-----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, LtMcXhU5sCs3A9F7q2T/NoKPAHymGpmvOVBznoDMdZG0iHK5p2NGHDs1gjhVt07L zUUUPkofEhQxxoyhyiYgng== 0001005477-98-003258.txt : 19981118 0001005477-98-003258.hdr.sgml : 19981118 ACCESSION NUMBER: 0001005477-98-003258 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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: SEC FILE NUMBER: 000-20730 FILM NUMBER: 98752147 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: September 30, 1998 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 incorporation or organization) Identification Number) 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 September 30, 1998: 34,921,027 MICRO WAREHOUSE, INC. INDEX Page PART I - FINANCIAL INFORMATION Item 1 - Financial Statements (unaudited) Consolidated Balance Sheets ............................................. 3 Consolidated Statements of Operations ................................... 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................................................. 17 SIGNATURE .................................................................. 19 INDEX TO EXHIBITS .......................................................... 20 EXHIBIT 10 ................................................................. 21 EXHIBIT 11.................................................................. 47 EXHIBIT 27.................................................................. 48 2 Part I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS (unaudited) MICRO WAREHOUSE, INC. CONSOLIDATED BALANCE SHEETS (in thousands)
September 30, December 31, 1998 1997 ---- ---- ASSETS (unaudited) (audited) Current assets: Cash and cash equivalents $ 154,977 $ 58,051 Marketable securities at market value 21,469 20,817 Accounts receivable, net of allowance for doubtful accounts ($9,335 and $13,399 at September 30, 1998 and December 31, 1997, respectively) 219,776 217,475 Inventories 114,003 170,543 Prepaid expenses and other current assets 12,385 11,763 Tax refunds 16,389 23,452 Deferred taxes 18,065 30,903 --------- --------- Total current assets 557,064 533,004 --------- --------- Property, plant and equipment, net 32,590 32,416 Goodwill, net 45,495 45,744 Non-current deferred taxes 3,992 5,850 Other assets 1,778 2,330 --------- --------- Total assets $ 640,919 $ 619,344 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 203,728 $ 168,886 Accrued expenses 54,467 66,563 Accrued litigation settlements -- 16,100 Deferred revenue 8,090 5,944 Loans payable, bank -- 12,570 Obligations under capitalized leases 123 492 --------- --------- Total liabilities 266,408 270,555 Stockholders' equity: Preferred stock, $.01 par value: Authorized - 100 shares; none issued -- -- Series A Junior Participating Preferred Stock, $.01 par value: Authorized - 45 shares; none issued -- -- Common stock, $.01 par value: Authorized - 100,000 shares; issued and outstanding; 34,921 and 34,639 Shares at September 30, 1998 and December 31, 1997, respectively 349 346 Additional paid-in capital 288,485 282,865 Deferred compensation (3,585) (4,413) Retained earnings 96,975 80,390 Cumulative translation adjustment (7,724) (10,403) Valuation adjustment for marketable securities 11 4 --------- --------- Total stockholders' equity 374,511 348,789 --------- --------- Total liabilities and stockholders' equity $ 640,919 $ 619,344 ========= =========
See accompanying notes to unaudited consolidated financial statements. 3 MICRO WAREHOUSE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the three and nine months ended September 30, 1998 and 1997 (in thousands, except per share data) (unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 ---- ---- ---- ---- Net sales $ 551,789 $ 522,072 $1,624,982 $1,551,994 Cost of goods sold 462,051 435,615 1,362,653 1,294,161 ---------- ---------- ---------- ---------- Gross profit 89,738 86,457 262,329 257,833 Selling, general and administrative expenses 72,648 77,844 214,673 225,040 ---------- ---------- ---------- ---------- Income from operations before interest, litigation provision and income taxes 17,090 8,613 47,656 32,793 Interest income, net 2,681 1,439 6,402 4,011 Provision for settlements of shareholder and derivative litigation -- 20,700 14,000 20,700 ---------- ---------- ---------- ---------- Income (loss) before income taxes 19,771 (10,648) 40,058 16,104 Income tax provision (benefit) 7,908 (3,530) 23,473 7,590 ---------- ---------- ---------- ---------- Net income (loss) $ 11,863 $ (7,118) $ 16,585 $ 8,514 ========== ========== ========== ========== Basic net income (loss) per share $ 0.34 $ (0.21) $ 0.48 $ 0.25 ========== ========== ========== ========== Diluted net income (loss) per share $ 0.33 $ (0.21) $ 0.47 $ 0.24 ========== ========== ========== ========== Shares used in per share calculation - Basic 34,816 34,550 34,695 34,432 ========== ========== ========== ========== Diluted 35,591 34,550 35,081 34,759 ========== ========== ========== ==========
See accompanying notes to unaudited consolidated financial statements. 4 MICRO WAREHOUSE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine months ended September 30, 1998 and 1997 (in thousands) (unaudited)
1998 1997 ---- ---- Cash flows from operating activities: Net income $ 16,585 $ 8,514 --------- --------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,043 12,062 Non-cash litigation settlement 6,000 -- Non-cash compensation 828 1,382 Deferred taxes 14,696 (6,032) Changes in assets and liabilities: Accounts receivable, net (4,447) (6,458) Inventories 54,901 40,338 Prepaid expenses and other current assets 10,291 (2,578) Other assets 97 72 Accounts payable 36,390 31,286 Accrued expenses (4,642) 2,522 Accrued litigation settlements (20,700) 20,700 Deferred revenue 2,186 936 Other 63 (3,214) --------- --------- Total adjustments 105,706 91,016 --------- --------- Net cash provided by operating activities 122,291 99,530 --------- --------- Cash flows from investing activities: Purchases of marketable securities, net (645) (752) Purchases or adjustments to acquisitions of businesses, represented by: Goodwill -- (18,642) Other net assets -- 654 Acquisition of property, plant and equipment (12,636) (11,659) --------- --------- Net cash used by investing activities (13,281) (30,399) --------- --------- Cash flows from financing activities: Net proceeds from issuance of common stock 4,300 3,228 Repurchase of common stock (4,677) -- Repayments under lines of credit, net (12,584) (37,473) Principal payments of obligations under capital leases (368) (87) --------- --------- Net cash used by financing activities (13,329) (34,332) --------- --------- Effect of exchange rate changes on cash 1,245 (1,821) --------- --------- Net change in cash 96,926 32,978 Cash and cash equivalents: Beginning of period 58,051 32,234 --------- --------- End of period $ 154,977 $ 65,212 ========= =========
See accompanying notes to unaudited consolidated financial statements. 5 MICRO WAREHOUSE, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except per 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 on Form 10-K for the fiscal year ended December 31, 1997. 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 September 30, 1998 and the results of operations for the three and nine months ended September 30, 1998 and 1997. Certain reclassifications have been made to conform the prior year to the 1998 presentation. 2. RESTRUCTURING On December 11, 1997 the Company announced a restructuring of its operations (the "Restructuring"). The objectives of the Restructuring were to simplify the business worldwide, reduce the cost structure, increase productivity of the sales force and eliminate certain non-core businesses operating at a loss. The Restructuring involved the closing of the Company's businesses in Australia and Japan, the sale of its operations in Norway, Denmark and Finland and the write-off of the goodwill of its German subsidiary. In addition, the Company closed its European headquarters in the United Kingdom, reducing certain functions and transferring others to the United Kingdom operation, other European business units and the United States. In the United States, the Company consolidated its USA Flex business from its facility in Bloomingdale, Illinois to existing facilities in New Jersey and Connecticut and wrote off the goodwill associated with this business. The Company also closed its Online Interactive, Inc. subsidiary in Seattle, Washington and wrote off the related goodwill. In addition, the Company reorganized its domestic sales force. In connection with the Restructuring, approximately 600 positions were eliminated. As a result of the Restructuring, the Company recorded a pre-tax charge of $67,828 in the fourth quarter of 1997. The charge comprised goodwill write-offs of $41,907, severance costs of $10,314 and $15,607 of other costs including lease terminations, moving costs and asset write-downs. These activities were substantially completed in the first quarter of 1998. Actual charges of approximately $57 million were incurred through September 30, 1998. 3. NEW ACCOUNTING STANDARDS In June 1997 the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components. The 6 adoption of SFAS No. 130 requires unrealized gains or losses on the Company's available-for-sale securities and foreign currency translation adjustments be included in the presentation of comprehensive income. The Company adopted SFAS No. 130 effective January 1, 1998. The components of comprehensive income (loss), net of related tax, for the three and nine month periods ended September 30, 1998 and 1997 are as follows: Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 -------- -------- -------- -------- Net income (loss) $ 11,863 $ (7,118) $ 16,585 $ 8,514 Unrealized gains (losses) on marketable securities -- (14) 7 (114) Foreign currency translation adjustments 3,439 (3,655) 2,679 (10,369) -------- -------- -------- -------- Comprehensive income (loss) $ 15,302 $(10,787) $ 19,271 $ (1,969) ======== ======== ======== ======== The components of accumulated other comprehensive income, net of related tax, at September 30, 1998 and December 31, 1997 are as follows: September 30, December 31, 1998 1997 ----------------- ---------------- Unrealized gains on marketable securities $ 11 $ 4 Foreign currency translation adjustments (7,724) (10,403) -------- -------- Accumulated other comprehensive income $ (7,713) $(10,399) ======== ======== Also in June 1997 the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS No. 131 establishes standards for the manner in which public companies report information about operating segments in annual and interim financial statements. The Company will implement SFAS No. 131 in its year end 1998 financial statements. 4. LEGAL PROCEEDINGS A pre-tax charge of $14,000 was recorded in the second quarter of 1998 for the settlement of the lawsuit brought by holders of approximately 1,300 shares of the Company's common stock which arose out of the stock merger between the Company and Inmac Corp. relating to the facts underlying the Company's announcements in September and October, 1996 that it intended to restate certain prior financial statements covering the 1992 through 1995 fiscal years (the "Restatement"). This settlement, consummated on July 30, 1998, provided for a total payment of $19,000, $6,000 of which was in the form of freely tradeable common stock. The pre-tax charge was based on the total amount of the settlement ($19,000), net of a $5,000 contribution from a non-affiliated source. On an after-tax basis, the charge recorded was $15,849. In addition, the Company reached a settlement with the State Board of Administration of Florida covering approximately 51 shares. The Company has made a $150 settlement payment to the State Board of 7 Administration which had earlier elected not to participate in the $30,000 settlement of the consolidated securities class action lawsuit approved by the U.S. District Court on June 2, 1998. These settlements exclude the ongoing SEC formal investigation into the events underlying the Restatement. The Company is cooperating with the SEC in its investigation. 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, space advertising in computer publications, Internet catalog and auction web sites on the worldwide web and 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, 3Com, Compaq, Epson, Hewlett Packard, IBM, Iomega, Microsoft and Toshiba. Through its four core catalogs, Micro Warehouse, Mac Warehouse, Data Comm Warehouse and Inmac, various specialty catalogs, space advertising and its Internet sites, the Company offers a broad assortment of 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. The Company currently publishes catalogs in seven countries outside the United States, specifically Canada, France, Germany, Mexico, the Netherlands, Sweden and the United Kingdom. The international operations represented approximately 28% of the Company's sales in the nine month period ended September 30, 1998. In December 1997 the Company announced a major restructuring of its operations including the sale or disposal of Macintosh-dependent operations in Australia, Denmark, Finland, Japan and Norway. RESULTS OF OPERATIONS The table below sets forth certain items expressed as a percent of net sales for each of the three and nine month periods ended September 30, 1998 and 1997:
