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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1998
COMMISSION FILE NUMBER: 0-20730
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MICRO WAREHOUSE, INC.
(Exact name of registrant as specified in its charter)
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Delaware 06-1192793
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
535 Connecticut Avenue, Norwalk, Connecticut 06854
(Address of Principal Executive Offices)
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(203) 899-4000
Registrant's Telephone Number, including Area Code
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject of such
filing requirements for the past 90 days. Yes |x| No |_|
Indicate by check mark if the disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-K or
any amendment to the Form 10-K. |x|
The aggregate market value of voting stock held by non-affiliates of
the Registrant computed by reference to the closing sales price as reported
on the Nasdaq Stock Market on March 25, 1999 was approximately $353,871,004.
In determining the market value of the voting stock held by non-affiliates,
shares of Common Stock beneficially owned by each executive officer, director
and holder of more than 10% of the outstanding shares of Common Stock have
been excluded. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
Common Stock outstanding as of March 25, 1999: 35,685,577
DOCUMENTS INCORPORATED BY REFERENCE:
Pursuant to General Instruction G(3) to this form, the information
required by Part III (Items 10, 11, 12, and 13) hereof is incorporated by
reference from the registrant's definitive Proxy Statement for its Annual
Meeting of Stockholders scheduled to be held on June 3, 1999.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business.............................................................3
Item 2. Properties..........................................................13
Item 3. Legal Proceedings...................................................14
Item 4. Submission of Matters to a Vote of Security Holders.................14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters......................................................15
Item 6. Selected Financial Data.............................................16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.........................................17
Item 7a. Quantitative and Qualitative Disclosures About Market Risk..........27
Item 8. Financial Statements and Supplementary Data.........................28
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................28
PART III
Item 10. Directors and Executive Officers of the Registrant..................29
Item 11. Executive Compensation..............................................29
Item 12. Security Ownership of Certain Beneficial Owners and Management......29
Item 13. Certain Relationships and Related Transactions......................29
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....29
Signatures..........................................................31
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PART 1
ITEM 1. BUSINESS
OVERVIEW
We are a $2.2 billion specialty catalog and online retailer and
direct marketer of brand name personal computers, computer software,
accessories, peripheral and networking products to commercial and consumer
customers. We market our products through frequent mailings of our
distinctive, colorful catalogs and our Internet catalog, discount retail and
auction sites. Additionally, we employ telemarketing account managers who
focus on building relationships with corporate, education and government
accounts. We offer brand name hardware and software from leading vendors such
as Adobe, Apple, 3Com, Compaq, Hewlett-Packard, IBM, Iomega, Microsoft and
Toshiba.
Through our four core catalogs, Micro Warehouse, Mac Warehouse,
Data Comm Warehouse and Inmac, various specialty catalogs and our Internet
sites we offer a broad assortment of computer products at competitive prices.
With colorful illustrations, concise product descriptions and relevant
technical information, each catalog focuses on a specific segment of the
computer market. The catalogs are recognized as a leading source for computer
hardware, software and other products. During 1998, we distributed
approximately 121 million catalogs worldwide and 2.0 million customers placed
orders with us. During 1997, we distributed approximately 124 million
catalogs worldwide and 2.2 million customers placed orders with us.
We maintain a full-service distribution center in Wilmington, Ohio,
totaling approximately 288,000 square feet and telemarketing centers in Lakewood
and Gibbsboro, New Jersey and South Norwalk, Connecticut. We operate 24 hours a
day, seven days a week in the United States. We also operate telemarketing and
distribution facilities in the United Kingdom, France, Germany, Sweden, the
Netherlands, Canada and Mexico.
We began operations in 1987 as a Connecticut corporation and were
reincorporated in Delaware on October 2, 1992.
Our principal executive offices are located at 535 Connecticut
Avenue, Norwalk, Connecticut 06854 and our telephone number there is (203)
899-4000.
INTERNET OPERATIONS. In July 1995 we launched our Internet
catalog on the World Wide Web at Warehouse.com. Product descriptions and
prices for more than 20,000 products are displayed in an online catalog with
full information and on-screen images available for more than 7,000 products.
Selected corporate clients can gain access to their own online catalog,
complete with unique product selections and customized pricing. Our European
subsidiaries also have web sites. In November 1997 we opened a live Internet
auction site at Webauction.com. The auction site offers a selection of
personal computers and home electronic products including first-run
merchandise, refurbished and end-of-life items. Auctions are conducted 24
hours a day, 7 days a week. Our Internet sites received approximately 72,000
daily visitors in December 1998. In February 1999 we launched an Internet
discount retailer at Computersbynet.com. Computersbynet.com offers computer
products to customers who are prepared to purchase through the Internet using
a credit card without the need for extensive telephone based customer support.
INTERNATIONAL OPERATIONS. International operations represented 28%
of our sales in 1998 and 30% in 1997. We have full-service, direct marketing
operations and publish catalogs in each country in which we operate.
We distributed approximately 20 million catalogs internationally in
1998 and 25 million in 1997. You can find more information regarding our
operations in different geographic areas in Note 12 of our financial statements
contained herein.
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1997 RESTRUCTURING. In December, 1997 we announced a major
restructuring of our operations. The restructuring objectives were to simplify
our business worldwide, reduce our cost structure, eliminate unprofitable
businesses in Norway, Denmark, Finland, Japan and Australia and concentrate
efforts on the productivity of the sales force and the continued growth of the
Wintel business. In connection with this restructuring, we discontinued our
Macintosh-dependent operations in Australia and Japan and completed the sale of
three small Macintosh-dependent operations in Denmark, Norway and Finland. In
the United States, we consolidated our under-performing businesses, USA Flex and
Online Interactive, into our existing New Jersey and Connecticut facilities. In
addition, we reorganized our domestic sales force. These measures involved
eliminating approximately 600 positions or 14% of our workforce.
These restructuring activities were completed in 1998.
OUR CATALOGS
We currently publish four primary catalogs for the domestic market:
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CATALOG NAME DESCRIPTION # 1998 ISSUES
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Mac Warehouse a full product line catalog for the Macintosh market 14
Micro Warehouse a full product line catalog for the Wintel market 12
Data Comm Warehouse a specialty catalog featuring products used in the
data communications and networking market 12
Inmac a supplies-focused catalog for the Wintel market 6
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We publish additional specialty catalogs from time to time. Each
catalog is printed with full-color photographs and detailed product
descriptions. The catalogs are generally created and produced by our in-house
designers and production artists on a computer-based desktop publishing
system.
We distributed 121 million catalogs worldwide in 1998, 124 million
in 1997 and 121 million in 1996. Generally each domestic customer who has placed
orders within the past 12 months receives a catalog at least monthly. In
addition, we mail a catalog with each order shipped. We also mail targeted
versions of catalogs to our corporate, education and government customers.
Internationally, we publish our catalogs in several languages and under a
variety of titles including Micro Warehouse, Mac Warehouse, Data Comm Warehouse,
Inmac, Technomatic and Lan Warehouse at various frequencies.
OUR INTERNET BUSINESS
In addition to our catalogs, we market our products through our four
Internet sites on the World Wide Web:
O Warehouse.com
O Webauction.com
O Computersbynet.com
O Readerswarehouse.com
In 1998 we experienced significant growth in our Internet business.
Internet-related sales in 1998 were $186.6 million, an increase of 277% from
$49.5 million in 1997. Our websites received 72,000 daily visitors in December
1998. To date, substantially all of our Internet revenues have been generated
from our domestic websites, although all of our European businesses also operate
websites.
We acquire customers for our Internet business through a variety of
means, including:
o advertisements appearing in our print catalogs
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o online advertisements
o e-mail marketing programs
o links from our vendors' websites
o print advertisements
WAREHOUSE.COM. Our core e-commerce website, Warehouse.com, is an
online catalog with descriptions, prices and pictures of a wide variety of
personal computer products. This is one of the leading e-commerce sites for
computer products with 1998 sales of $153 million, including fourth quarter
1998 sales of $59 million, up 42% sequentially from the third quarter. The
website is promoted in our core catalogs and attracts both corporate and
consumer customers because of its competitive pricing, customer service and
attractive and easy-to-use design. Customers can take advantage of our online
store format by shopping at their convenience and purchasing brand name
products at value prices. In 1999 we have expanded our product category
offering with the addition of a book commerce site, Readerswarehouse.com,
that offers approximately 2,000 best selling titles at discount prices.
SAVEBYNET.COM, INC. In early 1999 we announced the formation of a
new subsidiary -- Savebynet.com, Inc. This subsidiary operates our existing
Internet auction business Webauction.com and our new Internet discount retailer
Computersbynet.com.
Through interactive auctions on our Webauction.com website, we offer
a wide variety of merchandise, such as excess, refurbished, close-out,
discounted or end-of-life computer products. Although our
primary offerings are in computers and computer-related products, we also offer
a wide variety of other merchandise, including:
o consumer electronics
o sports memorabilia
o jewelry
o housewares
o sports and fitness equipment
o vacation packages
Since its launch in November 1997 Webauction.com has provided us with the means
to test new product categories and liquidate aged inventory and refurbished or
end of life items. Webauction.com's 1998 sales were $33.7 million, up from 1997
sales of $2.5 million. Webauction.com attracted 24,000 daily visitors in
December 1998 and had 150,000 registered bidders as of December 31, 1998.
Launched in February 1999, Computersbynet.com is an Internet-only
discount reseller targeted at the growing number of online consumers who are
prepared to purchase computer products by credit card without the need for
extensive telephone based customer support. Much like Warehouse.com, the
Computersbynet.com website offers full descriptions and pricing information on a
wide variety of products and online ordering capability.
The introduction of the Computersbynet.com brand and site
provides an opportunity to leverage our marketing capabilities and existing
infrastructure to compete effectively on a low-cost basis as an Internet
discount retailer. By taking only online orders and limiting the amount of
customer service offered to consumers, our transaction cost should be lower
in business generated by Computersbynet.com than in our traditional
business, thus allowing us to sell at lower gross margins.
We intend to maintain our "full service" Warehouse.com brand with
its separate pricing strategy to enable us to offer full sales and service
support for customers who prefer a higher level of service.
MARKETING AND SALES
We serve both the commercial and consumer markets. For the year
ended December 31, 1998, commercial customers represented
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approximately 46% of our domestic customer base and accounted for
approximately 79% of domestic sales.
Our marketing programs are designed to attract new customers and
to stimulate additional purchases from existing customers. We continuously
attract new customers by selectively mailing catalogs to prospective
customers as well as through advertising in major computer magazines and on
the Internet. We obtain the names of prospective customers through the use of
selected mailing lists from various sources, including manufacturers,
suppliers, software publishers and computer magazine publishers. Worldwide we
had 2.0 million customers who placed orders with us in 1998, 2.2 million in
1997 and 2.3 million in 1996.
In addition to traditional means of marketing, we attract new
customers through e-mail programs, catalog advertisements, online advertising,
links from our vendors' websites and sweepstakes.
SALESFORCE. Our domestic salesforce, located in our Lakewood and
Gibbsboro, New Jersey and South Norwalk, Connecticut facilities, consists of
sales representatives who are responsible for:
o servicing inbound telephone orders and responding to customer
inquiries we receive in response to our catalogs, advertising
or Internet sites
o making outbound prospecting and account management sales calls
to generate sales from commercial, education and government
accounts.
As our sales continue to shift towards the commercial segment,
our future success depends, in part, on our ability to improve the skills,
effectiveness and productivity of our salesforce. To this end, in early 1998
we reorganized our domestic salesforce to attempt to streamline and improve
the productivity of sales operations. As a result, approximately 230 inbound
sales positions were eliminated.
To accelerate the growth of our business, during the third
quarter of 1998 we formed our Business Development Unit to focus on
developing commercial accounts. During the fourth quarter of 1998 we hired a
new senior sales management team and began an aggressive recruiting program
to expand our domestic outbound telemarketing sales force. As of March 19,
1999 the total domestic sales force numbered 721 associates, up from 602 as
of October 1, 1998 when we began this effort. We are in the process of
implementing new compensation, training and sales activity measurement
programs designed to improve the effectiveness of our outbound sales force.
CUSTOMER SERVICE/TECHNICAL SUPPORT. We believe that our ability to
provide prompt and efficient customer service has been critical to our success.
Our dedicated customer service representatives are trained to respond to
frequently asked questions such as the status of an order or our return policy.
We also have a technical support staff to assist customers with the selection,
installation and operation of their products. We offer a toll-free number for
customer service and technical support from 8:00 a.m. to midnight, eastern time,
Monday through Friday and from 10:00 a.m. to 6:00 p.m. on Saturday and Sunday.
CUSTOMER RETURN POLICY. We provide a 30-day guarantee against
defects with respect to most of our products. We work closely with customers and
vendors to assure that all vendor warranties and return privileges are honored.
During 1998 we had a return rate of approximately 6% of gross sales. Returns are
received and processed as a segregated activity to maintain control over the
returned product, to initiate the refund process and to obtain appropriate
credit from suppliers. Return experience is closely monitored at the
stock-keeping-unit level to identify trends in product offerings, enhance
customer satisfaction and reduce overall returns.
SEASONALITY. Response rates to catalog mailings are subject to
seasonal variations. The first and last quarters of the year generally have
higher response rates while the two middle quarters typically have lower
response rates. Given this fact, we mail fewer catalogs during the second and
third quarters. The slower quarters are impacted by the summer months,
particularly in Europe.
PRODUCTS AND MERCHANDISING
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We offer more than 30,000 microcomputer hardware, software and
peripheral products and supplies. During 1998 sales of Wintel computers and
related products represented approximately 66% of our net sales while sales for
Macintosh computers and related products represented approximately 34% of net
sales. Our product evaluation teams for the various product categories
constantly monitor the market for new products from new and existing vendors. As
product areas decline in importance, the amount of catalog exposure is reduced
in favor of more sought-after new products and the inventory levels and numbers
of stock-keeping-units are adjusted. During 1998 no single product accounted for
more than 2% of our net sales.
HARDWARE. We offer a large selection of hardware items. This
category includes personal computers, servers, printers, modems, monitors, data
storage devices, add-on circuit boards, connectivity products and certain
business machines. Brands sold in this category include American Power
Conversion, Apple, 3Com, Compaq, Epson, Hewlett-Packard, IBM, Iomega, Texas
Instruments and Toshiba. Hardware sales constituted approximately 71% of our net
sales in 1998.
SOFTWARE. We sell a wide variety of computer software packages in
the business and personal productivity, connectivity, utility, language,
education and entertainment categories. We offer products from the larger, well
known vendors as well as numerous specialty products from new and emerging
vendors. Brands offered include Adobe, Claris, Connectix, Corel, Intuit,
Macromedia, Microsoft, Novell, Quark, and Symantec. Software sales constituted
approximately 16% of our net sales in 1998.
SUPPLIES AND ACCESSORIES. We currently sell various supplies such as
media, toner cartridges, desk and computer accessories and computer furniture.
Sales of these products constituted approximately 13% of our net sales in 1998.
PRIVATE LABEL BRANDS. Under our private label brands, Power User,
Inmac, USA Flex and Nu Data, we sell products such as microcomputers, hard
drives, server switches, memory chips, CD-Roms, cables, and accessories.
Sales of these products accounted for approximately 5% of our net sales in
1998. These sales have also been included in the product categories listed
above.
PURCHASING
We purchase products from approximately 1,000 vendors and
purchase approximately 53% of our products directly from manufacturers with
the balance from distributors. Our largest domestic vendors include Adobe,
Apple, 3Com, Compaq, Hewlett-Packard, IBM, Ingram Micro, Iomega, Microsoft
and Toshiba. In 1998 the leading 100 products accounted for approximately 24%
of domestic net sales. Purchases of products from Ingram Micro, our largest
vendor, constituted approximately 23% of our product purchases on a worldwide
basis in 1998. Purchases of products from Apple, our second largest vendor,
constituted approximately 9% of our product purchases on a worldwide basis in
1998.
We believe that our volume purchases enable us to obtain favorable
product pricing. Many of our suppliers make funds available to us in the form of
advertising allowances and incentives to promote and increase sales of their
products. Generally, we have been able to return unsold or obsolete inventory to
our vendors through written agreements with, or unwritten policies of, such
vendors. In addition, we typically receive price protection should a vendor
subsequently lower its price. Recently, however, vendors have been reducing
periods for which inventory is price protected and limiting the quantity of
product they will accept for returns. There can be no assurance that we will
continue to receive any price protection or return privileges in the future (see
"Outlook" in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations").
ORDER FULFILLMENT
Orders are placed via telephone, fax, Internet or mail. When an
order is entered into our computer system, a credit check or credit card
verification is performed and, if approved, the order is electronically
transmitted to the warehouse and a packing slip is printed for order
fulfillment. Domestic
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orders accepted by midnight eastern time are generally shipped for delivery
the following day via Airborne Express. Upon request, orders may also be
shipped by alternate means. Our international operations generally use the
same distribution and order processing computer systems and are able to
exchange data with United States operations.
We conduct our United States distribution operations at our
Wilmington, Ohio warehouse/distribution center. The warehouse/distribution
center consists of approximately 288,000 square feet located in three facilities
adjacent to the main distribution facility of Airborne Express. Construction of
our new 230,000 sq. ft. warehouse facility at the Airborne Express hub in
Wilmington, Ohio will be completed in the second quarter of 1999. Installation
of equipment and systems will begin in the second quarter and we expect the
facility to be operational in the fall of 1999. This will permit us to
consolidate our fulfillment center functions in a single highly automated
building instead of the three facilities that we currently occupy and should
enable us to reduce overall distribution costs.
We also operate distribution facilities in the United Kingdom,
France, Germany, Sweden, the Netherlands, Canada and Mexico.
MANAGEMENT INFORMATION SYSTEMS
We have committed significant resources to the development of an
integrated computer system which is used to manage all aspects of our business.
The main computer system is principally comprised of Hewlett-Packard hardware
and licensed and internally-developed software. This system supports
telemarketing, marketing, purchasing, accounting, order entry, financial
reporting, customer service, warehousing and distribution. The system allows us,
among other things, to monitor sales trends, make informed purchasing decisions,
provide product availability and order status information.
In addition to the main system, we have a system of networked
personal computers which provides numerous additional management control,
planning and exception reporting which facilitates data sharing and provides an
automated office environment.
We remain committed to invest in systems and facilities to improve
the efficiency of our business. In 1998 we made installations and upgrades to
our computer systems in both our domestic and international operations, at an
approximate cost of $10.4 million.
During 1998, we converted our domestic financial systems to
Peoplesoft Inc. application software and continued our program to upgrade our
primary operating systems worldwide by the end of the second quarter of 1999.
In addition, during the first half of 1999 we will convert our domestic human
resources information system to PeopleSoft application software. These
systems enhancements are intended to create efficiencies in many business
areas, including sales, warehousing, distribution, human resources and
financial management.
In addition to the efficiencies discussed above, the implementation
of these new systems will address Year 2000 issues. In 1998 we continued to
address our Year 2000 remediation issues and incurred costs of approximately
$1.4 million after-tax or $0.04 per share. Additionally, in 1999 we expect to
invest approximately $18 million in capital expenditures to complete the upgrade
of our computer systems. For a description of management information system
issues facing us related to the Year 2000, see "Year 2000 Compliant Information
Systems" in Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
COMPETITION
The direct marketing industry and the computer products retail
business are highly competitive and are becoming more competitive as a result of
numerous factors including the increase in direct selling of computers and
peripherals by computer hardware manufacturers and the increase in the number of
electronic commerce competitors. We expect competition to continue to increase
in the future.
We compete with a variety of other resellers, both traditional and
Internet-related, depending on the type of merchandise and sales format they
offer. Many of our competitors have longer operating histories, larger customer
bases, greater brand recognition and significantly greater financial, marketing,
customer support, technical and other resources. As a result, they
may be able to respond
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more quickly to changes in customer preferences or devote greater resources
to the development, promotion and sale of their merchandise. We may not be
able to compete successfully against current and future competitors. Any
inability to do so could materially and adversely affect our business,
financial condition and results of operations.
Our principal competitors include:
o Computer products direct marketers -- companies with
substantial customer bases in the computer and peripherals
catalog business, including CDW Computer Centers, Inc.,
Creative Computers, Inc., Insight Enterprises, Inc., Multiple
Zones International, Inc. and PC Connection, Inc.
o Personal computer manufacturers -- companies such as Apple
Computer Inc., Compaq Computer Corp., Dell Computers
Corporation and Gateway, Inc. that are selling their
products directly.
o Consumer electronic and computer retail stores, including
superstores such as Best Buy Co., Inc., Circuit City Stores,
Inc. and CompUSA Inc.
o Value added resellers of computer products, such as Entex
Corporation and Inacom, that sell computers to corporate
clients for whom they provide networking, systems
integration and other related services.
o Internet direct marketers of computer products -- companies
that sell and distribute computer-related products via the
Internet, including Beyond.com Corporation, Buy.com, Inc.,
Cyberian Outpost, Inc., NECX Corp., ONSALE Inc. and
ValueAmerica.com, Inc.
o Internet auction houses such as ONSALE Inc., Surplus Auction
(the auction site for Egghead.com, Inc.) and Ubid Inc.
o Internet content providers or portals such as, America Online
Inc., Excite, Inc., Infoseek Corporation, Lycos, Inc.,
Microsoft Corporation and Yahoo! Inc. that engage in
electronic commerce and may offer or provide means for others
to offer competitive products.
o Internationally, our competition includes direct vendors,
direct marketers, retailers, corporate resellers, value
added resellers and internet resellers. Some of our
competitors include: Action Computer (United Kingdom),
Computacenter plc (France and the United Kingdom), Computer
Company (the Netherlands), Dustin (Sweden), MISCO (France
and Germany), Global Direct Mail (United Kingdom), Info
Products (the Netherlands), Multiple Zones International,
Inc. (Germany) and PC Express (Sweden).
We believe the principal competitive factors affecting our market
are:
o price
o product availability
o speed and accuracy of fulfillment
o size and productivity of an outbound sales force
o ability to purchase merchandise at satisfactory prices
o brand recognition
o ability to attract customers at favorable customer acquisition
costs
o speed, reliability, accessibility and ease of use of Websites
o effectiveness of customer service
Price is an important competitive factor in the personal computer
hardware and software market. We expect increased competition on the basis of
price. That could result in reduced operating margins, loss of market share
and diminished brand loyalty, any one of which factors could materially and
adversely affect our business, financial condition and results of operations.
In addition, new technologies and the expansion of existing technologies on
the Internet, such as price comparison programs, may direct end-users to
retailers that compete with us.
EMPLOYEES
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As of December 31, 1998, we employed 3,595 people, down from 4,133
as of December 31, 1997. 1,292 were in management, support services and
administration; 1,618 in sales, technical support and customer service and 685
in warehouse/distribution. Of the total number of employees, 1,248 were employed
internationally. Our domestic employees are not represented by a labor union and
we have experienced no work stoppages. We believe that our employee relations
are good.
SALES TAX
Presently, we collect state sales tax, or other similar tax, only
on sales of products to residents of New Jersey, Connecticut and Ohio.
Various states have tried to impose on direct marketers the burden of
collecting state sales taxes on the sale of products shipped to state
residents. The U.S. Supreme Court has held that it is unlawful for a state to
impose these sales tax collection obligations on an out-of-state mail order
company whose only contacts with the state are the distribution of catalogs
and other advertising materials through the mail and subsequent delivery of
purchased goods by parcel post and interstate common carriers. It is
possible, however, that legislation may be passed to overturn such decision
or the Supreme Court may change its position. Additionally, it is currently
uncertain whether electronic commerce, which includes our various Internet
sales activities, will be subject to state sales tax. The imposition of new
state sales tax collection obligations increases our administrative expenses
and may impact our ability to compete effectively on the basis of price.
In October 1998 Congress passed the Internet Tax Freedom Act. The
stated purpose of the ITFA is to provide neutral tax treatment of economic
activity, electronic or otherwise. Towards this end, the ITFA prohibits state
and local taxes that discriminate against or single out the Internet. As part of
the Act, Congress created the Advisory Committee on Electronic Commerce, charged
to conduct an 18-month study of whether use of or sales on the Internet should
be taxed, and if so, how taxes could be applied without subjecting the Internet
and electronic commerce to special, discriminatory or multiple taxation.
Although it is not an issue specific to the Internet, one of the agenda items
for the Advisory Committee is a review of the sales tax "nexus" issue as it
relates to all direct marketers. We cannot assure you that the Advisory
Committee's report to Congress will not ultimately result in a modification by
legislation of the Supreme Court's favorable rulings regarding sales and use
taxation on out of state direct marketers.
TRADEMARKS
We conduct our business under many trademarks, service marks
and Internet domain names in the U.S. and internationally including Micro
Warehouse, Mac Warehouse, Data Comm Warehouse, Inmac, USA Flex, Nu Data, Power
User, Lan Warehouse, Warehouse.com, Auction Warehouse, Webauction,
Webauction.com, Computersbynet.com, Reader's Warehouse, Savebynet.com and a
variety of other marks and domain names that appear in the our catalogs,
Internet sites, advertisements and on our private label products.
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We intend to use and protect these or related marks and domain
names, as necessary and appropriate, in the U.S and in various foreign
countries. We believe our trademarks, service marks and domain names have
significant value and are an important factor in the marketing of our products.
Our trademarks, service marks and domain names have an indefinite term as long
as they are used in connection with our business activities. We intend to take
steps to maintain use of our marks and domain names as appropriate and to renew
registrations as necessary.
REGULATIONS
The direct response business is subject to the Mail and Telephone
Order Merchandise Rule and 1996 Telemarketing Sales Rule and related regulations
promulgated by the Federal Trade Commission and comparable state agencies. In
addition, U.S. and foreign laws regulate certain users of customer information
and the development and sale of mailing lists. We believe we are in compliance
with all rules and regulations governing our marketing practices and have
implemented programs and systems to assure ongoing compliance. However, new
restrictions may arise in this area that could have an adverse effect on our
business, financial condition and results of operations.
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Due to the increasing popularity and use of the Internet and other
commercial online services, it is possible that additional laws and regulations
may be adopted with respect to electronic commerce. These laws may cover issues
such as user privacy, pricing, content, copyrights, distribution and
characteristics and quality of products and services. For example, the states of
Virginia, Nevada, Washington and California have passed legislation intended to
deter fraudulent or other unfair practices in direct marketing via commercial
e-mail practices commonly known as "spamming". At least seventeen other states
and the federal government are currently considering similar legislation. We
believe we are in compliance with all laws governing direct marketing through
e-mail. However, we cannot predict whether any new legislation will result in
further restrictions on legitimate e-mail marketing efforts or that such
restrictions will make our efforts to market through commercial e-mail more
costly or less effective in the future. Moreover, the applicability to the
Internet and other commercial online services of existing laws in various
jurisdictions governing issues such as property ownership, sales and other
taxes, libel and personal privacy is uncertain and may take years to resolve.
Any new legislation or regulation, or the application of existing laws and
regulations to the Internet, could have the effect of decreasing the growth of
electronic commerce or increasing our cost of doing business on the Internet and
could have a material adverse effect on our business, financial condition and
results of operations.
12
<PAGE>
ITEM 2. PROPERTIES
Our principal facilities, all of which except for the warehouse and
distribution center facility in Runcorn, England are leased, are as follows:
<TABLE>
<CAPTION>
Expir. of
Approx. Current
Location Sq. Ft. Lease Term
-------- ------- ----------
<S> <C> <C> <C>
Telemarketing, technical support, management
information systems and customer service center ....................... Lakewood, NJ 52,109 2009
Telemarketing, technical support, management information
systems and customer service center ................................... Lakewood, NJ 41,514 2005
Manufacturing, sales and distribution ................................. Lakewood, NJ 30,360 2001
Telemarketing, technical support, management information
systems and customer service center .................................. Gibbsboro, NJ 82,000 2002
Warehouse and distribution center ................................... Wilmington, OH 102,400 1999
Warehouse and distribution center* .................................. Wilmington, OH 83,200 2003
Warehouse and distribution center* .................................. Wilmington, OH 32,000 2003
Warehouse and distribution center* .................................. Wilmington, OH 70,400 2001
Warehouse and distribution center** ................................. Wilmington, OH 230,000 2009
Headquarters and Administrative offices ................................ Norwalk, CT 83,000 2001
Corporate Sales .................................................. South Norwalk, CT 26,500 1999
European Coordination Center and offices ........................ Bracknell, England 11,000 2011
Offices and distribution center ........................... Watford, London, England 37,500 2004
Warehouse and distribution center ................................. Runcorn, England 69,000 N/A
Offices ....................................................... Borehamwood, England 48,300 2003
Offices and warehouse ........................................... Mitry-Mory, France 63,900 2002
Offices .......................................................... Ginsheim, Germany 37,542 2001
Offices and distribution center .............................. Mainz-Kastel, Germany 27,653 2008
Distribution center .......................................... Neu-Isenburg, Germany 7,209 2000
Offices and distribution center ............................. Amsterdam, Netherlands 10,000 1999
Offices and distribution center .................................. Stockholm, Sweden 11,475 1999
</TABLE>
13
<PAGE>
<TABLE>
<S> <C> <C> <C>
Offices .......................................................... Stockholm, Sweden 12,000 2000
Offices and distribution center ................................ Mexico City, Mexico 4,600 1999
Retail and offices ........................................ Toronto, Ontario, Canada 7,500 2001
Offices and warehouse ..................................Mississauga, Ontario, Canada 56,517 2004
Retail, offices and warehouse .......................... North York, Ontario, Canada 3,500 1999
</TABLE>
We believe that our facilities are adequate for our current needs
and that suitable additional space will be available as needed.
* We intend to sub-lease these properties once our new
warehouse/distribution center is completed.
** We expect the lease of the new warehouse/distribution center to
commence during the second quarter of 1999.
ITEM 3. LEGAL PROCEEDINGS.
During 1998 we settled all remaining litigation, with the exception
of the ongoing formal investigation by the Commission, arising out of our
announcements in September and October, 1996 that we intended to restate our
financial statements covering the 1992 through 1995 fiscal years.
During the second quarter of 1998 we recorded a pre-tax charge of
$14 million for the settlement of the lawsuit brought by holders of
approximately 1.3 million shares of our common stock and which arose out of our
1996 stock merger with Inmac Corp. This settlement, consummated on July 30,
1998, provided for a total payment of $19 million, $6 million of which was in
the form of our common stock. The pre-tax charge was based on the total amount
of the settlement, net of a $5 million contribution from a non-affiliated
source. In addition, we consummated a settlement with the State Board of
Administration of Florida, which had earlier elected not to participate in the
class action settlement, by making a $150,000 cash payment.
In September 1997, we settled the consolidated securities class
action lawsuit relating to the restatement of our financial statements. In
September 1998 we consummated the Court-approved settlement and paid $30 million
in cash to the class plaintiffs.
The staff of the Commission is conducting a formal investigation
into the events underlying the restatement. We are cooperating with the
Commission in its investigation. We cannot predict the outcome of this
investigation.
We are and may in the future be involved in other litigation
relating to claims arising out of our operations in the normal course of
business. We do not expect any pending litigation to have a material adverse
effect on our business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of our security holders during
the fourth quarter of the fiscal year covered by this report.
14
<PAGE>
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on The Nasdaq Stock Market
under the symbol MWHS. As of December 31, 1998, the Common Stock was held by
approximately 182 holders of record. The table below sets forth the reported
quarterly high and low sales prices for the Common Stock on the Nasdaq Stock
Market for Fiscal Year 1998 and 1997.
FISCAL 1998 HIGH LOW
First Quarter $17.38 $10.25
Second Quarter 18.75 13.25
Third Quarter 27.63 14.63
Fourth Quarter 36.38 11.25
FISCAL 1997
First Quarter $16.50 $ 9.75
Second Quarter 18.63 12.88
Third Quarter 30.00 13.00
Fourth Quarter 24.75 9.88
The Company has never declared nor paid any cash dividends on its
Common Stock. The Company currently intends to retain future earnings, if any,
for future growth and does not anticipate paying any cash dividends in the
foreseeable future.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
For the Years Ended December 31,
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
- -----------------------------------------------------------------------------------------------------------------------------
Net sales $2,220,018 $2,125,698 $1,916,244 $1,684,627 $1,130,796
Gross profit 359,935 351,976 342,446 323,991 246,678
Restructuring, merger costs and goodwill write-off -- 67,828 32,161 -- --
Litigation settlements 14,000 20,700 -- -- --
Income (loss) from operations before interest, income
taxes and extraordinary charge 52,528 (42,455) 33,093 57,715 41,063
Income (loss) before income taxes and extraordinary
charge 61,578 (37,816) 36,601 57,903 40,877
Extraordinary charge, net of taxes -- -- 1,584 -- --
=============================================================================================================================
Net income (loss) $30,178 ($36,681) $15,298 $35,244 $24,556
=============================================================================================================================
Basic net income (loss) per share $0.87 ($1.06) $0.45 $1.07 $0.82
Diluted net income (loss) per share $0.85 ($1.06) $0.44 $1.05 $0.80
Shares used in per share calculation -
Basic 34,803 34,475 34,310 32,940 29,847
Diluted 35,349 34,475 34,793 33,605 30,560
=============================================================================================================================
OPERATING DATA:
- -----------------------------------------------------------------------------------------------------------------------------
Gross profit percentage 16.2% 16.6% 17.9% 19.2% 21.8%
Operating profit (loss) percentage 2.4% (2.0%) 1.7% 3.4% 3.6%
Current ratio 2.2:1 2.0:1 2.2:1 2.8:1 2.5:1
BALANCE SHEET DATA (AT DECEMBER 31):
- -----------------------------------------------------------------------------------------------------------------------------
Working capital $312,128 $262,449 $271,530 $298,843 $210,278
Total assets 666,530 619,344 607,842 554,546 411,876
Long - term obligations -- -- 376 20,458 1,497
Short-term debt obligations -- 12,570 40,803 18,888 25,461
Stockholders' equity 398,543 348,789 384,168 364,669 270,862
=============================================================================================================================
</TABLE>
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The table below sets forth certain items expressed as a percent of net
sales for each of the years in the three-year period ended December 31, 1998.
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0%
Cost of sales 83.8 83.4 82.1
- -----------------------------------------------------------------------------------------------------------------
Gross profit 16.2 16.6 17.9
Selling, general and administrative expenses 13.2 14.4 14.5
Restructuring costs, merger costs and goodwill write-off -- 3.2 1.7
Litigation settlements 0.6 1.0 --
- -----------------------------------------------------------------------------------------------------------------
Income (loss) from operations before interest, income taxes and extraordinary charge 2.4 (2.0) 1.7
Interest income, net 0.4 0.2 0.2
- -----------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and extraordinary charge 2.8% (1.8%) 1.9%
=================================================================================================================
</TABLE>
1998 COMPARED TO 1997
WORLDWIDE SALES
o Net sales increased $94.3 million or 4.4% to $2.220 billion from $2.126
billion in the prior year. In 1998 we continued to focus on expanding our
IBM PC-compatible ("Wintel") business. This focus resulted in an
approximate 16.4% increase in our worldwide Wintel sales. Our worldwide
Mac sales declined approximately 13.6%. Overall, our Mac business
represented approximately 34% of our total business in 1998, down from
approximately 41% in 1997.
o Sales growth for the year was impacted by the disposal of our small-Mac
dependent Norwegian, Finnish, Danish, Japanese and Australian businesses
in December of 1997 and early in 1998. The sales growth excluding these
businesses was $153.3 million or 7.4% over 1997. Wintel sales grew
approximately 19.1% and Mac sales declined approximately 10.4%.
o Our average order value was $523 in 1998, an increase of 4.0% compared to
1997, while our number of orders shipped remained relatively flat year
over year.
o As of December 31, 1998 we had 2.0 million customers who had placed orders
with us in the last twelve months, down 9.1% from 2.2 million at the end
of 1997. This decrease was principally due to a decline in the number of
active Mac customers.
DOMESTIC SALES
o Domestic sales grew $120.8 million or 8.2% to $1.603 billion from
$1.483 billion in 1997.
o Domestic Wintel sales increased approximately 24.2% from 1997, while
domestic Mac sales declined approximately 11.2% from the prior year.
o Wintel desktop computer sales increased 121% over 1997 and unit
volume increased 221%.
17
<PAGE>
o Macintosh OS computer sales decreased 2%, while units increased 5%.
Sales of Apple branded computers, including the new iMac, increased
42% in revenue and 72% in units, partially offsetting the
elimination of Macintosh clones from the marketplace.
o Overall, our domestic average selling price for computers declined
20% from 1997.
o Our domestic average order value increased 7.9% to $556 from $515 in
1997 despite a higher percentage of Internet orders which typically
have lower average order values.
INTERNATIONAL SALES
o International sales decreased $26.5 million or 4.1% to $616.7
million from $643.2 million in 1997. On a currency-adjusted basis,
international sales declined 2.7%.
o Excluding the results of the businesses disposed of in December of
1997 and early 1998, international sales increased 5.6% and
increased 7.1% on a currency-adjusted basis.
o International Wintel sales increased approximately 3.0% from 1997.
o International Mac sales declined approximately 22.5% from 1997.
WORLDWIDE INTERNET SALES
o Our Internet business continued to grow substantially in 1998.
Internet sales increased $137.1 million or 277% to $186.6 million
from $49.5 million in 1997.
o Sales from our Warehouse.com core business Internet site increased
$105.9 million or 225% to $152.9 million from $47.0 million in 1997.
We have begun a significant upgrade of this site, adding many new
features and services. We have also expanded our product category
offering with the addition of a book commerce site,
Readerswarehouse.com.
o Sales for our auction website Webauction.com were $33.7 million
during 1998 compared to $2.5 million in 1997. Webauction.com began
operations in November 1997.
o In February 1999 we announced the formation of an Internet-only
subsidiary, Savebynet.com Inc. which includes Webauction.com and
Computersbynet.com, our new Internet discount retailer website.
GROSS PROFIT
o Gross profit increased to $359.9 million in 1998 from $352.0 million in
1997 but decreased as a percentage of net sales to 16.2% in 1998 from
16.6% in 1997.
o The gross profit percentage decline was due to lower domestic margins.
International margins were relatively flat.
o Our domestic margins were lower as a result of increased competitive
pricing pressures and the impact of a greater percentage of low-margin
Internet sales.
o Our international margins were flat due to increased competitive pressure
in the UK, offset by the disposal of our lower margin businesses in
Norway, Denmark, Finland, Japan and Australia in December of 1997 and
early 1998.
We expect to experience continued reduction in gross profit margins
in 1999 due to continued industry-wide pricing pressures. Also, some
manufacturers and distributors provide us with incentives in the form of price
protection and rebates. No assurance can be given that we will continue to
receive such incentives in the future. In addition, our gross margin as a
percentage of sales may vary based on product mix, pricing strategies, market
conditions and other factors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
18
<PAGE>
o Selling, general and administrative expenses decreased as a percentage of
net sales to 13.2% from 14.4% in 1997.
o This decrease was due to several factors including our net advertising
costs, which decreased as a percentage of sales to 0.9% from 1.3% in 1997,
lower overall operating costs and savings from the disposal and
restructuring of our international businesses. These savings were
partially offset by $2.3 million of Year 2000 readiness costs and higher
compensation and recruiting and training expenses for our domestic sales
force.
LITIGATION SETTLEMENTS, GOODWILL WRITE-OFFS AND RESTRUCTURING CHARGES
o Our 1998 results include a pre-tax charge of $14.0 million for the
settlement of the Inmac shareholder litigation.
o Our 1997 results include pre-tax charges of $67.8 million relating to the
write-off of goodwill ($41.9 million) and restructuring costs ($25.9
million) announced in December of 1997.
o Included in our 1997 results is a pre-tax charge of $20.7 million relating
to the settlements of the consolidated class action and derivative
lawsuits arising out of the restatement of our financial statements for
the years 1992 through 1995.
INCOME (LOSS) FROM OPERATIONS
o Income from operations for 1998 was $52.5 million or 2.4% of net sales
compared to a loss from operations of $42.5 million or 2.0% of net sales
in 1997.
o Excluding the 1998 charge for the Inmac shareholder litigation settlement,
income from operations would have been $66.5 million or 3.0% of net sales.
o The 1997 income from operations was impacted by pre-tax restructuring
charges and goodwill write-offs of $67.8 million.
o The 1997 income from operations was also impacted by a pre-tax charge of
$20.7 million for the settlement of the shareholder and derivative
litigation.
o Excluding the charges related to the restructuring, goodwill write-off and
litigation settlements, income from operations would have been $46.1
million or 2.2% of net sales in 1997.
