FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from _____________ to _______________
Commission File Number: 0-20730
MICRO WAREHOUSE, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1192793
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
535 Connecticut Avenue, Norwalk, Connecticut 06854
(Address of principal executive offices)
(203) 899-4000
(Registrant's telephone number, including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of issuer's class of common
stock as the latest practicable date:
Class: COMMON STOCK Outstanding Shares At September 30, 1998: 34,921,027
<PAGE>
MICRO WAREHOUSE, INC.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
Consolidated Balance Sheets ............................................. 3
Consolidated Statements of Operations ................................... 4
Consolidated Statements of Cash Flows ................................... 5
Notes to Unaudited Consolidated Financial Statements .................... 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations .................... 9
PART II - OTHER INFORMATION................................................. 17
SIGNATURE .................................................................. 19
INDEX TO EXHIBITS .......................................................... 20
EXHIBIT 10 ................................................................. 21
EXHIBIT 11.................................................................. 47
EXHIBIT 27.................................................................. 48
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Part I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (unaudited)
MICRO WAREHOUSE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS (unaudited) (audited)
Current assets:
Cash and cash equivalents $ 154,977 $ 58,051
Marketable securities at market value 21,469 20,817
Accounts receivable, net of allowance for doubtful
accounts ($9,335 and $13,399 at September 30, 1998
and December 31, 1997, respectively) 219,776 217,475
Inventories 114,003 170,543
Prepaid expenses and other current assets 12,385 11,763
Tax refunds 16,389 23,452
Deferred taxes 18,065 30,903
--------- ---------
Total current assets 557,064 533,004
--------- ---------
Property, plant and equipment, net 32,590 32,416
Goodwill, net 45,495 45,744
Non-current deferred taxes 3,992 5,850
Other assets 1,778 2,330
--------- ---------
Total assets $ 640,919 $ 619,344
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 203,728 $ 168,886
Accrued expenses 54,467 66,563
Accrued litigation settlements -- 16,100
Deferred revenue 8,090 5,944
Loans payable, bank -- 12,570
Obligations under capitalized leases 123 492
--------- ---------
Total liabilities 266,408 270,555
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized - 100 shares; none issued -- --
Series A Junior Participating Preferred Stock,
$.01 par value:
Authorized - 45 shares; none issued -- --
Common stock, $.01 par value:
Authorized - 100,000 shares; issued and
outstanding; 34,921 and 34,639
Shares at September 30, 1998
and December 31, 1997, respectively 349 346
Additional paid-in capital 288,485 282,865
Deferred compensation (3,585) (4,413)
Retained earnings 96,975 80,390
Cumulative translation adjustment (7,724) (10,403)
Valuation adjustment for marketable securities 11 4
--------- ---------
Total stockholders' equity 374,511 348,789
--------- ---------
Total liabilities and stockholders' equity $ 640,919 $ 619,344
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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MICRO WAREHOUSE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended September 30, 1998 and 1997
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 551,789 $ 522,072 $1,624,982 $1,551,994
Cost of goods sold 462,051 435,615 1,362,653 1,294,161
---------- ---------- ---------- ----------
Gross profit 89,738 86,457 262,329 257,833
Selling, general and
administrative expenses 72,648 77,844 214,673 225,040
---------- ---------- ---------- ----------
Income from operations before
interest, litigation provision
and income taxes 17,090 8,613 47,656 32,793
Interest income, net 2,681 1,439 6,402 4,011
Provision for settlements of
shareholder and derivative
litigation -- 20,700 14,000 20,700
---------- ---------- ---------- ----------
Income (loss) before income taxes 19,771 (10,648) 40,058 16,104
Income tax provision (benefit) 7,908 (3,530) 23,473 7,590
---------- ---------- ---------- ----------
Net income (loss) $ 11,863 $ (7,118) $ 16,585 $ 8,514
========== ========== ========== ==========
Basic net income (loss) per share $ 0.34 $ (0.21) $ 0.48 $ 0.25
========== ========== ========== ==========
Diluted net income (loss) per share $ 0.33 $ (0.21) $ 0.47 $ 0.24
========== ========== ========== ==========
Shares used in per
share calculation -
Basic 34,816 34,550 34,695 34,432
========== ========== ========== ==========
Diluted 35,591 34,550 35,081 34,759
========== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
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MICRO WAREHOUSE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1998 and 1997
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 16,585 $ 8,514
--------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 10,043 12,062
Non-cash litigation settlement 6,000 --
Non-cash compensation 828 1,382
Deferred taxes 14,696 (6,032)
Changes in assets and liabilities:
Accounts receivable, net (4,447) (6,458)
Inventories 54,901 40,338
Prepaid expenses and other current assets 10,291 (2,578)
Other assets 97 72
Accounts payable 36,390 31,286
Accrued expenses (4,642) 2,522
Accrued litigation settlements (20,700) 20,700
Deferred revenue 2,186 936
Other 63 (3,214)
--------- ---------
Total adjustments 105,706 91,016
--------- ---------
Net cash provided by operating activities 122,291 99,530
--------- ---------
Cash flows from investing activities:
Purchases of marketable securities, net (645) (752)
Purchases or adjustments to acquisitions
of businesses, represented by:
Goodwill -- (18,642)
Other net assets -- 654
Acquisition of property, plant and equipment (12,636) (11,659)
--------- ---------
Net cash used by investing activities (13,281) (30,399)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock 4,300 3,228
Repurchase of common stock (4,677) --
Repayments under lines of credit, net (12,584) (37,473)
Principal payments of obligations under capital leases (368) (87)
--------- ---------
Net cash used by financing activities (13,329) (34,332)
--------- ---------
Effect of exchange rate changes on cash 1,245 (1,821)
--------- ---------
Net change in cash 96,926 32,978
Cash and cash equivalents:
Beginning of period 58,051 32,234
--------- ---------
End of period $ 154,977 $ 65,212
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
MICRO WAREHOUSE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
1. FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of Micro
Warehouse, Inc. and its subsidiaries (the "Company") and have been
prepared, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. Although the
Company believes that the disclosures are adequate to make the information
presented not misleading, these financial statements should be read in
conjunction with the audited financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly
the financial position of the Company at September 30, 1998 and the
results of operations for the three and nine months ended September 30,
1998 and 1997. Certain reclassifications have been made to conform the
prior year to the 1998 presentation.
2. RESTRUCTURING
On December 11, 1997 the Company announced a restructuring of its
operations (the "Restructuring"). The objectives of the Restructuring were
to simplify the business worldwide, reduce the cost structure, increase
productivity of the sales force and eliminate certain non-core businesses
operating at a loss. The Restructuring involved the closing of the
Company's businesses in Australia and Japan, the sale of its operations in
Norway, Denmark and Finland and the write-off of the goodwill of its
German subsidiary. In addition, the Company closed its European
headquarters in the United Kingdom, reducing certain functions and
transferring others to the United Kingdom operation, other European
business units and the United States. In the United States, the Company
consolidated its USA Flex business from its facility in Bloomingdale,
Illinois to existing facilities in New Jersey and Connecticut and wrote
off the goodwill associated with this business. The Company also closed
its Online Interactive, Inc. subsidiary in Seattle, Washington and wrote
off the related goodwill. In addition, the Company reorganized its
domestic sales force. In connection with the Restructuring, approximately
600 positions were eliminated.
As a result of the Restructuring, the Company recorded a pre-tax charge of
$67,828 in the fourth quarter of 1997. The charge comprised goodwill
write-offs of $41,907, severance costs of $10,314 and $15,607 of other
costs including lease terminations, moving costs and asset write-downs.
These activities were substantially completed in the first quarter of
1998. Actual charges of approximately $57 million were incurred through
September 30, 1998.
3. NEW ACCOUNTING STANDARDS
In June 1997 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes new rules for the
reporting and display of comprehensive income and its components. The
6
<PAGE>
adoption of SFAS No. 130 requires unrealized gains or losses on the
Company's available-for-sale securities and foreign currency translation
adjustments be included in the presentation of comprehensive income. The
Company adopted SFAS No. 130 effective January 1, 1998.
The components of comprehensive income (loss), net of related tax, for the
three and nine month periods ended September 30, 1998 and 1997 are as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
Net income (loss) $ 11,863 $ (7,118) $ 16,585 $ 8,514
Unrealized gains (losses) on
marketable securities -- (14) 7 (114)
Foreign currency translation
adjustments 3,439 (3,655) 2,679 (10,369)
-------- -------- -------- --------
Comprehensive income (loss) $ 15,302 $(10,787) $ 19,271 $ (1,969)
======== ======== ======== ========
The components of accumulated other comprehensive income, net of related
tax, at September 30, 1998 and December 31, 1997 are as follows:
September 30, December 31,
1998 1997
----------------- ----------------
Unrealized gains on marketable securities $ 11 $ 4
Foreign currency translation adjustments (7,724) (10,403)
-------- --------
Accumulated other comprehensive income $ (7,713) $(10,399)
======== ========
Also in June 1997 the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS No. 131
establishes standards for the manner in which public companies report
information about operating segments in annual and interim financial
statements. The Company will implement SFAS No. 131 in its year end 1998
financial statements.
4. LEGAL PROCEEDINGS
A pre-tax charge of $14,000 was recorded in the second quarter of 1998 for
the settlement of the lawsuit brought by holders of approximately 1,300
shares of the Company's common stock which arose out of the stock merger
between the Company and Inmac Corp. relating to the facts underlying the
Company's announcements in September and October, 1996 that it intended to
restate certain prior financial statements covering the 1992 through 1995
fiscal years (the "Restatement"). This settlement, consummated on July 30,
1998, provided for a total payment of $19,000, $6,000 of which was in the
form of freely tradeable common stock. The pre-tax charge was based on the
total amount of the settlement ($19,000), net of a $5,000 contribution
from a non-affiliated source. On an after-tax basis, the charge recorded
was $15,849.
In addition, the Company reached a settlement with the State Board of
Administration of Florida covering approximately 51 shares. The Company
has made a $150 settlement payment to the State Board of
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<PAGE>
Administration which had earlier elected not to participate in the $30,000
settlement of the consolidated securities class action lawsuit approved by
the U.S. District Court on June 2, 1998.
These settlements exclude the ongoing SEC formal investigation into the
events underlying the Restatement. The Company is cooperating with the SEC
in its investigation.
8
<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, space advertising in computer publications, Internet catalog
and auction web sites on the worldwide web and telemarketing account managers
who focus on corporate, education and government accounts. The Company offers
brand name hardware and software from leading vendors such as Adobe, Apple,
3Com, Compaq, Epson, Hewlett Packard, IBM, Iomega, Microsoft and Toshiba.
Through its four core catalogs, Micro Warehouse, Mac Warehouse, Data Comm
Warehouse and Inmac, various specialty catalogs, space advertising and its
Internet sites, the Company offers a broad assortment of computer products at
competitive prices. With colorful illustrations, concise product descriptions
and relevant technical information, each catalog title focuses on a specific
segment of the computer market. The catalogs are recognized as a leading source
for computer hardware, software and other products.
