-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fw7Bj/+qmkAboN2R0uazy2TLTaCNMZrNUtFDK42oymxi0eLge273NAhsQyLl+u8E lAX35gHtmux7VlYcmrqOkw== 0001005477-97-002117.txt : 19970815 0001005477-97-002117.hdr.sgml : 19970815 ACCESSION NUMBER: 0001005477-97-002117 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICRO WAREHOUSE INC CENTRAL INDEX KEY: 0000892872 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 061192793 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20730 FILM NUMBER: 97663163 BUSINESS ADDRESS: STREET 1: 535 CONNECTICUT AVE CITY: NORWALK STATE: CT ZIP: 06854 BUSINESS PHONE: 2038994000 MAIL ADDRESS: STREET 1: 535 CONNECTICUT AVE CITY: NORWALK STATE: CT ZIP: 06854 10-Q 1 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: JUNE 30, 1997 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _____________ to _______________ Commission File Number: 0-20730 MICRO WAREHOUSE, INC. (Exact name of registrant as specified in its charter) Delaware 06-1192793 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 535 Connecticut Avenue, Norwalk, Connecticut 06854 (Address of principal executive offices) (203) 899-4000 (Registrant's telephone number, including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate the number of shares outstanding of each of issuer's class of common stock as the latest practicable date: Class: COMMON STOCK Outstanding Shares At June 30, 1997: 34,425,348 MICRO WAREHOUSE, INC. INDEX Page PART I - FINANCIAL INFORMATION Item 1 - Financial Statements (unaudited) Consolidated Balance Sheets .........................................3 Consolidated Statements of Income ...................................4 Consolidated Statements of Cash Flows ...............................5 Notes to Unaudited Consolidated Financial Statements ................6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations ................9 PART II - OTHER INFORMATION............................................14 SIGNATURE .............................................................16 EXHIBIT 11.............................................................17 2 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS MICRO WAREHOUSE, INC. CONSOLIDATED BALANCE SHEETS (in thousands)
June 30, December 31, 1997 1996 ---- ---- ASSETS (unaudited) (audited) Current assets: Cash and cash equivalents $ 94,750 $ 32,234 Marketable securities at market value 20,415 20,022 Accounts receivable, net of allowance for doubtful accounts ($11,915 and $10,876 at June 30, 1997 and December 31, 1996, respectively) 186,813 203,687 Inventories 141,434 201,119 Prepaid expenses and other current assets 19,981 17,886 Tax refunds 18,623 16,433 Deferred taxes 4,295 3,447 --------- --------- Total current assets 486,311 494,828 --------- --------- Property, plant and equipment, net 29,939 29,712 Goodwill, net 73,669 66,291 Non-current deferred taxes 12,531 14,443 Other assets 3,726 2,568 --------- --------- Total assets $ 606,176 $ 607,842 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 140,873 $ 127,723 Accrued expenses 39,641 52,445 Loans payable, bank 22,734 40,505 Deferred revenue 7,792 2,327 Equipment obligations 350 298 --------- --------- Total current liabilities 211,390 223,298 Equipment obligations and other 254 376 --------- --------- Total liabilities 211,644 223,674 --------- --------- Stockholders' equity: Preferred stock, $.01 par value: -- -- Authorized - 100 shares; none issued Common stock, $.01 par value: Authorized - 50,000 shares; issued and outstanding; 34,425 and 34,359 shares at June 30, 1997 and December 31, 1996, respectively 344 343 Additional paid-in capital 280,257 270,762 Deferred compensation (7,529) 421 Loan to officer (1,400) (1,400) Retained earnings 132,703 117,071 Cumulative translation adjustment (9,761) (3,047) Valuation adjustment for marketable securities (82) 18 --------- --------- Total stockholders' equity 394,532 384,168 --------- --------- Total liabilities and stockholders' equity $ 606,176 $ 607,842 ========= =========
See accompanying notes to unaudited consolidated financial statements. 3 MICRO WAREHOUSE, INC. CONSOLIDATED STATEMENTS OF INCOME For the three and six months ended June 30, 1997 and 1996 (in thousands, except per share data) (unaudited)
Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 -------- -------- ---------- --------- Net Sales $500,420 $437,175 $1,029,922 $ 951,565 Cost of goods sold 416,507 352,188 858,546 768,036 -------- -------- ---------- --------- Gross margin 83,913 84,987 171,376 183,529 Selling, general and administrative expenses 71,953 66,087 147,196 141,823 Write-off of goodwill -- 5,977 -- 5,977 Restructuring costs -- -- -- 21,226 Merger costs -- -- -- 6,113 -------- -------- ---------- --------- Income from operations before interest, income taxes and extraordinary charge 11,960 12,923 24,180 8,390 Interest income, net 1,712 236 2,572 362 -------- -------- ---------- --------- Income before income taxes and extraordinary charge 13,672 13,159 26,752 8,752 Income taxes 5,851 7,749 11,120 8,443 -------- -------- ---------- --------- Income before extraordinary charge 7,821 5,410 15,632 309 Extraordinary charge, net of taxes of $1,078 -- -- -- 1,584 -------- -------- ---------- --------- Net income (loss) $ 7,821 $ 5,410 $ 15,632 ($ 1,275) ======== ======== ========== ========= Net income (loss) per share $ 0.23 $ 0.16 $ 0.45 ($ 0.04) ======== ======== ========== ========= Net income per share before extraordinary charge $ 0.23 $ 0.16 $ 0.45 $ 0.01 ======== ======== ========== ========= Weighted average number of shares outstanding 34,732 34,701 34,563 34,085 ======== ======== ========== =========
See accompanying notes to unaudited consolidated financial statements 4 MICRO WAREHOUSE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the six months ended June 30, 1997 and 1996 (in thousands) (unaudited)
Cash flows from operating activities: 1997 1996 -------- --------- Net income (loss) $ 15,632 ($ 1,275) -------- --------- Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 8,372 5,345 Restructuring cost - non-cash portion -- 3,457 Extraordinary charge -- 1,900 Write-off of goodwill -- 5,977 Write-off of deferred financing costs -- 762 Deferred taxes 1,037 (242) Changes in assets and liabilities: Accounts receivable, net 10,083 (12,217) Inventories 56,945 39,325 Prepaid expenses and other current assets (4,558) 3,470 Other assets (1,390) 533 Accounts payable 10,115 (17,096) Accrued expenses (9,464) 4,292 Deferred revenue 5,391 2,548 Other (2,429) (939) -------- --------- Total adjustments 74,102 37,115 -------- --------- Net cash provided by operating activities 89,734 35,840 -------- --------- Cash flows from investing activities: Sales (purchases) of marketable securities, net (493) 7,301 Purchases or adjustments to cost of acquisitions of businesses, represented by: Goodwill (3,816) (5,149) Other net assets (13) (1,405) Acquisition of property, plant and equipment, net (7,749) (5,765) -------- --------- Net cash (used) by investing activities (12,071) (5,018) Cash flows from financing activities: Net proceeds from issuance of common stock 706 5,134 Borrowings (repayments) under lines of credit, net (14,201) 14,113 Repayment of notes payable -- (21,900) Principal payments of obligations under capital leases (70) (113) -------- --------- Net cash (used) by financing activities (13,565) (2,766) -------- --------- Effect of exchange rate changes on cash (1,582) (360) -------- --------- Net change in cash 62,516 27,696 Cash and cash equivalents: Beginning of period 32,234 81,614 ======== ========= End of period $ 94,750 $ 109,310 ======== =========
See accompanying notes to unaudited consolidated financial statements. 5 MICRO WAREHOUSE, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share data) 1. FINANCIAL STATEMENTS The consolidated financial statements include the accounts of Micro Warehouse, Inc. and its subsidiaries (the "Company") and have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although the Company believes that the disclosures are adequate to make the information presented not misleading, these financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company's Annual Report to Shareholders which was filed as an exhibit to its Annual Report on Form 10-K for the fiscal year ended December 31, 1996. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company at June 30, 1997 and the results of operations and cash flows for the three and six months ended June 30, 1997 and 1996. 2. BUSINESS COMBINATIONS In November 1996, the Company acquired the business of USA Flex, a direct marketer of IBM PC-compatible computers and peripherals. The total cost of the acquisition was $26,762, which exceeded the fair value of the net assets acquired by $22,053. In February 1997, the Company acquired two businesses, one in Canada which Markets IBM-PC compatible computers and peripherals and one in Australia which markets data communications products. The total cost of the acquisitions was $3,829 which exceeded the fair value of the net assets acquired by $3,816. The excess cost over the fair value of the net assets acquired for these acquisitions has been allocated on a preliminary basis to goodwill, which is subject to change as such valuations are finalized. As a result of the analysis performed, management has determined that the appropriate amortization periods for such goodwill range from 5 to 15 years. The goodwill recorded as a result of the USA Flex acquisition is being amortized over 15 years. Initially, the Company had commenced amortization of this goodwill over a 40 year period. The impact of this change in the amortization period on the prior period is not material. At June 30, 1997, the Company reclassified $4,800 of goodwill relating to the 1995 acquisition of Technomatic Ltd., a UK company which it determined had been incorrectly classified. This change had no impact on current or prior year reported earnings. 3. STOCK-BASED COMPENSATION In June 1997, the Stockholders of the Company approved an amendment to the 1994 Stock Option Plan (the "Plan") which increased the number of shares reserved for issuance from 1,000,000 to 4,000,000. In January 1997, the Company approved a comprehensive option grant program providing a total of 2,017,000 options to directors and all qualified full-time employees of the Company and an exchange 6 program covering 360,000 outstanding stock options. The exercise price for options under these programs is $12.63 per share. The Company recorded as deferred compensation expense the difference between the exercise price and closing market price on the date of stockholder approval of $8,387. Such amount is being amortized over the five year option vesting period. Pursuant to the Plan, the Company granted additional options to purchase 65,000 shares of common stock with exercise prices ranging from $11.69 to $17.38 per share. Also during 1997, the Company granted options to purchase 390,000 shares of common stock to senior executives outside of its stock option plans. The exercise prices of these options range from $10.75 to $17.32 per share. Compensation expenses relating to the Plan for the three months and six months ended June 30, 1997 were $788 and $839, respectively. 4. LEGAL PROCEEDINGS The Company and certain of its directors and officers are named as defendants in various lawsuits that followed and are predicated upon the facts underlying the Company's announcements in September and October 1996 that it intended to restate certain prior financial statements. On February 10, 1997, the Company filed Forms 10-K/A with the SEC reflecting restated financial statements for the years 1992 through 1995. The plaintiffs in these lawsuits seek compensatory damages, other relief, legal fees and litigation costs. The Company is unable to predict the outcome or the potential financial impact of this litigation and, accordingly, has made no provision therefor in the consolidated financial statements. In addition, the staff of the SEC is conducting a formal investigation into the events that underlie the Company's restatement of its prior period financial statements noted above. The Company is cooperating with the staff in its investigation. 5. NEW ACCOUNTING STANDARD In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" which specifies the computation, presentation and disclosure requirements for earnings per share. This statement is effective for both interim and annual periods ending after December 15, 1997. Early implementation is not permitted. The Company does not expect that the application of this standard will have a material effect on its present method of calculating and reporting earnings per share. 6. SUBSEQUENT EVENT In July 1997, the Company acquired the business of OnLine Interactive, Inc., a Seattle, Washington based reseller of electronic software ("OLI"). The cost of the acquisition was $14,500 in cash, plus a potential future earnout payment of a maximum of $6,000 based on certain 1998 operating and performance targets. The cost of the acquisition exceeded the fair value of net assets by an estimated $14,000. Additionally, the Company entered into two-year employment contracts with five key employees which provide base compensation, cash incentives and stock options and grants. The Company granted these key employees an aggregate of 125,000 stock options at $16.63 per share vesting over four years. Additionally, these employees are eligible to receive an aggregate of 125,000 shares of stock. These shares will be granted over a three and one-half year period based upon achieving 7 certain operating and performance targets or continuation of employment. Deferred compensation expense in the aggregate of $2,078 will be recorded and amortized over the three and one-half years. 8 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Overview Micro Warehouse, Inc. (the "Company") is a specialty catalog retailer and direct marketer of brand name personal computers, computer software, accessories, peripheral and networking products to commercial and consumer customers. The Company markets its products through frequent mailings of its distinctive, colorful catalogs, Internet catalog sites on the worldwide web and dedicated telemarketing account managers who focus on corporate, education and government accounts. The Company offers brand name hardware and software from leading vendors such as Adobe, Apple, Compaq, Hewlett Packard, IBM, Iomega, Microsoft, Motorola, 3Com, and Toshiba. Through its three core catalogs, MicroWarehouse, MacWarehouse and Data Comm Warehouse, various specialty catalogs and its Internet sites, the Company offers a broad assortment of more than 25,000 computer products at competitive prices. With colorful illustrations, concise product descriptions and relevant technical information, each catalog title focuses on a specific segment of the computer market. The catalogs are recognized as a leading source for computer hardware, software and other products. International operations, particularly in Europe and Canada, have become a significant part of the Company's business. In 1991, the Company established full-service, direct marketing operations in the United Kingdom. In late 1992, the Company began operations in France and Germany and, in 1993 and 1994, acquired companies or initiated operations in Sweden, Denmark, Norway, the Netherlands, Belgium, Finland, and France. In this same time frame the Company also expanded into the non-European markets of Japan, Canada and Mexico. In 1995, the Company acquired businesses in the United Kingdom, Germany, Australia and Switzerland. In 1996 the Company discontinued its "Macintosh only" operations in Belgium and Switzerland. The Company currently publishes catalogs in 12 countries outside the US. In January 1996, the Company acquired Santa Clara, California-based Inmac Corp. ("Inmac"), a leading international direct-response marketer of a wide range of personal computer and networking products. Inmac had operations in the United States, Canada, France, Germany, the Netherlands, Sweden and the UK. For accounting purposes, the Inmac merger has been treated as a pooling of interests. Accordingly, all historical financial information has been adjusted to include Inmac. In September 1996, the Company acquired the Helsinki, Finland-based Business Forum and a related company. In November 1996, the Company completed the acquisition of the business of USA Flex, a Bloomingdale, Illinois direct marketer of IBM PC-compatible personal computer products. In February 1997, the Company acquired the Notebook Store of Toronto, Canada and Commsware of Brisbane, Australia. In July 1997, the Company acquired Online Interactive, Inc. of Seattle, Washington. 