the
Premises resulting in loss or injury or death to any person, excepting only
those actions actually taken by Assignee under this Assignment. Should the
Assignee incur any such liability, loss or damage under the Lease or under
or by reason of this Assignment, or in defense against any such claims or
demands, the amount thereof; including costs, expenses, and attorneys'
fees, together with interest thereon at the highest rate from time to time
applicable under the Note, shall be included as Obligations and shall be
secured hereby and by any and all collateral at any time given by the
Assignor to the Assignee to secure the Obligations, and the Assignor shall
reimburse the Assignee therefor immediately upon demand.
-4-
5. Miscellaneous.
-------------
a. The rights of the Assignee hereunder shall not be affected by any
extensions, renewals, indulgences, settlements, or compromises respecting
any Obligations; by the release of any party primarily or secondarily
liable respecting any Obligations; or by the taking or release by the
Assignee of any security for any Obligations or for the performance by any
party primarily or secondarily liable respecting any Obligations.
b. No delay or omission on the part of the Assignee in exercising any
right or remedy shall operate as a waiver of such right or remedy or any
other right or remedy. A waiver on any one occasion shall not be construed
as a bar to or waiver of any right or remedy on any future occasion.
c. All the Assignee's rights and remedies, whether evidenced hereby
or by any other agreement or instrument, or whether otherwise available,
shall be cumulative.
d. Any demand or notice which any party may be required to or may
elect to give shall be given as provided in the Loan Agreement.
e. All rights of the Assignee hereunder shall inure to the benefit of
the successors and assigns of the Assignee, and this Assignment shall bind
the Assignor's successors and assigns.
f. If any provision hereof shall be invalid or unenforceable in any
respect, the remaining provisions hereof shall remain in full force and
effect and shall be enforceable to the maximum extent permitted by law.
g. No consent, approval, or waiver shall be binding on the Assignee
unless in writing.
h. This Assignment and all rights and obligations hereunder,
including matters of construction, validity, and performance, shall be
governed by the laws of the State of New Hampshire and shall be construed
liberally in favor of the Assignee.
-5-
WITNESS the execution hereof; as a sealed instrument, on this the 19th day
of November, 1997.
PC CONNECTION, INC.
/s/ Paul Drahnak By: /s/ Wayne L. Wilson
- ------------------------------------- ----------------------------------
Witness Wayne L. Wilson,
Senior Vice President
/s/ Jack L. Ferguson
- ------------------------------------
Witness
STATE STREET BANK AND
TRUST COMPANY
/s/ By: /s/ Thomas J. Pyles
- ------------------------------------ ------------------------------------
Witness Thomas J. Pyles, Vice President
/s/ Dawn R. Miller
- ------------------------------------
Witness
STATE OF NEW HAMPSHIRE
COUNTY OF HILLSBOROUGH, SS.
On this the 19th day of November, 1997, before me, the undersigned notary
or justice, personally appeared Thomas J. Pyles, who acknowledged himself to be
a Vice President of State Street Bank and Trust Company, a bank, and that he, as
such authorized officer, being authorized So to do, executed the foregoing
instrument for the purposes therein contained, by signing the name of the
corporation by himself as such authorized officer.
/s/ Wayne Bruce LeBlanc
--------------------------------------
Notary Public
My commission expires: June 19, 2003
STATE OF NEW HAMPSHIRE
COUNTY OF HILLSBOROUGH, SS.
On this the 19th day of November, 1997, before me, the undersigned notary
or justice, personally appeared Wayne L. Wilson, who acknowledged himself to be
a Senior
-6-
Vice President of PC Connection, Inc., a corporation, and that he, as
such authorized officer, being authorized so to do, executed the foregoing
instrument for the purposes therein contained, by signing the name of the
corporation by himself as such authorized officer.
/s/ Dolores R. Collins
-----------------------------------------
Dolores R. Collins,
Notary Public
My commission expires: January 27, 1999
-7-
Schedules and Exhibits may be obtained from the Registrant upon written request.
-8-
Exhibit 10.18
EMPLOYMENT AGREEMENT
In consideration of employment and compensation to be paid to Patricia
Gallup (the "Employee") by PC Connection, Inc. (the "Corporation"), a New
Hampshire corporation, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties agree as
follows:
1. Term. The Corporation hereby agrees to continue to employ the Employee,
-----
and the Employee hereby agrees to continue employment with the Corporation, upon
the terms set forth in this Agreement. The employment pursuant to this
Agreement shall commence January 1, 1998. The employment shall be "at will";
that is, the Employee or the Corporation may elect to terminate the employment
relationship at any time.
2. Title; Capacity. The Employee agrees to serve in her capacity as Chairman
---------------
of the Board, President and Chief Executive Officer. The Employee hereby agrees
to continue to undertake the duties and responsibilities inherent in such
position. The Employee agrees to abide by the rules, regulations, instructions,
personnel practices and policies of the Corporation and any changes therein
which may be adopted from time to time by the Corporation.