INTEREST INCOME, NET
o Net interest income totaled $9.1 million in 1998 compared to $4.6 million
in 1997.
o The principal reason for this increase was the higher level of cash and
cash equivalents on hand during 1998.
INCOME TAXES
o Our effective income tax rate for 1998 was 51.0% compared to a benefit of
3.0% in 1997.
o The 1998 income tax rate was unfavorably impacted by the Inmac shareholder
litigation settlement which is not deductible for tax purposes. The $14
million pre-tax charge for the settlement of this litigation was recorded
net of a $5 million contribution from a non-affiliated source.
o The 1997 income tax rate was impacted by valuation allowances recorded on
the tax benefits of restructuring costs and the write-off of goodwill.
o Excluding the impact of the 1998 after-tax charge of $15.8 million
relating to the litigation settlement and the 1997 valuation allowances
recorded on the tax benefits of restructuring costs our effective
19
<PAGE>
income tax rate was 39.1% in 1998 compared to 47.2% in 1997. The lower
rate is principally due to the recognition of tax benefits on certain
foreign net operating losses.
NET INCOME (LOSS)
o Net income for 1998 was $30.2 million or $0.85 per share compared to a net
loss of $36.7 million or $1.06 per share in 1997.
o Our 1998 results were impacted by a $15.8 million or $0.45 per share
charge for the settlement of the Inmac shareholder litigation. Our 1997
results include charges of $12.7 million or $0.37 per share for the
settlement of the shareholder and derivative litigation, and $52.5 million
or $1.52 per share in restructuring costs and goodwill write-offs.
o If you exclude these charges, our net income for 1998 was $46.0 million or
$1.30 per share compared to net income of $28.5 million or $0.83 per share
in 1997.
1997 COMPARED TO 1996
SALES
o Our net sales increased $209.5 million or 10.9% to $2.126 billion from
$1.916 billion in the prior year.
o Wintel sales increased approximately $268 million or 27.2% compared to
1996, while Macintosh-related sales decreased approximately $59 million or
6.3%. Wintel sales in 1997 increased in both the domestic and
international markets while the Macintosh business decreased in both
markets compared to 1996.
o The continued shift in product mix to hardware resulted in an average
order value of $503 in 1997, an increase of 8.4% compared to 1996.
o Overall, domestic sales increased 15.7% over 1996 and international sales
increased 1.3%.
o Our increase in sales was in part due to the increase in the number of
catalogs distributed worldwide which increased 3.0% to 124.1 million
catalogs and a 2.4% increase in the number of orders.
GROSS PROFIT
o Gross profit increased to $352.0 million in 1997 from $342.4 million in
1996 but decreased as a percentage of net sales to 16.6% in 1997 from
17.9% in 1996.
o The gross profit percentage declined primarily due to lower margins in our
European operations resulting from a higher proportion of hardware sales
and on a worldwide basis due to the shift in product mix to the Wintel
business which had lower margins than the Macintosh business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
o Selling, general and administrative expenses decreased as a percentage of
net sales to 14.4% from 14.5% in 1996, primarily reflecting a 0.9%
decrease in net advertising costs to 1.3% of net sales from 2.2% of net
sales in 1996.
o This decrease was partially offset by increases in headcount during the
year.
LITIGATION SETTLEMENTS, GOODWILL WRITE-OFFS AND RESTRUCTURING CHARGES
o Our 1997 results include pre-tax charges of $67.8 million relating to the
write-off of goodwill ($41.9 million) and restructuring costs ($25.9
million).
20
<PAGE>
o These charges were incurred in connection with the closing of our
businesses in Australia and Japan and the sale of our operations in
Norway, Denmark and Finland and the write-off of goodwill in our German
business. In addition, we closed our European headquarters in the United
Kingdom reducing certain functions and transferring others to the United
Kingdom, other European business units and the United States.
o In the United States, we consolidated our USA Flex business from the
facility in Bloomingdale, Illinois and our Online Interactive, Inc.
business from the facility in Seattle, Washington into our existing New
Jersey and Connecticut facilities and wrote-off the remaining goodwill of
these businesses. We also reorganized our domestic sales force.
o These measures involved eliminating approximately 600 positions. All of
these actions were completed in 1998.
o Our 1997 results also include a pre-tax charge of $20.7 million relating
to the proposed settlements of the consolidated class action and
derivative lawsuit that arose out of the facts underlying our
announcements in September and October, 1996 that we intended to restate
our financial statements covering years 1992 through 1995.
INCOME (LOSS) FROM OPERATIONS
o Our loss from operations for 1997 was $42.5 million or 2.0% of net sales
compared to income from operations of $33.1 million or 1.7% of net sales
in 1996.
o Excluding the charges related to the restructuring, goodwill write-off and
the Litigation Settlements, 1997 income from operations would have been
$46.1 million or 2.2% of net sales.
o The 1996 results include pre-tax charges of $32.2 million relating to the
write-off of goodwill and restructuring and merger costs relating to the
1996 Inmac merger. Income from operations for 1996 excluding these charges
would have been $65.3 million or 3.4% of net sales.
INTEREST INCOME, NET
o Net interest income totaled $4.6 million in 1997 compared to $3.5 million
in 1996.
INCOME TAXES
o The effective income tax rate for 1997 was a benefit of 3.0% compared to a
provision of 54.9% in 1996 including the extraordinary charge.
o The 1997 income tax rate was impacted by valuation allowances recorded on
the tax benefits of restructuring costs and the write-off of goodwill.
o Excluding these items the effective tax rate was 47.2%, as compared to
40.7% in 1996, excluding certain restructuring and merger costs and
goodwill write-offs incurred in 1996. The higher rate is principally due
to the absence of a tax benefit on certain foreign losses.
NET INCOME (LOSS)
o Our net loss for 1997 was $36.7 million or $1.06 per share compared to net
income of $15.3 million or $0.44 per share in 1996.
o Excluding the charges related to the restructuring, goodwill write-offs,
litigation settlements, merger costs and extraordinary charge, net income
for 1997 was $28.5 million or $0.83 per share as compared to $40.9 million
or $1.18 per share in 1996.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
ASSET MANAGEMENT
o Cash and marketable securities were $188.6 million at December 31, 1998
compared to $78.9 million at December 31, 1997. The increase of $109.7
million was due primarily to improved inventory and accounts payable
management offset by payments of $12.6 million in short-term borrowings
and $33.4 million in connection with the shareholder and derivative
litigation settlements.
o Inventory decreased $40.7 million to $129.9 million at year end 1998 from
$170.5 million at year end 1997. Inventory turns for the year ended
December 31, 1998 were 15 compared to 11 in 1997.
o Accounts payable increased $39.4 million to $208.3 million from $168.9
million, primarily resulting from improvements in vendor terms.
o Overall, working capital increased $49.7 million from 1997 to 1998.
o We believe that our existing cash reserves and expected cash flow from
operations will be sufficient to satisfy our operating cash needs for at
least the next 12 months.
CAPITAL EXPENDITURES
o Capital expenditures were $22.2 million in 1998 and $16.5 million in 1997.
Major expenditures for 1998 were primarily related to the implementation
of new domestic financial systems, the upgrade of our websites and
telephone systems and other computer and hardware purchases. In 1997, our
expenditures were primarily related to purchases of computer equipment and
leasehold improvements.
o During the year, construction began on our new 230,000 sq. ft. warehouse
facility at the Airborne Express hub facility in Wilmington, Ohio. We
anticipate spending approximately $16 million for equipment, fixtures and
computer systems for the new warehouse during the next nine months. We
have executed a 10-year lease of this facility to commence upon completion
of construction, which will occur during the second quarter of 1999.
o We currently anticipate investing approximately $18 million over the
course of 1999 for the upgrade of our computer systems. This investment is
intended to improve and create efficiencies in many businesses including
sales, warehouse, inventory and financial management. In addition to these
expected improvements, the implementation of these upgrades will address
"Year 2000 readiness" issues.
o The upgrade of our primary domestic operating system has begun and new
domestic financial systems were successfully installed in 1998.
o These investments in systems and the expenditures related to the new
warehouse will be funded from existing cash and operating cash flows.
LINES OF CREDIT
o We have a multi-currency revolving credit facility of $55.0 million. This
facility expires on June 30, 1999. The facility is used for general
corporate and working capital purposes. As of December 31, 1998 this
facility was not being used.
o At December 31, 1998 we had unused lines of credit in the United Kingdom
and France which provide for unsecured borrowings up to 2.0 million
British pounds ($3.3 million at December 31, 1998 exchange rate) and 45
million French francs ($8.0 million at December 31, 1998 exchange rate),
for working capital purposes.
22
<PAGE>
FORWARD EXCHANGE CONTRACTS
o We use forward exchange contracts to manage exposure to foreign currency
risk related to intercompany loans and investments in our foreign
subsidiaries. Outstanding agreements involve the exchange of one currency
for another at a fixed rate. Our credit exposure is limited to the
replacement cost, if any, of the instruments and we only enter into such
agreements with highly-rated counterparties. We match the term and
notional amount of the contracts to the underlying intercompany loans or
investments and do not enter into forward exchange contracts for trading
or speculative purposes.
o At December 31, 1998 we had outstanding forward exchange contracts with
notional amounts of $13.0 million which mature in six months or less. The
single largest currency represented was the French franc.
IMPACT OF INFLATION AND SEASONALITY
o Response rates to catalog mailings are subject to seasonal variations. The
first and last quarters of the year generally have higher response rates
while the two middle quarters typically have lower response rates. Given
this fact, we mail fewer catalogs during the second and third quarters.
The slower quarters are impacted by the summer months, particularly in
Europe.
o We do not believe that inflation has had a material effect on our sales
during recent years.
ACCOUNTING PRONOUNCEMENTS
o 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 standards for reporting
and displaying comprehensive income and its components in the financial
statements. We adopted SFAS No. 130 effective January 1, 1998.
o 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. We adopted SFAS No. 131 in 1998.
o In 1998, the FASB issued Statement No. 133 "Accounting for Derivative
Instruments and Hedging Activities." It requires an entity to recognize
all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. This
statement is effective for all fiscal quarters beginning after June 15,
1999. We do not expect the adoption of this statement to be material to
our business, financial position or results of operations.
o In 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." SOP 98-1 is
effective for fiscal years beginning after December 15, 1998. We do not
expect the adoption of SOP 98-1 to be material to our business, financial
condition or results of operations.
o Also in 1998 the AICPA issued Statement of Position 98-5 ("SOP 98-5"),
"Reporting on the Costs of Start-up Activities." This Statement of
Position requires the expensing of certain costs such as pre-operating
expenses and any organizational costs associated with start-up activities,
and is effective for fiscal years beginning after December 15, 1998. The
effect of adoption is required to be accounted for as a cumulative effect
of change in accounting principle. We do not expect the impact of SOP 98-5
to be material to our business, financial condition or results of
operations.
YEAR 2000 READINESS
23
<PAGE>
We use a significant number of computer software programs and
operating systems in our internal operations including applications used in
financial business systems and various administrative functions that will be
affected by the Year 2000 problem common to most businesses. If these systems
are unable to properly recognize date sensitive information related to Year 2000
they could generate erroneous data or fail to operate. This in turn may cause
disruptions of our operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
YEAR 2000 READINESS PROGRAMS. To reduce the possibility of
significant interruptions in normal operations we have initiated a worldwide
Year 2000 readiness program. We are using both internal and external
resources in our Year 2000 program. As part of our readiness program, we have
named a Year 2000 Director, established a project office and formed a
cross-functional task force to coordinate this program on a worldwide basis.
In 1998 we performed a comprehensive review of our existing
information systems to determine which of our computer equipment and software
might not function properly with respect to dates referencing the Year 2000 and
thereafter. This 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.
We are in the process of modifying or replacing systems that were
identified as not being Year 2000 ready. In addition to the planned upgrades
described in Liquidity and Capital Resources, above, we identified the need for
and have begun making modifications to our worldwide systems in connection with
the Year 2000 program. We estimate that we were 45% complete at December 31,
1998 with respect to the modification or replacement of our worldwide systems
and remain on target for completion by June 30, 1999. Final integration testing
for these systems is scheduled to occur in the third quarter of 1999.
Significant milestones in this project include:
o We have substantially completed our worldwide hardware
upgrades.
o We have successfully inventoried and evaluated our
desktop/server software on a worldwide basis. The
implementation of compliant versions of the software for these
platforms is on schedule.
o We have identified as needing replacement or upgrading our
domestic operating and human resource systems. These
replacement or upgrade projects have been staffed and are
proceeding in accordance with our plan. Our European core
systems identified as needing upgrading have already been
remediated, are in the testing phase and are on schedule
for completion in accordance with our plan.
o We have converted our domestic financial systems to Peoplesoft
Inc. application software.
During the second quarter of 1998 we began a program for determining
the Year 2000 readiness of our business partners, including our vendors, service
providers and major customers and the compatibility of system interfaces for
electronic business transactions. First we identified our business partners and
categorized them according to their significance to our operations. Then we
wrote to each business partner to determine its Year 2000 readiness status.
Based on these communications, we believe that most of our significant business
partners and our interfaces with their systems will be Year 2000 ready. However,
it is too early to determine whether any of our other business partners will be
Year 2000 ready. During the first quarter of 1999, we began to escalate our
correspondence to those business
24
<PAGE>
partners that have not responded to our initial communications or whose response
identified an issue requiring further clarification. During the next six months,
we intend to complete our readiness analysis, work with our business partners to
clarify any outstanding issues and, where appropriate, develop contingency plans
including securing alternative vendors and service providers.
COST OF YEAR 2000 READINESS PROGRAMS. After-tax charges related
to the identification, assessment, remediation and testing efforts related to
the Year 2000 program are expected to be approximately $4.7 million. We
expect that remaining after-tax Year 2000 expenses during the first nine
months of 1999 will be approximately $3.3 million which will negatively
impact earnings by approximately $0.04 per share in each of the first two
quarters of 1999 and $0.02 per share in the third quarter of 1999. This
amount is not included in the $18 million we expect to invest in the planned
upgrade of our worldwide computer systems during the next twelve months. As
of December 31, 1998, we had incurred after-tax costs of approximately $1.4
million primarily for outside consulting fees related to the planning and
analysis activities of the Year 2000 program, including incurred costs of
approximately $0.6 million or $0.02 per share during the fourth quarter of
1998.
RISKS ASSOCIATED WITH YEAR 2000 ISSUES. If we or our significant
business partners fail to address Year 2000 issues in an adequate and timely
manner, our ability to process transactions could be impeded. In addition,
the failure of common carriers or other means of shipping products to be able
to transport shipments of our products to customers in a timely basis during
the first days or weeks of the new millennium could cause the loss of
material amount of revenue some of which may be permanent. This may result in
a direct and material impact on our ability to generate revenue and to
attract and retain customers in the future. This in turn could have a
material impact on our business, financial condition and results of
operations.
Among the factors that could cause our Year 2000 efforts to be less
than fully effective are the novelty and complexity of these issues and their
solutions and our dependence on the technical skills of employees and
independent contractors and on the representations and preparedness of third
parties. Moreover, Year 2000 issues present a number of risks that are beyond
our control. These include the failure of vendors or common carriers to deliver
merchandise to us or our 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 us of the effects of Year 2000
issues on the economy in general or on our business partners and customers in
particular.
In addition, variability of definitions of "compliance with Year
2000" and the variety of computer products we sell that may themselves contain a
Year 2000 problem may lead to claims against us, including those arising out of
the failure of such products to be "compliant". Through our Year 2000 compliance
office we have received over 12,000 third party requests for documentation of
internal compliance and product compliance. We rely upon the warranties of the
product manufacturers in case of any such claims but we have not received
assurance that such warranties will be sufficient to cover the costs and
expenses of any successful claims.
Assuming that governmental services, the banking system, common
carriers, telecommunications and utilities are operational and no material
adverse impact on the market for our products or the economy in general occurs
prior to or immediately following the new millennium, we believe that the
reasonably likely worst case scenario would be the requirement to incur
additional expense and resources needed to repair or replace additional systems
or subsystems, the potential loss or delay of customer orders, direct and
material impact on our ability to generate revenue and to attract and retain
customers in the future and a higher than anticipated influx of customer returns
and claims relating to products sold by us that were not Year 2000 ready. Any of
these things could have a material adverse effect on our business, financial
condition and results of operations.
25
<PAGE>
CONTINGENCY PLANS. We are in the process of developing
contingency plans to mitigate to the extent possible any significant
identified Year 2000 risks. We have begun a comprehensive analysis of the
nature and extent of operational problems that would be reasonably likely to
result from our failure or the failure of our business partners to complete
their Year 2000 readiness efforts. This analysis will provide the information
necessary to develop a contingency plan for dealing with the most likely
worst case scenario. We currently expect to complete such analysis and
contingency planning during the second quarter of 1999.
EUROPEAN MONETARY UNION
On January 1, 1999 eleven member countries of the European Community
established the euro, a new common currency, by fixing exchange rates between
their national currencies and the euro. Of these eleven member countries, we
have operations in France, Germany and the Netherlands. 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 impact of the common currency on our European
businesses was the requirement to process customer orders in both national
currencies and the euro. We have performed an analysis to determine the
requirements to upgrade various computer systems to manage our business in a
dual currency environment. These upgrades are currently being implemented and
are expected to be complete by the end of the first quarter in 1999. Until these
upgrades are complete, we will manually process transactions for those customers
who require us to transact business in the euro. We do not expect these manual
processes to result in any significant disruption to our European businesses.
The cost of the computer systems upgrade is not material.
Our existing multi-currency revolving credit agreement contemplates
borrowing in the euro. Our foreign exchange exposures are not expected to be
materially altered by the introduction of the euro.
OUTLOOK
We depend in large part on sales of hardware and software
products for users of Apple Macintosh computers. These products represented
approximately 34% of our net sales for the year ended December 31, 1998.
Computers manufactured by Apple Computer, Inc. itself represented
approximately 11% of our net sales for the Year ended December 31, 1998.
Apple has significantly restricted the number of authorized resellers of its
products and sells its products to end users in direct competition with us
and other resellers. If Apple were to withdraw our reseller authorization,
this would have an immediate adverse impact on our business, financial
condition and results of operations. In addition, Compaq Computer Corp., one
of our largest suppliers, has recently expanded its direct sales efforts. The
continuing impact of these matters may adversely affect our business,
financial condition and results of operations.
We acquire products for resale both directly from manufacturers and
indirectly through distributors and other sources. Many of these manufacturers
have historically provided us 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 the 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 us, which could have a material adverse effect on our business,
financial condition and results of operations.
26
<PAGE>
We have embarked on a program to expand our telemarketing sales
force and believe that our future success depends, in part, on our ability to
recruit, train and retain an adequate number of skilled sales associates.
We are in the process of replacing or modifying substantially all of
our significant operating and financial systems. We believe that our future
success is dependent upon the successful integration of these systems in a
timely fashion.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
With the exception of historical information contained in this
Report, the matters described in this Report contain "forward-looking
statements". Forward-looking statements typically include the words "believe,"
"expect," "anticipate," "intend," "estimate," or similar expressions. The
forward-looking statements in this Report are subject to economic, competitive,
governmental, technological and legal contingencies, many of which are beyond
our control. They are specifically subject to risks and uncertainties relating
to:
o increased competition from other catalog, retail store, online
and other resellers and manufacturers of computer products
o reductions in manufacturers' incentive programs
o our foreign operations
o the volatility of our stock
o privacy concerns with respect to mailing list development and
maintenance
o IT systems capacity restraints
o continued development of electronic commerce
o quarterly fluctuations and seasonality of our business
o increases in postage, shipping and paper costs
o state sales tax collection efforts
o the ultimate outcome of the Commission's investigation into
our reported accounting errors
o the Year 2000 issue and specifically our Year 2000 readiness
initiatives
o certain provisions of our Certificate of Incorporation that
could delay, defer or prevent a change in control
We discuss these and other risks in more detail in:
o Management's Discussion and Analysis of Financial Condition
and Results of Operations section of this Report and more
specifically in the paragraphs in that section captioned
"Liquidity and Capital Resources," "Impact of Inflation and
Seasonality" and "Outlook"
o the Risk Factors section of our Registration Statement on Form
S-3 dated January 25, 1999
We warn you not to place undue reliance on the forward-looking
statements contained in this Report because they speak only as of the date of
this Report and we have no obligation to update or revise them in the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk in the normal course of our business
operations due to our operations in different foreign currencies, and our
ongoing investing activities. The risk of loss can be assessed from the
perspective of adverse changes in fair values, cash flows and future earnings.
We
27
<PAGE>
have established policies and procedures governing our management of market
risks and the use of financial instruments to manage exposure to these risks.
The primary purpose of our foreign currency hedging activities is to
manage currency risk related to intercompany loans and investments in our
foreign subsidiaries. The single largest hedged currency represented at December
31, 1998 is the French franc. At December 31, 1998, we had outstanding forward
exchange contracts in notional amounts totaling $12,973 (fair value of $12,990)
which mature in six months or less. We match the term and the notional amount of
the contracts to the underlying intercompany loans or investments, and do not
enter into any derivative financial instruments for trading purposes. Foreign
currency hedging activity is not material to our consolidated financial
position, results of operations, or cash flow.
We are exposed to changes in interest rates primarily as a result
of our investing activities. The primary objective of our investing
activities is to preserve principal while at the same time maximizing yields
without significantly increasing risk. We primarily invest in highly liquid
tax exempt municipal bonds, floating rate bonds, commercial paper, money
market funds and corporate bonds which totaled $60,520 at December 31, 1998.
These investment portfolios have a weighted average maturity of less than one
year with no individual investment having a maturity exceeding two years. The
market risk associated with investing activity is not material to our
consolidated financial position, results of operations or cash flow.
The interest rate risk evaluation noted above is based on a
sensitivity analysis performed on our marketable securities at December 31,
1998. If the actual changes in interest rates are substantially different from
expected changes, the net impact of interest rate risk on our cash flows may be
materially different from that disclosed above.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 19, 1999, we informed KPMG LLP that upon completion of
the audit for the year ended December 31, 1998, we will not reappoint them as
the principal accountants for the year ended December 31, 1999. We will
engage PricewaterhouseCoopers LLP as our principal accountants. The decision
to change accountants was recommended by the Audit Committee of the Board of
Directors and approved by the full Board of Directors.
In connection with the audits of the two fiscal years ended
December 31, 1998, there were no disagreements with KPMG LLP on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedures, which disagreements if not resolved to their
satisfaction would have caused them to make reference in connection with
their opinion to the subject matter of the disagreement.
The audit reports of KPMG LLP on our consolidated financial
statements as of and for the years ended December 31, 1998 and 1997, did not
contain any adverse opinion or disclaimer of opinion, nor were they qualified
or modified as to uncertainty, audit scope, or accounting principles. We have
requested that KPMG LLP furnish us with a letter to the Commission stating
whether or not they agree with the above statements. A copy of this letter,
dated March 19, 1999 from KPMG LLP is attached as exhibit 16.1 to this Report.
28
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item appears in the Company's
definitive Proxy Statement for its Annual Meeting of Stockholders scheduled to
be held on June 3, 1999 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item appears in the Company's
definitive Proxy Statement for its Annual Meeting of Stockholders scheduled to
be held on June 3, 1999 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item appears in the Company's
definitive Proxy Statement for its Annual Meeting of Stockholders scheduled to
be held on June 3, 1999 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears in the Company's
definitive Proxy Statement for its Annual Meeting of Stockholders scheduled to
be held on June 3, 1999 and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM
8-K
(a)(1) Consolidated Financial Statements:
The following consolidated financial statements are filed as part of
this report:
Responsibility for Financial Statements and Independent Auditors'
Report.
Consolidated Balance Sheets as of December 31, 1998 and 1997.
Consolidated Statements of Operations for the years ended December
31, 1998, 1997 and 1996.
Consolidated Statements of Comprehensive Income (Loss) for the
years ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Stockholders' Equity as of and for the
years ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
(a)(2) Consolidated Financial Statement Schedule:
The following Consolidated Financial Statement Schedule of the
Company as set forth below is filed with this report:
Schedule II Valuation and Qualifying Accounts
29
<PAGE>
Independent Auditors' Report on Consolidated Financial Statement
Schedule
Consolidated Financial Statement Schedules other than the one listed
above are omitted for the reason that they are not required or are
not applicable, or the required information is shown in the
consolidated financial statements or notes thereto.
(a)(3) Exhibits
See Exhibit Index for exhibits filed with this report on Form 10-K.
(b) Reports on Form 8-K
1. The Company filed a Form 8-K pursuant to Item 5 therein
on December 31, 1998 to report that it had amended its By
Laws to provide that the Secretary of the Company must
receive written notification describing any business
proposed to be presented by a stockholder at an annual
meeting at least 60 days before the date on which the
Company mailed its proxy materials for the prior year's
annual meeting.
2. The Company filed a Form 8-K pursuant to Item 4 therein
on March 26, 1999 to report that upon completion of the
audit for the year ended December 31, 1998 the Company
will not reappoint KPMG LLP as its principal accountants
for the year ended December 31, 1999 and that the Company
will engage PricewaterhouseCoopers LLP as its principal
accountants.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Micro Warehouse, Inc.
By /s/ PETER GODFREY
-----------------------------------------------
Peter Godfrey
Chairman, Chief Executive Officer and President
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
Peter Godfrey and Bruce L. Lev, or either of them, his attorneys-in-fact, with
the power of substitution, for him in any and all capacities, to sign any
amendments to this report on Form 10-K for the year ended December 31, 1998, and
to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorneys-in-fact, or their substitute or substitutes,
may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report on Form 10-K for the year ended December 31, 1998 has been signed
below by the following persons on behalf of the Company and in the capacities
and on the dates indicated.
NAME Title Date
Peter Godfrey /s/ PETER GODFREY March 31,1999
------------------------------
Chairman, Chief Executive
Officer and President
Felix Dennis /s/ FELIX DENNIS March 31,1999
------------------------------
Director
Frederick H. Fruitman /s/ FREDERICK H. FRUITMAN March 31,1999
------------------------------
Director
Joseph M. Walsh /s/ JOSEPH M. WALSH March 31,1999
------------------------------
Director
Wayne P. Garten /s/ WAYNE P. GARTEN March 31,1999
------------------------------
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer)
31
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Responsibility for Financial Statements F-2
Independent Auditors' Report F-3
Consolidated Balance Sheets as of December 31, 1998 and 1997. F-4
Consolidated Statements of Operations and Consolidated Statements of
Comprehensive Income (Loss) for the years ended December 31, 1998,
1997 and 1996. F-5
Consolidated Statements of Stockholders' Equity as of and for the years
ended December 31, 1998, 1997 and 1996. F-6
Consolidated Statements of Cash flows for the years ended
December 31, 1998, 1997 and 1996. F-7
Notes to Consolidated Financial Statements F-8
F-1
<PAGE>
RESPONSIBILITY FOR FINANCIAL STATEMENTS
AND INDEPENDENT AUDITORS' REPORT
MICRO WAREHOUSE, INC.
MANAGEMENT RESPONSIBILITY FOR FINANCIAL STATEMENTS
The financial data in this report, including the audited financial
statements, have been prepared by management using the best available
information and applying judgment. Accounting principles used in preparing the
financial statements are those that are generally accepted in the United States.
In meeting our responsibility for the integrity of the financial statements
we maintain a system of internal controls designed to provide reasonable
assurance that assets are safeguarded, transactions are executed in accordance
with management's authorization and accounting records provide a reliable basis
for the preparation of the financial statements. Management has also established
a formal Business Code of Ethics which is distributed throughout the Company. We
acknowledge our responsibility to establish and preserve an environment in which
all employees properly understand the fundamental importance of high ethical
standards in the conduct of our business.
Our independent auditors are engaged to audit and to render an opinion on
the fairness in all material respects of our consolidated financial statements
presented in conformity with generally accepted accounting principles. In
performing their audit in accordance with generally accepted auditing standards,
they evaluate the effectiveness of our internal accounting control systems,
review selected transactions and carry out other auditing procedures to the
extent they consider necessary in expressing their opinion on our financial
statements.
The Audit Committee of the Board of Directors meets with management, our
internal auditors and our independent auditors to review accounting, auditing
and financial matters. Our Audit Committee is composed of only outside
directors. This committee and the independent auditors have free access to each
other with or without management being present.
Peter Godfrey Wayne P. Garten
President, Chief Executive Officer and Executive Vice President and
Chairman of the Board Chief Financial Officer
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
KPMG LLP
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF MICRO WAREHOUSE, INC.:
We have audited the accompanying consolidated balance sheets of Micro
Warehouse, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, comprehensive income (loss),
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Micro Warehouse, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Stamford, Connecticut
February 16, 1999
F-3
<PAGE>
CONSOLIDATED BALANCE SHEETS
MICRO WAREHOUSE, INC.
December 31,
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- -------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 128,035 $ 58,051
Marketable securities at market value 60,520 20,817
Accounts receivable, net of allowance for doubtful accounts ($10,943
and $13,399 at December 31, 1998 and 1997, respectively) 216,487 217,475
Inventories 129,852 170,543
Prepaid expenses and other current assets 14,379 11,763
Tax refunds 13,176 23,452
Deferred taxes 17,666 30,903
- -------------------------------------------------------------------------------------------------
Total current assets 580,115 533,004
- -------------------------------------------------------------------------------------------------
Property, plant and equipment, net 36,950 32,416
Goodwill, net 44,444 45,744
Non-current deferred taxes 3,422 5,850
Other assets 1,599 2,330
- -------------------------------------------------------------------------------------------------
Total assets $ 666,530 $ 619,344
=================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 208,335 $ 168,886
Accrued expenses 50,508 67,055
Accrued litigation settlements -- 16,100
Loans payable, bank -- 12,570
Deferred revenue 9,144 5,944
- -------------------------------------------------------------------------------------------------
Total liabilities 267,987 270,555
- -------------------------------------------------------------------------------------------------
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: 35,413 and 34,639
shares at December 31, 1998 and 1997, respectively 354 346
Additional paid-in capital 299,544 282,865
Deferred compensation (3,123) (4,413)
Retained earnings 110,568 80,390
Accumulated other comprehensive loss (8,800) (10,399)
- -------------------------------------------------------------------------------------------------
Total stockholders' equity 398,543 348,789
- -------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 666,530 $ 619,344
=================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
MICRO WAREHOUSE, INC.
<TABLE>
<CAPTION>
Years Ended December 31,
(in thousands, except per share data) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 2,220,018 $ 2,125,698 $ 1,916,244
Cost of goods sold 1,860,083 1,773,722 1,573,798
- -----------------------------------------------------------------------------------------------------------
Gross profit 359,935 351,976 342,446
Selling, general and administrative expenses 293,407 305,903 277,192
Write-off of goodwill -- 41,907 5,977
Restructuring costs -- 25,921 20,071
Merger costs -- -- 6,113
Provision for settlements of shareholder and
derivative litigation 14,000 20,700 --
- -----------------------------------------------------------------------------------------------------------
Income (loss) from operations before interest,
income taxes and extraordinary charge 52,528 (42,455) 33,093
Interest income 9,482 6,408 5,717
Interest expense (432) (1,769) (2,209)
- -----------------------------------------------------------------------------------------------------------
Interest income, net 9,050 4,639 3,508
- -----------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and
extraordinary charge 61,578 (37,816) 36,601
Income tax provision (benefit) 31,400 (1,135) 19,719
- -----------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary charge 30,178 (36,681) 16,882
Extraordinary charge, net of taxes of $1,078 -- -- 1,584
- -----------------------------------------------------------------------------------------------------------
Net income (loss) $ 30,178 $ (36,681) $ 15,298
===========================================================================================================
Basic net income (loss) per share $ 0.87 ($ 1.06) $ 0.45
Basic net income (loss) per share before
extraordinary charge $ 0.87 ($ 1.06) $ 0.49
Diluted net income (loss) per share $ 0.85 ($ 1.06) $ 0.44
Diluted net income (loss) per share before
extraordinary charge $ 0.85 ($ 1.06) $ 0.49
Shares used in per share calculation -
Basic 34,803 34,475 34,310
Diluted 35,349 34,475 34,793
===========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
MICRO WAREHOUSE, INC
Years Ended December 31,
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ 30,178 $ (36,681) $ 15,298
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on marketable
securities (2) (14) 64
Foreign currency translation adjustments 1,601 (7,356) (2,014)
- -----------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) 1,599 (7,370) (1,950)
- -----------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ 31,777 $ (44,051) $ 13,348
===========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
MICRO WAREHOUSE, INC.
<TABLE>
<CAPTION>
Additional Loan to Accumulated
Common Stock Paid-in Deferred Former Retained Comprehensive
(In thousands) Shares Amount Capital Compensation Officer Earnings Loss Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 33,944 $ 339 $ 263,636 $ -- $ -- $ 101,773 $ (1,079) $ 364,669
====================================================================================================================================
Net income -- -- -- -- -- 15,298 -- 15,298
Common stock issued pursuant to
stock awards, stock options and
warrants exercised 415 4 5,807 -- -- -- -- 5,811
Loan to former officer -- -- 1,400 -- (1,400) -- -- --
Deferred compensation -- -- 340 -- -- -- -- 340
Foreign currency translation
Adjustment -- -- -- -- -- -- (2,014) (2,014)
Valuation adjustment for
Marketable securities -- -- -- -- -- -- 64 64
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 34,359 343 271,183 -- (1,400) 117,071 (3,029) 384,168
====================================================================================================================================
Net (loss) -- -- -- -- -- (36,681) -- (36,681)
Common stock issued pursuant
to stock options exercised 280 3 6,256 -- -- -- -- 6,259
Loan to former officer -- -- (775) -- 1,400 -- -- 625
Deferred compensation -- -- 6,201 (4,413) -- -- -- 1,788
Foreign currency translation
Adjustment -- -- -- -- -- -- (7,356) (7,356)
Valuation adjustment for
Marketable securities -- -- -- -- -- -- (14) (14)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 34,639 346 282,865 (4,413) -- 80,390 (10,399) 348,789
====================================================================================================================================
Net income -- -- -- -- -- 30,178 -- 30,178
Common stock issued pursuant
to stock options exercised 774 8 15,710 -- -- -- -- 15,718
Stock issuance for Litigation
Settlement 277 3 5,997 -- -- -- -- 6,000
Deferred compensation -- -- (354) 1,290 -- -- -- 936
Repurchase of Common Stock (277) (3) (4,674) -- -- -- -- (4,677)
Foreign currency translation
Adjustment -- -- -- -- -- -- 1,601 1,601
Valuation adjustment for
Marketable securities -- -- -- -- -- -- (2) (2)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 35,413 $ 354 $ 299,544 ($ 3,123) $ -- $ 110,568 ($ 8,800) $ 398,543
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
REPRESENTING INCREASES (DECREASES) IN CASH AND CASH EQUIVALENTS
MICRO WAREHOUSE, INC.
Years Ended December 31,
(in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 30,178 ($ 36,681) $ 15,298
Adjustments to reconcile net income (loss)
to net cash provided (used) by
operating activities:
Depreciation and amortization 15,039 16,160 12,340
Non-cash litigation settlement 6,000 -- --
Write-off of goodwill -- 41,907 5,977
Restructuring costs - non-cash portion -- 11,853 3,457
Litigation settlements -- 20,700 --
Non-cash compensation 936 1,788 421
Deferred taxes 15,665 (19,062) (4,389)
Extraordinary charge -- -- 1,900
Changes in assets and liabilities:
Accounts receivable, net (2,222) (23,069) (24,662)
Inventories 40,361 26,576 (55,530)
Prepaid expenses and other current assets (2,817) 1,853 10,781
Tax refunds 10,407 (7,196) (3,710)
Other assets 143 (199) 1,119
Accounts payable 43,103 38,936 15,447
Accrued expenses (9,749) 6,607 14,677
Accrued litigation settlements (16,100) -- --
Deferred revenue 3,169 3,619 (2,249)
Other (337) (38) (473)
- ----------------------------------------------------------------------------------------------
Total adjustments 103,598 120,435 (24,894)
Net cash provided (used) by operating activities 133,776 83,754 (9,596)
- ----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property, plant and equipment (22,240) (16,518) (11,172)
Purchases of businesses, represented by:
Goodwill -- (20,883) (28,986)
Net liabilities (assets) -- 654 (5,836)
Proceeds from sale of equipment 73 147 576
Sales (purchases) of marketable securities, net (39,705) (809) 622
- ----------------------------------------------------------------------------------------------
Net cash used by investing activities (61,872) (37,409) (44,796)
- ----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 15,718 6,259 5,811
Purchase of treasury stock (4,677) -- --
Borrowings under (repayments of) lines of credit, net (12,584) (24,467) 22,037
Repayment of notes payable -- -- (21,900)
Principal payments of obligations under capital leases (509) (218) (378)
- ----------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (2,052) (18,426) 5,570
- ----------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 132 (2,102) (558)
- ----------------------------------------------------------------------------------------------
Net change in cash 69,984 25,817 (49,380)
Cash and cash equivalents:
Beginning of year 58,051 32,234 81,614
- ----------------------------------------------------------------------------------------------
End of year $ 128,035 $ 58,051 $ 32,234
==============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MICRO WAREHOUSE, INC.
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include Micro Warehouse, Inc. and
its subsidiaries (the "Company"), which are all wholly-owned. All significant
intercompany accounts and transactions are eliminated in consolidation.
Reclassifications have been made to conform prior years to the 1998
presentation.
CASH EQUIVALENTS
Highly liquid investments with original maturities of three months or
less are included in cash equivalents unless designated as available for sale
and classified as investment securities.
MARKETABLE SECURITIES
Marketable securities consist primarily of highly liquid tax exempt
municipal bonds, floating rate bonds, commercial paper, money market funds
and corporate bonds which have a weighted average maturity of less than one
year with no individual investment having a maturity exceeding two years. All
investments are classified as available-for-sale and are reported at fair
market value with net unrealized gains and losses included in equity. For all
investment securities, unrealized losses that are other than temporary are
recognized in earnings.
INVENTORIES
Inventories (substantially all finished goods) consist of computer
hardware, software and peripheral equipment, and are stated at cost (determined
under the first-in, first-out cost method) or market, whichever is lower.
PREPAID CATALOG COSTS AND DEFERRED REVENUE
The costs of producing and distributing catalogs are deferred and
charged to expense over the period that revenues are derived for each catalog
(generally ten weeks). Vendors have the ability to place advertisements in the
catalogs for which the Company receives advertising allowances and incentives.
These revenues are recognized on the same basis as the catalog costs.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment (including equipment acquired under
capital leases) are stated at cost and are depreciated using the straight-line
method over the estimated useful lives of the assets, as follows:
<TABLE>
<S> <C>
Computer equipment and software 3-7 years
Furniture and fixtures 5-7 years
Leasehold improvements Life of lease or 7 years
Machinery and equipment 7 years
</TABLE>
F-8
<PAGE>
INTANGIBLE ASSETS
Intangible assets are stated at cost and are amortized using the
straight-line method over the estimated useful lives of the assets, as follows:
<TABLE>
<S> <C>
Trademarks 5 years
Goodwill 40 years
</TABLE>
INCOME TAXES
Deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax basis of existing assets and liabilities. A valuation allowance is used
to reduce the carrying amount of deferred tax assets which may not be realized.
REVENUE RECOGNITION
Revenue on product sales is recognized at the time of shipment. A
reserve for product returns is established based upon historical trends.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries are translated into
United States dollars at the exchange rate in effect at the balance sheet date.
Revenue and expenses are translated at average rates in effect during the
period. The resultant translation adjustment is reflected as a separate
component of Stockholders' Equity and is included in other comprehensive income
(loss).
FORWARD EXCHANGE CONTRACTS
For a foreign currency commitment that is classified as a hedge, any
gain or loss on the commitment is deferred and included in the basis of the
underlying item. Any unrealized gains or losses associated with foreign currency
commitments that are classified as speculative are recognized in the current
period. Foreign currency gains and losses realized are included in the
Consolidated Statements of Operations as selling, general and administrative
expenses. If a foreign currency transaction previously considered as a hedge is
terminated before the transaction date of the related commitment, any deferred
gain or loss shall continue to be deferred and included in the basis of the
underlying item.
FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, accounts receivable
and accounts payable approximated fair values due to the short-term maturities
of these instruments. The fair value of currency forward contracts were
estimated based on quoted market prices for contracts with similar terms.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the balance
sheet, and the
F-9
<PAGE>
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
NET INCOME PER SHARE
Diluted earnings per share reflects the potential dilution that could
occur if outstanding common stock options and awards were exercised. The
dilutive effect of such options and awards to weighted average shares
outstanding was 546 in 1998 and 483 in 1996. Potentially dilutive shares of 191
in 1997 were not reflected in the calculation of diluted earnings per share
since the inclusion of such shares would have been antidilutive as a result of
the net loss for the year.
LONG-LIVED ASSETS
The Company periodically evaluates the carrying value of intangibles
and the related periods of amortization to determine whether events and
circumstances warrant revised estimates of asset value or useful lives. The
Company annually assesses the recoverability of goodwill by determining whether
the amortization of the balance over its remaining life can be recovered through
projected undiscounted future operating cash flows. Evaluations of asset value
as well as periods of amortization are performed for each geographic market.
STOCK-BASED COMPENSATION
The Company follows the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, which allows it to continue to apply APB Opinion No.
25 and provide the pro forma disclosure provisions of SFAS No. 123 (see note
11). As such, compensation expense is recorded only if the current market price
of the Company's stock on the date of grant (or measurement date, if later)
exceeds the exercise price.
DEPENDENCE ON MACINTOSH PRODUCTS
The Company derives approximately 34% of its revenues from the sale
of Macintosh products. Sales of computers manufactured by Apple Computer,
Inc. represent approximately 11% of net sales. If Apple were to withdraw the
Company's reseller authorization, this would have an immediate adverse impact
on the Company's business, financial condition and results of operations.
UNAUDITED CONDENSED QUARTERLY DATA
In the opinion of management, the unaudited condensed quarterly
financial data in note 13 reflect all adjustments which are necessary for a fair
statement of the results of operations for the periods presented.
NOTE 2. BUSINESS COMBINATIONS
In July 1997 the Company acquired the business of Online Interactive,
Inc., a Seattle, Washington-based electronic reseller of software ("OLI") in a
business combination accounted for as a purchase. The total cost of the
acquisition was $16,400 which exceeded the fair value of the net liabilities by
$17,066.
In February 1997 the Company acquired two businesses, one with
operations in Canada and one with operations in Australia. These acquisitions
were accounted for as purchases. The total cost of the acquisitions was $3,829
which exceeded the fair value of the net assets acquired by $3,817.
F-10
<PAGE>
In October 1996 the Company acquired the business of USA Flex in a
business combination accounted for as a purchase. The total cost of the
acquisition was $26,762 which exceeded the fair value of the net assets acquired
by $22,053.
In January 1996, the Company acquired Inmac Corp. ("Inmac") through an
exchange of 3,034 of its shares for all of Inmac's 10,817 shares in a
transaction accounted for as a pooling of interests. Under pooling of interests
accounting, all of the Company's consolidated financial statements as of and for
periods prior to the acquisition of Inmac have been restated to reflect Inmac
and the Company on a combined basis. In connection with the transaction, the
Company recorded (i) $20,071 of restructuring charges, primarily for personnel
and facilities matters; (ii) $6,113 for merger costs; and (iii) an extraordinary
charge of $1,584 (net of tax benefit of $1,078) related to a mandatory
prepayment to extinguish certain Inmac indebtedness.
During 1996 the Company acquired two other businesses, one with
operations in Finland and one with operations in the United States. These
acquisitions were accounted for as purchases. The aggregate purchase price and
goodwill were $7,411 and $6,284, respectively.
In connection with the December 1997 announced restructuring plan, the
goodwill related to the USA Flex, OLI, Norway, Finland, Germany and Australia
businesses were written-off (see note 3).
NOTE 3. RESTRUCTURING AND GOODWILL WRITE-OFFS
1997 RESTRUCTURING
During December 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 salesforce and eliminate certain non-core businesses
currently operating at a loss. The Restructuring involved the closing of its
businesses in Australia and Japan, the sale of its operations in Norway, Denmark
and Finland and the write-off of its goodwill of its German business. 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 and OLI businesses from its
facilities in Bloomingdale, Illinois and Seattle, Washington to existing
facilities in New Jersey and Connecticut and wrote-off all of the goodwill
associated with these businesses. In addition, the Company reorganized its
domestic salesforce. In connection with the Restructuring, approximately 600
positions were eliminated. These restructuring activities were completed in
1998.
As a result of the Restructuring, the Company recorded a pre-tax charge
of $67,828. Details of this restructuring charge are as follows:
<TABLE>
<CAPTION>
Original Utilized Balance at
(in millions) Accrual Cash Noncash December 31, 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Goodwill write-offs $41,907 $ -- $41,907 $ --
Severance costs $10,314 $ 7,350 $ -- $2,964
Lease terminations, moving costs and asset
write-downs $15,607 $ 917 $ 8,756 $5,934
- -----------------------------------------------------------------------------------------------------------
$67,828 $ 8,267 $50,663 $8,898
===========================================================================================================
</TABLE>
As of December 31, 1998, the Company's accrual related primarily to
remaining contractual lease termination and severance payments.
The operations closed or sold had revenues of approximately $59,000 and
operating losses of approximately $5,000 in 1997.
F-11
<PAGE>
INMAC RESTRUCTURING
In connection with the merger with Inmac during 1996, the Company
initiated a restructuring plan to reduce costs and increase future operating
efficiencies by eliminating excess operations and facilities acquired in the
Inmac acquisition. The closing of the facilities was completed during the first
half of 1997. As a result, the Company recorded restructuring costs of $20,071
in 1996.
In connection with the Inmac restructuring, approximately 493 employees
associated with the facilities closed were terminated. Estimated employee
termination costs of $10,886 were accrued in 1996 and paid in 1996 and 1997. In
addition to the cost of terminating employees, the principal costs of the Inmac
restructuring included the write-off of fixed assets and lease terminations.
Estimated charges of $2,983 for asset write downs, $3,952 for lease terminations
and $2,250 of other costs were accrued in 1996 and paid in 1996 and 1997.
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Computer equipment and software $56,260 $47,994
Furniture and fixtures 15,688 14,005
Leasehold improvements 10,937 9,921
Machinery and equipment 6,894 8,687
Construction in Progress 4,468 536
- --------------------------------------------------------------------------------
94,247 81,143
Less accumulated depreciation and amortization 57,297 48,727
- --------------------------------------------------------------------------------
$36,950 $32,416
================================================================================
</TABLE>
NOTE 5. BORROWING ARRANGEMENTS
LINES OF CREDIT
The Company has a $55,000 unsecured multi-currency revolving credit
facility permitting borrowing by the Company and certain of its foreign
subsidiaries. The facility expires on June 30, 1999. This facility was unused at
December 31, 1998 and the balance outstanding was $12,570 at December 31, 1997.
The facility provides for borrowing with interest at the bank's prime rate or
LIBOR (or its foreign currency equivalent) plus 0.50%-1.25%, based on the ratio
of debt to earnings before interest and taxes. The weighted average interest
rate was approximately 5.8% for loans outstanding as of December 31, 1997.
Commitment fees were not significant.
At December 31, 1998 and 1997 the Company had unused lines of credit in
the United Kingdom and France. The credit line in the United Kingdom provides
for unsecured borrowings up to 2,000 British pounds ($3,319 and $3,286 at
December 31, 1998 and December 31, 1997 currency exchange rates, respectively).
The credit line in France provides for unsecured borrowings up to 45,000 French
francs ($8,037 and $7,476 at December 31, 1998 and December 31, 1997 currency
exchange rates, respectively). Both these credit lines are available for working
capital purposes.
F-12
<PAGE>
INMAC BORROWINGS
During 1996 as a result of the merger with the Company all Inmac
borrowings were repaid. An extraordinary charge of $1,584 after-tax ($2,662
pre-tax) was recorded for fees and penalties arising from the early
extinguishment of such borrowings.
HEDGING
The Company utilizes 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 and the Company only enters
into such agreements with 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 December 31, 1998 the Company had outstanding forward exchange
contracts in notional amounts of $12,973 (fair value of $12,990) which mature in
six months or less. The single largest currency represented was the French
franc.
At December 31, 1997 the Company had outstanding forward exchange
contracts in notional amounts of $27,095 (fair value of $27,123) which matured
in six months or less. The single largest currency represented was the British
pound.
NOTE 6. GOODWILL
Amounts consist of:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Goodwill $49,676 $49,316
LESS: AMORTIZATION 5,232 3,572
- --------------------------------------------------------------------------------
$44,444 $45,744
================================================================================
</TABLE>
During 1997 in connection with the Restructuring (see note 3) the
Company recorded a charge for goodwill write-offs of $41,907 related to the sale
or closing of its businesses in Norway, Finland and Australia, and the
diminution in value of the goodwill associated with the USA Flex, OLI and German
businesses.
NOTE 7. ACCRUED EXPENSES
Accrued expenses at December 31, 1998 and 1997 include approximately
$14,261 and $9,560 respectively, of accrued payroll costs and $8,898 and $21,498
respectively, of accrued restructuring costs.
F-13
<PAGE>
NOTE 8. COMMITMENTS
LEASES
The Company rents certain office facilities from related parties,
occupies office and warehouse space, and rents equipment under various operating
leases with independent parties which provide for minimum annual rentals.
Future minimum annual rentals at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Related
Total Party
- -------------------------------------------------------------------------------
<S> <C> <C>
1999 $ 9,833 $343
2000 8,814 --
2001 7,142 --
2002 5,782 --
2002 5,096 --
2003 AND AFTER 9,391 --
- -------------------------------------------------------------------------------
Total $46,058 $343
===============================================================================
</TABLE>
Rent expense was as follows:
<TABLE>
<CAPTION>
Related
Total Party
- -------------------------------------------------------------------------------
<S> <C> <C>
Year ended December 31, 1998 $ 9,829 $312
Year ended December 31, 1997 10,444 312
Year ended December 31, 1996 8,774 312
</TABLE>
NOTE 9. INCOME TAXES
The provision (benefit) for income taxes is summarized below:
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $ 10,605 $ 16,254 $ 23,012
State 1,920 1,195 1,920
Foreign 3,210 478 (1,902)
- --------------------------------------------------------------------------------
15,735 17,927 23,030
Deferred
Federal 15,224 (16,155) (1,537)
State 589 (1,195) (202)
Foreign (148) (1,712) (2,650)
- --------------------------------------------------------------------------------
15,665 (19,062) (4,389)
- --------------------------------------------------------------------------------
F-14
<PAGE>
Total $ 31,400 ($ 1,135) $ 18,641
================================================================================
</TABLE>
The following table accounts for the difference between the actual tax
provision (benefit) and the amounts obtained by applying the statutory United
States Federal income tax rate of 35% to income (loss) before taxes.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal tax rate 35.0% (35.0%) 35.0%
State income taxes net of Federal benefit 2.6 -- 3.3
Non-deductible restructuring and merger costs -- 11.0 6.3
Goodwill amortization and write-off -- 8.9 7.9
Foreign rate difference and unused foreign losses 2.1 10.6 4.4
Provision for settlement of litigation 10.8 -- --
Other, Net 0.5 1.5 (2.0)
- -------------------------------------------------------------------------------------
Effective tax rate 51.0% (3.0%) 54.9%
=====================================================================================
</TABLE>
The United States and foreign components of income (loss) before income
taxes were:
<TABLE>
<CAPTION>
UNITED STATES FOREIGN
- --------------------------------------------------------------------------------
<S> <C> <C>
Year ended December 31, 1998 $ 56,468 $ 5,110
Year ended December 31, 1997 (11,299) (26,517)
Year ended December 31, 1996 52,255 (18,316)
</TABLE>
Taxes have not been provided for undistributed earnings of foreign
subsidiaries since the Company presently intends to continue to reinvest these
earnings.
Components of the net deferred tax asset relate to:
<TABLE>
<CAPTION>
December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets
Accounts receivable reserve $ 1,886 $ 3,259 $ 2,091
Inventory reserve 1,107 2,503 2,002
Restructuring reserve 8,745 12,489 --
Accrued expenses 3,813 3,169 3,346
Inventory capitalization 1,009 970 1,066
Litigation settlement reserve -- 7,351 --
Other 708 2,613 3,321
Tax loss carryforwards 15,875 20,769 18,970
- ----------------------------------------------------------------------------------------
33,143 53,123 30,796
Valuation allowance for tax loss carryforwards (12,055) (16,370) (12,906)
- ----------------------------------------------------------------------------------------
F-15
<PAGE>
Total deferred tax asset 21,088 36,753 17,890
========================================================================================
</TABLE>
The Company has approximately $23,688 in unutilized foreign tax loss
carryforwards and approximately $17,370 in unutilized United States federal tax
loss carryforwards. Of these loss carryforwards, $20,006 have no expiration
dates, $20,344 expire beginning 2005 through 2011, and $708 expire beginning
1999 through 2005. United States tax law imposes a limitation on the amount of
the United States tax loss carryforwards which can be utilized each year when
there is a change in the stock ownership of the Company which incurred the
losses. The United States federal tax losses which became an asset of the
Company through the acquisition of Inmac Corp. are subject to this rule. Based
on the Company's historical and expected taxable earnings, management believes
it is more likely than not that the Company will realize the benefit of the
existing net deferred tax asset at December 31, 1998.
In 1998 the international tax loss carryforwards and related valuation
allowance were reduced by $4,109 relating to the disposal of certain businesses
in December 1997 and early 1998.
NOTE 10. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid during the period for:
Interest $ 414 $ 1,776 $ 1,805
Income taxes 2,879 18,418 27,297
Non-cash investing and financing activities:
Loan to (settlement from) former officer for
purchase of stock -- (1,400) 1,400
================================================================================
</TABLE>
NOTE 11. STOCK OPTIONS, EMPLOYEE BENEFIT PLAN AND STOCKHOLDERS RIGHTS PLAN
The Company applies APB Opinion No. 25 and related interpretations in
accounting for stock-based compensation. Accordingly, compensation expense is
recorded only if the current market price of the Company's common stock on the
date of grant (or measurement date if later) exceeds the exercise price.
Compensation cost recognized in 1998 was $936. Had compensation cost been
determined on a fair value basis consistent with SFAS No. 123, the Company's net
income and net income per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) As reported $30,178 ($36,681) $15,298
Pro forma $25,306 ($38,693) $12,673
Net income (loss) per share - diluted basis As reported $0.85 ($1.06) $0.44
Pro forma $0.72 ($1.12) $0.36
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to year
1995 and additional awards in future years are anticipated.
A summary of the status of stock options outstanding as of December 31,
1998, 1997 and 1996 and changes during the years ended on those dates is
presented below:
F-16
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
Weighted Weighted Weighted
Average Average Average
Shares Price Shares Price Shares Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares under option:
Outstanding at beginning of year 3,172 $14.44 1,710 $22.28 1,328 $17.18
Granted 1,854 $15.06 3,048 13.58 836 27.50
Exercised (808) $16.25 (594) 12.21 (346) 16.79
Forfeited (302) $17.89 (992) 21.40 (108) 23.23
- --------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 3,916 $14.93 3,172 $14.44 1,710 $22.28
====================================================================================================================
Options exercisable at year end 925 $16.80 512 $16.06 407 $15.56
- --------------------------------------------------------------------------------------------------------------------
Weighted average fair value per share of
Options granted during 1998, 1997 and 1996 $9.69 $6.07 $12.64
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The fair value of each stock option grant is estimated as of the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rates 5.43% 6.30% 6.20%
Expected lives 5 years 5 years 5 years
Expected volatility 73.83% 39.30% 42.50%
Expected dividend yields 0% 0% 0%
</TABLE>
1992 AND 1994 STOCK OPTION PLANS
The 1992 and 1994 Stock Option Plans (the "Plans") provide for the grant
of stock options to officers, directors and key employees of, and consultants
to, the Company and its subsidiaries. Under the Plans, the Company may grant
options that are intended to qualify as incentive stock options ("Incentive
Stock Options") within the meaning of Section 422A of the Internal Revenue Code
of 1986, as amended (the "Code"), or options not intended to qualify as
Incentive Stock Options ("Non-statutory Stock Options"). A total of 5,000 shares
of common stock have been reserved for issuance upon the exercise of options
granted under the Plans.
The Plans are administered by the Compensation and Stock Option
Committee of the Board of Directors. Subject to the provisions of the Plans, the
Committee has the authority to select the employees, directors and consultants
to whom options are granted and determine the terms of each option, including
(i) the number of shares of common stock covered by the option, (ii) when the
option becomes exercisable, (iii) the option exercise price, which must be at
least 100%, with respect to Incentive Stock Options, and at least 85%, with
respect to Non-statutory Stock Options, of the fair market value of the common
stock as of the date of grant, and (iv) the duration of the option (which may
not exceed ten years).
In June 1997 the Stockholders of the Company approved an amendment to
the 1994 stock option plan which increased the number of shares reserved for
issuance from 1,000 to 4,000. In January 1997, the Company approved a
comprehensive option grant program providing a total of 2,017 options to
directors and all qualified employees of the Company and authorized the exchange
of 360 outstanding
F-17
<PAGE>
stock options. The exercise price for options under these programs is $12.63 per
share. As a result of this program, the Company recorded deferred compensation
of $8,387 representing the difference between the exercise price and closing
market price on the date of stockholder approval for the shares granted. Such
amount is being amortized over the 5-year vesting period of the options.
Amortization of deferred compensation relating to these grants for 1998 and 1997
was $936 and $1,788, respectively and $354 and $2,186 of such amount of deferred
compensation was forfeited in 1998 and 1997, respectively.
STOCK OPTIONS ISSUED OUTSIDE THE PLANS
During 1996 and 1997 the Company granted to certain senior executives
options to purchase 890 shares of common stock at prices ranging from $10.75 to
$25.00 per share. During 1997 574 of these options were forfeited. During 1998
no options issued outside the Plans were forfeited.
Stock options outstanding at December 31, 1998, are summarized as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Range of Number average remaining average Number average
exercise prices outstanding contractual life exercise price exercisable exercise price
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$9.00 - $13.97 2,576 8.41 years $12.87 602 $12.76
$14.03 - $20.41 1,034 8.97 years 16.17 116 16.28
$22.50 - $32.00 305 7.86 years 28.01 206 28.77
$44.50 1 6.84 years 44.50 1 44.50
- ------------------------------------------------------------------------------------------------------------
$9.00 - $44.50 3,916 8.51 years $14.93 925 $16.80
- ------------------------------------------------------------------------------------------------------------
</TABLE>
STOCK AWARDS
During 1997 the Company granted to certain senior executives awards for
78 shares of common stock that are outstanding at December 31, 1998. Such awards
are fully vested.
401(K) SAVINGS PLAN
The Company sponsors a 401(k) Savings Plan (the "401(k) Plan") which
covers substantially all full-time employees who meet the 401(k) Plan's
eligibility requirements. Participants may make tax deferred contributions of up
to 15% of annual compensation (subject to other limitations specified by the
Internal Revenue Code) and the Company makes a 50% matching contribution for
amounts which do not exceed 6% of participant's annual compensation. The Company
may also make discretionary profit sharing contributions to the 401(k) Plan.
During 1998, 1997 and 1996, the Company incurred approximately $1,482, $534, and
$556, respectively, of expense related to the 401(k) matching component of the
401(k) Plan.
STOCKHOLDERS RIGHTS PLAN
Under a stockholder rights plan effective June 27, 1996, rights to
purchase a unit consisting of one one-thousandth of a share of a new Series A
Junior Participating Preferred Stock at an exercise price of $110.00 have been
distributed as a dividend at the rate of one right for each share of the
Company's common stock. The terms of the Preferred Stock have been designed so
that each one one-thousandth of
F-18
<PAGE>
a share of Preferred Stock will approximate the same economic value of one share
of the Company's common stock.
The rights become exercisable only following the acquisition by a person
or group, without the prior consent of the Company, of 20% or more of the
Company's voting stock or following the announcement of a tender offer or
exchange offer to acquire an interest in the Company of 20% or more. After the
rights become exercisable, they will be adjusted upon the occurrence of certain
events relating to an attempted acquisition of the Company so as to entitle all
holders, except the takeover bidder, to purchase stock in the Company or the
prospective acquirer's company, as the case may be, at a bargain price. The
effect of the plan is to encourage a prospective acquirer to negotiate with the
Board of Directors of the Company a transaction that is fair to all
stockholders.
NOTE 12. OPERATIONS BY GEOGRAPHIC AREAS
The Company operates primarily in one industry segment, the distribution
of computer hardware, software, supplies and accessories. Information about the
Company's operations in different geographic areas for the years ended December
31, 1998, 1997 and 1996 is presented below.
<TABLE>
<CAPTION>
Year Ended December 31, 1998 United States International Consolidated
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $1,603,342 $616,676 $2,220,018
Income from Operations Before
Interest and Income Taxes 48,164 4,364 52,528
Long-Lived Assets, Net 28,185 8,765 36,950
Year Ended December 31, 1997 United States International Consolidated
- --------------------------------------------------------------------------------
Net sales $1,482,509 $643,189 $2,125,698
Loss from operations before
interest and income taxes (16,558) (25,897) (42,455)
Long-lived assets, net 22,250 10,166 32,416
Year Ended December 31, 1996 United States International Consolidated
- --------------------------------------------------------------------------------
Net sales $1,281,237 $635,007 $1,916,244
Income (loss) from operations before
interest, income taxes and
extraordinary charges 49,504 (16,411) 33,093
Long-lived assets, net 18,573 11,139 29,712
</TABLE>
NOTE 13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for the years ended December 31, 1998
and 1997:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 Net sales $551,706 $521,487 $551,789 $595,036
Gross profit 88,361 84,230 89,738 97,606
Net income (loss) 9,762 (5,040) 11,863 13,593
Basic net income (loss) per share (A) $0.28 ($0.15) $0.34 $0.39
Diluted net income (loss) per share (A) $0.28 ($0.15) $0.33 $0.38
Shares used in per share calculation -
Basic 34,600 34,633 34,816 35,101
Incremental shares from assumed
F-19
<PAGE>
conversion of options and awards (B) 62 -- 775 940
Diluted 34,662 34,633 35,591 36,041
- ---------------------------------------------------------------------------------------------
1997 Net sales $529,503 $500,420 $522,072 $573,703
Gross profit 87,465 83,913 86,457 94,141
Net income (loss) 7,813 7,821 (7,118) (45,197)
Basic net income (loss) per share (A) $0.23 $0.23 ($0.21) ($1.30)
Diluted net income (loss) per share (A) $0.23 $0.23 ($0.21) ($1.30)
Shares used in per share calculation -
Basic 34,364 34,432 34,550 34,637
Incremental shares from assumed
conversion of options and awards (B) 73 300 -- --
Diluted 34,437 34,732 34,550 34,637
</TABLE>
(A) The sum of the quarterly amounts on a per share basis do not equal amounts
for the year due to rounding.
(B) Incremental shares were not included for periods with a net loss as they
would have had an antidilutive effect.
NOTE 14. LEGAL PROCEEDINGS
During the second quarter of 1998, the Company recorded a pre-tax charge
of $14,000 for the settlement of the lawsuit brought by holders of approximately
1.3 million 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 provided for a total payment of
$19,000, $6,000 of which was in the form of the Company's common stock. The
implementation of this settlement occurred July 30, 1998. The pre-tax charge was
based on the total amount of the settlement, net of a $5,000 contribution from a
non-affiliated source. On an after-tax basis, the charge recorded was $15,849.
Also in 1998, the Company reached a settlement with the State Board of
Administration of Florida covering approximately 51 shares. The Company made a
$150 settlement payment to the State Board of 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.
A pre-tax charge of $20,700 was recorded in the third quarter of 1997
for the settlements of the consolidated class action and derivative lawsuit that
arose out of the facts underlying the Restatement. The charge of $20,700 was
comprised of $31,600 for the settlements of the consolidated class action and
derivative lawsuit including estimated legal fees, offset by insurance proceeds
of $10,900.
These settlements exclude the ongoing formal investigation by the
Securities and Exchange Commission (the "Commission") into the events underlying
the Restatement. The Company is cooperating with the Commission in its
investigation.
NOTE 15. ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of accumulated other comprehensive income, net of related
tax, at December 31, 1998 and 1997 are as follows:
F-20
<PAGE>
<TABLE>
<CAPTION>
Foreign Unrealized Accumulated Other
Currency Gains on Comprehensive
Items Securities Income
----- ---------- ------
<S> <C> <C> <C>
December 31, 1997 ($10,403) $ 4 ($10,399)
Current-period change 1,601 (2) 1,599
- -----------------------------------------------------------------------------
December 31, 1998 ($ 8,802) $ 2 ($ 8,800)
=============================================================================
</TABLE>
NOTE 16. MARKETABLE SECURITIES
All marketable securities are classified as available-for-sale. The following
is a summary of marketable securities at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Market Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1998
State governmental obligations $ 34,638 $ 6 $ (5) $ 34,639
Corporate debt securities 13,580 2 (1) 13,581
Other debt securities 12,300 -- -- 12,300
December 31, 1997
State governmental obligations 18,315 4 -- 18,319
Other debt securities 2,498 -- -- 2,498
</TABLE>
At December 31, 1998, marketable securities mature as follows:
<TABLE>
<CAPTION>
Within 1 year 1-2 years
- --------------------------------------------------------------------------------
<S> <C> <C>
State governmental obligations $ 18,458 $ 16,181
Corporate debt securities 13,581 --
Other debt securities 12,300 --
</TABLE>
F-21
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors and Stockholders of Micro Warehouse, Inc.
Under date of February 16, 1999, we reported on the consolidated
balance sheets of Micro Warehouse, Inc. and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of operations, comprehensive
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1998 which are included in this Form 10-K.
In connection with our audits of the aforementioned consolidated financial
statements, we also have audited the related consolidated financial statement
schedule as listed under (a)(2). This consolidated financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this consolidated financial statement schedule based on
our audits.
In our opinion, the related consolidated financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth
therein.
Stamford, Connecticut
February 16, 1999
S-1
<PAGE>
SCHEDULE II
MICRO WAREHOUSE, INC.
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
Balance at Additions Deductions Balance at
Beginning Charged to from End
of Year Operations Reserves of Year
- -------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Allowance for doubtful accounts Year ended:
December 31, 1996 7,808 8,195 (5,127) 10,876
December 31, 1997 10,876 11,242 (8,719) 13,399
December 31, 1998 13,399 9,917 (12,373) 10,943
Reserve for obsolete inventory
Year ended:
December 31, 1996 8,336 5,601 (3,416) 10,521
December 31, 1997 10,521 10,246 (8,030) 12,737
December 31, 1998 12,737 10,173 (15,179) 7,731
</TABLE>
S-2
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
3.1(6) Amended and Restated Certificate of Incorporation of the Company
3.2(8) Amended and Restated By-Laws of the Company
4.1(1) Stockholders Rights Plan dated June 27, 1996
10.1(2) 1992 Stock Option Plan
10.2(3) Amendment No. 1 to 1992 Stock Option Plan
10.3(4) Amendment No. 2 to 1992 Stock Option Plan
10.4(6) Amended and Restated 1994 Stock Option Plan
10.5(2) Lease Agreements between C.P. Lakewood, L.P. and the Company relating
to the Lakewood, New Jersey facilities
10.6(2) Lease Agreement between Miller-Valentine Partners and the Company
relating to the Wilmington, Ohio facility
10.7(2) Lease Agreement between Peter Godfrey and the Company relating to the
South Norwalk, Connecticut facility (47 Water Street)
10.8(2) Lease Agreement between Hialet Associates and the Company relating to a
South Norwalk, Connecticut facility (53 Water Street)
10.9(2) Lease Agreement between Hialet Associates and the Company relating to a
South Norwalk, Connecticut facility (29 Haviland Street)
10.10(5) Lease Agreement between BBS Norwalk One Inc. and the Company relating
to the Norwalk, Connecticut facility
10.11(3) Employment Agreement between Peter Godfrey and the Company
10.12(6) Consulting Services Agreement between Felix Dennis and the Company, as
amended
10.13(6) Form of Indemnification Agreement with Officers and Directors
10.14(6) Amended and Restated Credit Agreement among the Company, the
Subsidiaries of the Company, and The Chase Manhattan Bank dated as of
December 31, 1997
10.15(6) Resignation Agreement between Linwood A. Lacy, Jr. and the Company
dated December 8, 1997
10.16(7) Severance Agreement and General Release between Stephen F. England and
the Company dated October 19, 1998
10.17(6) Resignation Agreement between Kris Rogers and the Company
<PAGE>
10.18 Amendment to Lease Agreement between C.P. Lakewood, L.P. and the
Company relating to Lakewood, New Jersey facility
10.19 Lease Agreement between Wilmington Commerce Park Partnership and the
Company relating to new Wilmington, Ohio warehouse/distribution
center.
10.20 Fourth Amendment to Lease Agreement between Peter Godfrey and the
Company relating to a South Norwalk, Connecticut facility (47 Water
Street)
10.21 Fourth Amendment to Lease Agreement between Hialet Associates and the
Company relating to a South Norwalk, Connecticut facility (53 Water
Street)
10.22 Second Amendment to Lease Agreement between Hialet Associates and the
Company relating to a South Norwalk, Connecticut facility (29 Haviland
Street)
10.23 Employment Agreement between Stephen J. Carline and the Company dated
as of October 28, 1998
10.24 Amended and Restated Employment Agreement between Adam W. Shaffer and
the Company dated as of January 1, 1998
10.25 Amended and Restated Employment Agreement between Bruce L. Lev and the
Company dated as of January 1, 1998
10.26 Amended and Restated Employment Agreement between Wayne P. Garten and
the Company dated as of January 1, 1998
10.27(9) Micro Warehouse, Inc. Deferred Compensation Plan Master Plan Document
10.28 Resignation Agreement between Peter Cannone and the Company dated
December 16, 1998
11.1 Statement re Computation of Per Share Earnings
16.1 Letter from KPMG LLP to the SEC dated March 19, 1998 re Change in
Certifying Accountants
21.1 Subsidiaries of the Company
23.1 Consent of independent accountants
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
- ----------
(1) Incorporated by reference to the Company's Registration Statement on
Form 8-A (File No. 00-20730)
(2) Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 33-53100)
<PAGE>
(3) Incorporated by reference to the Company's Annual Report on Form 10-K
for fiscal year 1995
(4) Incorporated by reference to the Company's Annual Report on Form 10-K
for fiscal year 1996
(5) Incorporated by reference to the Company's Form 10-Q for the quarter
ended June 30, 1994
(6) Incorporated by reference to the Company's Annual Report on Form 10-K
for fiscal year 1997
(7) Incorporated by reference to the Company's Form 10-Q for the quarter
ended September 30, 1998
(8) Incorporated by reference to the Company's Form 8-K filed on December
31, 1998
(9) Incorporated by reference to the Company's Registration Statement on
Form S-8 filed March 2, 1998
<PAGE>
EXHIBIT 10.18
AMENDMENT TO LEASE
This Amendment to Lease is made this ___22nd__ day of September, 1998 by and
between 1720 Oak Street, L.L.C. a New Jersey limited liability company, having
an address c/o Sudler Management Company, 300 Interpace Parkway, Bldg C,
Parsippany, New Jersey 07054-1100, successor in interest to C.P. Lakewood, L.P.
("Landlord"), and Micro Warehouse, Inc., a Delaware corporation, having an
address at 29 Haviland Street, South Norwalk, Connecticut 06854 ("Tenant").
WITNESSETH:
WHEREAS, by Agreement of Lease dated February 25, 1992 (the "Lease"),
by and between Landlord and Tenant, Landlord leased to Tenant and Tenant leased
from Landlord the premises located at 1720 Oak Street, Lakewood, New Jersey
consisting of approximately 52,109 square feet of space ("Premises"); and
WHEREAS, it is now the desire of Landlord and Tenant to amend and
extend said Lease as set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, Landlord and Tenant hereby agree that, effective as the date hereof
as set forth above, the Lease is amended as follows:
1. Section 1(b) of the Lease is deleted and the following substituted in its
place and stead:
"(b) NAME AND ADDRESS OF LANDLORD:
1720 Oak Street, L.L.C.
a New Jersey limited liability company
c/o Sudler Management Company
300 Interpace Parkway, Bldg C
Parsippany, New Jersey 07054-1100"
2. Section 1(h) of the Lease is deleted and the following substituted in its
place and stead:
"(h) BROKER:
Samson Realty Corp.; commission to be paid by Landlord."
3. TERM: The term of the Lease is extended for a period of ten (10)
additional years commencing on July 1, 1999 and terminating on June 30,
2009 (the "Extension Term").
4. Section 3 of the Lease is amended by deleting the second and third
paragraphs thereof.
5. RENT: The Fixed Rent payable by Tenant to Landlord during the Extension
Term shall be as follows:
Period Per Square Foot Monthly Annually
------ --------------- ------- --------
Years 1 - 5 $6.25 $27,140.10 $325,681.25
of the Extension Term
Years 6 - 10 $7.19 $31,221.98 $374,663.71
of the Extension Term
<PAGE>
6. The first paragraph of Section 8 of the Lease shall be designated
Section 8(a) and the following new sections 8(b) and 8(c) shall be
added:
"(b) In the event that Tenant wishes to utilize services of an
alternative electricity service provider ("ASP") rather than
the public utility that is servicing the Building as of the
date of Tenant's execution of this Amendment, no such ASP
shall be permitted to provide service to Tenant or to install
its lines or other equipment with the Building without
obtaining the prior written consent of Landlord, not to be
unreasonably withheld.
(c) Unless all of the following conditions are satisfied to in
a written agreement between the ASP and Tenant or by any other
means acceptable to Landlord, it shall be reasonable for
Landlord to refuse its consent:
(i) Landlord shall incur no expense whatsoever with
respect to any aspect of ASP's provision of its
services, including without limitation, the cost of
installation, service and materials;
(ii) Prior to commencement of any work in or about
the Premises by ASP, ASP shall supply verification
that ASP is properly insured and financially capable
of covering any uninsured damage;
(iii) ASP shall agree in writing to abide by rules
and regulations, job site rules, and such other
requirements, imposed on reasonable notice, as
reasonably determined by Landlord, to be necessary to
protect Landlord's interest in the Premises;
(iv) Landlord reasonably determines that there is
sufficient space in the Building for the placement of
all of ASP's equipment and materials, including
without limitation, in the electricity risers;
(v) ASP is, licensed by applicable government
agencies, as shown in documents acceptable to
Landlord;
(vi) ASP agrees that Landlord shall have the right,
upon reasonable request, to supervise ASP's
performance of any work on or about the Premises,
including, without limitation, any installations or
repairs;
(vii) ASP agrees that Landlord shall have the right
to enter ASP's space at any time in the event of an
emergency and at all reasonble times and upon
reasonable notice for the purpose or inspecting same,
making repairs (though nothing herein shall be
construed to obligate Landlord to make any repairs),
or exhibiting the space for purposes of sale, lease,
or financing.
(d) Landlord's consent under this Section shall not be deemed
any kind of warranty or representation by Landlord, including
without limitation, as to the suitability or competence of
ASP.
(e) Tenant shall indemnify and hold harmless Landlord for all
losses, claims, demands, expenses, and judgments against
Landlord caused by or arising out of, either directly or
indirectly, any negligent or reckless acts or omissions by
ASP.
7. Section 11 of the Lease is deleted in its entirety and the following
substituted in its place and stead:
<PAGE>
"11. MAINTENANCE AND REPAIRS. (a) Tenant shall keep and maintain the
Property (including all non-structural, exterior, interior and
landscaped areas, systems and equipment and the roof of the building)
in good order, condition and repair during the Term, normal wear and
tear excepted. Tenant shall promptly replace any portion of the
Property or any systems or equipment thereof which cannot be fully
repaired. All repairs and replacements shall be performed in a good and
workmanlike manner. All of Tenant's obligations to maintain and repair
the Property shall be accomplished at Tenant's sole expense.
(b) Tenant shall keep and maintain all portions of the
Property and the parking areas, sidewalks and landscaped areas, in an
attractive and clean condition free of dirt and rubbish, and clear the
parking areas and sidewalks of accumulations of snow and ice.
(c) Landlord shall keep and maintain the structural portions
of the building (except the roof) in good order, condition and repair,
at Landlord's expense (except Tenant shall be responsible for any
structural repairs and replacements necessitated by Tenant's negligence
or Tenant's alterations to structural portion of building).
(d) During the Term, Tenant shall procure and maintain the
following service contracts: (i) contract for inspection and
maintenance of the roof of the Building (the inspections pursuant to
such contract shall be made at least semi-annually); (ii) contract for
the inspection, service, maintenance and repair of all heating,
ventilating and air conditioning equipment installed in the Building
(the inspection pursuant to such contract shall be made at least
quarterly); (iii) contract for the inspection, maintenance and repair
of sprinkler and fire protection systems, and (iv) contract for
maintenance of the landscaped areas of the Property. The identity of
each contractor and each contract shall be subject to Landlord's
reasonable approval. Copies of reports of inspections made hereunder
shall be promptly supplied to Landlord.."
8. Sections 16(a) and 16(b) of the Lease shall be deleted in their
entirety and the following substituted in their place and stead:
"16. ENVIRONMENTAL LAW COMPLIANCE. (a) Tenant agrees that it shall, at
its sole cost and expense, materially fulfill, observe and comply with
all of the applicable terms and provisions of the Industrial Site
Recovery Act, N.J.S.A 13:1K-6 ET SEQ., ("ISRA") the Spill Compensation
and Control Act, N.J.S.A. 58:10-23.11 ET SEQ., (the "Spill Act"), and
all other federal, state and local environmental laws now in effect or
hereinafter enacted, as any of the same may be amended from time to
time, and all rules, regulations, ordinances, opinions, orders and
directives issued or promulgated pursuant thereto or in connection
therewith. Tenant's obligations pursuant to this Section 16(a) shall
apply to conditions relating to Tenant's operations and/or possession
or use of the Property, and to conditions arising during Tenant's
possession or use of the Property whether pursuant to this Lease or
otherwise and whether caused directly or indirectly by Tenant or any
other party on or off the Property. Landlord shall be responsible, at
its sole cost and expense, for compliance with governmental
requirements, if any, for cleanup or removal for any environmental
contamination at the Property which pre-existed Tenant's initial
occupancy of the Property which initial occupancy, the parties
acknowledge, predates this Lease.
(b) Without limiting the foregoing, within the time period
prescribed by applicable law with respect to "closing operations" or
"transferring ownership or operations" (as said terms are defined in
ISRA) by Tenant, Tenant, at its sole cost and expense, shall provide
Landlord with a certified true copy of:
<PAGE>
(i) A letter from the New Jersey Department of Environmental
Protection ("NJDEP") (or such other agency or body as shall then have
jurisdiction over ISRA matters), stating that ISRA does not then apply
to Tenant, Tenant's use and occupancy of the Property and the closing
of operations or transferring of ownership or operations of all or any
portion of the Property; or
(ii) A "No further action letter" (as said term is defined in
ISRA) duly and finally approved by NJDEP or such other agency or body
as shall then have jurisdiction over ISRA matters; or
(iii) A "Remedial action workplan" (as said term is defined in
ISRA) duly and finally approved by NJDEP or such other agency or body
as shall then have jurisdiction over ISRA matters, or
(iv) other documentation reasonably acceptable to Landlord
evidencing Tenant's compliance with, or the non-applicability of, ISRA.
(c) In the event Tenant complies with Section 16(b), by
obtaining an approved final Remedial action workplan, Tenant further
agrees that it shall, at its sole cost and expense:
(i) Post or cause to be posted any financial guarantee or
other bond required to secure implementation and completion of such
Remedial action workplan, and
(ii) Promptly implement and prosecute to completion or cause
to be so implemented and prosecuted such Remedial action workplan, in
accordance with the schedules contained in said Remedial action
workplan or as may be otherwise ordered or directed by NJDEP or such
other agency or body as shall then have jurisdiction over such Remedial
action workplan.
