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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1996 COMMISSION FILE NUMBER: 0-20730
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MICRO WAREHOUSE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 06-1192793
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
535 CONNECTICUT AVENUE, NORWALK, CONNECTICUT 06854
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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(203) 899-4000
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
(TITLE OF CLASS)
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Page 1 of
Exhibit Index on Page 20
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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 of such
filing requirements for the past 90 days. Yes |X| No |_|.
Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to the Form 10-K. |X|
The aggregate market value of voting stock held by non-affiliates of the
Registrant computed by reference to the closing sales price as reported on the
Nasdaq Stock Market on March 17, 1997 was approximately $222,594,417. In
determining the market value of the voting stock held by non-affiliates, shares
of Common Stock beneficially owned by each executive officer, director and
holder of more than 10% of the outstanding shares of Common Stock have been
excluded. This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
Common Stock outstanding as of March 17, 1997: 34,366,046
DOCUMENTS INCORPORATED BY REFERENCE:
Pursuant to General Instruction G(2) to this form, the information required
by Part I (Item 3) and Part II (Items 5, 6, 7 and 8) hereof is incorporated by
reference from the registrant's Annual Report to Stockholders for the Fiscal
Year ended December 31, 1996.
Pursuant to General Instruction G(3) to this form, the information required
by Part III (Items 10, 11, 12, and 13) hereof is incorporated by reference from
the registrant's definitive Proxy Statement for its Annual Meeting of
Stockholders scheduled to be held on June 4, 1997.
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2
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business....................................................... 4
Item 2. Properties..................................................... 12
Item 3. Legal Matters.................................................. 13
Item 4. Submission of Matters to a Vote of Security Holders............ 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters...................................................... 13
Item 6. Selected Financial Data........................................ 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 13
Item 8. Financial Statements and Supplementary Data.................... 14
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 14
PART III
Item 10. Directors and Executive Officers of the Registrant............. 14
Item 11. Executive Compensation......................................... 14
Item 12. Security Ownership of Certain Beneficial Owners and Management. 14
Item 13. Certain Relationships and Related Transactions................. 14
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 14
Signatures..................................................... 19
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PART I
ITEM 1. BUSINESS
Micro Warehouse, Inc. (the "Company" or "Micro Warehouse") is a specialty
catalog retailer and direct marketer of brand name personal computers, computer
software, accessories, peripheral and networking products to commercial and
consumer customers. The Company markets its products through frequent mailings
of its distinctive, colorful catalogs, Internet catalog sites on the worldwide
web and dedicated telemarketing account managers who focus on corporate,
education and government accounts. The Company offers brand name hardware and
software from leading vendors such as Adobe, Apple, Compaq, Hewlett Packard,
IBM, Iomega, Microsoft, Motorola, 3Com, and Toshiba.
Through its three core catalogs, MicroWarehouse, MacWarehouse and Data Comm
Warehouse, various specialty catalogs and its Internet sites, the Company offers
a broad assortment of more than 25,000 computer products at competitive prices.
With colorful illustrations, concise product descriptions and relevant technical
information, each catalog title focuses on a specific segment of the computer
market. The catalogs are recognized as a leading source for computer hardware,
software and other products. During the year ended December 31, 1996, the
Company distributed approximately 123 million catalogs worldwide, and as of
December 31, 1996, the Company had approximately 2.3 million customers who had
purchased products within the last 12 months (excluding customers of USA Flex,
which was acquired in October).
International operations, particularly in Europe and Canada, have become a
significant part of the Company's business. In 1991, the Company established
full-service, direct marketing operations in the United Kingdom. In late 1992,
the Company began operations in France and Germany and, in 1993 and 1994,
acquired companies or initiated operations in Sweden, Denmark, Norway, the
Netherlands, Belgium, Finland, and France. In this same timeframe, the Company
also expanded into the non-European markets of Japan, Canada and Mexico. In
1995, the Company acquired businesses in the United Kingdom, Germany, Australia
and Switzerland. In 1996 the Company discontinued its "Macintosh only"
operations in Belgium and Switzerland. The Company currently publishes catalogs
in 12 countries outside the US and distributed approximately 41 million catalogs
internationally in the year ended December 31, 1996. See Note 15 to Notes to
Consolidated Financial Statements for information regarding the Company's
operations in different geographic areas.
On January 25, 1996, the Company acquired Santa Clara, California-based Inmac
Corp. ("Inmac") through the issuance by the Company of 3,033,682 shares of its
common stock. Inmac is a leading international direct-response marketer of a
wide range of personal computer and networking products. Inmac operates in the
United States, Canada, France, Germany, the Netherlands, Sweden and the UK.
International sales by Inmac accounted for 73% of net sales in its fiscal year
ended July 29, 1995. For accounting purposes, the Inmac merger has been treated
as a pooling of interests.
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Throughout 1996 the Company integrated the operations of Micro Warehouse and
Inmac on a worldwide basis. In the US, Inmac's corporate offices in Santa Clara
and its manufacturing operations in Sunnyvale, California were closed. Inmac's
Dallas, Texas telemarketing facility was closed and telemarketing operations
were moved to Micro Warehouse's Gibbsboro, New Jersey facility. Inmac's
warehouse in Louisville, Kentucky was closed and all activity was moved to the
Micro Warehouse fulfillment facility in Wilmington, Ohio. Internationally,
facilities were closed in the UK, France, Germany, the Netherlands, Sweden and
Canada.
In September 1996 the Company acquired the Helsinki, Finland based Business
Forum and a related company. In November the Company completed the acquisition
of the business of USA Flex, a Bloomingdale, Illinois direct marketer of IBM
PC-compatible personal computer products. This company has been successful in
acquiring customers and building its business from advertisements placed in US
computer publications, particularly Computer Shopper. The operating results of
these entities from dates of acquisition were not significant.
The Company maintains a full-service distribution center in Wilmington, Ohio,
totaling approximately 365,000 square feet and telemarketing centers in Lakewood
and Gibbsboro, New Jersey, South Norwalk, Connecticut, and Bloomingdale,
Illinois. The Company operates 24 hours a day, seven days a week in the US. The
Company also operates telemarketing and distribution facilities in the United
Kingdom, France, Germany, Denmark, Sweden, Norway, Finland, the Netherlands,
Japan, Australia, Mexico, and Canada. The Company's international operations
generally use the same distribution and processing computer systems and are able
to exchange data with US operations.
The Company began operations in 1987 as a Connecticut corporation and was
reincorporated in Delaware on October 2, 1992.
Catalog Publication
The Company currently publishes three main catalogs in the US: MacWarehouse for
the Macintosh market, MicroWarehouse for the IBM PC-compatible market and
DataCommWarehouse, for the data communications and networking market. The
Company published 14 editions of MacWarehouse and 12 editions each of
MicroWarehouse and Data CommWarehouse in the US in 1996. The Company also
published 7 editions of the Inmac catalog in the US in 1996. Additional
specialty catalogs are produced at various intervals. Domestically, active
customers (customers who have placed orders within the past 12 months) receive a
catalog at least monthly and all customers receive a catalog with every order
shipped. The Company also mails targeted versions of its catalogs to its
corporate, education and government customers. Internationally, catalogs are
published under the MicroWarehouse, MacWarehouse, Inmac, Lan Warehouse and
several other titles at various frequencies. The numbers of catalogs distributed
during the last three years were 123 million in 1996, 103 million in 1995 and 87
million in 1994.
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Each catalog is printed with full-color photographs and detailed product
descriptions. The catalogs are generally created and produced in-house by the
Company's designers and production artists on a computer-based desktop
publishing system. The in-house preparation of most portions of the catalog
streamlines the production process, provides for greater flexibility and
creativity in catalog production and results in significant cost savings.
Marketing and Sales
Micro Warehouse services commercial and consumer customers but the focus of the
business has moved towards the commercial segment. As of December 31, 1996,
commercial customers represented one-third of the total domestic customer base
but accounted for approximately two-thirds of total domestic sales. The
Company's various marketing programs are designed to attract new customers and
to stimulate additional purchases from existing customers. The Company
continuously attracts new customers by selectively mailing catalogs to
prospective customers as well as through advertising in major computer magazines
and on the Internet. In addition, the Company obtains the names of prospective
customers through the use of selected mailing lists from various sources,
including manufacturers, suppliers, software publishers and computer magazine
publishers. Worldwide active customers in 1996 were 2.3 million and were 2.1
million and 1.8 million in 1995 and 1994, respectively.
Inbound Telemarketing. The Company employs telemarketing representatives who
assist customers in purchasing decisions, process product orders and respond to
customer inquiries on order status, product pricing and availability. The
Company processes approximately 43,000 domestic calls per day. The Company
offers toll-free numbers for all of its domestic customers. In addition, it
receives orders by fax, mail and the Internet. Through the Company's integrated
computer systems, a sales representative can quickly access a customer's record
which details past purchases as well as billing information. To provide more
targeted service, the Company has separate inbound sales groups for the
consumer, corporate and government/education segments.
Managed Commercial Telemarketing. In addition to its inbound telemarketers, the
Company has dedicated telemarketing account managers who are assigned to manage
and oversee various corporate, government and education accounts. The Company's
commercial sales program combines account management and catalog mailing to
penetrate these accounts. The Company's sales staff, through frequent contact,
seeks to build long-term relationships with the Company's commercial customers.
The Company has approximately 231,000 domestic commercial accounts that are
managed by its commercial telemarketing operations.
Customer Service and Technical Support. The Company believes that its ability to
provide prompt and efficient customer service has been critical to its success.
The Company's dedicated customer service representatives are trained to respond
to frequently asked questions such as the
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status of an order or the Company's return policy. The Company also has a
technical support staff to assist customers with the selection, installation and
operation of their products. The Company offers a toll-free number for customer
service and technical support from 8:00 a.m. to midnight, eastern time, Monday
through Friday and from 10:00 a.m. to 6:00 p.m. on Saturday and Sunday.
Customer Return Policy. The Company provides a 30-day guarantee against defects
with respect to all of its products. The Company works closely with customers
and vendors to assure that all vendor warranties and return privileges are fully
honored. For the year ended December 31, 1996, the Company had a return rate of
approximately 7.3% of gross sales. Returns are received and processed as a
segregated activity to maintain control over the returned product, to initiate
the refund process and to obtain appropriate credit from suppliers. Return
experience is closely monitored at the stock-keeping-unit ("SKU") level to
identify trends in product offerings, enhance customer satisfaction and reduce
overall returns.
Micro Warehouse on the Internet. In July 1995, the Company launched an internet
catalog on the worldwide web. Product descriptions and prices of more than
20,000 products are provided on-line, with full information and on screen images
available for 10,000 items. Browsers can download demonstration
software to "try before they buy". Selected corporate clients can gain access to
their own exclusive on-line catalog, complete with unique product selections at
customized pricing. In 1996, some of the Company's overseas subsidiaries
launched their own web sites.
Seasonality. Customer response rates are subject to variations. The first and
last quarters of the year generally have higher response rates while the two
middle quarters typically have lower response rates. The slower quarters are
impacted by the summer months, particularly in Europe.
Products and Merchandising
The Company offers over 25,000 microcomputer hardware, software and peripheral
products to Macintosh and PC users. For the year ended December 31, 1996, sales
of products for Apple Macintosh computers represented approximately 48.5% of the
Company's net sales, while sales for IBM PC-compatible personal computers
represented approximately 51.5% of net sales. The Company's product evaluation
teams for the various product categories constantly monitor the market for new
products from new and existing vendors. As product areas decline in importance,
the amount of catalog exposure is reduced in favor of "hotter" new products and
the inventory levels and numbers of SKU's are adjusted downward. For the year
ended December 31, 1996, no single product accounted for more than 2.5% of the
Company's domestic net sales.
Hardware. The Company offers a large selection of hardware items. This category
includes personal computers, servers, printers, modems, monitors, data storage
devices, add-on circuit boards, connectivity products and certain business
machines. Brands sold in this category
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include Apple, Compaq, Epson, 3Com, Cisco, Hayes, Hewlett Packard, IBM, Intel,
Texas Instruments and Toshiba. Hardware sales constituted approximately 74% of
the Company's domestic net sales in 1996.
Software. The Company sells a wide variety of computer software packages in the
business and personal productivity, connectivity, utility, language, education
and entertainment categories. The Company offers products from the larger, well
known vendors as well as numerous specialty products from new and emerging
vendors. Brands offered by the Company include Adobe, Claris, Connectix,
Insignia Solutions, Macromedia, Microdyne, Microsoft, Novell, Quark, and
Symantec. Software sales represented approximately 19% of the Company's domestic
net sales in 1996.
Supplies and Accessories. The Company currently sells various supplies such as
media, toner cartridges, desk and computer accessories and computer furniture
through its catalogs. Sales of these products constituted approximately 7% of
the Company's domestic net sales in 1996.
Private Label Brands. Under its private label brands, Power User, USA Flex and
NuData, the Company sells products such as microcomputers, hard drives, server
switches, memory chips, CD-Roms, cables, and accessories. Sales of these
products constituted approximately 10% of the Company's domestic net sales in
1996.
Purchasing
Domestically, the Company purchases products from approximately 1,700 vendors
and purchases approximately 72% of its products directly from manufacturers with
the balance from distributors. The Company's largest domestic vendors include
Adobe, Apple, Hayes, Hewlett Packard, IBM, Iomega, Microsoft, Motorola, 3Com and
Toshiba. In 1996 the leading 100 products sold by the Company accounted for
approximately 27% of its net sales. Purchases of products from Apple, the
Company's largest vendor, constituted approximately 16% of the Company's product
purchases.
The Company believes that its volume purchases enable it to obtain favorable
product pricing. Many of the Company's suppliers make funds available to the
Company in the form of advertising allowances and incentives to promote and
increase sales of their products. Generally, the Company has been able to return
unsold or obsolete inventory to its vendors through written agreements with, or
unwritten policies of, such vendors. In addition, the Company typically receives
price protection should a vendor subsequently lower its price. Internationally,
vendors price protection and return privileges are more limited.
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Distribution Centers
All of the Company's U.S. distribution operations are conducted at the
Wilmington, Ohio warehouse/distribution center, which consists of approximately
365,000 square feet located in four facilities adjacent to the main distribution
facility of Airborne Express. Domestic orders accepted by midnight, eastern
time, are generally shipped for delivery the following day via Airborne Express
for a charge based on weight. Upon request, orders may also be shipped by
alternate means. The Company also operates distribution facilities in the United
Kingdom, France, Germany, Denmark, Norway, Sweden, Finland, the Netherlands,
Japan, Canada, Mexico, Australia.
Domestic orders are placed at the Company's Lakewood and Gibbsboro, New Jersey,
South Norwalk, Connecticut, and Bloomingdale, Illinois, facilities which include
telemarketing, customer service, training, management information systems,
accounting and administration. When an order is entered into the system, a
computer credit check or credit card verification is performed and, if approved,
the order is electronically transmitted to the warehouse in Wilmington, Ohio and
a packing slip is printed for order fulfillment. Inventory shrinkage has been
nominal.
Management Information Systems
The Company has committed significant resources to the development of an
integrated computer system which is used to manage all aspects of its business.
The main computer system is principally comprised of Hewlett Packard hardware
and licensed and internally-developed software. This system supports
telemarketing, marketing, purchasing, accounting, customer service, warehousing
and distribution. The system allows the Company, among other things, to monitor
sales trends, make informed purchasing decisions, provide product availability
and order status information. In addition to the main system, the Company has a
system of networked personal computers which provide numerous additional
management control, planning, and exception reporting which facilitates data
sharing and provides an automated office environment. During 1996, the Company
made installations and upgrades to its computer systems in both its domestic and
international operations, at an approximate cost of $5 million. The Company's
international operations generally use the same system and are able to exchange
data with the Company's United States operations. Routine capacity enhancements
are made periodically, as the Company deems necessary.
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Competition
The computer products business is highly competitive. The Company competes with
consumer electronic and computer retail stores, including superstores, corporate
resellers, value-added resellers, other direct marketers of software and
computer related products and various "on-line" vendors and other resellers of
computer products. Some of those competitors provide superior product support,
configuration, and installation services. Several hardware and software vendors
sell their products directly to end users. Certain competitors of the Company
have financial and other resources greater than those of the Company. There can
be no assurance that the Company can continue to compete effectively against
existing competitors or new competitors that may enter the market. Price is an
important competitive factor in the personal computer software and hardware
market and there can be no assurance that the Company will not be subject to
increased price competition.
Employees
As of December 31, 1996, the Company employed 3,481 persons, of whom 733 were in
management, support services and administration; 1,079 in sales, technical
support and customer service; 466 in warehouse/distribution and 1,203 employed
at international locations. The Company's domestic employees are not represented
by a labor union and it has experienced no work stoppages. The Company believes
that its employee relations are good.
Sales Tax
The Company presently collects sales tax on sales of products to residents in
the states of New Jersey, Connecticut, Ohio and Illinois. Various states have
tried to impose on direct marketers the burden of collecting sales taxes on the
sale of products shipped to state residents. The United States Supreme Court
affirmed its position that it is unlawful for a state to impose sales tax
collection obligations on an out-of-state mail order company whose only contacts
with the state are the distribution of catalogs and other advertising materials
through the mail and subsequent delivery of purchased goods by parcel post and
interstate common carriers. In the event legislation is passed to overturn the
United States Supreme Court's decision or if the Court changes its position, the
imposition of a sales tax collection obligation on the Company in states to
which it ships products would result in additional administrative expenses to
the Company and could result in price increases to the customer.
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Trademarks
The Company conducts its business under the trademarks and service marks
"MacWAREHOUSE," "MacSHOPPER," "MicroWAREHOUSE," "Upgrade Warehouse," "Windows
Warehouse," "Power User," "Data CommWAREHOUSE," "CD-Rom WAREHOUSE," "Micro
SystemsWAREHOUSE," "Mac Systems WAREHOUSE," "Home ComputerWAREHOUSE,"
"LanWAREHOUSE," "WAREHOUSE-On-Line," "Academic WAREHOUSE," "Developer's
WAREHOUSE," "The Mac Superstore," "NU DATA,", "Workstation EXPRESS," "PC
Select," "USA Flex," "Inmac," "MacSelect," "The Inmac Advantage," "Good
Impressions," "Black Pearl," and "Datamaster." The Company intends to use and
protect these or related marks, as necessary, in the United States and in
various foreign countries. The Company believes its trademarks and service marks
have significant value and are an important factor in the marketing of its
products. The Company's trademarks and servicemarks have an indefinite term as
long as they are used in connection with the Company's business activities. The
Company intends to take all appropriate steps to maintain use of its marks and
to renew registrations for its marks.
Regulation
The direct response business as conducted by the Company is subject to the Mail
and Telephone Order Merchandise Rule and 1996 Telemarketing Sales Rule and
related regulations promulgated by the Federal Trade Commission and comparable
state agencies. The Company believes it is in compliance with such rules and
regulations and has implemented programs and systems to assure ongoing
compliance.
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ITEM 2. PROPERTIES
The Company's principal facilities, all of which are leased, are as follows:
<TABLE>
<CAPTION>
Approx. Expiration of
Facility Location Sq. Ft. Leases
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<S> <C> <C> <C>
Telemarketing, technical support,
management information systems and
customer service center................Lakewood, NJ 52,109 1999
Telemarketing, technical support,
management information systems and
customer service center................Lakewood, NJ 41,514 2000
Manufacturing, sales and distribution.....Lakewood, NJ 30,360 2001
Telemarketing, technical support,
management information systems and
customer service center................Gibbsboro, NJ 82,000 2002
Telemarketing.............................Bloomingdale, IL 21,939 1999
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Warehouse and distribution center.........Wilmington, OH 102,400 1998
Warehouse and distribution center.........Wilmington, OH 102,400 1999
Warehouse and distribution center.........Wilmington, OH 102,400 1997
Warehouse and distribution center.........Wilmington, OH 12,800 1997
Warehouse and distribution center.........Wilmington, OH 44,800 1999
Headquarters and Administrative offices...Norwalk, CT 83,000 2001
Corporate Sales...........................South Norwalk, CT 31,515 1997
European Headquarters and offices.........Bracknell, England 11,000 2011
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Offices and distribution center...........Watford, London, 37,500 2004
England
Warehouse and distribution center Runcorn, England 69,000 2015
Offices...................................Kingsbury, Wembly, 10,550 1996
England
Offices...................................Suresnes, France 9,900 2002
Offices and warehouse.....................Mitry-Mory, France 60,000 1999
Offices and distribution center...........Florsheim, Germany 70,000 1998
Offices and distribution center...........Amsterdam, Netherlands 28,000 1999
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Offices and distribution center...........Ega, Denmark 3,735 1996
Offices and distribution center...........Oslo, Norway 8,217 1996
Offices and distribution center...........Stockholm, Sweden 11,475 1998
Offices and distribution center...........Helsinki, Finland 4,410 1996
Retail and offices .......................Helsinki, Finland 11,150 1997
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Offices and distribution center...........Kanagawa, Japan 1,500 1996
Offices and distribution center...........Mexico City, Mexico 1,800 1996
Retail and offices........................Toronto, Ontario, 6,800 1997
Canada
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Warehouse.................................Toronto, Ontario, 2,500 1998
Canada
Offices and warehouse.....................Mississauga, Ontario, 23,800 2001
Canada
Retail, offices and warehouse.............North York, Ontario, 1,800 1998
Canada
Offices and distribution center...........Brisbane, Australia 7,500 2001
</TABLE>
The Company believes that its facilities are adequate for its current needs and
that suitable additional space will be available as needed.
ITEM 3. LEGAL MATTERS
The information required by this item appears on page 1 of the Company's Annual
Report to Stockholders under the caption "Restatement of Financial Statements"
and in Note 17 to Notes to Consolidated Financial Statements on page 36 of the
Company's Annual Report to Stockholders, all of which information is
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded in the over-the-counter market and is
quoted on the Nasdaq Stock Market. The information appearing on page 37 of the
Company's Annual Report to Stockholders under the caption 'Common Stock' is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item appears on page 17 of the Company's
Annual Report to Stockholders under the caption 'Selected Financial Information'
which information is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information appearing on pages 18 through 21 of the Company's Annual
Report to Stockholders under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" is incorporated herein by
reference.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information appearing on pages 22 through 36 of the Company's Annual
Report to Stockholders is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item appears in the Company's definitive
Proxy Statement for its Annual meeting of Stockholders scheduled to be held on
June 4, 1997 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item appears in the Company's definitive
Proxy Statement for its Annual Meeting of Stockholders scheduled to be held on
June 4, 1997 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item appears in the Company's definitive
Proxy Statement for its Annual Meeting of Stockholders scheduled to be held on
June 4, 1997 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears in the Company's definitive
Proxy Statement for its Annual Meeting of Stockholders scheduled to be held on
June 4, 1997 and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM
8-K
(a)(1) Consolidated Financial Statements:
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The following consolidated financial statements are incorporated by
reference from the Company's Annual Report to Stockholders for the fiscal year
ended December 31, 1996:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1996 and 1995.
Consolidated Statements of Income for the years ended December 31, 1996,
1995 and 1994.
Consolidated Statements of Stockholders Equity as of and for the years
ended December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
(a)(2) Consolidated Financial Statement Schedule:
The following Consolidated Financial Statement Schedule of the Company as
set forth below is filed with this report on Form 10-K.
Independent Auditors' Report on Consolidated Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts
Consolidated Financial Statement Schedules other than the one listed above
are omitted for the reason that they are not required or are not applicable, or
the required information is shown in the consolidated financial statements or
notes thereto.
(a)(3) Exhibits
See Exhibit Index on Pages 20 through 21 for exhibits filed with this
report on Form 10-K.
(b) Reports on Form 8-K
1) The Company filed a Form 8-K pursuant to Item 5 on October 1, 1996 to
report that the Company may restate its 1994 and 1995 financial
results.
2) The Company filed a Form 8-K pursuant to Item 5 on October 3, 1996 to
report that Linwood A. Lacy, Jr. was appointed President and Chief
Executive Officer of the Company effective as of October 1, 1996.
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3) The Company filed a Form 8-K pursuant to Item 5 on October 3, 1996 to
report that a class action complaint dated October 1, 1996 had been
filed against the Company in the U.S. District Court in Bridgeport,
Connecticut captioned Bruce Payne, et als v. Micro Warehouse, Inc., et
als bearing docket no. 396CV01920 claiming a possible violation of
Sections 10(b) and 20(a) of the Securities Exchange Act and Rule
10b-5.
4) The Company filed a Form 8-K pursuant to Item 5 on October 16, 1996 to
report that it continues to oversee a review of previously reported
errors in its accounting procedures and confirmed that it will restate
1994 and 1995 and first quarter 1996 financial results and it may
restate 1993 financial results.
5) The Company filed a Form 8-K pursuant to Item 5 on November 21, 1996
to announce a significant reorganization to include several immediate
resignations in its Finance Department and the future resignation of
its Chief Operating Officer.
6) The Company filed a Form 8-K pursuant to Item 5 on December 19, 1996
to report that fourth quarter earnings were likely to be significantly
lower than expected.
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SCHEDULE II
MICRO WAREHOUSE, INC.