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 ---- ---- ---- ---- Net sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold 83.7 83.4 83.9 83.4 ------- ------ ------ ------ Gross profit 16.3 16.6 16.1 16.6 Selling, general and administrative expenses 13.2 14.9 13.2 14.5 Litigation settlement -- 4.0 0.8 1.3 ------- ------ ------ ------ Income from operations before interest and income taxes 3.1 (2.3) 2.1 0.8 Interest income, net 0.5 0.3 0.4 0.2 ------- ------ ------ ------ Income before income taxes 3.6% (2.0%) 2.5% 1.0%
Three Months Ended September 30, 1998 Compared to Three Months Ended September 30, 1997 Net sales increased $29.7 million or 5.7% to $551.8 million for the three months ended September 30, 1998, compared to $522.1 million for the same period last year. This increase in net sales was primarily attributable to continued growth in the IBM PC-compatible ("Wintel") business which increased approximately 17%. 9 Worldwide Macintosh-related ("Mac") sales declined approximately 12%. The Mac business represented approximately 33% of net sales, compared to approximately 40% in the same period last year. Excluding the results of the small Mac-dependent businesses sold in early 1998, net sales increased $42.1 million or 8.3% for the three months ended September 30, 1998, compared to the same period last year. Worldwide average order value increased 3.3% to $524 while worldwide catalog circulation decreased 4.2% to 30.9 million. Excluding sales from webauction.com, worldwide average order value was $553 for the third quarter of 1998. The active customer base decreased approximately 12% to 2.1 million for the three months ended September 30, 1998 compared to the same period last year, principally due to a reduction in the number of Mac consumer customers. Domestic sales increased $28.0 million or 7.3% to $411.4 million for the three months ended September 30, 1998 compared to $383.5 million for the same period last year. Wintel sales increased approximately 21%. Wintel desktop computers and servers, PDAs, digital cameras and networking routers were among the fastest growing product categories in the quarter. Wintel desktop computer sales increased approximately 124% while Wintel CPU unit volume increased approximately 257% compared to the same period last year. Mac sales decreased approximately 11%. Mac computer sales were flat while Mac CPU unit volume increased 11% compared to the third quarter of 1997. Sales of Apple branded computers, including the new iMac, increased 51% in revenue and 97% in units, partially offsetting the decline in sales of other Mac products and the virtual elimination of Mac clones from the marketplace. Overall, CPUs represented 28% of total revenue. The average selling price for Wintel computers declined 34% and the average selling price for Mac computers declined 10% compared to the third quarter of 1997. The average order value increased 4.5% to $572. Excluding sales from WebAuction.com average order value was $620 for the third quarter of 1998. Catalog circulation remained relatively flat at 26.4 million compared to 26.9 million in the prior year third quarter. International sales increased $1.8 million or 1.3% to $140.4 million for the three months ended September 30, 1998 compared to $138.6 million for the same period last year. Wintel sales increased approximately 8% and Mac sales declined approximately 17%. International sales decreased to 25.4% of total net sales in the three months ended September 30, 1998 compared to 26.6% in the same period last year. The average order value remained relatively flat at $420 compared to $421 in the prior year third quarter. Catalog circulation decreased 21.1% to 4.5 million catalogs principally as a result of reduced Inmac and Wintel catalog circulation. Excluding the results of the businesses disposed of in early 1998, international sales increased 11.2% compared to the same period last year. Wintel sales increased approximately 14% and Mac sales increased approximately 2%. Internet-related sales for the quarter were $50.4 million, up 22% compared to $41.4 million in the second quarter of 1998. Internet-related sales in the third quarter of 1997 were $15.3 million. Sales from the Company's e-commerce site warehouse.com were $41.6 million for the quarter compared to $28.2 million during the second quarter of 1998, representing a sequential increase of 48%. Sales from the Company's Internet auction site webauction.com were $8.8 million for the three months ended September 30, 1998 compared to $13.2 million in the second quarter of 1998, representing a sequential decrease of 33%. In September, 1998 the number of daily visitors to the Company's Internet sites was approximately 62,000. The gross profit margin for the three months ended September 30, 1998 was 16.3% of net sales compared to 16.2% in the second quarter of 1998 and 16.6% in the same period last year. The year-on-year decline was principally due to the impact of lower margins in the webauction.com business unit. Selling, general and administrative expenses were $72.6 million, or 13.2% of net sales for the three months ended September 30, 1998, compared to $77.8 million or 14.9% of net sales for the third quarter of 1997. 10 The percentage decrease was principally due to lower net advertising costs which decreased to 1.2% of net sales from 1.7% in the same period last year and lower overall operating expenses, partially offset by Year 2000 readiness costs of $0.6 million and higher recruiting and training expenses. Sequentially, selling, general and administrative expense increased from $68.6 million or 13.1% of net sales in the second quarter of 1998 as a result of higher net advertising expense as a percentage of sales, partially offset by lower payroll costs. The average annualized domestic sales per sales associate for the quarter were $2.7 million as compared to $1.9 million in the first quarter. This improvement was primarily the result of increased inbound sales force performance. During the quarter, the Company initiated a program to hire up to 150 new sales associates. The domestic sales force numbered 642 on November 13, 1998 compared to 602 at June 30, 1998. Operating income for the three months ended September 30, 1998 was $17.1 million compared to $8.6 million for the same period last year. The 1997 results exclude the pre-tax charge of $20.7 million for the settlement of the shareholder and derivative lawsuit. The international businesses incurred a $1.5 million operating loss during the three months ended September 30, 1998 compared to a loss of $3.0 million in the same period last year. Reductions in net catalog expenses were the primary factor in the relative improvement. The prior year results included $1.3 million in aggregate losses related to the businesses that were sold or disposed of in early 1998. Net interest income increased to $2.7 million for the three months ended September 30, 1998 compared to $1.4 million for the same period last year. The increase was due primarily to the higher level of cash and cash equivalents available for investment in the three months ended September 30, 1998. Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30, 1997 Net sales increased $73.0 million or 4.7% to $1,625.0 million in the nine months ended September 30, 1998 compared to $1,552.0 million in the nine months ended September 30, 1997. This increase in net sales was primarily attributable to continued growth in the Wintel business which increased approximately 18%. The worldwide Mac business declined approximately 15%. The Mac business represented approximately 34% of net sales, compared to approximately 42% in the same period last year. Worldwide average order value increased 4.9% to $522 while worldwide catalog circulation declined 5.5% to 87.9 million. Excluding sales from webauction.com, worldwide average order value was $544. Domestic sales increased 8.2% to $1,176.3 million while international sales declined 3.4% to $448.7 million. Excluding the results of the small Mac-dependent businesses that were disposed of or sold in early 1998, international sales were up 6.2%, and, on a currency-adjusted basis, 8.8% compared to the same period last year. Internet-related sales increased to approximately $122.0 million for the nine months ended September 30, 1998 compared to $27.0 million during the nine months ended September 30, 1997. The gross profit margin for the nine months decreased as a percentage of sales to 16.1% in 1998 compared to 16.6% during the same period last year. The percentage decline in gross profit margin in 1998 is principally attributable to a decline in margins for software products and the impact of lower margins in the Company's webauction.com business unit. Selling, general and administrative expenses decreased 4.6% to $214.7 million for the nine months ended September 30, 1998 compared to $225.0 million for the same period in 1997 and declined as a percentage of net sales to 13.2% from 14.5%. The percentage decrease was principally due to savings from the disposal and restructuring of certain international businesses, lower insurance and legal costs and lower net advertising costs which decreased to 0.9% of net sales compared to 1.4% of net sales during the same period last year. These savings were partially offset by an 11 increase in compensation costs for the domestic sales force, Year 2000 readiness costs of $1.3 million and higher recruiting and training expenses. Excluding the pre-tax charges of $14.0 million in 1998 and $20.7 million in 1997 for the settlement of shareholder and derivative litigation, operating income for the nine months ended September 30, 1998 was $47.7 million as compared to $32.8 million for the same period last year. International operations during the nine months ended September 30, 1998 had operating income of $4.5 million compared to a loss of $3.7 million in the same period last year. Reductions in net catalog expenses were the primary factor in the improved international operating profit. The prior year results included $3.6 million in aggregate losses related to the businesses that were sold or disposed of in early 1998. Net interest income increased to $6.4 million for the nine months ended September 30, 1998 compared to $4.0 million for the same period in 1997. The increase was due primarily to the higher level of cash and cash equivalents available for investment. The Company's effective income tax rate was 58.6% for the nine months ended September 30, 1998 compared to 47.1% for the same period in 1997. The increase in the effective tax rate resulted primarily from the provision for settlement of the Inmac Corp. shareholder litigation since the settlement is not deductible for tax purposes. The $19 million pre-tax charge for the settlement was recorded net of a $5 million contribution from a non-affiliated source. Excluding the net after tax charges of $15.8 million in 1998 and $12.7 million in 1997 for the settlement of shareholder and derivative litigation, the effective income tax rate for the nine months ended September 30, 1998 and 1997 was 40.0% and 43.0%, respectively. Liquidity and Capital Resources At September 30, 1998, the Company had cash and short-term investments totaling $176.4 million compared to $78.9 million at December 31, 1997 while all of the $12.6 million of short-term borrowings outstanding at December 31, 1997 were paid off. In connection