The Company currently publishes catalogs in seven countries outside the United
States, specifically Canada, France, Germany, Mexico, the Netherlands, Sweden
and the United Kingdom. The international operations represented approximately
28% of the Company's sales in the nine month period ended September 30, 1998. In
December 1997 the Company announced a major restructuring of its operations
including the sale or disposal of Macintosh-dependent operations in Australia,
Denmark, Finland, Japan and Norway.
RESULTS OF OPERATIONS
The table below sets forth certain items expressed as a percent of net sales for
each of the three and nine month periods ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 83.7 83.4 83.9 83.4
------- ------ ------ ------
Gross profit 16.3 16.6 16.1 16.6
Selling, general and
administrative expenses 13.2 14.9 13.2 14.5
Litigation settlement -- 4.0 0.8 1.3
------- ------ ------ ------
Income from operations before interest and
income taxes 3.1 (2.3) 2.1 0.8
Interest income, net 0.5 0.3 0.4 0.2
------- ------ ------ ------
Income before income taxes 3.6% (2.0%) 2.5% 1.0%
</TABLE>
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
Net sales increased $29.7 million or 5.7% to $551.8 million for the three months
ended September 30, 1998, compared to $522.1 million for the same period last
year. This increase in net sales was primarily attributable to continued growth
in the IBM PC-compatible ("Wintel") business which increased approximately 17%.
9
<PAGE>
Worldwide Macintosh-related ("Mac") sales declined approximately 12%. The Mac
business represented approximately 33% of net sales, compared to approximately
40% in the same period last year. Excluding the results of the small
Mac-dependent businesses sold in early 1998, net sales increased $42.1 million
or 8.3% for the three months ended September 30, 1998, compared to the same
period last year. Worldwide average order value increased 3.3% to $524 while
worldwide catalog circulation decreased 4.2% to 30.9 million. Excluding sales
from webauction.com, worldwide average order value was $553 for the third
quarter of 1998. The active customer base decreased approximately 12% to 2.1
million for the three months ended September 30, 1998 compared to the same
period last year, principally due to a reduction in the number of Mac consumer
customers.
Domestic sales increased $28.0 million or 7.3% to $411.4 million for the three
months ended September 30, 1998 compared to $383.5 million for the same period
last year. Wintel sales increased approximately 21%. Wintel desktop computers
and servers, PDAs, digital cameras and networking routers were among the fastest
growing product categories in the quarter. Wintel desktop computer sales
increased approximately 124% while Wintel CPU unit volume increased
approximately 257% compared to the same period last year. Mac sales decreased
approximately 11%. Mac computer sales were flat while Mac CPU unit volume
increased 11% compared to the third quarter of 1997. Sales of Apple branded
computers, including the new iMac, increased 51% in revenue and 97% in units,
partially offsetting the decline in sales of other Mac products and the virtual
elimination of Mac clones from the marketplace. Overall, CPUs represented 28% of
total revenue. The average selling price for Wintel computers declined 34% and
the average selling price for Mac computers declined 10% compared to the third
quarter of 1997. The average order value increased 4.5% to $572. Excluding sales
from WebAuction.com average order value was $620 for the third quarter of 1998.
Catalog circulation remained relatively flat at 26.4 million compared to 26.9
million in the prior year third quarter.
International sales increased $1.8 million or 1.3% to $140.4 million for the
three months ended September 30, 1998 compared to $138.6 million for the same
period last year. Wintel sales increased approximately 8% and Mac sales declined
approximately 17%. International sales decreased to 25.4% of total net sales in
the three months ended September 30, 1998 compared to 26.6% in the same period
last year. The average order value remained relatively flat at $420 compared to
$421 in the prior year third quarter. Catalog circulation decreased 21.1% to 4.5
million catalogs principally as a result of reduced Inmac and Wintel catalog
circulation. Excluding the results of the businesses disposed of in early 1998,
international sales increased 11.2% compared to the same period last year.
Wintel sales increased approximately 14% and Mac sales increased approximately
2%.
Internet-related sales for the quarter were $50.4 million, up 22% compared to
$41.4 million in the second quarter of 1998. Internet-related sales in the third
quarter of 1997 were $15.3 million. Sales from the Company's e-commerce site
warehouse.com were $41.6 million for the quarter compared to $28.2 million
during the second quarter of 1998, representing a sequential increase of 48%.
Sales from the Company's Internet auction site webauction.com were $8.8 million
for the three months ended September 30, 1998 compared to $13.2 million in the
second quarter of 1998, representing a sequential decrease of 33%. In September,
1998 the number of daily visitors to the Company's Internet sites was
approximately 62,000.
The gross profit margin for the three months ended September 30, 1998 was 16.3%
of net sales compared to 16.2% in the second quarter of 1998 and 16.6% in the
same period last year. The year-on-year decline was principally due to the
impact of lower margins in the webauction.com business unit.
Selling, general and administrative expenses were $72.6 million, or 13.2% of net
sales for the three months ended September 30, 1998, compared to $77.8 million
or 14.9% of net sales for the third quarter of 1997.
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The percentage decrease was principally due to lower net advertising costs which
decreased to 1.2% of net sales from 1.7% in the same period last year and lower
overall operating expenses, partially offset by Year 2000 readiness costs of
$0.6 million and higher recruiting and training expenses. Sequentially, selling,
general and administrative expense increased from $68.6 million or 13.1% of net
sales in the second quarter of 1998 as a result of higher net advertising
expense as a percentage of sales, partially offset by lower payroll costs.
The average annualized domestic sales per sales associate for the quarter were
$2.7 million as compared to $1.9 million in the first quarter. This improvement
was primarily the result of increased inbound sales force performance. During
the quarter, the Company initiated a program to hire up to 150 new sales
associates. The domestic sales force numbered 642 on November 13, 1998 compared
to 602 at June 30, 1998.
Operating income for the three months ended September 30, 1998 was $17.1 million
compared to $8.6 million for the same period last year. The 1997 results exclude
the pre-tax charge of $20.7 million for the settlement of the shareholder and
derivative lawsuit. The international businesses incurred a $1.5 million
operating loss during the three months ended September 30, 1998 compared to a
loss of $3.0 million in the same period last year. Reductions in net catalog
expenses were the primary factor in the relative improvement. The prior year
results included $1.3 million in aggregate losses related to the businesses that
were sold or disposed of in early 1998.
Net interest income increased to $2.7 million for the three months ended
September 30, 1998 compared to $1.4 million for the same period last year. The
increase was due primarily to the higher level of cash and cash equivalents
available for investment in the three months ended September 30, 1998.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
Net sales increased $73.0 million or 4.7% to $1,625.0 million in the nine months
ended September 30, 1998 compared to $1,552.0 million in the nine months ended
September 30, 1997. This increase in net sales was primarily attributable to
continued growth in the Wintel business which increased approximately 18%. The
worldwide Mac business declined approximately 15%. The Mac business represented
approximately 34% of net sales, compared to approximately 42% in the same period
last year. Worldwide average order value increased 4.9% to $522 while worldwide
catalog circulation declined 5.5% to 87.9 million. Excluding sales from
webauction.com, worldwide average order value was $544.
Domestic sales increased 8.2% to $1,176.3 million while international sales
declined 3.4% to $448.7 million. Excluding the results of the small
Mac-dependent businesses that were disposed of or sold in early 1998,
international sales were up 6.2%, and, on a currency-adjusted basis, 8.8%
compared to the same period last year. Internet-related sales increased to
approximately $122.0 million for the nine months ended September 30, 1998
compared to $27.0 million during the nine months ended September 30, 1997.
The gross profit margin for the nine months decreased as a percentage of sales
to 16.1% in 1998 compared to 16.6% during the same period last year. The
percentage decline in gross profit margin in 1998 is principally attributable to
a decline in margins for software products and the impact of lower margins in
the Company's webauction.com business unit.
Selling, general and administrative expenses decreased 4.6% to $214.7 million
for the nine months ended September 30, 1998 compared to $225.0 million for the
same period in 1997 and declined as a percentage of net sales to 13.2% from
14.5%. The percentage decrease was principally due to savings from the disposal
and restructuring of certain international businesses, lower insurance and legal
costs and lower net advertising costs which decreased to 0.9% of net sales
compared to 1.4% of net sales during the same period last year. These savings
were partially offset by an
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increase in compensation costs for the domestic sales force, Year 2000 readiness
costs of $1.3 million and higher recruiting and training expenses.
Excluding the pre-tax charges of $14.0 million in 1998 and $20.7 million in 1997
for the settlement of shareholder and derivative litigation, operating income
for the nine months ended September 30, 1998 was $47.7 million as compared to
$32.8 million for the same period last year. International operations during the
nine months ended September 30, 1998 had operating income of $4.5 million
compared to a loss of $3.7 million in the same period last year. Reductions in
net catalog expenses were the primary factor in the improved international
operating profit. The prior year results included $3.6 million in aggregate
losses related to the businesses that were sold or disposed of in early 1998.
Net interest income increased to $6.4 million for the nine months ended
September 30, 1998 compared to $4.0 million for the same period in 1997. The
increase was due primarily to the higher level of cash and cash equivalents
available for investment.
The Company's effective income tax rate was 58.6% for the nine months ended
September 30, 1998 compared to 47.1% for the same period in 1997. The increase
in the effective tax rate resulted primarily from the provision for settlement
of the Inmac Corp. shareholder litigation since the settlement is not deductible
for tax purposes. The $19 million pre-tax charge for the settlement was recorded
net of a $5 million contribution from a non-affiliated source. Excluding the net
after tax charges of $15.8 million in 1998 and $12.7 million in 1997 for the
settlement of shareholder and derivative litigation, the effective income tax
rate for the nine months ended September 30, 1998 and 1997 was 40.0% and 43.0%,
respectively.
Liquidity and Capital Resources
At September 30, 1998, the Company had cash and short-term investments totaling
$176.4 million compared to $78.9 million at December 31, 1997 while all of the
$12.6 million of short-term borrowings outstanding at December 31, 1997 were
paid off. In connection with the shareholder and derivative litigation
settlements, the Company paid $32.6 million during the third quarter. The
increase in cash and short-term investments was due primarily to improved
inventory management as inventories decreased to $114.0 million at September 30,
1998 compared to $170.5 million at December 31, 1997. Inventory turns for the
three months ended September 30, 1998 were 17 compared to 12 for the three
months ended December 31, 1997. Accounts receivable increased slightly to $219.8
million at September 30, 1998 compared to $217.5 million at December 31, 1997.
Days sales outstanding remained stable at 45 days. Accounts payable increased to
$203.7 million at September 30, 1998 compared to $168.9 million at December 31,
1997. Overall, operations generated cash of $122.3 million during the nine
months ended September 30, 1998. Working capital increased $28.2 million or
10.7% to $290.7 million, compared to $262.4 at December 31, 1997.