9 RESULTS OF OPERATIONS The table below sets forth certain items expressed as a percent of net sales for each of the interim periods presented: Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 ----- ----- ----- ----- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 83.2 80.6 83.4 80.7 ----- ----- ----- ----- Gross margin 16.8 19.4 16.6 19.3 Selling, general and administrative expenses 14.4 15.1 14.3 14.9 Write-off of goodwill, restructuring and merger costs -- 1.4 -- 3.5 ----- ----- ----- ----- Income from operations before interest, income taxes and extraordinary charge 2.4 2.9 2.3 0.9 Interest income, net 0.3 0.1 0.3 -- ----- ----- ----- ----- Income before income taxes and extraordinary charge 2.7% 3.0% 2.6% 0.9% Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996 Net sales increased by $63.2 million or 14.5% to $500.4 million for the three months ended June 30, 1997, from $437.2 million for the three months ended June 30, 1996. This increase in net sales was primarily attributable to continued growth in the IBM PC-Compatible ("Wintel") business which increased by 31%. The worldwide Macintosh ("Mac") business was nominally lower. The Mac business represented approximately 42% of total worldwide sales, down from approximately 50% in the same period last year. Domestic sales for the quarter ended June 30, 1997 increased $53.9 million or 18.3% to $347.7 million. Wintel sales increased approximately 41% due to significant increases in the CPU, data storage and datacom product catagories. Mac sales remained essentially flat. Wintel CPU sales increased 44% while CPU unit volume grew more than 100% over the same period last year. The average order size increased 11.7% to $517. Circulation increased 11.9% to 20.6 million catalogs. Wintel sales growth in the U.S. without the USA Flex and Inmac businesses was approximately 40%. Inmac sales were $14.9 million, representing a decline of 27.5% from the prior year, and USA Flex sales in the quarter were $15.7 million. International sales for the quarter ended June 30, 1997 increased by $9.3 million or 6.5% from the prior year to $152.7 million. International Wintel sales were up approximately 18%, offsetting a decline of approximately 15% in Mac sales. International sales decreased to 30.5% of total net sales in the three months ended June 30, 1997 from 32.8% in the same period in 1996. The average order size increased 6.3% to $444. Circulation increased by 8.5% to 6.2 million catalogs. Translation of international sales at 1997 exchange rates reduced sales in dollars by approximately 4.4% as compared to last year. Gross margin decreased as a percentage of net sales to 16.8% in 1997 from 19.4% during the same period last year. The decline in gross margin was due to a continuing shift in mix towards lower margin Wintel products, a decline in the Mac business gross margin and a reduction in the gross margin of the legacy Inmac business in Europe. 10 Selling, general and administrative expenses increased by 8.9% to $72.0 million for the three months ended June 30, 1997 from $66.1 million for the same period in 1996 and decreased as a percentage of net sales to 14.4% from 15.1%. The principal reason for the percentage decline in 1997 was lower net advertising costs which declined from 2.1% of sales to .8% of sales. These savings were offset by higher legal and insurance costs ($1.0 million), stock option compensation expenses ($0.8 million), bad debt expenses ($0.9 million), certain fixed asset write-offs ($0.5 million) and transition costs for the integration of the Company's operation in Australia ($0.3 million). The stock option compensation expense relates to the recently approved stock options and expanded Stock Option Plan and represents the prorata difference between the option grant price on January 23, 1997 and the price on June 10, 1997, the date of Stockholder approval. This difference is $8.4 million in the aggregate and is being amortized over the five year vesting period. Operating income for the second quarter of 1997 was $12.0 million as compared to $12.9 million for the same period in 1996. Operating income in 1996 included a $6.0 million write-off of goodwill. International operations during the second quarter of 1997 operated at a loss of $0.8 million compared to income of $1.2 million in 1996, resulting from marginal profits in Europe and aggregate losses of $1.2 million in Australia, Canada, Japan and Mexico. Net interest income increased to $1.7 million for the second quarter of 1997 from $0.2 million for the same period in 1996. The increase was due to the higher level of cash and cash equivalents available for investment. Income taxes were 42.8% of before tax income in the second quarter of 1997 versus 58.9% of before tax income in 1996. The decrease relates primarily to the goodwill write-off in 1996 which was not deductible for tax purposes and accordingly no benefit was recognized in the income tax provision. Six Months Ended June 30,1997 Compared to Six Months Ended June 30, 1996 Net sales increased by $78.4 million or 8.2% to $1,029.9 million in the six months ended June 30, 1997 from $951.6 million in the six months ended June 30, 1996. This increase in net sales was primarily attributable to continued growth in the Wintel business which increased by approximately 27%, including USA Flex net sales of $38.5 million. The worldwide Mac business declined approximately 10%. The Mac business represented approximately 43% of total worldwide sales, down from approximately 51% in the same period last year. Worldwide average order size increased 10.8% to $491 and worldwide catalog circulation increased 3.3% to 60.4 million. Domestic sales increased 12.2% to $704.2 million and international sales were flat at $325.7 million. Translation of international sales at 1997 exchange rates reduced sales in dollars by approximately 3.9% as compared to last year. Gross margin for the six months decreased as a percentage of net sales to 16.6% in 1997 from 19.3% during the same period last year. The decline in gross margin was due to the continuing shift in mix towards lower margin Wintel products, a decline in the MAC business gross margin and a reduction in the gross margin of the legacy Inmac business in Europe. Selling, general and administrative expenses increased by 3.8% to $147.2 million for the six months ended June 30, 1997 from $141.8 million for the same period in 1996 and decreased as a percentage of net sales to 14.3% from 14.9%. The principal reason for the percentage decline in 1997 was due to lower net advertising costs which declined from 2.3% of sales to 1.2% of sales. These savings were offset by higher legal and insurance costs ($2.0 million), stock option compensation 11 ($0.8 million), bad debt expenses ($0.8 million), certain fixed asset write-offs ($0.5 million) and transition costs for the integration of the Company's operation in Australia ($0.8 million). Operating income for the six months ended June 30, 1997 was $24.2 million as compared to $8.4 million for the same period in 1996. Operating income in 1996 included a $6.0 million write-off of goodwill and restructuring and merger costs relating to the acquisition of Inmac of $21.2 million and $6.1 million respectively. Operating income for international operations during the period was a loss of $.8 million compared to income of $8.3 million in 1996, resulting primarily from lower sales and margins in France and Germany. Net interest income increased to $2.6 million for the first six months of 1997 from $0.4 million for the same period in 1996. The increase was due to the higher level of cash and cash equivalents available for investment. Liquidity and Capital Resources As of June 30, 1997, the Company had cash and short-term investments totaling $115.2 million compared to $52.3 million at December 31, 1996. This increase was primarily due to a reduction in inventories and accounts receivable. Inventories decreased to $141.4 million at June 30, 1997 from $201.1 million at December 31, 1996. Accounts receivable decreased to $186.8 million at June 30, 1997 from $203.7 million at December 31, 1996. In 1997 the Company completed its domestic system integration of its inventory, accounts receivables, customer database and product listings. The integration of these systems improved inventory turnover from approximately 9 times in the first quarter of 1997 to approximately 11 times in the second quarter of 1997. The current ratio was 2.3 to 1 at June 30, 1997 compared to 2.2 to 1 at December 31, 1996 and working capital was $274.9 million compared to $271.5 million for the same periods, respectively. Overall, operations generated cash of $89.7 million in the current quarter. Capital expenditures for the first six months of 1997 were $7.7 million, primarily for computer systems and distribution equipment both in the United States and internationally. Although the Company's primary capital need will be to fund its working capital requirements for expected sales growth, the Company expects that future growth will also require continued expansion of its computer systems and distribution capacity. In July 1997, the Company paid $14.5 million from available cash to acquire Online Interactive, Inc, an electronic software reseller. The Company has a multi-currency borrowing facility of $75 million. The purpose of this facility is to provide working capital financing for its foreign subsidiaries in local currencies, thus limiting exposure to foreign exchange fluctuation. Total borrowings as of June 30, 1997 under the multi-currency borrowing facility were $22.7 million. Additionally, at June 30, 1997, the Company had unused lines of credit in the United States and United Kingdom, which provided for unsecured borrowings of up to $10.0 million and (pounds)1.8 million, respectively, for working capital purposes. The Company anticipates it will continue to reduce foreign debt and utilize derivative financial instruments or other methods to reduce the Company's exposure to foreign currency rate fluctuations. 12 The Company believes that its existing cash reserves, cash flow from operations and existing credit facilities will be sufficient to satisfy its cash needs for at least the next 12 months without consideration of uncertainties surrounding litigation pending against the Company. Outlook The Company expects that the installed base of personal computers will continue to expand at slower rates than experienced in the past. In Europe, the Company anticipates increased competitive pressures and uneven market demand depending on the business cycles of individual countries. Apple Computer ("Apple") continues to experience difficulties and has significantly downsized its operations. It has recently accepted the resignation of its Chief Executive Officer, replaced members of its board and is now searching for a new C.E.O. Apple has licensed the Macintosh operating system to certain other manufacturers, some of which have introduced Macintosh "clones". These "clones" are generally entering the market at lower prices than Apple's products which has led to increased price competition. At the present time there is uncertainty as to whether Apple will continue to license these manufacturers. The Company cannot predict what impact these matters will have on its future operating results. Statement under the Private Securities Litigation Reform Act With the exception of the historical information contained in this report, the matters described herein contain forward-looking statements that involve risk and uncertainties including but not limited to economic, competitive, governmental, technological and litigation factors outside of the control of the Company. These factors more specifically include : uncertainties surrounding the electronic software reselling business attributable to technological and commercial issues; uncertainties attributable to internet commerce generally; uncertainties surrounding the demand for and supply of products manufactured by and compatible with those of Apple Computer; success of the Company's diversification away from its Apple products; competition from other catalog, retail store, on-line and other resellers of computer products; and the ultimate outcome of the legal proceedings brought against the Company in connection with its reported accounting errors. These and other factors are described generally in the MD&A section of the Company's 1996 Annual Report to Stockholders and most specifically in the paragraphs in that section captioned "Liquidity and Capital Resources," "Impact of Inflation and Seasonality", and "Outlook." Forward-looking statements are typically identified by the words "believe," "expect," "anticipate," "intend," "estimate," and similar expressions. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. 13 Part II - OTHER INFORMATION Item 1. Legal Proceedings The information required by this item appears on page 1 of the Company's 1996 Annual Report to Stockholders under the caption "Restatement of Financial Statements" and in Note 17 to Notes to Consolidated Financial Statement on page 36 of the Company's 1996 Annual Report to Stockholders, all of which information is incorporated herein by reference. Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders of Micro Warehouse, Inc. was held on June 10, 1997. At that meeting, the stockholders elected the following individuals to serve as members of the Board of Directors in accordance with the votes indicated below: WITHHELD NAME FOR AUTHORITY - ---- --- --------- Felix Dennis 28,525,248 2,942,950 Frederick H. Fruitman 28,833,923 2,634,275 Peter Godfrey 28,832,463 2,635,735 Linwood A. Lacy, Jr. 28,839,803 2,628,395 Joseph M. Walsh 28,832,463 2,635,735 Additionally, the Stockholders approved an amendment to the 1994 Stock Option Plan to increase the number of shares reserved for issuance from 1,000,000 to 4,000,000 shares. The results were as follows: FOR AGAINST ABSTAIN --- ------- ------- 20,515,296 5,172,820 313,433 Finally, the Stockholders ratified the appointment of KPMG Peat Marwick LLP as the Company's independent auditors for the fiscal year ending December 31,1997. The results were as follows: FOR AGAINST ABSTAIN --- ------- ------- 30,052,539 731,590 684,069 14 Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 10.40 Form of Employment Agreement by and between the Company and Charles R. Gottschalk, Pete O'Dell, Tim Choate, John Brown and John Ballantine dated as of July 18, 1997. Exhibit 10.41 Stock Purchase Agreement by and between the Company and Online Interactive, Inc., Tim Choate and John Ballantine dated July 18, 1997. Exhibit 11 Statement re: computation of per share earnings Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K None 15 MICRO WAREHOUSE, INC. FORM 10-Q June 30, 1997 SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MICRO WAREHOUSE, INC. The Registrant Date: August 14, 1997 By /Wayne P. Garten/ -------------------- WAYNE P. GARTEN Senior Vice President and Chief Financial Officer (Duly Authorized Officer of the Registrant and Principal Financial Officer) 16 EX-10.40 2 EMPLOYMENT AGREEMENT EXHIBIT 10.40 EMPLOYMENT AGREEMENT This agreement ("Agreement") made as of the 18 day of July, 1997 between Micro Warehouse, Inc., a Delaware corporation (hereinafter referred to as the "Company"), with its principal place of business at 535 Connecticut Avenue, Norwalk, Connecticut 06854, and ___________________________ whose address is 2815 Second Avenue, Suite 500, Seattle, Washington 98121 (hereinafter referred to as "Employee"). WHEREAS, the parties hereto for good and valuable consideration, are hereby entering into this Agreement which shall represent the entire agreement between the parties with respect to the subject matter herein; NOW, THEREFORE, for and in consideration of the premises and mutual promises and covenants hereinafter contained, it is agreed between the parties as follows: 1. Employment. The Company hereby employs Employee, and Employee agrees to serve the Company, commencing as of the date hereof on the terms and subject to the conditions set forth below. 