(d) Within twenty (20) days after written request by Landlord,
Tenant, shall deliver to Landlord a duly executed and acknowledged
affidavit of Tenant as Landlord may, from time to time, reasonably
require, certifying:
(i) The proper four digit Standard Industrial Classification
number relating to Tenant's then current use of the demised premises
(said Standard Industrial Classification number to be obtained by
reference to the then current Standard Industrial Classification Manual
prepared and published by the Executive Office of the President, Office
of Management and Budget or the successor to such publication); and
(ii) (A) That Tenant's then current use of the Property does
not involve the generation, manufacture, refining, transportation,
treatment, storage, handling, or disposal of hazardous substances(other
than normal and customary office products and cleaning supplies used in
Tenant's business in accordance with applicable environmental laws), or
hazardous wastes, as hazardous substances and hazardous wastes are
defined in ISRA, on site, above ground or below ground (all of the
foregoing being hereinafter collectively referred to as the Presence of
Hazardous Substances), or, (B) that Tenant's then present use does
involve the Presence of Hazardous Substances, (other than normal and
customary office products and cleaning supplies used in Tenant's
business in accordance with applicable environmental laws) in which
event, said affidavit shall describe in reasonable detail that portion
of Tenant's operations which involves the Presence of Hazardous
Substances. Tenant shall make available to Landlord, at reasonable
times and upon Landlord's reasonable request, information which
identifies each Hazardous Substance present at the Property, with the
exception of ordinary office and/or cleaning supplies and products used
in connection with the conduct of Tenant's business at the Premises.
Tenant shall supply Landlord with such additional information relating
to said Presence of Hazardous Substances as
<PAGE>
Landlord may reasonably request.
(e) Without limiting the foregoing, Tenant agrees,
(i) at its sole cost and expense, to promptly
discharge and remove any lien or other encumbrance against the Property
arising from or in connection with Tenant's failure or inability, for
any reason whatsoever, to observe or comply with ISRA, all other
environmental laws and the provisions of this Section 16; and
(ii) to indemnify and hold Landlord harmless from and
against any and all liability, penalties, losses, expenses, damages,
costs, claims, causes of action, judgments and/or the like, of whatever
nature, including, but not limited to, reasonable attorneys' fees, to
the extent said lien, encumbrance, liability, penalty, loss, expense,
damage, cost, claim, cause of action, judgment and/or the like arise
from or in connection with Tenant's failure or inability, for any
reason whatsoever, to observe or comply with ISRA, all other
environmental laws and the provisions of this Section 16.
(f) Tenant shall not, without the prior written consent of
Landlord having been obtained, at any time during the term of this
Lease, install any underground or above-ground tanks for the storage of
fuel oil, gasoline and/or other petroleum products or by-products.
(g) In the event any portion of the Property is subleased or
otherwise occupied by or through Tenant, Tenant shall be responsible
for causing such parties to comply with the provisions of this Section
16.
(h) Any cleanup of the Property required to be performed by
Tenant hereunder shall be to the strictest standard regardless of use."
9. Sections 16(c) and 16(d) of the Lease shall be renumbered as 16(i) and
16(j), respectively.
10. All references in the Lease to Sudler Construction Company shall be
changed to Sudler Management Company, L.L.C., including but not limited
to the references contained in Sections 7 and 25 of the Lease.
11. Remaining Terms. Except as specifically amended and modified herein,
all of the terms, covenants or conditions of the Lease shall remain in
full force and effect.
IN WITNESS WHEREOF, the parties hereby have duly executed this
Amendment to Lease as of the date first above set forth.
LANDLORD:
1720 Oak Street, L.L.C.
WITNESS:
By: /s/ Peter Sudler
--------------------------------
Peter D. Sudler
Its: Manager
TENANT:
MICRO WAREHOUSE, INC.
ATTEST:
By: /s/ Bruce L. Lev
--------------------------------
Print Name: Bruce L. Lev
Its: Executive Vice President
<PAGE>
EXHIBIT 10.19
WILMINGTON COMMERCE PARK PARTNERSHIP
WAREHOUSE/DISTRIBUTION
AGREEMENT OF LEASE
LEASE FOR BUILDING 11
PROPERTY LOCATED AT 3336 State Route 73 South, Wilmington, Ohio 45177
ARTICLE
I TERM .........................................................2
2 ACCEPTANCE OF LEASED PREMISES ................................2
3 RENT .........................................................3
4 COMMON AREA ..................................................3
5 USE OF LEASED PREMISES .......................................4
6 ASSIGNMENT AND SUBLET71NG ....................................5
7 REPAIRS ......................................................5
8 INSTALLATIONS AND ALTERATIONS ................................6
9 RISK OF LOSS .................................................6
10 INSURANCE ....................................................7
11 DAMAGE BY FIRE OR OTHER CASUALTY .............................8
12 EMINENT DOMAIN ...............................................8
13 ACCESS TO LEASED PREMISES ....................................9
14 LESSOR'S SUCCESSORS ..........................................9
15 SUBORDINATION ................................................9
16 ATTORNMENT ..................................................10
17 LIMITATION OF LIABILITY .....................................10
18 LESSEE'S DEFAULT ............................................10
19 SURRENDER OF LEASED PREMISES ................................11
20 WAIVER OF SUBROGATION .......................................12
21 ZONING; PERMITS .............................................12
22 ENVIRONMENTAL PROVISIONS ....................................12
23 ESTOPPEL CERTIFICATE ........................................13
24 ACCELERATION OF RENT ........................................13
25 RENT DEMAND .................................................13
26 NO REPRESENTATION BY LESSOR .................................13
27 WAIVER OF BREACH ............................................14
28 QUIET ENJOYMENT .............................................14
29 INTERPRETATION ..............................................14
30 DEFINITIONS .................................................14
31 HEADINGS ....................................................14
32 NOTICE ......................................................14
33 FINANCIAL STATEMENTS ........................................15
34 MEMORANDUM OF LEASE .........................................15
35 TIME ........................................................15
36 OPTION TO RENEW .............................................15
37 ENTIRE AGREEMENT ............................................16
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WILMINGTON COMMERCE PARK PARTNERSHIP
WAREHOUSE/DISTRIBUTION
AGREEMIENT OF LEASE
THIS LEASE made by and between WILMINGTON COMMERCE PARK PARTNERSHIP,
hereinafter referred to as the Lessor, and MICROWAREHOUSE, INC., OF OHIO,
hereinafter referred to as the Lessee. The Lessor's business enterprise is
organized as an Ohio partnership. The Lessee's business enterprise is organized
as a corporation and is admitted to do business in the State of Ohio.
WITNESSETH:
The Lessor does hereby lease and let to the Lessee and the Lessee accepts
from the Lessor under the terms and conditions of this Lease, the following
described Premises:
220,800 square feet, more or less, located at 3336 State Route 73 South,
Wilmington, Ohio 45177 and being the entire building sometimes designated
as Building 11, as shown and more particularly described on Schedule A
attached hereto, hereinafter referred to as the Leased Premises.
ARTICLE 1.
TERM.
SECTION 1. TO HAVE AND TO HOLD unto the Lessee for a term of Ten (10)
years, commencing on the 1st day of February, 1999, ("commencement date") and
ending on the 31st day of January, 2009, both dates inclusive. Should the
commencement date be delayed as set forth in Section 2 hereof, the term of the
Lease shall run for ten years from the actual commencement date.
SECTION 2. If this Lease is executed and the Lessor cannot deliver
possession of the Leased Premises before the commencement date as defined above,
it shall not be deemed to be in default under the Lease, and Lessee shall accept
possession of the Leased Premises whenever Lessor is able to tender them;
PROVIDED, HOWEVER, that possession must be tendered on or before May 1, 1999, or
Lessee shall be released from all liability hereunder. Lessor waives the payment
of rent covering any period before possession is tendered to Lessee. Tender of
possession must include an unconditional certificate of occupancy issued by the
appropriate governing authority.
ARTICLE 2.
ACCEPTANCE OF LEASED PREMISES.
The Leased Premises shall be delivered to the Lessee in Shell condition,
subject to the completion of the work set forth on attached Exhibit B in a good
and workmanlike manner, which includes the Certificate of Occupancy. Lessor will
provide a Tenant Improvement allowance not to exceed $240,000.00 to or on behalf
of Lessee toward Lessee's tenant improvements to the Leased Premises. This will
allow the finish out of approximately 8000 square feet of office space within
the premises. Exhibit C includes a list of additional and/or
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alternate items for the Premises together with the costs of such elective Tenant
Improvements above the $240,000.00 allowance. Lessor shall provide Lessee access
to the Leased Premises prior to the commencement date based on the schedule set
forth in the Timeline attached hereto as Exhibit D. This access will be for the
purpose of Lessee's installation of racking and other operational equipment.
Lessee shall not owe rent during this period but the entire risk of loss as to
equipment so installed shall be born by Lessee.
ARTICLE 3.
RENT.
SECTION 1. Lessee shall pay to the Lessor as BASIC ANNUAL RENT for the
Leased Premises for each year of the period of February 1, 1999 through January
31, 2004 the sum of One Million Fifteen Thousand Four Hundred Sixty-Four Dollars
($1,015,464.00) which shall be paid in equal monthly installments of Eighty Four
Thousand Six Hundred Twenty-Two Dollars ($84,622.00), due and payable on the
first day of each month, in advance. Said rent shall be paid to the Lessor, or
to the duly authorized agent of the Lessor, at its office at 3800 Red Bank Road,
Cincinnati, Ohio 45227 during business hours. Checks should be made payable to
WILMINGTON COMMERCE PARK PARTNERSHIP. Any Basic Annual Rent payment not received
by the Lessor by the first day of the month shall be past due. If the
commencement date of this Lease is other than the first day of the month, any
rental adjustment or additional rents hereinafter provided for shall be prorated
accordingly. The Lessee will pay the rent as herein provided, without deduction
whatsoever, and without any obligation of the Lessor to make demand for it. Any
installment of rent accruing hereunder and any other sum payable hereunder, if
not paid when due, shall bear interest at the rate of eighteen percent (18%) per
annum until paid. The Basic Annual Rent of $1,015,464.00 shall be adjusted once
during the term of the Lease. Beginning February 1, 2004, the sixth year of
Lease, and each year of the term thereafter, the Basic Annual Rent shall be One
Million One Hundred Seventeen Thousand Ten Dollars ($1,117,010.00) which shall
be paid in equal monthly installments of Ninety-Three Thousand Eighty-Four and
17/100's Dollars ($93,084.17).
SECTION 2. The Lessee shall pay for the costs of all water, gas, and
electricity, including electricity costs for exterior lighting, or any other
utilities in connection with the Leased Premises.
SECTION 3. The Lessee agrees to pay all real estate taxes on the Leased
Premises during the term of this Lease. Taxes for any portion of a calendar year
during the term of this Lease shall be prorated between Lessor and Lessee. The
Lessee shall pay its share of expenses that the Lessor shall incur by reason of
compliance with new laws, orders, special rent/use taxes, ordinances and new
regulations of Federal, State, County and Municipal authorities, and with any
lawful direction of any public officer or officers, which lawful direction shall
be imposed upon the Lessor for the common good of the occupants of the Airborne
Commerce Park. Capital improvements which are the responsibility of Lessor shall
not be deemed to be prorated or to be passed through to Lessee hereunder.
ARTICLE 4.
COMMON AREA.
For the purpose of this Lease, the term "common area" is defined for all
purposes of this Lease as facilities that are intended for the common use of all
tenants of the Airborne
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Commerce Park. For purposes of this definition, facilities include the parking
area, driveways, private streets and alleys, landscaping, curbs, loading area,
sidewalks and exterior lighting facilities, which facilities located around the
Leased Premises are identified and designated as such in Exhibit B; PROVIDED,
HOWEVER, THAT NOTWITHSTANDING the foregoing, the Lessee, as lessee of the entire
Building 11 shall have the exclusive right to use all of the parking and loading
areas for that Building as shown on Exhibit A. The Lessee shall have no right to
use the common area for storage of pallets or other storage purposes and trash
shall be stored only in such containers and in such place as approved by the
Lessor. The Lessor shall maintain the common area and keep the same in good
order and repair including lighting and landscaping. The Lessor may temporarily
close any part of the common area for any period necessary to make repairs or
alterations or to prevent the public from obtaining prescriptive rights. The
cost of exterior lighting and ice and snow removal, general cleaning, asphalt
sealing and restriping and landscape maintenance will be charged to the Lessee
in accordance with the percentage that the square footage of the Leased Premises
bears to the total square footage of all buildings adjacent to the Leased
Premises. The share of such cost will be deemed to be additional rent and shall
be due the first of the month following the invoice thereof by Lessor to the
Lessee of the amount due.
ARTICLE 5.
Use of Leased Premises.
SECTION 1. The Leased Premises shall be used and occupied only for direct
mail and telemarketing activities, warehousing and distribution of products and
related activities and for no other purposes without the written consent of the
Lessor.
SECTION 2. The Lessee shall operate its business in a safe and proper
manner as is normal, considering the uses of the Leased Premises above provided;
and shall not manufacture, store, display or maintain any products or materials
that will endanger the Leased Premises; shall do nothing that would increase the
cost of insurance on the building or invalidate existing policies; shall not
obstruct the sidewalks; shall not use the plumbing for any other purpose than
for which it was constructed; shall not make or permit any unreasonable noise
and/or odor objectionable to the public or adjacent occupants; shall not create
a nuisance on the Leased Premises; and shall commit no waste.
SECTION 3. The Lessee shall abide by all police and fire regulations
concerning the operation of its business; shall store all trash, rubbish and
debris in closed containers; and shall practice all proper procedures and
methods that are common to its business enterprise. The Lessee shall maintain a
minimum temperature in the Leased Premises of fifty-five (55) degrees
fahrenheit.
SECTION 4. The Lessee shall at all times keep all improvements and any
equipment facilities or fixtures in good order, condition and repair and in a
clean, sanitary and safe condition and in accordance with all applicable laws,
ordinances and regulations of any governmental authority having jurisdiction.
Lessee shall permit no waste, damage or injury to the Leased Premises.
SECTION 5. Lessee shall forthwith at its own cost and expense replace
with glass of the same kind and quality any cracked or broken glass, including
plate glass or glass or other
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breakable materials used in structural portions, and any interior and exterior
windows and doors in the Leased Premises.
ARTICLE 6.
ASSIGNMENT AND SUBLETTING.
Lessee shall not transfer, mortgage, or pledge this lease, or sublease
the subject premises or any portion thereof, without the Lessor's prior written
consent, which shall not be unreasonably withheld or delayed. Lessee shall give
ABX AIR, INC., the first right to sublease any or all of the premises. ABX shall
have seven (7) business days following receipt of written notice of such right
to sublease to accept or reject all or any portion of the property offered for
sublease. Said acceptance or rejection shall be in writing. The Lessor may deem
any levy or sale or execution or other legal process against the Lessee, or any
assignment or sale in bankruptcy or assignment or a receiver or insolvency of
the Lessee, to be an assignment within the meaning of this Article.
ARTICLE 7.
REPAIRS.
SECTION 1. Lessor shall keep the foundations, exterior walls (except
plate glass or glass or other breakable materials used in structural portions)
roof, and sprinklers in good repair.
SECTION 2. Lessee shall contract for the maintenance of mechanical
equipment. The Lessee shall replace any hot water heater as the need should
arise with the same type and quality servicing the Leased Premises. The Lessor
shall replace, as needed, the heating and air conditioning equipment, provided
the unit has been serviced annually. Lessee will be entitled to apply any
benefits which Lessor may have under any warranties on such mechanical systems
either by assignment of such warranties to Lessee or through cooperation of
Lessor and Lessee in making claims under such warranties. Lessor shall have the
option to elect whether to assign warranties or participate in making claims.
SECTION 3. Lessor shall not be liable for failure to keep the Leased
Premises in repair, unless notice of the need for repairs has been given Lessor,
after the same has come to the explicit attention of Lessee, a reasonable time
has elapsed and Lessor has failed to make such repairs. Lessor shall not be
liable for any damage done or occasioned by or from the electrical system, the
heating and/or air conditioning system, the plumbing and sewer system in, above,
upon or about the Leased Premises nor for damage occasioned by water, snow or
ice being upon or coming through the roof, walls, windows, doors or otherwise,
unless such damages are a result of Lessor's negligence or intentional
misconduct in performance or failure to perform as above provided.
SECTION 4. Except as provided in Sections 1, 2 and 3 of this Article,
Lessor shall not be obligated to make repairs, replacements or improvements of
any kind upon said Leased Premises, or to any equipment facilities or fixtures
therein contained, which shall at all times be kept in good order, condition and
repair by Lessee, and in a clean, sanitary and safe condition and in accordance
with all applicable laws, ordinances and regulations of any governmental
authority having jurisdiction. Lessee shall permit no waste, damage, or injury
to the Leased Premises.
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ARTICLE 8.
INSTALLATIONS AND ALTERATIONS.
SECTION 1. Lessee shall not make any alterations or additions to the
Leased Premises without first procuring Lessor's written consent, which consent
shall be exercised at Lessor's sole discretion, and delivering to Lessor the
plans and specifications and copies of the proposed contracts and necessary
permits, and shall furnish indemnification against liens, costs, damages and
expenses as may be reasonably required by Lessor. All alterations, additions
improvements and fixtures, other than trade fixtures, which may be made or
installed by either of the parties hereto upon the Leased Premises and which in
any manner are attached to the floors, walls or ceilings, at the termination of
this Lease shall become the property of the Lessor unless Lessor requests their
removal and shall remain upon and be surrendered with the Leased Premises as a
part thereof, without damage or injury; and linoleum or other floor covering
which may be cemented or adhesively affixed to the floor shall likewise become
the property of Lessor, all without compensation or credit to Lessee.
SECTION 2. Lessor may withhold consent, whether reasonably or
unreasonably, to any proposed alteration, addition or installation which Lessor
believes, in the Lessor's sole opinion and discretion, could be considered a
safety hazard by the Federal Aviation Administration ("FAA") or which Lessor
believes would delay compliance or increase the costs incurred by Lessor in
complying with any regulation or law administered or enforced by the FAA or
similar regulatory body.
SECTION 3. The Lessee shall not erect or install any signage without
first procuring Lessor's written consent, which consent shall not be
unreasonably withheld or delayed.
SECTION 4. The Lessee shall have no rights to use and shall not use the
roof of the Leased Premises for any purpose without the written consent of the
Lessor. The Lessee shall not use the roof for storage, for any activity that
will result in traffic on the roof, for anything that will penetrate the roof,
use the roof as an anchor or otherwise damage the roof. The consent of the
Lessor must be in writing for each specific use and must also approve the method
of installation of the permitted use. Should the Lessee break this covenant, the
Lessee shall be responsible for any damages caused to the roof or other parts of
the building and shall assume the cost of maintaining and repairing the roof
during the term of the Lease, including any renewals.
ARTICLE 9.
RISK OF LOSS.
SECTION 1. The Lessor shall not be held responsible for and is relieved
from all liability by reason of, any injury or damage to any person, persons or
property in the demised premises, whether belonging to the Lessee or any other
person, caused by any fire or by any breakage or leakage in any part or portion
of the demised premises, or in any part or portions of the building of which the
demised premises are a part, unless such breakage, leakage, injury or damage is
caused by or results from the negligence or intentional misconduct of the Lessor
or its agents. The Lessee, in consideration of the rent, accepts and assumes
such responsibility and liability.
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SECTION 2. The Lessor shall not be held responsible for and is relieved
from all liability by reason of, any injury or damage to any person, persons or
property in the demised premises, whether belonging to the Lessee or any other
person, from water, rain or snow that may leak into, issue, or flow from any
part of the premises or of the building of which the demised premises are a
part, from the pipes or plumbing work of the same or from any place or quarter,
unless such damage, leak or flow is caused by or results from the negligence or
intentional misconduct of the Lessor or its agents. The Lessee, in consideration
of the rent herein specified, accepts and assumes such responsibility and
liability.
SECTION 3. The Lessee releases the Lessor from all liability, and assumes
all liability, for damages which may arise from any kind of injury to person,
persons or property on account of the use, misuse or abuse of all elevators,
hatches, or openings of any kind that may exist or hereinafter be erected or
constructed on the premises or from any kind of injury that may arise from any
other cause on the premises, unless such damage, injury, use, misuse or abuse is
caused by or results from the negligence or intentional misconduct of the Lessor
or its agents.
ARTICLE 10.
INSURANCE.
SECTION 1. Lessee shall not carry any stock of goods or do anything in or
about said Leased Premises which will in any way tend to increase insurance
rates on said Leased Premises or the building in which the same are located. If
Lessor shall consent to such use, Lessee agrees to reimburse Lessor, upon
demand, all increase or increases of premiums on insurance carried by the Lessor
on all or part of the Leased Premises, or on the building of which the Leased
Premises are a part, caused in any way by the Lessee's occupancy. If Lessee
installs any electrical equipment that overloads or may overload the power lines
to the building, Lessee shall make immediately, and at its own expense, whatever
changes are necessary to remedy such overload or possible overload and to avoid
the same in the future, and shall comply with all requirements of all
governmental authorities having jurisdiction and with the requirements of any
insurance underwriters and rating bureaus.
SECTION 2. Lessee agrees to procure and maintain a policy or policies of
insurance, at its own costs and expense, insuring from all claims, demands or
actions for injury to or death of more than one person in any one accident and
for damages to property in an aggregate amount of not less than $3,500,000.00
made by or on behalf of any person or persons, firm or corporation, arising
from, related to, or connected with the conduct and operation of Lessee's
business in the Leased Premises. Lessor shall be named an Additional Insured
Party in said policy. Such insurance shall be primary relative to any other
valid and collectible insurance. Lessee may satisfy this insurance requirement
with appropriate coverage under its existing policies and shall not be obligated
to obtain a separate policy for the Leased Premises. Said insurance shall not be
subject to cancellation except after at least thirty (30) days prior written
notice to Lessor, and the policy or policies, or duly executed certificate of
insurance for the same, together with satisfactory evidence of the payment of
the premium thereon, shall be deposited with Lessor at the commencement of the
term and renewals of such coverage. If Lessee fails to comply with such
requirement, Lessor may obtain such insurance and keep the same in effect, and
Lessee shall pay Lessor the premium cost thereof upon demand.
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SECTION 3. All property of Lessee or those claiming under Lessee which
may be upon said Leased Premises during the term hereof or any renewal thereof
shall be at and upon the sole risk and responsibility of the Lessee.
ARTICLE 11.
DAMAGE BY FIRE OR OTHER CASUALTY.
SECTION 1. If the leased Premises shall be destroyed or so injured by any
cause as to be unfit, in whole or in part, for occupancy, Lessor shall use its
best efforts to provide occupant comparable space within sixty (60) miles of the
Leased Premises and if Lessor cannot provide such space, Lessee may terminate
this Lease. If the Lessor has provided such temporary space and such destruction
or injury could reasonably be repaired within three (3) months from the
happening of such destruction or injury, then Lessee shall not be entitled to
surrender possession of the Leased Premises nor shall Lessee's liability to pay
rent under this Lease cease without mutual consent of the parties hereto. In
case of any such destruction or injury, Lessor shall repair the same with all
reasonable speed and shall complete such repairs within three (3) months from
the happening of such injury, and if during such period Lessee shall be unable
to use all or any portion of the Leased Premises, a proportionate allowance
shall be made to Lessee from the rent corresponding to the time during which and
to the portion of the Leased Premises of which Lessee shall be so deprived of
the use on account thereof.
SECTION 2. If such destruction or injury cannot reasonably be repaired
within three (3) months from the happening thereof, Lessor shall notify Lessee
within ten (10) days after the happening of such destruction or injury whether
or not Lessee will repair or rebuild. If Lessor elects not to repair or rebuild,
this Lease shall be terminated. If Lessor shall elect to repair or rebuild,
Lessor shall specify the time within which such repairs or reconstruction will
be complete and Lessee shall have the option, within ten (10) days after the
receipt of such notice, to elect either to terminate this Lease and further
liability hereunder, or to extend the term of the Lease by a period of time
equivalent to the time from the happening of such destruction or injury until
the Leased Premises are restored to their former condition. In the event Lessee
elects to extend the term of the Lease, Lessor shall restore this Leased
Premises to its former condition within the specified time in the notice, and
Lessee shall not be liable to pay rent for the period from the time of such
destruction or injury until the Leased Premises are so restored to their former
condition.
SECTION 3. All of Lessee's obligations under this lease including, but
not limited to the duty to pay rents shall continue unabated if Lessee is
provided with substitute space as set forth above at no additional cost to
Lessee.
ARTICLE 12.
EMINENT DOMAIN.
SECTION 1. If any of the Leased Premises shall be taken by a public
authority under the power of eminent domain and Lessor is unable to provide
substitute space within tile area of the Airborne Commerce Park, then the term
of this Lease shall cease as of the day possession shall be taken by such public
authority, and the rent shall be paid up to that date with a proportionate
refund by Lessor of such rent as shall have been paid in advance.
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SECTION 2. If less than substantially all of the floor area of the Leased
Premises shall be so taken, as of the day possession shall be taken by such
public authority, and the rent shall be paid up to that day with a proportionate
refund by Lessor of such rent as may have been paid in advance, and thereafter
the minimum rent shall be equitably abated, and Lessor shall at its own cost and
expense make all necessary repairs or alterations as to constitute the remaining
Leased Premises a complete architectural unit.
SECTION 3. All damages awarded for such taking under the power of eminent
domain, whether for the whole or a part of the Leased Premises, shall be the
property of Lessor whether such damages shall be awarded as compensation for
diminution in value of the leasehold or to the fee of the Leased Premises;
provided, however, that the Lessor shall not be entitled to any separate award
made to Lessee for loss of business, depreciation to and cost of removal of
stock and fixtures.
ARTICLE 13.
ACCESS TO LEASED PREMISES.
Lessee shall retain all keys to the Leased Premises for security reasons.
Lessee agrees to have accessible to Lessor for twenty-four (24) hours each day,
a person or persons who will be able to provide reasonable access to the Leased
Premises for Lessor. The Lessor or its agents shall have the right to enter upon
the Leased Premises at all reasonable hours for the purpose of inspecting the
same or of making repairs, additions or alterations thereto or to the building
in which the same are located. If Lessor must obtain access to the premises in
an emergency, and Lessee has not provided access as set forth above, Lessor may
use whatever means are necessary to obtain access, and any costs to repair
damage caused to the Leased Premises by Lessor in obtaining access shall be paid
by Lessee. During the final six months of the Lease term, the Lessor shall have
the right, upon reasonable notice, to show the Leased premises to prospective
Lessees, purchasers or others. Lessor shall not be liable to Lessee in any
manner for any expense, loss or damage by reason thereof, nor shall the exercise
of such right be deemed an eviction or disturbance of Lessee's use and
possession.
ARTICLE 14.
LESSOR'S SUCCESSORS.
The term "Lessor" as used in this Lease shall be limited to mean and
include only the owner or owners, at the time, of the fee of the building, their
successors and assigns, so that in the event of any sale or sales of the
building, the previous Lessor shall be entirely released with respect to the
performance of all subsequently accruing covenants and obligations on the part
of lessor. The retention of fee ownership by a lessor of the building or of the
land on which it is located under an underlying lease which is now or hereafter
in effect, shall not be deemed to impose on such underlying lessor any
liability, initial or continuing, for the performance of the covenants and
obligations of Lessor.
ARTICLE 15.
SUBORDINATION.
This Lease shall be subject to and subordinate at all times to the lien
of any mortgages, now or hereafter made on the Leased Premises, and to all
advances made or hereafter to be made thereunder. The Lessee agrees to execute a
subordination agreement
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should Lessor's lender request same.
ARTICLE 16.
ATTORNMENT.
In the event the herein Leased Premises are sold due to any sale,
transfer or foreclosure, by virtue of judicial proceedings or otherwise, this
Lease shall continue in full force and effect, and Lessee agrees, upon request,
to attorn to and acknowledge the transferee(s) or purchaser(s) at such transfer
or sale as Lessor(s) hereunder; provided such transferee(s) or purchaser will
recognize this Lease, unless and until it is in default.
ARTICLE 17.
LIMITATION ON LIABILITY.
Notwithstanding any other provision of this Lease, Lessee agrees to look
solely to Lessor's interest in the building (subject to any mortgage on the
building) for the recovery of any judgment requiring the payment of money by
Lessor; it being agreed that Lessor, and if Lessor is a partnership, its
partners whether general or limited, or if Lessor is a corporation, its
directors, officers, and shareholders, shall never be personally liable for any
such judgment, and no other assets of the Lessor shall be subject to such levy,
execution or other procedures for the satisfaction of Lessee's judgment. The
provision contained in the foregoing sentence is not intended to, and shall not,
limit any right that Lessee might otherwise have to obtain injunctive relief
against Lessor or Lessor's successors in interest, or to maintain any other
action not involving the personal liability of Lessor, or to maintain any suit
or action in connection with enforcement or collection of amounts which may
become owing or payable under or on account of insurance maintained by Lessor.
ARTICLE 18.
LESSEE'S DEFAULT.
SECTION 1. The Lessee, ten (10) days after receipt of written notice,
shall be considered in default of this Lease upon failure to pay when due the
rent or any other sum required by the terms of the Lease. Lessee shall also be
considered in default thirty (30) days after receipt of written notice for
failure to perform any term, covenant or condition of this Lease; upon the
commencement of any action or proceeding for the dissolution, liquidation or
reorganization under the Bankruptcy Act, of Lessee, or for the appointment of a
receiver or trustee of the Lessee's property; upon making of any assignment for
the benefit of creditors by Lessee; upon suspension of business; or the
abandonment of the Leased Premises by the Lessee. Any defaults other than
nonpayment defaults shall have a thirty (30) day cure period.
SECTION 2. In the event of default of this Lease by either party, then
either party may pursue any and all remedies and rights available under
applicable Ohio law. Should Lessor elect to reenter, as herein provided, or
should it take possession pursuant to legal proceedings or pursuant to any
notice provided for by law, it may either terminate this Lease, or it may
without terminating this Lease relet said Leased Premises or any part thereof
for such term or terms and at such rental or rentals and upon such other terms
and conditions as Lessor may deem advisable, with the right to make alterations
and repairs to said Leased Premises for the purpose or rerental. Should such
rentals received from such reletting during any month be less than required to
be paid by Lessee as defined above, then Lessee shall immediately pay such
deficiency to Lessor.
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SECTION 3. No such reentry or taking possession of said Leased Premises
by Lessor shall be construed as an election on its part to terminate this Lease,
unless a written notice of such intention be given to Lessee or unless the
termination thereof be decreed by a court of competent jurisdiction.
Notwithstanding any such reletting without termination, Lessor may at any time
thereafter elect to terminate this Lease for such previous breach or act of
default. Should Lessor at any time terminate this Lease for any breach or act of
default, in addition to any other remedy it may have, it may recover from Lessee
all damages it may incur by reason of such breach or act of default, including
the cost of recovering the Leased Premises, legal fees, and including the worth
at the time of such termination of the excess, if any, of the amount of rent and
charges equivalent to rent reserved in this Lease for the remainder of the
stated term over the then reasonable rental value of the Leased Premises for the
remainder of the stated term.
ARTICLE 19.
SURRENDER OF LEASED PREMISES.
SECTION 1. If Lessee holds possession of the Leased Premises after the
termination of this Lease for any reason not authorized by the Lessor, Lessee
shall pay Lessor one hundred fifty percent (150%) of the rent provided for
herein for such period that Lessee holds over, but such payment of rent shall
not create any Lease arrangement whatsoever between Lessor and Lessee, unless
expressly agreed to in writing by Lessor. It is further understood that during
such period that Lessee holds over, the Lessor retains all of Lessor's rights
under this Lease, including damages as a result of the termination of this Lease
and the right to immediate possession of the Leased Premises. This paragraph
shall not be construed to grant Lessee permission to hold over.
SECTION 2. At the expiration of the tenancy created hereunder, whether by
lapse of time or otherwise, Lessee shall surrender the Leased Premises broom
clean, free of tire marks, free of all debris and in good condition and repair,
reasonable wear and loss by fire or other unavoidable casualty excepted.
SECTION 3. Prior to surrender of the Leased Premises, the Leased Premises
will be reviewed by a representative of the Lessor and Lessee to determine if
there is any deferred maintenance or unrepaired damage. Lessee shall have the
option to effect such maintenance and repairs. In the event that there is
deferred maintenance and/or unrepaired damage not taken care of by Lessee, then
Lessor may effect such maintenance and repairs and Lessee will pay the cost
thereof.
SECTION 4. Upon the expiration of the tenancy hereby created, if Lessor
so requests in writing, Lessee shall promptly remove any additions (not to
include permitted Tenant Improvements), signs, fixtures and installations placed
in the Leased Premises by Lessee that is designated in said request, AND REPAIR
ANY DAMAGE occasioned by such removals at its own expense, and in default
thereof, Lessor may effect such removals and repairs, and Lessee shall pay
Lessor the cost thereof, with interest at the rate of eight (8) percent per
annum from the date of payment by Lessor.
11
<PAGE>
ARTICLE 20.
WAIVER OF SUBROGATION.
The Lessor and Lessee waive all rights, each against the other, for
damages caused by fire or other perils covered by insurance where such damages
are sustained in connection with the occupancy of the Leased Premises.
ARTICLE 21.
ZONING; PERMITS.
Anything herein elsewhere contained to the contrary, this Lease and all
the terms and conditions hereof are in all respects subject and subordinate to
all zoning restrictions and restricting covenants affecting the Leased Premises,
and the building in which they are located, and the Lessee shall be bound by
such restrictions. Lessor represents that to the best of its knowledge and
belief, the present zoning of the premises permit the activities of Lessee as
such are presently carried on. The Lessor further does not warrant that any
licenses or permits which may be required for the business to be conducted by
the Lessee on the Leased Premises will be granted, or, if granted, will be
continued in effect or renewed. Any failure to obtain the licenses, permits, or
any revocation thereof or failure to renew them, shall not release the Lessee
from the terms of this Lease.
ARTICLE 22.
ENVIRONMENTAL PROVISIONS.
SECTION 1. The Lessor, to the best of its knowledge, represents to the
Lessee that no toxic, explosive or other dangerous materials or hazardous
substances have been concealed within, buried beneath, released on or from, or
removed from and stored off-site of the Property upon which the Leased Premises
is constructed.
SECTION 2. Lessee shall at all times during the term of this Lease comply
with all applicable federal, state, and local laws, regulations, administrative
rulings, orders, ordinances, and the like, pertaining to the protection of the
environment, including but not limited to, those regulating the handling and
disposal of waste materials. Further, during the term of this Lease, neither
Lessee nor any agent or party acting at the direction or with the consent of
Lessee shall treat, store, or dispose of any "hazardous substance," as defined
in Section 101 (14) of the Comprehensive Environmental Response, Compensation
and Liability Act of 1980 ("CERCLA ") (or any analogous legislation), or
petroleum (including crude oil or any fraction thereof) on or from the Property.
SECTION 3. Lessee shall fully and promptly pay, perform, discharge,
defend, indemnify and hold harmless Lessor from any and all claims, orders,
demands, causes of action, proceedings, judgments, or suits and all liabilities,
losses, costs or expenses (including, without limitation, technical consultant
fees, court costs, expenses paid to third parties and reasonable legal fees) and
damages arising out of, or as a result of, (i) any "release" as defined in
Section 101 (22) of CERCLA (or any analogous legislation), of any "hazardous
substance," as defined in Section 101 (14) of CERCLA (or any analogous
legislation), or petroleum, (including crude oil or any fraction thereof) or
placed into, on or from the Property at any time after the date of this Lease by
Lessee, its agents, or employees; (ii) any contamination of the Property's soil
or groundwater or damage to the environment and natural resources of the
Property the result of actions occurring after the date of this Lease, whether
arising under CERCLA or other statutes
12
<PAGE>
and regulations, or common law by Lessee, its agents, or employees; and (iii)
any toxic, explosive or otherwise dangerous materials or hazardous substances
which have been buried beneath, concealed within or released on or from the
Property after the date of this Lease by Lessee, its agents or employees.
SECTION 4. Lessor agrees to indemnify and hold harmless Lessee upon the
same terms and conditions set forth above for any release which is caused by any
other tenant in the Airborne Commerce Park or by Lessor itself, except to the
extent that Lessee is determined to be partly or wholly responsible for such
release.
ARTICLE 23.
ESTOPPEL CERTIFICATE.
The Lessee agrees to execute an Estoppel Certificate on a form to be
supplied by Lessor for the benefit of Lender or any mortgage holder; that
wherein the Lessee acknowledges the terms and conditions of this Lease.
ARTICLE 24.
ACCELERATION OF RENT.
If the Lessee becomes insolvent, bankrupt, or makes an assignment for the
benefit of creditors, or is levied upon or sold out by Sheriff's or Marshall's
sale, or if a receiver is appointed, the Lessor may declare the rent for the
balance of the term or any part thereof to be due and payable as if by the terms
of the lease it were payable in advance. If the rent or any other sum payable
hereunder is at any time unpaid when due, the Lessor may then declare the rent
for the balance of the term or any part thereof to be immediately due and
payable as if by the terms of the Lease it were payable in advance, and the
Lessor may immediately proceed to distrain, collect, or bring action for the
whole rent or any part thereof, as if it were in arrears, or may enter judgment
therefor, in an amicable action as hereinabove provided in the case of rent in
arrears.
ARTICLE 25.
RENT DEMAND.
Every demand for rent due wherever and whenever made shall have the same
effect as if made at the time it falls due and at the place of payment, and
after the service of any notice or commencement of any suit, or final judgment
therein, Lessor may receive and collect any rent due, and such collection or
receipt shall not operate as a waiver of nor affect such notice, suit or
judgment.
ARTICLE 26.
NO REPRESENTATION BY LESSOR.
Lessor and its agent have made no representations or promises with
respect to the Leased Premises or the building of which the same form a part
except as herein expressly set forth. Lessor represents that all systems and
Leased Premises will be in good working order and in full compliance with law
and provision of the certificate of occupancy upon commencement of the Lease.
13
<PAGE>
ARTICLE 27.
WAIVER OF BREACH.
No waiver of any breach of the covenants, provisions or conditions
contained in this Lease shall be construed as a waiver of the covenant itself or
any subsequent breach itself, and if any breach shall occur and afterwards be
compromised, settled or adjusted, this Lease shall continue in full force and
effect as if no breach had occurred, unless otherwise agreed. The acceptance of
rent hereunder shall neither be or construed to be a waiver of any breach of any
term, covenant or condition of this Lease.
ARTICLE 28.
QUIET ENJOYMENT.
Lessor hereby covenants and agrees that if Lessee shall perform all the
covenants and agreements herein stipulated to be performed on Lessee's part,
Lessee shall at all times during the continuance hereof have the peaceable and
quiet enjoyment and possession of the Leased Premises without any manner of let
or hindrance from Lessor or any person or persons lawfully claiming the Leased
Premises except as otherwise provided for herein.
ARTICLE 29.
INTERPRETATION.
SECTION 1. Wherever either the word "Lessor" or "Lessee" is used in this
Lease, it shall be considered as meaning the singular and/or neuter pronouns as
used herein, and the same shall be construed as including all persons and
corporations designated respectively as Lessor or Lessee in the heading of this
instrument wherever the context requires.
ARTICLE 30.
DEFINITIONS.
PRO RATA share. Unless otherwise indicated, "pro rata share" means the
share of any costs, fees, or expenses Lessee is required to pay to Lessor under
this Agreement calculated by dividing the square footage of the Leased Premises
by the total square footage of the building of which the Leased Premises are a
part.
BUILDING. Unless otherwise indicated, "building" means the building of
which the leased premises are a part.
ARTICLE 31.
HEADINGS.
All headings preceding the text of the several Articles and Sections
hereof are inserted solely for convenience or reference and shall not constitute
a part of this Lease or affect its meaning, construction, or effect.
ARTICLE 32.
NOTICE.
All notices under this Lease may be personally delivered; sent by courier
service, with receipt; or mailed to the address shown by certified mail, return
receipt requested. The effective date of any mailed notice shall be three (3)
days after delivery of the same to the United States Postal Service.