Capital expenditures for the nine months ended September 30, 1998 were $12.6
million, primarily for computer software and equipment and leasehold
improvements. During the quarter construction commenced on the Company's new
230,000 sq. ft. warehouse facility at the Airborne Express hub in Wilmington,
Ohio. The Company anticipates spending approximately $12-15 million for
equipment, fixtures and computer systems for the new warehouse during the next
twelve months. The Company has executed a 10-year lease of this facility to
commence upon completion of construction, which is anticipated to occur during
the first half of 1999. In addition, the Company expects to invest approximately
$25 million in the upgrade or replacement of its worldwide computer systems
during the next twelve months. This investment is intended to improve and create
efficiencies in many business areas including sales, warehouse, inventory and
financial management. In addition to these improvements, the implementation of
these upgrades or new systems will address certain "Year 2000 readiness" issues.
The upgrades of the Company's primary domestic operating system has begun and a
new domestic accounting system was successfully installed in November, 1998.
These investments in systems and the expenditures related to the new warehouse
will be funded from operating cash flows.
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<PAGE>
At September 30, 1998, the Company had a multi-currency revolving credit
facility of $61.7 million which reduces by $6.7 million on December 31, 1998.
This facility expires on June 30, 1999. The facility is available for general
corporate and working capital purposes for the Company's domestic operations and
certain of the Company's foreign subsidiaries. At September 30, 1998, there were
no borrowings under this facility. Additionally, at September 30, 1998 the
Company had unused lines of credit in the United Kingdom and France which
provide for unsecured borrowings up to 2.0 million British pounds and 45 million
French francs ($3.4 million and $8.0 million at September 30, 1998 exchange
rates, respectively) for working capital purposes.
The Company is utilizing forward exchange contracts to manage exposure to
foreign currency risk related to intercompany loans and investments in its
foreign subsidiaries. Outstanding agreements involve the exchange of one
currency for another at a fixed rate. The Company's credit exposure is limited
to the replacement cost, if any, of the instruments; the Company enters into
such agreements with only highly-rated counterparties. The Company matches the
term and notional amount of the contracts to the underlying intercompany loans
or investments and does not enter into forward exchange contracts for trading or
speculative purposes. At September 30, 1998 the Company had outstanding forward
exchange contracts in notional amounts of $12.7 million which mature in three
months or less. The largest currencies represented are the French franc and
Dutch guilder.
In June 1998, the Board of Directors authorized a program for the purchase of up
to $10.0 million of its common stock. As of September 30 the Company purchased
277,000 shares representing 0.8% of the Company's outstanding common stock at
December 31, 1997 at a cost of $4.7 million. In connection with the settlement
of the Inmac Corp. shareholder litigation, 277,457 shares were issued.
The Company believes that its existing cash reserves, cash flow from operations
and existing credit facilities will be sufficient to satisfy its cash needs for
at least the next 12 months.
Year 2000 Readiness
The Company uses a significant number of computer software programs and
operating systems in its internal operations, including applications used in
financial business systems and various administrative functions that will be
affected by the Year 2000 ("Y2K") problem common to most businesses. If these
systems are unable to properly recognize date sensitive information related to
the year 2000 they could generate erroneous data or fail to operate. This in
turn may cause disruptions of operations, including, among other things, a
temporary inability to process transactions, send invoices or engage in similar
normal business activities.
The Company's Year 2000 Readiness Programs
To reduce the possibility of significant interruptions in normal operations the
Company has initiated a worldwide Y2K readiness program. The Company is
utilizing both internal and external resources in its Y2K program. The Company
has named a Y2K Director, established a project office and formed a
cross-functional task force to coordinate this program on a worldwide basis.
During the first quarter of 1998 the Company began a comprehensive review of its
existing information systems to determine which of its computer equipment and
software might not function properly with respect to dates referencing the Year
2000 and thereafter. The review included systems commonly thought of as
information technology ("IT") systems, including accounting, data processing and
other miscellaneous systems, as well as systems not commonly thought of as IT
systems such as alarm systems, fax machines and other similar systems. As a
result of this review the Company determined that certain of these systems will
require modification or replacement and has developed a plan to address this
issue.
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<PAGE>
The Company has begun the process of modifying or replacing systems that were
identified as not being Y2K ready. In addition to the planned upgrades described
in Liquidity and Capital Resources, the Company identified the need for
and has begun making modifications to certain of its worldwide systems in
connection with the Y2K program. The Company estimates that it is currently 30%
complete with respect to the modification or replacement of its worldwide
systems and is on schedule for completion of implementation by June 30, 1999 and
final integration testing in the third quarter of 1999.
During the second quarter of 1998 the Company established a program for
determining the Y2K readiness of its vendors, service providers and major
customers and the compatibility of systems interfaces for electronic business
transactions. In this regard, the Company has identified its significant
business partners and has begun the process of communicating with them to
determine the status of their Y2K readiness. The Company will develop a
remediation plan based on the results of the initial communications.
Cost of Y2K Readiness Programs
Charges related to the identification, assessment, remediation and testing
efforts related to the Y2K program are expected to be approximately $7.5
million. This amount is not included in the $25 million the Company expects to
invest in the planned upgrade of its worldwide computer systems during the next
twelve months. As of September 30, 1998, the Company had incurred costs of
approximately $1.3 million primarily for outside consulting fees and internal
payroll expense related to the planning and analysis activities of the Y2K
program. The Company expects that pre-tax Y2K expenses over the next twelve
months will be approximately $6.2 million or $0.03 per share per quarter.
Risks Associated With Y2K Issues
Failure by the Company or its business partners to address adequately their Y2K
issues in a timely manner could impede the Company's ability to process
transactions and have a direct and material impact on its ability to generate
revenue and to attract and retain customers in the future. This in turn could
have a material impact on the Company's business, financial condition and
results of operations.
Among the factors that could cause the Company's efforts to be less than fully
effective are the novelty and complexity of these issues and their solutions and
the Company's dependence on the technical skills of employees and independent
contractors and on the representations and preparedness of third parties.
Moreover, Y2K issues present a number of risks that are beyond the Company's
control. These include the failure of vendors or common carriers to deliver
merchandise to the Company or its customers, the failure of utility companies to
deliver electricity, the failure of telecommunications companies to provide
voice and data services, the failure of financial institutions to process
transactions and transfer funds and the collateral effects on the Company of the
effects of Y2K issues on the economy in general or on the Company's business
partners and customers in particular.
In addition, variability of definitions of "compliance with Y2K" and the myriad
of computer products sold by the Company that may themselves contain a Y2K
problem may lead to claims against the Company, including those arising out of
the failure of such products to be "compliant". The Company will rely upon the
warranties of the product manufacturers in case of any such claims but the
Company has received no assurance that such warranties will be sufficient to
cover the costs and expenses of any successful claims.
Contingency Plans
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<PAGE>
The Company intends to develop contingency plans to mitigate to the extent
possible any significant identified Y2K risks. The Company has begun a
comprehensive analysis of the nature and extent of operational problems that
would be reasonably likely to result from the failure by the Company or its
business partners to complete their Y2K readiness efforts. This analysis will
provide the information necessary to develop a contingency plan for dealing with
the most likely worst case scenario. The Company expects to complete such
analysis and contingency planning during the second quarter of 1999.
European Monetary Union
On January 1, 1999 certain member countries of the European Community will
establish the Euro, a new common currency, by fixing exchange rates between
their national currencies and the Euro. On January 1, 2002 Euro coins and notes
are scheduled to be introduced while national currency coins and notes are
scheduled to be withdrawn from circulation by July 1, 2002. During this three
year transition period goods and services may be purchased with the Euro or
national currency. After the transition period transactions in both the
wholesale and retail marketplace are expected to be conducted in the Euro.
The immediate expected impact of the common currency on certain of the Company's
European businesses is the requirement to process customer orders in both
national currencies and the Euro. The Company has performed an analysis to
determine the requirements to upgrade various computer systems to manage its
business in a dual currency environment. These upgrades are currently being
developed and are expected to be implemented in the first quarter of 1999. Until
such time, the Company will utilize manual processes for those customers who
require the Company to transact business in the Euro. The Company does not
expect these manual processes to result in any significant disruption to the
Company's European businesses. The Company's estimates for the cost of the
computer systems upgrade are not expected to be material, though there can be no
assurance in this regard.
The Company's existing multi-currency revolving credit agreement contemplates
borrowing in the Euro. The Company's foreign exchange exposures are not expected
to be materially altered by the introduction of the Euro.
Outlook
The Company depends in large part on sales of hardware and software products for
users of Apple Macintosh computers. These products represented approximately 33%
of the Company's net sales for the quarter ended September 30, 1998. Apple has
significantly restricted the number of authorized resellers of its products and
sells certain products to end-users in direct competition with the Company and
other resellers. In addition, certain Wintel manufacturers who are suppliers to
the Company including Compaq Computer Corp. have recently expanded their direct
sales efforts. The continuing impact of these matters may adversely affect the
Company's business, financial condition and results of operations.
The Company acquires Wintel products for resale both directly from manufacturers
and indirectly through distributors and other sources. Many of these
manufacturers and distributors have historically provided the Company with
incentives in the form of supplier reimbursements, price protection payments,
rebates and other similar arrangements. The increasingly competitive environment
between and amongst computer hardware manufacturers has already resulted in
reduction and/or elimination of some of these incentive programs. Additionally,
the return rights historically offered by manufacturers have become more
limited. Manufacturers are also taking steps to reduce their inventory exposure
by supporting "build to order" programs in which distributors and resellers are
being authorized to directly manufacture computer hardware. This trend is part
of an overall effort by manufacturers to reduce their costs and shift the burden
of inventory risk to resellers like the
15
<PAGE>
Company, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company has embarked on a program to expand its telemarketing sales force
and believes that its future success depends, in part, on its ability to
recruit, train and retain an adequate number of skilled sales associates.
The Company is in the process of replacing or modifying substantially all of its
significant operating and financial systems. The Company believes that its
future success is dependent upon the successful integration of these systems in
a timely fashion.
Information Concerning Forward-Looking Statements
With the exception of the historical information contained in this report, the
matters described herein contain forward-looking statements that involve risk
and uncertainties including but not limited to economic, competitive,
governmental, technological and litigation factors outside of the control of the
Company. These factors more specifically include: uncertainties attributable to
Internet commerce generally; risks associated with systems capacity restraints;
uncertainties surrounding the demand for and supply of products manufactured by
and compatible with those of Apple products; competition from other catalog,
retail store, on-line and other resellers of computer products and certain
manufacturers; issues surrounding the Company's European businesses;
uncertainties relating to the "Year 2000 issue" and specifically, the Company's
and its business partner's Y2K readiness initiatives; uncertainties relating to
the January 1999 conversion to a single European currency (the Euro); and the
ultimate outcome of the SEC formal investigation brought in connection with the
Company's reported accounting errors. These and other factors are described
generally in the Management's Discussion and Analysis of Financial Condition and
Results of Operations section of the Company's 1997 Annual Report to
Stockholders and most specifically in the paragraphs in that section captioned
"Liquidity and Capital Resources," "Impact of Inflation and Seasonality," and
"Outlook" and in the Company's Form 10-Q for the quarter ended June 30, 1998 and
the "Risk Factors" in the Company's Form S-3 filed July 22, 1998. In addition,
the statements contained herein relating to the costs of the Company's Y2K
readiness efforts and the dates on which the Company believes it will complete
such efforts are forward looking statements which were based upon numerous
assumptions regarding future events, including the continued availability of
certain resources, third-party remediation plans and other factors. There can be
no assurance that the facts underlying these assumptions will prove to be
accurate and actual results could differ materially from those currently
anticipated. Forward-looking statements are typically identified by the works
"believe," "expect," "anticipate," "intend," "estimate," and similar
expressions. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their dates.