3. Compensation and Benefits.
-------------------------
(a) Salary. The Corporation shall pay the Employee, in semi-monthly
------
installments, an annual base salary of $300,000.00 for the period January 1,
1998 through December 31, 1998 in consideration for the duties performed by the
Employee. Such salary shall be payable for any period in which the Employee
renders services hereunder. Such salary shall be subject to adjustment
thereafter as determined by the Compensation Committee (the "Committee") of the
Board of Directors (the "Board") or, in the absence of such Committee, by the
Board.
(b) Fringe Benefits. The Employee shall be entitled to participate in
----------------
bonus and benefit programs that the Corporation establishes and makes available
to its employees, if any, to the extent that the Employee's participation is
approved by the Committee or the Board.
4. Entire Agreement. This Agreement constitutes the entire agreement between
----------------
the parties and supersedes all prior agreements and understandings, whether
written or oral, relating to the subject matter of this Agreement.
5. Amendment. This Agreement may be amended or modified only by a written
---------
instrument executed by both the Corporation and the Employee.
6. Governing Law. This Agreement shall be construed, interpreted and enforced
-------------
in accordance with the laws of the State of New Hampshire.
7. Successors and Assigns. This Agreement shall be binding upon and inure to
----------------------
the benefit of both parties and their respective successors and assigns,
including any corporation with which or into which the Corporation may be merged
or which may succeed to its assets or business, provided, however, that the
obligations of the Employee are personal and shall not be assigned by her.
8. Miscellaneous. In case any provision of this Agreement shall be invalid,
-------------
illegal or otherwise unenforceable, the validity, legality and enforceability of
the remaining provisions shall in no way be affected or impaired thereby.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the 12th day of January, 1998.
PC CONNECTION, INC.
By: /s/Wayne L. Wilson
----------------------------------------
Title: Chief Financial Officer
-------------------------------------
EMPLOYEE
/s/ Patricia Gallup
-----------------------------------------------
Patricia Gallup
Exhibit 10.19
EMPLOYMENT AGREEMENT
In consideration of employment and compensation to be paid to David Hall
(the "Employee") by PC Connection, Inc. (the "Corporation"), a New Hampshire
corporation, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. Term. The Corporation hereby agrees to continue to employ the Employee,
-----
and the Employee hereby agrees to continue employment with the Corporation, upon
the terms set forth in this Agreement. The employment pursuant to this
Agreement shall commence January 1, 1998. The employment shall be "at will";
that is, the Employee or the Corporation may elect to terminate the employment
relationship at any time.
2. Title; Capacity. The Employee agrees to serve in his current capacity of
---------------
Vice Chairman of the Board. The Employee hereby agrees to continue to undertake
the duties and responsibilities inherent in such position. The Employee agrees
to abide by the rules, regulations, instructions, personnel practices and
policies of the Corporation and any changes therein which may be adopted from
time to time by the Corporation.
3. Compensation and Benefits.
-------------------------
(a) Salary. The Corporation shall pay the Employee, in semi-monthly
------
installments, an annual base salary of $300,000.00 for the period January 1,
1998 through December 31, 1998 in consideration of the duties performed by the
Employee. Such salary shall be payable for any period in which the Employee
renders services hereunder. Such salary shall be subject to adjustment
thereafter as determined by the Compensation Committee (the "Committee") of the
Board of Directors (the "Board") or, in the absence of such Committee, by the
Board.
(b) Fringe Benefits. The Employee shall be entitled to participate in
----------------
bonus and benefit programs that the Corporation establishes and makes available
to its employees, if any, to the extent that the Employee's participation is
approved by the Committee or the Board.
4. Entire Agreement. This Agreement constitutes the entire agreement between
----------------
the parties and supersedes all prior agreements and understandings, whether
written or oral, relating to the subject matter of this Agreement.
5. Amendment. This Agreement may be amended or modified only by a written
---------
instrument executed by both the Corporation and the Employee.
6. Governing Law. This Agreement shall be construed, interpreted and enforced
-------------
in accordance with the laws of the State of New Hampshire.
7. Successors and Assigns. This Agreement shall be binding upon and inure to
----------------------
the benefit of both parties and their respective successors and assigns,
including any corporation with which or into which the Corporation may be merged
or which may succeed to its assets or business, provided, however, that the
obligations of the Employee are personal and shall not be assigned by him.
8. Miscellaneous. In case any provision of this Agreement shall be invalid,
-------------
illegal or otherwise unenforceable, the validity, legality and enforceability of
the remaining provisions shall in no way be affected or impaired thereby.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the 12th day of January, 1998.
PC CONNECTION, INC.
By: /s/ Patricia Gallup
------------------------------------------
Title: Chairman and Chief Executive Officer
--------------------------------------
EMPLOYEE
/s/ David Hall
-----------------------------------------------
David Hall
INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.1
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-41171 of PC Connection, Inc. of our report dated November 4, 1997
(December 29, 1997 as to the third through eighth paragraphs of Note 12),
appearing in the Prospectus, which is part of such Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
Deloitte & Touche LLP
Boston, Massachusetts
January 12, 1998