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Additions Deductions Balance at
Beginning of Charged from End
Year to Operations Reserves of Year
---- ------------- -------- -------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended:
December 31, 1994 $5,345 $ 3,980 ($ 3,649) 5,676
December 31, 1995 5,676 7,099 (4,967) 7,808
December 31, 1996 7,808 8,195 (5,127) 10,876
Reserve for obsolete inventory
Year ended:
December 31, 1994 6,801 3,917 (4,385) 6,333
December 31, 1995 6,333 6,388 (4,385) 8,336
December 31, 1996 8,336 5,601 (3,416) 10,521
Reserve for refunds
Year ended:
December 31, 1994 461 5,880 (5,774) 567
December 31, 1995 567 11,275 (11,183) 659
December 31, 1996 659 7,745 (7,640) 764
</TABLE>
17
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors and Stockholders of MICRO WAREHOUSE, INC.:
Under date of February 10, 1997, we reported on the consolidated balance
sheets of Micro Warehouse, Inc. and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the years in the three year period ended December 31,
1996, as contained in the annual report to stockholders for 1996 and incorpoated
by reference in the Company's Form 10-K for the year 1996. In connection with
our audits of the aforementioned consolidated financial statements, we also have
audited the related consolidated financial statement schedule as listed under
(a)(2). This consolidated financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
consolidated financial statement schedule based on our audits.
In our opinion, the related consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
Stamford, Connecticut
February 10, 1997
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MICRO WAREHOUSE, INC.
By /s/ LINWOOD A. LACY, JR.
-----------------------------
LINWOOD A. LACY, JR.
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Peter
Godfrey and Linwood A. Lacy, Jr., or either of them, his attorneys-in-fact, with
the power of substitution, for him in any and all capacities, to sign any
amendments to this report on Form 10-K for the year ended December 31, 1996, and
to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorneys-in-fact, or their substitute or substitutes,
may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K for the year ended December 31, 1996 has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Peter Godfrey Chairman of the Board March 27, 1997
- -----------------------
Peter Godfrey
/s/ Linwood A. Lacy, Jr. President, Chief Executive March 27, 1997
- ----------------------- Officer, Chief Financial
Linwood A. Lacy, Jr. Officer, and Director
(Principal Executive Officer)
(Principal Financial Officer)
(Principal Accounting Officer)
/s/ Felix Dennis Director March 27, 1997
- -----------------------
Felix Dennis
/s/ Frederick H. Fruitman Director March 27, 1997
- -----------------------
Frederick H. Fruitman
/s/ Melvin Seiler Executive Vice President, Chief March 27, 1997
- ----------------------- Operating Officer and Director
Melvin Seiler
/s/ Joseph M. Walsh Director March 27, 1997
- -----------------------
Joseph M. Walsh
19
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
- --------------------------------------------------------------------------------
3.1 -- Certificate of Incorporation of Registrant as Amended ..........
3.2 -- By-Laws of Registrant, as Amended ..............................
10.1 -- Amendment No. 1 to 1992 Stock Option Plan ......................
10.2 -- Amendment No. 1 to 1994 Stock Option Plan ......................
10.3* -- Amendment No. 2 to 1992 and 1994 Stock Option Plans ............
10.4 -- Lease Agreements between C.P. Lakewood, L.P. and the
Registrant relating to the Lakewood, New Jersey facilities ...
10.5 -- Lease Agreement between Miller-Valentine Partners and the
Registrant relating to the Wilmington, Ohio facility .........
10.6 -- Lease Agreement between Peter Godfrey and the Registrant
relating to the South Norwalk, Connecticut facility ..........
10.6(a) -- Lease Agreement between Hialet Associates and the
Registrant relating to a South Norwalk, Connecticut facility
(53 Water Street) ............................................
10.6(b) -- Lease Agreement between Hialet Associates and the
Registrant relating to a South Norwalk, Connecticut facility
(29 Haviland Street) .........................................
10.7 -- Lease Agreement between 50 Water Street Associates and
the Registrant relating to the South Norwalk, Connecticut
facility .....................................................
10.8 -- Lease between Union Square Assoc. Ltd. Part. and the
Registrant relating to the South Norwalk, Connecticut
facility .....................................................
10.9 -- Lease Agreement between South Norwalk Redevelopment
Partnership and the Registrant relating to the South
Norwalk, Connecticut facility ................................
10.10 -- Lease Agreement between Unigate (UK) Limited and the
Registrant relating to the Barnet, England facility ..........
10.11 -- Second Amendment to Lease Agreement between Peter Godfrey
and the Registrant relating to the South Norwalk,
Connecticut facility (47 Water Street) .......................
10.12 -- Second Amendment to Lease Agreement between Hialet
Associates and the Registrant relating to the South Norwalk,
Connecticut facility (53 Water Street) .......................
10.13 -- Lease Agreement between Misco, Sofibus and the Registrant
relating to the Bonneuil Sur Marne, France facility ..........
10.14 -- Lease Agreement between Miller-Valentine Partners and the
Registrant relating to the Wilmington, Ohio facility .........
10.15 -- Lease Agreement between BBS Norwalk One Inc. and the
Registrant relating to the Norwalk, Connecticut facility .....
10.16 -- Lease Agreement between J & W Computer GNBTT and the
Registrant relating to Kelkheim, Germany facility ............
10.17* -- Sublease Agreement between Comark, Inc. and the
Registrant ...................................................
10.18 -- Employment Agreement between Peter Godfrey and the
Registrant ...................................................
10.19 -- Employment Agreement between Melvin Seiler and the
Registrant ...................................................
10.20 -- Employment Agreement between Steven Purcell and the
Registrant ...................................................
10.21 -- Employment Agreement between Stephen England and the
Registrant ...................................................
10.22 -- Employment Agreement between Adam W. Shaffer and the
Registrant ...................................................
10.23 -- Amendment to Employment Agreement between Adam W. Shaffer
and the Registrant ...........................................
10.24 -- Employment Agreement between Linwood A. Lacy, Jr. and the
Registrant ...................................................
10.25 -- Amendment to Employment Agreement between Linwood A. Lacy, Jr.
and the Registrant............................................
10.26 -- Employment Agreement between Bruce L. Lev and the
Registrant ...................................................
10.27 -- Consulting Agreement between Felix Dennis and the
Registrant, as amended .......................................
10.28 -- Form of Indemnification Agreement with Officers and
Directors ....................................................
10.29 -- Commercial Revolving Loan and Security Agreement between
State Street Bank and Trust Company and the Registrant dated
July 1, 1991 .................................................
20
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
- --------------------------------------------------------------------------------
10.30 -- Amendment Agreement between State Street Bank and Trust
Company and the Registrant dated November 20, 1991 ...........
10.31 -- Second Amendment Agreement between State Street Bank and
Trust Company and the Registrant dated July 10, 1992 .........
10.32 -- Third Amendment Agreement between State Street Bank and
Trust Company and the Registrant dated October 1, 1992 .......
10.33 --Credit Agreement among the Registrant, the Subsidiaries of
the Registrant, and The Chase Manhattan Bank (National
Association) dated July 25, 1995 .............................
10.34 --First Amendment Agreement among the Registrant, the
Subsidiaries of the Registrant, and The Chase Manhattan Bank
(National Association) dated January 1, 1996 .................
10.35 --Second Amendment Agreement among the Registrant, the
Subsidiaries of the Registrant, and The Chase Manhattan Bank
(National Association) dated January 15, 1996 ................
10.36 --Third Amendment Agreement among the Registrant, the
Subsidiaries of the Registrant, and The Chase Manhattan Bank
(National Association) dated May 10, 1996 ....................
10.37* --Resignation Agreement by and between Eric Furman and the
Registrant dated November 20, 1996 ...........................
10.38* --Resignation Agreement by and between Steven Purcell and
the Registrant dated November 20, 1996 .......................
10.39* --Resignation Agreement by and between Melvin R. Seiler and
the Registrant dated January 20, 1997 ........................
11* --Statement Re Computation of Per Share Earnings ..................
13.1* --Annual Report to Stockholders for the fiscal year ended
December 31, 1996 (such Annual Report, except for those
portions thereof which are expressly incorporated by
reference in this filing, is furnished solely for the
information of the Commission and is not to be deemed
'filed' as part of this filing.) .............................
21.1* -- Subsidiaries of the Registrant .................................
23.1* -- Consent of Independent Auditors ................................
24.1* -- Power of Attorney (included on signature page) .................
27* -- Financial Data Schedule.........................................
- ------------
*Filed herewith. All other exhibits have been previously filed as an Exhibit to
the Registrant's Form 10-Q for the quarter ended September 30, 1996, Annual
Report on Form 10-K for Fiscal Year 1995 or the Registration Statements on
Form S-1 (File Nos. 33-53100 and 33-66066) or amendments thereto and are
incorporated by reference herein.
21
EXHIBIT 10.3
MICRO WAREHOUSE, INC.
AMENDMENT NO. 2 TO 1992 AND 1994 STOCK OPTION PLANS
DATED AS OF DECEMBER 18, 1996
WHEREAS, the 1992 Stock Option Plan was approved by the Board of Directors
on October 1, 1992 and by the Stockholders on June 15, 1992; and
WHEREAS, the 1994 Stock Option Plan was approved by the Board of Directors
on October 1, 1994 and by the Stockholders on June 15, 1994; and
WHEREAS, this Amendment No. 2 was approved by the Board of Directors at
the December 18, 1996 Board Meeting and is subject to approval by the
stockholders at their Annual Meeting of Micro Warehouse, Inc. on June 4, 1997;
and
WHEREAS, this Amendment is intended to comply with certain amendments to
Section 162(m) of the Internal Revenue Code.
NOW, THEREFORE,
The undersigned Secretary of the Corporation certifies the following is
Amendment No. 2 to the 1992 Stock Option Plan and the 1994 Stock Option Plan
subject to Stockholder approval on June 4, 1997:
Paragraph 4 of the Micro Warehouse, Inc. 1992 Stock Option Plan captioned
"Administration" shall be amended so that the same shall read as follows:
"The 1992 Plan shall at all times be administered in accordance with
the regulations of Rule 16b-3 of the Securities and Exchange Act of 1934
as amended by the Securities and Exchange Commission Release No. 34-37260.
The 1992 Plan may be administered by the Board of Directors or by a
Committee of two or more "non-employee directors". The Board or the
Committee shall determine and designate, from time to time, the employees,
directors and consultants to whom options shall be granted and the number
of shares to be covered by each option, the option price, the period of
each option, and the time or times at which options may be exercised.
Subject to the provisions of the 1992 Plan, the Board or the Committee
may, from time to time, adopt rules and regulation relating to
administration of the 1992 Plan and make all other determinations in the
judgment of the Board or the Committee necessary or desirable for the
administration of
<PAGE>
the 1992 Plan. The interpretation and construction of the provisions of
the 1992 Plan and stock option agreements implemented thereunder by the
Board or the Committee shall be final and conclusive. The Board or the
Committee may correct any defect or supply any omission or reconcile any
inconsistency in the 1992 Plan or in any option agreement in the manner
and to the extent it shall deem expedient to carry the 1992 Plan into
effect and it shall be the sole and final judge or such expediency."
Paragraph 7 of the Micro Warehouse, Inc. 1992 Stock Option Plan captioned
"Nontransferability" shall be amended so that the same shall read as
follows:
"(a) Options. Each option granted under the 1992 Plan by its terms
shall be nonassignable and nontransferable by the optionee, either
voluntarily or by operation of law, except that options may be assigned or
transferred as follows to: members of the optionee's immediate family
intended to include parents, spouse, children or grandchildren; or trusts,
family partnerships, or other like entities provided that all of the
beneficiaries of the same are members of said immediate family, or to any
person or entity by will or by the laws of descent and distribution of the
state or country of the optionee's domicile at the time of death. In all
events, the transferrees' rights with respect to any such option shall be
subject to and fully governed by the provisions of the Plan and any
provisions which would have affected any transferred options had the same
not been transferred shall, pari passu, govern said options. Upon any
attempt to transfer, assign, pledge, hypothecate or otherwise dispose of
any option under this 1992 Plan or of any right or privilege conferred
hereby or hereunder contrary to the provisions hereof, or upon the sale or
levy or any attachment or similar process upon the rights and privileges
conferred hereby or hereunder, such option relating thereto shall
thereupon terminate and become null and void. In all events, each such
option by its terms shall be exercisable by either the optionees or
transferrees permitted hereinabove.
(b) Stock. Stock issued upon exercise of an option may have, in
addition to restrictions on transfer imposed by law, such restrictions on
transfer as may be determined by the Board or the Committee."
The Corporation is desirous of amending its 1994 Stock Option Plan to
increase the number of shares available for issue upon exercise of options
from 1,000,000 to 3,000,000 in the aggregate.
Pursuant to the Securities and Exchange Commission Release No. 34-37260
dated May 21, 1996, new rules were adopted with respect to Section 16 of
the Securities and Exchange Act of 1934 and the Corporation is desirous of
complying with said new rules and amending its 1994 Stock Option Plan in
furtherance of the same.
Said 1994 Stock Option Plan is hereby amended in the following
particulars:
<PAGE>
Subject to stockholder approval with respect to the proposed share
increase from 1,000,000 to 3,000,000 common shares, Paragraph 2 of the
Micro Warehouse, Inc. 1994 Stock Option Plan captioned "Shares Subject to
the 1994 Plan" shall be amended so that the same shall read as follows:
"Subject to adjustment, as provided in Paragraph 10, the stock to be
offered under the 1994 Plan shall consist of shares of the Company's
Common Stock ("Stock") and the number of shares of Stock that may be
issued upon exercise of all options granted under the 1994 Plan shall not
exceed in the aggregate 3,000,000 shares; however, the maximum number of
shares underlying an option grant shall not exceed 100,000 in any one year
to any individual. Such shares may be authorized and unissued shares or
may be treasury shares. If an option granted under the 1994 Plan shall
expire or terminate for any reason without having been exercised in full,
the unpurchased shares subject to such option shall again be available
under the 1994 Plan. Stock issued under the 1994 Plan may be subject to
such restrictions on transfer, repurchase rights or other restrictions as
shall be determined by the Board of Directors of the Company (the "Board)"
or a Committee of the Board (the "Committee") as determined under
Paragraph 4 hereinbelow
Paragraph 4 of the Micro Warehouse, Inc. 1994 Stock Option Plan captioned
"Administration" shall be amended so that the same shall read as follows:
"The 1994 Plan shall at all times be administered in accordance with
the regulations of Rule 16b-3 of the Securities and Exchange Act of 1934
as amended by the Securities and Exchange Commission Release No. 34-37260.
The 1994 Plan may be administered by the Board of Directors or by a
Committee of two or more "non-employee directors". The Board or the
Committee shall determine and designate, from time to time, the employees,
directors and consultants to whom options shall be granted and the number
of shares to be covered by each option, the option price, the period of
each option, and the time or times at which options may be exercised.
Subject to the provisions of the 1994 Plan, the Board or the Committee
may, from time to time, adopt rules and regulation relating to
administration of the 1994 Plan and make all other determinations in the
judgment of the Board or the Committee necessary or desirable for the
administration of the 1994 Plan. The interpretation and construction of
the provisions of the 1994 Plan and stock option agreements implemented
thereunder by the Board or the Committee shall be final and conclusive.
The Board or the Committee may correct any defect or supply any omission
or reconcile any inconsistency in the 1994 Plan or in any option agreement
in the manner and to the extent it shall deem expedient to carry the 1994
Plan into effect and it shall be the sole and final judge or such
expediency."
Paragraph 7 of the Micro Warehouse, Inc. 1994 Stock Option Plan captioned
"Nontransferability" shall be amended so that the same shall read as
follows:
<PAGE>
"(a) Options. Each option granted under the 1994 Plan by its terms
shall be nonassignable and nontransferable by the optionee, either
voluntarily or by operation of law, except that options may be assigned or
transferred as follows to: members of the optionee's immediate family
intended to include parents, spouse, children or grandchildren; or trusts,
family partnerships, or other like entities provided that all of the
beneficiaries of the same are members of said immediate family, or to any
person or entity by will or by the laws of descent and distribution of the
state or country of the optionee's domicile at the time of death. In all
events, the transferrees' rights with respect to any such option shall be
subject to and fully governed by the provisions of the Plan and any
provisions which would have affected any transferred options had the same
not been transferred shall, pari passu, govern said options. Upon any
attempt to transfer, assign, pledge, hypothecate or otherwise dispose of
any option under this 1994 Plan or of any right or privilege conferred
hereby or hereunder contrary to the provisions hereof, or upon the sale or
levy or any attachment or similar process upon the rights and privileges
conferred hereby or hereunder, such option relating thereto shall
thereupon terminate and become null and void. In all events, each such
option by its terms shall be exercisable by either the optionees or
transferrees permitted hereinabove.
(b) Stock. Stock issued upon exercise of an option may have, in
addition to restrictions on transfer imposed by law, such restrictions on
transfer as may be determined by the Board or the Committee."
Except as amended herein, the Micro Warehouse, Inc. 1992 and 1994
Stock Option Plans remain in full force and effect.
The undersigned certifies this Amendment in his capacity as
Secretary of Micro Warehouse, Inc.
______________________________________
Bruce L. Lev
Secretary of the Corporation
SUBLEASE
THIS SUBLEASE is made and entered into this ____ day of March, 1997, by
and between COMARK, INC., an Illinois corporation, having an address at 444
Scott Drive, Bloomingdale, Illinois 60108 ("Sublessor") and MICROWAREHOUSE,
INC., a Delaware corporation, having an address at 535 Connecticut Avenue,
Norwalk, Connecticut 06854 ("Sublessee").
I. RECITALS
A. Sublessor is the lessee under that certain Lease dated March 29, 1991
(the "Underlying Lease"), made by and between Sublessor, as tenant, and American
National Bank and Trust Company of Chicago, not individually but solely as
Trustee under Trust Agreement dated March 29, 1991 and known as Trust Number
113698-08 ("Lessor"), as landlord, relating to certain premises commonly known
as 471 Brighton Drive and 472 Fox Court, Bloomingdale, DuPage County, Illinois
(the "Leased Premises") and situated in the Covington Corporate Center (the
"Center"). The Underlying Lease was amended by a First Amendment to Lease dated
as of November 18, 1991, made by and between Sublessor, as tenant, and Lessor,
as landlord (the "First Amendment"). The Underlying Lease and the First
Amendment are hereinafter sometimes collectively referred to as the "Lease". A
true and complete copy of the Lease is attached hereto as Exhibit A.
B. Sublessee has requested that Sublessor sublease to Sublessee a portion
of the Leased Premises comprised of 21,939 square feet of office space commonly
known as 471 Brighton Drive, as more particularly identified on Exhibit B
attached hereto (the "Sublease Space"). Sublessor has agreed to lease the
Sublease Space to Sublessee on the terms and conditions set forth herein.
II. SUBLEASE
(a) Sublessor hereby sublets to Sublessee, and Sublessee hereby subleases
from Sublessor, the Sublease Space. Sublessee shall have the right to use in
common with Sublessor the hallways and other access ways to the Sublease Space.
Sublessee shall accept the Sublease Space in the condition existing on the date
of this Sublease. All capitalized terms used in this Sublease and not otherwise
defined herein shall have the meanings ascribed to such terms in the Lease.
(b) Sublessee shall use the Sublease Space for general office purposes
only.
<PAGE>
(c) Sublessee shall also be given use of all modular furniture currently
in the Sublease Space, provided that Sublessee shall acquire no interest in said
modular furniture and said modular furniture shall be returned to Sublessor in
good condition (ordinary wear and tear excepted) upon the expiration or earlier
termination of this Sublease.
III. TERMS
The terms of this Sublease shall be as follows:
A. Fixed Rent. The rental for the Sublease Space shall be THIRTEEN AND
NO/100 DOLLARS ($13.00) per square foot or TWO HUNDRED EIGHTY FIVE THOUSAND TWO
HUNDRED SEVEN AND NO/100 DOLLARS ($285,207) per annum ("Base Rent"). The Base
Rent for the period commencing on March 14, 1997 and expiring March 31, 1997
shall be NINE THOUSAND FOUR HUNDRED THIRTY FIVE AND/NO 100 DOLLARS (($9435.00).
The Base Rent shall increase by 40/100 Dollars ($.40) per square foot on January
1, 1998 and again on January 1, 1999. During the first ten (10) months of the
term of this Sublease, the Base Rent shall be reduced to ONE HUNDRED NINETY FIVE
AND NO/100 DOLLARS ($195,000), as follows:
Lease Year Annual Rent Monthly Rent
---------- ----------- ------------
4/1/97 - 12/31/97 $195,000.00 $16,250.00
1/1/98 - 12/31/98 $293,982.60 $24,498.55
1/1/99 - 11/17/99 $302,758.20 $25,229.85
The Base Rent shall be payable in monthly installments, in advance, as set forth
above, on or before the first day of each month of the term of this Sublease,
payable to Sublessor at Comark, Inc., 444 Scott Drive, Bloomingdale, Illinois
60108, Attention: David Keilman, or at such other place as Sublessor may from
time to time designate by written notice to Sublessee.
B. Additional Rent. In addition to the Base Rent payable by Sublessee
under this Sublease, Sublessee shall also pay the following expenses under the
Lease: (i) fifty percent (50%) of the cost of all summer landscaping; (ii) fifty
percent (50%) of the cost of lawn irrigation maintenance; (iii) all water bills
levied against the Leased Premises, except when lawn irrigation is underway, in
which case Sublessee shall pay fifty percent (50%) of the water bills; (iv) all
electricity expenses over and above the sum of SEVEN HUNDRED AND NO/100 DOLLARS
($700.00) incurred on a monthly basis; (v) seventy-five percent (75%) of all gas
expenses on a monthly basis; (vi) the cost of preventative maintenance for all
heating and air-conditioning units in the Sublease Space; and (vii) all other
maintenance and operational costs and expenses chargeable to Sublessor, as
tenant, under the Lease and attributable to the Sublease Space (collectively,
the "Additional Rent"). Sublessor shall submit
-2-
<PAGE>
written invoices to Sublessee requesting payment of all or any portion of the
Additional Rent. Sublessee shall pay all Additional Rent within ten (10) days
from the effective date of Sublessor's invoice for the same. In the event that
Sublessor receives any refund of Additional Rent under the Lease or otherwise,
with respect to amounts paid by Sublessee for the Sublease Space, as provided
herein, then Sublessor shall promptly remit all such refunds to Sublessee. In
the event the remainder of the Leased Premises (excluding the Sublease Space) is
sublet to a third party, Sublessor and Sublessee agree to amend this Additional
Rent provision to reflect the presence of another sublessee.
C. Payment of Rent. All Base Rent and Additional Rent shall be paid by
Sublessee, in lawful money of the United States of America, without any set-off
or deduction whatsoever. All Base Rent and Additional Rent not paid when due
shall bear interest from the date due until paid at the default rate set forth
in Section 3.4 of the Lease.
D. Taxes. Included in the Base Rent of THIRTEEN AND NO/100 DOLLARS per
square foot ($13.00) is the sum of THREE AND NO/100 DOLLARS ($3.00) per square
foot ("Tax Rent") for all taxes, as "Taxes" is defined in Article VI of the
Lease, which Taxes are allocable to the Sublease Space ("Sublease Taxes"). In
the event the Tax Rent is insufficient to pay the Sublease Taxes or, in the
alternative, the Tax Rent collected is in excess of the Sublease Taxes, the
parties shall adjust the Tax Rent accordingly based on the real estate tax bill
issued for the immediately preceding year.
E. Term of Sublease. The term of this Sublease shall commence on March 14,
1997 and shall expire November 17, 1999, unless sooner terminated or as
otherwise provided herein.
F. Services. All services to which Sublessor is entitled under the Lease,
with respect to the Sublease Space, shall in turn be furnished to Sublessee by
Sublessor, but only to the extent such services are actually furnished by Lessor
to Sublessor. Sublessee shall pay to Sublessor all costs described in Section
8.1 of the Lease. If Lessor fails to provide any services to the Sublease Space
which Lessor is required to furnish to such space, as provided by the terms of
the Lease, then, upon written notice by Sublessee to Sublessor of such failure,
Sublessor shall, at Sublessee's expense (and using attorneys provided by
Sublessee), exercise its rights and remedies against the Lessor as provided in
the Lease or, to the extent such rights and remedies are not set forth in the
Lease, such rights and remedies as are otherwise available against Lessor in
equity or at law.
-3-
<PAGE>
IV. NO ASSIGNMENT
Sublessee shall not sublet or assign this Sublease in whole or in part
without the prior written consent of Sublessor and Lessor.
V. NO ALTERATIONS
Except as otherwise expressly provided in this Section V, Sublessee shall
not alter, remodel or change the Sublease Space without the prior written
consent of Sublessor which consent shall not be unreasonably withheld or
delayed. Notwithstanding anything in the preceding sentence to the contrary,
Sublessee shall be permitted, without obtaining Sublessor's consent, to (i)
paint and recarpet the Sublease Space, hang art work and shelving on the walls
thereof (provided that Sublessee shall at its expense repair all damage to such
walls caused by the removal of any such items), and to otherwise decorate the
Sublease Space, and (ii) install cabling and wiring in the Sublease Space;
provided however, that in no event shall Sublessee undertake any actions
pursuant to clause (i) or clause (ii) above in violation of Article XX of the
Lease. Any alterations so made by Sublessee shall, at the option of Sublessor,
remain at the end of the term of this Sublease and become the property of
Sublessor or Lessor, as the case may be, or be removed by Sublessee at the
expense of Sublessee so as to restore the Sublease Space to the condition
required by Section VII of this Sublease.