with the shareholder and derivative litigation settlements, the Company paid $32.6 million during the third quarter. The increase in cash and short-term investments was due primarily to improved inventory management as inventories decreased to $114.0 million at September 30, 1998 compared to $170.5 million at December 31, 1997. Inventory turns for the three months ended September 30, 1998 were 17 compared to 12 for the three months ended December 31, 1997. Accounts receivable increased slightly to $219.8 million at September 30, 1998 compared to $217.5 million at December 31, 1997. Days sales outstanding remained stable at 45 days. Accounts payable increased to $203.7 million at September 30, 1998 compared to $168.9 million at December 31, 1997. Overall, operations generated cash of $122.3 million during the nine months ended September 30, 1998. Working capital increased $28.2 million or 10.7% to $290.7 million, compared to $262.4 at December 31, 1997. Capital expenditures for the nine months ended September 30, 1998 were $12.6 million, primarily for computer software and equipment and leasehold improvements. During the quarter construction commenced on the Company's new 230,000 sq. ft. warehouse facility at the Airborne Express hub in Wilmington, Ohio. The Company anticipates spending approximately $12-15 million for equipment, fixtures and computer systems for the new warehouse during the next twelve months. The Company has executed a 10-year lease of this facility to commence upon completion of construction, which is anticipated to occur during the first half of 1999. In addition, the Company expects to invest approximately $25 million in the upgrade or replacement of its worldwide computer systems during the next twelve months. This investment is intended to improve and create efficiencies in many business areas including sales, warehouse, inventory and financial management. In addition to these improvements, the implementation of these upgrades or new systems will address certain "Year 2000 readiness" issues. The upgrades of the Company's primary domestic operating system has begun and a new domestic accounting system was successfully installed in November, 1998. These investments in systems and the expenditures related to the new warehouse will be funded from operating cash flows. 12 At September 30, 1998, the Company had a multi-currency revolving credit facility of $61.7 million which reduces by $6.7 million on December 31, 1998. This facility expires on June 30, 1999. The facility is available for general corporate and working capital purposes for the Company's domestic operations and certain of the Company's foreign subsidiaries. At September 30, 1998, there were no borrowings under this facility. Additionally, at September 30, 1998 the Company had unused lines of credit in the United Kingdom and France which provide for unsecured borrowings up to 2.0 million British pounds and 45 million French francs ($3.4 million and $8.0 million at September 30, 1998 exchange rates, respectively) for working capital purposes. The Company is utilizing forward exchange contracts to manage exposure to foreign currency risk related to intercompany loans and investments in its foreign subsidiaries. Outstanding agreements involve the exchange of one currency for another at a fixed rate. The Company's credit exposure is limited to the replacement cost, if any, of the instruments; the Company enters into such agreements with only highly-rated counterparties. The Company matches the term and notional amount of the contracts to the underlying intercompany loans or investments and does not enter into forward exchange contracts for trading or speculative purposes. At September 30, 1998 the Company had outstanding forward exchange contracts in notional amounts of $12.7 million which mature in three months or less. The largest currencies represented are the French franc and Dutch guilder. In June 1998, the Board of Directors authorized a program for the purchase of up to $10.0 million of its common stock. As of September 30 the Company purchased 277,000 shares representing 0.8% of the Company's outstanding common stock at December 31, 1997 at a cost of $4.7 million. In connection with the settlement of the Inmac Corp. shareholder litigation, 277,457 shares were issued. 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. Year 2000 Readiness The Company uses a significant number of computer software programs and operating systems in its internal operations, including applications used in financial business systems and various administrative functions that will be affected by the Year 2000 ("Y2K") problem common to most businesses. If these systems are unable to properly recognize date sensitive information related to the year 2000 they could generate erroneous data or fail to operate. This in turn may cause disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. The Company's Year 2000 Readiness Programs To reduce the possibility of significant interruptions in normal operations the Company has initiated a worldwide Y2K readiness program. The Company is utilizing both internal and external resources in its Y2K program. The Company has named a Y2K Director, established a project office and formed a cross-functional task force to coordinate this program on a worldwide basis. During the first quarter of 1998 the Company began a comprehensive review of its existing information systems to determine which of its computer equipment and software might not function properly with respect to dates referencing the Year 2000 and thereafter. The review included systems commonly thought of as information technology ("IT") systems, including accounting, data processing and other miscellaneous systems, as well as systems not commonly thought of as IT systems such as alarm systems, fax machines and other similar systems. As a result of this review the Company determined that certain of these systems will require modification or replacement and has developed a plan to address this issue. 13 The Company has begun the process of modifying or replacing systems that were identified as not being Y2K ready. In addition to the planned upgrades described in Liquidity and Capital Resources, the Company identified the need for and has begun making modifications to certain of its worldwide systems in connection with the Y2K program. The Company estimates that it is currently 30% complete with respect to the modification or replacement of its worldwide systems and is on schedule for completion of implementation by June 30, 1999 and final integration testing in the third quarter of 1999. During the second quarter of 1998 the Company established a program for determining the Y2K readiness of its vendors, service providers and major customers and the compatibility of systems interfaces for electronic business transactions. In this regard, the Company has identified its significant business partners and has begun the process of communicating with them to determine the status of their Y2K readiness. The Company will develop a remediation plan based on the results of the initial communications. Cost of Y2K Readiness Programs Charges related to the identification, assessment, remediation and testing efforts related to the Y2K program are expected to be approximately $7.5 million. This amount is not included in the $25 million the Company expects to invest in the planned upgrade of its worldwide computer systems during the next twelve months. As of September 30, 1998, the Company had incurred costs of approximately $1.3 million primarily for outside consulting fees and internal payroll expense related to the planning and analysis activities of the Y2K program. The Company expects that pre-tax Y2K expenses over the next twelve months will be approximately $6.2 million or $0.03 per share per quarter. Risks Associated With Y2K Issues Failure by the Company or its business partners to address adequately their Y2K issues in a timely manner could impede the Company's ability to process transactions and have a direct and material impact on its ability to generate revenue and to attract and retain customers in the future. This in turn could have a material impact on the Company's business, financial condition and results of operations. Among the factors that could cause the Company's efforts to be less than fully effective are the novelty and complexity of these issues and their solutions and the Company's dependence on the technical skills of employees and independent contractors and on the representations and preparedness of third parties. Moreover, Y2K issues present a number of risks that are beyond the Company's control. These include the failure of vendors or common carriers to deliver merchandise to the Company or its customers, the failure of utility companies to deliver electricity, the failure of telecommunications companies to provide voice and data services, the failure of financial institutions to process transactions and transfer funds and the collateral effects on the Company of the effects of Y2K issues on the economy in general or on the Company's business partners and customers in particular. In addition, variability of definitions of "compliance with Y2K" and the myriad of computer products sold by the Company that may themselves contain a Y2K problem may lead to claims against the Company, including those arising out of the failure of such products to be "compliant". The Company will rely upon the warranties of the product manufacturers in case of any such claims but the Company has received no assurance that such warranties will be sufficient to cover the costs and expenses of any successful claims. Contingency Plans 14 The Company intends to develop contingency plans to mitigate to the extent possible any significant identified Y2K risks. The Company has begun a comprehensive analysis of the nature and extent of operational problems that would be reasonably likely to result from the failure by the Company or its business partners to complete their Y2K readiness efforts. This analysis will provide the information necessary to develop a contingency plan for dealing with the most likely worst case scenario. The Company expects to complete such analysis and contingency planning during the second quarter of 1999. European Monetary Union On January 1, 1999 certain member countries of the European Community will establish the Euro, a new common currency, by fixing exchange rates between their national currencies and the Euro. On January 1, 2002 Euro coins and notes are scheduled to be introduced while national currency coins and notes are scheduled to be withdrawn from circulation by July 1, 2002. During this three year transition period goods and services may be purchased with the Euro or national currency. After the transition period transactions in both the wholesale and retail marketplace are expected to be conducted in the Euro. The immediate expected impact of the common currency on certain of the Company's European businesses is the requirement to process customer orders in both national currencies and the Euro. The Company has performed an analysis to determine the requirements to upgrade various computer systems to manage its business in a dual currency environment. These upgrades are currently being developed and are expected to be implemented in the first quarter of 1999. Until such time, the Company will utilize manual processes for those customers who require the Company to transact business in the Euro. The Company does not expect these manual processes to result in any significant disruption to the Company's European businesses. The Company's estimates for the cost of the computer systems upgrade are not expected to be material, though there can be no assurance in this regard. The Company's existing multi-currency revolving credit agreement contemplates borrowing in the Euro. The Company's foreign exchange exposures are not expected to be materially altered by the introduction of the Euro. Outlook The Company depends in large part on sales of hardware and software products for users of Apple Macintosh computers. These products represented approximately 33% of the Company's net sales for the quarter ended September 30, 1998. Apple has significantly restricted the number of authorized resellers of its products and sells certain products to end-users in direct competition with the