16
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Part II - OTHER INFORMATION
Item 1. Legal Proceedings
The information required by this item appears in Note 14 to Notes to
Consolidated Financial Statement on page 40 of the Company's 1997 Annual
Report to Stockholders, Item 1 of Part II of the Company's Form 10-Q for
the quarter ended June 30, 1998 and the section captioned "Litigation" in
the Company's Form S-3 filed July 22, 1998, all of which information is
incorporated herein by reference. Additionally, the Company has settled
with and paid to the State Board of Administration of Florida $150,000 in
satisfaction of its claims arising out of the Restatement.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of Micro Warehouse, Inc. was held on June 4,
1998. At that meeting, the stockholders elected the following individuals to
serve as members of the Board of Directors in accordance with the votes
indicated below:
NAME FOR ABSTAIN
Felix Dennis 31,048,551 95,677
Frederick H. Fruitman 31,048,578 95,650
Peter Godfrey 31,046,547 97,681
Joseph M. Walsh 31,048,578 95,650
Additionally, the Stockholders ratified the appointment of KPMG Peat Marwick LLP
as the Company's independent auditors for the fiscal year ending December 31,
1998. The results were as follows:
FOR 31,108,133 AGAINST 25,001 ABSTAIN 11,094
Item 5. Other Information
On October 19, 1998 the Company and Stephen F. England, the Company's
Executive Vice President, Sales, entered into a Severance Agreement and
General Release pursuant to which Mr. England agreed to resign as an
officer of the Company effective December 31, 1998. Pending the effective
date of his resignation, Mr. England has ceased active duties with the
Company.
Jeffrey Sheahan, the Company's Senior Vice President, President of its
European operations and General Manager of its U.K. subsidiary, resigned
effective October 9, 1998. Adam Shaffer, the Company's Executive Vice
President, Marketing, Advertising and Purchasing, will provide executive
oversight to the Company's European subsidiaries and will serve as interim
General Manager of the Company's U.K. subsidiary.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10 Severance Agreement and General Release, dated October 19,
1998, between Stephen F. England and the Company.
Exhibit 11 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Exhibit 27 FINANCIAL DATA SCHEDULE
(b) Reports on Form 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICRO WAREHOUSE, INC.
The Registrant
Date: November 16, 1998 By /s/ Wayne P. Garten
---------------------------------
WAYNE P. GARTEN
Executive Vice President
and Chief Financial Officer
(Duly Authorized Officer of the
Registrant and Principal
Financial Officer)
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<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
10 Severance Agreement and General Release, dated October 19, 1998, between
Stephen F. England and the Company
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
SEVERANCE AGREEMENT AND GENERAL RELEASE
This is an Agreement, dated as of October 19, 1998, between Stephen F.
England (the "Employee") and Micro Warehouse, Inc. (the "Company").
WHEREAS, the Company has urged the Employee to remain in its employ,
WHEREAS, the Employee has decided that he wishes to leave the employ of
the Company,
WHEREAS, the Employee and the Company intend the terms and conditions of
this Agreement to govern all issues related to the Employee's employment and
resignation from the Company,
WHEREAS, the Employee has had at least 21 days to consider a draft of this
Agreement, and
WHEREAS, the Employee has been advised to consult with an attorney before
signing this Agreement,
NOW THEREFORE, in consideration of these premises, the Employee and the
Company agree as follows:
1. Resignation: The Employee shall resign as Executive Vice President
of Sales of the Company and from all other positions with the
Company and its subsidiaries and affiliated companies, effective
December 31, 1998 (the "Termination Date"). The Employee shall have
no further duties or responsibilities with respect to the Company or
his employment after the Effective Date (as defined below), except
as expressly set forth herein.
2. Payment:
a. The Company shall continue to pay the Employee his base salary of
$250,000 annually ("Base Salary") through December 31, 2000.
Commencing January 1, 1999, the Base Salary to be paid to the
Employee during each year shall be increased by any increase in the
cost of living determined in accordance with the formula set forth
in subparagraphs (i), (ii) and (iii) hereinbelow.
i. For the purposes of this paragraph 2, the following
definition shall apply:
<PAGE>
1. The term "Base Year" shall mean the twelve-month period
commencing on January 1, 1998 and terminating on December 31,
1998. The term "Second Year" shall mean the twelve-month
period commencing on January 1, 1999 and terminating on
December 31, 1999. The term "Third Year" shall mean the
twelve-month period commencing on January 1, 2000 and
terminating on December 31, 2000.
2. The term "Price Index" shall mean the average of the
monthly "Consumer Price Index" published by the Bureau of
Labor Statistics of the U.S. Department of Labor, New York,
Northern New Jersey, Long Island, New York-New
Jersey-Connecticut, for urban wage earners and clerical
workers, or a successor or substitute index appropriately
adjusted ("Consumer Price Index"), for each month of any given
twelve-month period.
ii. Effective as of each of January 1 of 1999 and 2000, there
shall be a cost of living adjustment to the Base Salary
applicable for the succeeding twelve-month period. The
adjustment shall be based on the percentage difference between
the Price Index for the Second Year and the Price Index for
the Base Year, with respect to the adjustment to be made on
January 1, 1999; and the Price Index for the Third Year and
the Price Index for the Base Year, with respect to the
adjustment to be made on January 1, 2000.
In the event that the Price Index for the Second Year reflects
an increase over the Price Index for the Base Year, the Base
Salary originally herein provided to be paid shall be
multiplied by the percentage difference between the Price
Index for the Second Year and the Price Index for the Base
Year, and the resulting sum shall be added to such original
Base Salary, effective on January 1, 1999. Said adjusted Base
Salary shall thereafter be payable hereunder until it is
readjusted pursuant to the terms of this paragraph 2 as of
January 1, 2000. In the event that the Price Index for the
Third Year reflects an increase over the Price Index for the
Base Year, the Base Salary originally herein provided to be
paid (unchanged by any adjustment made pursuant to the
immediately preceding sentence) shall be multiplied by the
percentage difference between the Price Index for the Third
Year, and the Price Index for the Base Year, and the resulting
sums shall be added to such original Base Salary, effective on
January 1, 2000.
In the event that the Price Index ceases to use 1982-1984 =
100 as the basis of calculation, or if a substantial change is
made in the terms or
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<PAGE>
number of items contained in the Price Index, then the Price
Index shall be adjusted to the figure that would have been
arrived at had the manner of computing the Price Index in
effect at the date of this Agreement not been altered. In the
event such Price Index (or a successor or substitute index) is
not available, a reliable governmental or other non-partisan
publication evaluating the information theretofore used in
determining the Price Index shall be used.
iii. In no event shall the Employee's Base Salary provided
herein, as the same may be increased from time to time
pursuant to this paragraph 2, be reduced by virtue of this
paragraph 2.
b. The Employee shall receive payments at such intervals each year
as salary payments are made to other executive officers of the
Company. Deductions will be made from such payments for statutorily
mandated federal, state and local withholding and other applicable
taxes.
3. Incentive Compensation: In addition to Base Salary, the Employee
shall receive incentive compensation through December 31, 1998
("Incentive Compensation"). The amount of Incentive Compensation to
be paid to the Employee will be calculated pursuant to the Incentive
Plan established for executive officers for 1998, which is attached
hereto as Exhibit A, as the same may be adjusted from time to time.
The amount of Incentive Compensation shall not exceed One Hundred
Percent (100%) of Base Salary. The Incentive Plan sets forth a
target bonus amount, which amount for calendar 1998 shall be One
Hundred Twenty-Five Thousand Dollars ($125,000) (hereinafter the
"Target Bonus Amount"). One Hundred Percent (100%) of that amount
shall be payable for accomplishing One Hundred Percent (100%) of
targets in 1998. The actual amount, if any, of Incentive
Compensation to which the Employee may be entitled shall range on a
linear basis from Fifty Percent (50%) of Target Bonus Amount if
Eighty Percent (80%) of Targets are achieved to a maximum of Two
Hundred Percent (200%) of Target Bonus Amount if One Hundred Twenty
Percent (120%) of Targets are achieved. By way of example, One
Hundred Percent (100%) of Target Bonus Amount at accomplishment of
One Hundred Percent (100%) of Targets shall be One Hundred
Twenty-Five Thousand Dollars ($125,000). If the Company achieves
Eighty Percent (80%) of Targets, Target Bonus Amount shall be
Sixty-Two Thousand Five Hundred Dollars ($62,500) (i.e., .5 x
$125,000), which shall be automatically due and payable to the
Employee. By way of further example, if the Company achieves One
Hundred Ten Percent (110%) of Targets, Target Bonus Amount shall be
One Hundred Eighty-Seven Thousand Five Hundred Dollars ($187,500)
(1.50 x $125,000), which shall be automatically due and payable to
the Employee. The incentive compensation shall be paid to the
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<PAGE>
Employee in a lump sum cash payment as soon as practicable after
December 31, 1998, but not later than the date other executive
officers are paid incentive compensation for 1998.
4. Target Commission Compensation: The Employee shall receive target
commission compensation through December 31, 1998. For the period
January 1, 1998 through December 31, 1998, the Employee shall
receive $100,000 in target commission compensation, due and payable
to the Employee upon execution of this Agreement.
5. Mitigation: The Employee is under no obligation to seek other
employment opportunities during any period between the date of this
Agreement and the December 31, 2000 expiration of this Agreement
(the "Effective Period"), and the Employee is not obligated to
accept any other employment opportunity that may be offered to the
Employee during the Effective Period. Nothing in this Agreement,
however, shall prohibit the Employee from accepting other employment
opportunities during the Effective Period, in which event the
Employee shall continue to receive the entire amount due and owing
to him under Sections 2, 3 and 4 above and retain all his other
rights hereunder without any offset for any amount paid to the
Employee arising out of any new employment relationship.
Notwithstanding the foregoing, medical, dental, hospitalization and
life insurance and short-term disability benefits will be reduced to
the extent comparable insurance benefits are actually received by
the Employee from another employer during the Effective Period. Any
such benefits actually received by the Employee shall be reported by
the Employee to the Company.