VI. WAIVER AND INDEMNITY.
A. Except as otherwise set forth herein, Sublessor and its partners,
affiliates, officers, directors, agents, servants and employees shall not be
liable for any damage either to person, property or business or resulting from
the loss of use thereof sustained by Sublessee or by other persons as a result
of or in any way related to (i) the condition (structural or otherwise) of the
Center or any part thereof; (ii) the occurrence of any accident or event in or
about the Center, including the Sublease Space; or (iii) the act or neglect of
Lessor, or of any tenant or occupant of the Center or of any other person,
unless caused by (y) the negligence or wilful misconduct of Sublessor or its
agents, employees or contractors or (z) the breach of this Sublease by
Sublessor. This provision shall apply particularly, but not exclusively, to
damage caused by gas, electricity, snow, ice, frost, steam, sewage, sewer gas or
odors, fire, water or by the bursting or leaking of pipes, faucets, sprinklers,
plumbing fixtures and windows, and, except as provided above, shall apply
without distinction as to the person whose act or neglect was responsible for
the damage and shall apply whether the damage was due to any of the causes
specifically enumerated above or to some other cause of an entirely different
kind. Sublessee further agrees that all
-4-
<PAGE>
personal property upon the Sublease Space, or upon loading docks, receiving and
holding areas, or freight elevators of the Center, shall be at the risk of
Sublessee only, and that Sublessor shall not be liable for any loss or damage
thereto or theft thereof, unless caused by the negligence or wilful acts of
Sublessor, its agents, contractors or employees or by Sublessor's breach of this
Sublease. Without limitation of any other provisions hereof, but subject to the
provisions of Section XIII hereof, Sublessee agrees to defend, protect,
indemnify and save harmless Sublessor and its partners, affiliates, officers,
agents, servants and employees from and against all liability to third parties
arising out of Sublessee's use of the Sublease Space, this Sublease or the acts
or omissions of Sublessee or its servants, agents or employees.
Sublessor shall indemnify and hold harmless Sublessee from and against all
liability to third parties arising out of events described in subsection (y) or
(z) of the immediately preceding paragraph.
B. The indemnity contained in this Section VI shall survive the expiration
or termination of this Sublease.
VII. SUBLEASE SPACE AND SURRENDER OF SUBLEASE SPACE.
Sublessee shall maintain the Sublease Space, during the term of this
Sublease, in good condition and repair, ordinary wear and fire and other
casualty (including acts of God) insured against by Sublessor excepted, failing
which Sublessor may restore the Sublease Space to such condition and Sublessee
shall pay Sublessor the cost thereof; provided that nothing contained in the
preceding clause shall be construed to require Sublessee to (i) remove any
fixtures, alterations or other improvements contained in the Sublease Space on
the date of this Sublease, or (ii) repair any damage to or violation of the
Sublease Space which exists on the date of this Sublease. Upon the expiration or
termination of this Sublease or termination of Sublessee's right of possession
of the Sublease Space, Sublessee shall return the Sublease Space to Sublessor in
the condition existing as of the commencement of this Sublease, provided,
however, that if Sublessee is not then in default, Sublessee may remove personal
property installed by Sublessee. Such removals shall be done in a good and
workmanlike manner and Sublessee shall restore the Sublease Space to a
tenantable condition. In the event possession of the Sublease Space is not
promptly delivered to Sublessor, or if Sublessee shall fail to remove all of
Sublessee's personal property, as aforesaid, Sublessor may remove any of such
property therefrom without any liability to Sublessee. All such property which
may be removed from the Sublease Space by Sublessor shall be conclusively
presumed to have been abandoned by Sublessee and title thereto shall pass to
Sublessor without any cost or credit therefor and Sublessor may,
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at its option and at Sublessee's expense, store or dispose of such property.
If Sublessee retains possession of the Sublease Space, or any part
thereof, after the expiration or termination of this Sublease (whether by lapse
of time or otherwise), Sublessee shall pay to Sublessor, during each month or
portion thereof for which Sublessee shall retain possession of the Sublease
Space or any part thereof, an amount as Rent equal to 150% of one-twelfth of the
Base Rent and 100% of one-twelfth of the Additional Rent paid by Sublessee
during the previous year herein provided. The provisions of this Section VII
shall not be deemed to limit or constitute a waiver of any other rights or
remedies of Sublessor provided herein or at law.
VIII. DUTIES OF SUBLESSEE
A. Sublessee acknowledges that this Sublease, in all terms and respects,
is subject to the provisions of the Lease; unless otherwise expressly modified
herein.
B. By executing this Sublease and to the extent applicable to the Sublease
Space and the Term of this Sublease, Sublessee agrees to be bound by the same
obligations and duties as govern Sublessor's conduct, as tenant, under the Lease
(unless such obligations and duties have been expressly modified by the terms of
this Sublease), Sublessee shall have the same rights and remedies available to
Sublessor, as tenant, under the Lease, and Sublessee agrees to perform all of
the covenants and honor all of the restrictions imposed on Sublessor, as tenant,
under the Lease.
C. By executing this Sublease, to the extent applicable to the Sublease
Space and the Term of this Sublease, Sublessor agrees to be bound by the same
obligations and duties as govern Lessor's conduct, as Landlord, under the Lease,
Sublessor shall have the same rights and remedies available to Lessor under the
Lease (including without limitation rights and remedies in the event of a
default under this Sublease or the Lease), and, subject to any limitations
expressly set forth in this Sublease, Sublessor agrees to perform all of the
covenants and honor all of the restrictions imposed on Lessor, as Landlord,
under the Lease.
D. The provisions of the Lease are by this reference incorporated into and
made a part of this Sublease as if reproduced in full herein, except that (i)
the following provisions of the Underlying Lease shall not be applicable with
respect to this Sublease: Articles I, II, III, V, VI, VII, XVI, XXIII, XXIV,
XXV, together with Section 8.2 and Exhibit A, and (ii) the following provisions
of the First Amendment shall not be applicable with respect to this Sublease:
Sections 3, 4 and 5.
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E. Sublessee covenants and warrants that Sublessee shall do no act which
would be a violation of the Lease and agrees to hold harmless, indemnify and, at
Sublessor's election, defend Sublessor (with counsel reasonably acceptable to
Sublessor) against all liability (including, without limitation, attorneys' fees
and costs) for any such act performed by Sublessee or Sublessee's agents,
employees or invitees or for any tortious or negligent act on the part of
Sublessee or Sublessee's agents, employees or invitees.
IX. NOTICE
Any notice to be given hereunder shall be deemed given and delivered when
given personally or on the second day from the date of mailing in a properly
addressed envelope, with postage prepaid, by United States certified mail.
Notices to the parties shall be addressed as follows:
Sublessor: Comark, Inc.
444 Scott Drive
Bloomingdale, Illinois 60108
Attention: David Keilman
with a copy to: Kenneth G. Kolmin
Sonnenschein Nath & Rosenthal
8000 Sears Tower
Chicago, Illinois 60606
Sublessee: Microwarehouse, Inc.
535 Connecticut Avenue
Norwalk, Connecticut 06854
Attention: Bruce Lev
X. SUBLESSOR'S REPRESENTATIONS AND COVENANTS
Sublessor hereby represents and warrants to Sublessee that the Lease is in
full force and effect without default on the part of Sublessor. Sublessor
covenants and warrants to Sublessee that Sublessor (i) will comply in all
material respects with all of the terms and provisions of the Lease, and (ii)
will not default in any obligation of Sublessor under the terms of the Lease
during the term of this Sublease. Sublessor further covenants and warrants to
Sublessee that Sublessor will not voluntarily enter into any agreement with the
Lessor which would result in the termination of the Lease prior to the
termination of this Sublease. Sublessor acknowledges and agrees that,
notwithstanding any other provisions contained in the Lease or in this Sublease,
Sublessee shall not have any liability with respect to any matter for the period
prior to the date possession of the Sublease Space is tendered to Sublessee,
including, without limitation, (i) the condition of the Sublease Space
(including any damage thereto and all latent defects), and (ii)
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any acts or omissions of Sublessor, including the failure by Sublessor to
perform any of its covenants and agreements contained in the Lease.
XI. UNTENANTABILITY AND EMINENT DOMAIN
Sublessee shall have the right to terminate this Sublease following the
occurrence of a fire or casualty or condemnation only to the extent that
Sublessor would have the right to terminate the Lease under Articles XIV and XV
thereof. Sublessee will give Sublessor prompt written notice of any termination
of this Sublease pursuant to the rights granted to Sublessee in this Paragraph
XI.
XII. BROKERS
Sublessee represents that Sublessee has not dealt with any broker, in
connection with this Sublease, and that insofar as Sublessee knows, no brokers
(other than Sublessor's broker disclosed below) negotiated this Lease or are
entitled to any commissions in connection therewith. Sublessee agrees to
indemnify, defend and hold Sublessor and its employees, agents, their officers
and partners, harmless from and against any claims, costs or liabilities arising
out of Sublessee's breach of this representation.
Sublessor represents that Sublessor has dealt with (and only with) Grubb &
Ellis, as Sublessee's sole broker, in connection with this Sublease, and that
insofar as Sublessor knows, no other brokers (other than Sublessee's broker
disclosed above) negotiated this Sublease or are entitled to any commissions in
connection therewith. Sublessor shall pay to such named brokers any commissions
which may be due in connection with this Sublease pursuant to separate
agreements with such brokers. Sublessor agrees to indemnify, defend and hold
Sublessee and its partners, employees, agents, their officers and partners,
harmless from and against any claims, costs or liabilities arising out of
Sublessor's breach of this representation.
The indemnities contained in this Paragraph XII shall survive the
termination of this Sublease.
XIII. SUBLESSEE'S INSURANCE.
Sublessee shall maintain at all times during the Term, fire and extended
coverage insurance insuring the leasehold improvements installed in the Sublease
Space, at Sublessee's sole cost and expense, and Sublessee's office furniture,
equipment and supplies. Sublessee shall also maintain, at all times during the
Term, commercial general liability insurance, insuring Sublessee against any
loss, liability or damage on, about, or relating to the Sublease Space, or any
portion thereof, and
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<PAGE>
naming Sublessor as an additional insured, with limits of not less than
$1,000,000 for any single incident and not less than $3,000,000 in the
aggregate. Said policy of general liability insurance may not be terminated or
amended without thirty days prior written notice to Sublessor. Within ten days
of execution of this Sublease, Sublessee shall deliver to Sublessor certificates
evidencing its compliance with the insurance requirements set forth in this
Section XIII.
XIV. SECURITY DEPOSIT.
As additional security for the full and prompt performance by Sublessee of
all of its obligations hereunder, Sublessee shall pay to Sublessor upon
Sublessee's execution of this Sublease, a security deposit in the amount of
$25,229.85, which sum may be applied by Sublessor for the purpose of curing any
default or defaults of Sublessee under this Sublease. Sublessee shall pay to
Sublessor as security, on request by Sublessor, any amounts so used by
Sublessor. Sublessor shall not pay any interest on the security deposit and the
security deposit may be commingled by Sublessor or other funds of Sublessor. If
Sublessee has not defaulted hereunder or if Sublessor has not applied said sum
to said default, then said security deposit or any portion thereof not so
applied by Sublessor shall be paid to Sublessee within forty-five (45) days
after the expiration of this Sublease and the vacation of the Sublease Space by
Sublessee (unless Sublessee continues to occupy the Sublease Space pursuant to
Section XVIII hereof). The security deposit shall not be deemed an advance
payment of Base Rent or measure of damages for any default by Sublessee under
this Sublease, nor shall it be a bar or defense to any action which Sublessor
may at any time institute against Sublessee.
XV. STANDARDS FOR CONSENT AND APPROVAL.
The parties to this Sublease each agree that where the consent or approval
(whether written or otherwise) of a party hereto is required in connection with
any matter set forth herein, then such consent or approval shall not be
unreasonably withheld, conditioned or delayed; provided, however, that the
provisions of this Section XV shall not apply to the provisions of Section IV
hereof.
XVI. LANDLORD'S CONSENT.
Sublessor and Sublessee mutually agree and acknowledge that the consent of
Lessor to this Sublease is required and that this Sublease shall not commence or
be in full force and effect until such consent is obtained.
XVII. SIGNAGE.
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Sublessee may install signage on or about the Sublease Space, subject to
the provisions of the Lease and further subject to all applicable laws.
XVIII. RENEWAL OPTION.
Article XXIII of the Underlying Lease grants Sublessor, as tenant, the
option to extend the Term of the Lease, subject to and on the conditions set
forth in said Article XXIII (the "Renewal Option"). Sublessor hereby grants to
Sublessee an option to cause Sublessor to exercise the Renewal Option, subject
to the following:
(a) Sublessee shall give Sublessor written notice of its intent to cause
Sublessor to exercise the Renewal Option no later than thirteen (13) months
prior to the expiration of the original Term or the First Renewal Term, as
applicable;
(b) Sublessee shall be in full compliance with this Sublease and with the
Lease, as it may apply to the Sublease Space;
(c) Sublessee shall agree to amend the definition of "Sublease Space" to
include the Leased Premises, in its entirety, and this Sublease shall be amended
so that all costs and expenses (including, without limitation, all rent due and
owning under the Lease), imposed on Sublessor, as tenant, under the Lease, shall
become the sole responsibility and obligation of Sublessee;
(d) Sublessee shall deliver to Sublessor an irrevocable stand-by letter of
credit for the discounted value of the Lease for the First Renewal Term and the
Second Renewal Term; and
(e) The option granted herein is subject to the terms of Article XXIII of
the Underlying Lease.
XVIV. PARKING.
The Sublessee shall have access to 125 parking spaces, 76 of which shall
be to the immediate south-southeast of the Sublease Space and 49 of which shall
be in the northwest parking lot, all as indicated on Exhibit C attached hereto.
XVV. SUBLESSOR'S WORK.
Sublessor covenants and agrees to
(a) steam clean the carpeting on the west side of the Sublease Space, at
Sublessor's sole cost and expense;
(b) paint the west side of the Sublease Space, at a cost to borne equally
by Sublessor and Sublessee;
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(c) assist Sublessee in its application for various permits, provided that
Sublessor shall not incur any expense in so assisting Sublessee and further
provided that Sublessor makes no representations or warranties of any kind in
connection with such assistance.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Sublease as of
March __, 1997.
SUBLESSOR:
COMARK, INC.
By ____________________________
Its: ____________________
SUBLESSEE:
MICROWAREHOUSE, INC.
By ____________________________
Its: ____________________
Agreed to, consented to and acknowledged by the undersigned as of the
_____ day of __________, 1997.
AMERICAN NATIONAL BANK AND TRUST COMPANY
OF CHICAGO, as Trustee, under Trust
Agreement dated 3/29/91 and known as
Trust Number 113698-08
By_________________________
Its:__________________
2/6/97
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<PAGE>
EXHIBIT A
THE LEASE
<PAGE>
EXHIBIT B
THE SUBLEASE SPACE
<PAGE>
EXHIBIT C
PARKING
November 20, 1996
Mr. Eric Furman
60 Riverside Drive
Ridgefield, CT 06877
Dear Eric:
This agreement will serve to confirm the terms and conditions under which
we are accepting your resignation as Corporate Controller and Chief Accounting
Officer.
1. Resignations. Effective immediately you are resigning as Corporate
Controller and Chief Accounting Officer and any other officerships or
directorships of Micro Warehouse, Inc. or any of its affiliates, sister
companies or subsidiaries (hereinafter "the Company"). You are not resigning
your employment with the Company, which shall continue, subject to the
provisions of this agreement, until June 30, 1997 (hereinafter "the Termination
Date").
2. Employment Agreement. Any employment agreement with the Company,
whether written or oral, except for the agreement set forth herein is
terminated. Through June 30, 1997 you shall be paid your current salary and
receive all benefits generally provided to all employees of the Company. All of
the Company's employment policies will be applicable to you. You shall not be
eligible to receive any 1996 or 1997 bonus notwithstanding the possibility that
other comparably compensated employees might receive bonuses attributable to
either of said years.
3. Duties. Your duties shall include support of any task force or related
efforts in connection with the preparation of the Company's restated financial
information and support of the Company's preparation and filing of its Form
10-K, Annual Report, Proxy and related materials and you shall report to Chip
Lacy,
<PAGE>
President and Chief Executive Officer. You shall additionally perform such other
duties as he shall require of you from time to
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<PAGE>
time. It is not anticipated that you shall be required to perform these duties
on any Micro Warehouse, Inc. premises; however, it may be necessary from time to
time for you to meet with Micro Warehouse employees or advisors and you shall
make yourself available to do so during normal business hours.
4. Stock Options. Schedule B-1 sets forth, inter alia, stock options
already granted to you and which have already vested which may be exercised by
you on or prior to December 31, 1997. Schedule B-1 also sets forth stock options
granted to you which as of November 20, 1996 have not yet vested. We confirm
that we will not forfeit these options but will deem these options vested as of
June 30, 1997 and they may be exercised by you on or prior to December 31, 1997.
Said Schedule B-1 also describes all other stock options granted to you which
will be deemed forfeited and of no further force and effect. You will not be
eligible to receive any further stock options or otherwise participate in any
deferred compensation programs notwithstanding the possibility that the Company
might provide the same participation to other comparably compensated employees.
5. Indemnification. We confirm that , as our former Corporate Controller
and Chief Accounting Officer, you shall continue to be entitled to
indemnification pursuant to our Articles of Incorporation and By Laws currently
in effect. If requested by us in connection with any advance made pursuant to
your indemnification right, you shall undertake in a manner satisfactory to us
to repay any amounts advanced if it shall ultimately be determined by a final
order of court that you are not entitled to be indemnified by us pursuant to
applicable law.
6. Release.
(a) As consideration for the Company to enter into this agreement
and as consideration for the covenants contained herein, subject to the
immediately following sentence, you irrevocably and unconditionally release,
remit, acquit and forever discharge the Company, its officers, directors,
shareholders,
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agents, employees, representatives, attorneys, parents, divisions, subsidiaries,
affiliates, related companies or entities, successors and assigns and the
officers, executives, directors, shareholders, agents and employees of any and
all of the Company's parents, divisions, subsidiaries, affiliates, related
companies or entities, successors or entities (separately or collectively, the
"Released Parties"), jointly and individually, from any and all claims, charges,
complaints, expenses and causes of action of any nature or kind whatsoever,
known or unknown, which you, your heirs, successors or assigns have or may have
against the Released Parties based upon, related to or arising out of your
employment with the Company through the date hereof, including, but not limited
to, claims, charges, complaints, liabilities, losses, obligations, demands,
damages, costs, expenses and causes of action relating to the terms, conditions,
commencement, duration or termination of your employment, or claims of
discrimination under any federal, state or local law, rule, regulation or common
law, whether such claims are past or present, whether they arise from equity,
common law or statute, and whether they arise from labor laws or discrimination
laws, such as the Age Discrimination in Employment Act, as amended, Title VII of
the Civil Rights Act of 1964, 42 U.S.C. ss.1981, the Equal Pay Act, as amended,
the Americans with Disabilities Act, or any other federal, state or local law,
rule or regulation. This release is intended to cover all possible relief,
including, but not limited to, reinstatement, wages, back pay, front pay,
vacation pay, bonuses or incentive compensation, supplemental or other
retirement benefits, perquisites, compensatory damages, punitive damages,
damages for pain or suffering, and attorneys' fees, provided, however, that
nothing in this agreement will limit or otherwise affect any right you may have
to indemnification under the Company's Articles of Incorporation, By Laws or any
insurance policy in effect as of the termination of your employment with the
Company. In addition, if the Company complies with its obligations hereunder,
you agree you will not be entitled to any benefit from any claim or proceeding
filed by you or on your behalf with any agency or court which is within the
scope of this agreement or which goes to the validity of any provision of this
agreement.
4
<PAGE>
(b) Effective as of the Termination Date, the releases provided for
in Paragraph 6(a) will, without further action, be automatically extended to
cover all acts, failures to act and other events (other than any breach of this
agreement by the Company) occurring between the date hereof and such date.
(c) The releases under this Paragraph 6 are intended to cover all
possible rights, obligations and liabilities, including any such rights,
obligations or liabilities based upon, relating to or arising from any claim
which goes to the validity of any provision of this agreement, other than a
claim for any breach of this agreement.
(d) You acknowledge that you have been given a period of at least 21
days to review and consider this agreement before signing it, and that you
understand that you may use as much of the 21-day period as you wish prior to
signing.
7. Covenant Not to Compete. In consideration for the Company's
undertakings described in this agreement, you hereby covenant and agree that for
a period of nine (9) months subsequent to the Termination Date (the "Non-Compete
Period"), you 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 you from (a) performing services for a
Competitive Business if such Competitive Business is also engaged in other lines
of business and if your services are restricted to employment in such other
lines of business; or (b) acquiring the securities of or an
5
<PAGE>
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 one percent (1%) of any class or
type of securities of, or interest in, such Business. The term "Competitive
Business" shall mean and include any business or activity that sells to end
users (whether commercial or consumer) by any direct response method or
technique including but not limited to catalog mailings, outbound telemarketing
and space advertising personal computers, software, accessories, peripherals and
other related products regardless of where such Competitive Business is located.
The businesses or activities included within this definition shall be those
conducted by the Company at any time on or prior to the Termination Date.
8. Confidential Information. You acknowledge that the Company would be
damaged if your knowledge with respect to the business of the Company was
disclosed to or utilized by parties other than the Company. Accordingly, you
covenant and agree that you 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 you and relates
to such matters as budget and forecasts, customer mailing lists, data base
management techniques, pricing and credit techniques, marketing techniques,
research and development activities, sources of product, 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
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the Company or others, information required by law to be disclosed or
information learned by you from third parties without restrictions on
disclosure.
9. Assignment. This agreement is not assignable, except that the Company
may assign it to any successor of substantially all of the Company's business or
assets. This agreement will be binding upon, and inure to the benefit of, the
parties and their successors and assigns.
10. Partial Invalidity. If any provision of this agreement is held to be
invalid, void or unenforceable, the remaining provisions shall continue in full
force without being impaired or invalidated in any way.
11. Governing Law. This agreement will be governed by the laws of the
State of Connecticut, without giving effect to the conflict of laws principles
thereof.
12. Entire Agreement. This agreement reflects the complete agreement
between the parties with respect to the subject matter hereof, and there are no
written or oral understandings, promises or agreements directly or indirectly
related to this letter agreement or the subject matter hereof that are not
incorporated herein.
13. Revocation Period. For a period of seven (7) calendar days following
your execution of this agreement, you may revoke this agreement. This agreement
will not become effective or enforceable to release any claims or rights which
you may have under the Age Discrimination in Employment Act until this
revocation period has expired. This agreement also will not become effective or
enforceable with respect to any obligations that the Company may have hereunder
until this revocation period has expired. You acknowledge and agree that if the
Company satisfies any obligations hereunder that otherwise would have arisen
during this revocation period as soon as practicable after the revocation period
has expired, such action will constitute
7
<PAGE>
timely satisfaction of such obligations hereunder. You also acknowledge and
agree that the benefits to you of the covenants contained herein, including, but
not limited to, payments hereunder, are provided to you in exchange for the
promises in this agreement, are not normally available under Company policy or
practice to employees whose employment is terminated and provide for the
payments of amounts to which you would not otherwise be entitled.
8
<PAGE>
14. Confidentiality and Intent to be Bound. The terms and conditions of
this agreement are confidential and must not be disclosed to any person other
than those who must perform tasks to effect the agreement. Notwithstanding the
foregoing, the Company and you may disclose any term of this agreement to comply
with applicable law. In addition, nothing contained herein shall be construed to
prohibit either party from disclosing the terms and conditions of this agreement
to its attorneys, accountants or bookkeepers or to any other person with whom a
fiduciary relationship has been established. Both parties have read this
agreement, have had the opportunity to consult with counsel, fully understand
the agreement's terms and conditions, and enter this agreement freely,
voluntarily and intending to be legally bound hereby.
15. Enforcement of Agreement; Liquidated Damages. You hereby acknowledge
and agree that your obligations under Paragraph 7 are a material part of the
consideration for this agreement and for the payments from the Company to you
under Paragraph 2, that your failure to satisfy any of such obligations could
cause irreparable harm to the Company and that the damages caused by such
failure would be uncertain and difficult to measure. You further acknowledge and
agree that the Company may seek injunctive relief to prevent your failure or
further failure to satisfy any of such obligations, in addition to all other
rights, remedies and claims that it may have under this agreement, at law or in
equity. You also acknowledge and agree that, if you fail to satisfy any of your
obligations under Paragraph 7, the Company will be entitled to receive as
liquidated damages for such failure recovery of any amounts paid to you under
this agreement after such failure, any amounts that you may have earned or
received as a result of or in connection with such failure, and all costs and
expenses, including fees and disbursements of counsel and other costs thereof,
incurred by the Company in connection with the enforcement of such obligations.