14
<PAGE>
Lessor: WILMINGTON COMMERCE PARK PARTNERSHIP
Mail: Attn: Dave Neyer
3800 Red Bank Road
Cincinnati, OH 5227
Telephone: (513) 271-6400
FAX: (513) 271-1350
Lessee: Microwarehouse, Inc. of Ohio
Mail: Attn: Bruce Lev
535 Connecticut Avenue
Norwalk, CT 06854
Telephone: (203) 899-4529
FAX: (203) 899-4312
ARTICLE 33.
FINANCIAL STATEMENTS.
At Lessor's request, the Lessee, within thirty (30) days of Lessor's
request, shall furnish the Lessor with Lessee's most current financial
statements including the Lessee's balance sheet, a consolidated statement of
earnings and retained earnings, and changes in Lessee's financial position for
the year. All such statements shall be certified by an independent certified
public accountant. All such financial statements shall be prepared in accordance
with generally accepted accounting principles which shall be consistently
applied.
ARTICLE 34.
MEMORANDUM OF LEASE.
It is agreed by both parties that this instrument is not recordable and
if either party should record the same in the office of the Recorder of Clinton
County, Ohio, the recording shall have no effect. When possession of the Leased
Premises has been delivered to Lessee, the parties hereto may execute,
acknowledge and deliver a Memorandum of Lease in recordable form specifying the
terms of this Lease and renewal periods of this Lease. In the event they differ
from the dates herein, the date in the Memorandum shall control.
ARTICLE 35.
TIME.
Time is of the essence in this Lease.
ARTICLE 36.
OPTION TO RENEW.
Lessee is hereby granted an option to renew this Lease for one (1)
additional term of five (5) years on the same terms and conditions contained
herein except as to the Basic Annual Rent amount which shall be One Million Two
Hundred Twenty-Eight Thousand Seven Hundred Eleven Dollars ($1,228,711.00) for
each year of the renewal term and upon the conditions that:
15
<PAGE>
A. Written Notice of the exercise of the exercise of such option shall be
given by Lessee to Lessor not less than One Hundred Eighty (180) days prior to
the end of the term of this Lease; and
B. At the time of the giving of such notice and at the expiration of the
term of this Lease, there are no defaults in the covenants, agreements, terms
and conditions on the part of Lessee to be kept and performed, and all rents are
and have been fully paid. Provided also, that the rent to be paid during each
said renewal period shall be at the same rate as being paid at the end of the
previous term.
ARTICLE 37.
ENTIRE AGREEMENT.
This Lease contains the entire agreement between the parties; it
supersedes all previous understandings and agreements between the parties, if
any and no oral or implied representation of understandings shall vary its
terms; and it may not be amended except by a written instrument executed by both
parties hereto.
IN WITNESS WHEREOF, the parties hereto set their hands to triplicates
hereof, this 5th day of june 1998, as to Lessor, and this 3rd day of June 1998,
as to Lessee.
Signed and acknowledged Lessor: WILMINGTON COMMMERCE PARK
in the presence of: PARTNERSHIP
Edward J. Schrier By: David F. Neyer
Thomas W. Torbeck Its: Vice President, A. Neyer Inc.
Bonnie Ann Bartoli. Lesee: MICROWAREHOUSE, INC. OF OHIO
Eden F. Corbett By: Peter Godfrey
Its: President
<PAGE>
STATE OF OHIO, COUNTY OF HAMILTON, SS:
The foregoing instrument was acknowledged before me this 3rd-day of June
1998, David F. Neyer on behalf of WILMINGTON COMMERCE PARK PARTNERSHIP,an Ohio
partnership.
CINDY D. FANCHER
NOTARY PUBLIC
IN AND FOR THE STATE OF OHIO Notary Public
My COMMISSION EXPIRES MAY 31, 2002
16
<PAGE>
STATE OF CONNECTICUT, COUNTY OF FAIRFIELD, SS: NORWALK
The foregoing instrument was acknowledged before me this 3rd day of June
1998, by Peter Godfrey, President/CEO, on behalf of MICROWAREHOUSE, INC., of
Ohio, a corporation
EDEN F.CORBET
NOTARY PUBLIC
IN AND FOR THE STATE OF CONNECTICUT Notary Public
My Commission Expires May 31, 2002
Prepared by Karen Buckley, Buckley, Miller& Wright, Attorneys at Law,
Wilmington, Ohio. (bldgll/lc)
17
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EXHIBIT A
Situate in the City of Wilmington, Clinton County, Ohio, and being a part
of Military Survey No. 1170 and bounded and described as follows: Beginning at a
1/2" iron pin (found) at the Southerly corner of a 13.500 Acre Tract as recorded
in Volume 25, Plat No. 82, of the Clinton County Engineers Record of Land
Division: Running thence, from said point of beginning, with the Southwesterly
line of said 13.500 Acre Tract, N. 52(0) 09' 02" W. 395.49 feet to a point;
thence, by new division lines, on the following courses: (1) N. 49(0) 33' 08" E.
1048.71 feet to a point; (2) S. 40(0) 26' 52" E. 387.27 feet to a point; thence,
with the Southeasterly line of the aforesaid 13.500 Acre Tract, S. 49(0) 33' 08"
W. 968.49 feet to the point of beginning, containing Eight and Nine Hundred
Sixty Seven Thousandths (8.967) Acres. Subject to all easements of record.
This description is the result of a new survey made under the direction
of Richard D. Roll, Registered Surveyor No. 4957, by CLINCO SURVEYORS,
Wilmington, Ohio, in May, 1996, as recorded in Volume 26, Plat No. 293, of the
Clinton County Engineers Record of Land Division. The bearings in this
description were derived from the survey of the aforesaid 13.500 Acre Tract.
18
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EXHIBIT B
OUTLINE SPECIFICATIONS FOR AIRBORNE EXPRESS BUILDING #11 (MICROWAREHOUSE)
GENERAL REQUIREMENTS
A) INTENT: This specification outlines the scope of work for the design and
construction of an approximate 220,800 square foot building for Airborne
Express. Al. Neyer, Inc. (ANI) will have a complete set of certified,
final working drawings and specifications prepared in conformance with
these outline documents and will furnish all labor, materials, equipment
and supervision necessary for the execution and completion of the work.
Final specifications will include Year 2000 certification. ANI will
include the building permit fee. Additional general requirements will be
as outlined in the contract documents. ANI will pay for sewer and water
hookup fees.
B) GUARANTEE: Except as may otherwise be specified herein or as may be
provided by the equipment and material manufacturers, all material,
equipment and labor Is guaranteed for a period of two (2) years from the
date of "Beneficial Occupancy".
C) BUILDERS RISK INSURANCE: Includes all risk insurance during construction.
D) PERFORMANCE BOND: Not included.
SITE DEVELOPMENT
A) GRADING AND EARTHWORK: ANI will complete the excavation and rough and
fine grading of the approximate 10 acre site. ANI will provide site
survey and engineering. Areas to receive bituminous paving outside the
areas of the building structure will be cut and filled to grades
appropriate for commercial parking lots.
B) EXTERIOR CONCRETE SIDEWALKS, CURB AND GUTTER: ANI will furnish and
install 4" concrete at sidewalks. Exterior concrete areas are to be
broom-finished unless noted otherwise. Integral curbs and gutters are to
be furnished at the parking areas and along the entrance drive. A
concrete dolly pad will be placed 45'wide from the loading docks, 6"
thickness unreinforced.
C) BITUMINOUS PAVING AND STRIPING: ANI will furnish and install all
bituminous concrete parking lots, driveways, walkways, and loading areas
as shown on the drawing. Approximately one hundred seventy (170) car
parking spaces will be provided.
All bituminous paving will be constructed to conform to Ohio Department of
Transportation Specification #404 over a #304 gravel base. ANI will construct
areas designated for auto traffic with total 2" thick bituminous mat over 8"
granular base. Areas designated for truck traffic will be constructed with a
total 4" bituminous mat over 8" granular base. All bituminous pavements will be
striped to indicate parking stalls, median lines, traffic control features, and
handicapped parking locations.
<PAGE>
OUTLINE SPECIFICATIONS FOR AIRBORNE EXPRESS BUILDING #11 (MICRO WAREHOUSE)
D) TELEPHONE, GAS AND ELECTRIC UTILITIES: ANI will coordinate the service
entrances with telephone, gas, and electric utility companies and will
interface this work with the gas and electric utility work to provide
complete and operable systems. The materials and workmanship for utility
work will conform to the standards of various utilities. Wall conduit for
fiber optic wires for "Smart Park" is included.
E) WATER SERVICE: ANI will provide a 2" water service main for the domestic
services within the building and 8" main for the interior fire protection
systems, including valves, tap and meter as required by the City of
Wilmington. The water main will be buried to the depth from finished
grade required by code for frost protection, and tested before
backfilling.
F) SANITARY SEWERAGE: ANI will furnish and install a 6" sanitary sewer from
the building to the property line. The sanitary sewer line will be
standard PVC plastic or standard strength vitrified clay sewer pipe with
code approved manholes, cleanouts and castings.
G) STORM SEWERAGE: ANI will provide an on-site storm sewer system with catch
basins and manholes and storm water detention basin. The dock area will
be used for a portion of the detention needs in conjunction with one (1)
detention basin. The storm sewer will be PVC with catch basins and
manholes as required by code and the governing watershed district. All
catch basins will have heavy duty grates.
H) LAWNS AND LANDSCAPING: An allowance of $30,000 is included for sodded and
seeded lawn areas, landscaping and irrigation. All lawn areas to receive
sod and seed will be prepared with a minimum of 4" of top soil material.
ANI will assist the Owner in soliciting landscaping schemes designed with
the restrictions of the allowance.
1) EXTERIOR LIGHTING: Parking lots, drives and dock areas will be lighted
using twenty-five (25) 175 watt wallpacks and six (6) uplights. An
alternate to provide two (2) footcandles in parking 1=area by adding
eight (8) pole lights and three (3) building-mounted flood lights is
provided.
Page 2
<PAGE>
OUTLINE SPECIFICATIONS FOR AIRBORNE EXPRESS BUILDING #11 (MICROWAREHOUSE)
III. BUILDING STRUCTURE AND EXTERIOR ENVELOPE
A) BUILDING STRUCTURAL SYSTEM: ANI will design and construct a
structural system consisting of-
1) Open web bar joists, steel columns and beams and metal roof
deck; based on an approximate bay size of 52'x 40'. All
steel finished with a shop coat of rust inhibitor paint.
2) Concrete slabs-on-grade, unreinforced. 3) Reinforced
concrete footings. All concrete footings and foundation
walls will have a minimum compressive strength of 3,000 psi
at 28 days. Slabs-on-grade will have a minimum compression
strength of 4,000 psi at 28 days and will be 6" thick,
unreinforced. An alternate for a 7" thick, unreinforced
slab is provided. Concrete floor flatness and levelness
will conform to the following: 1) The minimum average
readings taken as a whole, shall be Ff of 55 for flatness
and an F1, of 35 for levelness as set forth by ASTME 1155.
The building will be designed in accordance with the
standards of the American Concrete Institute, ACI 318, and
all other applicable building, codes. A vapor barrier under
the warehouse floor is included. The warehouse floor will
be sealed with an Ashford formula sealer; the floor joints
to be caulked.
B) BUILDING EXTERIOR: ANI will construct the building wall system
using poured reinforced tiltup concrete panels, painted.
Approximately 34' clear to the bottom of the bar joists in the
warehouse. Wall insulation will be 4" vinyl faced insulation from
6' above floor level to roof deck. The inside wall surface will be
painted to 6' above floor level.
C) ROOFING: ANI will install a flexible sheet, ballasted roof
membrane insulated to provide an R-Value for the roofing system of
IS. All roofs and flashings will be guaranteed by a 10 year
limited warranty by the membrane manufacturer. An alternate to
provide an R-value of 20 for the roofing system is provided.
The roof will slope to interior downspouts that drain underground
to the storm detention basin and then to the public storm system.
A minimum of' 1/4" per foot slope is to be provided for all roof
areas. All flashings will be galvanized metal.
Page 3
<PAGE>
OUTLINE SPECIFICATIONS FOR AIRBORNE EXPRESS BUILDING #11 (MICROWAREHOUSE)
INTERIOR FINISHES
A tenant improvement allowance of $240,000 (8,000 s.f. x $30/s.f.)
is included. An alternate to provide an additional $300,000 of
tenant improvements is provided.
V. DOORS, FRAMES, AND HARDWARE
Included, are entry/exit doors for the shell building. All other
doors to be included in tenant improvement allowance.
VI. TOILET PARTITIONS AND ACCESSORIES
Toilet Rooms: To be included in tenant improvement allowance.
VII. DOCK EQUIPMENT
Equipment: Includes 6'x 8'mechanical dock levelers [sixteen (16)]
at all dock doors. Dock shelters and dock locks are not included.
An alternate is provided for dock seals or canopies.
VIII. CUSTOM MILLWORK
To be included in tenant improvement allowance.
IX S IGNAGE
One (1) directional sign shall be provided similar to building
#12. 1
X. SPECIALTIES
A) Fire Extinguishers: Fire extinguishers and cabinets will be
provided as required by local fire department.
B) Sanitary Sewer: Includes a 6" sewer line along the south
wall for future tap-in potential.
Page 4
<PAGE>
OUTLINE SPECIFICATIONS FOR AIRBORNE EXPRESS BUILDING #11 (MICROWAREHOUSE)
X1. MECHANICAL
A) PLUMBING: To be included in tenant improvement allowance.
Floor drains will be provided in each toilet room. Floor
drains and cleanouts will be Josam, Smith, Wade, Zurn, or
equal.
Connections will be made to the municipal utilities and all
piping systems will be flushed and tested. Stop valves will
be provided at each fixture. Isolating valves will be
provided in the supply lines to each set of toilet rooms.
B) HEATING, VENTILATING AND AIR CONDITIONING: The warehouse
heating system will be four (4) Cambridge direct-fire gas
heating units, including all code required smoke detectors
(if any), designed to maintain 60'F.D.B. at O'F outside.
All heating and cooling equipment for the tenant office
buildout is included in the Interior Finish Tenant
Improvement allowance. Ten (10) exhaust fans and ten (10)
supply fans are provided for the warehouse summertime
exhaust system designed to provide four (4) air changes per
hour. An alternate to provide one hundred thirty-eight
(138) paddle fans (56"; 22,000 cfm) at each bay is
provided.
C) FIRE PROTECTION SYSTEM: A complete automatic fire
protection sprinkler system will be provided for the
building in accordance with the requirements of the Fire
Department and applicable codes. All necessary piping,
valves and specialties will be included to provide a
complete system.
The automatic fire protection sprinkler system will be
designed using ESFR standards. Upturned brass sprinkler
heads will be used in areas with exposed structure. This
proposal assumes connection to the Wilmington Commerce Park
fire pump system at no fee.
XII. ELECTRICAL
A) POWER DISTRIBUTION: ANI will design and install complete
building power distribution system from a utility company
furnished, pad mounted transformer. The electrical
installation will be complete from the transformer,
including concrete transformer pad, to power and lighting
panels, switches, and/or circuit breakers throughout the
building to supply heating, ventilating, lighting,
convenience outlets, and the other items of this
specification.
A 2,000 amp, 480 volt, 3-phase service, will be supplied to
the building. Plug-in type circuit breakers will be used on
panel boards.
Page 5
<PAGE>
OUTLINE SPECIFICATIONS FOR AIRBORNE EXPRESS BUILDING #11 (MLCROWAREHOUSE)
Receptacles will be installed as follows:
1) Provide twenty-five (25) duplex receptacles and two (2) weatherproof
receptacles. 2) No electrical distribution or hook-up of Owner's
equipment is included in this proposal.
B) LIGHTING: ANT will design and install all lighting systems. In
general, the lighting systems will be as follows:
1) Two hundred sixty-four (264) metal halide (400 watt) fixtures to
provide twenty (20) footcandles will be hung at the underside of
the structure. An alternate to provide one hundred thirty-eight
(138) additional light fixtures - one (1) per bay - is provided.
2) Twenty-six (26) Exit Light Fixtures will be provided where
required by code.
3) Twenty-three (23) Emergency Egress Lighting will be provided as
required by code.
C) TELEPHONE: Based upon future Tenant Specifications.
X111. ITEMS NOT INCLUDED
The following items shall be specifically excluded from Al. Neyer, Inc.'s
proposal:
Furniture and office furnishings including demountable or landscape
office partitioning, reception desk, marker boards, projection screens,
draperies and vending machines. Cable trays, power poles and underfloor
electrical duct systems, UPS and generator systems. Central timeclock and
music, telephone systems, security or other internal communications
systems. Furnishing, moving, handling, wiring or connection of Owner
furnished equipment ID1-7 Humidification or dehumidification systems.
Special computer room HVAC and electrical systems. Window treatments and
draperies. Compressed air piping or system.
Page 6
<PAGE>
OUTLINE SPECIFICATIONS FOR AIRBORNE EXPRESS BUILDING #11 (MICROWAREHOUSE) *
Smoke alarms except as required by code for shell building.
* Security system
* Groundskeepers, HVAC service, janitorial.
* Moving expenses.
* Interior plantscaping.
* Walk-off mats.
* Process related exhaust fans, hoods or louvers.
* Fencing or padlocks.
* Cranes/forklifts.
* Wallcoverings or artwork.
#I1 air 98 specs4 specs 98
Page 7
<PAGE>
EXHIBIT C
SUMMARY OF ALTERNATIVES
AIRBORNE EXPRESS
BUILDING #11
WILMINGTON COMMERCE PARK
(220,800 SQUARE FEET)
ADDITIONAL
<TABLE>
<CAPTION>
Alternates Lease Amount per
- ----------- Year*
----------------
<S> <C>
1. In crease strength of concrete to 4,000 psi at 28 days and provide 4"
crushed stone bed at slab-on-grade $0
2. Increase concrete slab-on-grade thickness from 6" to 7". $6,498
3. Provide R-value of 18 for roof system. $0
4. Provide R-value of 20 for roof system. $1,139
5. Add one hundred thirty-eight (138) paddle fans (56"; 22,000 cfm) - one
(1) per bay. $10,853
6. Add dock seals for sixteen (16) docks. $1,911
7. Add 4' x 12' dock canopy for sixteen (16) docks. $1,911
8. Add one hundred thirty-eight (138) metal halide light fixtures - one (1)
per bay. $5,530
9. Increase exterior lighting, to two foot candle lighting Add eight (8)
pole lights and three (3) building mounted flood lights in rear. $3,424
</TABLE>
Based upon a 10 year lease term. Tenant Improvements above the $240,000 already
included can be added to the lease based upon an annual lease amount change of
$1,490 for each $10,000 spent. An additional $300,000 can be spent on Tenant
Improvements in this manner.
<PAGE>
EXHIBIT 10.20
FOURTH AMENDMENT TO LEASE
THIS FOURTH AMENDMENT TO LEASE made as of this 31st day of December, 1998
by and between PETER GODFREY, of Beachside Avenue, Westport, Connecticut 06880,
and MICRO WAREHOUSE, INC., a Delaware corporation with a principal place of
business at 535 Connecticut Avenue, Norwalk, Connecticut 06854.
WITNESSETH:
WHEREAS, the parties hereto entered into a Lease Agreement dated October 1,
1989, as amended, covering premises located at 47 Water Street, South Norwalk,
Connecticut (as amended, the "Lease"); and
WHEREAS, the Lease expires on December 31, 1998; and WHEREAS, the parties
wish to extend the term of the Lease.
NOW, THEREFORE, for One Dollar ($1.00) and other valuable consideration,
the sufficiency of which is hereby acknowledged, the parties hereby agree as
follows:
1. Paragraph 3 of said Lease Agreement is hereby amended to read as
follows:
"3. Term. The term of this Lease shall begin on October 1, 1989
(the "Commencement Date") and end on December 31, 1999 (the
"Termination Date")."
2. Paragraph 4(a) of said Lease Agreement is hereby amended by inserting
at the end thereof the following:
"Beginning on January 1, 1999, the Rent shall be increased by ten
percent (10%) to One Hundred Fifty Nine Thousand One Hundred
Fifty Two and
<PAGE>
40/100 ($159,152.40) payable in equal monthly installments of
$13,262.70 in advance on the first day of each calendar month."
3. Except as specifically set forth herein, in all other terms,
conditions and provisions set forth in the Lease shall remain
unchanged and in full force and effect.
IN WITNESS WHEREOF, the parties have executed this agreement effective the
day and year first above written.
By: /s/ Peter Godfrey
-------------------------------
Peter Godfrey
MICRO WAREHOUSE, INC.
By: /s/ Bruce L. Lev
----------------------------------
Bruce L. Lev, Its
Executive Vice President, Legal and Corporate
Affairs and General Counsel
Hereunto Duly Authorized
2
<PAGE>
EXHIBIT 10.21
FOURTH AMENDMENT TO LEASE
THIS FOURTH AMENDMENT TO LEASE made as of this 31st day of December, 1998
by and between HIALET ASSOCIATES, a Connecticut general partnership with a
principal place of business at 29 Haviland Street, South Norwalk, Connecticut
06854, and MICRO WAREHOUSE, INC., a Delaware corporation with a principal place
of business at 535 Connecticut Avenue, Norwalk, Connecticut 06854.
WITNESSETH:
WHEREAS, the parties hereto entered into a Lease Agreement dated February
13, 1991, as amended, covering premises located at 53 Water Street, South
Norwalk, Connecticut (as amended, the "Lease"); and
WHEREAS, the Lease expires on December 31, 1998; and
WHEREAS, the parties wish to extend the term of the Lease on the terms set
forth below.
NOW, THEREFORE, for One Dollar ($1.00) and other valuable consideration,
the sufficiency of which is hereby acknowledged, the parties hereby agree as
follows:
1. Paragraph 3 of said Lease Agreement is hereby amended to read as
follows:
"3. Term. The term of this Lease shall begin on February 13, 1991
(the "Commencement Date") and end on December 31, 1999 (the
"Termination Date")."
2. Paragraph 4(a) of said Lease Agreement is hereby amended by inserting
at the end thereof the following:
<PAGE>
"Beginning on January 1, 1999, the Rent shall be increased by ten
percent (10%) to Seventy Eight Thousand Six Hundred Fifty and
00/100 ($78,650.00) payable in equal monthly installments of
$6,554.17 in advance on the first day of each calendar month."
3. Except as specifically set forth herein, in all other terms,
conditions and provisions set forth in the Lease shall remain
unchanged and in full force and effect.
IN WITNESS WHEREOF, the parties have executed this agreement effective
the day and year first above written.
HIALET ASSOCIATES
By: /s/ Peter Godfrey
--------------------------------
Peter Godfrey, a Partner
Hereunto Duly Authorized
MICRO WAREHOUSE, INC.
By: /s/ Bruce L. Lev
---------------------------------------
Bruce L. Lev, Its
Executive Vice President, Legal and Corporate Affairs
and General Counsel
Hereunto Duly Authorized
2
<PAGE>
EXHIBIT 10.22
SECOND AMENDMENT TO LEASE
THIS SECOND AMENDMENT TO LEASE made as of this 31st day of December, 1998
by and between HIALET ASSOCIATES, a Connecticut general partnership with a
principal place of business at 29 Haviland Street, South Norwalk, Connecticut
06854, and MICRO WAREHOUSE, INC., a Delaware corporation with a principal place
of business at 535 Connecticut Avenue, Norwalk, Connecticut 06854.
WITNESSETH:
WHEREAS, the parties hereto entered into a Lease Agreement dated November
1, 1992, as amended, covering premises located at 29 Haviland Street, South
Norwalk, Connecticut (as amended, the "Lease"); and
WHEREAS, the Lease expires on December 31, 1998; and
WHEREAS, the parties wish to extend the term of the Lease on the terms
set forth below.
NOW, THEREFORE, for One Dollar ($1.00) and other valuable consideration,
the sufficiency of which is hereby acknowledge, the parties hereby agrees as
follows:
1. Paragraph 3 of said Lease Agreement is hereby amended to read as
follows:
"3. Term. The term of this Lease shall begin on November 1,
1992 (the "Commencement Date") and end on December 31, 1999
(the "Termination Date").
2. Paragraph 4(a) of said Lease Agreement is hereby amended by
inserting at the end thereof the following:
<PAGE>
"Beginning on January 1, 1999, the Rent shall be
increased by ten percent (10%) to One Hundred Five
Thousand Six Hundred and 00/100 ($105,600.00)
payable in equal monthly installments of $8,800 in
advance on the first day of each calendar month.
3. Except as specifically set forth herein, in all other terms,
conditions and provisions set forth in the Lease shall remain
unchanged and in full force and effect.
IN WITNESS WHEREOF, the parties have executed this agreement effective
the day and year first above written.
HIALET ASSOCIATES
By: /s/ Peter Godfrey
-------------------------------
Peter Godfrey, a Partner
Hereunto Duly Authorized
MICRO WAREHOUSE, INC.
By: /s/ Bruce L. Lev
-----------------------------------
Bruce L. Lev, Its
Executive Vice President, Legal and Corporate Affairs
And General Counsel
Hereunto Duly Authorized
<PAGE>
EXHIBIT 10.23
EMPLOYMENT AGREEMENT
(CARLINE)
This employment agreement ("Agreement") is made as of the 28th day of
October, 1998 between Micro Warehouse, Inc., a Delaware corporation (hereinafter
referred to as the "Company"), with its principal place of business at 535
Connecticut Avenue, Norwalk, Connecticut 06854, and Stephen J. Carline, whose
address is 5240 East Cholla Street, Scottsdale, Arizona 85254 (hereinafter
referred to as "Employee").
WHEREAS, the Company wishes to retain the full-time services of the
Executive, and the Executive is willing to commence employment with the Company
on a full-time basis, upon the other terms and conditions hereinafter provided.
NOW, THEREFORE, in consideration of the premises, the Company and
Employee agree as follows:
1. EMPLOYMENT; CONDITION SUBSEQUENT TO EFFECTIVENESS. (a) The Company shall
hereby employ Employee, and Employee hereby accepts such employment, commencing
on the date hereof, on the terms and conditions set forth below.
(b) If the Company has not purchased all of Employee's membership
interests in Discovery Training & Development, L.L.C. on or prior to November
30, 1998, then, unless this condition subsequent is specifically waived or
extended by a writing signed by both parties, this Agreement shall be null and
void AB INITIO and the Company's only obligation to Employee shall be to pay
Employee any Base Salary due through November 30, 1998 and reimburse any
expenses incurred by Employee in accordance with Section 5. Upon nullification
pursuant to this Section 1(b), Employee shall nonetheless be bound by the
obligations in Sections 8 and 10; PROVIDED, HOWEVER, that the term "Restrictive
Period" as used in Section 10 shall mean the period beginning on the date hereof
and ending one year following the last date of employment hereunder. Upon
nullification pursuant to this Section 1(b), all stock options granted to
Employee pursuant to Section 4(C) shall be rescinded and null and void.
2. DUTIES. During the Period of Employment (as hereinafter defined), the Company
shall employ Employee as Executive Vice President of Sales, reporting to Peter
Godfrey, the President and Chief Executive Officer of the Company, or his
successor, to perform such duties as shall be required by Mr. Godfrey, or his
successor, provided the same are consistent with those of an executive vice
president of sales of a public company in a business similar to the Company's
business. The precise responsibilities of Employee may be revised from time to
time provided the same do not materially affect Employee's position. In
furtherance of the foregoing, Employee hereby agrees to perform his duties
faithfully. Employee acknowledges that the Company in its sole discretion has
the right to make all decisions with respect to strategies, plans, budgets,
projections, goals, objectives, incentive plans, operations, finances and
processes relating to the conduct of its business, and any of these may be
amended, modified or rescinded from time-to-
<PAGE>
time by the Company. During the Period of Employment and except for vacations in
accordance herewith, absences due to temporary illness and outside Board
responsibilities, Employee shall devote all of his available business time and
energies during normal business hours to the business of the Company. Employee's
principal place of business will be at any of the Company's facilities in New
Jersey. Employee represents and warrants that he is not subject to or bound by
any agreement with, or is otherwise under any duty to, any third party that may
limit or restrict his right to become employed by the Company or to perform any
tasks or responsibilities required of an executive officer of the Company,
including without limitation any covenant not to compete, confidentiality
agreement or agreement to assign intellectual property.
3. TERM. The term of Employee's employment by the Company (the "Period of
Employment") shall commence as of the date hereof and, unless earlier terminated
pursuant to the terms hereof, shall end as of the close of business on December
31, 2001.
4. COMPENSATION.
(A) BASE SALARY. For all services rendered by Employee under this
Agreement, during the Period of Employment the Company shall pay to him a
minimum "Base Salary" at the rate of Two Hundred Fifty Thousand Dollars
($250,000) per annum payable in at least equal monthly installments. The term
"Base Salary" shall mean regular cash compensation paid on a periodic basis
exclusive of benefits, bonuses or incentive payments.
(B) ANNUAL INCENTIVE COMPENSATION. In addition to Base Salary,
beginning calendar year 1999 Employee shall be eligible to earn annual incentive
compensation ("Incentive Compensation") as set forth below, not to exceed One
Hundred Percent (100%) of Base Salary in any one year. No incentive compensation
may be earned for the remainder of calendar year 1998.
(i) Prior to each January 1 during the Period of Employment,
the Board of Directors and Employee shall mutually agree upon and
establish a plan (the "Incentive Plan") describing anticipated results
of operations for the coming fiscal year and containing financial goals
(hereinafter "Targets"). The Incentive Plan shall be determined in the
sole discretion of the Board of Directors and Employee and may vary
from year to year. A copy of the Incentive Plan shall be provided to
the Company's Certified Public Accountants ("CPAs"). Subsequent to the
conclusion of the year the CPAs shall compare the actual results of
operations for said year to the Incentive Plan.
(ii) The Incentive Plan shall set forth a target bonus amount,
One Hundred Percent (100%) of which shall be payable for accomplishing
One Hundred Percent (100%) of Targets, which amount shall be Fifty
Percent (50%) of Base Salary for each full calendar year beginning 1999
(hereinafter "Target Bonus Amount"). The Board of Directors may modify
upward the Target Bonus Amount as part of the salary review process for
years subsequent to 1999. The actual amount, if any, of Incentive
Compensation to which Employee may be entitled shall range on a linear
basis from Fifty
2
<PAGE>
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. No Incentive Compensation shall be paid if less than
Eighty Percent (80%) of Targets are achieved.
By way of example, if Base Salary is $250,000, One Hundred
Percent (100%) of Target Bonus Amount at accomplishment of One Hundred
Percent (100%) of Targets shall be $125,000. If the Company achieves
Eighty Percent (80%) of Targets, Target Bonus Amount shall be $62,500
(I.E., 50% of $125,000), which shall be automatically due and payable
to Employee.
By way of further example, if the Company achieves One Hundred
Ten Percent (110%) of Targets, Target Bonus Amount shall be $187,500
(I.E., 150% x $125,000), which shall be automatically due and payable
to Employee.
(iii) Incentive Compensation shall be paid to Employee in a
lump sum cash payment as soon as practicable after the CPAs determine
the amounts, if any, which are due Employee. Incentive Compensation
earned during the final calendar year of the Period of Employment shall
be payable as soon as practicable after the CPAs determine the amounts,
if any, which are due Employee, notwithstanding the earlier expiration
or termination of the Period of Employment.
(C) STOCK OPTIONS.
(i) On the date hereof, the Company will grant to Employee
options to purchase Fifty Thousand (50,000) common shares at an
exercise price per share equal to the average of the closing prices of
the Company's common shares on the business day preceding the date
hereof and the date hereof, which options shall be "non-qualified"
stock options. During the Period of Employment such options shall
become cumulatively vested and exercisable at the rate of one-third
(1/3) per year commencing on the anniversary of the date of grant.
(ii) The options set forth in this Paragraph 4(C) shall be
granted to Employee pursuant to the Company's 1994 Stock Option Plan
(the "Stock Option Plan") and Employee shall be subject to the terms
and conditions set forth therein. The options set forth in this
Paragraph 4(C) shall also be evidenced by Employee executing and
becoming a party to an option agreement between Employee and the
Company (the "Option Agreement"). Notwithstanding any of the foregoing,
if there is any inconsistency between or among this Agreement, the
Stock Option Plan and/or the Option Agreement, this Agreement, to the
extent it is consistent with the restrictions provided in the last
sentence of paragraph 12 of the Plan, shall govern as to all documents
described in this subparagraph 4(C)(ii).
3
<PAGE>
(iii) Notwithstanding the foregoing, the options described in
this Paragraph 4(C) shall under the following circumstances become
vested and exercisable, and expire, as follows:
(a) upon a termination of the Period of Employment by
the Company without cause pursuant to Paragraph 11(A) that
DOES NOT invoke the provisions of Paragraph 11(E)(ii)(a) or
upon termination of the Period of Employment by Employee for
cause (as described in Paragraph 11(C)), all of Employee's
unvested options shall become accelerated and immediately
fully vested, and exercisable at any time until the earlier of
the expiration date of the options (as specified in the Stock
Option Plan) or the first anniversary of the effective date of
such termination; or
(b) upon a termination of the Period of Employment by
the Company without cause pursuant to Paragraph 11(A) that
invokes the provisions of Paragraph 11(E)(ii)(a), Employee's
unvested options shall not continue to vest beyond the
effective date of such termination and all options that were
vested as of the effective date of termination shall be
exercisable at any time until the earlier of the expiration
date of the options (as specified in the Stock Option Plan) or
the first anniversary of the effective date of such
termination;
PROVIDED, HOWEVER, that for purposes of this subparagraph
4(C)(iii), no options will become vested and exercisable
subsequent to the expiration date of the options as specified
in the Stock Option Plan.
(D) ADDITIONAL COMPENSATION. During the Period of Employment, Employee
shall be eligible to receive any other payments of bonus, compensation or other
amounts not specifically set forth herein but which may be paid by the Company
at its sole discretion ("Additional Compensation").
5. BUSINESS EXPENSES. During the Period of Employment, the Company agrees to
reimburse Employee for reasonable and necessary expenses incurred by him in
connection with the performance of his duties hereunder. Employee shall submit
vouchers, invoices and such other documentation in accordance with the Company's
general policy with respect thereto.
6. BENEFITS. The Company will provide or, as necessary, reimburse Employee with
or for the following benefits:
(A) ORDINARY INSURANCE. During the Period of Employment, Employee shall
be entitled to medical, dental and hospitalization insurance and short-term
disability coverage for himself and his dependents, to the extent provided
generally to the senior executives of the Company.
4
<PAGE>
(B) VACATIONS. During the Period of Employment, Employee shall be
entitled to three (3) weeks paid vacation per year, the scheduling of which
shall be in accordance with the general policies and practices of the Company
with respect thereto.
(C) EMPLOYEE BENEFIT PLANS AND PERQUISITES. During the Period of
Employment, Employee shall be entitled (i) to participate in all employee
benefit plans, programs, policies and arrangements sponsored, maintained or
contributed to by the Company, subject to and in accordance with the terms and
conditions of such plans, programs, policies and arrangements as they relate to
similarly situated executive officers of the Company, and (ii) to receive all
other benefits and perquisites provided or made available by the Company to its
senior executive officers subject to and in accordance with the terms and
conditions of such benefits and perquisites as they relate to similarly situated
senior executive officers of the Company.
(D) RELOCATION. In connection with Employee's relocation to the State
of New Jersey, to occur within the first three (3) months of this Agreement, the
Company will provide Employee with the relocation benefits described on EXHIBIT
A to this Agreement.
7. DEATH OR PERMANENT DISABILITY. In the event of the death or Permanent
Disability of Employee ("Permanent Disability" being defined as an illness which
will prevent Employee from performing his duties for a period of six (6)
consecutive months or nine (9) out of any consecutive twelve (12) months) prior
to the expiration of the Period of Employment, his employment shall be deemed to
cease as of the end of the month of the date of his death or Permanent
Disability and this Agreement shall terminate forthwith and all rights under it
shall expire, except that Employee or Employee's estate shall be entitled to
receive Base Salary for a period of six (6) months from the date of death or
Permanent Disability plus the PRO RATA amount of any Incentive Compensation
which would have been due Employee pursuant to Paragraph 4 above for the period
January 1 of said year through the date of death or Permanent Disability. Said
Base Salary shall be paid at the time it would regularly be paid. Said Incentive
Compensation shall be paid as soon as practicable after a determination of the
amount due is made by the Company's CPAs. Additionally, any options eligible to
vest within twelve (12) months of the date of death or Permanent Disability
shall be deemed accelerated and fully vested as of the date of death or
Permanent Disability subject to the further terms and conditions of the Stock
Option Plan pursuant to which the same were granted.
8. CONFIDENTIAL INFORMATION. Employee acknowledges that the Company would be
damaged if Employee's knowledge with respect to the business of the Company were
disclosed to or utilized by parties other than the Company. Accordingly,
Employee covenants and agrees that he will not disclose any presently known or
hereafter acquired confidential or proprietary information of the Company or its
business to any person, firm, corporation or other entity. For the purposes of
this Paragraph, the term "confidential or proprietary information" shall mean
all information which is currently known to or hereafter acquired by Employee
and relates to such matters as customer mailing lists, pricing and credit
techniques, marketing techniques, research and development activities, sources
of product, lists of magazines or other publications containing advertising of
the Company and other confidential or restricted information which is
5
<PAGE>
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
Employee from third parties without restrictions on disclosure provided the same
would not, if released, damage the Company. The provisions of this Paragraph
shall survive the termination of this Agreement.
9. COVENANT NOT TO COMPETE. Employee hereby covenants and agrees that, from the
date hereof until December 31, 2002 (the "Restrictive Period"), he shall not,
directly or indirectly, own, operate, manage, join, control, participate in the
ownership, management, operation or control of, or be paid or employed by, or
acquire any securities of, or otherwise become associated with or provide
assistance to, as an employee, consultant, director, officer, shareholder,
partner, agent, associate, principal, representative or in any other capacity,
any business entity or activity which is directly or indirectly a "Competitive
Business" (as hereinafter defined); PROVIDED, HOWEVER, that the foregoing shall
not prevent Employee from (i) performing services for a Competitive Business if
such Competitive Business is also engaged in other lines of business and if
Employee's services are restricted to employment in such other lines of
business; or (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 Two Percent (2%) of any class or type of securities of, or interest
in, such Competitive Business. The term "Competitive Business" shall mean and
include any business or activity that is substantially the same as any business
or activity then conducted by the Company, regardless of where such Competitive
Business is located. If either the period of time or the geographic area
specified in this Paragraph 9 should be adjudged unreasonable in any proceeding,
then the period of time shall be reduced by such number of months and/or the
geographic area shall be limited in scope so that such restrictions may be
enforced for such time and in such area as is adjudged to be reasonable. If
Employee violates any of the restrictions contained in this Paragraph 9, the
Restrictive Period shall not run in Employee's favor from the time of the
commencement of any such violation until such time as such violation shall be
cured to the satisfaction of the Company.
10. COVENANT NOT TO SOLICIT. Unless Employee has obtained the prior written
consent of the Company, he hereby covenants and agrees that, during the
Restrictive Period, he shall not, for or on behalf of a Competitive Business,
directly or indirectly, as owner, officer, director, stockholder, partner,
associate, consultant, manager, advisor, representative, employee, agent
creditor, or otherwise, attempt to solicit or in any other way disturb or
service any person, firm or corporation that has been a customer account of the
Company at any time or times during the Restrictive Period, whether or not he at
any time had any direct or indirect account responsibility for, or contact with,
such customer account. Further, unless Employee has obtained the prior written
consent of the Company, he hereby covenants and agrees that, during the
Restrictive Period, he shall not, for or on behalf of a Competitive Business,
directly or indirectly, induce, solicit or attempt to influence any employee or
former employee (employed by the Company within the prior 12 months) of the
Company to terminate his/her employment relationship with the Company or to
accept a position with any Competitive Business. If either the period of time or
the geographic area specified in this Paragraph 10 should be adjudged
unreasonable in any
6
<PAGE>
proceeding, then the period of time shall be reduced by such number of months
and/or the geographic area shall be limited in scope so that such restrictions
may be enforced for such time and in such area as is adjudged to be reasonable.