6. Stock Options: The Employee's outstanding stock options are set
forth on Exhibit B attached hereto. All stock options granted to the
Employee by the Company shall continue to vest according to their
terms until December 31, 2000, without regard to termination of
Employee's employment. Any stock options that have not vested as of
December 31, 2000 shall lapse. Except to the extent set forth in
Section 13(c), which shall control in the event of conflict, each
outstanding stock option shall be exercisable at any time prior to
the earlier of (i) its expiration date or (ii) the later of (A) the
expiration of twelve (12) months after vesting, or (B) the
expiration of twelve (12) months after the Termination Date.
7. Business Expenses: The Company agrees to reimburse the Employee for
all reasonable and necessary expenses incurred by him in connection
with the performance of his duties for the Company. The Employee
shall submit vouchers, invoices and such other documentation in
accordance with the Company's standard policy concerning business
expenses.
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<PAGE>
8. Insurance Benefits: The Company shall continue to maintain at
Company cost medical, dental, hospitalization and life insurance and
short term disability for the Employee and his dependents through
December 31, 2000 to the extent such policies are provided generally
to the senior executives of the Company. Employee shall be
responsible for such cost-sharing, co-pays and deductibles as may be
required of other senior executives. If and to the extent Employee
is unable to participate in any such benefits, the Company shall at
its cost obtain comparable benefits for Employee.
9. Insurance Assignment: The Company owns the insurance policies on the
life of Employee attached hereto as Exhibit C. The Company shall
assign to the Employee all rights it might have in such policies,
subject to compliance with any requirements imposed by the insurance
company.
10. Retirement Plan: The Company shall make matching contributions to
the Employee's 401(k) plan through December 31, 2000, according to
the prevailing practice for senior executives.
11. Other Benefits: The Company shall continue all other benefits
received by the Employee through December 31, 1998. In addition, the
Company agrees:
a. to assume all liability for the New Jersey rental home located at
362 Cheryl Drive, Toms River, New Jersey, including but not limited
to all rental payments and any risk of loss; and
b. to convey to Employee, without further consideration, all of its
right, title and interest in and to the computer and peripheral
equipment used by Employee, together with software as permitted by
the applicable licensing agreements.
12. Relocation Payments. Employee shall be entitled to reimbursement of
reasonable relocation expenses (including without limitation
brokerage commissions) of up to Fifteen Thousand Dollars ($15,000)
if he accepts a new position out of the area, but only to the extent
such expenses are not covered by his new employer. Any such payment
shall be subject to applicable withholding requirements.
13. Change in Control.
a. Definitions. For purposes of this Agreement, Change in Control
means the occurrence during the Effective Period of any of the
following events, subject to the provisions of paragraph 13(b)
hereof:
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<PAGE>
i. All or substantially all of the assets of the Company are
sold or transferred to another corporation or entity, or the
Company is merged, consolidated or reorganized into or with
another corporation or entity, with the result that upon
conclusion of the transaction less than Fifty-One Percent
(51%) of the outstanding securities entitled to vote generally
in the election of directors or other capital interests of the
acquiring corporation or entity are owned directly or
indirectly, by the shareholders of the Company generally prior
to the transaction; or
ii. There is a report filed on Schedule 13D or Schedule 14D-1
(or any successor schedule, form or report), each as
promulgated pursuant to the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), disclosing that any person
(as the term "person" is used in Section 13(d)(3) or Section
14(d)(2) of the Exchange Act) has become the beneficial owner
(as the term "beneficial owner" is defined under Rule 13d-3 or
any successor rule or regulation promulgated under the
Exchange Act (a "Beneficial Owner")) of securities
representing Twenty Percent (20%) or more of the combined
voting power of the then-outstanding voting securities of the
Company; or
iii. The Company shall file a report or proxy statement with
the Securities and Exchange Commission pursuant to the
Exchange Act disclosing in response to Item 1 of Form 8-K
thereunder or Schedule 14A (or any successor schedule, form or
report or item therein) that a change in control of the
Company has or may have occurred or will or may occur in the
future pursuant to any then-existing contract or transaction;
or
iv. The individuals who, at the beginning of any period of two
(2) consecutive calendar years, constituted the directors of
the Company cease for any reason to constitute at least a
majority thereof unless the nomination for election by the
Company's stockholders of each new director of the Company was
approved by a vote of at least two-thirds (2/3) of the
directors of the Company still in office who were directors of
the Company at the beginning of any such period; or
v. The Board of Directors determines that (A) any particular
actual or proposed merger, consolidation, reorganization, sale
or transfer of assets, accumulation of shares or tender offer
for shares of the Company or other transaction or event or
series of transactions or events will, or is likely to, if
carried out, result in a Change in Control falling within
paragraph 13(a)(i), (ii), (iii) or (iv), and (B) it is in the
best interests of the Company and its shareholders, and will
serve the intended purposes of this
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<PAGE>
Agreement, if this Agreement shall thereupon become
immediately operative with respect to the provisions of this
paragraph 13 regarding Change in Control
b. Exceptions. Notwithstanding the foregoing provisions of this
paragraph 13:
i. If any such merger, consolidation, reorganization, sale or
transfer of assets, or tender offer or other transaction or
event or series of transactions or events mentioned in
paragraph (13)(a)(v) shall be abandoned, or any such
accumulations of shares shall be dispersed or otherwise
resolved, the Board of Directors may, by notice to the
Employee, nullify the effect thereof and reinstate this
Agreement as previously in effect, but without prejudice to
any action that may have been taken prior to such
nullification.
ii. Unless otherwise determined in a specific case by the
Board of Directors, a "Change in Control" shall not be deemed
to have occurred for purposes of paragraph 13(a)(ii) or (iii)
solely because (X) the Company, (Y) a subsidiary of the
Company, or (Z) any Company-sponsored employee stock ownership
plan or any other employee benefit plan of the Company or any
subsidiary either files or becomes obligated to file a report
or a proxy statement under or in response to Schedule 13D,
Schedule 14D-1, Form 8-K or Schedule 14A (or any successor
schedule, form or report or item therein) under the Exchange
Act disclosing Beneficial Ownership by it of shares of the
then-outstanding voting securities of the Company, whether in
excess of Twenty Percent (20%) or otherwise, or because the
Company reports that a change in control of the Company has
occurred or will occur in the future by reason of such
beneficial ownership.
c. Vesting Upon Change in Control. In the event that a Change in
Control occurs during the Effective Period, except as provided
herein, those of the 100,000 options granted to Employee in
February, 1998 that have not yet vested shall become accelerated and
immediately fully vested and exercisable, at any time prior to the
expiration date of such options, as specified in the applicable
stock option plan, or the expiration of twelve (12) months after the
date of acceleration, whichever is the longer period; provided,
however, that for purposes of this paragraph 13(c), no such options
will become vested and exercisable subsequent to the expiration date
of the options as specified in the applicable Stock Option Plan. If
(i) a Change in Control involves any combination of the Company with
any other entity, and (ii) the Company and such entity desire to
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account for such combination under the pooling-of-interests method
for financial statement purposes ("Pooling"), and (iii) the sole
reason that Pooling would be unavailable to the Company and such
entity is, in the opinion of the Company's independent accountants,
the acceleration of vesting of options provided for in this
paragraph 13(c), then this paragraph 13(c) shall be void.
14. Certain Additional Payments by the Company.
a. Anything in this Agreement to the contrary notwithstanding, in
the event that it shall be determined (as hereafter provided) that
any payment or distribution by the Company or any of its affiliates
to or for the benefit of the Employee, whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement
or otherwise pursuant to or by reason of any other agreement,
policy, plan, program or arrangement, including without limitation
any stock option, performance share, performance unit, stock
appreciation right or similar right, or the lapse or termination of
any restriction on, or the vesting or exercisability of, any of the
foregoing (a "Payment"), would be subject to the excise tax imposed
by Section 4999 of the Internal Revenue Code of 1986, as amended
(the "Code") (or any successor provision thereto) by reason of being
considered "contingent on a change in ownership or control" of the
Company, within the meaning of Section 280G of the Code (or any
successor provision thereto) or to any similar tax imposed by state
or local law, or any interest or penalties with respect to such tax
(such tax or taxes, together with any such interest and penalties,
being hereafter collectively referred to as the "Excise Tax"), then
the Employee shall be entitled to receive an additional payment or
payments (collectively, a "Gross-Up Payment"). The Gross-Up Payment
shall be in an amount such that, after payment by the Employee of
all taxes (including any interest or penalties imposed with respect
to such taxes), including any Excise Tax imposed upon the Gross-Up
Payment, the Employee retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payment.
b. Subject to the provisions of paragraph 14(f), all determinations
required to be made under this paragraph 14, including whether an
Excise Tax is payable by the Employee and the amount of such Excise
Tax and whether a Gross-Up Payment is required to be paid by the
Company to the Employee and the amount of such Gross-Up Payment, if
any, shall be made by a nationally recognized accounting firm (the
"Accounting Firm") selected by the Employee in his sole discretion.
The Employee shall direct the Accounting Firm to submit its
determination and detailed supporting calculations to both the
Company and the Employee within thirty (30) calendar days after the
Termination Date, if applicable, and any such other time or times as
may be requested by the Company or the Employee. If the Accounting
Firm determines that any Excise Tax is
-8-
<PAGE>
payable by the Employee, the Company shall pay the required Gross-Up
Payment to the Employee within five (5) business days after receipt
of such determination and calculations with respect to any Payment
to the Employee. If the Accounting Firm determines that no Excise
Tax is payable by the Employee, it shall, at the same time as it
makes such determination, furnish the Company and the Employee an
opinion that the Employee has substantial authority not to report
any Excise Tax on his federal, state or local income or other tax
return. As a result of the uncertainty in the application of Section
4999 of the Code (or any successor provision thereto) and the
possibility of similar uncertainty regarding applicable state or
local tax law at the time of any determination by the Accounting
Firm hereunder, it is possible that Gross-Up Payments which will not
have been made by the Company should have been made (an
"Underpayment"), consistent with the calculations required to
be-made hereunder. In the event that the Company exhausts or fails
to pursue its remedies pursuant to paragraph 14(f) and the Employee
thereafter is required to make a payment of any Excise Tax, the
Employee shall direct the Accounting Firm to determine the amount of
the Underpayment that has occurred and to submit its determination
and detailed supporting calculations to both the Company and the
Employee as promptly as possible. Any such Underpayment shall be
promptly paid by the Company to, or for the benefit of; the Employee
within five (5) business days after receipt of such determination
and calculations.
c. The Company and the Employee shall each provide the Accounting
Firm access to and copies of any books, records and documents in the
possession of the Company or the Employee, as the case may be,
reasonably requested by the Accounting Firm, and otherwise cooperate
with the Accounting Firm in connection with the preparation and
issuance of the determinations and calculations contemplated by
paragraph 14(b). Any determination by the Accounting Firm as to the
amount of the Gross-Up Payment shall be binding upon the Company and
the Employee.