16. No Waiver. No failure on the part of either party at any time to
require the performance by the other party of any term
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<PAGE>
hereof shall be taken or held to be a waiver of such term or in any way affect
such party's right to enforce such term, and no waiver on the part of either
party of any term hereof shall be taken or held to be a waiver of any other term
hereof or the breach thereof.
17. COBRA Benefits. You acknowledge that the Company will have no
obligation to pay directly or reimburse you for any COBRA payments due
subsequent to the Termination Date.
If you agree to and accept the terms and conditions of this agreement,
please sign both copies hereof in the space provided below, retain one copy for
your records and return the other copy to the undersigned.
Very truly yours,
MICRO WAREHOUSE, INC.
By: __________________________________
Name: Linwood A. Lacy, Jr.
Title: President & Chief Executive
Officer
Agreed to and accepted on the
date first above written:
_________________________________
Eric Furman
Date Signed: November __, 1996
10
<PAGE>
SCHEDULE B-1 TO
LETTER AGREEMENT WITH ERIC FURMAN
DATED AS OF NOVEMBER 20, 1996
Stock options already granted to you and already vested which may be exercised
pursuant to Paragraph 4 on or prior to December 31, 1997:
1. 1,250 options @ $9.00 granted 12/10/92 per agreement dated 1/30/93 (copy
attached).
2. 2,250 options @ $9.78 granted 1/13/93 per agreement dated 1/30/93 (copy
attached).
3. 1,200 options @ $11.38 granted 6/21/93 per agreement dated 8/2/93 (copy
attached).
4. 5,000 options @ $31.00 granted 10/25/94 per agreement dated 1/10/95 (copy
attached).
5. 3,399 options @ $30.125 granted 1/19/95 per agreement dated 2/10/95 (copy
attached).
6. 1,250 options @ $44.50 granted 10/31/95 per agreement dated 11/6/95 (copy
attached).
Stock options already granted to you, not vested as of 11/20/96, which shall be
deemed vested as of June 30, 1997 and available for exercise pursuant to
Paragraph 4 on or prior to December 31, 1997:
1. 1,250 options @ $9.00 granted 12/10/92 per agreement dated 1/30/93.
2. 2,250 options @ $9.78 granted 1/13/93 per agreement dated 1/30/93.
3. 1,500 options @ $11.38 granted 6/21/93 per agreement dated
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8/2/93.
4. 1,500 options @ $32.00 granted 1/19/96 per agreement dated 2/9/96 (copy
attached).
(continued on next page)
12
<PAGE>
Schedule B-1
to Letter Agreement with
Eric Furman Dated as of
November 20, 1996
Page 2
Stock options deemed forfeited and of no further force and effect subject to
Paragraph 4:
1. 1,800 options @ $11.38 granted 6/21/93 per agreement dated 8/2/93.
2. 5,000 options @ $31.00 granted 10/25/94 per agreement dated 1/10/95.
3. 3,750 options @ $44.50 granted 10/31/95 per agreement dated 11/6/95.
4. 1,500 options @ $32.00 granted 1/19/96 per agreement dated 2/9/96.
13
November 20, 1996
Mr. Steven Purcell
62 Fern Circle
Trumbull, CT 06611
Dear Steve:
This agreement will serve to confirm the terms and conditions under which
we will be accepting your resignation as Vice President - Finance and Chief
Financial Officer and Treasurer.
1. Resignations. Effective immediately, you are resigning as Vice
President - Finance and Chief Financial Officer and Treasurer and any other
officerships or directorships of Micro Warehouse, Inc. or any of its affiliates,
sister companies or subsidiaries (hereinafter "the Company"). You are not
resigning your employment with the Company, which shall continue, subject to the
provisions of this agreement, until September 30, 1997 (hereinafter "the
Termination Date").
2. Employment Agreement. Your Employment Agreement dated as of January 1,
1995 is terminated. Through September 30, 1997 you shall be paid your current
salary and receive all benefits provided by your Employment Agreement (except
that there shall be no vacation benefits). All of the Company's employment
policies will be applicable to you. You shall not be eligible to receive any
1996 or 1997 bonus notwithstanding the possibility that other comparably
compensated employees might receive bonuses attributable to either of said
years.
3. Duties. Your duties shall include support of any task force or related
efforts in connection with the preparation of the Company's restated financial
information and support of the Company's preparation and filing of its Form
10-K, Annual Report,
<PAGE>
Proxy and related materials and you shall report to Chip Lacy, President and
Chief Executive Officer. You shall additionally perform such other duties as he
shall require of you from time to time. It is not anticipated that you shall be
required to perform these duties on any Micro Warehouse, Inc. premises; however,
it may be necessary from time to time for you to meet with Micro Warehouse
employees or advisors and you shall make yourself available to do so during
normal business hours.
4. Stock Options. Schedule B-1 sets forth, inter alia, stock options
already granted to you which may be exercised by you on or prior to December 31,
1997. Subsequent to November 20, 1996 you shall not be bound by the Company's
trading window policies although you are still subject to the rules and
regulations of the Securities and Exchange Commission or any state securities
regulatory agencies. Schedule B-1 also sets forth all other stock options
granted to you which as of the date of this agreement have not yet vested. We
confirm that we will not forfeit these options and deem these options vested as
of the date indicated on Schedule B-1 and that they may be exercised by you on
or prior to December 31, 1997. Said Schedule B-1 also sets forth other stock
options granted to you which are deemed forfeited and of no further force and
effect. You will not be eligible to receive any further stock options or
otherwise participate in any deferred compensation programs notwithstanding the
possibility that the Company might provide the same participation to other
comparably compensated employees.
5. Repayment of Incentive Compensation. You acknowledge that you have
received incentive compensation attributable to the 1995 year in the gross
amount of $490,000.00. You shall be required to repay to us the amount of
$316,572.00 (representing the net amount paid to you after withholding of
requisite taxes from the same) on or prior to December 31, 1996. Your failure to
do so shall constitute a breach of your obligations under this agreement in
which event we reserve all rights and remedies whether at law or equity arising
from the same. Notwithstanding any other rights and/or remedies available to us
in this instance,
2
<PAGE>
the failure to make this repayment shall cause a forfeiture of your right to
exercise certain stock options separately identified on Schedule B-1.
6. Indemnification. We confirm that the Indemnification Agreement between
you and the Company dated as of January 25, 1994 is in full force and effect.
7. Release.
(a) As consideration for the Company to enter into this agreement
and as consideration for the covenants contained herein, subject to the
immediately following sentence, you irrevocably and unconditionally release,
remit, acquit and forever discharge the Company, its officers, directors,
shareholders, agents, employees, representatives, attorneys, parents, divisions,
subsidiaries, affiliates, related companies or entities, successors and assigns
and the officers, executives, directors, shareholders, agents and employees of
any and all of the Company's parents, divisions, subsidiaries, affiliates,
related companies or entities, successors or entities (separately or
collectively, the "Released Parties"), jointly and individually, from any and
all claims, charges, complaints, expenses and causes of action of any nature or
kind whatsoever, known or unknown, which you, your heirs, successors or assigns
have or may have against the Released Parties based upon, related to or arising
out of your employment with the Company through the date hereof, including, but
not limited to, claims, charges, complaints, liabilities, losses, obligations,
demands, damages, costs, expenses and causes of action relating to the terms,
conditions, commencement, duration or termination of your employment, or claims
of discrimination under any federal, state or local law, rule, regulation or
common law, whether such claims are past or present, whether they arise from
equity, common law or statute, and whether they arise from labor laws or
discrimination laws, such as the Age Discrimination in Employment Act, as
amended, Title VII of the Civil Rights Act of 1964, 42 U.S.C. ss.1981, the Equal
Pay Act, as amended, the Americans with Disabilities Act, or any other federal,
state or
3
<PAGE>
local law, rule or regulation. This release is intended to cover all possible
relief, including, but not limited to, reinstatement, wages, back pay, front
pay, vacation pay, bonuses or incentive compensation, supplemental or other
retirement benefits, perquisites, compensatory damages, punitive damages,
damages for pain or suffering, and attorneys' fees, provided, however, that
nothing in this agreement will limit or otherwise affect any right you may have
to indemnification under the Company's Articles of Incorporation, By Laws or any
insurance policy in effect as of the termination of your employment with the
Company or pursuant to Article 6 hereof. In addition, if the Company complies
with its obligations hereunder, you agree you will not be entitled to any
benefit from any claim or proceeding filed by you or on your behalf with any
agency or court which is within the scope of this agreement or which goes to the
validity of any provision of this agreement.
(b) Effective as of the Termination Date, the releases provided for
in Paragraph 7(a) will, without further action, be automatically extended to
cover all acts, failures to act and other events (other than any breach of this
agreement by the Company) occurring between the date hereof and such date.
(c) The releases under this Paragraph 7 are intended to cover all
possible rights, obligations and liabilities, including any such rights,
obligations or liabilities based upon, relating to or arising from any claim
which goes to the validity of any provision of this agreement, other than a
claim for any breach of this agreement.
(d) You acknowledge that you have been given a period of at least 21
days to review and consider this agreement before signing it, and that you
understand that you may use as much of the 21-day period as you wish prior to
signing.
8. Covenant Not to Compete. In consideration for the Company's
undertakings described in this agreement, you hereby
4
<PAGE>
covenant and agree that through the Termination Date (the "Non-Compete Period"),
you 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 you from (a) performing services for a Competitive
Business if such Competitive Business is also engaged in other lines of business
and if your services are restricted to employment in such other lines of
business; or (b) acquiring the securities of or an interest in any Competitive
Business, provided such ownership of securities or interests represents at the
time of such acquisition, but including any previously held ownership interests,
less than one percent (1%) of any class or type of securities of, or interest
in, such Business. The term "Competitive Business" shall mean and include any
business or activity that is substantially the same as, or related to any
business or activity conducted by the Company, regardless of where such
Competitive Business is located.
9. Confidential Information. You acknowledge that the Company would be
damaged if your knowledge with respect to the business of the Company was
disclosed to or utilized by parties other than the Company. Accordingly, you
covenant and agree that you 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
5
<PAGE>
is currently known to or hereafter acquired by you and relates to such matters
as budget and forecasts, customer mailing lists, data base management
techniques, pricing and credit techniques, marketing techniques, research and
development activities, sources of product, and other confidential or restricted
information which
6
<PAGE>
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
you from third parties without restrictions on disclosure provided the same
would not, if released, damage the Company.
10. Covenant Not to Solicit. Unless you receive the prior written consent
of the Company you hereby covenant and agree that, from the date hereof until
the expiration on the Non-Compete Period, you shall not, for or on behalf of a
Competitive Business, directly or indirectly, as owner, officer, director,
stockholder, partner, associate, consultant, manager, advisor, representative,
employee, agent, creditor or otherwise, attempt to solicit or in any other way
disturb or service any person, firm or corporation that has been a customer
account of the Company at any time or times prior to the termination of the
Period of Employment, whether or not you at any time had any direct or indirect
account responsibility for, or contact with, such customer account.
11. Assignment. This agreement is not assignable, except that the Company
may assign it to any successor of substantially all of the Company's business or
assets. This agreement will be binding upon, and inure to the benefit of, the
parties and their successors and assigns.
12. Partial Invalidity. If any provision of this agreement is held to be
invalid, void or unenforceable, the remaining provisions shall continue in full
force without being impaired or invalidated in any way.
13. Governing Law. This agreement will be governed by the laws of the
State of Connecticut, without giving effect to the conflict of laws principles
thereof.
14. Entire Agreement. This agreement reflects the complete agreement
between the parties with respect to the subject matter hereof, and there are no
written or oral understandings, promises
7
<PAGE>
or agreements directly or indirectly related to this letter agreement or the
subject matter hereof that are not incorporated herein.
15. Revocation Period. For a period of seven (7) calendar days following
your execution of this agreement, you may revoke this agreement. This agreement
will not become effective or enforceable to release any claims or rights which
you may have under the Age Discrimination in Employment Act until this
revocation period has expired. This agreement also will not become effective or
enforceable with respect to any obligations that the Company may have hereunder
until this revocation period has expired. You acknowledge and agree that if the
Company satisfies any obligations hereunder that otherwise would have arisen
during this revocation period as soon as practicable after the revocation period
has expired, such action will constitute timely satisfaction of such obligations
hereunder. You also acknowledge and agree that the benefits to you of the
covenants contained herein, including, but not limited to, payments hereunder,
are provided to you in exchange for the promises in this agreement, are not
normally available under Company policy or practice to employees whose
employment is terminated and provide for the payments of amounts to which you
would not otherwise be entitled.
16. Confidentiality and Intent to be Bound. The terms and conditions of
this agreement are confidential and must not be disclosed to any person other
than those who must perform tasks to effect the agreement. Notwithstanding the
foregoing, the Company and you may disclose any term of this agreement to comply
with applicable law. In addition, nothing contained herein shall be construed to
prohibit either party from disclosing the terms and conditions of this agreement
to its attorneys, accountants or bookkeepers or to any other person with whom a
fiduciary relationship has been established. Both parties have read this
agreement, have had the opportunity to consult with counsel, fully understand
the agreement's terms and conditions, and enter this agreement freely,
voluntarily and intending to be legally bound
8
<PAGE>
hereby.
17. Enforcement of Agreement; Liquidated Damages. You hereby acknowledge
and agree that your obligations under Paragraphs 8, 9 and 10 are a material part
of the consideration for this agreement and for the payments from the Company to
you under Paragraph 2, that your failure to satisfy any of such obligations
could cause irreparable harm to the Company and that the damages caused by such
failure would be uncertain and difficult to measure. You further acknowledge and
agree that the Company may seek injunctive relief to prevent your failure or
further failure to satisfy any of such obligations, in addition to all other
rights, remedies and claims that it may have under this agreement, at law or in
equity. You also acknowledge and agree that, if you fail to satisfy any of your
obligations under Paragraphs 8, 9 and 10, the Company will be entitled to
receive as liquidated damages for such failure recovery of any amounts paid to
you under this agreement after such failure, any amounts that you may have
earned or received as a result of or in connection with such failure, and all
costs and expenses, including fees and disbursements of counsel and other costs
thereof, incurred by the Company in connection with the enforcement of such
obligations.
18. No Waiver. No failure on the part of either party at any time to
require the performance by the other party of any term hereof shall be taken or
held to be a waiver of such term or in any way affect such party's right to
enforce such term, and no waiver on the part of either party of any term hereof
shall be taken or held to be a waiver of any other term hereof or the breach
thereof.
19. COBRA Benefits. You acknowledge that the Company will have no
obligation to pay directly or reimburse you for any COBRA payments due
subsequent to the Termination Date.
If you agree to and accept the terms and conditions of this agreement,
please sign both copies hereof in the space provided
9
<PAGE>
below, retain one copy for your records and return the other copy to the
undersigned.
Very truly yours,
MICRO WAREHOUSE, INC.
By: _________________________________
Name: Linwood A. Lacy, Jr.
Title: President & Chief Executive
Officer
Agreed to and accepted on the
date first above written:
_________________________________
Steven Purcell
Date Signed: December __, 1996
10
January 20, 1997
Mr. Melvin R. Seiler
2 East Meadow Road
Wilton, CT 06897
Dear Mel:
This agreement will serve to confirm the terms and conditions under which
we will be accepting your resignation as Executive Vice President and Chief
Operating Officer.
1. Resignations. Effective June 30, 1997 or such earlier date as shall be
mutually agreed (hereinafter the "Termination Date") you will be resigning as
Executive Vice President and Chief Operating Officer and member of the Board and
any other officerships or directorships of Micro Warehouse, Inc. or any of its
affiliates, sister companies or subsidiaries (hereinafter "the Company").
2. Employment Agreement. Your Employment Agreement dated as of January 1,
1995 will be deemed terminated as of the Termination Date. You shall be eligible
to receive any 1996 or, on a pro-rata basis through the Termination Date, any
1997 bonus available to you pursuant to your Employment Agreement or otherwise.
Through the Termination Date you shall be paid your current salary and receive
all benefits provided by your Employment Agreement. All of the Company's
employment policies will be applicable to you. We acknowledge that you are an
employee of Micro Warehouse, Inc. of Ohio and we shall continue through the
Termination Date to reimburse you for the difference between the taxes withheld
from your salary and the amount which would have been withheld had you been paid
as an employee of Micro Warehouse, Inc.
3. Benefits. For a period of twelve (12) months subsequent to the
Termination Date you shall continue to receive
<PAGE>
all benefits provided to you as of said date including but not limited to
payment of the premiums attributable to the cost of your current life and
disability insurance policies. Subsequent to the Termination Date you shall not
be reimbursed for any Blue Cross/Blue Shield premiums currently being paid by
the Company.
4. Duties. In addition to your regular duties as Executive Vice President
and Chief Operating Officer you shall also assist in the transition arising out
of the Company's hiring of any person to assume all or any portion of your
responsibilities. You shall continue to report to Chip Lacy, President and Chief
Executive Officer.
5. Stock Options. Schedule B-1 sets forth, inter alia, stock options
already granted to you which may be exercised by you on or prior to December 31,
1998. Schedule B-1 also sets forth stock options granted to you which as of the
date of this agreement have not yet vested. We confirm that we will not forfeit
these options and deem these options vested as of the date indicated on Schedule
B-1 and that they may be exercised by you on or prior to December 31, 1998. Said
Schedule B-1 also sets forth other stock options granted to you which are deemed
forfeited and of no further force and effect. You will not be eligible to
receive any further stock options or otherwise participate in any deferred
compensation programs notwithstanding the possibility that the Company might
provide the same participation to other comparably compensated employees.
6. Repayment of Incentive Compensation. You acknowledge that you have
received incentive compensation attributable to the 1995 year in the gross
amount of $612,000.00. You shall be required to repay to us the amount of
$398,535.68 (representing the net amount paid to you after withholding of
requisite taxes from the same) on or prior to December 31, 1996. It is agreed
that you shall be permitted to repay the same by delivering to the Company a
full recourse promissory note in the form of Exhibit A.
7. Indemnification. We confirm that the Indemnification
2
<PAGE>
Agreement between you and the Company dated as of January 25, 1994 is in full
force and effect.
8. Release.
(a) As consideration for the Company to enter into this agreement
and as consideration for the covenants contained herein, subject to the
immediately following sentence, you irrevocably and unconditionally release,
remit, acquit and forever discharge the Company, its officers, directors,
shareholders, agents, employees, representatives, attorneys, parents, divisions,
subsidiaries, affiliates, related companies or entities, successors and assigns
and the officers, executives, directors, shareholders, agents and employees of
any and all of the Company's parents, divisions, subsidiaries, affiliates,
related companies or entities, successors or entities (separately or
collectively, the "Released Parties"), jointly and individually, from any and
all claims, charges, complaints, expenses and causes of action of any nature or
kind whatsoever, known or unknown, which you, your heirs, successors or assigns
have or may have against the Released Parties based upon, related to or arising
out of your employment with the Company through the date hereof, including, but
not limited to, claims, charges, complaints, liabilities, losses, obligations,
demands, damages, costs, expenses and causes of action relating to the terms,
conditions, commencement, duration or termination of your employment, or claims
of discrimination under any federal, state or local law, rule, regulation or
common law, whether such claims are past or present, whether they arise from
equity, common law or statute, and whether they arise from labor laws or
discrimination laws, such as the Age Discrimination in Employment Act, as
amended, Title VII of the Civil Rights Act of 1964, 42 U.S.C. ss.1981, the Equal
Pay Act, as amended, the Americans with Disabilities Act, or any other federal,
state or local law, rule or regulation. This release is intended to cover all
possible relief, including, but not limited to, reinstatement, wages, back pay,
front pay, vacation pay, bonuses or incentive compensation, supplemental or
other retirement benefits, perquisites, compensatory damages, punitive damages,
damages for
3
<PAGE>
pain or suffering, and attorneys' fees, provided, however, that nothing in this
agreement will limit or otherwise affect any right you may have to
indemnification under the Company's Articles of Incorporation, By Laws or any
insurance policy in effect as of the termination of your employment with the
Company or pursuant to Article 6 hereof. In addition, if the Company complies
with its obligations hereunder, you agree you will not be entitled to any
benefit from any claim or proceeding filed by you or on your behalf with any
agency or court which is within the scope of this agreement or which goes to the
validity of any provision of this agreement.
(b) Effective as of the Termination Date, the releases provided for
in Paragraph 8(a) will, without further action, be automatically extended to the
Termination Date (except the same will not cover any breach of this agreement by
the Company).
(c) The releases under this Paragraph 8 are intended to cover all
possible rights, obligations and liabilities, including any such rights,
obligations or liabilities based upon, relating to or arising from any claim
which goes to the validity of any provision of this agreement, other than a
claim for any breach of this agreement. (d) You acknowledge that you have been
given a period of at least 21 days to review and consider this agreement before
signing it, and that you understand that you may use as much of the 21-day
period as you wish prior to signing.
9. Covenant Not to Compete.
(a) In consideration for the Company's undertakings described in
this agreement and the payments set forth in sub-paragraph (b) hereinbelow, you
hereby covenant and agree that for a period of eighteen (18) months subsequent
to the Termination Date (the "Non-Compete Period"), you 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
4
<PAGE>
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 you from (i) performing services for a
Competitive Business if such Competitive Business is also engaged in other lines
of business and if your 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 one percent (1%) of any class or type of
securities of, or interest in, such Business. The term "Competitive Business"
shall mean and include any business or activity that is substantially the same
as, or related to any business or activity conducted by the Company, regardless
of where such Competitive Business is located.
(b) In partial consideration for the Covenant not to Compete in
sub-paragraph 9(a) hereinabove the Company shall pay you the gross amount of
Twenty Thousand Dollars ($20,000) per month for eighteen (18) months (less any
taxes required to be withheld), which amount shall be paid on or about the
fifteenth (15th) of each month.
10. Confidential Information. You acknowledge that the Company would be
damaged if your knowledge with respect to the business of the Company was
disclosed to or utilized by parties other than the Company. Accordingly, you
covenant and agree that you 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 you and relates
to such matters as budget and forecasts, customer mailing lists, data base
management techniques, pricing and credit techniques,
5
<PAGE>
marketing techniques, research and development activities, sources of product,
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 you from
third parties without restrictions on disclosure provided the same would not, if
released, damage the Company.
11. Covenant Not to Solicit. Unless you receive the prior written consent of
the Company you hereby covenant and agree that, from the date hereof until the
expiration on the Non-Compete Period, you shall not, for or on behalf of a
Competitive Business, directly or indirectly, as owner, officer, director,
stockholder, partner, associate, consultant, manager, advisor, representative,
employee, agent, creditor or otherwise, attempt to solicit or in any other way
disturb or service any person, firm or corporation that has been a customer
account of the Company at any time or times prior to the termination of the
Period of Employment, whether or not you at any time had any direct or indirect
account responsibility for, or contact with, such customer account.
12. Assignment. This agreement is not assignable, except that the Company
may assign it to any successor of substantially all of the Company's business or
assets. This agreement will be binding upon, and inure to the benefit of, the
parties and their successors and assigns.
13. Partial Invalidity. If any provision of this agreement is held to be
invalid, void or unenforceable, the remaining provisions shall continue in full
force without being impaired or invalidated in any way.
14. Governing Law. This agreement will be governed by the laws of the
State of Connecticut, without giving effect to the conflict of laws principles
thereof.
15. Entire Agreement. This agreement reflects the complete
6
<PAGE>
agreement between the parties with respect to the subject matter hereof, and
there are no written or oral understandings, promises or agreements directly or
indirectly related to this letter agreement or the subject matter hereof that
are not incorporated herein.
16. Revocation Period. For a period of seven (7) calendar days following
your execution of this agreement, you may revoke this agreement. This agreement
will not become effective or enforceable to release any claims or rights which
you may have under the Age Discrimination in Employment Act until this
revocation period has expired. This agreement also will not become effective or
enforceable with respect to any obligations that the Company may have hereunder
until this revocation period has expired. You acknowledge and agree that if the
Company satisfies any obligations hereunder that otherwise would have arisen
during this revocation period as soon as practicable after the revocation period
has expired, such action will constitute timely satisfaction of such obligations
hereunder. You also acknowledge and agree that the benefits to you of the
covenants contained herein, including, but not limited to, payments hereunder,
are provided to you in exchange for the promises in this agreement, are not
normally available under Company policy or practice to employees whose
employment is terminated and provide for the payments of amounts to which you
would not otherwise be entitled.
17. Confidentiality and Intent to be Bound. The terms and conditions of
this agreement are confidential and must not be disclosed to any person other
than those who must perform tasks to effect the agreement. Notwithstanding the
foregoing, the Company and you may disclose any term of this agreement to comply
with applicable law. In addition, nothing contained herein shall be construed to
prohibit either party from disclosing the terms and conditions of this agreement
to its attorneys, accountants or bookkeepers or to any other person with whom a
fiduciary relationship has been established. Both parties have read this
agreement, have had the opportunity to consult with counsel, fully
7
<PAGE>
understand the agreement's terms and conditions, and enter this agreement
freely, voluntarily and intending to be legally bound hereby.