If Employee violates any of the restrictions contained in this Paragraph 10, the
Restrictive Period shall not run in Employee's favor from the time of the
commencement of any such violation until such time as such violation shall be
cured to the satisfaction of the Company.
11. TERMINATION. In addition to termination for death or Permanent Disability
pursuant to Paragraph 7, the Period of Employment shall terminate upon the
occurrence of any of the following:
(A) TERMINATION WITHOUT CAUSE UPON PRIOR NOTICE. The Company may
terminate the Period of Employment by giving Employee ninety (90) days prior
written notice.
(B) TERMINATION FOR CAUSE. At the election of the Company, it may
immediately upon written notice by the Company to Employee terminate the Period
of Employment for cause. For the purposes of this Paragraph, cause for
termination shall be deemed to exist upon (i) a good faith finding by the
Company of a willful failure or refusal of Employee to perform assigned duties
for the Company of which he has knowledge, or the commission of any other
willful or grossly negligent action by Employee with the intent to injure the
Company; (ii) any material breach of any material provision of this Agreement by
Employee if Employee fails to correct such breach (or to take substantial steps
to correct such breach) within ten (10) days after receiving written notice
thereof; or (iii) the conviction of Employee of, or the entry of a plea of
guilty or NOLO CONTENDERE by Employee to, a crime involving an act of fraud or
embezzlement against the Company or the conviction of Employee of, or the entry
of a plea of guilty or NOLO CONTENDERE by Employee to, any felony involving
moral turpitude. Notwithstanding the foregoing, the Company shall not terminate
Employee for cause pursuant to subparagraphs (i) or (ii) of this Paragraph
unless and until there shall have been delivered to Employee a copy of a
resolution, duly adopted by the affirmative vote of the Board of Directors at a
meeting called and held after reasonable notice to Employee and an opportunity
for Employee, together with his counsel, to be heard before the Board of
Directors, finding that in the good faith opinion of the Board of Directors
Employee is guilty of conduct set forth in subparagraphs (i) or (ii) of this
Paragraph and specifying the particulars thereof in reasonable detail.
(C) EMPLOYEE'S ELECTION FOR CAUSE. At the election of Employee, he may
terminate the Period of Employment for cause immediately upon written notice by
Employee to the Company. For purposes of this Paragraph, cause for termination
shall be deemed to exist upon (i) a material failure by the Company to continue
Employee's participation in any bonus, compensation or other benefit plan in
which Employee is entitled to participate pursuant hereto or the taking by the
Company of any action which would directly or indirectly materially reduce his
participation therein; or (ii) a material breach of any provision of this
Agreement by the Company if such breach is not corrected (or substantial steps
have not been taken to correct such breach) within thirty (30) days after the
Board of Directors received written notice thereof.
7
<PAGE>
(D) EMPLOYEE'S ELECTION WITHOUT CAUSE. Effective any time after the
Contingent Amount (as defined in the Interest Purchase Agreement, among the
Company, Employee and certain other parties (the "Purchase Agreement")) is
earned in full, Employee may terminate the Period of Employment by giving the
Company ninety (90) days prior written notice.
(E) EFFECT OF TERMINATION.
(i) TERMINATION BY THE COMPANY FOR CAUSE OR AT THE ELECTION OF
EMPLOYEE WITHOUT CAUSE. In the event that Period of Employment is
terminated by the Company for cause pursuant to Paragraph 11(B)(i) or
(ii) or Employee elects to terminate the Period of Employment without
cause pursuant to Paragraph 11(D), the Company shall pay to Employee
the Base Salary, Incentive Compensation and Additional Compensation
due, if any, under Paragraph 4, on a PRO RATA basis to the effective
date of termination at the time such Base Salary, Incentive
Compensation or Additional Compensation would regularly be paid and
benefits otherwise payable to him hereunder all through the last day of
his actual employment by the Company. Upon termination under this
Paragraph 11(E), Employee will thereupon no longer be entitled to any
compensation or benefits provided herein, and nothing herein shall
limit the Company's right against Employee or the rights and
obligations of the parties under Paragraphs 8, 9, and 10 hereof.
(ii) TERMINATION BY THE COMPANY WITHOUT CAUSE OR AT THE
ELECTION OF EMPLOYEE FOR CAUSE. In the event the Period of Employment
is terminated without cause by the Company pursuant to Paragraph 11(A)
or by Employee pursuant to Paragraph 11(C), then, following the
occurrence of such event, the Company shall pay to Employee (I) the
Base Salary due through the expiration of the Period of Employment as
if the Period of Employment had not been earlier terminated, paid at
the time such Base Salary would regularly be paid, and (II) the
Incentive Compensation and Additional Compensation due, if any, under
Paragraph 4 hereof for the year during which termination occurs, on a
PRO RATA basis through the effective date of termination, paid at the
time such Incentive Compensation or Additional Compensation would
regularly be paid. In addition, Employee will continue to receive the
benefits provided under Paragraph 6 hereof, including payment of
accrued but unused vacation benefits. During said period, Employee
shall continue to be bound by the provisions of Paragraphs 8, 9 and 10
hereof. Notwithstanding the foregoing:
(a) if the Period of Employment is terminated without
cause by the Company pursuant to Paragraph 11(A) between
December 31, 1999 and March 31, 2000 and the positive amount
of the 1999 Surplus (as defined in the Purchase Agreement) is
not equal to or greater than 10% of the Total Gross Profit
Dollars (as defined in the Purchase Agreement) for the year
ending December 31, 1998, then, following the occurrence of
such event, the Company shall pay to Employee (I) the Base
Salary due for one year following the effective date of
termination, paid at the time such Base Salary would regularly
be paid, and (II) the Incentive Compensation and Additional
Compensation due, if any, under Paragraph 4
8
<PAGE>
hereof for the year ending December 31, 1999 (with no
Incentive Compensation and Additional Compensation being
payable for any part of the year ending December 31, 2000),
paid at the time such Incentive Compensation or Additional
Compensation would regularly be paid. In addition, Employee
will continue to receive the healthcare benefits provided
under Paragraph 6(A) hereof for a period of one year from
the effective date of termination. During said period,
Employee shall continue to be bound by the provisions of
Paragraphs 8, 9 and 10 hereof; PROVIDED, HOWEVER, that the
"Restrictive Period" (for purposes of Paragraphs 9 and 10),
shall terminate one year from the effective date of
termination.
(b) if the Period of Employment is terminated without
cause by the Company pursuant to Paragraph 11(A) between
December 31, 2000 and March 31, 2001 and the positive amount
of the 2000 Surplus (as defined in the Purchase Agreement) is
not equal to or greater than 10% of the Total Gross Profit
Dollars for the year ending December 31, 2000, then, following
the occurrence of such event, the Company shall pay to
Employee (I) the Base Salary due for a one-year period from
the effective date of termination, paid at the time such Base
Salary would regularly be paid, and (II) the Incentive
Compensation and Additional Compensation due, if any, under
Paragraph 4 hereof for the year ending December 31, 2000 (with
no Incentive Compensation and Additional Compensation being
payable for any part of the year ending December 31, 2001),
paid at the time such Incentive Compensation or Additional
Compensation would regularly be paid. In addition, Employee
will continue to receive the healthcare benefits provided
under Paragraph 6(A) hereof for a period of one-year from the
effective date of termination. During said period, Employee
shall continue to be bound by the provisions of Paragraphs 8,
9 and 10 hereof; PROVIDED, HOWEVER, that the "Restrictive
Period" (for purposes of Paragraphs 9 and 10), shall terminate
one year from the effective date of termination.
12. SUCCESSORS AND BINDING AGREEMENT.
(A) The Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation, reorganization or otherwise) to all or
substantially all of the business or assets of the Company, by agreement in form
and substance reasonably satisfactory to Employee, expressly to assume and agree
to perform this Agreement in the same manner and to the same extent the Company
would be required to perform if no such succession had taken place. This
Agreement will be binding upon and inure to the benefit of the Company and any
successor to the Company, including without limitation any persons acquiring
directly or indirectly all or substantially all of the business or assets of the
Company whether by purchase, merger, consolidation, reorganization or otherwise
(and such successor will thereafter be deemed the "Company" for the purposes of
this Agreement), but will not otherwise be assignable, transferable or delegable
by the Company.
9
<PAGE>
(B) This Agreement will inure to the benefit of and be enforceable by
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees and legatees.
(C) This Agreement is personal in nature and neither of the parties
hereto will, without the consent of the other, assign, transfer or delegate this
Agreement or any rights or obligations hereunder except as expressly provided in
subparagraphs 12(A) or (B) above. Without limiting the generality or effect of
the foregoing, Employee's right to receive payments hereunder will not be
assignable, transferable or delegable, whether by pledge, creation of a security
interest, or otherwise, other than by a transfer by Employee's will or by the
laws of descent and distribution and, in the event of any attempted assignment
or transfer contrary to this subparagraph 12(C), the Company will have no
liability to pay any amount so attempted to be assigned, transferred or
delegated.
13. 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 remaining provisions of this Agreement will be unaffected thereby and
will remain in full force and effect to the fullest extent permitted by law.
14. REPRESENTATION. Each party represents and warrants that it is fully
authorized and empowered to enter into this Agreement and that performance of
its obligations under this Agreement will not violate any agreement between it
and any other person or entity.
15. NOTICES. All notices, elections, demands or other communications required or
permitted to be made or given pursuant to this Agreement shall be in writing and
shall be considered properly given or made if sent by telecopier, Telex, courier
service or certified mail, return receipt requested and addressed to the parties
at the respective addresses specified below. Either party may change its address
by giving notice in writing pursuant to this Paragraph to the other of its new
address. To the Company: Micro Warehouse, Inc.
535 Connecticut Avenue
Norwalk, Connecticut 06854
Attn.: Bruce L. Lev, Executive Vice President, Legal
and Corporate Affairs and General Counsel
Telephone: (203) 899-4000
Telecopy: (203) 899-4312
To Employee: Stephen J. Carline
5240 East Cholla Street
Scottsdale, Arizona 85254
16. JURISDICTION.
10
<PAGE>
(A) Any controversy, claim or breach arising out of or relating to this
Agreement (except those relating to monetary damages and those relating to
Paragraphs 8, 9 or 10) shall be submitted for settlement to an arbitrator agreed
upon by the parties. The decision of such arbitrator shall be final and binding
on the parties. If the parties cannot agree upon an arbitrator, the controversy,
claim or breach shall be referred to the American Arbitration Association with a
request that an arbitrator be appointed pursuant to the rules of said
Association. Such arbitration shall be held in Stamford, Connecticut, in
accordance with the rules and practices of the American Arbitration Association
pertaining to single-party arbitration then in effect, and the judgement upon
the award rendered shall be entered by consent in any court having jurisdiction
thereof.
(B) Employee acknowledges the restrictions contained in Paragraphs 8, 9
and 10, in view of (i) the nature of the business in which the Company is
engaged, (ii) the unique nature of the services rendered by Employee to the
Company, and (iii) the national and international scope of the business
enterprise of the Company, are reasonable, appropriate and necessary in order to
protect the legitimate interests of the Company, and that any violation thereof
would result in irreparable injuries to the Company, and Employee therefore
acknowledges that, notwithstanding subparagraph 16(A), in the event of a
violation of any of these restriction, the Company shall be entitled to obtain
from any court of competent jurisdiction, temporary, preliminary and permanent
injunctive relief as well as damages and equitable accounting of all earnings,
profits and other benefits arising from such violation, which rights shall be
cumulative and in addition to any other rights or remedies to which the Company
may be entitled.
17. ENTIRE AGREEMENT. This Agreement constitutes the full and complete
understanding and agreement of the parties. Neither party has relied upon any
representation of the other not set forth herein. This Agreement may not be
changed orally but only by an agreement in writing, signed by the party against
whom enforcement of any waiver, change, modification, extension or discharge is
sought. This Agreement supersedes all prior agreements between the parties
hereto with respect to its subject matter and notwithstanding any provision
hereof, will become effective upon the execution of this Agreement by the
parties.
18. BINDING EFFECT. This Agreement shall be binding upon and accrue to the
benefit of the parties hereto, their heirs, executors, administrators and
successors.
19. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Connecticut without regard to its
principles with respect to conflicts of law.
20. COUNSEL FEES. Except as set forth herein, the parties hereto shall bear
their own fees, costs and expenses incurred in connection with this Agreement.
If either party is required to bring suit or otherwise seek enforcement of its
or his rights in connection with the same, the prevailing party in such action
or proceeding shall be entitled to recover counsel fees incurred in such action
or proceeding.
11
<PAGE>
21. COUNTERPARTS. This Agreement may be executed simultaneously in one or more
counterparts, each of which will be deemed to be an original but all of which
together will constitute one and the same instrument.
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have affixed their signatures on
the day and year first above written.
COMPANY:
MICRO WAREHOUSE, INC.
By: /s/ Peter Godfrey
--------------------------------------
Peter Godfrey
President and Chief Executive Officer
EMPLOYEE:
By: /s/ Stephen J. Carline
--------------------------------------
Stephen J. Carline
13
<PAGE>
EXHIBIT A
RELOCATION BENEFITS AND REIMBURSEMENT AGREEMENT
1. The Company will reimburse you for the costs of moving your household goods
to a mutually satisfactory location within the State of New Jersey. You will be
responsible for obtaining at least two competitive bids for the relocation and
for choosing the lowest commercially reasonable bid.
2. In addition, during the period prior to moving to your new location, the
Company will reimburse you for the reasonable cost of travel for you and your
partner to conduct two house-hunting trips to New Jersey and for the reasonable
cost of temporary housing in New Jersey through January 31, 1999. You will be
authorized and reimbursed for a total of seven round-trip air fares from Phoenix
to New Jersey, including the aforementioned house-hunting trips, and for the
cost of hotel and ground transportation in New Jersey through November 30, 1998.
Your travel will be reimbursed in accordance with the Company's travel expense
policy, a copy of which you have been provided.
3. In consideration of the agreement of the Company to reimburse you for the
relocation benefits described in this offer letter, you agree as follows:
a. That if I resign before completing twelve (12) months of
employment, I will reimburse the Company for the amount of the
relocation benefit received by me, prorated on a monthly basis.
b. I authorize the Company to withhold from any moneys due to
me at the time of resignation (including my final expense reports,
vacation pay and, if necessary, regular compensation, the sum exempt
from taxation under federal and state law) that is necessary to
complete this obligation.
ACKNOWLEDGED AND AGREED:
/s/ Stephen J. Carline 10/28/99
- -------------------------------- ---------------------
Stephen J. Carline Date
14
<PAGE>
EXHIBIT 10.24
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
This amended and restated employment agreement ("Agreement") made as of
the 1st day of January, 1998 between Micro Warehouse, Inc., a Delaware
corporation (hereinafter referred to as the "Company"), with its principal place
of business at 535 Connecticut Avenue, Norwalk, Connecticut 06854, and Adam W.
Shaffer whose address is 7 Godfrey Road West, Weston, Connecticut 06883
(hereinafter referred to as "Employee").
WHEREAS, this Agreement is effective January 1, 1998 (the "Effective
Date") and is an amendment and restatement of, and supersedes each provision of
the employment agreement and the letter agreement modifying such employment
agreement previously entered into for good and valuable consideration by
Employee and Company on or about January 1, 1996 and April 24, 1997,
respectively; and
WHEREAS, this Agreement shall represent the entire employment agreement
between the parties with respect to the subject matter herein.
NOW, THEREFORE, in consideration of the premises, the Company and the
Employee agree as follows:
1. EMPLOYMENT. The Company shall hereby continue to employ Employee, and
Employee hereby accepts such continued employment, commencing on the Effective
Date, on the terms and conditions set forth below.
<PAGE>
2. DUTIES. During the Period of Employment (as hereinafter defined), the
Company shall continue to employ Employee as Executive Vice President of
Marketing, Advertising and Purchasing reporting to Peter Godfrey, the President
and Chief Executive Officer of the Company, or his successor, to perform such
duties as shall be required by Mr. Godfrey, or his successor, provided the same
are consistent with those of an executive vice president of marketing,
advertising and purchasing of a public company. The precise responsibilities of
Employee may be revised from time to time provided the same do not materially
affect Employee's position. In furtherance of the foregoing, Employee hereby
agrees to perform his duties faithfully. During the Period of Employment and
except for vacations in accordance herewith and absences due to temporary
illness, Employee shall devote all of his available business time and energies
during normal business hours to the business of the Company.
3. TERM. The term of Employee's continued employment by the Company
shall commence as of the Effective Date and end as of the close of business on
December 31, 2000 (the "Period of Employment").
4. COMPENSATION.
(A) BASE SALARY. For all services rendered by the Employee under this
Agreement, the Company shall pay to him a minimum "Base Salary" at the rate of
Three Hundred Twenty-Five Thousand Dollars ($325,000) per annum during the
Period of Employment payable in at least equal monthly installments. The term
"Base Salary" shall mean regular cash compensation paid on a periodic basis
exclusive of benefits, bonuses or incentive payments.
<PAGE>
(B) ADJUSTMENTS TO BASE SALARY. 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 4(B), the following
definition shall apply:
(a) 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.
(b) 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
<PAGE>
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
4(B) 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 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.
<PAGE>
(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 4(B), be
reduced by virtue of this paragraph 4(B).
(C) ANNUAL INCENTIVE COMPENSATION. In addition to Base Salary, with
respect to the Period of Employment, the Employee shall be eligible to receive
annual incentive compensation ("Incentive Compensation") as set forth below,
which amount of Incentive Compensation shall not exceed One Hundred Percent
(100%) of Base Salary in any one year.
(i) Prior to January 1 of each year that this Agreement remains
in effect, the Board of Directors and the Employee shall mutually agree upon and
establish a plan (the "Incentive Plan") describing anticipated results of
operations for the coming fiscal year and containing financial goals
(hereinafter "Targets"). The Incentive Plan established for 1998 is attached
hereto as EXHIBIT A. The Incentive Plan shall be determined in the sole
discretion of the Board of Directors and the Employee and may vary from year to
year. A copy of the Incentive Plan shall be provided to the Company's Certified
Public Accountants ("CPAs"). Subsequent to the conclusion of the year the CPAs
shall compare the actual results of operations for said year to the Incentive
Plan.
(ii) The Incentive Plan shall set forth a target bonus amount,
One Hundred Percent (100%) of which shall be payable for accomplishing One
Hundred Percent (100%) of Targets, which amount for calendar 1998 shall be One
Hundred Sixty-Two Thousand Five Hundred Dollars ($162,500), and for subsequent
years shall be Fifty Percent (50%) of Base
<PAGE>
Salary for each year ending December 31 during the Period of Employment
(hereinafter "Target Bonus Amount"). The Board of Directors may modify upward
the Target Bonus Amount as part of the salary review process for years
subsequent to 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, if Base Salary is Three Hundred Twenty-Five Thousand
Dollars ($325,000), One Hundred Percent (100%) of Target Bonus Amount at
accomplishment of One Hundred Percent (100%) of Targets shall be One Hundred
Sixty-Two Thousand Five Hundred Dollars ($162,500). If the Company achieves
Eighty Percent (80%) of Targets, Target Bonus Amount shall be Eighty One
Thousand Two Hundred Fifty Dollars ($81,250) (I.E., .5 x $162,500) which shall
be automatically due and payable to the Employee.
By way of further example, if Base Salary is Three Hundred Twenty- Five
Thousand Dollars ($325,000), One Hundred Percent (100%) of Target Bonus Amount
at accomplishment of One Hundred Percent (100%) of Targets shall be One Hundred
Sixty-Two Thousand Five Hundred Dollars ($162,500). If the Company achieves One
Hundred Ten Percent (110%) of Targets, Target Bonus Amount shall be Two Hundred
Forty-Three Thousand Seven Hundred Fifty Dollars ($243,750) (I.E., 1.50 x
$162,500), which shall be automatically due and payable to the Employee.
<PAGE>
(iii) Incentive Compensation shall be paid to Employee in a lump
sum cash payment as soon as practicable after the CPAs determine the amounts, if
any, which are due the Employee.
(D) SPECIAL MONTHLY INCENTIVE COMPENSATION. The Company shall pay to the
Employee One Hundred Thousand Dollars ($100,000) in eighteen (18) monthly
installments each in the amount of Five Thousand Five Hundred Fifty-Five and
50/100 Dollars ($5,555.50). The first such payment shall have been made on May
1, 1997 and the last such payment shall be made on October 1, 1998, provided
that the Employee is in the employ of the Company when such payments are due
("Special Monthly Incentive Compensation"). Notwithstanding the foregoing, if
Employee's Period of Employment is terminated by the Company without cause (as
defined in paragraph 11(A)) or Employee terminates his Period of Employment for
cause (a described in paragraph 11(C)), Employee need not be in the employ of
the Company to receive the payments described in this paragraph 4(D).
(E) STOCK OPTIONS.
(i) On February 26, 1998, the Company granted to the Employee
options to purchase Five Hundred Thousand (500,000) shares of common stock at an
exercise price of Thirteen and 59/100 Dollars ($13.59) per share, which options
shall be "non-qualified" stock options. During the Period of Employment, such
options shall become cumulatively vested and exercisable at the rate of
one-third (1/3) per year commencing on December 31, 1998 and one-third (1/3) on
each of the next two anniversaries of such date.
<PAGE>
(ii) The options set forth in this paragraph 4(E) shall be
granted to the Employee pursuant to the Company's 1994 Stock Option Plan (the
"Stock Option Plan") and the Employee shall be subject to the terms and
conditions set forth therein. The options set forth in this paragraph 4(E) shall
also be evidenced by the Employee executing and becoming a party to an option
agreement between the Employee and the Company (the "Option Agreement").
Notwithstanding any of the foregoing, if there is any inconsistency between or
among this Agreement, the Stock Option Plan and/or the Option Agreement, this
Agreement, to the extent it is consistent with the restrictions provided in the
last sentence of paragraph 12 of the Plan, shall govern as to all documents
described in this subparagraph 4(E)(ii).
(iii) Notwithstanding the foregoing, the options described in
this paragraph 4(E) shall, under the following circumstances become vested and
exercisable as follows: (I) upon a Change in Control (as defined in paragraph
11(D) herein), except as provided in subparagraph (v) below, all of Employee's
unvested options shall become accelerated and immediately fully vested; and (II)
upon termination of the Period of Employment by the Company without cause (as
described in paragraph 11(A)) or upon termination of the Period of Employment by
Employee for cause (as described in paragraph 11(C)), all of Employee's unvested
options shall become accelerated and immediately fully vested, and exercisable,
at any time prior to the expiration date of the options as specified in the
Stock Option Plan, or the expiration of twelve (12) months after the date of
such termination, whichever is the longer period; PROVIDED, HOWEVER, that for
purposes of this clause 4(E)(iii)(II), no options will become
<PAGE>
vested and exercisable subsequent to the expiration date of the options as
specified in the Stock Option Plan.
(iv) 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
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
subparagraph (iii)(I) above, then such subparagraph (iii)(I) shall be void.
(F) ADDITIONAL COMPENSATION. During the Period of Employment, the
Employee shall be eligible to receive any other payments of bonus, compensation
or other amounts not specifically set forth herein but which may be paid by the
Company ("Additional Compensation").
5. BUSINESS EXPENSES. During the Period of Employment, the Company
agrees to reimburse Employee for reasonable and necessary expenses incurred by
him in connection with the performance of his duties hereunder. Employee shall
submit vouchers, invoices and such other documentation in accordance with the
Company's general policy with respect thereto.
6. BENEFITS. During the Period of Employment, the Company shall provide
or, as necessary, reimburse Employee with or for the following benefits:
(A) ORDINARY INSURANCE. Medical, dental, hospitalization and life
insurance and short-term disability coverage for himself and his dependents, to
the extent provided generally to the
<PAGE>
senior executive officers of the Company.
(B) VACATIONS. Employee shall be entitled to four (4) weeks paid
vacation per year, the scheduling of which shall be in accordance with the
general policies and practices of the Company with respect thereto.
(C) EMPLOYEE BENEFIT PLANS AND PERQUISITES. During the Period of
Employment, the Employee shall be entitled (i) to participate in all employee
benefit plans, programs, policies and arrangements sponsored, maintained or
contributed to by the Company, subject to and in accordance with the terms and
conditions of such plans, programs, policies and arrangements as they relate to
similarly situated executive officers of the Company, and (ii) to receive all
other benefits and perquisites provided or made available by the Company to its
senior executive officers subject to and in accordance with the terms and
conditions of such benefits and perquisites as they relate to similarly situated
senior executive officers of the Company.
7. DEATH OR PERMANENT DISABILITY. In the event of the death or Permanent
Disability ("Permanent Disability" being defined as an illness which will
prevent the Employee from performing his duties for a period of six (6)
consecutive months or nine (9) out of any consecutive twelve (12) months) prior
to the expiration of the Period of Employment, his employment shall be deemed to
cease as of the end of the month of the date of his death or Permanent
Disability and this Agreement shall terminate forthwith and all rights under it
shall expire, except that Employee or Employee's estate shall be entitled to
receive Base Salary for a period of six (6) months from the date of death or
Permanent Disability plus the PRO RATA amount
<PAGE>
of any Incentive Compensation or Special Monthly Incentive Compensation which
would have been due the Employee pursuant to paragraph 4 hereinabove for the
period January 1 of said year through the date of death or Permanent Disability.
Said Base Salary shall be paid at the time it would regularly be paid. Said
Incentive Compensation, Special Monthly Incentive Compensation or Additional
Compensation shall be paid as soon as practicable after a determination of the
amount due is made by the Company's CPAs.
Additionally, any options eligible to vest within twelve (12) months of
the date of death or Permanent Disability shall be deemed accelerated and fully
vested as of the date of death or Permanent Disability subject to the further
terms and conditions of the Stock Option Plan pursuant to which the same were
granted.
8. CONFIDENTIAL INFORMATION. Employee acknowledges that the Company
would be damaged if Employee's knowledge with respect to the business of the
Company were disclosed to or utilized by parties other than the Company.
Accordingly, Employee covenants and agrees that he will not disclose any
presently known or hereafter acquired confidential or proprietary information of
the Company or its business to any person, firm, corporation or other entity.
For the purposes of this paragraph, the term "confidential or proprietary
information" shall mean all information which is currently known to or hereafter
acquired by Employee and relates to such matters as customer mailing lists,
pricing and credit techniques, marketing techniques, research and development
activities, sources of product, lists of magazines or other publications
containing advertising of the Company and other confidential or restricted
information which is
<PAGE>
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 provided the
same would not, if released, damage the Company. The provisions of this
paragraph shall survive the termination of this Agreement.
9. COVENANTS NOT TO COMPETE AND NOT TO SOLICIT.
(A) Employee hereby covenants and agrees that from the date of
this Agreement until twelve (12) months after the termination of the Period of
Employment (the "Non-Compete Period"), within the Territory (as described in
subparagraph 9(B)(i)) (and, as to subparagraph 9(A)(iii), any place), he shall
not, directly or indirectly, do or suffer any of the following:
(i) Own, manage, control or participate in the
ownership, management, or control of, or be employed or engaged by or
otherwise affiliated or associated as an employee, consultant, independent
contractor or otherwise with, any other corporation, partnership,
proprietorship, firm, association, or other business, which is in competition
with the Company's business (as described in subparagraph 9(B)(ii); PROVIDED,
however, that the ownership of not more than Two Percent (2%) of any class of
publicly-traded securities of any entity shall not be deemed a violation of
this Agreement.
(ii) Employ, assist in employing, or otherwise associate
in business with any person who during the Period of Employment or at the end of
the Period of
<PAGE>
Employment is an employee, officer or agent of the Company, or any of its
affiliated, related or subsidiary entities.
(iii) Induce any person who is an employee, officer or
agent of the Company, or any of its affiliated, related or subsidiary entities
to terminate such relationship.
(B) For purposes of this Agreement:
(i) "Territory" shall mean the countries identified in
EXHIBIT B hereto.
(ii) The Company's business shall mean specialty catalogue
retailer and direct marketer of brand name personal computers, computer
software, hardware, accessories, peripheral and networking products to
commercial and consumer customers. Said marketing activities are primarily
conducted through frequent catalogue mailings, Internet catalogue and auction
web sites and outbound telemarketing activities.
(C) In the event Employee shall violate any provision of this
paragraph 9 as to which there is a specific time period during which he is
prohibited from taking certain actions or from engaging in certain activities,
as set forth in such provision, then, in such event, such violation shall toll
the running of such time period from the date of such violation until such
violation shall cease.
(D) Employee has carefully considered the nature and extent of
the restrictions upon him and the rights and remedies conferred upon the Company
under this paragraph 9 and this Agreement, and hereby acknowledges and agrees
that the same are reasonable in time and territory, are designed to eliminate
competition which otherwise would be unfair to the
<PAGE>
Company, do not stifle the inherent skill and experience of Employee, would not
operate as a bar to Employee's sole means of support, are fully required to
protect the legitimate interests of the Company and do not confer a benefit upon
the Company disproportionate to the detriment to Employee.
10. DISCLOSURE. Employee, for a period commencing on the date of this
Agreement through the end of the Non-Compete Period, agrees to communicate the
contents of paragraphs 8 and 9 of this Agreement to any person, firm,
association, or corporation which he intends to employed by, associated in
business with, or represent.
11. TERMINATION. In addition to termination for death or Permanent
Disability pursuant to paragraph 7, the employment of the Employee by the
Company pursuant to this Agreement shall terminate upon the occurrence of any of
the following:
(A) TERMINATION UPON PRIOR NOTICE. The Company may terminate this
Agreement by giving the Employee ninety (90) days prior written notice.
(B) EMPLOYEE TERMINATION FOR CAUSE. At the election of the Company, it
may immediately upon written notice by the Company to the Employee terminate the
Employee for cause. For the purposes of this paragraph, cause for termination
shall be deemed to exist upon (i) a good faith finding by the Company of a
willful failure or refusal of the Employee to perform assigned duties for the
Company of which he has knowledge, or the commission of any other willful or
grossly negligent action by Employee with the intent to injure the Company; (ii)
any material breach of any material provision of this Agreement by the Employee
if the Employee
<PAGE>
fails to correct such breach (or to take substantial steps to correct such
breach) within ten (10) days after receiving written notice thereof; or (iii)
the conviction of the Employee of, or the entry of a plea of guilty or NOLO
CONTENDERE by the Employee to, a crime involving an act of fraud or embezzlement
against the Company or the conviction of the Employee of, or the entry of a plea
of guilty or NOLO CONTENDERE by the Employee to, any felony involving moral
turpitude. Notwithstanding the foregoing, the Company shall not terminate the
Employee for cause pursuant to this paragraph unless and until there shall have
been delivered to the Employee a copy of a resolution, duly adopted by the
affirmative vote of the Board of Directors at a meeting called and held after
reasonable notice to the Employee and an opportunity for the Employee, together
with his counsel, to be heard before the Board of Directors, finding that in the
good faith opinion of the Board of Directors the Employee is guilty of conduct
set forth in subparagraphs (i) and (ii) of this paragraph and specifying the
particulars thereof in reasonable detail.
(C) EMPLOYEE'S ELECTION FOR CAUSE. At the election of the Employee, he
may terminate the Period of Employment for cause immediately upon written notice
by Employee to the Company. For purposes of this paragraph, cause for
termination shall be deemed to exist upon (i) a material failure by the Company
to continue the Employee's participation in any bonus, compensation or other
benefit plan in which the Employee is entitled to participate pursuant hereto or
the taking by the Company of any action which would directly or indirectly
materially reduce his participation therein; or (ii) a material breach of any
provision of this Agreement by the Company, or any breach of any provision of
this Agreement by the Company, whether or not material, if such breach is not
corrected (or substantial steps have not been taken
<PAGE>
to correct such breach) within thirty (30) days after the Board of Directors
received written notice thereof.
(D) TERMINATION FOLLOWING A CHANGE IN CONTROL. For purposes of this
Agreement, Change in Control means the occurrence during the Period of
Employment of any of the following events, subject to the provisions of
paragraph (11)(D)(vii) hereof:
(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) The Company is merged, consolidated or reorganized into or
with another corporation or entity, with the result that upon the conclusion of
the transaction the Company is not the surviving corporation or entity; or
(iii) 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
<PAGE>
representing Twenty Percent (20%) or more of the combined voting power of the
then-outstanding voting securities of the Company; or
(iv) 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
(v) 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
(vi) The Board of Directors determines that (I) 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 11(D)(i), (ii), (iii), (iv) or (v), and (II) it is in the best
interests of the Company and its shareholders, and will serve the intended
purposes of this Agreement, if this Agreement shall thereupon become immediately
operative with respect to the provisions of this paragraph 11(D)
<PAGE>
regarding Change in Control.
(vii) Notwithstanding the foregoing provisions of this paragraph
(11)(D):
(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 (11)(D)(vi) 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 (11)(D)(iii) or (iv)
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
<PAGE>
control of the Company has occurred or will occur in the future by reason
of such beneficial ownership.
Notwithstanding anything contained in this Agreement to the contrary, in
the event of a Change in Control, (I) the Employee may terminate employment with
the Company for any reason, or without reason, at any time following the date
six months after the first occurrence of a Change in Control, and (II) the
Employee may terminate employment with the Company during the Period of
Employment if the Company relocates its principal executive offices, or requires
the Employee to have his principal location of work changed, to any location
that is in excess of 35 miles from the location thereof immediately prior to the
Change in Control, in each case with the right to receive the benefits described
in paragraph 11(E)(iii) below.
(E) EFFECT OF TERMINATION.
(i) TERMINATION BY THE COMPANY FOR CAUSE OR AT THE ELECTION OF THE
EMPLOYEE WITHOUT CAUSE. In the event that the Employee's employment is
terminated by the Company for cause pursuant to paragraph 11(B)(i) or (ii) or
the Employee elects to terminate his employment without cause, the Company shall
pay to the Employee the Base Salary, Incentive Compensation, and Special Monthly
Incentive Compensation due, if any, under paragraph 4, on a PRO RATA basis to
the date of termination at the time such Base Salary, Incentive Compensation and
Special Monthly Incentive Compensation would regularly be paid and benefits
otherwise payable to him hereunder all through the last day of his actual
employment by the Company. Upon termination under this paragraph 11(E), the
Employee will thereupon no longer be entitled to any
<PAGE>
compensation or benefits provided herein, and nothing herein shall limit the
Company's right against the employee or the rights and obligations of the
parties under paragraphs 8, 9, and 10 hereof.
(ii) TERMINATION AT THE ELECTION OF THE COMPANY WITHOUT CAUSE OR
AT THE ELECTION OF THE EMPLOYEE FOR CAUSE. In the event that the Employee's
employment is terminated without cause by the Company pursuant to paragraph
11(A) prior to a Change in Control or with cause by the Employee pursuant to
paragraph 11(C), then, following the occurrence of such event, the Company shall
pay to the Employee (I) the Base Salary and Special Monthly Incentive
Compensation due, if any through the Period of Employment, and (II) the
Incentive Compensation due, if any, under paragraph 4 hereof; PROVIDED, HOWEVER,
that any such Incentive Compensation shall be paid on a PRO RATA basis to the
date of termination. In addition, Employee will continue to receive the benefits
provided under paragraph 6 hereof, including payment of accrued but unused
vacation benefits. During said period, the Employee shall continue to be bound
by the provisions of paragraphs 8, 9 and 10 hereof.
(iii) TERMINATION FOLLOWING A CHANGE IN CONTROL. In the event
that a Change in Control occurs during the Period of Employment and Employee's
employment is terminated in the manner described in paragraph 11(A) or paragraph
11(D), the Company shall pay to the Employee a lump sum cash payment in an
amount equal to two (2) times his then current Base Salary, plus two (2) times
the average of the sum of the Incentive Compensation and Additional Compensation
he received under paragraph 4 for the three (3) years immediately preceding such
<PAGE>
Change in Control. In addition, Employee will continue to receive the benefits
provided under paragraph 6 hereof through the Period of Employment.
12. NO MITIGATION OBLIGATION.
(A) Employee shall be under no obligation to seek other
employment opportunities during any period between termination of his employment
following a Change in Control and the expiration of the Period of Employment
(the "Interim Period"), and Employee shall not be obligated to accept any other
employment opportunity which may be offered to Employee during the Interim
Period; however, subject to the provisions of paragraph 9, and except as
provided in the following sentence, nothing in this Agreement shall prohibit the
Employee from accepting other employment opportunities during the Interim
Period, in which event Employee shall receive the entire amount due and owing to
him as described in paragraph 11(E)(iii) without set-off for any amount paid to
Employee arising out of any new employment relationship. Benefits described in
paragraph 6(A) and (B) will be reduced to the extent comparable welfare benefits
are actually received by the Employee from another Company during the Interim
Period and such benefits actually received by the Employee shall be reported by
the Employee to the Company.
(B) Employee's termination of this Agreement by reason of a
Change in Control and the receipt by Employee of any amount pursuant to
paragraph 11(E)(iii) shall not preclude
<PAGE>
Employee's continued employment with the Company or the surviving entity in any
Change in Control, on such terms as shall be negotiated between the Company (or
such surviving entity) and the Employee following termination of this Agreement.
13. 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"); PROVIDED, HOWEVER, that no Gross-up Payment shall be made with
respect to the Excise Tax, if any, attributable to (i) any
<PAGE>
incentive stock option, as defined by Section 422 of the Code ("ISO") granted
prior to the execution of this Agreement, or (ii) any stock appreciation or
similar right, whether or not limited, granted in tandem with any ISO described
in clause (i). 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 13(F), all
determinations required to be made under this paragraph 13, 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
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
<PAGE>
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 13(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 13(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.
<PAGE>
(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 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
13(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
<PAGE>
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;
<PAGE>
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 result of such representation and
payment of costs and expenses. Without limiting the foregoing provisions of this
paragraph 13(F), the Company shall control all proceedings taken in connection
with the contest of any claim contemplated by this paragraph 13(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
<PAGE>
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 13(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 13(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 13(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 13.
14. SUCCESSORS AND BINDING AGREEMENT.
(A) The Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation, reorganization or otherwise) to all or
substantially all of the business or assets of the Company, by agreement in form
and substance reasonably satisfactory to the Employee, expressly to assume and
agree to perform this Agreement in the same manner and to
<PAGE>
the same extent the Company would be required to perform if no such succession
had taken place. This Agreement will be binding upon and inure to the benefit of
the Company and any successor to the Company, including without limitation any
persons acquiring directly or indirectly all or substantially all of the
business or assets of the Company whether by purchase, merger, consolidation,
reorganization or otherwise (and such successor will thereafter be deemed the
"Company" for the purposes of this Agreement), but will not otherwise be
assignable, transferable or delegable by the Company.
(B) This Agreement will inure to the benefit of and be enforceable by
the Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees and legatees.
(C) This Agreement is personal in nature and neither of the parties
hereto will, without the consent of the other, assign, transfer or delegate this
Agreement or any rights or obligations hereunder except as expressly provided in
paragraphs 9(A) and 9(B). Without limiting the generality or effect of the
foregoing, the Employee's right to receive payments hereunder will not be
assignable, transferable or delegable, whether by pledge, creation of a security
interest, or otherwise, other than by a transfer by Employee's will or by the
laws of descent and distribution and, in the event of any attempted assignment
or transfer contrary to this paragraph 9(C), the Company will have no liability
to pay any amount so attempted to be assigned, transferred or delegated.
15. SEVERABILITY. In the event that any provision or portion of this
Agreement is
<PAGE>
determined to be invalid or unenforceable for any reason, in whole or in part,
the remaining provisions of this Agreement will be unaffected thereby and will
remain in full force and effect to the fullest extent permitted by law.
16. REPRESENTATION. Each party represents and warrants that it is fully
authorized and empowered to enter into this Agreement and that performance of
its obligations under this Agreement will not violate any agreement between it
and any other person or entity.
17. NOTICES. All notices, elections, demands or other communications
required or permitted to be made or given pursuant to this Agreement shall be in
writing and shall be considered properly given or made if sent by telecopier,
Telex, courier service or certified mail, return receipt requested and addressed
to the parties at the respective addresses specified below. Either party may
change its address by giving notice in writing pursuant to this paragraph to the
other of its new address.
To the Company: Micro Warehouse, Inc.