d. The federal, state and local income or other tax returns filed by
the Employee shall be prepared and filed on a consistent basis with
the determination of the Accounting Firm with respect to the Excise
Tax payable by the Employee. The Employee shall make proper payment
of the amount of any Excise Payment, and at the request of the
Company, provide to the Company true and correct copies (with any
amendments) of his federal income tax return as filed with the
Internal Revenue Service and corresponding state and local tax
returns, if relevant, as filed with the applicable taxing authority,
and such other documents reasonably requested by the Company,
evidencing such payment. If prior to the filing of the Employee's
federal income tax return, or corresponding state or local tax
return, if relevant, the Accounting Firm determines that the amount
of the
-9-
<PAGE>
Gross-Up Payment should be reduced, the Employee shall within five
(5) business days pay to the Company the amount of such reduction.
e. The fees and expenses of the Accounting Firm for its services in
connection with the determinations and calculations contemplated by
paragraph 14(b) shall be borne by the Company. If such fees and
expenses are initially paid by the Employee, the Company shall
reimburse the Employee the full amount of such fees and expenses
within five (5) business days after receipt from the Employee of a
statement therefor and reasonable evidence of his payment thereof.
f. The Employee shall notify the Company in writing of any claim by
the Internal Revenue Service or any other taxing authority that, if
successful, would require the payment by the Company of a Gross-Up
Payment. Such notification shall be given as promptly as practicable
but no later than ten (10) business days after the Employee actually
receives notice of such claim and the Employee shall further apprise
the Company of the nature of such claim and the date on which such
claim is requested to be paid (in each case, to the extent known by
the Employee). The Employee shall not pay such claim prior to the
earlier of (I) the expiration of the thirty (30) calendar-day period
following the date on which he gives such notice to the Company and
(ii) the date that any payment of amount with respect to such claim
is due. If the Company notifies the Employee in writing prior to the
expiration of such period that it desires to contest such claim, the
Employee shall:
i. provide the Company with any written records or documents
in his possession relating to such claim reasonably requested
by the Company;
ii. take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time
to time, including without limitation accepting legal
representation with respect to such claim by an attorney
competent in respect of the subject matter and reasonably
selected by the Company;
iii. cooperate with the Company in good faith in order
effectively to contest such claim; and
iv. permit the Company to participate in any proceedings
relating to such claim; provided, however, that the Company
shall bear and pay directly all costs and expenses (including
interest and penalties) incurred in connection with such
contest and shall indemnify and hold harmless the Employee, on
an after-tax basis, for and against any Excise Tax or income
tax, including interest and penalties with respect thereto,
imposed as a
-10-
<PAGE>
result of such representation and payment of costs and
expenses. Without limiting the foregoing provisions of this
paragraph 14(f), the Company shall control all proceedings
taken in connection with the contest of any claim contemplated
by this paragraph 14(f) and, at its sole option, may pursue or
forego any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in respect
of such claim (provided, however, that the Employee may
participate therein at his own cost and expense) and may, at
its option, either direct the Employee to pay the tax claimed
and sue for a refund or contest the claim in any permissible
manner, and the Employee agrees to prosecute such contest to a
determination before any administrative tribunal, in a court
of initial jurisdiction and in one or more appellate courts,
as the Company shall determine; provided, however, that if the
Company directs the Employee to pay the tax claimed and sue
for a refund, the Company shall advance the amount of such
payment to the Employee on an interest-free basis and shall
indemnify and hold the Employee harmless, on an after-tax
basis, from any Excise Tax or income or other tax, including
interest or penalties with respect thereto, imposed with
respect to such advance; and provided further, however, that
any extension of the statute of limitations relating to
payment of taxes for the taxable year of the Employee with
respect to which the contested amount is claimed to be due is
limited solely to such contested amount. Furthermore, the
Company's control of any such contested claim shall be limited
to issues with respect to which a Gross-Up Payment would be
payable hereunder and the Employee shall be entitled to settle
or contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.
g. If; after the receipt by the Employee of an amount advanced by
the Company pursuant to paragraph 14(f), the Employee receives any
refund with respect to such claim, the Employee shall (subject to
the Company's complying with the requirements of paragraph 14(f))
promptly pay to the Company the amount of such refund (together with
any interest paid or credited thereon after any taxes applicable
thereto). If; after the receipt by the Employee of an amount
advanced by the Company pursuant to paragraph 14(f), a determination
is made that the Employee shall not be entitled to any refund with
respect to such claim and the Company does not notify the Employee
in writing of its intent to contest such denial or refund prior to
the expiration of thirty (30) calendar days after such
determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of any such advance shall
offset, to the extent thereof; the amount of Gross-Up Payment
required to be paid by the Company to the Employee pursuant to this
paragraph 14.
-11-
<PAGE>
15. Confidential Information:
a. Employee acknowledges that the Company would be damaged if
Employee's knowledge with respect to the business of the Company
were disclosed to or utilized by parties other than the Company.
Accordingly, Employee covenants and agrees that he will not disclose
any presently known or hereafter acquired confidential or
proprietary information of the Company or its business to any
person, firm, corporation or other entity. For the purposes of this
paragraph, the term "confidential or proprietary information" shall
mean all information which is currently known to or hereafter
acquired by Employee and relates to such matters as customer mailing
lists, pricing and credit techniques, marketing techniques, research
and development activities, sources of product, lists of magazines
or other publications containing advertising of the Company and
other confidential or restricted information which is not in the
public domain. Confidential or proprietary information shall not be
deemed to include information released generally to the public by
the Company or others, information required by law to be disclosed
or information learned by the Employee from third parties without
restrictions on disclosure.
b. Employee shall return to the Company all confidential or
proprietary information of the Company in his possession or control.
Employee acknowledges that he has transferred to floppy disk or
other removable media and shall return to the Company any
confidential or proprietary information on the computer to be
retained by Employee.
16. Covenant Not To Compete: The Employee hereby covenants and agrees
that during the Effective Period (the "Non-Compete Period"), he
shall not, directly or indirectly, own, operate, manage, join,
control, participate in the ownership, management, operation or
control of, or be paid or employed by, or acquire any securities of,
or otherwise become associated with or provide assistance to, as an
employee, consultant, director, officer, shareholder, partner,
agent, associate, principal, representative or in any other
capacity, any business entity or activity which is directly or
indirectly a "Competitive Business" (as hereinafter defined);
provided, however, that the foregoing shall not prevent the Employee
from (i) performing services for a Competitive Business if such
Competitive Business is also engaged in other lines of business and
if the Employee's services are restricted to employment in such
other lines of business; or (ii) acquiring the securities of or an
interest in any Competitive Business, provided such ownership of
securities or interests represents at the time of such acquisition,
but including any previously held ownership interests, less than
Five Percent (5%) of any class or type of securities of, or interest
in, such Competitive Business. The term "Competitive Business" shall
mean (x) a business engaged in the marketing and
-12-
<PAGE>
sale to end users of hardware, software, peripheral and associated
products for personal computers (other than a business that may from
time to time market or sell any of the foregoing on an incidental
basis and whose sales of the foregoing in any year do not exceed
five percent (5%) of its net sales or $10 million in the aggregate)
or (y) a business principally engaged at the time of Employee's
employment in the auction sale of goods or services to end users
over the Internet. This provision shall apply regardless of where
such Competitive Business is located. Nothing in this Agreement
shall be deemed to prevent the Employee from working for a business
that provides customized software or software as an integral part of
a database or other service relationship.
17. Indemnification: The rights provided to the Employee and the Company
under the Indemnification Agreement, which is attached hereto as
Exhibit D (the "Indemnification Agreement"), shall survive the
Employee's resignation. Any right to indemnification under the
Indemnification Agreement shall survive termination of the
Employee's employment by the Company.
18. References: The Employee agrees not to disparage the Company, and
the Company agrees not to disparage the Employee. With respect to
reference requests, the Company will provide only dates of
employment and position held. Reference requests will be directed to
Peter Godfrey, chairman, only. The Company shall give written
instructions to its Executive Committee, senior vice presidents and
other officers not to discuss the Employee's employment at the
Company unless there is a business necessity to do so and to refer
all unsolicited reference requests they receive with respect to the
Employee to the chairman. Either party may disclose the text of the
non-competition provisions of this Agreement to third parties.
19. Release by Employee. The Employee and his heirs, assigns and agents
release, waive, and discharge the Company, its directors, officers,
employees, subsidiaries, affiliates and agents (the "Released
Parties") from each and every claim, action or right of any sort,
known or unknown, arising on or before the Effective Date (as
hereafter defined).
a. The foregoing release includes, but is not limited to, any claim
of discrimination on the basis of wrongful termination, constructive
discharge, discharge in violation of public policy, race, sex,
religion, marital status, sexual orientation, national origin,
handicap or disability, age, veteran status, special disabled
veteran status, citizenship status, any other claim based on a
statutory prohibition; any claim arising out of or related to an
express or implied employment contract, any other contract affecting
terms and conditions of employment, or a covenant of good faith and
fair dealing; any tort claims and any
-13-
<PAGE>
personal gain with respect to any claim arising under the qui tam
provisions of the False Claims Act, 31 U.S.C. 3730.
b. Notwithstanding anything to the contrary contained in this
Agreement, this Release does not include any claim the Employee may
have against the Company for the Company's breach of this Agreement
or the Indemnification Agreement.
c. The Employee represents that he understands the foregoing
Agreement, that rights and claims under the Age Discrimination in
Employment Act of 1967, as amended, are among the rights and claims
against the Company he is releasing, and that he understands that he
is not releasing any rights or claims arising after the Effective
Date.
20. Release by Company. The Company, releases, waives and discharges the
Employee, his heirs, successors and assigns, from each and every
claim, action or right of any sort, known or unknown, arising on or
before the Effective Date (as hereafter defined).
a. This release includes, but is not limited to, any claim of breach
of contract, breach of fiduciary duty, defamation, unjust
enrichment, any claim arising out of or related to an express or
implied employment contract, any other contract affecting terms or
conditions of employment, or a covenant of good faith and fair
dealing, and any tort claims.
b. Notwithstanding anything to the contrary contained in this
Agreement, this Release does not include any claim the Company may
have against the Employee for civil or criminal fraud in connection
with the Employee's employment, the procurement of this Agreement or
otherwise, the commitment of a crime and/or the Employee's breach of
this Agreement.
21. Covenant Not To Sue. The Employee agrees never to sue any of the
Released Parties, or cause any of the Released Parties to be sued,
regarding any matter within the scope of the release set forth in
Section 19 above. The Company agrees never to sue, or cause the
Employee to be sued, regarding any matter within the scope of the
release set forth in Section 20 above. If one party is determined by
a court of competent jurisdiction to have violated this provision by
suing or causing the other party (or Released Party) to be sued, the
party found to have violated this provision agrees to pay all costs
and expenses of defending against the suit incurred by the other
party (or Released Party), including
-14-
<PAGE>
reasonable attorneys' fees together with any damages and liabilities
to the other party (or Released Party) resulting from such suit.