18. Enforcement of Agreement; Liquidated Damages. You hereby acknowledge
and agree that your obligations under Paragraphs 9, 10 and 11 are a material
part of the consideration for this agreement and for the payments from the
Company to you under Paragraph 9(b), that your failure to satisfy any of such
obligations could cause irreparable harm to the Company and that the damages
caused by such failure would be uncertain and difficult to measure. You further
acknowledge and agree that the Company may seek injunctive relief to prevent
your failure or further failure to satisfy any of such obligations, in addition
to all other rights, remedies and claims that it may have under this agreement,
at law or in equity. You also acknowledge and agree that, if you fail to satisfy
any of your obligations under Paragraphs 9, 10 and 11, the Company will be
entitled to receive as liquidated damages for such failure recovery of any
amounts paid to you under this agreement after such failure, any amounts that
you may have earned or received as a result of or in connection with such
failure, and all costs and expenses, including fees and disbursements of counsel
and other costs thereof, incurred by the Company in connection with the
enforcement of such obligations.
18. No Waiver. No failure on the part of either party at any time to
require the performance by the other party of any term hereof shall be taken or
held to be a waiver of such term or in any way affect such party's right to
enforce such term, and no waiver on the part of either party of any term hereof
shall be taken or held to be a waiver of any other term hereof or the breach
thereof.
19. COBRA Benefits. You acknowledge that the Company will have no
obligation to pay directly or reimburse you for any COBRA payments due after 12
months subsequent to the Termination Date.
8
<PAGE>
If you agree to and accept the terms and conditions of this agreement,
please sign both copies hereof in the space provided below, retain one copy for
your records and return the other copy to the undersigned.
Very truly yours,
MICRO WAREHOUSE, INC.
By: ________________________________
Name: Linwood A. Lacy, Jr.
Title: President & Chief Executive
Officer
Agreed to and accepted on
the date first above written:
______________________________
Melvin R. Seiler
Date Signed: January 20, 1997
9
<PAGE>
SCHEDULE B-1 TO
LETTER AGREEMENT WITH MELVIN R. SEILER
DATED AS OF JANUARY 20, 1997
Stock options already granted to you and already vested which may be exercised
pursuant to Paragraph 5 on or prior to December 31, 1998:
1. 18,000 options @ $11.38 granted on 6/21/93 per agreement dated November
12, 1993 (copy attached).
2. 10,729 options @ $30.125 granted on 1/19/95 per agreement dated February
6, 1995 (copy attached).
Stock options already granted to you, not vested as of 12/13/96, which shall be
deemed vested as of the dates indicated and available for exercise pursuant to
Paragraph 5 on or prior to December 31, 1998:
1. 17,500 options @ $32.00 granted 1/19/96 per agreement dated February 8,
1996 vesting January 19, 1997 (copy attached).
2. 10,000 options @ $11.38 granted on 6/21/93 per agreement dated November
12, 1993 vesting June 21, 1997.
Stock Options deemed forfeited pursuant to Paragraph 5:
1. 17,500 options @ $32.000 granted 1/19/96 per agreement dated February 8,
1996 vesting January 19, 1998.
2. 12,000 options @ $11.38 granted on 6/21/93 per agreement dated November
12, 1993 vesting June 21, 1998.
10
EXHIBIT 11
Micro Warehouse, Inc. and Subsidiaries
Statement Re Computation of Per Share Earnings
(in thousands, except per share data)
PRIMARY
-----------------------------------
YEAR ENDED
-----------------------------------
December December December
31, 1996 31, 1995 31, 1994
-------- -------- --------
Net Income
Income before extraordinary charge $16,882 $35,244 $24,556
Extraordinary loss on early
extinguishment of debt 1,584 -- --
------- ------- -------
Net income $15,298 $35,244 $24,556
======= ======= =======
Shares
Weighted average common shares outstanding 34,310 32,579 29,847
Common equivalent shares 483 1,026 713
------- ------- -------
Weighted average common and common
equivalent shares outstanding 34,793 33,605 30,560
======= ======= =======
Per Share
Income before extraordinary charge $ 0.49 $ 1.05 $ 0.80
Extraordinary loss on early
extinguishment of debt 0.05 -- --
------- ------- -------
Net income $ 0.44 $ 1.05 $ 0.80
======= ======= =======
FULLY DILUTED
-----------------------------------
YEAR ENDED
-----------------------------------
December December December
31, 1996 31, 1995 31, 1994
-------- -------- --------
Net Income
Income before extraordinary charge $16,882 $35,244 $24,556
Extraordinary loss on early
extinguishment of debt 1,584 -- --
------- ------- -------
Net income $15,298 $35,244 $24,556
======= ======= =======
Shares
Weighted average common shares outstanding 34,310 32,579 29,847
Common equivalent shares 481 1,053 745
------- ------- -------
Weighted average common and common
equivalent shares outstanding 34,791 33,632 30,592
======= ======= =======
Per share
Income before extraordinary charge $ 0.49 $ 1.05 $ 0.80
Extraordinary loss on early
extinguishment of debt $ 0.05 -- --
------- ------- -------
Net income $ 0.44 $ 1.05 $ 0.80
======= ======= =======
Business Description
Micro Warehouse, Inc.
Micro Warehouse is a specialty catalog retailer and direct marketer of brand
name personal computers, computer software, accessories, peripheral and
networking products to commercial and consumer customers. The Company markets
its products through frequent mailings of its distinctive, colorful catalogs,
Internet catalog sites on the World Wide Web and dedicated telemarketing account
managers who focus on corporate, education and government accounts.
Through its three core catalogs - MicroWarehouse, MacWarehouse and Data
Comm Warehouse - various specialty catalogs, and its Internet sites, the Company
offers a broad assortment of more than 25,000 computer products at competitive
prices. With colorful illustrations, concise product descriptions and relevant
technical information, each catalog title focuses on a specific segment of the
computer market.
Micro Warehouse employs approximately 3,500 people worldwide and publishes
catalogs in 13 countries. The Company's common stock is traded on The Nasdaq
Stock Market under the symbol "MWHS."
Mission
To be the leading worldwide direct marketing reseller of micro computer products
with industry leading skills in database marketing, business and institution
selling, efficient logistics, and in providing excellent customer service. Micro
Warehouse will be guided by an unyielding commitment to providing employees with
growth and development opportunities.
Contents
This is Micro Warehouse (foldout)
Financial Highlights page 1
Letter to Shareholders page 2
Expertise in Database Management page 6
Strong Commercial Sales Focus page 8
Broad Product Assortment page 10
Developing Systems and Logistics page 12
International Operations page 14
Micro Warehouse Operating Results page 16
Selected Financial Information page 17
Corporate Information page 37
Officers and Directors page 37
[Inside Front Cover depicting products, personnel, catalogs and related
captions]
<PAGE>
Financial Highlights
Micro Warehouse, Inc.
<TABLE>
<CAPTION>
% Increase
For the years ended December 31 (Decrease)
(in thousands, except per share data) 1996 1995(1) 1996 over 1995 1994(1)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income Statement Data:
Net sales $1,916,244 $1,684,627 13.7% $1,130,796
Restructuring costs, merger costs,
and goodwill write-off 32,161 -- -- --
Income from operations before interest,
income taxes and extraordinary charge 33,093 57,715 (42.7%) 41,063
Income before income taxes and
extraordinary charge 36,601 57,903 (36.8%) 40,877
Extraordinary charge, net of taxes 1,584 -- -- --
Net income $ 15,298 $ 35,244 (56.6%) $ 24,556
Net income per share $ 0.44 $ 1.05 (58.1%) $ 0.80
Weighted average number
of shares outstanding 34,793 33,605 3.5% 30,560
Balance Sheet Data:
Total assets $ 607,842 $ 554,546 9.6% $ 411,876
Long-term obligations
excluding current portion 376 20,458 (98.2%) 1,497
Stockholders' equity 384,168 364,669 5.3% 270,862
- ---------------------------------------------------------------------------------------------------
Supplemental Data
Net income before unusual charges (2) $ 40,913 $ 35,244 16.1% $ 24,556
Income per share before unusual charges(2) $ 1.18 $ 1.05 12.4% $ 0.80
</TABLE>
(1) Restated to reflect the acquisition of Inmac Corp. as a pooling of
interests. (See note 2 to Notes to Consolidated Financial Statements).
(2) Amounts exclude the effect of unusual charges comprised of restructuring
costs, merger costs, goodwill write-off and extraordinary charge.
- --------------------------------------------------------------------------------
Restatement of Financial Statements
In late September 1996, an internal review led to the discovery of certain
errors in Micro Warehouse's accounting records. A Task Force comprised of
Company representatives and members of its outside accounting firm, KPMG Peat
Marwick LLP, was immediately organized to determine the extent, causes and
implications of these errors and appropriate corrective action. Simultaneously,
the Audit Committee of the Board of Directors engaged outside counsel and
independent auditing advisors to examine these matters.
Over the course of the next several months, the Task Force and Audit
Committee examined these issues in detail. Ultimately, the Company determined
that the errors primarily impacted accrued inventory liabilities and trade
payables since 1992. Inaccuracies in these accounts totaled approximately $47.3
million before tax. The 1992 through 1995 restated financial statements reflect
aggregate net pre-tax adjustments of $41.9 million, net of the recovery of $2.2
million of incentive bonus payments for 1995 made to certain senior executives.
The balance of $3.2 million in pre-tax adjustments were made to the Company's
first quarter 1996 results and were reflected in its Form 10-Q for the third
quarter ending September 30, 1996.
On February 10, 1997, the Company filed Forms 10-K/A with the
Securities and Exchange Commission (SEC) reflecting restated financial
statements for the years and quarters 1992, 1993, 1994 and 1995. Additionally,
the Board of Directors is taking steps to strengthen the Company's internal
controls.
As a consequence of the disclosure of these accounting errors, the
following lawsuits and administrative proceeding have been initiated.
During October, November and December 1996, the Company and certain of its
directors and officers were named as defendants in 11 lawsuits brought in the
United States District Court for the District of Connecticut by parties which
seek to represent classes of stockholders who purchased shares of the Company's
common stock during different periods between January 1994 and September 1996,
or exchanged shares in a merger transaction completed in January 1996. These
lawsuits advance claims under various provisions of the federal securities laws
and the common law and assert that various misleading disclosures were made
concerning the Company's financial performance and position and other related
circumstances during the periods described. The lawsuits followed and are
predicated upon the Company's announcements in September and October 1996 that
it intended to restate certain prior financial statements. These matters have
been consolidated into a single proceeding.
In November 1996, a shareholder derivative action was filed in the United
States District Court for the District of Connecticut, purportedly on behalf of,
and for recovery by, the Company, which is named as a nominal defendant. The
complaint charges certain directors and officers with violation of fiduciary
duties in selling Company stock while in possession of non-public information
and in causing or permitting the exposure of the Company to damage, such as
through the class litigation described above, attributable to the same
circumstances that are the subject of the class litigation. The Company and the
individual defendants have filed a Motion to Dismiss the Complaint which is
pending before the Court.
In December 1996 and January 1997, the Company and certain of its directors
and officers were named as defendants in two largely identical lawsuits brought
in the Superior Court of Santa Clara County, San Jose, California. These
lawsuits have now been consolidated. The lawsuits arise out of the stock merger
between the Company and Inmac Corp. on January 25, 1996. The claims are
generally similar to those being asserted in the consolidated class action
described above.
All of the above referenced lawsuits are at a preliminary stage. The
plaintiffs in these lawsuits seek unspecified compensatory damages, other
relief, legal fees and litigation costs. The Company is unable to predict the
outcome or the potential financial impact of this litigation, and accordingly,
has made no provision therefor in the consolidated financial statements.
Finally, the SEC has commenced a formal investigation into the events
underlying the restatement. The Company has been cooperating with this
investigation and will continue to do so.
The Company has assembled a group of experienced outside advisors to work
with the Company's Executive Committee and Board to manage and defend these
claims. We are hopeful that, notwithstanding the complexities of these issues,
they will be resolved efficiently and in the best interests of the Company, all
of its shareholders, customers and employees.
- --------------------------------------------------------------------------------
CAPITALIZING ON OUR FIVE STRENGTHS 1
<PAGE>
Letter To Shareholders
Nineteen ninety-six has been a year of enormous challenge and change for Micro
Warehouse. We saw continued robust growth in our IBM PC-compatible business, but
the weakness of Apple Computer's Macintosh business significantly impacted us
throughout the year. During the first nine months of 1996, much of the Company's
operational energy was devoted to the merger with Inmac, a leading international
direct-response marketer of personal computer and networking products. In late
September, we announced that we had discovered financial errors that have
required us to restate our financial reports since 1992. These errors and the
actions the Company is taking to address them are described on page one.
In October, we welcomed our new President and Chief Executive Officer, Chip
Lacy. Chip brings a wealth of talent and experience, including building and
running the largest and most successful micro computer products distributor in
the world. His expertise will be invaluable in bringing us to the next level of
accomplishment.
[Photograph]
Peter Godfrey
Chairman of the Board
Linwood A. "Chip" Lacy, Jr.
President and Chief Executive Officer
During the year, we distributed 123 million catalogs to customers and
prospective customers worldwide. We began to realize the benefits from the
development of our Micro Warehouse MicroTrax Customer Database System. We
extended our range of personal computer products that now includes more than
25,000 SKUs and expanded our commercial sales business which now accounts for
approximately two-thirds of our total domestic sales. With the acquisition of
Inmac, our international net sales now represent approximately one-third of our
global net sales.
2 CAPITALIZING ON OUR FIVE STRENGTHS
<PAGE>
We continued our efforts to diversify our customer base and reduce our
dependence on users of the Macintosh platform. In the fourth quarter of the
year, sales of Macintosh products worldwide declined to 45% of total sales.
Key Acquisitions Strengthen
IBM PC-Compatible Business
Acquisitions played an important part in our diversification strategy. In
January, we completed the acquisition of Inmac Corp., a leading international
direct-response marketer of personal computer products with 73% of its fiscal
1995 sales in Europe. Inmac's product assortment includes a wide range of
personal computer and networking products that Micro Warehouse did not formerly
offer.
We spent much of 1996 merging the Micro Warehouse and Inmac businesses,
closing facilities and eliminating staff in every country in which the companies
operate together. For expenses associated with the merger and restructuring, we
took a one-time charge of $26.2 million. The Inmac acquisition has greatly
strengthened our operations in Europe, particularly in the datacomm market.
Inmac also has reduced our dependence on our Macintosh business in Europe.
In October, we completed the acquisition of the business of USA Flex,
based in Bloomingdale, Illinois. This company has been successful in acquiring
customers and building its business from advertisements in U.S. computer
publications, particularly Computer Shopper. The USA Flex acquisition should
strengthen our IBM PC-compatible business in the United States. In September, we
acquired the Helsinki, Finland-based firm, Business Forum and a related company
with the object of increasing our IBM PC-compatible business to commercial
accounts in the Finnish market.
- --------------------------------------------------------------------------------
Chip Lacy Hired as President and CEO
Linwood A. "Chip" Lacy, Jr. joined Micro Warehouse in October 1996 as President,
Chief Executive Officer and member of the Board of Directors. From 1985 to May
1996, Mr. Lacy was CEO of Ingram Micro and its predecessor company Micro D, the
leading distributor of micro computer products. From 1993 to 1996, Mr. Lacy,
served as President, and for a part of that time, as CEO of Ingram Industries,
Ingram Micro's parent company. Prior to his service at Ingram Micro, Mr. Lacy
spent nearly ten years at Best Products, a catalog showroom retailer, with his
last duties as Senior Vice President of Marketing. Mr. Lacy brings to the
Company 26 years of experience and skills in the retail, catalog and computer
industries which make him uniquely qualified to lead the Company into the 21st
Century.
- --------------------------------------------------------------------------------
CAPITALIZING ON OUR FIVE STRENGTHS 3
<PAGE>
[The following table was represented by a bar graph in the printed material.]
Net Sales, Worldwide
(in millions)
94 95 96
---- ---- ----
$1,131 $1,685 $1,916
Consolidated worldwide sales grew 14% in 1996 to $1,916
million.
[The following table was represented by a bar graph in the printed material.]
Net Income
Per Share
94 95 96 96(1)
---- ---- ---- ----
$0.80 $1.05 $0.44 $1.18
(1) 1996 net income per share was $0.44. Excluding the effect of restructuring
costs, merger costs and extraordinary expenses, net income per share
reflects growth over 1995 of 12% to $1.18.
Shift in Our Source of Revenue
Our core domestic IBM PC-compatible business (excluding Inmac) grew by more than
45% during 1996. Particularly significant in this growth were the sales of
notebook computers and the continued growth of our Data Comm Warehouse business.
The uncertainties of the Apple Macintosh marketplace had a significant
bearing on the Company throughout 1996. In the first quarter of 1996, our
domestic Mac business grew 50% over the previous year. By the final quarter we
saw a 13% decline in business over the previous year. Reflecting the uncertainty
of the Mac market, in the June quarter we took a one-time charge of $6 million
to write off the value of the goodwill held on our books for those overseas
subsidiaries that serviced the Mac market only. We have subsequently closed our
"Mac only" operations in Switzerland and Belgium. The future of the Macintosh
business continues to be uncertain in 1997.
Internet Becomes
Important Sales Tool
In 1996, the Internet continued to grow in importance as a means of offering our
product assortment, communicating efficiently with our customers and building
our customer base. We continued to develop our general Internet catalog and
catalogs for specific corporate customers with unique corporate pricing and
commercial capabilities. We believe that the various Internet initiatives that
we plan to introduce in 1997 will further enhance our business in the United
States and abroad.
- --------------------------------------------------------------------------------
10 Years of Growth
1987 Micro Warehouse, Inc. commences operations as a direct marketer of computer
software and peripherals for users of Apple Macintosh and IBM PC-compatible
personal computers. Direct response advertisements first appear in the June
issue of MacUser magazine.
1988 The first edition of the Mac Warehouse catalog of products for Macintosh
users is launched in January. The picture of telemarketing supervisor Kerry
appears on the front cover and is ultimately adopted as the Company trademark.
First advertisement for Micro Warehouse IBM PC-compatible products appears in
October.
1989 The dedicated telemarketing Account Manager program commences in April.
First Micro Warehouse "Electronic Mall" store is established on CompuServe
Information Services in May. Midnight Express Service commences in October-
enables customers to place orders until 12:00 A.M. (EST) for overnight delivery.
1990 First Micro Warehouse catalog for IBM PC-compatible products ships in
January. FaxFacts Interactive fax information service is introduced in April.
Own brand is established in June with introduction of Power User hard drives and
modems.
1991 Computer system conversion to current S.G.A. system is completed in
January. "Type on Call" Center for "over the phone" unlocking of Adobe "type"
software from a CD-ROM introduced in March. Full service direct marketing
operations commence in the U.K. in spring.
- --------------------------------------------------------------------------------
4 CAPITALIZING ON OUR FIVE STRENGTHS
<PAGE>
[The following table was represented by a bar graph in the printed material.]
Income Before
Taxes, Worldwide
(in millions)
94 95 96 96(1)
---- ---- ---- ----
$40.9 $57.9 $36.6 $68.8
(1) Net income before income taxes, restructuring costs, merger costs and
extraordinary expense grew 19% to $68.8 million.
[The following table was represented by a bar graph in the printed material.]
Stockholders' Equity
(in millions)
94 95 96
---- ---- ----
$271 $365 $384
Stockholders' equity grew $19 million in 1996 to $384 million.
Employees Are Paramount
to Long-Term Success
We are most grateful for the effort and dedication of the Micro Warehouse
employees worldwide. We welcome for the first time our many new Inmac, USA Flex
and Business Forum partners.
At this important juncture in the history of the Company, we have
introduced a broad-based stock option program as incentive for our employees.
Our goal is to focus the efforts of every employee on building the success of
Micro Warehouse and the value of the Company to its shareholders. We also have
introduced programs to drive accountability down to every level within the
Company and we are increasing our commitment to employee training to achieve our
goals.
There have been a number of recent changes in our executive staff. Mel Seiler,
Executive Vice President and Chief Operating Officer, will be leaving the
Company in the summer. Mel has been instrumental in guiding the day-to-day
operations of the Company over the last nine years. Many fundamental steps
forward in our business have come from Mel's leadership. We will miss his
significant contributions and want to thank him for his deep commitment to the
Company and its employees.
In February, the Company announced that two key senior management positions
had been filled. Kris Rogers was appointed Executive Vice President and General
Manager of US Operations and Wayne Garten was appointed Senior Vice President
and Chief Financial Officer. Kris has a diverse background in Sales, Management
Information Systems, Product Marketing and Operations. Kris comes to the Company
from Merisel, Inc., a leading distributor of computer products, where she held
several key positions and was a member of the Office of the President. Her last
position at Merisel was Senior Vice President of Product and Inventory. Wayne
brings a unique blend of strong finance and accounting skills plus an in-depth
understanding of the direct response business. Wayne previously held the
position of Executive Vice President and Chief Financial Officer of Hanover
Direct, Inc.
This has been a year of challenge and change for the Company. We would like
to thank our many shareholders for their continued support during a difficult
period. Nineteen ninety-seven is the tenth anniversary of Micro Warehouse and we
are excited about its future. We believe the critical building blocks for the
future are being set into place.
Sincerely,
/s/ Peter Godfrey
Peter Godfrey
Chairman of the Board
/s/ Linwood A. Lacy, Jr.
Linwood A. Lacy, Jr.
President and Chief Executive Officer
March 28, 1997
- --------------------------------------------------------------------------------
1992 International operations are extended to France and Germany. Upgrade
Warehouse is launched for easy availability of upgrade software. Micro
Warehouse introduces biodegradable packaging material in March. The Company
completes an initial public offering in December.
1993 The Data Comm Warehouse catalog of networking products is launched in
February. The distribution center is moved from Lakewood, New Jersey to
Wilmington, Ohio, adjacent to the Airborne Express hub facility. International
operations are commenced in Scandinavia in December.
1994 IBM authorizes Micro Warehouse to sell selected CPUs. The Company's product
assortment begins significant expansion to include a broad range of major
branded CPU models. International operations are started or acquired in
Australia, Canada, the Netherlands, Japan and Mexico.
1995 Worldwide sales (excluding Inmac) exceed $1 billion for the first time. The
Company launches its first Internet site at http://www.warehouse.com in July.
Governor Christine Todd Whitman opens new 82,000 square foot telemarketing
facility in Gibbsboro, New Jersey.
1996 The Company acquires Inmac Corp., a leading international direct response
marketer of computer products, in January. In September, the Company announces
discovery of accounting errors and forms Task Force to investigate. Chip Lacy
joins as President and Chief Executive Officer in October. USA Flex is acquired
in November.
CAPITALIZING ON OUR FIVE STRENGTHS 5
<PAGE>
1. Expertise in Database Management
and Direct Response Marketing
Mailing catalogs with pinpoint accuracy is a critical component of Micro
Warehouse's business. In 1996, we distributed 123 million catalogs to our
customers and potential new customers worldwide. During the year, we began to
realize the benefits of a new customer transactional database system, MicroTrax.
The Micro Warehouse MicroTrax Customer Database System provides the
capability to project customer value by predicting future performance from
customer type and initial purchasing activity. We can then focus our catalog
promotion plans on those customers most likely to make repeat purchases.
Initially developed in the United States, MicroTrax is being extended to our
operations in Europe in 1997.
MicroTrax enables us to store and analyze the complete purchasing history
of more than two million active customers - what they buy, how much they spend
and how often they purchase. Individual commercial customer performance at the
department level can be combined for improved understanding of each account.
Business data overlays are applied to enhance analysis and identify
high-potential markets. Product trends are also examined, including attachment
rates and product category trends by customer.
Immediate access to the information allows us to analyze and rank customers
by wide ranging attributes such as product purchasing history, average order
size, customer type and even initial purchasing methods. Hundreds of attributes
can be used to support traditional regression modeling. The desktop application
allows quick turnaround time for most queries, providing timely data for making
fast but reliable marketing decisions.
In 1996, the Internet began to significantly affect our direct response
marketing strategy, both as a means of extending our customer base and improving
our ability to communicate. Micro Warehouse is gathering Internet addresses from
both our telephone customers as well as visitors to our Internet web sites. As
we develop these contacts and automate our Internet communications technology,
we aim to significantly improve customer service and our ability to market to
these customers. Our main Internet web site can be found at
http://www.warehouse.com.
Our overall customer mailing and communications strategy is continuing to
benefit from advances in technology.
[The following table was represented by a bar graph in the printed material.]
Active Customers
(in millions)
94 95 96
---- ---- ----
1.8 2.1 2.3
The number of active customers grew to 2.3 million in 1996, up 10% over 1995.
[The following table was represented by a bar graph in the printed material.]
Catalogs Distributed
(in millions)
94 95 96
---- ---- ----
87 103 123
The total number of catalogs distributed in 1996 was 123 million, up 19% over
the prior year.
6 CAPITALIZING ON OUR FIVE STRENGTHS
<PAGE>
"Our expertise in database management allows us to target our customers and
prospective customers with pinpoint accuracy."