2. Duties. The Company shall employ Employee as _______________________ of the ESR Division of Micro Warehouse, Inc. and Vice President of Micro Warehouse, Inc. Employee shall perform such duties as are consistent with those of Chief Operating Officer of the ESR Division of Micro Warehouse, Inc. and Vice President of Micro Warehouse, Inc. The precise duties and responsibilities of Employee may be revised from time to time. Employee will not be required to relocate outside of the greater Seattle area for the Term of this Agreement. In furtherance of the foregoing, Employee hereby agrees to perform his duties faithfully and shall devote all of his business time and energies to the business of the Company; provided, that the Company acknowledges that Employee has notified it that he is a shareholder of FreeShop International, Inc., a Washington corporation ("FSI") and the successor in interest to the FreeShop division recently divested by Online Interactive, Inc., and the Company agrees that nothing herein shall prohibit such ownership interest 3. Compensation. (A) Base Salary. For all services rendered by Employee under this Agreement, the Company shall pay to him a "Base Salary" at the rate of One Hundred and Sixty Thousand and 00/100 ($160,000.00) Dollars per annum, paid bi-weekly. The term "Base Salary" shall mean regular cash compensation paid on a periodic basis exclusive of benefits or incentive payments. (B) Annual Incentive Compensation. In addition to Base Salary, Employee shall be eligible to receive annual incentive compensation ("Incentive Compensation") as set forth below. (i) Employee shall be eligible to receive Incentive Compensation each year based upon achievement of certain profit performance goals (the "Targets") and other individual goals which are mutually agreed between the Company and Employee (the "Other Goals"), with November 30 as the target date for such mutual agreement. The Targets and Other Goals shall be memorialized and a copy of the same shall be provided to Employee prior to the start of each calendar year. The Targets for Employee's employment during the remainder of calendar year 1997 are attached hereto as Exhibit A. The Other Goals for Employee's employment during the remainder of calendar year 1997 are to be mutually agreed within 30 days after the date hereof and are to be related 70% to the operating results of the ESR Division and 30% to other electronic mailings, list management and promotions. The Other Goals for Employee's employment during calendar year 1998 are to be mutually agreed by November 30, 1997, and are to be related 70% to the operating results of the ESR Division, 15% to other electronic mailings, list management and promotions and 15% to international electronic objectives. 1 Employee's target Incentive Compensation shall be Forty (40%) of Base Salary ("Target Bonus Amount"), One Hundred Percent (100%) of which shall be payable for accomplishing One Hundred Percent (100%) of Targets and Other Goals. The actual amount, if any, of Incentive Compensation to which Employee may be entitled shall range on a linear basis from Fifty Percent (50%) of Target Bonus Amount if Eighty Percent (80%) of Targets are achieved to a maximum of One Hundred Fifty Percent (150%) of Target Bonus Amount if One Hundred Twenty Percent (120%) of Targets are achieved. Sixty Percent (60%) of Incentive Compensation as determined shall be automatically due and payable to Employee based on the level of accomplishment of Targets and the remaining Forty Percent (40%) shall be payable as determined by the Company's Chief Executive Officer based upon the accomplishment of Other Goals. No Incentive Compensation shall be paid if less than Eighty Percent (80%) of Targets are achieved. By way of example, if Base Salary is One Hundred and Sixty Thousand Dollars, ($160,000.00), One Hundred Percent (100%) of Target Bonus Amount at accomplishment of One Hundred Percent (100%) of Targets and Other Goals shall be Sixty Four Thousand Dollars ($64,000.00). If the Company achieves Eighty Percent (80%) of Targets, Target Bonus Amount shall be Thirty Two Thousand Dollars ($32,000.00) (i.e., .5 x $64,000.00) and Nineteen Thousand Two Hundred Dollars ($19,200.00) (i.e., .6 x $32,000.00) shall be automatically due and payable to Employee with up to the full balance of Twelve Thousand Eight Hundred Dollars ($12,800.00) (i.e., .4 x $32,000) payable upon the achievement of Other Goals. By way of further example, if Base Salary is One Hundred and Sixty Thousand Dollars, ($160,000.00), One Hundred Percent (100%) of Target Bonus Amount at accomplishment of One Hundred Percent (100%) of Targets and Other Goals shall be Sixty Four Thousand Dollars ($64,000.00). If the Company achieves One Hundred Ten Percent (110%) of Targets, Target Bonus Amount shall be Eighty Thousand Dollars ($80,000.00) (i.e., 1.25 x $64,000.00) and Forty Eight Thousand Dollars ($48,000.00) (i.e., .6 x $80,000.00) shall be automatically due and payable to Employee with up to the full balance of Thirty Two Thousand Dollars ($32,000.00) (i.e., .4 x $80,000) payable upon the achievement of Other Goals. (ii) Incentive Compensation shall be payable to Employee after the close of each fiscal year on or about February 15, provided Employee is employed by the Company as of such payment date. (iii) During September of each year following the second year of Employee's employment, Employee's Base Salary shall be subject to an annual review with the proviso that the Company may not reduce the same but shall not be obligated to increase the same except in its sole discretion. (C) Stock Options. The Company has granted to Employee non-qualified options ("Stock Options") to purchase Twenty-Five Thousand (25,000) common shares of the Company's stock at an exercise price of Sixteen and 62.5/100 Dollars ($16.625) per share, the average of the closing bid prices of the Company's common stock on July 17, 1997 and July 18, 1997 as reported by Nasdaq. Said options shall vest according to the following schedule: 6,250 on July 18, 1998 6,250 on July 18, 1999 6,250 on July 18, 2000 6,250 on July 18, 2001 (D) Common Stock. Employee will be eligible to receive up to Twenty-Five Thousand (25,000) registered shares of the Company's Common Stock ("Common Stock") based upon length of employment and the achievement of the performance targets attached hereto as Exhibit B (the "Corporate Targets"). Notwithstanding the foregoing, Seven Thousand Five Hundred (7,500) of said shares shall be granted on December 31, 1998, provided only that Employee has not been terminated for "cause" (as hereinafter defined). An additional Five Thousand (5,000) shares or portion thereof shall be granted on December 31, 1998, provided the Corporate Targets are achieved. If any portion of said 5,000 shares is not granted as a consequence of the failure to achieve the Corporate Targets, the same shall be granted at December 31, 2000 if Employee is employed by the Company on that date. Twelve Thousand Five Hundred (12,500) shares shall be granted quarterly in the amount of One 2 Thousand Five Hundred and Sixty-Three (1,563) shares per quarter during the years 1999 and 2000 (except for the final quarter of such period in which One Thousand Five Hundred and Fifty-Nine (1,559) shares shall be granted), provided Employee is employed by the Company at the conclusion of any applicable quarter. 4. Business Expenses. During Employee's employment, the Company agrees to reimburse Employee for reasonable and necessary expenses incurred by him in connection with the performance of his duties hereunder in accordance with the Company's general policy in effect with respect to its executive employees. For each such reimbursement request, Employee shall submit vouchers, invoices and such other documentation in accordance with said policy. 5. Benefits. Employee will be eligible to participate in the Company's benefits program, which includes medical, dental, prescription, vision, life and disability insurance coverage and a 401(k) savings plan, to the same extent and on the same terms as such benefits are provided generally to executive employees of the Company, and such additional benefits as are provided generally to employees of the Company's Seattle area office. 6. Vacations. Employee shall be entitled to vacation in accordance with the Company's general policy in effect with respect to its executive employees. For purposes of vacation entitlement and participation in the Company's other benefits programs, Employee shall be deemed to have commenced employment with the Company on such date as Employee commenced employment with Online Interactive, Inc., except to the extent prohibited by law. 7. Confidential Information. Employee acknowledges that the Company would be damaged if Employee's knowledge with respect to the business of the Company were disclosed to or utilized by parties other than the Company. Accordingly, Employee covenants and agrees that he will not disclose any presently known or hereafter acquired confidential or proprietary information of the Company or its business to any person, firm, corporation or other entity. For the purposes of this paragraph, the term "confidential or proprietary information" shall mean all information which is currently known to or hereafter acquired by Employee and relates to such matters as customer mailing lists, pricing and credit techniques, marketing techniques, research and development activities, sources of product, lists of magazines or other publications containing advertising of the Company and other confidential or restricted information which is not in the public domain. Confidential or proprietary information shall include third party information that the Company is obligated to keep confidential but shall not be deemed to include information released generally to the public by the Company, information required by law to be disclosed or information learned by Employee from third parties without restrictions on disclosure provided the same would not, if released, damage the Company. The provisions of this paragraph shall survive the termination of this Agreement. 8. Covenant Not to Compete. Employee hereby covenants and agrees that from the date hereof until eighteen (18) months after the cessation of Employee's employment with the Company if such employment ceases on or before December 31, 1998, or one (1) year after the cessation of Employee's employment with the Company if such employment ceases after December 31, 1998, plus that period after cessation, if any, during which the Company continues to pay Employee (the "Non-Compete Period"), he shall not, directly or indirectly, own, operate, manage, join, control, participate in the ownership, management, operation or control of, or be paid or employed by, or acquire any securities of, or otherwise become associated with or provide assistance to, as an employee, consultant, director, officer, shareholder, partner, agent, associate, principal, representative or in any other capacity, any business entity or activity which is directly or indirectly a "Competitive Business" (as hereinafter defined); provided, however, that the foregoing shall not prevent Employee from (a) performing services for a Competitive Business after the cessation of Employee's employment if such Competitive Business is also engaged in other lines of business and if Employee's services are restricted to employment in such other lines of business; or (b) acquiring the securities of or an interest in any Competitive Business, provided such ownership of securities or interests represents at the time of such acquisition, but including any ownership interests then already held, less than two percent (2%) of any class or type of securities of, or interest in, such Competitive Business. The term "Competitive Business" shall mean and include any business or activity that is substantially the same as any business or activity 3 conducted by the Company as of the date of cessation of Employee's employment with the Company, regardless of where such Competitive Business is located.. 9. Covenant Not to Solicit Customers. Unless Employee has obtained the prior written consent of the Company, he hereby covenants and agrees that, from the date hereof until the expiration of two (2) years after the cessation of Employee's employment with the Company, he shall not, for or on behalf of a Competitive Business, directly or indirectly, as owner, officer, director, stockholder, partner, associate, consultant, manager, advisor, representative, employee, agent, creditor or otherwise, attempt to solicit or in any other way disturb or service any person, firm or corporation that has been a customer account of the Company at any time or times during Employee's employment by the Company, whether or not he at any time had any direct or indirect account responsibility for, or contact with, such customer account. Notwithstanding the foregoing, Employee may solicit former customers of the Company which were not customers of the Company for the six (6) month period prior to the solicitation. 10. Covenant Not to Solicit Employees. Unless Employee has obtained the prior written consent of the Company, he hereby covenants and agrees that, from the date hereof until the expiration of two (2) years after the cessation of Employee's employment with the Company, he shall not, for or on behalf of any party, directly or indirectly, as owner, officer, director, stockholder, partner, associate, consultant, manager, advisor, representative, employee, agent creditor or otherwise, attempt to solicit for employment or in any other way disturb the employment of any person who has been an employee of the Company at any time or times during Employee's employment by the Company. Notwithstanding the foregoing, Employee may solicit former employees of the Company who were not employees of the Company for the twelve (12) month period prior to the solicitation. 11. Term and Termination. (A) Term. Both Employee and the Company acknowledge that Employee's employment with the Company is for a term of two (2) years from the date hereof ("Term") and thereafter at will. (B) Termination by the Company. Notwithstanding anything to the contrary in this Agreement or otherwise, the Company at any time during or after the Term may terminate Employee's employment with or without "cause" (as hereinafter defined) upon thirty (30) days written notice and Employee shall thereafter be released from all his obligations under this Agreement except pursuant to paragraphs 7, 8, 9 and 10 hereof. In the event Employee's employment is terminated by the Company without cause at any time during the Term, (a) the Company shall pay to Employee in the normal course the Base Salary for the remainder of the Term, (b) Employee shall immediately vest such Options as would have vested pursuant to Section 3(C) of this Agreement had he remained employed by the Company during the entire Term, (c) Employee shall receive such shares of Common Stock as he would have received pursuant to Section 3(D) of this Agreement had he remain employed by the Company during the entire Term, provided that the Corporate Targets are achieved and (d) in lieu of Incentive Compensation, the Company shall pay to Employee in the normal course an additional amount equal to nine (9) months' Base Salary if such termination occurs during the first year of the Term or six (6) months' Base Salary if such termination occurs during the second year of the Term. For purposes of this paragraph 11(B), termination for "cause" shall be deemed to exist upon (i) a good faith finding by the Board of Directors of the Company of a failure, refusal or inability of Employee to perform reasonably assigned duties for the Company consistent with the terms of this Agreement; (ii) the commission or omission of any willful or negligent action that has the effect to materially injure the line of business of the Company related to the internet or on-line transactions or to otherwise injure the Company; (iii) a breach of any material provision of this Agreement by Employee and, if such breach is reasonably susceptible to cure, the failure to cure same within five (5) days after notice thereof to Employee; (iv) the conviction of Employee of, or the entry of a plea of guilty or nolo contendere by Employee to, a crime involving an act of fraud or embezzlement against the Company or the conviction of Employee of, or the entry of a plea of guilty or nolo contendere by Employee to, any felony involving moral turpitude; or (v) any conduct of Employee deemed by the Board of Directors of the Company after advice from outside counsel violative of the rules and regulations of the Securities and Exchange Commission, any state securities regulatory body or any national securities exchange. 