22. Opportunity To Cure: This Agreement is final and binding. If the
Employee breaches any of his obligations under this Agreement, the
Company shall give him written notice of such breach and an
opportunity to cure such breach (if such breach can be cured) of
thirty (30) days, after such time if such breach remains uncured,
the Company shall have the right, among other things, to discontinue
payments to be made hereunder. All notices hereunder shall be
effective upon delivery by hand or by certified or overnight mail to
the most recent address for the Employee provided by the Employee in
writing to the general counsel of the Company. The Employee shall
provide like notice and opportunity to cure for any Company breach
hereunder by giving written notice and a ten (10) business day
opportunity to cure with respect to any breach of an obligation to
pay money or to take actions with respect to stock options hereunder
and a thirty (30) day opportunity to cure any other breach hereunder
to the general counsel, which notice shall be effective upon
delivery by hand or by certified or overnight mail to 535
Connecticut Avenue, Norwalk, Connecticut 06854, or the most recent
address for the Company provided in writing to the Employee.
This Agreement is not to be construed as an admission that the
Employee or the Company acted wrongfully in any way.
23. Confidentiality: The terms and conditions of this Agreement are
confidential and shall not be disclosed to any person other than
those who must perform tasks to effect the Agreement.
Notwithstanding the foregoing, either party may disclose any term of
this Agreement (i) to any governing authority if disclosure is
required to comply with applicable law, or (ii) to either party's
attorneys, accountants or advisors with whom a fiduciary
relationship has been established.
24. Revocation: The Employee may revoke this Agreement in writing within
seven (7) days of signing it (the "Revocation Period"). This
Agreement will not take effect until the Effective Date. If the
Employee revokes this Agreement, all of its provisions shall be void
and unenforceable. The Effective Date (the "Effective Date") of this
Agreement shall be the day after the end of the Revocation Period.
25. Attorneys' Fees: The Company agrees to pay all reasonable attorneys'
fees and costs associated with the negotiation and drafting of this
Agreement including reasonable attorneys' fees and costs of
Employee.
26. Severability: In the event that any provision or portion of this
Agreement is determined to be invalid or unenforceable for any
reason, in whole or in part, the
-15-
<PAGE>
remaining provisions of this Agreement will be unaffected thereby
and will remain in full force and effect to the fullest extent
permitted by law.
27. Modification: This Agreement constitutes the entire understanding
between the Employee and the Company. The parties have not relied on
any oral statements that are not included in this Agreement. Any
modifications to this Agreement must be in writing and signed by the
Employee and an authorized employee or agent of the Company.
28. Choice Of Law: This Agreement shall be construed, interpreted and
applied in accordance with the law of the State of Connecticut.
29. Waiver. Delay or failure of any party to insist on strict
performance or observance of any provision of this Agreement or to
exercise any rights or remedies hereunder shall not be deemed a
waiver. Any waiver shall be effective only if in writing and signed
by the waiving party.
THE PARTIES ACKNOWLEDGE THAT THEY UNDERSTAND THE ABOVE AGREEMENT INCLUDING THE
RELEASE OF ALL CLAIMS EXCEPT AS SPECIFICALLY EXCEPTED. THE PARTIES UNDERSTAND
THAT THEY ARE WAIVING UNKNOWN CLAIMS AND THEY DO SO INTENTIONALLY.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their duly authorized representatives as of the day and year first
above written.
MICRO WAREHOUSE, INC. STEPHEN F. ENGLAND
By: /s/ Peter Godfrey /s/ Stephen F. England
------------------------------ -----------------------------
Name: Peter Godfrey
Title: Chief Executive Officer
Date: October 19, 1998 Date: October 7, 1998
---------------------------- ------------------------
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<PAGE>
EXHIBIT A
Incentive Plan for the Year 1998
The Targets with respect to the 1998 Incentive Plan shall be based upon
the projected operating profit for the Company as described in the Company's
1998 Worldwide Plan dated March 13, 1998 (the "Plan"). The Plan includes a
separate projected operating profit for all U.S. operations and a separate
projected operating profit for the consolidated international operations. In
determining the Target Bonus amount, if any, 80% of said amount shall be
attributable to and based upon the Plan's projected operating profit for all
U.S. operations and 20% shall be attributable to and based upon the Plan's
projected operating profit for the consolidated international operations. With
respect to said 20%, the Target shall also be considered achieved in full if:
(i) all or a material number of the international subsidiaries are sold or
otherwise disposed of during 1998; or
(ii) the international subsidiaries on a consolidated basis have an
operating profit for the year ending December 31, 1998.
<PAGE>
STEPHEN ENGLAND EXHIBIT B
2 BERTHIER PLACE
REDGEFIELD, CT 06877
Micro Warehouse, Inc. OPTIONEE STATEMENT Run Date 07/24
As of 07/24/98 Page No.
<TABLE>
<CAPTION>
Date of Type of Grant Options Options Option Date of Options Available
Grant Granted Outstanding Price Expir. Vested For Exercise
- ------- ------------- ------- ----------- ------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
01/13/93 NON-QUAL 30,000 20,500 $9.7800 01/13/03 20,500 (Current) 20,500
06/21/93 NON-QUAL 58,000 58,000 $11.3800 06/21/03 58,000 (Current) 58,000
01/23/97 NON-QUAL 3,000 3,000 $12.6250 01/23/07 1,500 (Current) 1,500
1,500 on 07/19/99
1/23/97 NON-QUAL 20,000 20,000 $12.6250 01/23/07 4,000 (Current) 4,000
4,000 on 1/23/99
4,000 on 01/23/00
4,000 on 01/23/01
4,000 on 01/23/02
02/26/98 NON-QUAL 100,000 100,000 $13.6900 2/26/08 0 (Current) 0
33,334 on 12/31/98
33,333 on 12/31/99
33,333 on 12/31/00
------- ------- ------
Shares 211,000 201,500 84,000
</TABLE>
<PAGE>
EXHIBIT C
List of Life Insurance Policies
<PAGE>
EXHIBIT D
INDEMNIFICATION AGREEMENT
This agreement ("Agreement") is made as of this 1st day of January,
1994 between Micro Warehouse, Inc., a Delaware corporation (hereinafter referred
to as the "Corporation") and Stephen England (hereinafter referred to as
"Indemnitee").
WITNESSETH:
WHEREAS, Indemnitee is an officer of Micro Warehouse, Inc., and in
such capacity is performing a valuable service to the Corporation; and
WHEREAS, the Board of Directors of the Corporation has adopted
by-laws, providing for the indemnification of the officers, directors, agents
(as hereinafter defined) and employees of the Corporation to the maximum extent
authorized by Section 145 of the Delaware General Corporation Law; and
WHEREAS, Section 145(f) of the Delaware General Corporation Law
allows for the indemnification of officers, directors, agents and employees of
the Corporation by means of indemnification agreements such as contemplated
herein; and
WHEREAS, in order to thereby induce Indemnitee to serve or to
continue to serve the Corporation, the Corporation has determined and agreed to
enter into this Agreement with Indemnitee.
NOW, THEREFORE, in consideration of Indemnitee's service or
continued service as a director or officer of the Corporation after the date
hereof, the parties hereto agree as follows:
1. Definitions
(a) The term "Agent" means any person who is or was a
director, officer, employee or other agent of the Corporation or a subsidiary of
the Corporation; or is or was serving at the request of, for the convenience of,
or to represent the interests of, the Corporation or a subsidiary of the
Corporation as a director, officer, employee or agent of another entity or
enterprise; or was a director, officer, employee or agent of a predecessor
corporation of the Corporation or a subsidiary (as hereinafter defined) of the
Corporation, or was a director, officer, employee or agent of another enterprise
at the request of, for the convenience of, or to represent the interests of such
predecessor corporation.
(b) The term "Expenses" means all direct and indirect costs of
any type or nature whatsoever (including without limitation, all attorneys'
fees, costs of investigation and
<PAGE>
related disbursements) incurred by the Indemnitee in connection with the
investigation, settlement, defense or appeal of a claim or proceeding (as
hereinafter defined) covered hereby or establishing or enforcing a right to
indemnification under this Agreement.
(c) The term "Proceeding" means any threatened, pending or
completed claim, suit or action, whether civil, criminal, administrative,
investigative or otherwise.
(d) "Subsidiary" means any corporation of which more than 10%
of the outstanding voting securities is owned directly or indirectly by the
Corporation, and one or more Subsidiaries, taken as a whole.
2. Maintenance of Liability Insurance.
(a) The Corporation hereby covenants and agrees to each
Indemnitee that, so long as such Indemnitee shall continue to serve as an Agent
of the Corporation and thereafter so long as the Indemnitee shall be subject to
any claim or Proceeding by reason of the fact that the Indemnitee was an Agent
of the Corporation or in connection with such Indemnitee's acts as such an
Agent, the Corporation, subject to paragraph 2(b), shall obtain and maintain or
cause to be obtained and maintained in full force and effect directors' and
officers' liability insurance ("D&O Insurance") in reasonable amounts from
established and reputable insurers, but no less than the amounts currently in
effect on the date hereof.
(b) Notwithstanding the foregoing, the Corporation shall have
no obligation to obtain or maintain D&O Insurance if the Corporation determines
in good faith that the premium costs for such insurance are disproportionate to
the amount of coverage provided after giving effect to exclusions.
3. Mandatory Indemnification. The Corporation shall defend,
indemnify and hold harmless each Indemnitee:
(a) Third Party Actions. If the Indemnitee is a person who was
or is a party or is threatened to be made a party to any Proceeding (other than
an action by or in the right of the Corporation) by reason of the fact that such
Indemnitee is or was an Agent of the Corporation, or by reason of anything done
or not done by the Indemnitee in any such capacity, against any and all Expenses
and liabilities of any type whatsoever (including, but not limited to,
judgments, fines, ERISA excise taxes or penalties, and amounts paid in
settlement) incurred by him or her in connection with the investigation,
defense, settlement or appeal of such Proceeding, so long as the Indemnitee
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the Corporation, or, with respect to any
criminal action or Proceeding, had reasonable cause to believe his or her
conduct was not unlawful.
(b) Derivative Actions. If the Indemnitee is a person who was
or is a party or is threatened to be made a party to any Proceeding by or in the
right of the Corporation
2
<PAGE>
by reason of the fact that he or she is or was an Agent of the Corporation, or
by reason of anything done or not done by him or her in any such capacity,
against any amounts paid in settlement of any such Proceeding and all other
Expenses incurred by him or her in connection with the investigation, defense,
settlement or appeal of such Proceeding if he or she acted in good faith and in
a manner he or she reasonably believed to be in or not opposed to the best
interests of the Corporation; except that no indemnification under this
subparagraph shall be made, and the Indemnitee shall repay all amounts
previously advanced by the Corporation, in respect of any claim, issue or matter
for which such person is judged to be liable to the Corporation by a court of
competent jurisdiction due to misconduct in the performance of his or her duties
to the Corporation, unless and only to the extent that the court in which such
Proceeding was brought shall determine that such person is fairly and reasonably
entitled to indemnity.