Company and other resellers. In addition, certain Wintel manufacturers who are suppliers to the Company including Compaq Computer Corp. have recently expanded their direct sales efforts. The continuing impact of these matters may adversely affect the Company's business, financial condition and results of operations. The Company acquires Wintel products for resale both directly from manufacturers and indirectly through distributors and other sources. Many of these manufacturers and distributors have historically provided the Company with incentives in the form of supplier reimbursements, price protection payments, rebates and other similar arrangements. The increasingly competitive environment between and amongst computer hardware manufacturers has already resulted in reduction and/or elimination of some of these incentive programs. Additionally, the return rights historically offered by manufacturers have become more limited. Manufacturers are also taking steps to reduce their inventory exposure by supporting "build to order" programs in which distributors and resellers are being authorized to directly manufacture computer hardware. This trend is part of an overall effort by manufacturers to reduce their costs and shift the burden of inventory risk to resellers like the 15 Company, which could have a material adverse effect on the Company's business, financial condition and results of operations. The Company has embarked on a program to expand its telemarketing sales force and believes that its future success depends, in part, on its ability to recruit, train and retain an adequate number of skilled sales associates. The Company is in the process of replacing or modifying substantially all of its significant operating and financial systems. The Company believes that its future success is dependent upon the successful integration of these systems in a timely fashion. Information Concerning Forward-Looking Statements 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 attributable to Internet commerce generally; risks associated with systems capacity restraints; uncertainties surrounding the demand for and supply of products manufactured by and compatible with those of Apple products; competition from other catalog, retail store, on-line and other resellers of computer products and certain manufacturers; issues surrounding the Company's European businesses; uncertainties relating to the "Year 2000 issue" and specifically, the Company's and its business partner's Y2K readiness initiatives; uncertainties relating to the January 1999 conversion to a single European currency (the Euro); and the ultimate outcome of the SEC formal investigation brought in connection with the Company's reported accounting errors. These and other factors are described generally in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of the Company's 1997 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" and in the Company's Form 10-Q for the quarter ended June 30, 1998 and the "Risk Factors" in the Company's Form S-3 filed July 22, 1998. In addition, the statements contained herein relating to the costs of the Company's Y2K readiness efforts and the dates on which the Company believes it will complete such efforts are forward looking statements which were based upon numerous assumptions regarding future events, including the continued availability of certain resources, third-party remediation plans and other factors. There can be no assurance that the facts underlying these assumptions will prove to be accurate and actual results could differ materially from those currently anticipated. Forward-looking statements are typically identified by the works "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. 16 Part II - OTHER INFORMATION Item 1. Legal Proceedings The information required by this item appears in Note 14 to Notes to Consolidated Financial Statement on page 40 of the Company's 1997 Annual Report to Stockholders, Item 1 of Part II of the Company's Form 10-Q for the quarter ended June 30, 1998 and the section captioned "Litigation" in the Company's Form S-3 filed July 22, 1998, all of which information is incorporated herein by reference. Additionally, the Company has settled with and paid to the State Board of Administration of Florida $150,000 in satisfaction of its claims arising out of the Restatement. 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 4, 1998. 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: NAME FOR ABSTAIN Felix Dennis 31,048,551 95,677 Frederick H. Fruitman 31,048,578 95,650 Peter Godfrey 31,046,547 97,681 Joseph M. Walsh 31,048,578 95,650 Additionally, the Stockholders ratified the appointment of KPMG Peat Marwick LLP as the Company's independent auditors for the fiscal year ending December 31, 1998. The results were as follows: FOR 31,108,133 AGAINST 25,001 ABSTAIN 11,094 Item 5. Other Information On October 19, 1998 the Company and Stephen F. England, the Company's Executive Vice President, Sales, entered into a Severance Agreement and General Release pursuant to which Mr. England agreed to resign as an officer of the Company effective December 31, 1998. Pending the effective date of his resignation, Mr. England has ceased active duties with the Company. Jeffrey Sheahan, the Company's Senior Vice President, President of its European operations and General Manager of its U.K. subsidiary, resigned effective October 9, 1998. Adam Shaffer, the Company's Executive Vice President, Marketing, Advertising and Purchasing, will provide executive oversight to the Company's European subsidiaries and will serve as interim General Manager of the Company's U.K. subsidiary. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 10 Severance Agreement and General Release, dated October 19, 1998, between Stephen F. England and the Company. Exhibit 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS Exhibit 27 FINANCIAL DATA SCHEDULE (b) Reports on Form 8-K None 17 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: November 16, 1998 By /s/ Wayne P. Garten --------------------------------- WAYNE P. GARTEN Executive Vice President and Chief Financial Officer (Duly Authorized Officer of the Registrant and Principal Financial Officer) 18 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------ ---------------------- 10 Severance Agreement and General Release, dated October 19, 1998, between Stephen F. England and the Company 11 Statement re Computation of Per Share Earnings 27 Financial Data Schedule EX-10 2 SEVERANCE AGREEMENT SEVERANCE AGREEMENT AND GENERAL RELEASE This is an Agreement, dated as of October 19, 1998, between Stephen F. England (the "Employee") and Micro Warehouse, Inc. (the "Company"). WHEREAS, the Company has urged the Employee to remain in its employ, WHEREAS, the Employee has decided that he wishes to leave the employ of the Company, WHEREAS, the Employee and the Company intend the terms and conditions of this Agreement to govern all issues related to the Employee's employment and resignation from the Company, WHEREAS, the Employee has had at least 21 days to consider a draft of this Agreement, and WHEREAS, the Employee has been advised to consult with an attorney before signing this Agreement, NOW THEREFORE, in consideration of these premises, the Employee and the Company agree as follows: 1. Resignation: The Employee shall resign as Executive Vice President of Sales of the Company and from all other positions with the Company and its subsidiaries and affiliated companies, effective December 31, 1998 (the "Termination Date"). The Employee shall have no further duties or responsibilities with respect to the Company or his employment after the Effective Date (as defined below), except as expressly set forth herein. 2. Payment: a. The Company shall continue to pay the Employee his base salary of $250,000 annually ("Base Salary") through December 31, 2000. Commencing January 1, 1999, the Base Salary to be paid to the Employee during each year shall be increased by any increase in the cost of living determined in accordance with the formula set forth in subparagraphs (i), (ii) and (iii) hereinbelow. i. For the purposes of this paragraph 2, the following definition shall apply: 1. The term "Base Year" shall mean the twelve-month period commencing on January 1, 1998 and terminating on December 31, 1998. The term "Second Year" shall mean the twelve-month period commencing on January 1, 1999 and terminating on December 31, 1999. The term "Third Year" shall mean the twelve-month period commencing on January 1, 2000 and terminating on December 31, 2000. 2. The term "Price Index" shall mean the average of the monthly "Consumer Price Index" published by the Bureau of Labor Statistics of the U.S. Department of Labor, New York, Northern New Jersey, Long Island, New York-New Jersey-Connecticut, for urban wage earners and clerical workers, or a successor or substitute index appropriately adjusted ("Consumer Price Index"), for each month of any given twelve-month period. ii. Effective as of each of January 1 of 1999 and 2000, there shall be a cost of living adjustment to the Base Salary applicable for the succeeding twelve-month period. The adjustment shall be based on the percentage difference between the Price Index for the Second Year and the Price Index for the Base Year, with respect to the adjustment to be made on January 1, 1999; and the Price Index for the Third Year and the Price Index for the Base Year, with respect to the adjustment to be made on January 1, 2000. In the event that the Price Index for the Second Year reflects an increase over the Price Index for the Base Year, the Base Salary originally herein provided to be paid shall be multiplied by the percentage difference between the Price Index for the Second Year and the Price Index for the Base Year, and the resulting sum shall be added to such original Base Salary, effective on January 1, 1999. Said adjusted Base Salary shall thereafter be payable hereunder until it is readjusted pursuant to the terms of this paragraph 2 as of January 1, 2000. In the event that the Price Index for the Third Year reflects an increase over the Price Index for the Base Year, the Base Salary originally herein provided to be paid (unchanged by any adjustment made pursuant to the immediately preceding sentence) shall be multiplied by the percentage difference between the Price Index for the Third Year, and the Price Index for the Base Year, and the resulting sums shall be added to such original Base Salary, effective on January 1, 2000. In the event that the Price Index ceases to use 1982-1984 = 100 as the basis of calculation, or if a substantial change is made in the terms or -2- number of items contained in the Price Index, then the Price Index shall be adjusted to the figure that would have been arrived at had the manner of computing the Price Index in effect at the date of this Agreement not been altered. In the event such Price Index (or a successor or substitute index) is not available, a reliable governmental or other non-partisan publication evaluating the information theretofore used in determining the Price Index shall be used. iii. In no event shall the Employee's Base Salary provided herein, as the same may be increased from time to time pursuant to this paragraph 2, be reduced by virtue of this paragraph 2. b. The Employee shall receive payments at such intervals each year as salary payments are made to other executive officers of the Company. Deductions will be made from such payments for statutorily mandated federal, state and local withholding and other applicable taxes. 