4 In the event that Employee's employment is terminated by the Company with cause at any time during the Term, the Company shall have no further obligation to Employee under this Agreement. (C) Termination by Employee. Notwithstanding anything to the contrary in this Agreement or otherwise, Employee at any time during or after the Term may terminate Employee's employment with or without "cause" (as hereinafter defined) upon thirty (30) days written notice and Employee shall thereafter be released from all his obligations under this Agreement except pursuant to paragraphs 7, 8, 9 and 10 hereof. In the event Employee's employment is terminated by Employee with cause at any time during the Term, (a) the Company shall pay to Employee in the normal course the Base Salary for the remainder of the Term, (b) Employee shall immediately vest such Options as would have vested pursuant to Section 3(C) of this Agreement had he remained employed by the Company during the entire Term, (c) Employee shall receive such shares of Common Stock as he would have received pursuant to Section 3(D) of this Agreement had he remained employed by the Company during the entire Term, provided that the Corporate Targets are achieved and (d) in lieu of Incentive Compensation, the Company shall pay to Employee in the normal course an additional amount equal to nine (9) months' Base Salary if such termination occurs during the first year of the Term or six (6) months' Base Salary if such termination occurs during the second year of the Term. For purposes of this paragraph 11(C), termination for "cause" shall be deemed to exist upon (i) a breach of any material provision of this Agreement by the Company and, if such breach is reasonably susceptible to cure, the failure to cure same within five (5) days after notice thereof to the Company, or (ii) the filing by the Company under any state or Federal bankruptcy or insolvency laws. In the event that Employee's employment is terminated by Employee without cause at any time during the Term, the Company shall have no further obligation to Employee under this Agreement. 12. Notices. All notices, elections, demands or other communications required or permitted to be made or given pursuant to this Agreement shall be in writing and shall be considered properly given or made if sent by Telecopier, Telex, courier service or certified mail, return receipt requested and addressed to the parties at the respective addresses specified below. Either party may change its address by giving notice in writing pursuant to this paragraph to the other of its new address. To the Company: Mr. Linwood A. Lacy, Jr. President and Chief Executive Officer Micro Warehouse, Inc. 535 Connecticut Avenue Norwalk, Connecticut 06854 with a copy to: Bruce L. Lev Vice President and General Counsel Micro Warehouse, Inc. 535 Connecticut Avenue Norwalk, Connecticut 06854 To Employee: _________________________ ESR Division of Micro Warehouse, Inc. 2815 Second Avenue, Suite 500 Seattle, Washington 98121 13. Entire Agreement. This Agreement constitutes the full and complete understanding and agreement of the parties. Neither party has relied upon any representation of the other not set forth herein. This Agreement may not be changed orally but only by an agreement in writing, signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. All agreements regarding Employee's employment by Online Interactive, Inc. are terminated and of no further force or effect. 14. Binding Effect. This Agreement shall be binding upon and accrue to the benefit of the parties hereto, their heirs, executors, administrators and successors. 5 15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut without regard to its principles with respect to conflicts of law. 16. Counsel Fees. Except as set forth herein the parties hereto shall bear their own fees, costs and expenses incurred in connection with this Agreement. If either party is required to bring suit or otherwise seek enforcement of its or his rights in connection with the same, the prevailing party in such action or proceeding shall be entitled to recover reasonable counsel fees incurred in such action or proceeding. IN WITNESS WHEREOF, the parties hereto have affixed their signatures on the day and year first above written. THE COMPANY: MICRO WAREHOUSE, INC. By:______________________________________ Linwood A. Lacy, Jr. President and Chief Executive Officer EMPLOYEE: _________________________________________ EX-10.41 3 STOCK PURCHASE AGREEMENT EXHIBIT 10.41 STOCK PURCHASE AGREEMENT This Stock Purchase Agreement ("Agreement") is made this 18th day of July, 1997, by and among Micro Warehouse, Inc., a corporation duly organized under the laws of the State of Delaware ("Buyer"), Online Interactive, Inc., a corporation duly organized under the laws of the State of Washington (the "Company"), Tim Choate and John Ballantine (referred to collectively as the "Major Shareholders"), and those other shareholders of the Company who become parties hereto by execution of a Stock Power Agreement (referred to collectively as the "Other Shareholders"). WHEREAS, the Major Shareholders and the Other Shareholders, whose names and respective share ownership are set forth in Schedule 4.1 hereto (the Major Shareholders together with such persons or entities being hereinafter referred to as the "Sellers"), together are the owners of all of the issued and outstanding shares of the Company's capital stock (the "Shares"); and WHEREAS, Buyer desires to purchase the Shares pursuant to the terms and conditions set forth herein; and WHEREAS, Sellers desire to sell and transfer the Shares to Buyer pursuant to the terms and conditions set forth herein; NOW, THEREFORE, for and in consideration of the premises and mutual promises and covenants hereinafter contained, it is agreed between the parties as follows: 1. Sale of Shares. Subject to the terms and conditions set forth herein, Sellers shall sell, assign, convey, transfer and set over to Buyer, and Buyer shall purchase, assume and accept from Sellers, free and clear of any and all liens, claims, encumbrances, liabilities, obligations, security interests and debts, full, complete and marketable title to the Shares. 2. Delivery of Certificates. On the date of the closing of the transactions contemplated herein (the "Closing" or the "Closing Date"), (i) Sellers shall deliver to Buyer a certificate or certificates evidencing ownership of the Shares (the "Certificates"); (ii) the Major Shareholders shall deliver to Buyer stock powers executed and duly endorsed for transfer of the Shares owned by them to Buyer; and (iii) the Other Shareholders shall deliver to Buyer stock power agreements in the form attached hereto as Exhibit A ("Stock Power Agreements"), executed and duly endorsed by Sellers for transfer of the Shares to Buyer. 3. Payments. 3.1 Base Purchase Price. As consideration for the Shares being purchased hereby, Buyer shall at Closing pay to Major Shareholders as agents for Sellers, subject to the escrow as set forth in Paragraph 3.3 hereinbelow, by bank or certified check or by wire transfer of funds the aggregate sum of Thirteen Million Two Hundred Thousand Dollars ($13,200,000) (the "Base Purchase Price"). Major Shareholders shall promptly distribute the Base Purchase Price, less a reasonable reserve (the "Closing Reserve") for payment of expenses of the Company and Sellers in connection with the transactions contemplated herein, to the respective Sellers in proportion to the number of Shares owned by each as set forth on Schedule 3.1 attached hereto. Upon payment of all such expenses, Major Shareholders shall promptly distribute the balance, if any, of the Closing Reserve to the respective Sellers in proportion to the number of Shares owned by each as set forth on Schedule 3.1 attached hereto. 3.2 Advance. Pursuant to a letter agreement dated May 29, 1997 between Buyer, the Company, the Major Shareholders and certain other officers of the Company (the "Letter of Intent"), Buyer has previously paid the Company a One Million Five Hundred Thousand Dollars ($1,500,000) advance (the "Advance"). The amount of Three Hundred Thousand Dollars ($300,000) of such Advance has been used by the Company since the date of the Letter of Intent, which amount has been considered in calculating the Base Purchase Price specified in Paragraph 3.1 above. 3.3 Escrow Agreement. At the Closing, the parties shall enter into an escrow agreement in the form attached hereto as Exhibit B ("Escrow Agreement"), pursuant to which Two Million Dollars ($2,000,000) of the cash portion of the Base Purchase Price set forth in Paragraph 3.1 hereinabove (the "Escrow Fund") shall be held in accordance with the Escrow Agreement and is intended to provide a partial source of funds for the payment, and the procedures for the payment from such funds, of the amounts for which Buyer may become entitled to be indemnified under Paragraph 6 of this Agreement. 3.4 Earn-Out Payment. As additional consideration for the Shares being purchased hereby, and subject to Paragraph 3.5 below and certain adjustments as described in Exhibit C attached hereto, on or about February 15, 1999, Buyer shall pay to Major Shareholders as agents for Sellers, by bank or certified check or by wire transfer of funds, an amount of up to Six Million Dollars ($6,000,000) (the "Earn-Out Payment") based on the achievement by Buyer's Electronic Software Reselling Division of certain operating performance targets for calendar year 1998, as specified in Exhibit C attached hereto. 3.5 Payments to Key Employees. On or about February 15, 1999, upon written direction from the Major Shareholders, Buyer shall make available an amount equal to three and one-third percent (a "Full Share") of any Earn-Out Payment for distribution in whole or in part in the sole discretion of the Major Shareholders, on behalf of Buyer, as bonus compensation to each of Chuck Gottschalk, Pete O'Dell and John Brown ("Key Employees") in 2 lieu of payment of such amount to Major Shareholders as agents for Sellers. If the Major Shareholders elect not to award a Full Share to any one or more of the Key Employees, the amount not awarded shall remain part of the Earn-Out Payment to Sellers. If any one or more of such Key Employees is no longer employed by Buyer for any reason as of December 31, 1998, he shall be ineligible for such compensation and his Full Share shall remain part of the Earn-Out Payment to Sellers. 4. Representations, Warranties and Covenants of the Company and the Major Shareholders. The Company and the Major Shareholders jointly and severally represent, warrant, and covenant to Buyer as follows (whenever a statement below is qualified by "best knowledge" or a similar phrase, it is intended to indicate that no information that would give the person making such statement current actual knowledge of the inaccuracy of such statement has come to such person's attention after due inquiry): 4.1 Existence. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Washington. The Company has the corporate power to own and operate its properties and to carry on its business as it is now being conducted. Attached hereto as Schedule 4.1 are the Articles of Incorporation and By-Laws of the Company, each as amended to date, each of which is a true, correct and complete copy. The Company is not in violation of any term of such Articles of Incorporation or By-Laws. The minute books of the Company containing the records of meetings of the stockholders, the board of directors and any committees of the board of directors, the stock certificate books and the stock record books of the Company contain a correct and complete summary since the time of incorporation of the Company and reflect all transactions referred to in such minutes accurately in all respects. All actions taken by the Company requiring action by the board of directors or shareholders of the Company have been duly authorized or ratified as necessary. The Company has delivered to the Buyer all of the books and records pertaining to the Company. The Company is not required to be qualified as a foreign corporation in any jurisdictions other than the State of Washington. 4.2 Corporate Power. The Company and each of the Major Shareholders have full power and authority to execute and deliver this Agreement and such other agreements and instruments to be executed and delivered by them pursuant hereto, and to consummate the transactions contemplated hereby and thereby. All corporate acts and other proceedings required to be taken by or on the part of the Company and the Major Shareholders to authorize them to execute, deliver and perform this Agreement and such other agreements, instruments and transactions contemplated hereby have been duly and properly taken. 4.3 Binding Obligation; Governmental Consents. This Agreement has been duly executed and delivered by the Company and the Major Shareholders and constitutes, and such other agreements and instruments contemplated hereby when duly executed and delivered by the Company and the Major Shareholders will constitute, legal, valid and binding obligations of the Company and the Major Shareholders enforceable in accordance with their respective terms, subject, as to enforcement of remedies, to applicable bankruptcy, reorganization, insolvency, moratorium or other similar laws affecting the enforcement of creditors' rights 3 generally from time to time in effect, and subject to any equitable principles limiting the right to obtain specific performance of certain obligations of the Company and the Major Shareholders hereunder and thereunder. All consents of governmental and other regulatory authorities and of other parties required to be received by or on the part of the Company and the Major Shareholders to enable them to enter into and carry out this Agreement and the transactions contemplated hereby have been obtained. Without limiting the foregoing, the Company and the Major Shareholders have made all such filings and submissions which may be required under applicable law for the Company and the Major Shareholders to consummate the transactions contemplated hereby. Neither the execution and delivery of this Agreement nor the consummation by the Company and the Major Shareholders of the transactions contemplated hereby will (i) violate or conflict with any of the provisions of the Articles of Incorporation or By-laws of the Company; or (ii) violate or constitute a default under any note, bond, mortgage, indenture, contract, agreement, license or other instrument or any order, judgment or ruling of any governmental authority to which the Company or any of the Major Shareholders is a party or by which any of their respective properties are bound. No other consent, approval, license, permit, or authorization of, or registration, declaration or filing with, any state or federal court, administrative agency or commission or other governmental authority or instrumentality, or of any other third party, is required to be obtained or made by the Company or the Major Shareholders in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby other than those that may be required solely by reason of Buyer's (as opposed to any third party's) participation in the transactions contemplated hereby. 4.4 Capitalization. Immediately prior to the Closing, the Company's entire capital stock will consist of One Hundred Million (100,000,000) authorized shares of common stock, with no par value of which Twelve Million Two Hundred Twenty-Two Thousand Fifty-Eight (12,222,058) common shares will be issued and outstanding and Ten Million (10,000,000) shares of preferred stock with no par value, of which none of the preferred shares will be issued and outstanding. All the aforesaid issued and outstanding Shares will have been duly authorized and validly issued, will be fully paid and non-assessable, will be owned of record and beneficially by the Sellers in the amounts set forth in Schedule 3.1, and will have been offered, issued, sold and delivered by the Company in compliance with applicable federal and state securities laws (including, but not limited to, any applicable "Blue Sky" laws of the State of Washington). Except as disclosed on Schedule 4.4 attached hereto, there will be no outstanding pre-emptive, conversion or other rights, options, warrants, agreements or commitments granted or issued by or binding upon the Company for the issuance, disposition or acquisition of any shares of its capital stock. Neither Major Shareholder has granted options or other rights to purchase any shares of capital stock from such Major Shareholder. To the knowledge of the Major Shareholders, no Sellers have granted options or other rights to purchase any shares of capital stock from such Sellers. To the knowledge of the Major Shareholders, there are no voting trusts, proxies or any other agreements or understandings with respect to the voting of the capital stock of the Company. 