(c) Actions Where Indemnitee is Deceased. If the Indemnitee is
a person who was or is a party or is threatened to be made a party to any
Proceeding by reason of the fact that he or she is or was an Agent of the
Corporation, or by reason of anything done or not done by him or her in any such
capacity, and prior to, during the pendency of, or after completion of, such
Proceeding, the Indemnitee shall die, then the Corporation shall defend,
indemnify and hold harmless the estate, heirs and legatees of the Indemnitee
against any and all Expenses and liabilities incurred by or for such persons or
entities in connection with the investigation, defense, settlement or appeal of
such Proceeding on the same basis as provided for the Indemnitee in paragraphs
3(a) and 3(b) above.
The Expenses and liabilities covered hereby shall be net of any payments by D&O
Insurance carriers or others.
4. Partial Indemnification. If an Indemnitee is found under
paragraph 3(b), 7 or 10 hereof not to be entitled to indemnification for all of
the Expenses relating to a Proceeding, the Corporation shall indemnify the
Indemnitee for any portion of such Expenses not specifically precluded by the
operation of such paragraph 3(b), 7 or 10.
5. Mandatory Advancement of Expenses. Until a determination to the
contrary under paragraph 7 hereof is made and unless the provisions of paragraph
10 apply, the Corporation shall advance all Expenses incurred by each Indemnitee
in connection with the investigation, defense, settlement or appeal of any
Proceeding to which the Indemnitee is a party or is threatened to be made a
party covered by the indemnification in paragraph 3 hereof. As a condition to
such advance, each Indemnitee shall, at the request of the Corporation,
undertake in a manner satisfactory to the Corporation to repay such amounts
advanced if it shall ultimately be determined by an order of a court that the
Indemnitee is not entitled to be indemnified by the Corporation by the terms
hereof or under applicable law. Subject to paragraph 6 hereof, the advances to
be made hereunder shall be paid by the Corporation to the Indemnitee within
twenty (20) days following delivery of a written request by
3
<PAGE>
the Indemnitee to the Corporation, which request shall be accompanied by
vouchers, invoices and similar evidence documenting the amounts requested.
6. Indemnification Procedures.
(a) Promptly after receipt by the Indemnitee of notice of the
commencement or threat of any Proceeding covered hereby, the Indemnitee shall
notify the Corporation of the commencement or threat thereof, provided that any
failure to so notify shall not relieve the Corporation of any of its obligations
hereunder, except to the extent that such failure or delay increases the
liability of the Corporation hereunder.
(b) If, at the time of the receipt of a notice pursuant to
paragraph 6(a) above, the Corporation has D&O Insurance in effect, the
Corporation shall give prompt notice of the Proceeding or claim to its insurers
in accordance with the procedures set forth in the applicable policies. The
Corporation shall thereafter take all necessary or desirable action to cause
such insurers to pay all amounts payable as a result of such Proceeding in
accordance with the terms of such policies and the Indemnitee shall not take any
action (by waiver, settlement or otherwise) which would adversely affect the
ability of the Corporation to obtain payment from its insurers.
(c) If the Corporation shall be obligated to pay the Expenses
of any Indemnitee, the Corporation shall assume the defense of the Proceeding to
which the Expenses relate and shall deliver a notice of assumption to the
Indemnitee. The Corporation will not be liable to the Indemnitee under this
Agreement for any fees of counsel incurred after delivery of such notice with
respect to such Proceeding or any costs of settlement not approved in advance in
writing by the Corporation, provided that (i) the Indemnitee shall have the
right to employ his or her own counsel in any such Proceeding at the
Indemnitee's expense, and (ii) if (1) the employment of counsel by the
Indemnitee has been previously authorized by the Corporation, (2) the Indemnitee
shall have provided the Corporation with an opinion of counsel stating that
there is a strong argument that a conflict of interest exists between the
Corporation and the Indemnitee in the conduct of any such defense, or (3) the
Corporation shall not have assumed the defense of such Proceeding, the fees and
Expenses of Indemnitee's counsel shall be at the expense of the Corporation.
7. Determination of Right to Indemnification.
(a) To the extent an Indemnitee has been successful on the
merits or otherwise in defense of any Proceeding, claim, issue or matter covered
hereby, the Indemnitee need not repay any of the Expenses advanced in connection
with the investigation, defense or appeal of such Proceeding.
4
<PAGE>
(b) If paragraph 7(a) is inapplicable, the Corporation shall
remain obligated to indemnify the Indemnitee, and the Indemnitee need not repay
Expenses previously advanced, unless the Corporation, by contested motion before
a court of competent jurisdiction, obtains preliminary or permanent relief
suspending or denying the obligation to advance or indemnification for Expenses.
(c) Notwithstanding a determination by a court that the
Indemnitee is not entitled to indemnification with respect to a specific
Proceeding, the Indemnitee shall have the right to apply to the Court of
Chancery of Delaware for the purpose of enforcing the Indemnitee's right to
indemnification pursuant to this Agreement.
(d) Notwithstanding any other provision in this Agreement to
the contrary, the Corporation shall indemnify the Indemnitee against all
Expenses incurred by the Indemnitee in connection with any Proceeding under
paragraph 7(b) or 7(c) above and against all Expenses incurred by the Indemnitee
in connection with any other Proceeding between the Corporation and the
Indemnitee involving the interpretation or enforcement of the rights of the
Indemnitee under this Agreement unless a court of competent jurisdiction finds
that the material claims and/or defenses of the Indemnitee in any such
Proceeding were frivolous or made in bad faith.
8. Certificate of Incorporation and By Laws. The Corporation agrees
that the Certificate of Incorporation and By Laws of the Corporation in effect
on the date hereof shall not be amended to reduce, limit, hinder or delay (i)
the rights of the Indemnitee granted hereby or (ii) the ability of the
Corporation to indemnify the Indemnitee as required hereby. The Corporation
further agrees that it shall exercise the powers granted to it under its
Certificate of Incorporation, its By Laws and by applicable law to indemnify any
Indemnitee to the fullest extent possible as required hereby. The Corporation
further covenants and agrees that Articles 9 and 10 of the Corporation's
Certificate of Incorporation shall not be amended in a manner (i) adverse to any
Indemnitee or (ii) inconsistent with the benefits granted to the Indemnitee
hereby.
9. Witness Expenses. The Corporation agrees to reimburse each
Indemnitee for all Expenses, including attorneys' fees and travel costs,
incurred by such Indemnitee in connection with being a witness, or if an
Indemnitee is threatened to be made a witness, with respect to any Proceeding,
by reason of his serving or having served as an Agent of the Corporation.
10. Exceptions. Notwithstanding any other provision herein to the
contrary, the Corporation shall not be obligated pursuant to the terms of this
Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance
expenses to the Indemnitee with respect to Proceedings or claims initiated or
brought voluntarily by the Indemnitee and not by way of defense (other than
Proceedings brought to establish or enforce a right to indemnification under
this Agreement or the provisions of the Corporation's Certificate
5
<PAGE>
of Incorporation or By Laws unless a court of competent jurisdiction determines
that each of the material assertions made by the Indemnitee in such Proceeding
was not made in good faith or was frivolous).
(b) Unauthorized Settlements. To indemnify the Indemnitee
under this Agreement for any amounts paid in settlement of a Proceeding covered
hereby without the prior written consent of the Corporation to such settlement.
11. Non-exclusivity. This Agreement is not the exclusive arrangement
between the Corporation and any Indemnitee regarding the subject matter hereof
and shall not diminish or affect any other rights which each Indemnitee may have
under any provision of law, the Corporation's Certificate of Incorporation or By
Laws, under other agreements, or otherwise.
12. Continuation after Term. Each Indemnitee's rights hereunder
shall continue after the Indemnitee has ceased acting as a director or Agent of
the Corporation and the benefits hereof shall inure to the benefit of the heirs,
executors and administrators of each Indemnitee.
13. Interpretation of Agreement. This Agreement shall be interpreted
and enforced so as to provide indemnification to the Indemnitee to the fullest
extent now or hereafter permitted by law.
14. Severability. If any provision or provisions of this Agreement
shall be held to be invalid, illegal or unenforceable, (i) the validity,
legality and enforceability of the remaining provisions of the Agreement shall
not in any way be effected or impaired thereby, and (ii) to the fullest extent
possible, the provisions of this Agreement shall be construed or altered by the
court so as to remain enforceable and to provide the Indemnitee with as many of
the benefits contemplated hereby as are permitted under law.
15. Counterparts, Modification and Waiver. This Agreement may be
signed in counterparts. This Agreement constitutes a separate agreement between
the Corporation and each Indemnitee and may be supplemented or amended as to an
Indemnitee only by a written instrument signed by the Corporation and such
Indemnitee, with such amendment binding only the Corporation and the signing
Indemnitee(s). All waivers must be in a written document signed by the party to
be charged. No waiver of any of the provisions of this Agreement shall be
implied by the conduct of the parties. A waiver of any right hereunder shall not
constitute a waiver of any other right hereunder.
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<PAGE>
IN WITNESS WHEREOF, the parties hereby have caused this agreement to
be duly executed as of the day and year first above written.
MICRO WAREHOUSE, INC.
By /s/ Bruce Lev
------------------------
Bruce L. Lev, Its
Executive Vice President
Hereunto Duly Authorized
---------------------------
Stephen England
7
EXHIBIT 11
MICRO WAREHOUSE, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September September September September
30, 1998 30, 1997 30, 1998 30, 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $ 11,863 $ (7,118) $ 16,585 $ 8,514
======== ======== ======== ========
Shares
Weighted average common shares
outstanding 34,816 34,550 34,695 34,432
Common equivalent shares 775 -- 386 327
-------- -------- -------- --------
Weighted average common shares
and common equivalent shares
outstanding - Diluted 35,591 34,550 35,081 34,759
======== ======== ======== ========
Net income (loss) per share -
Diluted $ 0.33 $ (0.21) $ 0.47 $ 0.24
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 154,977
<SECURITIES> 21,469
<RECEIVABLES> 229,111
<ALLOWANCES> 9,335
<INVENTORY> 114,003
<CURRENT-ASSETS> 557,064
<PP&E> 32,590
<DEPRECIATION> 55,679
<TOTAL-ASSETS> 640,919
<CURRENT-LIABILITIES> 266,408
<BONDS> 0
0
0
<COMMON> 349
<OTHER-SE> 374,162
<TOTAL-LIABILITY-AND-EQUITY> 640,919
<SALES> 1,624,982
<TOTAL-REVENUES> 1,624,982
<CGS> 1,362,653
<TOTAL-COSTS> 1,362,653
<OTHER-EXPENSES> 214,673
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 320
<INCOME-PRETAX> 40,058
<INCOME-TAX> 23,473
<INCOME-CONTINUING> 16,585
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,585
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.47
</TABLE>