3. Incentive Compensation: In addition to Base Salary, the Employee shall receive incentive compensation through December 31, 1998 ("Incentive Compensation"). The amount of Incentive Compensation to be paid to the Employee will be calculated pursuant to the Incentive Plan established for executive officers for 1998, which is attached hereto as Exhibit A, as the same may be adjusted from time to time. The amount of Incentive Compensation shall not exceed One Hundred Percent (100%) of Base Salary. The Incentive Plan sets forth a target bonus amount, which amount for calendar 1998 shall be One Hundred Twenty-Five Thousand Dollars ($125,000) (hereinafter the "Target Bonus Amount"). One Hundred Percent (100%) of that amount shall be payable for accomplishing One Hundred Percent (100%) of targets in 1998. The actual amount, if any, of Incentive Compensation to which the 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 Two Hundred Percent (200%) of Target Bonus Amount if One Hundred Twenty Percent (120%) of Targets are achieved. By way of example, One Hundred Percent (100%) of Target Bonus Amount at accomplishment of One Hundred Percent (100%) of Targets shall be One Hundred Twenty-Five Thousand Dollars ($125,000). If the Company achieves Eighty Percent (80%) of Targets, Target Bonus Amount shall be Sixty-Two Thousand Five Hundred Dollars ($62,500) (i.e., .5 x $125,000), which shall be automatically due and payable to the Employee. By way of further example, if the Company achieves One Hundred Ten Percent (110%) of Targets, Target Bonus Amount shall be One Hundred Eighty-Seven Thousand Five Hundred Dollars ($187,500) (1.50 x $125,000), which shall be automatically due and payable to the Employee. The incentive compensation shall be paid to the -3- Employee in a lump sum cash payment as soon as practicable after December 31, 1998, but not later than the date other executive officers are paid incentive compensation for 1998. 4. Target Commission Compensation: The Employee shall receive target commission compensation through December 31, 1998. For the period January 1, 1998 through December 31, 1998, the Employee shall receive $100,000 in target commission compensation, due and payable to the Employee upon execution of this Agreement. 5. Mitigation: The Employee is under no obligation to seek other employment opportunities during any period between the date of this Agreement and the December 31, 2000 expiration of this Agreement (the "Effective Period"), and the Employee is not obligated to accept any other employment opportunity that may be offered to the Employee during the Effective Period. Nothing in this Agreement, however, shall prohibit the Employee from accepting other employment opportunities during the Effective Period, in which event the Employee shall continue to receive the entire amount due and owing to him under Sections 2, 3 and 4 above and retain all his other rights hereunder without any offset for any amount paid to the Employee arising out of any new employment relationship. Notwithstanding the foregoing, medical, dental, hospitalization and life insurance and short-term disability benefits will be reduced to the extent comparable insurance benefits are actually received by the Employee from another employer during the Effective Period. Any such benefits actually received by the Employee shall be reported by the Employee to the Company. 6. Stock Options: The Employee's outstanding stock options are set forth on Exhibit B attached hereto. All stock options granted to the Employee by the Company shall continue to vest according to their terms until December 31, 2000, without regard to termination of Employee's employment. Any stock options that have not vested as of December 31, 2000 shall lapse. Except to the extent set forth in Section 13(c), which shall control in the event of conflict, each outstanding stock option shall be exercisable at any time prior to the earlier of (i) its expiration date or (ii) the later of (A) the expiration of twelve (12) months after vesting, or (B) the expiration of twelve (12) months after the Termination Date. 7. Business Expenses: The Company agrees to reimburse the Employee for all reasonable and necessary expenses incurred by him in connection with the performance of his duties for the Company. The Employee shall submit vouchers, invoices and such other documentation in accordance with the Company's standard policy concerning business expenses. -4- 8. Insurance Benefits: The Company shall continue to maintain at Company cost medical, dental, hospitalization and life insurance and short term disability for the Employee and his dependents through December 31, 2000 to the extent such policies are provided generally to the senior executives of the Company. Employee shall be responsible for such cost-sharing, co-pays and deductibles as may be required of other senior executives. If and to the extent Employee is unable to participate in any such benefits, the Company shall at its cost obtain comparable benefits for Employee. 9. Insurance Assignment: The Company owns the insurance policies on the life of Employee attached hereto as Exhibit C. The Company shall assign to the Employee all rights it might have in such policies, subject to compliance with any requirements imposed by the insurance company. 10. Retirement Plan: The Company shall make matching contributions to the Employee's 401(k) plan through December 31, 2000, according to the prevailing practice for senior executives. 11. Other Benefits: The Company shall continue all other benefits received by the Employee through December 31, 1998. In addition, the Company agrees: a. to assume all liability for the New Jersey rental home located at 362 Cheryl Drive, Toms River, New Jersey, including but not limited to all rental payments and any risk of loss; and b. to convey to Employee, without further consideration, all of its right, title and interest in and to the computer and peripheral equipment used by Employee, together with software as permitted by the applicable licensing agreements. 12. Relocation Payments. Employee shall be entitled to reimbursement of reasonable relocation expenses (including without limitation brokerage commissions) of up to Fifteen Thousand Dollars ($15,000) if he accepts a new position out of the area, but only to the extent such expenses are not covered by his new employer. Any such payment shall be subject to applicable withholding requirements. 13. Change in Control. a. Definitions. For purposes of this Agreement, Change in Control means the occurrence during the Effective Period of any of the following events, subject to the provisions of paragraph 13(b) hereof: -5- i. All or substantially all of the assets of the Company are sold or transferred to another corporation or entity, or the Company is merged, consolidated or reorganized into or with another corporation or entity, with the result that upon conclusion of the transaction less than Fifty-One Percent (51%) of the outstanding securities entitled to vote generally in the election of directors or other capital interests of the acquiring corporation or entity are owned directly or indirectly, by the shareholders of the Company generally prior to the transaction; or ii. There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act (a "Beneficial Owner")) of securities representing Twenty Percent (20%) or more of the combined voting power of the then-outstanding voting securities of the Company; or iii. The Company shall file a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Item 1 of Form 8-K thereunder or Schedule 14A (or any successor schedule, form or report or item therein) that a change in control of the Company has or may have occurred or will or may occur in the future pursuant to any then-existing contract or transaction; or iv. The individuals who, at the beginning of any period of two (2) consecutive calendar years, constituted the directors of the Company cease for any reason to constitute at least a majority thereof unless the nomination for election by the Company's stockholders of each new director of the Company was approved by a vote of at least two-thirds (2/3) of the directors of the Company still in office who were directors of the Company at the beginning of any such period; or v. The Board of Directors determines that (A) any particular actual or proposed merger, consolidation, reorganization, sale or transfer of assets, accumulation of shares or tender offer for shares of the Company or other transaction or event or series of transactions or events will, or is likely to, if carried out, result in a Change in Control falling within paragraph 13(a)(i), (ii), (iii) or (iv), and (B) it is in the best interests of the Company and its shareholders, and will serve the intended purposes of this -6- Agreement, if this Agreement shall thereupon become immediately operative with respect to the provisions of this paragraph 13 regarding Change in Control b. Exceptions. Notwithstanding the foregoing provisions of this paragraph 13: i. If any such merger, consolidation, reorganization, sale or transfer of assets, or tender offer or other transaction or event or series of transactions or events mentioned in paragraph (13)(a)(v) shall be abandoned, or any such accumulations of shares shall be dispersed or otherwise resolved, the Board of Directors may, by notice to the Employee, nullify the effect thereof and reinstate this Agreement as previously in effect, but without prejudice to any action that may have been taken prior to such nullification. ii. Unless otherwise determined in a specific case by the Board of Directors, a "Change in Control" shall not be deemed to have occurred for purposes of paragraph 13(a)(ii) or (iii) solely because (X) the Company, (Y) a subsidiary of the Company, or (Z) any Company-sponsored employee stock ownership plan or any other employee benefit plan of the Company or any subsidiary either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act disclosing Beneficial Ownership by it of shares of the then-outstanding voting securities of the Company, whether in excess of Twenty Percent (20%) or otherwise, or because the Company reports that a change in control of the Company has occurred or will occur in the future by reason of such beneficial ownership. c. Vesting Upon Change in Control. In the event that a Change in Control occurs during the Effective Period, except as provided herein, those of the 100,000 options granted to Employee in February, 1998 that have not yet vested shall become accelerated and immediately fully vested and exercisable, at any time prior to the expiration date of such options, as specified in the applicable stock option plan, or the expiration of twelve (12) months after the date of acceleration, whichever is the longer period; provided, however, that for purposes of this paragraph 13(c), no such options will become vested and exercisable subsequent to the expiration date of the options as specified in the applicable Stock Option Plan. If (i) a Change in Control involves any combination of the Company with any other entity, and (ii) the Company and such entity desire to -7- account for such combination under the pooling-of-interests method for financial statement purposes ("Pooling"), and (iii) the sole reason that Pooling would be unavailable to the Company and such entity is, in the opinion of the Company's independent accountants, the acceleration of vesting of options provided for in this paragraph 13(c), then this paragraph 13(c) shall be void. 14. Certain Additional Payments by the Company. a. Anything in this Agreement to the contrary notwithstanding, in the event that it shall be determined (as hereafter provided) that any payment or distribution by the Company or any of its affiliates to or for the benefit of the Employee, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, performance share, performance unit, stock appreciation right or similar right, or the lapse or termination of any restriction on, or the vesting or exercisability of, any of the foregoing (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or any successor provision thereto) by reason of being considered "contingent on a change in ownership or control" of the Company, within the meaning of Section 280G of the Code (or any successor provision thereto) or to any similar tax imposed by state or local law, or any interest or penalties with respect to such tax (such tax or taxes, together with any such interest and penalties, being hereafter collectively referred to as the "Excise Tax"), then the Employee shall be entitled to receive an additional payment or payments (collectively, a "Gross-Up Payment"). The Gross-Up Payment shall be in an amount such that, after payment by the Employee of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed upon the Gross-Up Payment, the Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. b. Subject to the provisions of paragraph 14(f), all determinations required to be made under this paragraph 14, including whether an Excise Tax is payable by the Employee and the amount of such Excise Tax and whether a Gross-Up Payment is required to be paid by the Company to the Employee and the