4 4.5 Title to Shares. The Shares to be sold by the Major Shareholders are owned by the Major Shareholders free and clear of all liens, claims or encumbrances. To the knowledge of the Major Shareholders, the Shares to be sold by the Other Shareholders are owned by the Other Shareholders free and clear of all liens, claims or encumbrances. 4.6 Transfer of Shares. The performance by the Company and the Major Shareholders of their obligations hereunder will vest in the Buyer full, complete and marketable title in and to the Shares, free and clear of any and all liens, claims and encumbrances of any nature whatsoever. 4.7 Customer Information. (a) At the Closing, the Company and the Major Shareholders shall deliver to Buyer on electronic or magnetic media files containing reasonably complete and accurate customer lists and customer databases used by or for the Company (the "Customer Information") as of the Closing Date. Neither the Company nor the Major Shareholders has purposely omitted from the Customer Information any customer list or customer database used by or for the Company. Except as disclosed on Schedule 4.7(a), the Company is the owner of all right, title and interest in and to the Customer Information and the Company is not a party to any agreement to lease, sell, or license said Customer Information. (b) Schedule 4.7(b) sets forth all of the current unfulfilled back orders and deposits on such unfulfilled back orders received by the Company through Closing. Other than those set forth on Schedule 4.7(b), the Company has no unfulfilled back orders or deposits relating to such unfilled back orders. 4.8 Title to Real Property. Schedule 4.8(a) sets forth a complete list of all real property and interests in real property leased by the Company. Schedule 4.8(b) sets forth a complete list of all real property and interests in real property owned by the Company. The Company has good leasehold interest in all real property and interests in real property shown on Schedule 4.8(a) to be leased by it, and good fee title in all real property and interests in real property shown on Schedule 4.8(b) to be owned by it in each case free and clear of all mortgages, liens, easements, covenants, rights of way and other encumbrances or restrictions of any nature whatsoever, except (A) Permitted Liens as defined in Paragraph 4.10 hereinbelow, (B) zoning, building and other similar restrictions, (C) easements, covenants, rights-of-way or other restrictions which do not materially impair the use or detract from the value of the property to which they relate in the business of the Company as presently conducted, and (D) as described on Schedules 4.8(a) and (b). 4.9 Intellectual Property. (a) Schedule 4.9(a) sets forth a true and complete list of all patents, trademarks, trade names, service marks, service names, copyrights and applications therefor, proprietary subsystem programs and other intellectual property developed and owned by the 5 Company (collectively, the "Intellectual Property"). The Company has supplied Buyer with complete and correct copies of such items. Except as set forth in Schedule 4.9(a), the Company possesses adequate and enforceable rights to use in its business as presently conducted (without payment) all of its Intellectual Property, use of the Intellectual Property by the Company does not violate or infringe upon any rights of any third parties, there are no opposition or cancellation proceedings or infringement suits pending or, to the Company's best knowledge, threatened with respect to any of the Intellectual Property, no other person or entity owns any right, title or interest in the Intellectual Property, and no other person or entity has a right to a royalty or payment of any kind related to the Intellectual Property. All of the employees of the Company who have had access to proprietary or confidential information have been bound to treat such information as confidential, not only during the term of their employment, but also after the termination thereof for the time period specified in the Company's standard Employees Inventions, Confidential Information and Non-Competition Agreement. (b) All of the Company's proprietary computer software functions substantially as intended, to the best of the Company's and the Major Shareholders' knowledge is in full and complete compliance with all applicable State and Federal requirements, and runs/operates substantially in accordance with Schedule 4.9(b). No person or entity other than the Company has any right to use, modify, copy or sell such software except as specified on Schedule 4.9(b). No third party has a copy of any of the source codes to such software. 4.10 Material Contracts. Except as set forth on Schedule 4.10, neither the Company nor the Major Shareholders has made and neither is bound by (a) any material agreement, contract or commitment relating to the employment, compensation, pension, profit sharing, stock option, employee stock purchase, retirement or other employee benefit plan, (b) any agreement, contract or commitment relating to capital expenditures, (c) any loan or advance to, or investment in, any other person or entity, or any agreement, contract or commitment relating to the making of any such loan, advance or investment, (d) any guarantee or other contingent liability in respect of any indebtedness or obligation of any other person (other than the endorsement of negotiable instruments for collection in the ordinary course of business), (e) any management service, consulting or any other similar type of contract, (f) any agreement, contract or commitment limiting the freedom of the Company to engage in the present business of the Company or to compete with any other person or entity, or any such restrictions or limitations set forth in the Company's Articles of Incorporation or By-laws, (g) any material agreement, contract or commitment for the purchase, sale or lease of any materials, products, supplies or services, (h) any agreement, contract or commitment not entered into in the ordinary course of business, (i) any agreement, contract or commitment which might reasonably be expected to have a potentially material adverse impact on the financial condition of the Company, (j) any lease or similar agreement under which the Company is a lessor or sublessor of any real property, (k) any license or other agreement relating in whole or in part to the Intellectual Property (including, but not limited to, any license or other agreement under which the Company has the right to use any of the same owned or held by a third party), (l) any mortgage, pledge, or other document granting a lien (including, but not limited to, liens upon properties acquired under conditional sales, capital leases or other title retention or security 6 devices but excluding operating leases) other than as set forth on Schedule 4.10 (a "Permitted Lien"), (m) any agreement or contract providing for any bonus or other payment based on the sale of all or substantially all of the Shares, (n) any labor union contracts, (o) any contracts with any director, officer, shareholder or affiliate of the Company, (p) any joint venture agreement, (q) any customer, supplier, distributor or on-line provider agreement, or (r) any other agreement, contract, lease, license, commitment or instrument to which the Company is a party or by or to which it or any of the Shares or its business is bound or subject which has an aggregate future liability in excess of Twenty-Five Thousand Dollars ($25,000), is not terminable by Seller for a cost of less than Ten Thousand Dollars ($10,000) or can not be terminated with thirty (30) days or less notice. Each agreement, contract, lease, license, commitment or instrument of the Company described on Schedule 4.10 (collectively, the "Contracts") is in full force and effect, except as disclosed on Schedule 4.10. Except as disclosed on Schedule 4.10, the Company is not (with or without the lapse of time or the giving of notice, or both) in breach or default under any Contract and no other party to any of the Contracts is (with or without the lapse of time or the giving of notice, or both) in breach or default, or is claiming that the Company is in breach or default thereunder. Except as disclosed on Schedule 4.10, no consents of any person or entity under any agreement are required which have not been obtained. Except as disclosed on Schedule 4.10, no party to any Contract may, as a result of the change of ownership of the Shares, cancel such Contract or require the adoption of terms less favorable to Buyer than the current terms thereof. 4.11 Litigation. Except as disclosed in Schedule 4.11 attached hereto, there is no action, suit, claim, proceeding at law or in equity by any person or entity, or any arbitration or any administrative or other proceeding by or before any board, panel, tribunal or other such entity, or any investigation by any governmental or other instrumentality or agency, pending, or to the Company's and Major Shareholders' best knowledge threatened, against or affecting the Company, the Shares or the transactions contemplated hereby or which could affect the right or ability of the Sellers to transfer and sell the Shares to the Buyer or otherwise consummate the transactions contemplated herein nor has any such action, suit, proceeding or investigation been pending during the five (5) year period prior to the date hereof. Neither the Company nor the Major Shareholders know of any valid basis for any such action, proceeding or investigation. The Company is not subject to any judgment, order or decree entered in any lawsuit or proceeding, nor are the Company or any of the Major Shareholders aware of any circumstances that could give rise to a claim which may have a material adverse affect on the Shares or on any of the Company's operations, business practices or prospects or on its ability to acquire any property or conduct business. 4.12 Financial Statements. (a) Schedule 4.12(a)(i) sets forth the audited balance sheet (the "1996 Balance Sheet") of the Company for the year ended June 30, 1996 and the related statements of income, retained earnings and changes in financial position for such period, together with the notes, if any, to such financial statements (collectively the "1996 Financial Statements"). Schedule 4.12(a)(ii) sets forth the unaudited balance sheet of Seller as of May 31, 1997 (the 7 1997 Balance Sheet") and the related unaudited statement of income covering the period from July 1,1996 to May 31, 1997 (collectively the "1997 Financial Statements"). (b) The 1996 and the 1997 Financial Statements have been prepared in accordance with the books and records of the Company and in accordance with generally accepted accounting principles and practices consistently applied by the Company (except as described in the notes included therein), are complete and accurate in all material respects, and fairly present the financial condition and the results of operations of the Company as, at and for the periods indicated. The 1996 Financial Statements have been audited in accordance with generally accepted auditing standards. (c) From May 31, 1997 through the Closing Date, except for the FSI Spin-off, the below-market pricing and repricing of certain stock option grants, the award of restricted stock to certain employees, and expenses incurred in connection with the negotiation and closing of this Agreement: (i) the Company has conducted its business and affairs prudently and in a consistent manner; (ii) there has been no material adverse change in the assets, liabilities, sales, income or business of the Company, nor have the turnover, costs (direct or indirect) or margin of profitability of the Company shown any material deterioration; (iii) there has been no situation, either existing or threatened, including but not limited to any legislative or regulatory change, revocation of any license or right to do business, lapse of time, fire, explosion, accident, casualty, labor trouble, flood, riot, storm, condemnation or act of God or other public force which might result in any material adverse change (financial or otherwise) in the business, condition, assets or properties of the Company or which might adversely affect its business prospects; (iv) no debtor has been released by the Company on terms that it pay less than the book value of its debt, and no debt owing to the Company has been deferred, subordinated or written-off or has proved to any extent unrecoverable; (v) the Company has not incurred any obligations or liabilities (whether absolute, accrued, contingent or otherwise and whether due or to become due), except in the ordinary course of business and consistent with past practice, or incurred any single obligation or liability (whether absolute, accrued, contingent, or otherwise and whether due or to become due) that exceeds Ten Thousand Dollars ($10,000); (vi) the Company has not disposed of or permitted to lapse any patent, trademark, or copyright or any patent, trademark, or copyright application or license, or disposed of or disclosed to any person any trade secret, formula, process, or know-how; (vii) the Company has not introduced any material change with respect to the operation of its business, including its method or practice of accounting; and (viii) the Company has not increased the carrying value of any of its assets (whether tangible or intangible). (d) None of the outstanding receivables or claims of the Company reflected on the 1996 or 1997 Financial Statements have become subject to the expiration of any statutes of limitations. 4.13 Undisclosed Liabilities. Except as set fort in Schedule 4.13, the Company does not have any liabilities or obligations of any nature (whether accrued, absolute, contingent, unasserted or otherwise) required by generally accepted accounting principles and 8 practices to be reflected on a balance sheet or in notes thereto, except (i) as set forth or reflected on the 1996 and 1997 Balance Sheets (or described in the notes included therein), (ii) for items disclosed in this Agreement or the Schedules or Exhibits hereto, (iii) for purchase contracts and orders for inventory in the ordinary course of business consistent with past practice, and (iv) for liabilities and obligations incurred in the ordinary course of business consistent with past practice since the date of the 1997 Balance Sheet and not in violation of this Agreement (all liabilities and obligations set forth in (i)-(iv) above being herein called "Disclosed Liabilities"). 4.14 Complete Information. The Company and the Major Shareholders have heretofore furnished to Buyer and its agents information relating to the business and operations of the Company. The Company and the Major Shareholders have withheld no material information from Buyer. All such information is complete and accurate in all material respects. 4.15 Taxes. (a) For purposes of this Agreement: (i) "Tax" or "Taxes" shall mean, without limitation, all local, state, federal and foreign or other taxes (including franchise taxes or fees) and assessments, any Social Security taxes, any direct tax, withholding tax, any stamp taxes, sales or use taxes and capital taxes, and customs charges, including all interest, penalties and additions imposed with respect to such amounts not disclosed on the 1996 or 1997 Financial Statements, or set forth on Schedule 4.12(a)(i) or (ii); and (ii) "Pre-Closing Tax Period" shall mean all taxable periods ending on or before the Closing Date and the portion ending on the Closing Date of any taxable period that includes (but does not end on) such day. (b) The Company has duly filed in a timely manner all federal, state, county or municipal Tax reports and returns required to be filed by it. The Company has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder or other third person. Such reports and returns were completed in accordance with applicable laws and were true and correct in all material respects. The Company has duly paid or accurately accrued as liabilities on its Financial Statements all Taxes, interest, penalties, assessments and other charges due and payable or lawfully claimed to be due from it by every Tax authority for the periods covered by such reports and returns which are not prescribed by the statute of limitations. The Company has either collected and remitted or reserved for all sales Taxes required to be collected from any customer of the Company. The Company has withheld all payroll and other Taxes required to be withheld by an employer in the State of Washington and covenants to make all appropriate remittances in connection therewith in a timely manner. The reserves for Taxes and any other payments reflected on the 1996 and 1997 Financial Statements and as carried on the books of the Company as of the Closing Date are adequate. (c) Any Tax payable by the Company in connection with the sale of the Shares to Buyer hereunder shall have been paid or liability therefor accrued on the Financial Statements on or before the Closing Date and all laws imposing such Taxes shall have been fully complied with by the Sellers. 