Geoffrey Boytos, Vice President Database Marketing
[Photograph] [Photograph] [Photograph] [Photograph]
Catalogs Information Commercial Target
Systems Sales Forces Customers
Micro Managing Corporate Business-
Warehouse 2.3 million customers To-Business
and 25,000 SKUs Education
Micro Major
Systems MicroTrax Government Accounts
Warehouse Customer
Database Key
Mac System Accounts
Warehouse
Inbound State
Mac Commercial Government
Systems Sales
Warehouse Local
Inbound Government
Inmac Consumer
Sales Higher
Data Comm Education
Warehouse SGA
Sales K-12
Work Station System Education
Express
USA Flex
Micro Warehouse employs catalogs and print advertising to generate puchases from
existing and prospective customers. High potential commercial customers are
identified by inbound sales personnel and assigned to the commercial sales force
for development.
<PAGE>
2. Strong Commercial
Sales Focus
Micro Warehouse services commercial and consumer customers, but the focus of our
business has moved progressively towards the commercial segments. Today,
domestic commercial customers represent one-third of our total domestic customer
base, but account for over two-thirds of our total domestic sales.
The commercial segment is divided into Government (Federal, State and
Local), Education (K-12 and Higher Education) and the various segments of
Corporate Accounts. These are Key Accounts (the D&B 1-1,000), Major Accounts
(the D&B 1,001-10,000) and smaller businesses, referred to as the
"Business-to-Business" segment. The Company's unique combination of catalog
marketing and dedicated telemarketing Account Managers is particularly effective
at servicing the small and medium sized business community which cannot be
efficiently reached through in-person calls.
In all of these segments, the key sales interface to the customer is the
dedicated telemarketing Account Manager who maintains the business relationship
with the customer. At year-end, Micro Warehouse had 240 such Account Managers in
the United States. In Europe and the rest of the world there were 80 Account
Managers. The Company intends to expand the number of dedicated Account Managers
in 1997.
The Company's catalog mailing program and print advertisements are designed
to encourage commercial customers to call. Then, a combination of Account
Managers and targeted, repeat mailings seeks to expand the relationship with
each commercial customer.
The commercial customer has numerous competitive purchasing choices. In
many cases, responding to a printed catalog or an advertisement is not the
primary purchasing mechanism. The customer may have selected the product that he
or she wants from many sources and then called the reseller to check for
availability and price. Micro Warehouse is instituting a number of systems and
processes to enhance the management of such customers. The product assortment is
being enlarged to encourage "one-stop" shopping; and, a more business oriented,
quarterly commercial catalog, "The Computer Products Source Book," has been
introduced.
8 CAPITALIZING ON OUR FIVE STRENGTHS
<PAGE>
"Our strength in the commercial marketplace is built on our team of dedicated
Account Managers."
Mike Skolozdra, Group Sales Director
[Photograph]
CAPITALIZING ON OUR FIVE STRENGTHS 9
<PAGE>
3. Broad Product
Assortment
Micro Warehouse's goal is to be the "one-stop shop" for micro computer products
for the commercial and consumer markets. Through our various catalog brands and
Internet web sites, we provide up-to-date product information and pricing for
over 25,000 items. In 1996, we continued to broaden our product range to
encompass an expanding variety of technical products.
The product assortment management process has multiple phases at Micro
Warehouse. The Product Evaluation Teams for the various product categories
constantly monitor the market for new products from new and existing vendors.
Products selected can be placed immediately into the next catalog cycle and onto
the web sites. Once added to the assortment, the purchasing staff utilizes the
purchasing tracking and planning system to carefully track product stock levels.
Periodic marketing reviews examine all category sales. As product areas
decline in importance, the amount of catalog exposure is reduced in favor of
"hotter" new products and the inventory levels and number of SKUs are adjusted
downward.
The Company has made several acquisitions in the past few years
which have broadened its product assortment. The Inmac acquisition provided
significant expansion in specialty computer products such as custom wiring,
peripheral sharing products, printer supplies and accessories and a range of
testers and tools. In 1997, the Company plans to launch a specialty catalog
based upon tool products called ToolKit Warehouse targeting electronics
technicians, testing engineers and cable and network installers.
Similarly, the USA Flex acquisition provided the USA Flex brand of personal
computers, along with the capability to offer component configuration to meet
specialized customer requirements. The acquisition of NuData, Inc. in early 1996
provided NuData brand workstation equipment that operates in a UNIX operating
system environment. Over the years, the Company has built a well regarded line
of Power User brand computer peripherals and accessories offered through Mac
Warehouse which are manufactured by third-party suppliers to our specifications.
[The following table was represented by a pie graph in the printed material.]
1996 Domestic
Net Sales
Supplies and Accessories 7%
Software 19%
Hardware 74%
Hardware comprised nearly three-quarters of net sales in 1996.
In 1996, several product categories grew significantly. Our desktop and
notebook computer business continued to develop with the addition of new
manufacturers like Fujitsu, Hitachi and Olivetti. We were authorized to sell new
models of desktop systems such as IBM Aptiva and HP Vectra. Increased demand for
refurbished computers and authorization from Toshiba for its popular Encore
program provided customers the opportunity to purchase name brand computers at
significantly reduced prices.
Micro Warehouse intends to serve its customers with "first to market
products" and broad product assortment.
10 CAPITALIZING ON OUR FIVE STRENGTHS
<PAGE>
Micro Warehouse expects to be the 'one-stop shop' for microcomputer products in
the commercial and consumer marketplaces."
Chip Lacy, President and Chief Executive Officer
CAPITALIZING ON OUR FIVE STRENGTHS 11
<PAGE>
4. Developing
Systems and Logistics
The primary focus in the area of systems and logistics for 1996 was the
consolidation of the newly acquired Inmac operations with those of Micro
Warehouse to realize increased operating efficiencies. In the United States,
Inmac's central warehouse in Louisville, Kentucky was closed in August, and all
activity was combined into the Micro Warehouse logistics hub in Wilmington,
Ohio. In Europe, various Micro Warehouse warehousing facilities were closed. In
the UK we combined with the Inmac operation in the north of England. In France,
Germany and the Netherlands, the Micro Warehouse operations and facilities were
similarly combined with Inmac.
The domestic Inmac business operations were converted over to the Micro
Warehouse computer system in May, and in July, the UK computer system conversion
was completed. Conversion to an upgraded Micro Warehouse system is planned for
France and Germany in the summer of 1997.
Micro Warehouse has begun an important step forward in servicing its
customers and simplifying its business. In the past, separate inventory/customer
database systems were maintained to manage the distinct MicroWarehouse,
MacWarehouse and Data Comm Warehouse businesses. As the customers and products
have merged and as the Company focuses upon "cross platform" commercial
customers, integrating the information systems has become critical. In all
markets, the present separate inventory/customer systems will be integrated into
a common system. The initial conversion to this new "Alpha" system occurred in
the United States in March 1997 and will be followed by conversions in Europe
and Canada later in the year.
In the United States, Micro Warehouse's principal air delivery supplier,
Airborne Express, completed a $128 million expansion of its facilities in
Wilmington, Ohio which will improve Airborne's market reach and reliability of
service. Micro Warehouse should directly benefit from this investment.
Over the next two years, the Company intends to streamline its distribution
operations. Today, Micro Warehouse distributes from four separate buildings in
the immediate vicinity of the Airborne Express hub. A long-term logistics and
distribution evaluation has begun with the object of completing the design for a
new warehouse and configuration center to support the Company's needs over the
next several years.
12 CAPITALIZING ON OUR FIVE STRENGTHS
<PAGE>
"To more effectively serve our customers, we are committed to continuously
upgrade our information systems and processes at every stage of our supply
chain."
Melvin Seiler, Executive Vice President
and Chief Operating Officer
CAPITALIZING ON OUR FIVE STRENGTHS 13
<PAGE>
5. International
Operations
Throughout 1996, we continued the strategic development of our overseas
operations. Micro Warehouse currently operates subsidiaries in 12 countries
worldwide. International sales increased 6% to $635 million and represent almost
one-third of our consolidated revenues.
The integration of the Inmac business represents a quantum leap forward for
our combined international businesses. Significant critical mass throughout
Europe was effectively established. Inmac has a long and well-established
presence in Canada, France, Germany, the Netherlands, Sweden and the UK with
combined 1995 international sales of approximately $286 million.
The uncertainties in the Apple Macintosh business impacted us more in
Europe than in the United States. The 1996 net sales of our Macintosh business
in Europe decreased by 10 percent from $181 million to $164 million. As a
result, during the second quarter we re-evaluated our Macintosh-only
subsidiaries in Australia, Denmark, Mexico and Switzerland, writing off the
goodwill associated with these subsidiaries in its entirety and recording a
charge of $6 million. Shortly thereafter, the Company discontinued its
"Macintosh only" operations in Belgium and Switzerland.
In addition to the Inmac acquisition, during 1996 and early 1997, we have
acquired a number of businesses internationally that have expanded our IBM
PC-compatible business and reduced our dependence on the Macintosh platform. In
September, we acquired Helsinki-based Business Forum Oy Ltd. and a related
business. Business Forum has an impressive customer base of major corporations
in the Finnish market. In February 1997, we acquired The Notebook Store, a
Toronto, Canada based, single-store retailer and direct marketer of IBM
PC-compatible computer products. We also acquired CommsWare Australia Pty Ltd.,
a Brisbane, Australia-based direct marketer of data communication products.
[The following table was represented by a bar graph in the printed material.]
International Sales
(in millions)
94 95 96
---- ---- ----
$381 $597 $635
Consolidated international sales grew 6% to $635 million.
Our international businesses frequently depend on models, marketing and
sales techniques that differ from those used to drive our U.S. operations. In
recognition of the many complexities and opportunities overseas, we announced,
in late 1996, a significant Company-wide reorganization, converting to a
geographically oriented model.
This reorganization will permit the utilization of our newly acquired,
enhanced and expanded resources within the European market to manage our
European businesses locally from a strengthened UK-based European headquarters.
We also will provide for strengthened management of the remaining international
markets - Canada, Australia, Japan and Mexico.
14 CAPITALIZING ON OUR FIVE STRENGTHS
<PAGE>
"The reorganization of our businesses in October of 1996 will greatly strengthen
our management in Europe. We look forward to the challenge in 1997."
Jeffrey Sheahan, Vice President and General Manager of European Operations
[Map]
Norway
Sweden
Canada
Finland
Denmark
England
Mexico
Germany
France
Netherlands
<PAGE>
Micro Warehouse Operating Results
[The following table was represented by a bar graph in the printed material.]
Working Capital
(in thousands)
94 95 96
-------- -------- --------
$210,278 $298,843 $271,530
[The following table was represented by a bar graph in the printed material.]
Total Assets
(in thousands)
94 95 96
-------- -------- --------
$411,876 $554,546 $607,842
[The following table was represented by a bar graph in the printed material.]
Stockholders' Equity
(in thousands)
94 95 96
-------- -------- --------
$270,862 $364,669 $384,168
[The following table was represented by a bar graph in the printed material.]
Gross Margin as a
percentage of net sales
94 95 96
-------- -------- --------
21.8% 19.2% 17.9%
[The following table was represented by a bar graph in the printed material.]
Selling General and
Administrative Expenses
as a percentage of net
sales
94 95 96
-------- -------- --------
18.2% 15.8% 14.5%
[The following table was represented by a bar graph in the printed material.]
Net Income as a
percentage of net sales
94 95 96
-------- -------- --------
2.2% 2.1% 0.8%
16 CAPITALIZING ON OUR FIVE STRENGTHS
<PAGE>
Financial Contents
Selected Financial Information page 17
Management's Discussion and Analysis of Financial
Condition and Results of Operations page 18
Responsibility for Financial Statements page 22
Independent Auditors' Report page 22
Consolidated Balance Sheets page 23
Consolidated Statements of Income page 24
Consolidated Statements of Stockholders' Equity page 25
Consolidated Statements of Cash Flows page 26
Notes to Consolidated Financial Statements page 27
CAPITALIZING ON OUR FIVE STRENGTHS 17
<PAGE>
Selected Financial Information
Micro Warehouse, Inc.
<TABLE>
<CAPTION>
For the Years Ended December 31,
(In thousands except per share data and ratios) 1996 1995(A) 1994(A) 1993(A) 1992(A)(B)
- ----------------------------------------------------------------------------------------------------------------------
Income Statement Data
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $1,916,244 $1,684,627 $1,130,796 $789,971 $598,851
Gross profit 342,446 323,991 246,678 210,818 196,364
Restructuring, merger costs,
goodwill write-off 32,161 -- -- 16,546 --
Income from operations
before interest, income taxes and
extraordinary charge 33,093 57,715 41,063 10,858 19,380
Income before income taxes and
extraordinary charge 36,601 57,903 40,877 10,255 16,203
Extraordinary charge, net of taxes 1,584 -- -- -- --
======================================================================================================================
Net income $ 15,298 $ 35,244 $ 24,556 $ 4,519 $ 7,500
======================================================================================================================
Net income per share(C) $ 0.44 $ 1.05 $ 0.80 $ 0.17 $ 0.37
Weighted average
number of shares outstanding(C) 34,793 33,605 30,560 26,423 20,463
======================================================================================================================
Operating Data:
- ----------------------------------------------------------------------------------------------------------------------
Gross margin 17.9% 19.2% 21.8% 26.7% 32.8%
Operating margin 1.7% 3.4% 3.6% 1.4% 3.2%
Current ratio 2.2:1 2.8:1 2.5:1 1.8:1 1.4:1
Balance Sheet Data (at December 31):
- ----------------------------------------------------------------------------------------------------------------------
Working capital $ 271,530 $ 298,843 $ 210,278 $101,804 $ 87,115
Total assets 607,842 554,546 411,876 261,314 200,399
Long-term obligations, excluding
current portion 376 20,458 1,497 940 2,261
======================================================================================================================
Supplementary Data:
- ----------------------------------------------------------------------------------------------------------------------
Net income excluding unusual charges(D) $ 40,913 $ 35,244 $ 24,556 $ 15,084 $ 7,500
Net income per share excluding unusual
charges(C)(D) $ 1.18 $ 1.05 $ 0.80 $ 0.57 $ 0.37
Operating margin (D) 3.4% 3.4% 3.6% 3.5% 3.2%
</TABLE>
(A) Restated to reflect the acquisition of Inmac Corp. as a pooling of
interests. (See Note 2 to Notes to Consolidated Financial Statements).
(B) Pro forma adjustments made to reflect the elimination of special incentive
compensation and additional income taxes as if the Company's tax status was
a "C" corporation for the entire year.
(C) Years prior to 1994 are adjusted to reflect a two-for-one stock split
effective April 4, 1994.
(D) Amounts exclude the effect of unusual charges comprised of restructuring
costs, merger costs, goodwill write-off and extraordinary charge.
17
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Micro Warehouse, Inc.
Business
Micro Warehouse, Inc. (the "Company" or "Micro Warehouse") is a
specialty catalog retailer and direct marketer of brand name personal computers,
computer software, accessories, peripheral and networking products to commercial
and consumer customers. The Company markets its products through frequent
mailings of its distinctive, colorful catalogs, Internet catalog sites on the
worldwide web and dedicated telemarketing account managers who focus on
corporate, education and government accounts. The Company offers brand name
hardware and software from leading vendors such as Adobe, Apple, Compaq, Hewlett
Packard, IBM, Iomega, Microsoft, Motorola, 3Com, and Toshiba.
Through its three core catalogs, MicroWarehouse, MacWarehouse and Data
Comm Warehouse, various specialty catalogs and its Internet sites, the Company
offers a broad assortment of more than 25,000 computer products at competitive
prices. With colorful illustrations, concise product descriptions and relevant
technical information, each catalog title focuses on a specific segment of the
computer market. The catalogs are recognized as a leading source for computer
hardware, software and other products. During the year ended December 31, 1996,
the Company distributed approximately 123 million catalogs worldwide, and as of
December 31, 1996, the Company had approximately 2.3 million customers who had
purchased products within the last 12 months (excluding customers of USA Flex,
which was acquired in October).
International operations, particularly in Europe and Canada, have become a
significant part of the Company's business. In 1991, the Company established
full-service, direct marketing operations in the United Kingdom. In late 1992,
the Company began operations in France and Germany and, in 1993 and 1994,
acquired companies or initiated operations in Sweden, Denmark, Norway, the
Netherlands, Belgium, Finland, and France. In this same timeframe the Company
also expanded into the non-European markets of Japan, Canada and Mexico. In
1995, the Company acquired businesses in the United Kingdom, Germany, Australia
and Switzerland. In 1996 the Company discontinued its "Macintosh only"
operations in Belgium and Switzerland. The Company currently publishes catalogs
in 12 countries outside the US and distributed approximately 41 million catalogs
internationally in the year ended December 31, 1996. See Note 15 to Notes to the
Consolidated Financial Statements for information regarding the Company's
operations in different geographic areas.
On January 25, 1996, the Company acquired Santa Clara, California-based
Inmac Corp. ("Inmac") through the issuance by the Company of 3,033,682 shares of
its common stock. Inmac is a leading international direct-response marketer of a
wide range of personal computer and networking products. Inmac operates in the
United States, Canada, France, Germany, the Netherlands, Sweden and the UK.
International sales by Inmac accounted for 73% of net sales in its fiscal year
ended July 29, 1995. For accounting purposes, the Inmac merger has been treated
as a pooling of interests. Throughout 1996 the Company integrated the operations
of Micro Warehouse and Inmac on a worldwide basis.
In September 1996 the Company acquired the Helsinki, Finland based Business
Forum and a related company. In November the Company completed the acquisition
of the business of USA Flex, a Bloomingdale Illinois direct marketer of IBM
PC-compatible personal computer products. This company has been successful in
acquiring customers and building its business from advertisements in U.S.
computer publications, particularly Computer Shopper. The operating results of
these entities from dates of acquisition were not significant.
18
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Micro Warehouse, Inc.
The Company maintains a full-service distribution center in Wilmington,
Ohio, totaling approximately 365,000 square feet and telemarketing centers in
Lakewood and Gibbsboro, New Jersey, South Norwalk, Connecticut, and
Bloomingdale, Illinois. The Company operates 24 hours a day, seven days a week
in the US. The Company also operates telemarketing and distribution facilities
in the United Kingdom, France, Germany, Denmark, Sweden, Norway, Finland, the
Netherlands, Japan, Australia, Mexico, and Canada. The Company's international
operations generally use the same distribution and processing computer systems
and are able to exchange data with US operations.
Results of Operations
The Company acquired Inmac in a transaction accounted for as a
pooling of interests. Accordingly, all historical financial information has been
adjusted to include Inmac.
The table below sets forth certain items expressed as a percent of net
sales for each of the years in the three-year period ended December 31, 1996.
Year ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 82.1 80.8 78.2
- --------------------------------------------------------------------------------
Gross profit 17.9 19.2 21.8
Selling, general and
administrative expenses 14.5 15.8 18.2
Restructuring costs, goodwill write-off
and merger costs 1.7 --
- --------------------------------------------------------------------------------
Income from operations before interest,
income taxes and extraordinary charge 1.7 3.4 3.6
Interest income (expense), net .2 -- --
Income before income taxes and extraordinary
charge 1.9% 3.4% 3.6%
================================================================================
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net sales increased $231.6 million or 13.7% to $1.9 billion from $1.7
billion in the prior year. IBM PC-compatible and Data Comm (collectively
"Wintel") sales increased $187.1 million or 23.4% compared to 1995, while
Macintosh related sales increased $44.5 million or 5.0%. Wintel sales in 1996
increased in both the domestic and international markets while the Macintosh
business experienced domestic growth, but decreased in the international market
compared to 1995. Overall, domestic sales increased 17.8% over 1995 and
international sales increased 6.3%. Management believes that the increase in
sales is in part due to the increase in the number of catalogs distributed
worldwide which increased 19.4% to 122.5 million catalogs and the resultant
increased response in 1996. Additionally, the continued shift in product mix to
hardware resulted in an average order size of $464 in 1996, an increase of 12.2%
compared to 1995.
Gross profit dollars increased to $342.4 million in 1996 from $324.0
million in 1995, but decreased as a percentage of net sales to 17.9% in 1996
from 19.2% in 1995. Gross margins declined primarily due to heightened
competitive pressures and change of product mix in the Inmac portion of the
Wintel business and increased competitive pressures in the Macintosh business.
Additionally, across all businesses there was a continuation of product mix
shift towards hardware with typically lower margins. The Company expects
continued pressure on gross margins in 1997 due to the continued shift in
product mix and industry-wide pricing pressures.
Selling, general and administrative expenses decreased as a percentage of
net sales to 14.5% from 15.8% in 1995, primarily reflecting the integration of
the Inmac business.
Income from operations for 1996 was $33.1 million or 1.7% of net sales
compared to $57.7 million or 3.4% of net sales in 1995. The 1996 results include
one time costs associated with the Inmac restructuring and merger charges of
$20.1 million and $6.1 million, respectively, and a write-off of $6.0 million
for international Macintosh related goodwill. Operating income for 1996
excluding such one-time costs would have been $65.3 million or 3.4% of net
sales.
19
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Micro Warehouse, Inc.
Net interest income totaled $3.5 million in 1996 compared to $0.2 million
in 1995. The 1996 results included interest income of $1.4 million on
anticipated federal and state tax refunds as a result of the restatement
announced in September 1996.
Because the domestic pooled businesses are profitable, the Company has
reevaluated certain federal net operating loss carry forwards available from
Inmac. Accordingly, the 1995 effective tax rate for the consolidated entity has
been adjusted to reflect the tax benefit of $1.8 million resulting from expected
utilization of the 1995 operating losses. There is no anticipated effect on
earnings in 1996 or beyond, unless valuation allowances are adjusted.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net sales increased by $553.8 million or 49.0% to $1.7 billion up from $1.1
billion in 1994. Wintel sales increased $217.3 million or 37.3% compared to 1994
and the Macintosh related sales increased $336.5 million or 61.4%. Wintel and
Macintosh related sales increased in both the domestic and international
markets. Total domestic sales increased 45.0% in 1995 compared to 1994 and
international sales increased 56.8%. Worldwide catalogs distributed were 102.6
million in 1995, an increase of 17.5% over 1994, and average order size,
excluding Inmac, increased 35.2% compared to 1994.
Gross profit increased $77.3 million, however, as a percentage of net sales
decreased to 19.2% in 1995 from 21.8% in 1994. This reflects a shift in the
product mix from higher margin software to lower margin hardware.
Selling, general and administrative expenses increased $60.7 million in
1995 compared to 1994 but decreased as a percentage of net sales from 18.2% in
1994 to 15.8% in 1995. The dollar increase was related to the increase in order
volume.
Income from operations in 1995 was $57.7 million or 3.4% of net sales
compared to $41.1 million or 3.6% of sales in 1994. Interest income in 1995 was
flat compared to 1994.
The tax benefit of certain net operating losses available from Inmac was
$1.5 million in 1994.
Liquidity and Capital Resources
Cash and marketable securities were $52.3 million at December 31, 1996
compared to $102.2 million at December 31, 1995. The decline of $49.9 million
was due primarily to the acquisition of three businesses totaling $34.2 million.
In addition, the Company paid in cash $24.6 million for one-time restructuring
and merger costs and extraordinary charge. The 1995 balance reflects net
proceeds of $50.9 million from the Company's Common Stock offering completed in
October 1995.
Inventory increased $57.2 million to $201.1 million at year end 1996 from
$143.9 million at year end 1995 as a result of increased sales and changes to
the Company's stock balancing practices. Accounts receivable increased $31.4
million or 18.2% from year end 1995 to year end 1996 on a 13.7% increase in
sales, reflecting the shift to more commercial open account customers. Overall,
working capital decreased $27.3 million from year end 1995 to year end 1996
primarily due to the early redemption of Inmac notes payable.
Capital expenditures for 1996 and 1995 were $11.2 million and $13.8
million, respectively, primarily for computer equipment and leasehold
improvements. The Company's primary capital need will be to fund its working
capital requirements for expected sales growth. The Company anticipates that
future growth will also require continued expansion of its computer systems and
distribution capacity. The Company anticipates that 1997 capital expenditures
will be approximately $18.0 million. At December 31, 1996, the Company had an
unused line of credit in the United States, which provided for unsecured
borrowing of up to $10.0 million for working capital purposes. The Company also
has a multi-currency credit facility for $75.0 million with Chase Manhattan Bank
and State Street Bank. The purpose of the facility is to provide working capital
financing for its foreign subsidiaries through financing in local currency to
limit its exposure to foreign currency exchange fluctuations. Total borrowings
at December 31, 1996 under this multi-currency agreement were $40.5 million.
20
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Micro Warehouse, Inc.
The Company believes that its existing cash reserves, expected cash flow
from operations and existing credit facilities will be sufficient to satisfy its
operating cash needs for at least the next 12 months without consideration of
uncertainties surrounding pending litigation against the Company. See Note 17 to
Notes to Consolidated Financial Statements.
Impact of Inflation and Seasonality
Customer response rates are subject to variations. The first and last
quarters of the year generally have higher response rates while the two middle
quarters typically have lower response rates. The slower quarters are impacted
by the summer months, particularly in Europe. The Company does not believe that
inflation has had a material effect on the Company's sales during recent years.
Accounting Pronouncements
In 1996 the Company adopted the Financial Accounting Standards, Board
(FASB) Statement of Financial Accounting Standards (SFAS) No. 121 - "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. The impact of the adoption of SFAS No. 121
was immaterial.