535 Connecticut Avenue
Norwalk, Connecticut 06854
Attn.: Peter Godfrey
To Employee: Mr. Adam S. Shaffer
7 Godfrey Road West
Weston, Connecticut 06883
18. ARBITRATION. Any controversy, claim or breach (except those relating
to monetary damages) arising out of or relating to this Agreement shall be
submitted for settlement to an arbitrator agreed upon by the parties. The
decision of such arbitrator shall be final and binding
<PAGE>
on the parties. If the parties cannot agree upon an arbitrator, the controversy,
claim or breach shall be referred to the American Arbitration Association with a
request that an arbitrator be appointed pursuant to the rules of said
Association. Such arbitration shall be held in New Haven, Connecticut, in
accordance with the rules and practices of the American Arbitration Association
pertaining to single-party arbitration then in effect, and the judgment upon the
award rendered shall be entered by consent in any court having jurisdiction
thereof.
19. ENTIRE AGREEMENT. This Agreement constitutes the full and complete
understanding and agreement of the parties. Neither party has relied upon any
representation of the other not set forth herein. This Agreement may not be
changed orally but only by an agreement in writing, signed by the party against
whom enforcement of any waiver, change, modification, extension or discharge is
sought. This Agreement supersedes all prior agreements between the parties
hereto with respect to its subject matter and notwithstanding any provision
hereof, will become effective upon the execution of this Agreement by the
parties.
20. BINDING EFFECT. This Agreement shall be binding upon and accrue to
the benefit of the parties hereto, their heirs, executors, administrators and
successors.
21. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Connecticut without regard to its
principles with respect to conflicts of law.
22. COUNSEL FEES.
(A) Except as set forth herein the parties hereto shall bear
their own fees, costs
<PAGE>
and expenses incurred in connection with this Agreement. If either party is
required to bring suit or otherwise seek enforcement of its or his rights in
connection with the same, the prevailing party in such action or proceeding
shall be entitled to recover counsel fees incurred in such action or proceeding.
The Employee shall be reimbursed in an amount not to exceed Two Thousand Dollars
($2,000) for legal fees and costs incurred in connection with the review of this
Agreement by his own counsel.
<PAGE>
(B) Notwithstanding subparagraph (A), in the event of a Change in
Control, it is the intent of the Company that the Employee not be required to
incur fees and related expenses for the retention of attorneys, accountants,
actuaries, consultants, and/or other professionals ("professionals") in
connection with the interpretation, enforcement or defense of Employee's rights
under this Agreement by litigation or otherwise because the cost and expense
thereof would substantially detract from the benefits intended to be extended to
the Employee hereunder. Accordingly, if it should appear to the Employee that
the Company has failed to comply with any of its obligations under this
Agreement or in the event that the Company or any other person takes or
threatens to take any action to declare this Agreement void or unenforceable, or
institutes any litigation or other action or proceeding designed to deny, or to
recover from, the Employee the benefits provided or intended to be provided to
the Employee hereunder, the Company irrevocably authorizes the Employee from
time to time to retain one or more professionals of the Employee's choice, at
the expense of the Company as hereafter provided, to advise and represent the
Employee in connection with any such interpretation, enforcement or defense,
including without limitation the initiation or defense of any litigation or
other legal action, whether by or against the Company or any director, officer,
stockholder or other person affiliated with the Company, in any jurisdiction.
Notwithstanding any existing or prior relationship between the Company and such
professional, the Company irrevocably consents to the Employee's entering into a
relationship with any such professional, and in that connection the Company and
the Employee agree that a confidential relationship shall exist between the
Employee and any such professional. Without respect to whether the Employee
prevails, in
<PAGE>
whole or in part, in connection with any of the foregoing, the Company will pay
and be solely financially responsible for any and all reasonable fees and
related expenses incurred by the Employee in connection with any of the
foregoing.
23. COUNTERPARTS. This Agreement may be executed simultaneously in one
or more counterparts, each of which will be deemed to be an original but all of
which together will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have affixed their signatures on
the day and year first above written.
COMPANY:
MICRO WAREHOUSE, INC.
By: /s/ Peter Godfrey
--------------------------------
Peter Godfrey
President and Chief Executive Officer
EMPLOYEE:
By: /s/ Adam S. Shaffer
--------------------------------
Adam S. Shaffer
<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>
EXHIBIT 10.25
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
This amended and restated employment agreement ("Agreement") made as of
the 1st day of January, 1998 between Micro Warehouse, Inc., a Delaware
corporation (hereinafter referred to as the "Company"), with its principal place
of business at 535 Connecticut Avenue, Norwalk, Connecticut 06854, and Bruce L.
Lev whose address is 736 Titicus Road, North Salem, New York 10560 (hereinafter
referred to as "Employee").
WHEREAS, this Agreement is effective January 1, 1998 (the "Effective
Date") and is an amendment and restatement of, and supersedes each provision of
the employment agreement previously entered into for good and valuable
consideration by Employee and Company on or about April 1, 1995; and
WHEREAS, this Agreement shall represent the entire employment agreement
between the parties with respect to the subject matter herein.
NOW, THEREFORE, in consideration of the premises, the Company and the
Employee agree as follows:
1. EMPLOYMENT. The Company shall hereby continue to employ Employee, and
Employee hereby accepts such continued employment, commencing on the Effective
Date, on the terms and conditions set forth below.
2. DUTIES. During the Period of Employment (as hereinafter defined), the
Company
<PAGE>
shall continue to employ Employee as Executive Vice President of Legal
and Corporate Affairs reporting to Peter Godfrey, the President and Chief
Executive Officer of the Company, or his successor, to perform such duties as
shall be required by Mr. Godfrey, or his successor, provided the same are
consistent with those of an executive vice president of legal and corporate
affairs of a public company. The precise responsibilities of Employee may be
revised from time to time provided the same do not materially affect Employee's
position. In furtherance of the foregoing, Employee hereby agrees to perform his
duties faithfully. During the Period of Employment and except for vacations in
accordance herewith, absences due to temporary illness and outside Board
responsibilities, Employee shall devote all of his available business time and
energies during normal business hours to the business of the Company. Subject to
the reasonable review and concurrence of the Board of Directors, the Employee
shall be permitted to participate as a board member of other publicly traded and
privately held companies provided said participation does not interfere with the
discharge of the Employee's duties or obligations hereunder.
3. TERM. The term of Employee's continued employment by the Company
shall commence as of the Effective Date and end as of the close of business on
December 31, 2000 (the "Period of Employment").
4. COMPENSATION.
(A) BASE SALARY. For all services rendered by the Employee under this
Agreement, the Company shall pay to him a minimum "Base Salary" at the rate of
Three Hundred Thirty-Three Thousand Four Hundred Sixty-Six Dollars ($333,466)
per annum during the Period of Employment payable in at least equal monthly
installments. The term "Base Salary" shall mean
<PAGE>
regular cash compensation paid on a periodic basis exclusive of benefits,
bonuses or incentive payments.
(B) ADJUSTMENTS TO BASE SALARY. 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 4(B), the following
definition shall apply:
(a) 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.
(b) 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
<PAGE>
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
4(B) 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 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
<PAGE>
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 4(B), be
reduced by virtue of this paragraph 4(B).
(C) ANNUAL INCENTIVE COMPENSATION. In addition to Base Salary, with
respect to the Period of Employment, the Employee shall be eligible to receive
annual incentive compensation ("Incentive Compensation") as set forth below,
which amount of Incentive Compensation shall not exceed One Hundred Percent
(100%) of Base Salary in any one year.
(i) Prior to January 1 of each year that this Agreement remains
in effect, the Board of Directors and the Employee shall mutually agree upon and
establish a plan (the "Incentive Plan") describing anticipated results of
operations for the coming fiscal year and containing financial goals
(hereinafter "Targets"). The Incentive Plan established for 1998 is attached
hereto as EXHIBIT A. The Incentive Plan shall be determined in the sole
discretion of the Board of Directors and the Employee and may vary from year to
year. A copy of the Incentive Plan shall be provided to the Company's Certified
Public Accountants ("CPAs"). Subsequent to the conclusion of the year the CPAs
shall compare the actual results of operations for said year to the Incentive
Plan.
(ii) The Incentive Plan shall set forth a target bonus amount,
One Hundred
<PAGE>
Percent (100%) of which shall be payable for accomplishing One Hundred Percent
(100%) of Targets, which amount for calendar 1998 shall be One Hundred Sixty-Six
Thousand Seven Hundred Thirty-Three Dollars ($166,733), and for subsequent years
shall be Fifty Percent (50%) of Base Salary for each year ending December 31
during the Period of Employment (hereinafter "Target Bonus Amount"). The Board
of Directors may modify upward the Target Bonus Amount as part of the salary
review process for years subsequent to 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. No Incentive Compensation shall be paid if less than Eighty Percent
(80%) of Targets are achieved.
By way of example, if Base Salary is Three Hundred Thirty-Three Thousand
Four Hundred Sixty-Six Dollars ($333,466), One Hundred Percent (100%) of Target
Bonus Amount at accomplishment of One Hundred Percent (100%) of Targets shall be
One Hundred Sixty-Six Thousand Seven Hundred Thirty Three Dollars ($166,733). If
the Company achieves Eighty Percent (80%) of Targets, Target Bonus Amount shall
be Eighty Three Thousand Six Hundred Sixty-Six and 50/100 Dollars ($83,366.50)
(I.E., .5 x $166,733), which shall be automatically due and payable to the
Employee.
By way of further example, if Base Salary is Three Hundred Thirty-Three
Thousand Four Hundred Sixty-Six Dollars ($333,466), One Hundred Percent (100%)
of Target Bonus Amount at accomplishment of One Hundred Percent (100%) of
Targets shall be One Hundred Sixty-Six
<PAGE>
Thousand Seven Hundred Thirty-Three Dollars ($166,733). If the Company achieves
One Hundred Ten Percent (110%) of Targets, Target Bonus Amount shall be Two
Hundred Fifty Thousand Ninety-Nine and 50/100 Dollars ($250,099.50) (i.e., 1.50
x $166,733), which shall be automatically due and payable to the Employee.
(iii) Incentive Compensation shall be paid to Employee in a lump
sum cash payment as soon as practicable after the CPAs determine the amounts, if
any, which are due the Employee.
(D) SPECIAL GUARANTEED INCENTIVE COMPENSATION. In addition to Base
Salary, the Company shall pay to the Employee a quarterly guaranteed draw
against the Target Bonus Amount in the amount of Twelve Thousand Five Hundred
Dollars ($12,500) per quarter ("Special Guaranteed Incentive Compensation").
Such amount shall be paid approximately fifteen (15) to thirty (30) days after
the close of each quarter.
(E) STOCK OPTIONS.
(i) On February 26, 1998, the Company granted to the Employee
options to purchase One Hundred Thousand (100,000) common shares at an exercise
price of Thirteen and 59/100 Dollars ($13.59) per share, which options shall be
"non-qualified" stock options. During the Period of Employment such options
shall become cumulatively vested and exercisable at the rate of one-third (1/3)
per year commencing on December 31, 1998 and one-third (1/3) on each of the next
two anniversaries of such date.
(ii) As an incentive and inducement to the Employee to remain in
the employ
<PAGE>
of the Company and devote his best efforts to the affairs of the Company, in the
sole discretion of the Board of Directors, the Employee shall receive each year,
commencing in the year 2000, an option to purchase shares of common stock of the
Company, the exact number, terms and option price of which shall be determined
yearly by the Stock Option Committee of the Board of Directors. Such option
shall not be granted in 1998 and 1999.
(iii) The options set forth in this paragraph 4(E) shall be
granted to the Employee pursuant to the Company's 1994 Stock Option Plan (the
"Stock Option Plan") and the Employee shall be subject to the terms and
conditions set forth therein. The options set forth in this paragraph 4(E) shall
also be evidenced by the Employee executing and becoming a party to an option
agreement between the Employee and the Company (the "Option Agreement").
Notwithstanding any of the foregoing, if there is any inconsistency between or
among this Agreement, the Stock Option Plan and/or the Option Agreement, this
Agreement, to the extent it is consistent with the restrictions provided in the
last sentence of paragraph 12 of the Plan, shall govern as to all documents
described in this subparagraph 4(E)(iii).
(iv) Notwithstanding the foregoing, the options described in this
paragraph 4(E) shall, under the following circumstances become vested and
exercisable as follows: (I) upon a Change in Control (as defined in paragraph
11(D) herein), except as provided in subparagraph (v) below, all of Employee's
unvested options shall become accelerated and immediately fully vested; and (II)
upon termination of the Period of Employment by the Company without cause (as
described in paragraph 11(A)) or upon termination of the Period of
<PAGE>
Employment by Employee for cause (as described in paragraph 11(C)), all of
Employee's unvested options shall become accelerated and immediately fully
vested, and exercisable, at any time prior to the expiration date of the
options, as specified in the Stock Option Plan, or the expiration of twelve (12)
months after the date of such termination, whichever is the longer period;
PROVIDED, HOWEVER, that for purposes of this clause 4(E)(iv)(II), no options
will become vested and exercisable subsequent to the expiration date of the
options as specified in the Stock Option Plan.
(v) 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
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
subparagraph (iv)(I) above, then such subparagraph (iv)(I) shall be void.
(F) ADDITIONAL COMPENSATION. During the Period of Employment, the
Employee shall be eligible to receive any other payments of bonus, compensation
or other amounts not specifically set forth herein but which may be paid by the
Company ("Additional Compensation").
5. BUSINESS EXPENSES. During the Period of Employment, the Company
agrees to reimburse Employee for reasonable and necessary expenses incurred by
him in connection with the performance of his duties hereunder. Employee shall
submit vouchers, invoices and such
<PAGE>
other documentation in accordance with the Company's general policy with respect
thereto.
6. BENEFITS. During the Period of Employment, the Company will provide
or, as necessary, reimburse Employee with or for the following benefits:
(A) ORDINARY INSURANCE. Medical, dental and hospitalization insurance
and short-term disability coverage for himself and his dependents, to the extent
provided generally to the senior executives of the Company.
(B) LIFE AND DISABILITY INSURANCE. Notwithstanding the foregoing, during
the Period of Employment, the Company shall reimburse Employee or pay directly
premiums for disability and life insurance policies in the current aggregate
annual amount of approximately Fifteen Thousand Dollars ($15,000).
(C) VACATIONS. Employee shall be entitled to four (4) weeks paid
vacation per year, the scheduling of which shall be in accordance with the
general policies and practices of the Company with respect thereto.
(D) EMPLOYEE BENEFIT PLANS AND PERQUISITES. During the Period of
Employment, the Employee shall be entitled (i) to participate in all employee
benefit plans, programs, policies and arrangements sponsored, maintained or
contributed to by the Company, subject to and in accordance with the terms and
conditions of such plans, programs, policies and arrangements as they relate to
similarly situated executive officers of the Company, and (ii) to receive all
other benefits and perquisites provided or made available by the Company to its
senior executive officers subject to and in accordance with the terms and
conditions of such benefits and perquisites as they relate to similarly situated
senior executive officers of the Company.
<PAGE>
7. DEATH OR PERMANENT DISABILITY. In the event of the death or Permanent
Disability ("Permanent Disability" being defined as an illness which will
prevent the Employee from performing his duties for a period of six (6)
consecutive months or nine (9) out of any consecutive twelve (12) months) prior
to the expiration of the Period of Employment, his employment shall be deemed to
cease as of the end of the month of the date of his death or Permanent
Disability and this Agreement shall terminate forthwith and all rights under it
shall expire, except that Employee or Employee's estate shall be entitled to
receive Base Salary for a period of six (6) months from the date of death or
Permanent Disability plus the PRO RATA amount of any Incentive Compensation,
Special Guaranteed Incentive Compensation and Additional Compensation which
would have been due the Employee pursuant to paragraph 4 hereinabove for the
period January 1 of said year through the date of death or Permanent Disability.
Said Base Salary shall be paid at the time it would regularly be paid. Said
Incentive Compensation, Special Guaranteed Incentive Compensation or Additional
Compensation shall be paid as soon as practicable after a determination of the
amount due is made by the Company's CPAs.
Additionally, any options eligible to vest within twelve (12) months of
the date of death or Permanent Disability shall be deemed accelerated and fully
vested as of the date of death or Permanent Disability subject to the further
terms and conditions of the Stock Option Plan pursuant to which the same were
granted.
8. CONFIDENTIAL INFORMATION. Employee acknowledges that the Company
would be damaged if Employee's knowledge with respect to the business of the
Company were disclosed to or utilized by parties other than the Company.
Accordingly, Employee covenants and agrees
<PAGE>
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 provided the same would not, if released, damage the
Company. The provisions of this paragraph shall survive the termination of this
Agreement.
9. COVENANT NOT TO COMPETE. The Employee hereby covenants and agrees
that from the date hereof until twelve (12) months after the termination of the
Period of Employment (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
<PAGE>
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; (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 Two Percent (2%) of any class or type of securities of, or interest
in, such Competitive Business; or, (iii) practicing law; provided that while
engaging in the practice of law during the Non-Compete Period, the Employee does
not directly provide legal advice to a Competitive Business. The term
"Competitive Business" shall mean and include any business or activity that is
substantially the same as any business or activity then conducted by the
Company, regardless of where such Competitive Business is located.
Notwithstanding the foregoing, the parties to this Agreement hereby agree that
the covenant not to compete contained in this paragraph 9 is valid and
enforceable only to the extent permissible under applicable law
10. COVENANT NOT TO SOLICIT. Unless the Employee has obtained the prior
written consent of the Company, he hereby covenants and agrees that, from the
date hereof until the expiration of the Non-Compete Period, he shall not, for or
on behalf of a Competitive Business, directly or indirectly, as owner, officer,
director, stockholder, partner, associate, consultant, manager, advisor,
representative, employee, agent creditor, or otherwise, attempt to solicit or in
any other way disturb or service any person, firm or corporation that has been a
customer account of the Company at any time or times during the Period of
Employment or during the Non-Compete Period, whether or not he at any time had
any direct or indirect account responsibility for, or contact with, such
customer account.
<PAGE>
11. TERMINATION. In addition to termination for death or Permanent
Disability pursuant to paragraph 7, the employment of the Employee by the
Company pursuant to this Agreement shall terminate upon the occurrence of any of
the following:
(A) TERMINATION UPON PRIOR NOTICE. The Company may terminate this
Agreement by giving the Employee ninety (90) days prior written notice.
(B) EMPLOYEE TERMINATION FOR CAUSE. At the election of the Company, it
may immediately upon written notice by the Company to the Employee terminate the
Employee for cause. For the purposes of this paragraph, cause for termination
shall be deemed to exist upon (i) a good faith finding by the Company of a
willful failure or refusal of the Employee to perform assigned duties for the
Company of which he has knowledge, or the commission of any other willful or
grossly negligent action by Employee with the intent to injure the Company; (ii)
any material breach of any material provision of this Agreement by the Employee
if the Employee fails to correct such breach (or to take substantial steps to
correct such breach) within ten (10) days after receiving written notice
thereof; or (iii) the conviction of the Employee of, or the entry of a plea of
guilty or NOLO CONTENDERE by the Employee to, a crime involving an act of fraud
or embezzlement against the Company or the conviction of the Employee of, or the
entry of a plea of guilty or NOLO CONTENDERE by the Employee to, any felony
involving moral turpitude. Notwithstanding the foregoing, the Company shall not
terminate the Employee for cause pursuant to this paragraph unless and until
there shall have been delivered to the Employee a copy of a resolution, duly
adopted by the affirmative vote of the Board of Directors at a meeting called
and held after reasonable notice to the Employee and an opportunity for the
Employee,
<PAGE>
together with his counsel, to be heard before the Board of Directors, finding
that in the good faith opinion of the Board of Directors the Employee is guilty
of conduct set forth in subparagraphs (i) and (ii) of this paragraph and
specifying the particulars thereof in reasonable detail.
(C) EMPLOYEE'S ELECTION FOR CAUSE. At the election of the Employee, he
may terminate the Period of Employment for cause immediately upon written notice
by Employee to the Company. For purposes of this paragraph, cause for
termination shall be deemed to exist upon (i) a material failure by the Company
to continue the Employee's participation in any bonus, compensation or other
benefit plan in which the Employee is entitled to participate pursuant hereto or
the taking by the Company of any action which would directly or indirectly
materially reduce his participation therein; or (ii) a material breach of any
provision of this Agreement by the Company, or any breach of any provision of
this Agreement by the Company, whether or not material, if such breach is not
corrected (or substantial steps have not been taken to correct such breach)
within thirty (30) days after the Board of Directors received written notice
thereof.
(D) TERMINATION FOLLOWING A CHANGE IN CONTROL. For purposes of this
Agreement, Change in Control means the occurrence during the Period of
Employment of any of the following events, subject to the provisions of
paragraph (11)(D)(vii) hereof:
(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
<PAGE>
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) The Company is merged, consolidated or reorganized into or
with another corporation or entity, with the result that upon the conclusion of
the transaction the Company is not the surviving corporation or entity; or
(iii) 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
(iv) 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
(v) 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
<PAGE>
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
(vi) The Board of Directors determines that (I) 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 11(D)(i), (ii), (iii), (iv) or (v), and (II) it is in the best
interests of the Company and its shareholders, and will serve the intended
purposes of this Agreement, if this Agreement shall thereupon become immediately
operative with respect to the provisions of this paragraph 11(D) regarding
Change in Control.
(vii) Notwithstanding the foregoing provisions of this paragraph
(11)(D):
(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 (11)(D)(vi) 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
<PAGE>
purposes of paragraph (11)(D)(iii) or (iv) 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.
(ix) Notwithstanding anything contained in this Agreement to the
contrary, in the event of a Change in Control, (I) the Employee may terminate
employment with the Company for any reason, or without reason, at any time
following the date six months after the first occurrence of a Change in Control,
and (II) the Employee may terminate employment with the Company during the
Period of Employment if the Company relocates its principal executive offices,
or requires the Employee to have his principal location of work changed, to any
location that is in excess of 35 miles from the location thereof immediately
prior to the Change in Control, in each case with the right to receive the
benefits described in paragraph 11(E)(iii) below.
(E) EFFECT OF TERMINATION.
<PAGE>
(i) TERMINATION BY THE COMPANY FOR CAUSE OR AT THE ELECTION OF
THE EMPLOYEE WITHOUT CAUSE. In the event that the Employee's employment is
terminated by the Company for cause pursuant to paragraph 11(B)(i) or (ii) or
the Employee elects to terminate his employment without cause, the Company shall
pay to the Employee the Base Salary, Incentive Compensation, Special Guaranteed
Incentive Compensation and Additional Compensation due, if any, under paragraph
4, on a PRO RATA basis to the date of termination at the time such Base Salary,
Incentive Compensation, Special Guaranteed Incentive Compensation or Additional
Compensation would regularly be paid and benefits otherwise payable to him
hereunder all through the last day of his actual employment by the Company. Upon
termination under this paragraph 11(E), the Employee will thereupon no longer be
entitled to any compensation or benefits provided herein, and nothing herein
shall limit the Company's right against the Employee or the rights and
obligations of the parties under paragraphs 8, 9, and 10 hereof.
(ii) TERMINATION AT THE ELECTION OF THE COMPANY WITHOUT CAUSE OR
AT THE ELECTION OF THE EMPLOYEE FOR CAUSE. In the event that the Employee's
employment is terminated without cause by the Company pursuant to paragraph
11(A) prior to a Change in Control or with cause by the Employee pursuant to
paragraph 11(C), then, following the occurrence of such event, the Company shall
pay to the Employee (I) the Base Salary and Special Guaranteed Incentive
Compensation due, if any, through the Period of Employment, and (II) the
Incentive Compensation and Additional Compensation due, if any, under paragraph
4 hereof; PROVIDED, HOWEVER, that any such Incentive Compensation or Additional
Compensation shall be paid on a PRO RATA basis to the date of termination. In
addition, Employee will continue to receive the
<PAGE>
benefits provided under paragraph 6 hereof, including payment of accrued but
unused vacation benefits. During said period, the Employee shall continue to be
bound by the provisions of paragraphs 8, 9 and 10 hereof.
(iii) TERMINATION FOLLOWING A CHANGE IN CONTROL. In the event
that a Change in Control occurs during the Period of Employment and Employee's
employment is terminated in the manner described in paragraph 11(A) or paragraph
11(D), the Company shall pay to the Employee a lump sum cash payment in an
amount equal to two (2) times his then current Base Salary, plus two (2) times
the average of the sum of the Incentive Compensation, Special Guaranteed
Incentive Compensation and Additional Compensation he received under paragraph 4
for the three (3) years immediately preceding such Change in Control. In
addition, Employee will continue to receive the benefits provided under
paragraph 6 hereof through the Period of Employment.
12. NO MITIGATION OBLIGATION.
(A) Employee shall be under no obligation to seek other
employment opportunities during any period between termination of his employment
following a Change in Control and the expiration of the Period of Employment
(the "Interim Period"), and Employee shall not be obligated to accept any other
employment opportunity which may be offered to Employee during the Interim
Period; however, subject to the provisions of paragraph 9, and except as
provided in the following sentence, nothing in this Agreement shall prohibit the
Employee from accepting other employment opportunities during the Interim
Period, in which event Employee shall receive the entire amount due and owing to
him as described in paragraph
<PAGE>
11(E)(iii) without set-off for any amount paid to Employee arising out of any
new employment relationship. Benefits described in paragraph 6(A) and (B) will
be reduced to the extent comparable welfare benefits are actually received by
the Employee from another Company during the Interim Period and such benefits
actually received by the Employee shall be reported by the Employee to the
Company.
(B) Employee's termination of his employment following a Change
in Control and the receipt by Employee of any amount pursuant to paragraph
11(E)(iii) shall not preclude Employee's continued employment with the Company
or the surviving entity in any Change in Control, on such terms as shall be
negotiated between the Company (or such surviving entity) and the Employee
following termination of this Agreement.
<PAGE>
13. 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"); PROVIDED, HOWEVER, that no Gross-up Payment shall be made with
respect to the Excise Tax, if any, attributable to (i) any incentive stock
option, as defined by Section 422 of the Code ("ISO") granted prior to the
execution of this Agreement, or (ii) any stock appreciation or similar right,
whether or not limited, granted in tandem with any ISO described in clause (i).
The Gross-Up Payment shall be in an amount such that, after payment by the
Employee of all taxes (including any interest or
<PAGE>
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 13(F), all
determinations required to be made under this paragraph 13, 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
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
<PAGE>
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 13(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 13(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
<PAGE>
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 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
13(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
<PAGE>
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 result of such
representation and payment of costs and expenses. Without
limiting the foregoing provisions of this paragraph 13(F), the
Company shall control all proceedings taken in connection with
the contest of any claim contemplated by this paragraph 13(F)
and, at its sole option, may pursue or forego any and all
administrative appeals, proceedings,
<PAGE>
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.
<PAGE>
(G) If, after the receipt by the Employee of an amount advanced
by the Company pursuant to paragraph 13(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 13(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 13(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 13.
14. SUCCESSORS AND BINDING AGREEMENT.
(A) The Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation, reorganization or otherwise) to all or
substantially all of the business or assets of the Company, by agreement in form
and substance reasonably satisfactory to the Employee, expressly to assume and
agree to perform this Agreement in the same manner and to the same extent the
Company would be required to perform if no such succession had taken place. This
Agreement will be binding upon and inure to the benefit of the Company and any
successor to the Company, including without limitation any persons acquiring
directly or indirectly all or substantially all of the business or assets of the
Company whether by purchase,
<PAGE>
merger, consolidation, reorganization or otherwise (and such successor will
thereafter be deemed the "Company" for the purposes of this Agreement), but will
not otherwise be assignable, transferable or delegable by the Company.
(B) This Agreement will inure to the benefit of and be enforceable by
the Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees and legatees.
(C) This Agreement is personal in nature and neither of the parties
hereto will, without the consent of the other, assign, transfer or delegate this
Agreement or any rights or obligations hereunder except as expressly provided in
paragraphs 9(A) and 9(B). Without limiting the generality or effect of the
foregoing, the Employee's right to receive payments hereunder will not be
assignable, transferable or delegable, whether by pledge, creation of a security
interest, or otherwise, other than by a transfer by Employee's will or by the
laws of descent and distribution and, in the event of any attempted assignment
or transfer contrary to this paragraph 9(C), the Company will have no liability
to pay any amount so attempted to be assigned, transferred or delegated.
15. 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 remaining provisions of this Agreement will be unaffected
thereby and will remain in full force and effect to the fullest extent permitted
by law.
16. REPRESENTATION. Each party represents and warrants that it is fully
authorized and empowered to enter into this Agreement and that performance of
its obligations under this
<PAGE>
Agreement will not violate any agreement between it and any other person or
entity.
17. NOTICES. All notices, elections, demands or other communications
required or permitted to be made or given pursuant to this Agreement shall be in
writing and shall be considered properly given or made if sent by telecopier,
Telex, courier service or certified mail, return receipt requested and addressed
to the parties at the respective addresses specified below. Either party may
change its address by giving notice in writing pursuant to this paragraph to the
other of its new address.
To the Company: Micro Warehouse, Inc.
535 Connecticut Avenue
Norwalk, Connecticut 06854
Attn.: Peter Godfrey
To Employee: Bruce L. Lev, Esq.
736 Titicus Road
North Salem, New York 10560
18. ARBITRATION. Any controversy, claim or breach (except those relating
to monetary damages) arising out of or relating to this Agreement shall be
submitted for settlement to an arbitrator agreed upon by the parties. The
decision of such arbitrator shall be final and binding on the parties. If the
parties cannot agree upon an arbitrator, the controversy, claim or breach shall
be referred to the American Arbitration Association with a request that an
arbitrator be appointed pursuant to the rules of said Association. Such
arbitration shall be held in New Haven, Connecticut, in accordance with the
rules and practices of the American Arbitration Association pertaining to
single-party arbitration then in effect, and the judgment upon the award
rendered shall be entered by consent in any court having jurisdiction thereof.
<PAGE>
19. ENTIRE AGREEMENT. This Agreement constitutes the full and complete
understanding and agreement of the parties. Neither party has relied upon any
representation of the other not set forth herein. This Agreement may not be
changed orally but only by an agreement in writing, signed by the party against
whom enforcement of any waiver, change, modification, extension or discharge is
sought. This Agreement supersedes all prior agreements between the parties
hereto with respect to its subject matter and notwithstanding any provision
hereof, will become effective upon the execution of this Agreement by the
parties.
20. BINDING EFFECT. This Agreement shall be binding upon and accrue to
the benefit of the parties hereto, their heirs, executors, administrators and
successors.
21. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Connecticut without regard to its
principles with respect to conflicts of law.
22. COUNSEL FEES.
(A) Except as set forth herein the parties hereto shall bear
their own fees, costs and expenses incurred in connection with this Agreement.
If either party is required to bring suit or otherwise seek enforcement of its
or his rights in connection with the same, the prevailing party in such action
or proceeding shall be entitled to recover counsel fees incurred in such action
or proceeding. The Employee shall be reimbursed in an amount not to exceed Two
Thousand Dollars ($2,000) for legal fees and costs incurred in connection with
the review of this Agreement by his own counsel.
(B) Notwithstanding subparagraph (A), in the event of a Change
in Control, it
<PAGE>
is the intent of the Company that the Employee not be required to incur fees and
related expenses for the retention of attorneys, accountants, actuaries,
consultants, and/or other professionals ("professionals") in connection with the
interpretation, enforcement or defense of Employee's rights under this Agreement
by litigation or otherwise because the cost and expense thereof would
substantially detract from the benefits intended to be extended to the Employee
hereunder. Accordingly, if it should appear to the Employee that the Company has
failed to comply with any of its obligations under this Agreement or in the
event that the Company or any other person takes or threatens to take any action
to declare this Agreement void or unenforceable, or institutes any litigation or
other action or proceeding designed to deny, or to recover from, the Employee
the benefits provided or intended to be provided to the Employee hereunder, the
Company irrevocably authorizes the Employee from time to time to retain one or
more professionals of the Employee's choice, at the expense of the Company as
hereafter provided, to advise and represent the Employee in connection with any
such interpretation, enforcement or defense, including without limitation the
initiation or defense of any litigation or other legal action, whether by or
against the Company or any director, officer, stockholder or other person
affiliated with the Company, in any jurisdiction. Notwithstanding any existing
or prior relationship between the Company and such professional, the Company
irrevocably consents to the Employee's entering into a relationship with any
such professional, and in that connection the Company and the Employee agree
that a confidential relationship shall exist between the Employee and any such
professional. Without respect to whether the Employee prevails, in whole or in
part, in connection with any of the foregoing, the Company will pay and be
solely
<PAGE>
financially responsible for any and all reasonable fees and related expenses
incurred by the Employee in connection with any of the foregoing.
23. COUNTERPARTS. This Agreement may be executed simultaneously in one
or more counterparts, each of which will be deemed to be an original but all of
which together will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have affixed their signatures on
the day and year first above written.
COMPANY:
MICRO WAREHOUSE, INC.
By: /s/ Peter Godfrey
--------------------------------------
Peter Godfrey
President and Chief Executive Officer
EMPLOYEE:
By: /s/ Bruce L. Lev
--------------------------------------
Bruce L. Lev
<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>
EXHIBIT 10.26
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
This amended and restated employment agreement ("Agreement") made as of
the 1st day of January, 1998 between Micro Warehouse, Inc., a Delaware
corporation (hereinafter referred to as the "Company"), with its principal place
of business at 535 Connecticut Avenue, Norwalk, Connecticut 06854, and Wayne
Garten whose address is 747 Iris Court, Yorktown Heights, New York 10598
(hereinafter referred to as "Employee").
WHEREAS, this Agreement is effective January 1, 1998 (the "Effective
Date") and is an amendment and restatement of, and supersedes each provision of
the employment agreement previously entered into for good and valuable
consideration by Employee and Company on or about February 6, 1997; and
WHEREAS, this Agreement shall represent the entire employment agreement
between the parties with respect to the subject matter herein.
NOW, THEREFORE, in consideration of the premises, the Company and the
Employee agree as follows:
1. EMPLOYMENT. The Company shall hereby continue to employ Employee, and
Employee hereby accepts such continued employment, commencing on the Effective
Date, on the terms and conditions set forth below.
<PAGE>
2. DUTIES. During the Period of Employment (as hereinafter defined), the
Company shall continue to employ Employee as Executive Vice President and Chief
Financial Officer reporting to the President and Chief Executive Officer of the
Company, to perform such duties as shall be required the Company's President and
Chief Executive Officer, provided the same are consistent with those of an
executive vice president and chief financial officer of a public company. The
precise responsibilities of Employee may be revised from time to time provided
the same do not materially affect Employee's position. In furtherance of the
foregoing, Employee hereby agrees to perform his duties faithfully. During the
Period of Employment and except for vacations in accordance herewith and
absences due to temporary illness, Employee shall devote all of his available
business time and energies during normal business hours to the business of the
Company.
3. TERM. The term of Employee's continued employment by the Company
shall commence as of the Effective Date and end as of the close of business on
December 31, 2000 (the "Period of Employment").
4. COMPENSATION.
(A) BASE SALARY. For all services rendered by the Employee under this
Agreement, the Company shall pay to him a minimum "Base Salary" at the rate of
Three Hundred Twenty-Five Thousand Dollars ($325,000) per annum during the
Period of Employment payable in at least equal monthly installments. The term
"Base Salary" shall mean regular cash compensation paid on a periodic basis
exclusive of benefits, bonuses or incentive payments.
(B) ADJUSTMENTS TO BASE SALARY. Commencing January 1, 1999, the Base
Salary to be
<PAGE>
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) herein below.
(i) For the purposes of this paragraph 4(B), the following
definition shall apply:
(a) 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.
(b) 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
<PAGE>
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
4(B) 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 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
<PAGE>
increased from time to time pursuant to this paragraph 4(B), be reduced by
virtue of this paragraph 4(B).
(C) ANNUAL INCENTIVE COMPENSATION. In addition to Base Salary, with
respect to the Period of Employment, the Employee shall be eligible to receive
annual incentive compensation ("Incentive Compensation") as set forth below,
which amount of Incentive Compensation shall not exceed One Hundred Percent
(100%) of Base Salary in any one year.
(i) Prior to January 1 of each year that this Agreement remains
in effect, the Board of Directors and the Employee shall mutually agree upon and
establish a plan (the "Incentive Plan") describing anticipated results of
operations for the coming fiscal year and containing financial goals
(hereinafter "Targets"). The Incentive Plan established for 1998 is attached
hereto as EXHIBIT A. The Incentive Plan shall be determined in the sole
discretion of the Board of Directors and the Employee and may vary from year to
year. A copy of the Incentive Plan shall be provided to the Company's Certified
Public Accountants ("CPAs"). Subsequent to the conclusion of the year the CPAs
shall compare the actual results of operations for said year to the Incentive
Plan.
(ii) The Incentive Plan shall set forth a target bonus amount,
One Hundred Percent (100%) of which shall be payable for accomplishing One
Hundred Percent (100%) of Targets, which amount for calendar 1998 shall be One
Hundred Sixty-Two Thousand Five Hundred Dollars ($162,500), and for subsequent
years shall be Fifty Percent (50%) of Base Salary for each year ending December
31 during the Period of Employment (hereinafter "Target
<PAGE>
Bonus Amount"). The Board of Directors may modify upward the Target Bonus Amount
as part of the salary review process for years subsequent to 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, if Base Salary is Three Hundred Twenty-Five Thousand
Dollars ($325,000), One Hundred Percent (100%) of Target Bonus Amount at
accomplishment of One Hundred Percent (100%) of Targets shall be One Hundred
Sixty-Two Thousand Five Hundred Dollars ($162,500). If the Company achieves
Eighty Percent (80%) of Targets, Target Bonus Amount shall be Eighty One
Thousand Two Hundred Fifty Dollars ($81,250) (I.E., .5 x $162,500), which shall
be automatically due and payable to the Employee.
By way of further example, if Base Salary is Three Hundred-Twenty Five
Thousand Dollars ($325,000), One Hundred Percent (100%) of Target Bonus Amount
at accomplishment of One Hundred Percent (100%) of Targets shall be One Hundred
Sixty-Two Thousand Five Hundred Dollars ($162,500). If the Company achieves One
Hundred Ten Percent (110%) of Targets, Target Bonus Amount shall be Two Hundred
Forty-Three Thousand Seven Hundred Fifty Dollars ($243,750) (I.E., 1.50 x
$162,500), which shall be automatically due and payable to Employee.
(iii) Incentive Compensation shall be paid to Employee in a lump
sum cash
<PAGE>
payment as soon as practicable after the CPAs determine the amounts, if any,
which are due the Employee.
(D) SPECIAL GUARANTEED INCENTIVE COMPENSATION. In addition to Base
Salary, the Company shall pay to the Employee a quarterly guaranteed draw
against the Target Bonus Amount in the amount of Twelve Thousand Five Hundred
Dollars ($12,500) per quarter ("Special Guaranteed Incentive Compensation").
Such amount shall be paid approximately fifteen (15) to thirty (30) days after
the close of each quarter.
(E) STOCK OPTIONS.
(i) On February 26, 1998, the Company granted to the Employee
options to purchase One Hundred Thousand (100,000) common shares at an exercise
price of Thirteen and 59/100 Dollars ($13.59) per share, which options shall be
"non-qualified" stock options. During the Period of Employment such options
shall become cumulatively vested and exercisable at the rate of one-third (1/3)
per year commencing on December 31, 1998 and one-third (1/3) on each of the next
two anniversaries of such date.
(ii) As an incentive to the Employee to remain in the employ of
the Company and devote his best efforts to the affairs of the Company, in the
sole discretion of the Board of Directors, the Employee shall receive each year,
commencing in the year 2000, an option to purchase shares of common stock of the
Company, the exact number, terms and option price of which shall be determined
yearly by the Stock Option Committee of the Board of Directors. Such option
shall not be granted in 1998 and 1999.
<PAGE>
(iii) The options set forth in this paragraph 4(E) shall be
granted to the Employee pursuant to the Company's 1994 Stock Option Plan (the
"Stock Option Plan") and the Employee shall be subject to the terms and
conditions set forth therein. The options set forth in this paragraph 4(E) shall
also be evidenced by the Employee executing and becoming a party to an option
agreement between the Employee and the Company (the "Option Agreement").