9 (d) Except as disclosed in Schedule 4.15(d), no claim has ever been made by an authority in a jurisdiction where Seller does not file Tax returns or reports that it is or may be subject to taxation by such jurisdiction. Except as disclosed in Schedule 4.15(d), no issues, claims or disputes have been asserted, claimed or raised by the Internal Revenue Service or any other taxing authority in connection with an examination of any of the Tax returns and reports referred to herein. Except as disclosed in Schedule 4.15(d), none of Sellers Tax returns or reports has been audited or is currently subject thereto. 4.16 Insurance. Schedule 4.16 attached hereto sets forth the following information with respect to each such insurance policy to which the Company has been a party, a name insured or otherwise the beneficiary of coverage at any time within the past three (3) years: o The name, address and telephone number of the agent; o The name of the insurer, the name of the policyholder, and the name of each covered insured; o The policy number and the period of coverage; o The scope, including an indication of whether the coverage was on a claims-made, occurrence or other basis and amount including how deductibles and ceilings are calculated and operate of coverage; and o A description of any retroactive premium adjustments or other loss sharing arrangements. Schedule 4.16 also describes any self-insurance arrangements affecting the Company and indicates which policies are currently in effect with respect to the Company. To the Company's and the Major Shareholders' best knowledge, such policies are valid, outstanding and enforceable policies; and provide adequate insurance coverage for the property, assets, and operations of the Company. Except as disclosed on Schedule 4.16, to the Company's and the Major Shareholders' best knowledge, the Company has not been refused any insurance nor has its coverage been limited by any insurance carrier to which it has applied for insurance during the last three (3) years. The Company has delivered to the Buyer a correct and complete copy of each insurance policy to which the Company has been a party, a named insured or otherwise the beneficiary of coverage at any time within the past three (3) years. All premiums due thereon have been paid and the Company has complied in all material respects with the provisions of such policies. 4.17 Compliance with Applicable Laws. (a) The Company is in compliance with all applicable statutes, laws, ordinances, rules and regulations of any governmental authority or instrumentality, domestic or foreign (including, without limitation, laws relating to health, safety and environmental matters). (b) Except as set forth on Schedule 4.17, there are no present or past conditions in any way relating to the Company involving or resulting from any past or present 10 spill, discharge, leak, emission, injection, escape, dumping or release of any kind whatsoever of any substance or exposure of any type in any workplace or to any medium, including, but not limited to, air, land, surface waters or ground waters, or from any generation, transportation, treatment, storage or disposal of waste materials, raw materials or products of any kind or from the storage, use or handling of any hazardous or toxic materials or other substances that is likely to lead to imposition of any liability. Except as set forth in Schedule 4.17, there are no above-ground or underground storage tanks or septic systems on any property of the Company. 4.18 Inventories. The inventories reflected on the 1997 Balance Sheet or thereafter acquired by the Company consist of items of a quality and quantity usable in the ordinary course of the Company's business consistent with past practice at the amounts reflected on said Balance Sheet (which amounts reflect, among other things, normal obsolescence) in the case of inventories reflected therein, or, in the case of such inventories acquired after the date of the 1997 Balance Sheet, at the amounts reflected on the books of the Company. 4.19 Salary Increases and Bonuses. Since May 31, 1997, the Company has not paid any bonuses or granted any salary increases except (i) bonuses and salary increases of non-executive employees in the ordinary course of business in accordance with past practice, and (ii) bonuses and salary increases reflected on Schedule 4.19. 4.20 Promotional Materials. Separately provided as Schedule 4.20 are examples of all catalogues, advertisements and promotional materials distributed by the Company to any customer within the last six months. Schedule 4.20 also lists all Web sites maintained by Company or any joint venture in which the Company is a party, including the locations of the servers on which these Web sites reside. 4.21 Labor Law Matters. The Company (i) is in compliance with all applicable federal and state laws relating to employment and employment policies, wages, hours, terms, and conditions of employment, and (ii) has complied in all respects with social security, pension and welfare fund payment obligations. 4.22 Records and Systems. Except as disclosed on Schedule 4.22, all the records and systems (including but not limited to computer systems) and all data and information of the Company are recorded, stored, maintained or operated or otherwise held by the Company, and are not wholly or partly dependent on any facilities or third party which are not under the exclusive ownership or control of the Company. 4.23 Software Licenses. The Company owns or is licensed to use all software necessary to conduct its business operations in a commercially reasonably automated manner and to enable it to continue to use its computerized records for the foreseeable future in the same manner in which they have been used prior to the Closing Dare and the Company does not share any user rights in respect of such software with any other person or entity. 11 4.24 Employees, Compensation, Benefit Plans and Collective Bargaining Agreements. (a) The Company has furnished Buyer with true and accurate copies of all employment agreements to which the Company is a party. Attached as Schedule 4.24(a) is an accurate and complete list identifying all employees of the Company, including the ages of the employees and dates of employment as well as required minimum notice periods for termination, position (including authority to bind the Company), and current rates of compensation payable to each employee. Said Schedule also sets forth (i) all accrued benefits of each employee of the Company (collectively "Employee Benefits"), (ii) any unusual provision indicated in an employment contract with any employee of the Company, (iii) any loan by the Company to any of its employees, and (iv) any indebtedness or guarantee of the Company to, from or for the benefit of any of its employees. Immediately prior to the Closing, the Company also made certain below-market price stock option grants and awarded restricted stock to certain employees. Except as described in subsection (e) of Schedule 4.10, no employee leasing arrangement or temporary employment arrangement exists with third parties. For the purposes of this paragraph, the term "employee of the Company" shall mean any salaried or hourly employee of the Company and the legal representatives, managers and consultants of the Company but shall not include the Company's independent contractors, temporary employees or independent accountants, attorneys or other professional advisors. (b) In addition to their other indemnification obligations set forth herein, the Major Shareholders shall jointly and severally indemnify Buyer and shall defend against and hold Buyer harmless from and against any and all claims and/or lawsuits of past or present employees of the Company arising in connection with any act or omission of the Company or its temporary employees, employees and/or agents occurring on or prior to the Closing Date attributable to the employment by the Company of said employees. (c) Except as set forth on Schedule 4.24(c), no sum is due to any current or past employee or temporary employee of the Company arising from his or her employment or services contract or other arrangement. (d) The Company has not made or agreed to make any material payments to employees or temporary employees of the Company or retired employees or temporary employees of the Company that will not be tax deductible. (e) The Company has continuously complied, in all material respects, with all applicable requirements of the labor law, social security law, health and safety regulations and all other regulations concerning the employment of the Company's employees and temporary employees. (f) The Company is not in default of any of its labor related obligations and there exists no employment dispute of any kind related to employment matters nor, to the best knowledge of the Company and the Major Shareholders, is any such dispute 12 threatened. The Company has complied with the payment and withholding of all applicable labor and related taxes and contributions, and has supplied in this regard all required information to governmental authorities. (g) The Company is not a party to or bound by any collective bargaining agreement or other agreement covering the rights and obligations of the Company and its employees. (h) Attached as Schedule 4.24(h) is a list of all qualified and non-qualified employee benefit plans, including, but not limited to, all pension, retirement or employee health or welfare benefit plans maintained by the Company for the benefit of the Company's past and present employees or temporary employees, and a listing of the annual amounts paid to each such plan for each employee of Seller for the fiscal years ended June 30, 1995 and 1996 and the estimated amounts payable in fiscal year 1997. All amounts to be paid under such plans have been completely and timely paid. There is no unfunded liability with respect to such plans. Each of such plans complies in form and in operation with the applicable requirements of the Employment Retirement Income Security Act of 1974, as amended. In addition to their other indemnification obligations set forth herein, the Major Shareholders shall jointly and severally indemnify Buyer and shall defend against and hold Buyer harmless from and against any and all claims and/or lawsuits relating to any such plan maintained by the Company and any successor liability or obligation in connection therewith. 4.25 Product Suppliers and Distributors, Schedule 4.25 sets forth the name, address and dollar volume for the year ended June 30, 1996 and the eleven-month period ended May 31, 1997 of all distributors and software publishers which sell products to the Company. Except as set forth in Schedule 4.25, no such product distributor or software supplier has ceased, or indicated any intention to cease, to do business with the Company. Except as disclosed in Schedule 4.25, there are no agreements with suppliers or any other person regarding the level of resale prices of any of the products in the Company's inventory or any products which the Company has agreed to buy from any supplier. 4.26 Brokers/Finders. Except for Cowen & Co., neither the Company, the Sellers nor any of the Company's directors, employees or agents has employed any broker, finder, investment banker or other person and none of the foregoing has incurred any liability for any brokerage fees, commissions or finders' fees in connection with the transactions contemplated hereby. The Major Shareholders and/or the Sellers (not the Company) will pay any fees due Cowen & Co. 4.27 Free Shop. The Company has completed the FSI Spin-off (as defined in Article 7 below) in accordance with all applicable laws and does not own any assets or capital stock of FSI (as defined in Article 7 below). Except as disclosed on Schedule 4.7, (a) the Company has no past, current or future liabilities or obligations of any nature in connection with FSI, (b) the Company has no current tax nexus exposure related to the continuation of any business or relationship in connection with the FSI business prior to the FSI Spin-off, and (c) all 13 Company employees who worked in the FreeShop business unit have either resigned or been terminated from the Company and the Company has no obligations or liabilities in connection with such employees. 4.28 Business Interests. Other than as set forth on Schedule 4.28, the Company has no subsidiaries and does not directly or indirectly own any capital stock of or other equity interest in any corporation, partnership, limited liability company or other entity, and the Company is not a member of or participant in any partnership, joint venture or similar entity. 4.29 Bulk Sales. The transactions contemplated and described by this agreement are not governed or affected by any bulk sales or similar laws of the State of Washington. 4.30 Sales Tax Nexus. Except for offices in the State of Washington and servers located in the Commonwealth of Virginia related to America On-Line sales, the Company has no physical presence in any other state and does not otherwise maintain a place of business or conduct business in any other state. 4.31 Continuation of Relationships. (deliberately omitted] 4.32 Cash and Investments. The Company's cash and short-term investments exceed Two Hundred Fifty Thousand Dollars ($250,000) (exclusive of any credit attributable to the Advance and any proceeds to the Company from the exercise since the date of the Letter of Intent of any outstanding options or warrants). 4.33 Indebtedness. The Company's indebtedness for borrowed money does not exceed Four Hundred Thousand Dollars ($400,000) (exclusive of any indebtedness attributable to the Advance). 4.34 Tangible Net Book Value. The Company's tangible net book value is not more negative than Negative One Million Five Hundred Thousand Dollars (($1,500,000)) (exclusive of (a) any credit attributable to the Advance, (b) any proceeds to the Company from the exercise since the date of the Letter of Intent of any outstanding options or warrants and (c) any accounting adjustments, under generally accepted accounting principles, related to the FSI Spin-off, the below-market pricing or repricing of certain stock options grants and the award of restricted stock to certain employees). 5. Representations, Warranties and Covenants of Buyer. Buyer hereby represents, warrants and covenants to the Company and the Sellers as of the date hereof and at the Closing as follows: 14 5.1 Existence. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Buyer has the corporate power to own and operate its properties and to carry on its business as it is now being conducted. 5.2 Corporate Power. Buyer has full corporate power and authority to execute and deliver this Agreement and such other agreements and instruments to be executed and delivered by it pursuant hereto, and to consummate the transactions contemplated hereby and thereby. All corporate acts and other proceedings required to be taken by or on the part of the Buyer to authorize it to execute, deliver and perform this Agreement and such other agreements, instruments and transactions contemplated hereby have been duly and properly taken. 5.3 Binding Obligation; Governmental Contents. This Agreement has been duly executed and delivered by Buyer and constitutes, and such other agreements and instruments when duly executed and delivered by Buyer will constitute, legal, valid and binding obligations of Buyer enforceable in accordance with their respective terms, subject, as to enforcement of remedies, to applicable bankruptcy, reorganization, insolvency, moratorium or other similar laws affecting the enforcement of creditors rights generally from time to time in effect, and subject to any equitable principles limiting the right to obtain specific performance of certain obligations of Buyer hereunder and thereunder. All consents of governmental and other regulatory authorities and of other parties required to be received by or on the part of Buyer to enable it to enter into and carry out this Agreement and the transactions contemplated hereby have been obtained. 