In October 1995, the FASB issued SFAS No. 123 - "Accounting for Stock-Based
Compensation". As allowed by SFAS No. 123, the Company has not recognized
compensation cost for stock-based employee compensation arrangements, but has
disclosed the impact on net income and net income per share as if the fair value
based compensation cost had been recognized in Note 14 of Notes to Consolidated
Financial Statements.
Outlook
The Company expects that the installed base of personal computers will continue
to expand but at slower rates than experienced in the past. Apple Computer
continues to experience difficulties and has announced plans to significantly
downsize its operations. Such actions are expected to affect the Company's
Macintosh-related sales both domestically and in Europe. In addition, Apple
Computer has licensed the Macintosh operating system to other manufacturers.
These "clones" are generally entering the market at lower prices than Apple's
products, which has led to increased price competition and may result in reduced
margins. In Europe, the Company anticipates increased competitive pressures and
uneven market demand depending on the business cycles of individual countries.
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 surrounding the
demand for and supply of products manufactured by and compatible with those of
Apple Computer; success of the Company's diversification away from its Apple
products; competition from other catalog, retail store, on-line and other
resellers of computer products and the ultimate outcome of the legal proceedings
brought against the Company in connection with its reported accounting errors.
Forward-looking statements are typically identified by the words "believe,"
"expect," "anticipate," "intend," "estimate," and similar expressions. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of their dates.
CAPITALIZING ON OUR FIVE STRENGTHS 21
<PAGE>
Responsibility for Financial Statements
and Independent Auditors' Report
Micro Warehouse, Inc.
Management Responsibility for Financial Statements
The financial data in this report, including the audited financial
statements, have been prepared by management using the best available
information and applying judgement. Accounting principles used in preparing the
financial statements are those that are generally accepted in the United States.
In meeting our responsibility for the integrity of the financial
statements, we maintain a system of internal controls designed to provide
reasonable assurance that assets are safeguarded, that transactions are executed
in accordance with management's authorization and that the accounting records
provide a reliable basis for the preparation of the financial statements.
Management has also established a formal Business Code of Ethics which is
distributed throughout the Company. We acknowledge our responsibility to
establish and preserve an environment in which all employees properly understand
the fundamental importance of high ethical standards in the conduct of our
business.
Our independent auditors are engaged to audit and to render an opinion on
the fairness in all material respects of our consolidated financial statements
presented in conformity with generally accepted accounting principles. In
performing their audit in accordance with generally accepted auditing standards,
they evaluate the effectiveness of our internal accounting control systems,
review selected transactions and carry out other auditing procedures to the
extent they consider necessary in expressing their opinion on our financial
statements.
The Audit Committee of the Board of Directors meets with management and our
independent auditors to review accounting, auditing and financial matters. Our
Audit Committee is composed of only outside directors. This committee and the
independent auditors have free access to each other with or without management
being present.
Peter Godfrey Linwood A. Lacy Jr.
Chairman of the Board President, Chief Executive Officer
and Chief Financial Officer
Independent Auditors' Report
KPMG Peat Marwick LLP
The Board of Directors and Stockholders of Micro Warehouse, Inc.:
We have audited the accompanying consolidated balance sheets of Micro
Warehouse, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Micro Warehouse, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
Stamford, CT
February 10, 1997
22
<PAGE>
Consolidated Balance Sheets
Micro Warehouse, Inc.
<TABLE>
<CAPTION>
December 31,
(In thousands) 1996 1995
- ----------------------------------------------------------------------------------------------------------
ASSETS
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 32,234 $ 81,614
Marketable securities at market value 20,022 20,580
Accounts receivable, net of allowance for
doubtful accounts ($10,876 and $7,808 at December 31, 1996
and 1995, respectively) 203,687 172,275
Inventories 201,119 143,941
Prepaid expenses and other current assets 17,886 28,960
Tax refunds 16,433 12,723
Deferred taxes 3,447 8,169
- ----------------------------------------------------------------------------------------------------------
Total current assets 494,828 468,262
- ----------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 29,712 32,175
Goodwill, net 66,291 44,644
Non-current deferred taxes 14,443 5,332
Other assets 2,568 4,133
- ----------------------------------------------------------------------------------------------------------
Total assets $ 607,842 $ 554,546
==========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable - trade $ 127,723 $ 109,907
Accrued expenses 52,445 36,022
Deferred revenue 2,327 4,602
Loans payable, bank 40,505 18,504
Equipment obligations 298 384
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 223,298 169,419
Notes payable -- 19,790
Equipment obligations 376 668
- ----------------------------------------------------------------------------------------------------------
Total liabilities 223,674 189,877
- ----------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized - 100 shares; none issued -- --
Common stock, $.01 par value:
Authorized - 50,000 shares; issued and outstanding; 34,359
and 33,944 shares at December 31, 1996 and 1995, respectively 343 339
Additional paid-in capital 271,183 263,636
Loan to officer (1,400) --
Retained earnings 117,071 101,773
Cumulative translation adjustment (3,047) (1,033)
Valuation adjustment for marketable securities 18 (46)
- ----------------------------------------------------------------------------------------------------------
Total stockholders' equity 384,168 364,669
- ----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 607,842 $ 554,546
==========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
Consolidated Statements of Income
Micro Warehouse, Inc.
<TABLE>
<CAPTION>
Years Ended December 31,
(In thousands, except per share data) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,916,244 $1,684,627 $ 1,130,796
Costs of goods sold 1,573,798 1,360,636 884,118
- ----------------------------------------------------------------------------------------------------
Gross profit 342,446 323,991 246,678
Selling, general and administrative expenses 277,192 266,276 205,615
Write-off of goodwill 5,977 -- --
Restructuring costs 20,071 -- --
Merger costs 6,113 -- --
- ----------------------------------------------------------------------------------------------------
Income from operations before interest,
income taxes and extraordinary charge 33,093 57,715 41,063
Interest income (expense), net 3,508 188 (186)
- ----------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary charge 36,601 57,903 40,877
Income taxes 19,719 22,659 16,321
- ----------------------------------------------------------------------------------------------------
Income before extraordinary charge 16,882 35,244 24,556
Extraordinary charge, net of taxes of $1,078 1,584 -- --
- ----------------------------------------------------------------------------------------------------
Net income $ 15,298 $ 35,244 $ 24,556
====================================================================================================
Income per share before extraordinary charge $ 0.49 $ 1.05 $ 0.80
Net income per share $ 0.44 $ 1.05 $ 0.80
- ----------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding 34,793 33,605 30,560
- ----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
Consolidated Statements of Stockholders' Equity
Micro Warehouse, Inc.
<TABLE>
<CAPTION>
Valuation
Additional Loan Cumulative Adjustment
Common Stock Paid-in to Retained Translation Marketable
(In thousands) Shares Amount Capital Officer Earnings Adjustment Securities Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 27,688 $277 $ 92,516 -- $ 41,973(A) $(6,093) $ -- $ 128,673
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income -- -- -- -- 24,556 -- -- 24,556
Common stock offerings 4,100 41 102,052 -- -- -- -- 102,093
Common stock issued pursuant
to stock options exercised 94 1 1,393 -- -- -- -- 1,394
Common stock issued pursuant
to acquisitions 535 5 12,047 -- -- -- -- 12,052
Foreign currency
translation adjustment -- -- -- -- -- 2,544 -- 2,544
Valuation adjustment for
marketable securities -- -- -- -- -- -- (450) (450)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 32,417 324 208,008 -- 66,529 (3,549) (450) 270,862
====================================================================================================================================
Net income -- -- -- -- 35,244 -- -- 35,244
Common stock offering 1,200 12 50,799 -- -- -- -- 50,811
Common stock issued pursuant
to stock options exercised 315 3 4,148 -- -- -- -- 4,151
Common stock issued pursuant
to acquisitions 26 -- 1,150 -- -- -- -- 1,150
Retirement of treasury shares (14) -- (469) -- -- -- -- (469)
Foreign currency
translation adjustment -- -- -- -- -- 2,516 -- 2,516
Valuation adjustment for
marketable securities -- -- -- -- -- -- 404 404
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 33,944 339 263,636 -- 101,773 (1,033) (46) 364,669
====================================================================================================================================
Net income -- -- -- -- 15,298 -- -- 15,298
Common stock issued pursuant
to stock awards, stock options
and warrants exercised 415 4 7,207 -- -- -- -- 7,211
Loan to officer -- -- -- (1,400) -- -- -- (1,400)
Deferred compensation
and filing fees -- -- 340 -- -- -- -- 340
Foreign currency
translation adjustment -- -- -- -- -- (2,014) -- (2,014)
Valuation adjustment for
marketable securities -- -- -- -- -- -- 64 64
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 34,359 $343 $ 271,183 $(1,400) $117,071 $(3,047) $ 18 $ 384,168
====================================================================================================================================
</TABLE>
(A) Includes an adjustment of $4,992 for the recognition of Inmac Corp.'s net
operating tax loss carryforwards that the combined entity can utilize (see
Note 2).
See accompanying notes to consolidated financial statements.
25
<PAGE>
Consolidated Statements of Cash Flows
Representing Increases (Decreases) in Cash and Cash Equivalents
Micro Warehouse, Inc.
<TABLE>
<CAPTION>
Years Ended December 31,
(In thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 15,298 $ 35,244 $ 24,556
- ------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash (used) by operating
activities:
Depreciation and amortization 12,340 12,191 9,350
Restructuring cost - non-cash portion 3,457 -- --
Loss on disposal of fixed assets 127 199 565
Write-off of goodwill 5,977 -- --
Write-off of deferred financing costs 762 -- --
Non-cash compensation 421 -- --
Deferred taxes (4,389) (3,973) (2,625)
Extraordinary charge 1,900 -- --
Changes in assets and liabilities:
Accounts receivable, net (24,662) (33,508) (31,605)
Inventories (55,530) (28,048) (26,079)
Prepaid expenses and other current assets 10,781 (7,830) (5,645)
Tax refunds (3,710) (11,993) 205
Due from affiliates -- -- 385
Other assets 1,119 (469) (509)
Accounts payable - trade 14,085 29,514 5,968
Accrued expenses 14,677 2,352 118
Deferred revenue (2,249) 148 873
- ------------------------------------------------------------------------------------------------------------
Total adjustments (24,894) (41,417) (48,999)
- ------------------------------------------------------------------------------------------------------------
Net cash (used) by operating activities (9,596) (6,173) (24,443)
- ------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Sales (purchases) of marketable securities, net 622 24,028 (16,469)
Purchases of businesses, represented by:
Goodwill (28,986) (20,327) (10,042)
Net assets (5,836) (4,954) (3,873)
Proceeds from sale of equipment 576 162 403
Acquisition of property, plant and equipment (11,172) (13,774) (18,522)
- ------------------------------------------------------------------------------------------------------------
Net cash (used) by investing activities (44,796) (14,865) (48,503)
- ------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 5,811 54,962 103,487
Purchase of treasury stock -- (469) --
Borrowings under lines of credit, net 22,118 (7,708) (4,385)
Borrowing (repayment) of notes payable (21,900) 20,000 --
Public filing fees (81) -- --
Principal payments of obligations under capital leases (378) (942) (194)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 5,570 65,843 98,908
- ------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (558) 802 1,345
- ------------------------------------------------------------------------------------------------------------
Net change in cash (49,380) 45,607 27,307
Cash and cash equivalents:
Beginning of year 81,614 36,007 8,700
- ------------------------------------------------------------------------------------------------------------
End of year $ 32,234 $ 81,614 $ 36,007
============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
Notes to Consolidated Financial Statements
Micro Warehouse, Inc.
(Amounts in thousands, except per share data)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include Micro Warehouse, Inc. ("MWI")
and its subsidiaries, which are all wholly owned (collectively, the "Company").
All significant inter-company accounts and transactions are eliminated in
consolidation. The consolidated financial statements as of and for the years
ended prior to December 31, 1996, have been restated to reflect the acquisition
of Inmac Corp. ("Inmac") as a pooling of interests (see note 2). In addition,
certain reclassifications have been made to conform prior years to the 1996
presentation.
Cash Equivalents
All repurchase agreements, money market funds and highly liquid investments
with initial maturities of three months or less are considered cash equivalents.
Marketable Securities
Marketable securities consist primarily of highly liquid tax exempt
municipal bonds. All investments are classified as available-for-sale and are
reported at market value, with net unrealized gains and losses included in
equity. For all investment securities, unrealized losses that are other than
temporary are charged to operations.
Inventories
Inventories (substantially all finished goods) consist of hardware,
software packages and peripheral equipment, and are stated at cost (determined
under the first-in, first-out method) or market, whichever is lower.
Prepaid Catalog Costs and Deferred Revenue
The costs of producing and distributing catalogs are deferred and charged
to expense over the period that each catalog remains the most current selling
vehicle (generally one to two months). Vendors have the ability to place
advertisements in the catalogs for which the Company receives advertising
allowances and incentives. These revenues are recognized on the same basis as
the catalog costs.
Property, Plant and Equipment
Property, plant and equipment (including equipment acquired under capital
leases) are stated at cost and are depreciated using accelerated and
straight-line methods over the estimated useful lives of the assets, as follows:
Computer equipment 5 years
Furniture and fixtures 7 years
Leasehold improvements Lesser of life of lease or 7 years
Machinery and equipment 7 years
Intangible Assets
Intangible assets are stated at cost and are amortized using the
straight-line method over the estimated useful lives of the assets, as follows:
Trademarks 5 years
Goodwill 40 years
Income Taxes
Deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities. A valuation allowance is used to
reduce the carrying amount of deferred tax assets which may not be realized.
Revenue Recognition
Revenue on product sales is recognized at the time of shipment. A reserve
for product returns is established based upon historical trends.
27
<PAGE>
Notes to Consolidated Financial Statements
Micro Warehouse, Inc.
(Amounts in thousands, except per share data)
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at the exchange rate in effect at the balance sheet date or at
historical rates, as applicable. Revenue and expenses are translated at average
rates in effect during the period. The resultant translation adjustment is
reflected as a separate component of stockholders' equity.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the amounts reported in the
accompanying financial statements. Actual results could differ from those
estimates.
Net Income Per Share
Net income per share has been computed using the weighted average number of
common and common equivalent shares outstanding. Net income per share includes
the effect of dilutive common stock options for all periods. The difference
between primary and fully diluted earnings per share is not material for any of
the periods presented.
Long-Lived Assets
In 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 121 - "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." This statement requires that long-lived
assets be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. The
impact of the adoption of SFAS No. 121 was immaterial.
The Company periodically evaluates the carrying value of intangibles and
the periods of amortization to determine whether events and circumstances
warrant revised estimates of asset value or useful lives. The Company annually
assesses the recoverability of goodwill by determining whether the amortization
of the balance over its remaining life can be recovered through projected
undiscounted future operating cash flows. Evaluations of asset value as well as
periods of amortization are performed on a disaggregated basis by distinct
geographic market.
Stock-Based Compensation
Prior to January 1, 1996, the Company accounted for its stock-based
compensation in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock issued to Employees," and related
interpretations. As such, compensation expense would be recorded when the
current market price of the underlying stock exceeded the excise price at the
date of grant. On January 1, 1996, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation," and elected thereunder to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosures required
by SFAS No. 123 (see note 14).
Unaudited Condensed Quarterly Data
In the opinion of management, the unaudited condensed quarterly financial
data in note 16 reflect all adjustments which are necessary for a fair statement
of the results of operations for the periods presented.
NOTE 2. BUSINESS COMBINATIONS
Inmac Corp.
On January 25, 1996, MWI acquired Inmac through an exchange of 3,034 of its
shares for all of Inmac's 10,817 shares in a transaction accounted for as a
pooling of interests. Inmac, a leading international direct-response marketer of
multi-vendor products for the personal computer and networking industries, has
operations in the United States, United Kingdom, Canada, France, Germany, the
Netherlands and Sweden. Under pooling of interests accounting, all of the
Company's consolidated financial statements as of and for periods prior to the
acquisition of Inmac have been restated as though the merger took place at the
beginning of the earliest period presented. In connection therewith, the Company
recorded (i) $20,071 of restructuring charges, primarily for personnel and
facilities matters; (ii) $6,113 for merger costs; and (iii) an extraordinary
charge of $1,584 (net of tax benefit of $1,078) related to a mandatory
prepayment to extinguish certain Inmac indebtedness.
28
<PAGE>
Notes to Consolidated Financial Statements
Micro Warehouse, Inc.
(Amounts in thousands, except per share data)
The 1995 and 1994 combined amounts presented below differ from amounts
previously presented. The adjustment impacting net income was the recognition of
Inmac's net operating tax loss carryforwards that the combined company could
utilize. Prior to the pooling, Inmac's fiscal year ended in July. Subsequent to
the pooling, Inmac changed its year end to December 31, to conform with that of
MWI. Accordingly, Inmac's financial information has been converted to a calendar
basis for all periods presented.
The following is a reconciliation of net sales and net income (loss)
previously reported by MWI with combined amounts:
Years ended December 31, 1995 1994
- --------------------------------------------------------------------------------
Net sales:
Micro Warehouse $1,308,009 $ 776,377
Inmac 376,618 354,419
- --------------------------------------------------------------------------------
Combined $1,684,627 $1,130,796
================================================================================
Net income:
Micro Warehouse $ 31,094 $ 20,223
Inmac 2,391 2,848
Adjustment 1,759 1,485
- --------------------------------------------------------------------------------
Combined $ 35,244 $ 24,556
================================================================================
Net income per share:
Micro Warehouse $ 0.93 $ 0.66
Inmac 0.07 0.09
Adjustment 0.05 0.05
- --------------------------------------------------------------------------------
Combined $ 1.05 $ 0.80
================================================================================
Other
On October 25, 1996, the Company acquired USA Flex in a business
combination accounted for as a purchase. USA Flex directly markets IBM
PC-compatible computers and peripherals. The results of operations of USA Flex
are included in the accompanying financial statements since the date of the
acquisition. The total cost of the acquisition was $26,762, which exceeded the
fair value of the net assets of USA Flex by $22,053. The excess is being
amortized on a straight line basis over 40 years.
During 1996, the Company also acquired two businesses with operations in
Finland and the U.S. The aggregate purchase price and goodwill were $7,411 and
$6,284, respectively. In addition, the Company recorded goodwill of $649
relating to 1995 acquisitions.
During 1995, the Company acquired eight businesses with operations in the
United Kingdom, Australia, Germany, Switzerland and the U.S. The aggregate
purchase price was comprised of approximately $24,229 in cash and 26 common
shares with an average market value of approximately $44.00 per share. The
aggregate goodwill was $20,425. In addition, the Company recorded goodwill of
$1,052 relating to 1994 acquisitions.
During 1994, the Company acquired eight businesses with operations in
Holland, Belgium, Finland, Norway, Sweden, France, Mexico and Canada. The
aggregate purchase price was comprised of approximately $13,915 in cash and 335
common shares with an average market value of approximately $22.50 per share.
The aggregate goodwill was $17,580.
NOTE 3. RESTRUCTURING
During 1996, the Company initiated a restructuring plan to reduce costs and
increase future operating efficiencies by eliminating excess operations and
facilities acquired in the Inmac acquisition. The closing of the facilities
should be completed during the first half of 1997. As a result of the
restructuring plan, the Company recorded restructuring expense of $20,071.
In connection with the restructuring plan, approximately 493 employees have
been or will be terminated. These employees are or have been associated with the
facilities closed or closing. Estimated employee termination costs of $10,886
have been accrued in 1996. Of the total number of employees affected,
approximately 415 have been terminated in 1996 at a cost of $10,403.
29
<PAGE>
Notes to Consolidated Financial Statements
Micro Warehouse, Inc.
(Amounts in thousands, except per share data)
In addition to the cost of terminating employees, the principal costs of
the restructuring included the write-off of fixed assets and lease terminations.
Estimated charges of $2,983 for asset write downs, $3,952 for lease terminations
and $2,250 of other costs were accrued in 1996. As of December 31, 1996, costs
of $7,325 associated with these components of the restructuring have been paid
or written off.
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
1996 1995
- --------------------------------------------------------------------------------
Computer equipment $40,123 $36,858
Furniture and fixtures 11,730 9,152
Leasehold improvements 8,408 9,190
Machinery and equipment 8,933 9,596
- --------------------------------------------------------------------------------
69,194 64,796
Less accumulated depreciation and amortization 39,482 32,621
- --------------------------------------------------------------------------------
$29,712 $32,175
================================================================================
NOTE 5. BORROWING ARRANGEMENTS
Lines of Credit
The Company has a $75,000 unsecured multi-currency borrowing facility,
expiring in 1998, permitting borrowing by its subsidiaries in local currencies.
The balance outstanding was $40,505 and $13,214 at December 31, 1996 and 1995,
respectively. The facility provides for borrowings which bear interest at
various floating rates, the highest of which varies from LIBOR plus 0.50%-1.25%,
based on the ratio of debt to earnings before interest and taxes. The average
interest rate was approximately 5.5% and 6.0% for 1996 and 1995, respectively.
Commitment fees were immaterial.
At December 31, 1996 and 1995, the Company had a $10,000 and $15,000,
respectively, unused line of credit in the United States. The maximum amount of
borrowings under this credit facility was $15,000 and $12,000 for 1996 and 1995,
respectively. The line of credit, expiring in 1998, provides for unsecured
borrowing with interest at the bank's prime rate plus 1.50% or LIBOR plus 1.0%.
The average interest rates for 1996 and 1995 were approximately 9.75% and 8.0%,
respectively. Commitment fees for 1996 and 1995 were immaterial.
At December 31, 1996 and 1995, the Company also had (pound)1,800 and
(pound)125, respectively, unused lines of credit in the United Kingdom. The
lines, expiring in 1997, also provides for unsecured borrowing with interest at
the bank's base rate plus 1.5%. The average interest rate for 1996 and 1995 was
approximately 6.0%. Commitment fees for 1996 and 1995 were immaterial.
Inmac Borrowings
During 1996, as a result of the merger, all Inmac borrowings were repaid
and canceled. An extraordinary charge of $1,584 after tax ($2,662 pretax) was
recorded for fees, penalties and the write-off of deferred financing costs
arising from the mandatory early extinguishment of certain Inmac borrowings. In
addition, at the effective date of the merger the Inmac warrants (described
below) were converted in a non-cash transaction into approximately 19 shares of
the Company. Inmac borrowings consisted of the following:
During 1995, Inmac issued notes for $13,000, and NLG 10,919, (US $6,790 at
December 31, 1995 currency exchange rate) evidencing unsecured senior debt in a
private placement (the "Notes"). The lender also received 175 warrants which
could be converted into a like amount of Inmac common stock at an exercise price
of $6.756 per share. Inmac entered into a currency swap agreement with a major
international financial institution to hedge currency risk on interest and
principal payments on $7,000 of the Notes. The swap agreement effectively
converted $7,000 of the Notes into Deutsche Mark debt with a fixed interest rate
of 10.02%.
Also during 1995, Inmac entered into a $30,000, unsecured multi-currency
revolving credit facility at LIBOR plus 1.15% with a syndicate of banks (the
"Facility"). As of December 31, 1995, borrowings under the Facility were $5,290
and commitment fees were immaterial.
30
<PAGE>
Notes to Consolidated Financial Statements
Micro Warehouse, Inc.
(Amounts in thousands, except per share data)
Equipment Obligations
The Company is obligated under capital leases for computer equipment
expiring in the year 1998. Interest on these notes is approximately 6%.
As of December 31, 1996, future minimum lease payments are as follows:
1997 $372
1998 353
- --------------------------------------------------------------------------------
Total minimum lease payments 725
Less amounts representing interest 51
- --------------------------------------------------------------------------------
Present value of net minimum lease payments 674
Less current maturities 298
- --------------------------------------------------------------------------------
Long-term portion $376
================================================================================
NOTE 6. GOODWILL AND OTHER ASSETS
Amounts consist of:
1996 1995
- --------------------------------------------------------------------------------
Goodwill $68,961 $46,047
Less amortization 2,670 1,403
- --------------------------------------------------------------------------------
$66,291 $44,644
================================================================================
Trademarks $ 2,220 $ 1,941
Less amortization 1,187 764
- --------------------------------------------------------------------------------
1,033 1,177
Deposits 514 527
Other assets 1,021 2,429
================================================================================
$ 2,568 $ 4,133
================================================================================
Due to the uncertainties in the Apple Macintosh marketplace, the Company
reevaluated the carrying value of goodwill in its Macintosh-only subsidiaries in
Australia, Denmark, Mexico and Switzerland. As a result of that evaluation, the
Company recorded a charge of $5,977 in 1996, which represented all the goodwill
on these subsidiaries' balance sheets.
NOTE 7. ACCRUED EXPENSES
Accrued expenses at December 31, 1996 and 1995 include approximately
$11,882 and $7,171 respectively, of accrued catalog costs.
NOTE 8. PUBLIC OFFERINGS
On April 18, 1994, the Company issued 2,000 shares of common stock at
$21.25 per share. The proceeds to the Company, net of the underwriting discount
of $2,020 and other direct expenses of $301 were $40,179. On October 21, 1994,
the Company issued 2,100 shares of common stock at $31.00 per share. The
proceeds to the Company, net of the underwriting discount of $2,940 and other
direct expenses of $302 were $61,858 including $56 recorded in 1995. On October
2, 1995, the Company issued 1,200 shares of common stock at $44.50 per share.