amount of such Gross-Up Payment, if any, shall be made by a nationally recognized accounting firm (the "Accounting Firm") selected by the Employee in his sole discretion. The Employee shall direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and the Employee within thirty (30) calendar days after the Termination Date, if applicable, and any such other time or times as may be requested by the Company or the Employee. If the Accounting Firm determines that any Excise Tax is -8- payable by the Employee, the Company shall pay the required Gross-Up Payment to the Employee within five (5) business days after receipt of such determination and calculations with respect to any Payment to the Employee. If the Accounting Firm determines that no Excise Tax is payable by the Employee, it shall, at the same time as it makes such determination, furnish the Company and the Employee an opinion that the Employee has substantial authority not to report any Excise Tax on his federal, state or local income or other tax return. As a result of the uncertainty in the application of Section 4999 of the Code (or any successor provision thereto) and the possibility of similar uncertainty regarding applicable state or local tax law at the time of any determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be-made hereunder. In the event that the Company exhausts or fails to pursue its remedies pursuant to paragraph 14(f) and the Employee thereafter is required to make a payment of any Excise Tax, the Employee shall direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Company and the Employee as promptly as possible. Any such Underpayment shall be promptly paid by the Company to, or for the benefit of; the Employee within five (5) business days after receipt of such determination and calculations. c. The Company and the Employee shall each provide the Accounting Firm access to and copies of any books, records and documents in the possession of the Company or the Employee, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determinations and calculations contemplated by paragraph 14(b). Any determination by the Accounting Firm as to the amount of the Gross-Up Payment shall be binding upon the Company and the Employee. d. The federal, state and local income or other tax returns filed by the Employee shall be prepared and filed on a consistent basis with the determination of the Accounting Firm with respect to the Excise Tax payable by the Employee. The Employee shall make proper payment of the amount of any Excise Payment, and at the request of the Company, provide to the Company true and correct copies (with any amendments) of his federal income tax return as filed with the Internal Revenue Service and corresponding state and local tax returns, if relevant, as filed with the applicable taxing authority, and such other documents reasonably requested by the Company, evidencing such payment. If prior to the filing of the Employee's federal income tax return, or corresponding state or local tax return, if relevant, the Accounting Firm determines that the amount of the -9- Gross-Up Payment should be reduced, the Employee shall within five (5) business days pay to the Company the amount of such reduction. e. The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by paragraph 14(b) shall be borne by the Company. If such fees and expenses are initially paid by the Employee, the Company shall reimburse the Employee the full amount of such fees and expenses within five (5) business days after receipt from the Employee of a statement therefor and reasonable evidence of his payment thereof. f. The Employee shall notify the Company in writing of any claim by the Internal Revenue Service or any other taxing authority that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as promptly as practicable but no later than ten (10) business days after the Employee actually receives notice of such claim and the Employee shall further apprise the Company of the nature of such claim and the date on which such claim is requested to be paid (in each case, to the extent known by the Employee). The Employee shall not pay such claim prior to the earlier of (I) the expiration of the thirty (30) calendar-day period following the date on which he gives such notice to the Company and (ii) the date that any payment of amount with respect to such claim is due. If the Company notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: i. provide the Company with any written records or documents in his possession relating to such claim reasonably requested by the Company; ii. take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including without limitation accepting legal representation with respect to such claim by an attorney competent in respect of the subject matter and reasonably selected by the Company; iii. cooperate with the Company in good faith in order effectively to contest such claim; and iv. permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including interest and penalties) incurred in connection with such contest and shall indemnify and hold harmless the Employee, on an after-tax basis, for and against any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a -10- result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this paragraph 14(f), the Company shall control all proceedings taken in connection with the contest of any claim contemplated by this paragraph 14(f) and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim (provided, however, that the Employee may participate therein at his own cost and expense) and may, at its option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Employee to pay the tax claimed and sue for a refund, the Company shall advance the amount of such payment to the Employee on an interest-free basis and shall indemnify and hold the Employee harmless, on an after-tax basis, from any Excise Tax or income or other tax, including interest or penalties with respect thereto, imposed with respect to such advance; and provided further, however, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Employee with respect to which the contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of any such contested claim shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. g. If; after the receipt by the Employee of an amount advanced by the Company pursuant to paragraph 14(f), the Employee receives any refund with respect to such claim, the Employee shall (subject to the Company's complying with the requirements of paragraph 14(f)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after any taxes applicable thereto). If; after the receipt by the Employee of an amount advanced by the Company pursuant to paragraph 14(f), a determination is made that the Employee shall not be entitled to any refund with respect to such claim and the Company does not notify the Employee in writing of its intent to contest such denial or refund prior to the expiration of thirty (30) calendar days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of any such advance shall offset, to the extent thereof; the amount of Gross-Up Payment required to be paid by the Company to the Employee pursuant to this paragraph 14. -11- 15. Confidential Information: a. 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 not be deemed to include information released generally to the public by the Company or others, information required by law to be disclosed or information learned by the Employee from third parties without restrictions on disclosure. b. Employee shall return to the Company all confidential or proprietary information of the Company in his possession or control. Employee acknowledges that he has transferred to floppy disk or other removable media and shall return to the Company any confidential or proprietary information on the computer to be retained by Employee. 16. Covenant Not To Compete: The Employee hereby covenants and agrees that during the Effective Period (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 the Employee from (i) performing services for a Competitive Business if such Competitive Business is also engaged in other lines of business and if the Employee's services are restricted to employment in such other lines of business; or (ii) 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 previously held ownership interests, less than Five Percent (5%) of any class or type of securities of, or interest in, such Competitive Business. The term "Competitive Business" shall mean (x) a business engaged in the marketing and -12- sale to end users of hardware, software, peripheral and associated products for personal computers (other than a business that may from time to time market or sell any of the foregoing on an incidental basis and whose sales of the foregoing in any year do not exceed five percent (5%) of its net sales or $10 million in the aggregate) or (y) a business principally engaged at the time of Employee's employment in the auction sale of goods or services to end users over the Internet. This provision shall apply regardless of where such Competitive Business is located. Nothing in this Agreement shall be deemed to prevent the Employee from working for a business that provides customized software or software as an integral part of a database or other service relationship. 17. Indemnification: The rights provided to the Employee and the Company under the Indemnification Agreement, which is attached hereto as Exhibit D (the "Indemnification Agreement"), shall survive the Employee's resignation. Any right to indemnification under the Indemnification Agreement shall survive termination of the Employee's employment by the Company. 18. References: The Employee agrees not to disparage the Company, and the Company agrees not to disparage the Employee. With respect to reference requests, the Company will provide only dates of employment and position held. Reference requests will be directed to Peter Godfrey, chairman, only. The Company shall give written instructions to its Executive Committee, senior vice presidents and other officers not to discuss the Employee's employment at the Company unless there is a business necessity to do so and to refer all unsolicited reference requests they receive with respect to the Employee to the chairman. Either party may disclose the text of the non-competition provisions of this Agreement to third parties. 19. Release by Employee. The Employee and his heirs, assigns and agents release, waive, and discharge the Company, its directors, officers, employees, subsidiaries, affiliates and agents (the "Released Parties") from each and every claim, action or right of any sort, known or unknown, arising on or before the Effective Date (as hereafter defined). a. The foregoing release includes, but is not limited to, any claim of discrimination on the basis of wrongful termination, constructive discharge, discharge in violation of public policy, race, sex, religion, marital status, sexual orientation, national origin, handicap or disability, age, veteran status, special disabled veteran status, citizenship status, any other claim based on a statutory prohibition; any claim arising out of or related to an express or implied employment contract, any other contract affecting terms and conditions of employment, or a covenant of good faith and fair dealing; any tort claims and any -13- personal gain with respect to any claim arising under the qui tam provisions of the False Claims Act, 31 U.S.C. 3730. b. Notwithstanding anything to the contrary contained in this Agreement, this Release does not include any claim the Employee may have against the Company for the Company's breach of this Agreement or the Indemnification Agreement. c. The Employee represents that he understands the foregoing Agreement, that rights and claims under the Age Discrimination in Employment Act of 1967, as amended, are among the rights and claims against the Company he is releasing, and that he understands that he is not releasing any rights or claims arising after the Effective Date. 20. Release by Company. The Company, releases, waives and discharges the Employee, his heirs, successors and assigns, from each and every claim, action or right of any sort, known or unknown, arising on or before the Effective Date (as hereafter defined). a. This release includes, but is not limited to, any claim of breach of contract, breach of fiduciary duty, defamation, unjust enrichment, any claim arising out of or related to an express or implied employment contract, any other contract affecting terms or conditions of employment, or a covenant of good faith and fair dealing, and any tort claims. b. Notwithstanding anything to the contrary contained in this Agreement, this Release does not include any claim the Company may have against the Employee for civil or criminal fraud in connection with the Employee's employment, the procurement of this Agreement or otherwise, the commitment of a crime and/or the Employee's breach of this Agreement. 