5.4 Brokers/Finders. Except for The Robinson-Humphrey Company, Inc., neither the Buyer nor any of the Buyer's directors, employees or agents has employed any broker, finder, investment banker or other person and none of the foregoing has incurred any liability for any brokerage fees, commissions or finders' fees in connection with the transactions contemplated hereby. Buyer agrees to pay all fees due The Robinson-Humphrey Company, Inc. 5.5 Trident Settlement. Buyer shall immediately prior to Closing advance to the Company $0 to allow the Company to comply with its obligations under Paragraphs 1(a), 1(b) and 1(d) of that certain Investors Settlement Agreement dated July 18, 1997, by and among Information Associates, L.P., Information Associates, C.V., the Company and the Major Shareholders (such advance shall increase the amount of and become part of the Advance). 5.6 Other Stock Redemptions. Buyer shall immediately prior to Closing advance to the Company $0 to allow the Company to redeem shares of common stock at a price of $1.25 per share from certain of its shareholders, all as described in Schedule 5.6 attached hereto (such advance shall increase the amount of and become part of the Advance). [Schedule 5.6 to contain name, number of shares and aggregate price to be paid to the accepting $1.25 shareholders other than Information Associates, L.P. and Information Associates, C.V.]. l5 6. Indemnification. 6.1 Indemnification by Major Shareholders and Sellers. Without limiting any other indemnification set forth herein, the Major Shareholders hereby jointly and severally agree to indemnify and defend Buyer against and hold it harmless from any loss, liability, claim, damage or expense (including reasonable legal fees and expenses) suffered or incurred by Buyer to the extent arising from (a) any breach of any representation, warranty, covenant or non-fulfillment of obligations of the Major Shareholders and/or the Company contained in this Agreement or (b) any dispute between Major Shareholders and any of Sellers regarding distribution by Major Shareholders of the Base Purchase Price, the Earn-Out or any other amount to be paid by Buyer to Major Shareholders as agents for Sellers pursuant to this Agreement. The Major Shareholders hereby jointly and severally agree to indemnify Buyer against all liability for reasonable legal, accounting and other fees and expenses directly attributable to any such indemnification. In addition, the Sellers have severally agreed in the Stock Power Agreements to indemnify and defend Buyer against and hold it harmless from any loss, liability, claim, damage or expense, including reasonable attorneys fees and expenses, suffered or incurred by Buyer to the extent arising from a breach of any representation made in the Stock Power Agreements. The maximum aggregate liability of the Major Shareholders and the Other Shareholders for indemnification hereunder and under all causes of action, theories of liability, claims and damages arising out of or in connection with all transactions contemplated by this Agreement, the Stock Power Agreement and all other agreements entered into in connection herewith (exclusive of employment agreements), excluding (i) all Tax claims related to Paragraph 4.15 of this Agreement, (ii) all claims involving title to the Shares related to Paragraphs 4.4, 4.5 and 4.6 of this Agreement, (iii) all claims arising out of the FSI Spin-off and (iv) all claims arising out of any disputes between Major Shareholders and any of the Other Shareholders regarding distribution by Major Shareholders of the Base Purchase Price, the Earn-Out or any other amount to be paid by Buyer to Major Shareholders as agents for Sellers pursuant to this Agreement (as to all of which exclusions (i), (ii), (iii) and (iv) there shall be no limitation of liability of the Major Shareholders) and (v) all claims involving title to the Shares related to any Stock Power Agreement (as to which there shall be no limitation of liability of the respective Other Shareholder), made by Buyer against the Major Shareholders or any other party to this Agreement shall not exceed Three Million Dollars ($3,000,000). 6.2 Indemnification by Buyer. Buyer shall indemnify and defend the Major Shareholders against, and hold them harmless from, any loss, liability, claim, damage or expense (including reasonable legal fees and expenses) suffered or incurred by the Major Shareholders to the extent arising from any breach of any representation, warranty, covenant or non-fulfillment of obligations of Buyer contained in this Agreement or arising from the conduct of the business after the Closing. The aggregate total for claims arising under this Paragraph 6.2 or otherwise arising out of this Agreement, excluding claims related to non-payment of the Base Purchase Price, the Earn-Out or any other amount to be paid pursuant to this Agreement (for which there shall be no limitation of liability), made by the Major Shareholders or Other Shareholders against the Buyer shall not exceed Three Million Dollars ($3,000,000). 16 6.3 Procedures Relating to Indemnification. (a) In order for a party (the "Indemnified Party") to be entitled to any indemnification provided for under Paragraph 6.1 or 6.2 of this Agreement in respect of, arising out of, or involving a Claim (as hereinafter defined) or demand made by any person, firm, governmental authority or corporation against the Indemnified Party (a "Claim" or a "Third Party Claim"), such Indemnified Party shall notify the indemnifying party as soon as practicable following receipt of written notice of said Third Party Claim; provided, however, that the failure to give or delay in giving such notification shall not affect the indemnification provided hereunder except to the extent the indemnifying party shall have been actually prejudiced as a result of such failure or delay. Thereafter, the Indemnified Party shall deliver to the indemnifying party, as soon as practicable following the Indemnified Party's receipt thereof, copies of all notices and documents (including court papers) received by the Indemnified Party relating to the Third Party Claim. In providing notice to the indemnifying party, the Indemnified party acknowledges its responsibility to provide said notice as promptly as possible in order that the indemnifying party shall be able to engage counsel and to submit appropriate answers to any Third Party Claim within the time period required by law. Notice with respect to any claims must be made by the dates specified in Paragraph 7 of this Agreement. (b) If a Third Party Claim is made against an Indemnified Party, the indemnifying party shall assume the defense thereof with counsel selected by the indemnifying party and reasonably acceptable to the Indemnified Party. The Indemnified Party may participate in the defense of such Third Party Claim; provided, however, the indemnifying party will not be liable to the Indemnified Party for legal expenses incurred by the Indemnified Party in connection with such defense subsequent to the assumption thereof by the indemnifying party. The indemnifying party shall be liable for the reasonable fees and expenses of counsel employed by the Indemnified Party for any period during which the indemnifying party has not assumed the defense thereof. All of the parties hereto shall cooperate in the defense or prosecution of any Third Party Claim. Such cooperation shall include the retention and (upon the indemnifying party's written request) the provision to the indemnifying party of records and information which are reasonably relevant to such Third Party Claim, and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. The Indemnified Party shall not admit any liability with respect to, or settle, compromise or discharge, such Third Party Claim without the indemnifying party's prior written consent. 7. Duration and Qualification of Representations. The representations, warranties, covenants and indemnities in this Agreement and in any other document delivered in connection herewith (other than those with respect to Taxes which shall continue until the later of (i) the expiration date of any applicable statute of limitations, and (ii) the final resolution of any action commenced in connection with Taxes) shall survive the Closing and shall terminate on the later of (i) the close of business on July 18, 1999, and (ii) the final resolution of any claim made before the close of business on July 18, 1999. Buyer understands and acknowledges that 17 on June 30, 1997, the Company transferred the assets and liabilities of its FreeShop business unit to a wholly-owned subsidiary FreeShop International, Inc. ("FSI") and immediately thereafter effected a taxable distribution of the shares of capital stock of FSI to the Company's shareholders (such actions being collectively the "FSI Spin-off"). 8. Confidential Information. Each party agrees, during and after this Agreement, to maintain as confidential all information which is delivered to it by the other and agrees further not to disclose the same to any third party whatsoever or use any such information for any purpose except in connection with the implementation of the undertakings of the parties described herein, provided, however, that the Buyer may be required to release information concerning the transactions contemplated hereby in furtherance of its responsibilities as a publicly traded company. Additionally, the Mutual Non-Disclosure Agreement dated March 21, 1997 between the Company and Buyer is hereby incorporated into this Agreement and made a part hereof. The Major Shareholders hereby make the identical representations as to those made by the Company in such Mutual Non-Disclosure Agreement. 9. Closing. The Closing of the transactions contemplated hereby shall take place upon the signing of this Agreement by the respective parties hereto. 10. Closing Deliverables. At Closing: (a) The Major Shareholders shall deliver to the Buyer their respective Certificates and stock powers, and the Other Shareholders shall deliver to the Buyer their respective Certificates and Stock Power Agreements. (b) The Company shall furnish to Buyer, in form and substance satisfactory to Buyer, an absolute release or waiver of security interest from all persons and entities maintaining a security interest in any of the assets of the Company's business, other than the Permitted Liens. (c) The Company shall deliver to Buyer exclusive possession and control of the Company's offices located at 2815 Second Avenue, Suite 500, Seattle, Washington, together with all assets and property of the Company, real or personal, tangible or intangible, wheresoever located in the world, including but not limited to all business equipment and machinery and all corporate, business and financial records, flies and other documentation. The Company shall also deliver to Buyer a certificate of an officer of the Company making such statements as are reasonably requested by Buyer or its counsel and are customary in connection with the closing of a stock acquisition. (d) The Company and the Sellers shall execute and deliver to Buyer an Escrow Agreement in the form of Exhibit B attached hereto. (e) The Buyer shall receive (i) employment agreements, all in forms satisfactory to Buyer and its counsel, from those individuals listed on Schedule 10(e), (ii) the 18 written resignations of all officers and directors of the Company and (iii) waivers or consents from those individuals or entities listed on Schedule 10(e)(iii). (f) The counterparty to each equipment lease and/or other contract of the Company shall have executed and delivered a consent to the transfer of the Shares to the Buyer, where such is required. (g) The Buyer shall receive from the Company and the Major Shareholders a legal opinion of their counsel in form and substance reasonably satisfactory to Buyer and its counsel. (h) The Company shall furnish to Buyer a certificate of existence as a corporation in the State of Washington, dated as of the most recent practicable date. (i) Buyer shall pay the Base Purchase Price as specified herein. (j) Buyer shall execute and deliver to the Sellers an Escrow Agreement in the form of Exhibit B attached hereto. (k) Buyer shall furnish the Company and the Sellers with a legal opinion of its counsel in form and substance reasonably satisfactory to the Company, the Major Shareholders and their counsel. 11. Miscellaneous Provisions. 11.1 Further Assurances. Each party hereto agrees to execute and deliver such other documents, agreements or instruments and take such further action as may be reasonably requested by any other party hereto for the implementation of this Agreement and the consummation of the transactions contemplated hereby. 11.2 Notices. Any notices required or permitted hereunder shall be sufficiently given if in writing and personally delivered, by telecopy and confirmed by telephone, or by nationally recognized overnight courier, addressed as follows or to such other address as the parties shall have given notice of pursuant hereto: (a) If to the Major Shareholders (either collectively or individually); Tim Choate ESR Division of Micro Warehouse, Inc. 2815 2nd Avenue, Suite 500 Seattle, Washington 98121 Telephone (206) 443-1933 Facsimile (206) 443-1885 19 and John Ballantine ESR Division of Micro Warehouse, Inc. 2815 2nd Avenue, Suite 500 Seattle, Washington 98121 Telephone (206) 443-1933 Facsimile (206) 443-1885 with a copy to: Bogle & Gates P.L.L.C. Two Union Square 601 Union Street Seattle, Washington 98101 Attention: Bryce Holland, Esq. Telephone (206) 682-5151 Facsimile (206) 621-2666 (b) If to Sellers, as specified in the Stock Power Agreement executed by each Seller (c) If to Buyer: Micro Warehouse, Inc. 535 Connecticut Avenue Norwalk, CT 06854 Attention: Linwood A. Lacy, Jr. President and Chief Executive Officer Telephone (203) 899-4301 Facsimile (203) 853-4400 with a copy to: Bruce L. Lev, Esquire, Vice President and General Counsel Telephone (203) 899-4529 Facsimile (203) 853-4312 Provided the Buyer has used its best efforts to give notice to both Major Shareholders, notice to either Major Shareholder shall be considered notice to both Major Shareholders. All such notices shall be effective upon the earlier of receipt or, in the case of registered mail, seven (7) days after depositing in the mail, postage prepaid, return receipt requested and addressed as shown above. 20 11.3 Entire Agreement. This Agreement (including the Schedules and Exhibits hereto) represents the entire understanding and agreement between the parties with respect to the subject matter hereof and can be amended, supplemented or changed, and any provision hereof can be waived, only by written instrument making specific reference to this Agreement signed by the parties hereto. This Agreement supersedes all prior agreements and arrangements between the parties hereto and their affiliates. 11.4 Successors and Assigns; Benefits. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and, except as otherwise provided below, their respective successors and assigns. Nothing contained in this Agreement or in any of the Schedules or Exhibits hereto is intended to create any rights in any person or entity that is not a party to this Agreement (or does not become a party hereto by execution of a Stock Power Agreement) and no person or entity shall be deemed to be a third party beneficiary hereof or thereof. 11.5 Section Headings. The section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 11.6 Applicable Law. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Connecticut, without regard to the principles thereof relating to conflicts of law. 11.7 Expenses. Except as otherwise provided herein, the parties hereto shall pay their own respective fees and expenses, including without limitation, attorneys' and accountants' fees. 11.8 Severability. If any provision of this Agreement shall be held by any court of competent jurisdiction to be illegal, void or unenforceable, such provision shall be of no force and effect, but the illegality or unenforceability of such provision shall have no effect upon and shall not impair the enforceability of any other provision of this Agreement. 11.9 Publicity. Except as required by law or as part of Buyer's responsibilities as a publicly traded corporation, none of the parties hereto shall issue any press release or make any other public statement or announcement relating to, connected with or arising out of this Agreement or the matters contained herein, without obtaining the prior written approval of the other parties hereto to the contents and the manner of presentation and publication thereof. 11.10 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. This Agreement may be executed by telecopied signatures with the same effect as original signatures. 