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