21. Covenant Not To Sue. The Employee agrees never to sue any of the Released Parties, or cause any of the Released Parties to be sued, regarding any matter within the scope of the release set forth in Section 19 above. The Company agrees never to sue, or cause the Employee to be sued, regarding any matter within the scope of the release set forth in Section 20 above. If one party is determined by a court of competent jurisdiction to have violated this provision by suing or causing the other party (or Released Party) to be sued, the party found to have violated this provision agrees to pay all costs and expenses of defending against the suit incurred by the other party (or Released Party), including -14- reasonable attorneys' fees together with any damages and liabilities to the other party (or Released Party) resulting from such suit. 22. Opportunity To Cure: This Agreement is final and binding. If the Employee breaches any of his obligations under this Agreement, the Company shall give him written notice of such breach and an opportunity to cure such breach (if such breach can be cured) of thirty (30) days, after such time if such breach remains uncured, the Company shall have the right, among other things, to discontinue payments to be made hereunder. All notices hereunder shall be effective upon delivery by hand or by certified or overnight mail to the most recent address for the Employee provided by the Employee in writing to the general counsel of the Company. The Employee shall provide like notice and opportunity to cure for any Company breach hereunder by giving written notice and a ten (10) business day opportunity to cure with respect to any breach of an obligation to pay money or to take actions with respect to stock options hereunder and a thirty (30) day opportunity to cure any other breach hereunder to the general counsel, which notice shall be effective upon delivery by hand or by certified or overnight mail to 535 Connecticut Avenue, Norwalk, Connecticut 06854, or the most recent address for the Company provided in writing to the Employee. This Agreement is not to be construed as an admission that the Employee or the Company acted wrongfully in any way. 23. Confidentiality: The terms and conditions of this Agreement are confidential and shall not be disclosed to any person other than those who must perform tasks to effect the Agreement. Notwithstanding the foregoing, either party may disclose any term of this Agreement (i) to any governing authority if disclosure is required to comply with applicable law, or (ii) to either party's attorneys, accountants or advisors with whom a fiduciary relationship has been established. 24. Revocation: The Employee may revoke this Agreement in writing within seven (7) days of signing it (the "Revocation Period"). This Agreement will not take effect until the Effective Date. If the Employee revokes this Agreement, all of its provisions shall be void and unenforceable. The Effective Date (the "Effective Date") of this Agreement shall be the day after the end of the Revocation Period. 25. Attorneys' Fees: The Company agrees to pay all reasonable attorneys' fees and costs associated with the negotiation and drafting of this Agreement including reasonable attorneys' fees and costs of Employee. 26. Severability: In the event that any provision or portion of this Agreement is determined to be invalid or unenforceable for any reason, in whole or in part, the -15- remaining provisions of this Agreement will be unaffected thereby and will remain in full force and effect to the fullest extent permitted by law. 27. Modification: This Agreement constitutes the entire understanding between the Employee and the Company. The parties have not relied on any oral statements that are not included in this Agreement. Any modifications to this Agreement must be in writing and signed by the Employee and an authorized employee or agent of the Company. 28. Choice Of Law: This Agreement shall be construed, interpreted and applied in accordance with the law of the State of Connecticut. 29. Waiver. Delay or failure of any party to insist on strict performance or observance of any provision of this Agreement or to exercise any rights or remedies hereunder shall not be deemed a waiver. Any waiver shall be effective only if in writing and signed by the waiving party. THE PARTIES ACKNOWLEDGE THAT THEY UNDERSTAND THE ABOVE AGREEMENT INCLUDING THE RELEASE OF ALL CLAIMS EXCEPT AS SPECIFICALLY EXCEPTED. THE PARTIES UNDERSTAND THAT THEY ARE WAIVING UNKNOWN CLAIMS AND THEY DO SO INTENTIONALLY. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their duly authorized representatives as of the day and year first above written. MICRO WAREHOUSE, INC. STEPHEN F. ENGLAND By: /s/ Peter Godfrey /s/ Stephen F. England ------------------------------ ----------------------------- Name: Peter Godfrey Title: Chief Executive Officer Date: October 19, 1998 Date: October 7, 1998 ---------------------------- ------------------------ -16- EXHIBIT A Incentive Plan for the Year 1998 The Targets with respect to the 1998 Incentive Plan shall be based upon the projected operating profit for the Company as described in the Company's 1998 Worldwide Plan dated March 13, 1998 (the "Plan"). The Plan includes a separate projected operating profit for all U.S. operations and a separate projected operating profit for the consolidated international operations. In determining the Target Bonus amount, if any, 80% of said amount shall be attributable to and based upon the Plan's projected operating profit for all U.S. operations and 20% shall be attributable to and based upon the Plan's projected operating profit for the consolidated international operations. With respect to said 20%, the Target shall also be considered achieved in full if: (i) all or a material number of the international subsidiaries are sold or otherwise disposed of during 1998; or (ii) the international subsidiaries on a consolidated basis have an operating profit for the year ending December 31, 1998. STEPHEN ENGLAND EXHIBIT B 2 BERTHIER PLACE REDGEFIELD, CT 06877 Micro Warehouse, Inc. OPTIONEE STATEMENT Run Date 07/24 As of 07/24/98 Page No.
Date of Type of Grant Options Options Option Date of Options Available Grant Granted Outstanding Price Expir. Vested For Exercise - ------- ------------- ------- ----------- ------ ------- ------- ------------ 01/13/93 NON-QUAL 30,000 20,500 $9.7800 01/13/03 20,500 (Current) 20,500 06/21/93 NON-QUAL 58,000 58,000 $11.3800 06/21/03 58,000 (Current) 58,000 01/23/97 NON-QUAL 3,000 3,000 $12.6250 01/23/07 1,500 (Current) 1,500 1,500 on 07/19/99 1/23/97 NON-QUAL 20,000 20,000 $12.6250 01/23/07 4,000 (Current) 4,000 4,000 on 1/23/99 4,000 on 01/23/00 4,000 on 01/23/01 4,000 on 01/23/02 02/26/98 NON-QUAL 100,000 100,000 $13.6900 2/26/08 0 (Current) 0 33,334 on 12/31/98 33,333 on 12/31/99 33,333 on 12/31/00 ------- ------- ------ Shares 211,000 201,500 84,000
EXHIBIT C List of Life Insurance Policies EXHIBIT D INDEMNIFICATION AGREEMENT This agreement ("Agreement") is made as of this 1st day of January, 1994 between Micro Warehouse, Inc., a Delaware corporation (hereinafter referred to as the "Corporation") and Stephen England (hereinafter referred to as "Indemnitee"). WITNESSETH: WHEREAS, Indemnitee is an officer of Micro Warehouse, Inc., and in such capacity is performing a valuable service to the Corporation; and WHEREAS, the Board of Directors of the Corporation has adopted by-laws, providing for the indemnification of the officers, directors, agents (as hereinafter defined) and employees of the Corporation to the maximum extent authorized by Section 145 of the Delaware General Corporation Law; and WHEREAS, Section 145(f) of the Delaware General Corporation Law allows for the indemnification of officers, directors, agents and employees of the Corporation by means of indemnification agreements such as contemplated herein; and WHEREAS, in order to thereby induce Indemnitee to serve or to continue to serve the Corporation, the Corporation has determined and agreed to enter into this Agreement with Indemnitee. NOW, THEREFORE, in consideration of Indemnitee's service or continued service as a director or officer of the Corporation after the date hereof, the parties hereto agree as follows: 1. Definitions (a) The term "Agent" means any person who is or was a director, officer, employee or other agent of the Corporation or a subsidiary of the Corporation; or is or was serving at the request of, for the convenience of, or to represent the interests of, the Corporation or a subsidiary of the Corporation as a director, officer, employee or agent of another entity or enterprise; or was a director, officer, employee or agent of a predecessor corporation of the Corporation or a subsidiary (as hereinafter defined) of the Corporation, or was a director, officer, employee or agent of another enterprise at the request of, for the convenience of, or to represent the interests of such predecessor corporation. (b) The term "Expenses" means all direct and indirect costs of any type or nature whatsoever (including without limitation, all attorneys' fees, costs of investigation and related disbursements) incurred by the Indemnitee in connection with the investigation, settlement, defense or appeal of a claim or proceeding (as hereinafter defined) covered hereby or establishing or enforcing a right to indemnification under this Agreement. (c) The term "Proceeding" means any threatened, pending or completed claim, suit or action, whether civil, criminal, administrative, investigative or otherwise. (d) "Subsidiary" means any corporation of which more than 10% of the outstanding voting securities is owned directly or indirectly by the Corporation, and one or more Subsidiaries, taken as a whole. 2. Maintenance of Liability Insurance. (a) The Corporation hereby covenants and agrees to each Indemnitee that, so long as such Indemnitee shall continue to serve as an Agent of the Corporation and thereafter so long as the Indemnitee shall be subject to any claim or Proceeding by reason of the fact that the Indemnitee was an Agent of the Corporation or in connection with such Indemnitee's acts as such an Agent, the Corporation, subject to paragraph 2(b), shall obtain and maintain or cause to be obtained and maintained in full force and effect directors' and officers' liability insurance ("D&O Insurance") in reasonable amounts from established and reputable insurers, but no less than the amounts currently in effect on the date hereof. (b) Notwithstanding the foregoing, the Corporation shall have no obligation to obtain or maintain D&O Insurance if the Corporation determines in good faith that the premium costs for such insurance are disproportionate to the amount of coverage provided after giving effect to exclusions. 3. Mandatory Indemnification. The Corporation shall defend, indemnify and hold harmless each Indemnitee: (a) Third Party Actions. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any Proceeding (other than an action by or in the right of the Corporation) by reason of the fact that such Indemnitee is or was an Agent of the Corporation, or by reason of anything done or not done by the Indemnitee in any such capacity, against any and all Expenses and liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) incurred by him or her in connection with the investigation, defense, settlement or appeal of such Proceeding, so long as the Indemnitee acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal action or Proceeding, had reasonable cause to believe his or her conduct was not unlawful. (b) Derivative Actions. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any Proceeding by or in the right of the Corporation 2 by reason of the fact that he or she is or was an Agent of the Corporation, or by reason of anything done or not done by him or her in any such capacity, against any amounts paid in settlement of any such Proceeding and all other Expenses incurred by him or her in connection with the investigation, defense, settlement or appeal of such Proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation; except that no indemnification under this subparagraph shall be made, and the Indemnitee shall repay all amounts previously advanced by the Corporation, in respect of any claim, issue or matter for which such person is judged to be liable to the Corporation by a court of competent jurisdiction due to misconduct in the performance of his or her duties to the Corporation, unless and only to the extent that the court in which such Proceeding was brought shall determine that such person is fairly and reasonably entitled to indemnity. (c) Actions Where Indemnitee is Deceased. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any Proceeding by reason of the fact that he or she is or was an Agent of the Corporation, or by reason of anything done or not done by him or her in any such capacity, and prior to, during the pendency of, or after completion of, such Proceeding, the Indemnitee shall die, then the Corporation shall defend, indemnify and hold harmless the estate, heirs and legatees of the Indemnitee against any and all Expenses and liabilities incurred by or for such persons or entities in connection with the investigation, defense, settlement or appeal of such Proceeding on the same basis as provided for the Indemnitee in paragraphs 3(a) and 3(b) above. The Expenses and liabilities covered hereby shall be net of any payments by D&O Insurance carriers or others. 4. Partial Indemnification. If an Indemnitee is found under paragraph 3(b), 7 or 10 hereof not to be entitled to indemnification for all of the Expenses relating to a Proceeding, the Corporation shall indemnify the Indemnitee for any portion of such Expenses not specifically precluded by the operation of such paragraph 3(b), 7 or 10. 5. Mandatory Advancement of Expenses. Until a determination to the contrary under paragraph 7 hereof is made and unless the provisions of paragraph 10 apply, the Corporation shall advance all Expenses incurred by each Indemnitee in connection with the investigation, defense, settlement or appeal of any Proceeding to which the Indemnitee is a party or is threatened to be made a party covered by the indemnification in paragraph 3 hereof. As a condition to such advance, each Indemnitee shall, at the request of the Corporation, undertake in a manner satisfactory to the Corporation to repay such amounts advanced if it shall ultimately be determined by an order of a court that the Indemnitee is not entitled to be indemnified by the Corporation by the terms hereof or under applicable law. Subject to paragraph 6 hereof, the advances to be made hereunder shall be paid by the Corporation to the Indemnitee within twenty (20) days following delivery of a written request by 3 the Indemnitee to the Corporation, which request shall be accompanied by vouchers, invoices and similar evidence documenting the amounts requested. 6. Indemnification Procedures. (a) Promptly after receipt by the Indemnitee of notice of the commencement or threat of any Proceeding covered hereby, the Indemnitee shall notify the Corporation of the commencement or threat thereof, provided that any failure to so notify shall not relieve the Corporation of any of its obligations hereunder, except to the extent that such failure or delay increases the liability of the Corporation hereunder. (b) If, at the time of the receipt of a notice pursuant to paragraph 6(a) above, the Corporation has D&O Insurance in effect, the Corporation shall give prompt notice of the Proceeding or claim to its insurers in accordance with the procedures set forth in the applicable policies. The Corporation shall thereafter take all necessary or desirable action to cause such insurers to pay all amounts payable as a result of such Proceeding in accordance with the terms of such policies and the Indemnitee shall not take any action (by waiver, settlement or otherwise) which would adversely affect the ability of the Corporation to obtain payment from its insurers. (c) If the Corporation shall be obligated to pay the Expenses of any Indemnitee, the Corporation shall assume the defense of the Proceeding to which the Expenses relate and shall deliver a notice of assumption to the Indemnitee. The Corporation will not be liable to the Indemnitee under this Agreement for any fees of counsel incurred after delivery of such notice with respect to such Proceeding or any costs of settlement not approved in advance in writing by the Corporation, provided that (i) the Indemnitee shall have the right to employ his or her own counsel in any such Proceeding at the Indemnitee's expense, and (ii) if (1) the employment of counsel by the Indemnitee has been previously authorized by the Corporation, (2) the Indemnitee shall have provided the Corporation with an opinion of counsel stating that there is a strong argument that a conflict of interest exists between the Corporation and the Indemnitee in the conduct of any such defense, or (3) the Corporation shall not have assumed the defense of such Proceeding, the fees and Expenses of Indemnitee's counsel shall be at the expense of the Corporation. 7. Determination of Right to Indemnification. (a) To the extent an Indemnitee has been successful on the merits or otherwise in defense of any Proceeding, claim, issue or matter covered hereby, the Indemnitee need not repay any of the Expenses advanced in connection with the investigation, defense or appeal of such Proceeding. 4 (b) If paragraph 7(a) is inapplicable, the Corporation shall remain obligated to indemnify the Indemnitee, and the Indemnitee need not repay Expenses previously advanced, unless the Corporation, by contested motion before a court of competent jurisdiction, obtains preliminary or permanent relief suspending or denying the obligation to advance or indemnification for Expenses. (c) Notwithstanding a determination by a court that the Indemnitee is not entitled to indemnification with respect to a specific Proceeding, the Indemnitee shall have the right to apply to the Court of Chancery of Delaware for the purpose of enforcing the Indemnitee's right to indemnification pursuant to this Agreement. (d) Notwithstanding any other provision in this Agreement to the contrary, the Corporation shall indemnify the Indemnitee against all Expenses incurred by the Indemnitee in connection with any Proceeding under paragraph 7(b) or 7(c) above and against all Expenses incurred by the Indemnitee in connection with any other Proceeding between the Corporation and the Indemnitee involving the interpretation or enforcement of the rights of the Indemnitee under this Agreement unless a court of competent jurisdiction finds that the material claims and/or defenses of the Indemnitee in any such Proceeding were frivolous or made in bad faith. 8. Certificate of Incorporation and By Laws. The Corporation agrees that the Certificate of Incorporation and By Laws of the Corporation in effect on the date hereof shall not be amended to reduce, limit, hinder or delay (i) the rights of the Indemnitee granted hereby or (ii) the ability of the Corporation to indemnify the Indemnitee as required hereby. The Corporation further agrees that it shall exercise the powers granted to it under its Certificate of Incorporation, its By Laws and by applicable law to indemnify any Indemnitee to the fullest extent possible as required hereby. The Corporation further covenants and agrees that Articles 9 and 10 of the Corporation's Certificate of Incorporation shall not be amended in a manner (i) adverse to any Indemnitee or (ii) inconsistent with the benefits granted to the Indemnitee hereby. 9. Witness Expenses. The Corporation agrees to reimburse each Indemnitee for all Expenses, including attorneys' fees and travel costs, incurred by such Indemnitee in connection with being a witness, or if an Indemnitee is threatened to be made a witness, with respect to any Proceeding, by reason of his serving or having served as an Agent of the Corporation. 10. Exceptions. Notwithstanding any other provision herein to the contrary, the Corporation shall not be obligated pursuant to the terms of this Agreement: (a) Claims Initiated by Indemnitee. To indemnify or advance expenses to the Indemnitee with respect to Proceedings or claims initiated or brought voluntarily by the Indemnitee and not by way of defense (other than Proceedings brought to establish or enforce a right to indemnification under this Agreement or the provisions of the Corporation's Certificate 5 of Incorporation or By Laws unless a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such Proceeding was not made in good faith or was frivolous). (b) Unauthorized Settlements. To indemnify the Indemnitee under this Agreement for any amounts paid in settlement of a Proceeding covered hereby without the prior written consent of the Corporation to such settlement. 11. Non-exclusivity. This Agreement is not the exclusive arrangement between the Corporation and any Indemnitee regarding the subject matter hereof and shall not diminish or affect any other rights which each Indemnitee may have under any provision of law, the Corporation's Certificate of Incorporation or By Laws, under other agreements, or otherwise. 12. Continuation after Term. Each Indemnitee's rights hereunder shall continue after the Indemnitee has ceased acting as a director or Agent of the Corporation and the benefits hereof shall inure to the benefit of the heirs, executors and administrators of each Indemnitee. 13. Interpretation of Agreement. This Agreement shall be interpreted and enforced so as to provide indemnification to the Indemnitee to the fullest extent now or hereafter permitted by law. 14. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable, (i) the validity, legality and enforceability of the remaining provisions of the Agreement shall not in any way be effected or impaired thereby, and (ii) to the fullest extent possible, the provisions of this Agreement shall be construed or altered by the court so as to remain enforceable and to provide the Indemnitee with as many of the benefits contemplated hereby as are permitted under law. 15. Counterparts, Modification and Waiver. This Agreement may be signed in counterparts. This Agreement constitutes a separate agreement between the Corporation and each Indemnitee and may be supplemented or amended as to an Indemnitee only by a written instrument signed by the Corporation and such Indemnitee, with such amendment binding only the Corporation and the signing Indemnitee(s). All waivers must be in a written document signed by the party to be charged. No waiver of any of the provisions of this Agreement shall be implied by the conduct of the parties. A waiver of any right hereunder shall not constitute a waiver of any other right hereunder. 6 IN WITNESS WHEREOF, the parties hereby have caused this agreement to be duly executed as of the day and year first above written. MICRO WAREHOUSE, INC. By /s/ Bruce Lev ------------------------ Bruce L. Lev, Its Executive Vice President Hereunto Duly Authorized --------------------------- Stephen England 7 EX-11 3 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 MICRO WAREHOUSE, INC. AND SUBSIDIARIES STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA) (unaudited)
Three Months Ended Nine Months Ended September September September September 30, 1998 30, 1997 30, 1998 30, 1997 --------- --------- --------- --------- Net income (loss) $ 11,863 $ (7,118) $ 16,585 $ 8,514 ======== ======== ======== ======== Shares Weighted average common shares outstanding 34,816 34,550 34,695 34,432 Common equivalent shares 775 -- 386 327 -------- -------- -------- -------- Weighted average common shares and common equivalent shares outstanding - Diluted 35,591 34,550 35,081 34,759 ======== ======== ======== ======== Net income (loss) per share - Diluted $ 0.33 $ (0.21) $ 0.47 $ 0.24 ======== ======== ======== ========
EX-27 4 FDS
5 1,000 9-MOS DEC-31-1998 SEP-30-1998 154,977 21,469 229,111 9,335 114,003 557,064 32,590 55,679 640,919 266,408 0 0 0 349 374,162 640,919 1,624,982 1,624,982 1,362,653 1,362,653 214,673 0 320 40,058 23,473 16,585 0 0 0 16,585 0.48 0.47
-----END PRIVACY-ENHANCED MESSAGE-----