The proceeds to the Company, net of the underwriting discount of $2,328 and
other direct expenses of $205 were $50,867.
NOTE 9. COMMITMENTS
Leases
The Company rents some of its office facilities from affiliates and also
occupies office and warehouse space under various operating leases with
independent parties which provide for minimum annual rentals and escalations
based on increases in real estate taxes and other operating expenses.
31
<PAGE>
Notes to Consolidated Financial Statements
Micro Warehouse, Inc.
(Amounts in thousands, except per share data)
Future minimum annual rentals at December 31, 1996 were as follows:
Related
Total Party
- --------------------------------------------------------------------------------
1997 $ 9,198 $312
1998 7,416 --
1999 4,384 --
2000 3,555 --
2001 and after 13,900 --
- --------------------------------------------------------------------------------
Total $38,453 $312
================================================================================
Rent expense was as follows:
Related
Total Party
- --------------------------------------------------------------------------------
Year ended December 31, 1996 $ 8,774 $312
Year ended December 31, 1995 12,593 354
Year ended December 31, 1994 12,042 312
================================================================================
The Company had an agreement with a shareholder/consultant through December
1996 for an annual fee of $100.
401(k) Savings Plans
The Company sponsors 401(k) savings plans which cover substantially all
full-time employees who meet the plan's eligibility requirements. Participants
may make tax deferred contributions of up to 15% of annual compensation (subject
to other limitations specified by the Internal Revenue Code) and the Company
will make a 25% matching contribution for amounts which do not exceed 6% of
participant's annual compensation. The Company may also make discretionary
profit sharing contributions to the plans. During 1996, 1995 and 1994, the
Company incurred approximately $556, $466, and $426, respectively, of expense
related to the 401(k) matching component of this plan.
NOTE 10. INCOME TAXES
The provisions for income taxes were as follows:
Years ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
Current
Federal $ 23,012 $ 18,005 $ 11,966
State 1,920 2,086 1,719
Foreign (1,902) 6,541 5,261
- --------------------------------------------------------------------------------
23,030 26,632 18,946
Deferred
Federal (1,537) (2,473) (2,957)
State (202) 181 (131)
Foreign (2,650) (1,681) 463
- --------------------------------------------------------------------------------
(4,389) (3,973) (2,625)
- --------------------------------------------------------------------------------
Total $ 18,641 $ 22,659 $ 16,321
================================================================================
The following table accounts for the difference between the actual tax
provision and the amounts obtained by applying the statutory U.S. federal income
tax rate of 35% to income before taxes.
Years ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
Statutory federal tax rate 35.0% 35.0% 35.0%
State income taxes net of federal benefit 3.3 2.5 2.5
Tax-exempt interest income (0.7) (0.6) (1.6)
Non-deductible merger costs 6.3 -- --
Goodwill amortization and write-off 7.9 0.5 0.1
Foreign rate difference and unused foreign losses 4.4 3.5 5.1
Other, net (1.3) (1.8) (1.2)
- --------------------------------------------------------------------------------
Effective tax rate 54.9% 39.1% 39.9%
================================================================================
32
<PAGE>
Notes to Consolidated Financial Statements
Micro Warehouse, Inc.
(Amounts in thousands, except per share data)
The U.S. and foreign components of income before income taxes were as
follows:
U.S. Foreign
- --------------------------------------------------------------------------------
Year ended December 31, 1996 $ 52,255 $(18,316)
Year ended December 31, 1995 49,494 8,409
Year ended December 31, 1994 30,452 10,425
Income taxes have not been provided for undistributed earnings of foreign
subsidiaries since MWI presently intends to continue to reinvest these earnings.
Components of the net deferred tax asset relate to:
December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
Deferred tax assets:
Accounts receivable reserve $ 2,091 $ 1,564 $ 1,004
Inventory reserve 2,002 1,394 850
Refunds payable 312 197 211
Investments -- -- 370
Medical insurance 526 609 338
Accounts payable reserve 2,820 -- --
Inventory capitalization 1,066 431 473
Other 2,361 1,696 356
Alternative minimum tax credits carryforward 648 648 648
Tax loss carryforwards 18,970 16,752 13,182
- --------------------------------------------------------------------------------
30,796 23,291 17,432
Valuation allowance for tax loss carryforwards (12,906) (9,164) (7,353)
- --------------------------------------------------------------------------------
Total deferred tax asset 17,890 14,127 10,079
Deferred tax liability:
Property, plant and equipment -- (626) (551)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 17,890 $ 13,501 $ 9,528
================================================================================
The Company has $21,105 in unutilized foreign tax loss carryforwards and
$30,865 in unutilized U.S. federal tax loss carryforwards. Of these loss
carryforwards, $12,954 have no expiration dates, $35,901 expire beginning 2005
through 2010, and $3,115 expire beginning 1999 through 2004. In addition, the
Company has $648 of unutilized alternative minimum tax credits that can be
carried forward indefinitely. U.S. tax law imposes a limitation on the amount of
the U.S. tax loss carryforwards which can be utilized each year where there is a
change in the stock ownership of the Company which incurred the losses. The U.S.
tax losses of Inmac are subject to this rule. Based on the Company's historical
and expected taxable earnings, management believes it is more likely than not
that the Company will realize the benefit of the existing deferred tax asset at
December 31, 1996.
NOTE 11. MARKETABLE SECURITIES
The following is a summary of marketable securities December 31, 1996 and 1995:
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- -------------------------------------------------------------------------------
Securities available-for-sale:
Governmental obligations:
December 31, 1996 $20,004 $ 18 $ -- $20,022
December 31, 1995 $20,626 $ 1 $ 47 $20,580
At December 31, 1996, marketable securities mature as follows:
Within 1 year 1-5 years 5-10 years After 10 years
- --------------------------------------------------------------------------------
Government obligations $3,223 $3,000 -- $13,799
Certain of these obligations provide for the resetting of interest rates
at specified dates. The expected impact of resettting the interest rates is to
adjust the market value to the face amount.
NOTE 12. INTEREST INCOME (EXPENSE), NET
For the years ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
Interest income $ 5,292 $ 4,348 $ 2,421
Interest expense (1,784) (4,160) (2,607)
- --------------------------------------------------------------------------------
Interest income (expense), net $ 3,508 $ 188 $ (186)
================================================================================
NOTE 13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
1996 1995 1994
- --------------------------------------------------------------------------------
Cash paid during the period for:
Interest $ 1,805 $ 4,088 $ 2,627
Income taxes 27,297 32,956 19,848
Non-cash investing and financing activities:
Loan to officer for purchase of stock 1,400 -- --
Net assets acquired and goodwill established
through issuance of common stock -- 1,150 12,052
Equipment acquired under capital
lease obligations -- -- 1,021
33
<PAGE>
Notes to Consolidated Financial Statements
Micro Warehouse, Inc.
(Amounts in thousands, except per share data)
NOTE 14. STOCK-BASED COMPENSATION
The Company applies APB Opinion No. 25 and related interpretations in
accounting for stock-based compensation. Accordingly, no compensation cost has
been recognized for stock options issued at market value. Had compensation cost
been determined on a fair value basis consistent with SFAS No. 123, the
Company's net income and net income per share would have been reduced to the pro
forma amounts indicated below:
1996 1995
- --------------------------------------------------------------------------------
Net income As reported $15,298 $35,244
Pro forma $10,994 $33,650
Net income per share As reported $ 0.44 $ 1.05
Pro forma $ 0.32 $ 1.00
The fair value of each option grant included in the pro forma amounts above
was estimated on the date of grant using the Black-Scholes option pricing model
with the following assumptions for 1996 and 1995, respectively: risk-free
interest rates of 6.2 percent and 7.4 percent; dividend yield of zero for both
years; expected lives of 5 years for both years; and volatility of 42.5 percent
and 43.3 percent.
A summary of the status of stock options outstanding as of December 31,
1996, 1995 and 1994 and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1996 1995 1994
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares under option:
Outstanding at beginning of year 1,328 $17.18 1,346 $13.79 1,326 $12.38
Granted 836 27.50 338 27.63 234 22.35
Exercised (346) 16.79 (315) 13.18 (94) 14.83
Forfeited (108) 23.23 (41) 17.45 (120) 17.02
- ------------------------------------------------------------------------------------------------------------
Outstanding at end of year 1,710 $22.28 1,328 $17.18 1,346 $13.79
============================================================================================================
Options exercisable at year end 407 $15.56 420 $13.99 342 $12.36
- ------------------------------------------------------------------------------------------------------------
Weighted average fair value per share of
options granted during 1996, 1995, and 1994 $12.64 $13.30 $10.96
</TABLE>
1992 and 1994 Stock Option Plans
The 1992 and 1994 Stock Option Plans (the "Plans") provide for the grant of
stock options to officers, directors and key employees of, and consultants to,
the Company and its subsidiaries. Under the Plans, the Company may grant options
that are intended to qualify as incentive stock options ("Incentive Stock
Options") within the meaning of Section 422A of the Internal Revenue Code of
1986, as amended (the "Code"), or options not intended to qualify as Incentive
Stock Options ("Non-statutory Stock Options"). A total of 2,000 shares of common
stock have been reserved for issuance upon the exercise of options granted under
the Plans.
The Plans are administered by the Compensation and Stock Option Committee
of the Board of Directors. Subject to the provisions of the Plans, the Committee
has the authority to select the employees, directors and consultants to whom
options are granted and determine the terms of each option, including (i) the
number of shares of common stock covered by the option, (ii) when the option
becomes exercisable, (iii) the option exercise price, which must be at least
100%, with respect to Incentive Stock Options, and at least 85%, with respect to
Non-statutory Stock Options, of the fair market value of the common stock as of
the date of grant, and (iv) the duration of the option (which may not exceed ten
years).
Inmac Stock Option Plan
In connection with the Inmac merger, all outstanding Inmac stock options
were exchanged for the equivalent number of the Company's options.
Stock Options Issued Outside 1992 and 1994 Plans
During 1996, the Company granted to Mr. Lacy, who became the Chief
Executive Officer on October 1, 1996, options to purchase 500 shares of common
stock at $25.00 per share, vesting at the rate of 25% per year commencing
October 1, 1997.
34
<PAGE>
Notes to Consolidated Financial Statements
Micro Warehouse, Inc.
(Amounts in thousands, except per share data)
The following activity includes the grant made outside of the 1992 and 1994
Stock Option Plans. Stock options outstanding at December 31, 1996, are
summarized as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------------
Weighted Weighted Weighted
Range of Number average remaining average Number average
exercise prices outstanding contractual life exercise price exercisable exercise price
- ---------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$ 9.00 - $13.13 491 6.3 years $ 10.81 257 $ 9.72
$15.63 - $19.93 106 7.5 years 16.70 52 11.58
$21.00 - $28.99 634 9.3 years 24.56 48 19.97
$31.13 - $32.00 441 8.7 years 31.38 40 30.57
$39.00 - $46.69 38 8.7 years 42.34 10 42.54
- ---------------------------------------------------------------------------------------------------------
$ 9.00 - $46.69 1,710 8.1 years $ 22.28 407 $ 15.56
=========================================================================================================
</TABLE>
NOTE 15. OPERATIONS BY GEOGRAPHIC AREAS
The Company operates primarily in one industry segment, the distribution of
computer hardware, software, supplies and accessories. Information about the
Company's operations in different geographic areas for the years ended December
31, 1996, 1995 and 1994 are presented below.
Asia/
Year Ended December 31, 1996 North America Europe Pacific Consolidated
- --------------------------------------------------------------------------------
Net sales $1,330,601 $ 570,388 $ 15,255 $1,916,244
Income (loss) from operations
before interest income,
taxes and extraordinary charge 37,062 (2,847) (1,122) 33,093
Identifiable assets 422,967 182,298 2,577 607,842
Asia/
Year Ended December 31, 1995 North America Europe Pacific Consolidated
- --------------------------------------------------------------------------------
Net sales $1,130,292 $546,559 $7,776 $1,684,627
Income from operations
before interest and
income taxes 40,290 17,354 71 57,715
Identifiable assets 370,573 179,798 4,175 554,546
Asia/
Year Ended December 31, 1994 North America Europe Pacific Consolidated
- --------------------------------------------------------------------------------
Net sales $ 761,219 $ 369,577 -- $1,130,796
Income from operations
before interest and
income taxes 34,175 6,888 -- 41,063
Identifiable assets 263,048 148,828 -- 411,876
NOTE 16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for the years ended December 31, 1996,
1995 and 1994:
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
1996 Net sales $ 514,391 $437,175 $437,981 $526,697
Gross profit 98,542 84,987 78,692 80,225
Income (loss) before
extraordinary charge (5,101) 5,410 10,725 5,848
Net income (loss) (6,685) 5,410 10,725 5,848
Income (loss) per share
before extraordinary charge $ (0.15) $ 0.16 $ 0.31 $ 0.17
Net income (loss) per share $ (0.20) $ 0.16 $ 0.31 $ 0.17
Weighted average number of
shares outstanding 33,996 34,701 34,630 34,657
1995 Net sales $ 380,323 $378,574 $423,460 $502,270
Gross profit 79,774 73,726 78,976 91,515
Net income 10,183 7,184 9,689 8,188
Net income per share $ 0.31 $ 0.22 $ 0.29 $ 0.24
Weighted average number of
shares outstanding 33,021 33,214 33,451 34,663
35
<PAGE>
Notes to Consolidated Financial Statements
Micro Warehouse, Inc.
(Amounts in thousands, except per share data)
NOTE 16. QUARTERLY FINANCIAL DATA (UNAUDITED) CONTINUED
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
1994 Net sales $257,048 $253,310 $280,241 $340,197
Gross profit 60,678 56,319 58,358 71,323
Net income 6,761 6,209 5,305 6,281
Net income per share $ 0.24 $ 0.21 $ 0.17 $ 0.19
Weighted average number of
shares outstanding 28,485 30,162 30,742 32,547
The quarterly amounts of net income per share for 1995 and 1994 do not
equal amounts for the year due to rounding.
NOTE 17. LEGAL PROCEEDINGS
During October, November and December 1996, the Company and certain of its
directors and officers were named as defendants in eleven lawsuits brought in
the United States District Court for the District of Connecticut by parties
which seek to represent classes of stockholders who purchased shares of the
Company's common stock during different periods between January 1994 and
September 1996, or exchanged shares in a merger transaction completed in January
1996. These lawsuits advance claims under various provisions of the federal
securities laws and the common law and assert that various misleading
disclosures were made concerning the Company's financial performance and
position and other related circumstances during the periods described. The
lawsuits followed and are predicated upon the Company's announcements in
September and October 1996 that it intended to restate certain prior financial
statements. On February 10, 1997, the Company filed Forms 10-K/A with the
Securities and Exchange Commission (the "SEC") reflecting restated financial
statements for the years 1992 through 1995. These matters have been consolidated
into a single proceeding.
In November 1996, a shareholder derivative action was filed in the United
States District Court for the District of Connecticut, purportedly on behalf of,
and for recovery by, the Company, which is named as a nominal defendant. The
complaint charges certain directors and officers with violation of fiduciary
duties in selling Company stock while in possession of non-public information
and in causing or permitting the exposure of the Company to damage, such as
through the class litigation described above, attributable to the same
circumstances that are the subject of the class litigation. The Company and the
individual defendants have filed a Motion to Dismiss the Complaint which is
pending before the Court.
In December 1996 and January 1997, the Company and certain of its directors and
officers were named as defendants in two largely identical lawsuits brought in
the Superior Court of Santa Clara County, San Jose, California. These lawsuits
have now been consolidated. The lawsuits arise out of the stock merger between
the Company and Inmac on January 25, 1996. The claims are generally similar to
those being asserted in the consolidated class action described above.
All of the above referenced lawsuits are at a preliminary stage. The plaintiffs
in these lawsuits seek unspecified compensatory damages, other relief, legal
fees and litigation costs. The Company is unable to predict the outcome or the
potential financial impact of this litigation, and accordingly, has made no
provision therefor in the consolidated financial statements.
In addition, the staff of the SEC is conducting a formal investigation into
the events that underlie the Company's restatement of certain prior period
financial statements. The Company is cooperating with the staff in its
investigation.
36
<PAGE>
Board of Directors
[Photograph]
Peter Godfrey
Chairman
Micro Warehouse, Inc.
[Photograph]
Linwood A. Lacy, Jr.
President and
Chief Executive Officer
Micro Warehouse, Inc.
[Photograph]
Felix Dennis
Chairman
Dennis Publishing Ltd.
(Publishing)
[Photograph]
Melvin Seiler
Executive Vice President and
Chief Operating Officer
Micro Warehouse, Inc.
[Photograph]
Frederick H. Fruitman
Managing Director
Loeb Partners Corporation
(Investment Banking)
[Photograph]
Joseph M. Walsh
Chairman and
Chief Executive Officer
Curtis Circulation Company
(Magazine Distribution)
Corporate Officers
Deborah Cooper
Vice President
Mac Marketing
Stephen F. England
Vice President
Worldwide Advertising
Wayne P. Garten
Senior Vice President
and Chief Financial Officer
Michael J. Kurtz
Vice President
Human Resources
Bruce L. Lev
Vice President,
General Counsel
and Secretary
Kris Rogers
Executive Vice President
and General Manager
of U.S. Operations
Bruce Schellinkhout
Vice President
Distribution
Adam Shaffer
Senior Vice President
Product and Marketing
Jeffrey Sheahan
Vice President and
General Manager
of European Operations
Corporate Information
Transfer Agent
Boston EquiServe L.P., 150 Royall Street,
Canton, MA 02021 (800) 426-5523
Independent Certified Public Accountants
KPMG Peat Marwick LLP,
3001 Summer Street, Stamford, CT 06905
Annual Meeting
The 1997 Annual Meeting will be held on Wednesday, June 4, 1997 at 10:00 A.M. at
The Ramada Inn and Suites, 2373 Route 9, Toms River, New Jersey
Common Stock
Micro Warehouse, Inc.'s Common Stock is traded on The Nasdaq Stock Market under
the symbol MWHS.
Stockholders
As of December 31, 1996, Micro Warehouse, Inc. had approximately 272
stockholders of record.
Dividend Policy
The Company has never paid and has no present plans to pay any cash dividends on
its capital stock. The Company intends to retain its earnings to finance the
growth and development of its business.
Form 10-K
A copy of the Company's Form 10-K is available without charge upon request to:
Corporate Communications Dept., Micro Warehouse, Inc., 535 Connecticut Avenue,
Norwalk, CT 06854.
Investor Relations
For further information about Micro Warehouse, Inc., contact Melinda LeVino,
Director of Corporate Communications (203) 899-4672.
Quarterly Stock Price Range
High Low
Fiscal 1996 First Quarter $51.75 $31.25
Second Quarter 45.25 18.38
Third Quarter 32.75 14.00
Fourth Quarter 27.25 10.75
Fiscal 1995 First Quarter $35.75 $26.75
Second Quarter 48.25 30.00
Third Quarter 56.88 41.25
Fourth Quarter 54.50 36.75
Fiscal 1994 First Quarter $28.00 $19.25
Second Quarter 28.00 17.75
Third Quarter 33.00 17.75
Fourth Quarter 36.25 27.00
Fiscal 1993 First Quarter $11.88 $9.63
Second Quarter 12.50 11.25
Third Quarter 15.63 10.88
Fourth Quarter 21.38 17.50
*Stock prices are adjusted to reflect a two-for-one stock split effective April
4, 1994.
<PAGE>
CORPORATE OFFICES
Micro Warehouse, Inc.
535 Connecticut Avenue
Norwalk, CT 06854
(203) 899-4000
SUBSIDIARIES
Micro Warehouse, Inc. of New Jersey
1720 Oak Street, Lakewood, NJ 08701
55 United States Avenue, Gibbsboro, NJ 08026
Micro Warehouse, Inc. of Ohio
2841 Old State Road, Wilmington, OH 45200
Micro Warehouse Limited
Westerly Point, Market Street
Bracknell, Berkshire
RG12 1EW England
Micro Warehouse France SARL
Z.I. Mitry-Compans
2 Rue Charles Coulomb
B.P. 103
77293 Mitry-Mory Cedex France
Micro Warehouse (Deutschland) GmbH
Boettgerstrasse 2-14
65438 Floersheim Germany
Micro Warehouse, Sweden AB
Midskogsgrand 1-3
S-115 43 Stockholm Sweden
Micro Warehouse, Denmark APS
Gaseagervej #12
DK-8250 Ega Denmark
Micro Warehouse, Norway AS
Waldemar Thranesgate 98B
N-0175 Oslo Norway
Micro Warehouse, Finland OY
Kaisaniemenkatu 13
00100 Helsinki Finland
Micro Warehouse B.V.
Kelenbergweg 30
1101 GB Amsterdam The Netherlands
Micro Warehouse, Japan KK
Mitsuhashi No. 2 Bldg. 2F
1-13-27 Okada, Atsugi-shi
Kanagawa 243 Japan
Micro Warehouse Canada Limited
151 Caterpillar Road
Mississauga, Ontario L4X 226 Canada
Benton Sistemas S.A. de C.V.
Circuito Novelistos 129
Ciudad Satelite
Mexico City, Mexico 53100
Micro Warehouse (Australia) Pty Ltd.
2/11 Artisan Road
Private Bag 1 Unit 2
Seven Hill NSW 2147 Australia
26 Edmundstone Road 6
Bowen Hills, Queensland 4006 Australia
Micro Warehouse
535 Connecticut Avenue, Norwalk, CT 06854, 203-899-4000
http://www.warehouse.com
EXHIBIT 21.1
SUBSIDIARIES
The following is a list of subsidiaries of the Company as of March 17, 1996:
PLACE OF
NAME ORGANIZATION
- --------------------------------------------------------------------------------
Subsidiaries of Micro Warehouse, Inc. (Delaware)
Micro Warehouse, Inc. of New Jersey....................... United States
Micro Warehouse, Inc. of Ohio............................. United States
Micro Warehouse Catalogues, Inc. of Connecticut........... United States
Micro Warehouse Canada Limited............................ Canada
Micro Warehouse Denmark APS............................... Denmark
Micro Warehouse Finland OY................................ Finland
Micro Warehouse International, Inc. ...................... United States
Micro Warehouse Norway AS................................. Norway
Micro Warehouse Sweden AB................................. Sweden
Micro Warehouse AG........................................ Switzerland
TD 2 S.A.................................................. France
Innosoft S.A.R.L.......................................... France
Kelar S.A.R.L............................................. France
Micro Warehouse Australia Pty. Ltd........................ Australia
Benton Sistemas S.A. de C.V............................... Mexico
Inmac Inc................................................. Canada
Subsidiaries of Micro Warehouse Finland Oy:
Business Forum Oy......................................... Finland
Subsidiaries of Micro Warehouse International, Inc.:
Micro Warehouse (Deutschland) GmbH........................ Germany
Micro Warehouse Holding B.V............................... The Netherlands
Micro Warehouse Japan KK.................................. Japan
Subsidiaries of Micro Warehouse Holding B.V.:
Micro Warehouse B.V....................................... The Netherlands
Inmac AB.................................................. Sweden
TD S.A.................................................... France
Micro Warehouse Ltd....................................... United Kingdom
Micro Warehouse S.A.R.L................................... France
Subsidiaries of Inmac AB:
Micro Warehouse Sweden AB................................. Sweden
MacKatalogen AB........................................... Sweden
Subsidiaries of Micro Warehouse Ltd:
Technomatic Ltd........................................... United Kingdom
Inmac Ltd................................................. United Kingdom
Micro Warehouse (1996) Ltd................................ United Kingdom
22
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors MICRO WAREHOUSE, INC.:
We consent to incorporation by reference in the registration statements
(Nos.33-71868 and 33-31098) on Form S-8 of Micro Warehouse, Inc. of our reports
dated February 10, 1997, relating to the consolidated balance sheets of Micro
Warehouse, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
and related consolidated financial statement schedule for each of the years in
the three-year period ended December 31, 1996, which reports are included or
incorporated by reference in the December 31, 1996 annual report on Form 10-K of
Micro Warehouse, Inc.
Stamford, Connecticut
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 32,234
<SECURITIES> 20,022
<RECEIVABLES> 203,687
<ALLOWANCES> 10,876
<INVENTORY> 201,119
<CURRENT-ASSETS> 494,828
<PP&E> 29,712
<DEPRECIATION> 39,482
<TOTAL-ASSETS> 607,842
<CURRENT-LIABILITIES> 223,298
<BONDS> 376
0
0
<COMMON> 343
<OTHER-SE> 114,042
<TOTAL-LIABILITY-AND-EQUITY> 607,842
<SALES> 1,916,244
<TOTAL-REVENUES> 1,916,244
<CGS> 1,573,798
<TOTAL-COSTS> 1,573,798
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 36,601
<INCOME-TAX> 19,719
<INCOME-CONTINUING> 15,298
<DISCONTINUED> 0
<EXTRAORDINARY> 1,584
<CHANGES> 0
<NET-INCOME> 15,298
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.44
</TABLE>