21 11.11 Schedules and Exhibits. All Schedules and Exhibits referenced herein are incorporated herein by reference and shall be initialed by both panics in order to be deemed an integral pan of this Agreement. The contents of such Schedules and Exhibits are deemed to be disclosures to Buyer by the Company and the Major Shareholders. In the event that any Schedule or Exhibit provided for herein is incomplete or has not been prepared by the Company or the Major Shareholders and attached hereto as of the execution and delivery of this Agreement, it shall be a condition precedent to Closing that such Schedule or Exhibit shall be in form and substance reasonably satisfactory to Buyer. MICRO WAREHOUSE, INC. ONLINE INTERACTIVE, INC. By: /s/ Linwood A. Lacy By: Tim Choate --------------------------- ----------------------------- Vice President and Its: Chief Executive Officer Its: Chairman /s/ Tim Choate --------------------------------- Tim Choate, Individually /s/ John Ballantine --------------------------------- John Ballantine, Individually 22 Exhibit C Earn-Out Payment (a) The amount of the Earn-Out Payment will be determined with reference to achievement by Buyer's Electronic Software Reselling Division (the "ESR Division," which is to be the operating identity of the Company after Closing) of certain operating performance targets for calendar year 1998 as specified in this Exhibit C. All undertakings, obligations, measurements and calculations herein are with reference to calendar year 1998, and all capitalized terms used but not otherwise defined herein have the same meanings given to them in the Stock Purchase Agreement. On or about November 1, 1997, Buyer and the Major Shareholders shall commence good faith discussions of any modifications to this Exhibit C which either believes are appropriate and, to the extent mutually agreeable, shall document such changes by December 15, 1997. No change shall be made to this Exhibit C without the prior written approval of Buyer and the Major Shareholders. If at any time after June 1998 it is mutually agreed by the management of Buyer and the Major Shareholders that the Divisional Pre-Tax Income or Loss (as defined below) for the previous six (6) month period is substantially below projections, Buyer shall have the right to exercise prudent business judgment to reduce the ESR Division's operating and cash losses. The parties acknowledge that any limitations on accounting actions by Buyer (including, but not limited to, charges and adjustments) described in this Exhibit C are meant solely to apply to calculation of the Earn-Out Payment, and nothing herein shall limit Buyer's right to make all necessary accounting decisions and adjustments in the best interests of Buyer for purposes other than this Earn-Out Payment. (b) Subject to adjustment in accordance with the other terms of this Exhibit C, the amount of the Earn-Out Payment shall be calculated as follows: (i) if Net Sales (as defined below) are less than $16.00 million, the Earn-Out Payment shall be zero; (ii) if Net Sales are at least $16.00 million but less than $29.56 million, the Earn-Out Payment shall be $4.00 million multiplied by a fraction the numerator of which is the amount of Net Sales in excess of $16.00 million and the denominator of which is $13.56 million; (iii) if Net Sales are at least $29.56 million but less than $35.00 million, the Earn-Out Payment shall be $4.00 million plus an additional amount equal to $2.00 million multiplied by a fraction the numerator of which is the amount of Net Sales in excess of $29.56 million and the denominator of which is $5.44 million; and (iv) if Net Sales equal or exceed $35.00 million, the Earn-Out Payment shall be $6.00 million. 23 For purposes hereof, "Net Sales" means gross sales, including advertising revenues, but excluding advertising revenues, rebates or the like associated wit the ESR Division's product sales such that they effectively decrease cost of goods sold or reduce marketing costs or expenses (hereinafter "Co-op Ad Revenues"), from all sources related to electronic software reselling ("ESR"), including all international electronic software sales via United States-based web sites or via America Online or other commercial online services, but net of returns, and net of fraud and charge-backs to the extent that under such circumstances the Company is relieved from payment to the software publisher for the affected product. (c) The amount of the Earn-Out Payment calculated in paragraph (b) above shall be adjusted with reference to Divisional Pre-Tax Income or Loss. For purposes hereof, "Divisional Pre-Tax Income or Loss" means Net Sales, minus (i) all direct expenses of the ESR Division, as adjusted by Co-op Ad Revenues and (ii) all direct divisional expenses of the ESR Division. The amount of the adjustment to the Earn-Out Payment shall be calculated as follows: (i) if Divisional Pre-Tax Income or Loss is exactly a loss of $850,000, there shall be no adjustment in accordance with this paragraph (c); (ii) if Divisional Pre-Tax Income or Loss is greater than a loss of $850,000 (i.e., if the amount of the loss exceeds $850,000), the Earn-Out Payment shall be reduced dollar-for-dollar by the amount of the additional loss (for example, if the actual Pre-Tax Loss is $1,000,000, the Earn-Out Payment shall be reduced by $150,000); and (iii) if Divisional Pre-Tax Income or Loss is less than a loss of $850,000 (i.e., if the amount of the loss is less than $850,000) and Net Sales are at least $16.00 million, the Earn-Out Payment shall be increased by 37.5% of the amount of the reduced loss (for example, if the actual Pre-Tax Loss is $750,000 and Net Sales exceed $16.00 million, then the Earn-Out Payment shall be increased by $37,500). (d) Notwithstanding the other terms of this Exhibit C, if at any time after the Closing and prior to the end of calendar year 1998 (i) Chip Lacy for any reason other than death or physical incapacity ceases to be the President and Chief Executive Officer of Buyer, then $2.00 million of the Earn-Out Payment shall be paid immediately without concern for achievement of operating performance targets for calendar year 1998 and references to $4.00 million and $2.00 million in paragraph (b) above shall be deemed to be references to $2.00 million and $2.00 million, respectively, and/or (ii) Buyer or its ESR business is acquired through merger, consolidation, acquisition of property or stock, reorganization or transaction involving a change in control of Buyer, then all $6.00 million of the Earn-Out Payment shall be paid immediately without concern for achievement of operating performance targets for calendar year 1998. Provided, however, this paragraph (d) shall be null and void if Chip Lacy ceases to be President and Chief Executive Officer of Buyer after October 1, 1998, and the results of the ESR Division at the date of his departure clearly indicate that Net Sales of $16.00 million will not be achieved. 24 (e) If at any time after the Closing and prior to the end of calendar year 1998 Buyer or any of its affiliates acquires another business principally engaged in electronic software reselling ("ESR"), then upon request of the Major Shareholders, Buyer will in good faith renegotiate the terms of the Earn-Out Payment. (f) Buyer acknowledges and agrees to the following additional points, all of which are material to the ESR Division's ability to achieve the Earn-Out Payment: (i) There will be no Micro Warehouse, Inc. general and administrative corporate inter-company charges related to the ESR Division (including amortization of acquisition cost/goodwill and the costs of any audits of the ESR Division) applied from Buyer. However, there will be ordinary operating charges to the ESR Division for direct costs including, but not limited to, charges for payroll, post-closing legal and accounting expenses, credit card expenses, etc. Such charges will be reasonably determined and mutually agreed upon by Buyer and the Major shareholders. (ii) Except in such cases in which Buyer reasonably determines that integration would be inappropriate, Buyer will integrate ESR into all of Buyer's marketing efforts and sales strategies which involve the sale of software, including but not limited to catalogs, web sites, print advertising, and other efforts as described below, beginning as soon as possible after execution of this Agreement and without charge to ESR except as specifically noted below. It is acknowledged that in certain situations Buyer will be required to obtain consents from third parties (including, but not limited to, various manufacturers and publishers) in connection with the integration described above, and Buyer agrees to use reasonable efforts to obtain such consents. Buyer's efforts shall include the following: (A) Prominent promotion on all pages offering software in all catalogs, wit cross-sell messages where the same software is available for download similar to "Download this product now for faster delivery and free shipping!," except in cases where it is mutually agreed that such cross-sell message would be economically impractical because the cost of delivery via ESR is greater than the cost of mail order delivery and except in cases in which Buyer reasonably determines that such promotion would be inappropriate. (B) Inclusion of a full page in the front half of every catalog mailed by Buyer where more than 5% of the pages of such catalog include promotion of software (it is specifically agreed that the Micro Warehouse, MacWarehouse, DTP Warehouse, and Developers Warehouse catalogs meet this criteria), or in the back half of the catalog in the case of the DataComm catalog and any other catalog in which the management of the ESR Division concludes that placement in the back half of the catalog would be more beneficial to the ESR Division. (C) A less prominent link on the front cover, the back cover and the two page presentation located within the catalog containing order and contents information and reasonable efforts to place a less prominent link in every graphical element in a catalog in which 25 a telemarketer photograph appears in conjunction with inbound phone numbers and related telemarketing information. (D) Reasonable efforts to prominently promote ESR with an electronic link, where practical, on every introductory page and every page that includes software products of all web sites owned by Buyer, with cross-sell messages similar to the above connected to products which are also available via ESR, excluding Auction Warehouse sites, dedicated vendor sites, and other specific sites where ESR promotion would be inappropriate. (E) Appropriate ESR promotion in all of Buyer's print advertising. Print advertising for USA Flex and InMac brands shall be excluded unless and until the ESR Division creates sites using those brands to limit customer confusion. (F) Promotion on the catalog order form and front and back covers of every catalog, except for USA Flex and InMac branded catalogs unless and until the ESR Division creates sites using those brands to limit customer confusion. (G) Prominent promotion on the cover of at least seventy-five percent (75%) of all MacWarehouse and MicroWarehouse branded catalogs for January, February, and March of 1998 for the ESR tax products promotion, except that MacWarehouse catalogs shall be excluded if it is reasonably mutually determined that tax products do not represent a sufficient sales opportunity for MacWarehouse customers. (H) Inserts in all packages shipped wherever practical up to a maximum annual printing and production cost net of advertising revenue of $100,000, without charge to the ESR Division for printing and production or for inserting. If the costs of printing and production net of advertising revenue exceed $100,000 for calendar year 1998, then such additional costs above $100,000 will be charged to the ESR Division in calculating the Pre-Tax Income or Loss. (I) When appropriate, prominent promotion in all broadcast emails sent by Buyer to customers on Buyer's customer lists and any other multi-offer emails sent by Buyer to customers on Buyer's customer lists. (J) Full cooperation of Buyer's corporate and government sales forces. (iii) There will be no internal charge for use by the ESR Division of any of Buyer's databases. In addition to other efforts described above, the ESR Division may mail via traditional mail or electronic mail each customer in the Buyer's database up to four times per year with specific offers and promotions. (iv) Additional funds/people for international or other initiatives can be allocated to the ESR Division by Buyer, but there will be no negative impact on Earn-Out Payment calculations; 26 (v) No interest costs or interest income is to be included in the calculation of the Earn-Out Payment; (vi) No expenses from ESR restricted stock grants and option grants are to be taken into account in calculating the Earn-Out Payment; (vii) The lesser of (x) 50% of management bonuses and (y) $200,000 are to be taken into account in calculating the Earn-Out Payment; (viii) ESR operations for the balance of 1997 will be run off the final projections underlying negotiation of the Earn-Out Payment; (ix) Buyer will fund all reasonable ESR Division cash needs in accordance with the cash projections of the ESR Division and the cash projections to be agreed upon in the 1998 budget. At a minimum, cash needed to fund the ESR Division's expenses as projected for the Earn-Out Payment will be provided; and (x) To avoid conflict with Buyer's other operating groups and divisions, regardless of Buyer's standard internal accounting practices both the ESR Division and Buyer's other groups or divisions will get credit for Earn-Out Payment and other compensation program calculations for any ESR-related revenue produced by such other group or division. (g) Buyer and the Major Shareholders acknowledge that; (a) the creative responsibility for material, content and actions in connection with non-ESR Division products and Auction Warehouse products shall repose with Micro Warehouse, Inc.'s Norwalk home office; and (b) the creative responsibility for presentation ("look and feel") for all broadcast and one-to-one mailings including those of the ESR Division shall repose with Micro Warehouse, Inc.'s Norwalk home office. 27 EX-11 4 COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 MICRO WAREHOUSE, INC. STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA) (unaudited)
Primary Primary Three months ended Six months ended June 30, June 30, June 30, June 30, 1997 1996 1997 1996 ------- ------- ------- -------- Net income (loss) Income (loss) before extraordinary charge $ 7,821 $ 5,410 $15,632 $ 309 Extraordinary charge, net of taxes -- -- -- (1584) ------- ------- ------- -------- Net income (loss) $ 7,821 $ 5,410 $15,632 $ (1,275) ======= ======= ======= ======== Shares Weighted average common shares outstanding 34,432 34,175 34,378 34,085 Common equivalent shares 300 526 185 -- ------- ------- ------- -------- Weighted average common shares and common stock equivalent shares outstanding 34,732 34,701 34,563 34,085 ======= ======= ======= ======== Per share Income (loss) before extraordinary charge $ 0.23 $ 0.16 $ 0.45 $ 0.01 Extraordinary charge, net of taxes -- -- -- (0.05) ------- ------- ------- -------- Net income (loss) $ 0.23 $ 0.16 $ 0.45 ($ 0.04) ======= ======= ======= ========
Fully diluted Fully diluted Three months ended Six months ended June 30, June 30, June 30, June 30, 1997 1996 1997 1996 ------- ------- ------- -------- Net income (loss) Income (loss) before extraordinary charge $ 7,821 $ 5,410 $15,632 $ 309 Extraordinary charge, net of taxes -- -- -- (1584) ------- ------- ------- -------- Net income (loss) $ 7,821 $ 5,410 $15,632 $ (1,275) ======= ======= ======= ======== Shares Weighted average common shares outstanding 34,432 34,175 34,378 34,085 Common equivalent shares 369 526 231 -- ------- ------- ------- -------- Weighted average common shares and common stock equivalent shares outstanding 34,801 34,701 34,609 34,085 ======= ======= ======= ======== Per share Income (loss) before extraordinary charge $ 0.23 $ 0.16 $ 0.45 $ 0.01 Extraordinary charge, net of taxes -- -- -- (0.05) ------- ------- ------- -------- Net income (loss) $ 0.23 $ 0.16 $ 0.45 ($ 0.04) ======= ======= ======= ========
EX-27 5 FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1997 JUN-30-1997 94,750 20,415 186,813 11,915 141,434 486,311 29,939 (43,791) 606,176 211,390 604 0 0 344 394,188 606,176 1,029,922 1,029,922 858,546 1,005,742 0 3,229 1,008 26,752 11,120 15,632 0 0 0 15,632 0.45 0.45
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