Notwithstanding any of the foregoing, if there is any inconsistency between or
among this Agreement, the Stock Option Plan and/or the Option Agreement, this
Agreement, to the extent it is consistent with the restrictions provided in the
last sentence of paragraph 12 of the Plan, shall govern as to all documents
described in this subparagraph 4(E)(iii).
(iv) Notwithstanding the foregoing, the options described in this
paragraph 4(E) shall, under the following circumstances become vested and
exercisable as follows: (I) upon a Change in Control (as defined in paragraph
11(D) herein), except as provided in subparagraph (v) below, all of Employee's
unvested options shall become accelerated and immediately fully vested; and (II)
upon termination of the Period of Employment by the Company without cause (as
described in paragraph 11(A)) or upon termination of the Period of Employment by
Employee for cause (as described in paragraph 11(C)), all of Employee's unvested
options shall become accelerated and immediately fully vested, and exercisable,
at any time prior to the expiration date of the options, as specified in the
Stock Option Plan, or the expiration of twelve (12) months after the date of
such termination, whichever is the longer period; PROVIDED, HOWEVER, that for
purposes of this clause 4(E)(iv)(II), no options will become
<PAGE>
vested and exercisable subsequent to the expiration date of the options as
specified in the Stock Option Plan.
(v) 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
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
subparagraph (iv)(I) above, then such subparagraph (iv)(I) shall be void.
(F) ADDITIONAL COMPENSATION. During the Period of Employment, the
Employee shall be eligible to receive any other payments of bonus, compensation
or other amounts not specifically enumerated herein but which may be paid by the
Company ("Additional Compensation").
5. BUSINESS EXPENSES. During the Period of Employment, the Company
agrees to reimburse Employee for reasonable and necessary expenses incurred by
him in connection with the performance of his duties hereunder. Employee shall
submit vouchers, invoices and such other documentation in accordance with the
Company's general policy with respect thereto.
6. BENEFITS. During the Period of Employment, the Company will provide
or, as necessary, reimburse Employee with or for the following benefits:
(A) INSURANCE. Medical, dental, hospitalization and short-term
disability coverage for himself and his dependents, to the extent provided
generally to the senior executives of the
<PAGE>
Company. In addition, the Employee will receive term life insurance, insuring
the life of the Employee, in the principal face amount of two (2) times the
Employee's Base Salary.
(B) VACATIONS. Employee shall be entitled to four (4) weeks paid
vacation per year, the scheduling of which shall be in accordance with the
general policies and practices of the Company with respect thereto.
(C) EMPLOYEE BENEFIT PLANS AND PERQUISITES. During the Period of
Employment, the Employee shall be entitled (i) to participate in all employee
benefit plans, programs, policies and arrangements sponsored, maintained or
contributed to by the Company, subject to and in accordance with the terms and
conditions of such plans, programs, policies and arrangements as they relate to
similarly situated executive officers of the Company, and (ii) to receive all
other benefits and perquisites provided or made available by the Company to its
senior executive officers subject to and in accordance with the terms and
conditions of such benefits and perquisites as they relate to similarly situated
senior executive officers of the Company.
7. DEATH OR PERMANENT DISABILITY. In the event of the death or Permanent
Disability ("Permanent Disability" being defined as an illness which will
prevent the Employee from performing his duties for a period of six (6)
consecutive months or nine (9) out of any consecutive twelve (12) months) prior
to the expiration of the Period of Employment, his employment shall be deemed to
cease as of the end of the month of the date of his death or Permanent
Disability and this Agreement shall terminate forthwith and all rights under it
shall expire, except that Employee or Employee's estate shall be entitled to
receive Base Salary for a
<PAGE>
period of six (6) months from the date of death or Permanent Disability plus the
PRO RATA amount of Incentive Compensation, Special Guaranteed Incentive
Compensation and Additional Compensation which would have been due the Employee
pursuant to paragraph 4 hereinabove for the period January 1 of said year
through the date of death or Permanent Disability. Said Base Salary shall be
paid at the time it would regularly be paid. Said Incentive Compensation,
Special Guaranteed Incentive Compensation and Additional Compensation shall be
paid as soon as practicable after a determination of the amount due is made by
the Company's CPAs.
Additionally, any options eligible to vest within twelve (12) months of
the date of death or Permanent Disability shall be deemed accelerated and fully
vested as of the date of death or Permanent Disability subject to the further
terms and conditions of the Stock Option Plan pursuant to which the same were
granted.
8. CONFIDENTIAL INFORMATION. Employee acknowledges that the Company
would be damaged if Employee's knowledge with respect to the business of the
Company were disclosed to or utilized by parties other than the Company.
Accordingly, Employee covenants and agrees that he will not disclose any
presently known or hereafter acquired confidential or proprietary information of
the Company or its business to any person, firm, corporation or other entity.
For the purposes of this paragraph, the term "confidential or proprietary
information" shall mean all information which is currently known to or hereafter
acquired by Employee and relates to such matters as customer mailing lists,
pricing and credit techniques, marketing techniques, research and development
activities, sources of product, lists of magazines or other publications
<PAGE>
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 provided the same would not, if released, damage the Company. The
provisions of this paragraph shall survive the termination of this Agreement.
9. COVENANT NOT TO COMPETE. The Employee hereby covenants and agrees
that from the date hereof until twelve (12) months after the termination of the
Period of Employment (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; (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 Two Percent (2%) of any class or type of securities of, or interest
<PAGE>
in, such Competitive Business; or (iii) engaging in his profession as a
certified public accountant; provided that while working as an accountant he
does not directly provide accounting services or advice to a Competitive
Business. The term "Competitive Business" shall mean and include any business or
activity that is substantially the same as any business or activity then
conducted by the Company, regardless of where such Competitive Business is
located.
10. COVENANT NOT TO SOLICIT. Unless the Employee has obtained the prior
written consent of the Company, he hereby covenants and agrees that, from the
date hereof until the expiration of the Non-Compete Period, he shall not, for or
on behalf of a Competitive Business, directly or indirectly, as owner, officer,
director, stockholder, partner, associate, consultant, manager, advisor,
representative, employee, agent creditor, or otherwise, attempt to solicit or in
any other way disturb or service any person, firm or corporation that has been a
customer account of the Company at any time or times during the Period of
Employment or during the Non-Compete Period, whether or not he at any time had
any direct or indirect account responsibility for, or contact with, such
customer account.
11. TERMINATION. In addition to termination for death or Permanent
Disability pursuant to paragraph 7, the employment of the Employee by the
Company pursuant to this Agreement shall terminate upon the occurrence of any of
the following:
(A) TERMINATION UPON PRIOR NOTICE. The Company may terminate this
Agreement by giving the Employee ninety (90) days prior written notice.
(B) EMPLOYEE TERMINATION FOR CAUSE. At the election of the Company, it
may
<PAGE>
immediately upon written notice by the Company to the Employee terminate the
Employee for cause. For the purposes of this paragraph, cause for termination
shall be deemed to exist upon (i) a good faith finding by the Company of a
willful failure or refusal of the Employee to perform assigned duties for the
Company of which he has knowledge, or the commission of any other willful or
grossly negligent action by Employee with the intent to injure the Company; (ii)
any material breach of any material provision of this Agreement by the Employee
if the Employee fails to correct such breach (or to take substantial steps to
correct such breach) within ten (10) days after receiving written notice
thereof; or (iii) the conviction of the Employee of, or the entry of a plea of
guilty or NOLO CONTENDERE by the Employee to, a crime involving an act of fraud
or embezzlement against the Company or the conviction of the Employee of, or the
entry of a plea of guilty or NOLO CONTENDERE by the Employee to, any felony
involving moral turpitude. Notwithstanding the foregoing, the Company shall not
terminate the Employee for cause pursuant to this paragraph unless and until
there shall have been delivered to the Employee a copy of a resolution, duly
adopted by the affirmative vote of the Board of Directors at a meeting called
and held after reasonable notice to the Employee and an opportunity for the
Employee, together with his counsel, to be heard before the Board of Directors,
finding that in the good faith opinion of the Board of Directors the Employee is
guilty of conduct set forth in subparagraphs (i) and (ii) of this paragraph and
specifying the particulars thereof in reasonable detail.
(C) EMPLOYEE'S ELECTION FOR CAUSE. At the election of the Employee, he
may terminate the Period of Employment for cause immediately upon written notice
by Employee to
<PAGE>
the Company. For purposes of this paragraph, cause for termination shall be
deemed to exist upon (i) a material failure by the Company to continue the
Employee's participation in any bonus, compensation or other benefit plan in
which the Employee is entitled to participate pursuant hereto or the taking by
the Company of any action which would directly or indirectly materially reduce
his participation therein; or (ii) a material breach of any provision of this
Agreement by the Company, or any breach of any provision of this Agreement by
the Company, whether or not material, if such breach is not corrected (or
substantial steps have not been taken to correct such breach) within thirty (30)
days after the Board of Directors received written notice thereof.
(D) TERMINATION FOLLOWING A CHANGE IN CONTROL. For purposes of this
Agreement, Change in Control means the occurrence during the Period of
Employment of any of the following events, subject to the provisions of
paragraph (11)(D)(vii) hereof:
(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) The Company is merged, consolidated or reorganized into or
with another corporation or entity, with the result that upon the conclusion of
the transaction the Company is not the surviving corporation or entity; or
<PAGE>
(iii) 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
(iv) 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
(v) 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
(vi) The Board of Directors determines that (I) any particular
actual or
<PAGE>
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 11(D)(i),
(ii), (iii), (iv) or (v), and (II) it is in the best interests of the Company
and its shareholders, and will serve the intended purposes of this Agreement, if
this Agreement shall thereupon become immediately operative with respect to the
provisions of this paragraph 11(D) regarding Change in Control.
(vii) Notwithstanding the foregoing provisions of this paragraph
(11)(D):
(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 (11)(D)(vi) 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 (11)(D)(iii) or (iv)
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
<PAGE>
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.
Notwithstanding anything contained in this Agreement to the contrary, in
the event of a Change in Control, (I) the Employee may terminate employment with
the Company for any reason, or without reason, at any time following the date
six months after the first occurrence of a Change in Control, and (II) the
Employee may terminate employment with the Company during the Period of
Employment if the Company relocates its principal executive offices, or requires
the Employee to have his principal location of work changed, to any location
that is in excess of 35 miles from the location thereof immediately prior to the
Change in Control, in each case with the right to receive the benefits described
in paragraph 11(E)(iii) below.
(E) EFFECT OF TERMINATION.
(i) TERMINATION BY THE COMPANY FOR CAUSE OR AT THE ELECTION OF
THE EMPLOYEE WITHOUT CAUSE. In the event that the Employee's employment is
terminated by the Company for cause pursuant to paragraph 11(B)(i) or (ii) or
the Employee elects to terminate his employment
<PAGE>
without cause, the Company shall pay to the Employee the Base Salary, Incentive
Compensation, Special Guaranteed Incentive Compensation and Additional
Compensation due, if any, under paragraph 4, on a PRO RATA basis to the date of
termination at the time such Base Salary, Incentive Compensation, Special
Guaranteed Incentive Compensation or Additional Compensation would regularly be
paid and benefits otherwise payable to him hereunder all through the last day of
his actual employment by the Company. Upon termination under this paragraph
11(E), the Employee will thereupon no longer be entitled to any compensation or
benefits provided herein, and nothing herein shall limit the Company's right
against the employee or the rights and obligations of the parties under
paragraphs 8, 9, and 10 hereof.
(ii) TERMINATION AT THE ELECTION OF THE COMPANY WITHOUT CAUSE OR
AT THE ELECTION OF THE EMPLOYEE FOR CAUSE. In the event that the Employee's
employment is terminated without cause by the Company pursuant to paragraph
11(A) prior to a Change in Control or with cause by the Employee pursuant to
paragraph 11(C), then, following the occurrence of such event, the Company shall
pay to the Employee (I) the Base Salary and Special Guaranteed Incentive
Compensation due, if any, through the Period of Employment, and (II) the
Incentive Compensation and Additional Compensation due, if any, under paragraph
4 hereof; PROVIDED, HOWEVER, that any such Incentive Compensation or Additional
Compensation shall be paid on a PRO RATA basis to the date of termination. In
addition, Employee will continue to receive the benefits provided under
paragraph 6 hereof, including payment of accrued but unused vacation benefits.
During said period, the Employee shall continue to be bound by the provisions of
<PAGE>
paragraphs 8, 9 and 10 hereof.
(iii) TERMINATION FOLLOWING A CHANGE IN CONTROL. In the event
that a Change in Control occurs during the Period of Employment and Employee's
employment is terminated in the manner described in paragraph 11(A) or paragraph
11(D), the Company shall pay to the Employee a lump sum cash payment in an
amount equal to one (1) times his then current Base Salary, plus one (1) times
the average of the sum of the Incentive Compensation, Special Guaranteed
Incentive Compensation and Additional Compensation he received under paragraph 4
for the three (3) years immediately preceding such Change in Control. In
addition, Employee will continue to receive the benefits provided under
paragraph 6 hereof through the Period of Employment.
12. NO MITIGATION OBLIGATION.
(A) Employee shall be under no obligation to seek other
employment opportunities during any period between termination of his employment
following a Change in Control and the expiration of the Period of Employment
(the "Interim Period"), and Employee shall not be obligated to accept any other
employment opportunity which may be offered to Employee during the Interim
Period; however, subject to the provisions of paragraph 9, and except as
provided in the following sentence, nothing in this Agreement shall prohibit the
Employee from accepting other employment opportunities during the Interim
Period, in which event Employee shall receive the entire amount due and owing to
him as described in paragraph 11(E)(iii) without set-off for any amount paid to
Employee arising out of any new employment
<PAGE>
relationship. Benefits described in paragraph 6(A) and (B) will be reduced to
the extent comparable welfare benefits are actually received by the Employee
from another Company during the Interim Period and such benefits actually
received by the Employee shall be reported by the Employee to the Company.
(B) Employee's termination of his employment following a Change
in Control and the receipt by Employee of any amount pursuant to paragraph
11(E)(iii) shall not preclude Employee's continued employment with the Company
or the surviving entity in any Change in Control, on such terms as shall be
negotiated between the Company (or such surviving entity) and the Employee
following termination of this Agreement.
13. 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
<PAGE>
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"); PROVIDED, HOWEVER,
that no Gross-up Payment shall be made with respect to the Excise Tax, if any,
attributable to (i) any incentive stock option, as defined by Section 422 of the
Code ("ISO") granted prior to the execution of this Agreement, or (ii) any stock
appreciation or similar right, whether or not limited, granted in tandem with
any ISO described in clause (i). 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 13(F), all
determinations required to be made under this paragraph 13, 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)
<PAGE>
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 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 13(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.
<PAGE>
(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 13(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 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
13(B) shall be borne by the Company. If such fees and expenses are initially
paid by the Employee, the
<PAGE>
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
<PAGE>
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 result of such
representation and payment of costs and expenses. Without limiting the foregoing
provisions of this paragraph 13(F), the Company shall control all proceedings
taken in connection with the contest of any claim contemplated by this paragraph
13(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
<PAGE>
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 13(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 13(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 13(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
<PAGE>
Company to the Employee pursuant to this paragraph 13.
14. SUCCESSORS AND BINDING AGREEMENT.
(A) The Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation, reorganization or otherwise) to all or
substantially all of the business or assets of the Company, by agreement in form
and substance reasonably satisfactory to the Employee, expressly to assume and
agree to perform this Agreement in the same manner and to the same extent the
Company would be required to perform if no such succession had taken place. This
Agreement will be binding upon and inure to the benefit of the Company and any
successor to the Company, including without limitation any persons acquiring
directly or indirectly all or substantially all of the business or assets of the
Company whether by purchase, merger, consolidation, reorganization or otherwise
(and such successor will thereafter be deemed the "Company" for the purposes of
this Agreement), but will not otherwise be assignable, transferable or delegable
by the Company.
(B) This Agreement will inure to the benefit of and be enforceable by
the Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees and legatees.
(C) This Agreement is personal in nature and neither of the parties
hereto will, without the consent of the other, assign, transfer or delegate this
Agreement or any rights or obligations hereunder except as expressly provided in
paragraphs 9(A) and 9(B). Without limiting the generality or effect of the
foregoing, the Employee's right to receive payments
<PAGE>
hereunder will not be assignable, transferable or delegable, whether by pledge,
creation of a security interest, or otherwise, other than by a transfer by
Employee's will or by the laws of descent and distribution and, in the event of
any attempted assignment or transfer contrary to this paragraph 9(C), the
Company will have no liability to pay any amount so attempted to be assigned,
transferred or delegated.
15. 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 remaining provisions of this Agreement will be unaffected
thereby and will remain in full force and effect to the fullest extent permitted
by law.
16. REPRESENTATION. Each party represents and warrants that it is fully
authorized and empowered to enter into this Agreement and that performance of
its obligations under this Agreement will not violate any agreement between it
and any other person or entity.
17. NOTICES. All notices, elections, demands or other communications
required or permitted to be made or given pursuant to this Agreement shall be in
writing and shall be considered properly given or made if sent by telecopier,
Telex, courier service or certified mail, return receipt requested and addressed
to the parties at the respective addresses specified below. Either party may
change its address by giving notice in writing pursuant to this paragraph to the
other of its new address.
To the Company: Micro Warehouse, Inc.
535 Connecticut Avenue
Norwalk, Connecticut 06854
Attn.: Peter Godfrey
<PAGE>
To Employee: Mr. Wayne Garten
747 Iris Court
Yorktown Heights, New York 10598
18. ARBITRATION. Any controversy, claim or breach (except those relating
to monetary damages) arising out of or relating to this Agreement shall be
submitted for settlement to an arbitrator agreed upon by the parties. The
decision of such arbitrator shall be final and binding on the parties. If the
parties cannot agree upon an arbitrator, the controversy, claim or breach shall
be referred to the American Arbitration Association with a request that an
arbitrator be appointed pursuant to the rules of said Association. Such
arbitration shall be held in New Haven, Connecticut, in accordance with the
rules and practices of the American Arbitration Association pertaining to
single-party arbitration then in effect, and the judgment upon the award
rendered shall be entered by consent in any court having jurisdiction thereof.
19. ENTIRE AGREEMENT. This Agreement constitutes the full and complete
understanding and agreement of the parties. Neither party has relied upon any
representation of the other not set forth herein. This Agreement may not be
changed orally but only by an agreement in writing, signed by the party against
whom enforcement of any waiver, change, modification, extension or discharge is
sought. This Agreement supersedes all prior agreements between the parties
hereto with respect to its subject matter and notwithstanding any provision
hereof, will become effective upon the execution of this Agreement by the
parties.
20. BINDING EFFECT. This Agreement shall be binding upon and accrue to
the benefit of the parties hereto, their heirs, executors, administrators and
successors.
<PAGE>
21. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Connecticut without regard to its
principles with respect to conflicts of law.
22. COUNSEL FEES.
(A) Except as set forth herein the parties hereto shall bear
their own fees, costs and expenses incurred in connection with this Agreement.
If either party is required to bring suit or otherwise seek enforcement of its
or his rights in connection with the same, the prevailing party in such action
or proceeding shall be entitled to recover counsel fees incurred in such action
or proceeding. The Employee shall be reimbursed in an amount not to exceed Two
Thousand Dollars ($2,000) for legal fees and costs incurred in connection with
the review of this Agreement by his own counsel.
(B) Notwithstanding subparagraph (A), in the event of a Change in
Control, it is the intent of the Company that the Employee not be required to
incur fees and related expenses for the retention of attorneys, accountants,
actuaries, consultants, and/or other professionals ("professionals") in
connection with the interpretation, enforcement or defense of Employee's rights
under this Agreement by litigation or otherwise because the cost and expense
thereof would substantially detract from the benefits intended to be extended to
the Employee hereunder. Accordingly, if it should appear to the Employee that
the Company has failed to comply with any of its obligations under this
Agreement or in the event that the Company or any other person takes or
threatens to take any action to declare this Agreement void or unenforceable, or
<PAGE>
institutes any litigation or other action or proceeding designed to deny, or to
recover from, the Employee the benefits provided or intended to be provided to
the Employee hereunder, the Company irrevocably authorizes the Employee from
time to time to retain one or more professionals of the Employee's choice, at
the expense of the Company as hereafter provided, to advise and represent the
Employee in connection with any such interpretation, enforcement or defense,
including without limitation the initiation or defense of any litigation or
other legal action, whether by or against the Company or any director, officer,
stockholder or other person affiliated with the Company, in any jurisdiction.
Notwithstanding any existing or prior relationship between the Company and such
professional, the Company irrevocably consents to the Employee's entering into a
relationship with any such professional, and in that connection the Company and
the Employee agree that a confidential relationship shall exist between the
Employee and any such professional. Without respect to whether the Employee
prevails, in whole or in part, in connection with any of the foregoing, the
Company will pay and be solely financially responsible for any and all
reasonable fees and related expenses incurred by the Employee in connection with
any of the foregoing.
23. COUNTERPARTS. This Agreement may be executed simultaneously in one
or more counterparts, each of which will be deemed to be an original but all of
which together will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have affixed their signatures on
the day and year first above written.
<PAGE>
COMPANY:
MICRO WAREHOUSE, INC.
By: /s/ Peter Godfrey
-------------------------------------
Peter Godfrey
President and Chief Executive Officer
EMPLOYEE:
By: /s/ Wayne Garten
-------------------------------------
Wayne Garten
<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>
EXHIBIT 10.28
December 16, 1998
BY TELECOPY
- -----------
Mr. Peter Cannone
5 Seaman Drive
Freehold, New Jersey 07728
Dear Peter:
This agreement will serve to confirm the terms and conditions under which we
will accept your resignation as Senior Vice President, Sales.
1. RESIGNATIONS. Effective December 31, 1998 (hereinafter the "Resignation
Date") you will resign from employment as Senior Vice President, Sales and any
other officerships or directorships of Micro Warehouse, Inc. or any of its
affiliates, sister companies or subsidiaries (hereinafter "the Company").
2. EMPLOYMENT AGREEMENT; PAYMENTS HEREUNDER. (a) Any prior employment agreement
with the Company, whether written or oral and including specifically the letter
agreement between you and the Company dated October 6, 1997, is terminated as of
the Resignation Date.
(b) You shall be entitled to receive your current bi-weekly base salary of
$7,692.31 (after deducting all required withholding and other amounts) until
June 30, 1999. You shall also be eligible to receive the following incentive
compensation:
(i) the actual amount, if any, of your incentive bonus under the Micro
Warehouse Officers and Directors Incentive Bonus Plan ($30,000
target), to be calculated prior to January 31, 1999 and paid on the
date in 1999 that other eligible employees receive their 1998 bonus
under such plan; and
(ii) your quarterly bonus for the fourth quarter 1998 in the amount of
$4,166, which will be paid in a lump sum within two weeks of your
Resignation Date.
(c) Within two weeks of the Resignation Date you will also receive a
one time payment for your accrued and unused 1998 vacation time (after deducting
all required withholding and other amounts).
(d) Upon your request and subject to the receipt of appropriate
documentation, the Company will reimburse you for your actual expenses incurred
in relocation from New Jersey to Massachusetts, including the broker's fee and
closing costs on your home, up to a maximum of $25,000.
<PAGE>
(e) You may retain the Company's laptop computer in your possession
having the manufacturer, model and serial number described on the annex hereto,
PROVIDED that you remove all copies of any "confidential or proprietary
information" (as defined in Paragraph 9 below) from the hard drive of the
computer and any disks in your possession and return the same to my attention
within five (5) business days of the date hereof.
3. COBRA BENEFITS. The Company agrees to pay directly your COBRA payments
required to maintain your and your family's current health insurance coverage
through the Company until the earlier of June 30, 1999 or the first date you
become eligible for participation in the medical benefits program of any
subsequent employer (whether or not you elect coverage under such employer's
plan). After that date, all additional available COBRA coverage will be at your
expense. You acknowledge that the Company will have no obligation to pay
directly or reimburse you for any COBRA payments due more than six (6) months
subsequent to the Resignation Date.
4. STOCK OPTIONS. As of the Resignation Date 15,000 of the 60,000 options you
hold shall be accelerated and deemed vested and the remainder shall be deemed
cancelled. In all other respects, said options will continue to be subject to
the terms and conditions of the agreement and or Stock Option Plan under which
they were granted to you. All options retained by you pursuant to this agreement
shall have an exercise price of $15.44 per share and must be exercised on or
before September 30, 1999. You will not be eligible to receive any further stock
options or otherwise participate in any deferred compensation programs
notwithstanding the possibility that the Company might provide the same
participation to other comparably compensated employees.
5. STOCK TRADING RESTRICTIONS. For the period from the date hereof until three
business days after the public release of the Company's 1998 fourth quarter and
full year earnings, you will continue to be subject to and abide by the
Procedures Adopted by the Company to Prevent Insider Trading (incorporated in
the Insider Trading Memorandum attached hereto as Exhibit A) and specifically
will be prohibited from initiating a purchase or sale transaction in the
Company's stock except in a "window period."
6. RELEASE. (a) As consideration for the Company to enter into this agreement
and as consideration for the covenants contained herein, subject to the
immediately following sentence, you irrevocably and unconditionally release,
remit, acquit and forever discharge the Company, its officers, directors,
shareholders, agents, employees, representatives, attorneys, parents, divisions,
subsidiaries, affiliates, related companies or entities, successors and assigns
and the officers, executives, directors, shareholders, agents and employees of
any and all of the Company's parents, divisions, subsidiaries, affiliates,
related companies or entities, successors or entities (separately or
collectively, the "Released Parties"), jointly and individually, from any and
all claims, charges, complaints, expenses and causes of action of any nature or
kind whatsoever, known or unknown, which you, your heirs, successors or assigns
have or may have against the Released Parties based upon, related to or arising
out of your employment with the Company through the date hereof, including, but
not limited to, claims, charges, complaints, liabilities, losses, obligations,
demands,
2
<PAGE>
damages, costs, expenses and causes of action relating to the terms, conditions,
commencement, duration or termination of your employment, or claims of
discrimination under any federal, state or local law, rule, regulation or common
law, whether such claims are past or present, whether they arise from equity,
common law or statute, and whether they arise from labor laws or discrimination
laws, such as the Age Discrimination in Employment Act, as amended, Title VII of
the Civil Rights Act of 1964, 42 U.S.C. ss.1981, the Equal Pay Act, as amended,
the Americans with Disabilities Act, or any other federal, state or local law,
rule or regulation. This release is intended to cover all possible relief,
including, but not limited to, reinstatement, wages, back pay, front pay,
vacation pay, bonuses or incentive compensation, supplemental or other
retirement benefits, perquisites, compensatory damages, punitive damages,
damages for pain or suffering, and attorneys' fees, provided, however, that
nothing in this agreement will limit or otherwise affect any right you may have
to indemnification under the Company's Articles of Incorporation, By Laws or any
insurance policy in effect as of the termination of your employment with the
Company. In addition, if the Company complies with its obligations hereunder,
you agree you will not be entitled to any benefit from any claim or proceeding
filed by you or on your behalf with any agency or court which is within the
scope of this agreement or which goes to the validity of any provision of this
agreement.
(b) The releases under this Paragraph 6 are intended to cover all
possible rights, obligations and liabilities, including any such rights,
obligations or liabilities based upon, relating to or arising from any claim
which goes to the validity of any provision of this agreement, other than a
claim for any breach of this agreement.
(c) You acknowledge that you have been given a period of at least 21
days to review and consider this agreement before signing it, and that you
understand that you may use as much of the 21-day period as you wish prior to
signing. You also acknowledge that you have obtained independent legal counsel
in connection with reviewing this agreement.
7. COVENANT NOT TO COMPETE You hereby covenant and agree that from the date
hereof until June 30, 1999 you shall not, directly or indirectly, own, operate,
manage, join, control, participate in the ownership, management, operation or
control of, or be paid or employed by, or acquire any securities of, or
otherwise become associated with or provide assistance to, as an employee,
consultant, director, officer, shareholder, partner, agent, associate,
principal, representative or in any other capacity, any business entity or
activity which is directly or indirectly a "Competitive Business" (as
hereinafter defined); PROVIDED, HOWEVER, that the foregoing shall not prevent
you from (a) performing services for a Competitive Business if such Competitive
Business is also engaged in other lines of business and if your services are
restricted to employment in such other lines of business; or (b) acquiring the
securities of or an interest in any Competitive Business, provided such
ownership of securities or interests represents at the time of such acquisition,
but including any previously held ownership interests, less than two percent
(2%) of any class or type of securities of, or interest in, such Business. The
term "Competitive Business" shall mean and include any business or activity,
wherever located, that engages in the sale or distribution of computers and
computer-related products, regardless of the format or method of marketing or
order-taking; provided, however, that a "Competitive
3
<PAGE>
Business" shall not include wholesalers or distributors of computer products
(i.e., entities that do not sell to end-users) or retail stores that specialize
in computer products (E.G., CompUSA, Circuit City).
8. COVENANT NOT TO SOLICIT You hereby covenant and agree that, from the date
hereof until the expiration of eighteen (18) months from the Resignation Date,
you shall not, for or on behalf of any party, directly or indirectly, as owner,
officer, director, stockholder, partner, associate, consultant, manager,
advisor, representative, employee, agent creditor or otherwise, attempt to
solicit for employment any person who has been an employee of the Company at any
time or times during your employment by Company.
9. CONFIDENTIAL INFORMATION. You acknowledge that the Company would be damaged
if your knowledge with respect to the business of the Company was disclosed to
or utilized by parties other than the Company. Accordingly, you covenant and
agree that you will not disclose any presently known or hereafter acquired
confidential or proprietary information of the Company or its business to any
person, firm, corporation or other entity. For the purposes of this paragraph,
the term "confidential or proprietary information" shall mean all information
which is currently known to or hereafter acquired by you and relates to such
matters as budget and forecasts, customer mailing lists, data base management
techniques, pricing and credit techniques, marketing techniques, research and
development activities, sources of product, and other confidential or restricted
information which is not in the public domain. Confidential or proprietary
information shall not be deemed to include information released generally to the
public by the Company or others, information required by law to be disclosed or
information learned by you from third parties without restrictions on disclosure
provided the same would not, if released, damage the Company.
10. ASSIGNMENT. This agreement is not assignable, except that the Company may
assign it to any successor of substantially all of the Company's business or
assets. This agreement will be binding upon, and inure to the benefit of, the
parties and their successors and assigns. Any payments due to you under this
agreement shall be paid to your estate in the event that you should die before
said payments are made.
11. PARTIAL INVALIDITY. If any provision of this agreement is held to be
invalid, void or unenforceable, the remaining provisions shall continue in full
force without being impaired or invalidated in any way.
12. GOVERNING LAW. This agreement will be governed by the laws of the State of
Connecticut, without giving effect to the conflict of laws principles thereof.
Both parties hereby agree to waive the right to a jury trial in the event there
is any legal action arising out of the interpretation or enforcement of this
Agreement.
13. ENTIRE AGREEMENT. This agreement reflects the complete agreement between the
parties with respect to the subject matter hereof, and there are no written or
oral understandings, promises
4
<PAGE>
or agreements directly or indirectly related to this letter agreement or the
subject matter hereof that are not incorporated herein.
14. REVOCATION PERIOD. For a period of seven (7) calendar days following your
execution of this agreement, you may revoke this agreement. This agreement will
not become effective or enforceable to release any claims or rights which you
may have under the Age Discrimination in Employment Act until this revocation
period has expired. This agreement also will not become effective or enforceable
with respect to any obligations that the Company may have hereunder until this
revocation period has expired. You acknowledge and agree that if the Company
satisfies any obligations hereunder that otherwise would have arisen during this
revocation period as soon as practicable after the revocation period has
expired, such action will constitute timely satisfaction of such obligations
hereunder. You also acknowledge and agree that the benefits to you of the
covenants contained herein, including, but not limited to, payments hereunder,
are provided to you in exchange for the promises in this agreement, are not
normally available under Company policy or practice to employees whose
employment is terminated and provide for the payments of amounts to which you
would not otherwise be entitled.
15. CONFIDENTIALITY AND INTENT TO BE BOUND. The terms and conditions of this
agreement are confidential and must not be disclosed to any person other than
those who must perform tasks to effect the agreement. Notwithstanding the
foregoing, the Company and you may disclose any term of this agreement, after
prior written notice to the other party that disclosure is about to take place,
(i) to any governing authority if disclosure is required to comply with
applicable law; or (ii) to either party's attorneys, accountants, spouse or
advisors with whom a fiduciary relationship has been established. Both parties
have read this agreement, have had the opportunity to consult with counsel,
fully understand the agreement's terms and conditions, and enter this agreement
freely, voluntarily and intending to be legally bound hereby.
16. ENFORCEMENT OF AGREEMENT. You hereby acknowledge and agree that your
obligations under Paragraphs 7, 8 and 9 are a material part of the consideration
for this agreement and for the payments from the Company to you under Paragraph
2; that your failure to satisfy any of such obligations could cause irreparable
harm to the Company and that the damages caused by such failure would be
uncertain and difficult to measure. You further acknowledge and agree that the
Company may seek injunctive relief to prevent your failure or further failure to
satisfy any of such obligations, in addition to all other rights, remedies and
claims that it may have under this agreement, at law or in equity.
17. NO WAIVER. No failure on the part of either party at any time to require the
performance by the other party of any term hereof shall be taken or held to be a
waiver of such term or in any way affect such party's right to enforce such
term, and no waiver on the part of either party of any term hereof shall be
taken or held to be a waiver of any other term hereof or the breach thereof.
5
<PAGE>
If you agree to and accept the terms and conditions of this agreement,
please sign both copies hereof in the space provided below, retain one copy for
your records and return the other copy to the undersigned.
Very truly yours,
MICRO WAREHOUSE, INC.
By: /s/ Bruce L. Lev
----------------------------------------
Name: Bruce L. Lev
Title: Executive Vice President, Legal and
Corporate Affairs and General Counsel
YOU ACKNOWLEDGE THAT YOU HAVE READ THIS AGREEMENT, UNDERSTAND IT, AND ARE
KNOWINGLY AND VOLUNTARILY ENTERING INTO IT. PLEASE READ AND CONSIDER THIS
AGREEMENT CAREFULLY. IT CONTAINS A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS.
/s/ Peter Cannone
- -----------------------------------
Peter Cannone
Date Signed: December 16, 1998
6
<PAGE>
EXHIBIT 11.1
MICRO WAREHOUSE, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
FOR THE YEARS ENDED DECEMBER 31,
(in thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Net income (loss)
Income (loss) before extraordinary charge $30,178 ($36,681) $16,882 $35,244 $24,556
Extraordinary charge, net of taxes -- -- 1,584 -- --
Net income (loss) $30,178 ($36,681) $15,298 $35,244 $24,556
======= ======== ======= ======== =======
Shares
Weighted average common shares outstanding 34,803 34,475 34,310 32,940 29,847
Common equivalent shares 546 -- 483 665 713
Weighted average common shares and common
Equivalent shares outstanding - Diluted 35,349 34,475 34,793 33,605 30,560
======= ======== ======= ======== =======
Per share - Diluted
Income (loss) before extraordinary charge $ 0.85 ($ 1.06) $ 0.49 $ 1.05 $ 0.80
Extraordinary charge, net of taxes -- -- 0.05 -- --
Net income (loss) $ 0.85 ($ 1.06) $ 0.44 $ 1.05 $ 0.80
======= ======== ======= ======== =======
</TABLE>
<PAGE>
EXHIBIT 16.1
KPMG
- ----
Stamford Square
3001 Summer Street
Stamford, CT 06905
Securities and Exchange Commission
Washington, DC 20549
March 19, 1999
Ladies and Gentlemen:
We are the principal accountants for Micro Warehouse, Inc. and, under the date
of February 16, 1999, we will report on the consolidated financial statements of
Micro Warehouse, Inc. and subsidiaries as of and for the years ended December
31, 1998 and 1997. On March 19, 1999, we were informed that upon completion of
the audit for the year ended December 31, 1998 we will not be reappointed as
principal accountants for the year ended December 31, 1999. We have read Micro
Warehouse's statements included under Item 4 of its Form 8-K dated March 25,
1999, and we agree with such statements, except that we are not in a position to
agree or disagree with MicroWarehouse's statement that the change was
recommended by the Audit Committee of the Board of Directors and approved by the
full Board of Directors.
Very truly yours,
/s/ KPMG LLP
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES
The following is a list of subsidiaries of the Company as of March 31, 1999:
NAME PLACE OF ORGANIZATION
- --------------------------------------------------------------------------------
Subsidiaries of Micro Warehouse, Inc. (Delaware):
- -------------------------------------------------
Micro Warehouse Inc. of New Jersey United States
Micro Warehouse Inc. of Ohio United States
SaveByNet.com, Inc. United States
Micro Warehouse International, Inc. United States
Micro Warehouse Canada Limited Canada
Benton Sistemas SA de CV Mexico
Micro Warehouse Australia Pty. Ltd. Australia
Online Interactive Inc. United States
Auto Register Inc. United States
Micro Warehouse Switzerland AG Switzerland
Innosoft SARL France
Kelar SARL France
Inmac Spa Italy
Micro Warehouse Holding BV Netherlands
Computer Resources International Svenska AB Sweden
Subsidiaries of Micro Warehouse International Inc.:
- ---------------------------------------------------
Micro Warehouse Japan, KK Japan
Subsidiaries of Micro Warehouse Holding BV:
- -------------------------------------------
TD SA France
Micro Warehouse SARL France
Micro Warehouse BV Netherlands
Inmac AB Sweden
Micro Warehouse (Deutschland) GmbH Germany
Micro Warehouse Ltd. United Kingdom
Subsidiaries of Micro Warehouse Ltd.:
- -------------------------------------
Inmac Ltd. United Kingdom
Micro Warehouse (1996) Ltd. United Kingdom
Subsidiaries of Micro Warehouse (1996) Ltd.:
- --------------------------------------------
Technomatic Ltd. United Kingdom
Subsidiaries of Inmac AB:
- -------------------------
Micro Warehouse Sweden AB Sweden
Subsidiaries of Micro Warehouse Sweden AB:
- ------------------------------------------
MacKatalogen AB Sweden
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Micro Warehouse, Inc.
We consent to incorporation by reference in the registration statements (Nos.
333-33945 and 333-47163) on Form S-8 and (Nos. 333-59561 and 333-71131) on
Form S-3 if Micro Warehouse, Inc. and subsidiaries (the Company) of our
reports dated February 16, 1999, related to the consolidated balance sheets
of the Company as of December 31, 1998 and 1997, and the related consolidated
statements of operations, comprehensive operations, stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1998, and the related schedule, which reports appear in the December 31, 1998
annual report on Form 10-K of the Company.
KPMG LLP
Stamford, Connecticut
March 31, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<PERIOD-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<CASH> 128,035 58,051 32,234
<SECURITIES> 60,520 20,817 20,022
<RECEIVABLES> 216,487 217,475 203,687
<ALLOWANCES> 10,943 13,339 10,876
<INVENTORY> 129,852 170,543 201,119
<CURRENT-ASSETS> 580,115 533,004 494,828
<PP&E> 36,950 32,416 29,712
<DEPRECIATION> 57,297 48,727 39,482
<TOTAL-ASSETS> 666,530 619,344 607,842
<CURRENT-LIABILITIES> 267,987 270,555 223,298
<BONDS> 0 0 376
0 0 0
0 0 0
<COMMON> 354 346 343
<OTHER-SE> 398,189 348,443 383,825
<TOTAL-LIABILITY-AND-EQUITY> 666,530 619,344 607,842
<SALES> 2,220,018 2,125,698 1,916,244
<TOTAL-REVENUES> 2,220,018 2,125,698 1,916,244
<CGS> 1,860,083 1,773,722 1,573,798
<TOTAL-COSTS> 1,860,083 1,773,722 1,573,798
<OTHER-EXPENSES> 293,407 305,903 277,192
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 432 1,769 2,209
<INCOME-PRETAX> 61,578 (37,816) 36,601
<INCOME-TAX> 31,400 (1,135) 19,719
<INCOME-CONTINUING> 30,178 (36,681) 16,882
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 1,584
<CHANGES> 0 0 0
<NET-INCOME> 30,178 (36,681) 15,298
<EPS-PRIMARY> 0.87 (1.06) 0.45
<EPS-DILUTED> 0.85 (1.06) 0.44
</TABLE>
